When former star fund manager Neil Woodford’s flagship Woodford Equity Income fund was first suspended and then shut down last year, the main focus of commentary was, understandably, the consequences for the investors trapped in the fund when it was suspended in June.
But investors were not the only victims of the fund’s failure. One of the less commented repercussions has been the consequences for many of the biotech start-ups Woodford’s funds were major investors in. The fund was initially suspended because it had invested a large part of its capital in illiquid holdings in still private companies. Or companies that had listed on the Guernsey stock exchange to qualify as publically traded companies so the funds could get around rules on the ratio of listed to non-listed assets it was invested in.
Those rules are there to prevent the precise scenario that befell investors in the Woodford Equity Income fund. Namely, a lack of liquidity to pay investors if larger numbers ever wanted to withdraw their cash over a shorter space of time. But while companies listing on the Guernsey stock exchange ticked the ‘publically listed’ box, allowing the fund to meet its quota of stock exchange-traded holdings, it didn’t actually help the liquidity problem. The Guernsey stock exchange has very low liquidity levels because not many investors trade the shares listed on it.
The result was that these holdings in a number of promising UK biotech start-ups still couldn’t be sold quickly without the fund accepting unreasonable losses on the shares. That lead to the fund’s suspension and subsequent closure.
However, while it was clearly irresponsible of Neil Woodford to bend the rules on the liquidity levels of his fund’s investments – a decision that has ultimately cost him his career as a top-level fund manager in the UK – it doesn’t mean the investments themselves were necessarily bad. Many of the biotech and life sciences companies the fund was a major backer of are well regarded and believed to hold significant potential. They are simply riskier and longer-term investments that a fund structured and marketed in the way the Woodford Equity Income fund was should not have had such a high ratio of its capital in.
But several of these young, promising companies have also been ‘thrown into disarray’ as a result of the collapse of the fund that had invested hundreds of millions in them. Many of these companies need to continue to raise fresh investment capital before they can hope to reach profitability. But new investors have been reluctant to commit fresh money due to a “Woodford overhang” on their shares.
But the sale of Woodford’s assets has now begun. That should see investors get at least some of their capital back. And it should also mean a resolution for the biotech start-ups that have struggled to raise new capital over the past few months.
The proposed buyer of Woodford’s stakes in 20 start-ups is WG Partners – a boutique bank. It has agreed, in principal, to acquire the holdings for £550 million and has secured exclusivity for negotiations until the end of this month. WG is now raising to raise the capital it needs to close the deal before the deadline looming at the end of this week, though it could attempt to agree an extension.
The holdings, which include major stakes in biotech and life sciences start-ups such as Oxford Nanopore, Immunocore and Arix Biosciences, represent a large part of the Woodford Equity Income fund’s life sciences assets. The £550 million WG Partners is attempting to raise includes around £56 million needed to buy out other investors as well as close to £100 million required for future investment. WG has valued the assets at around 55% of what they were worth at their peak. It plans to open a new investment fund, with the Woodford holdings at its core, but marketed as a long term, illiquid, investment suitable for high net worth investors.
The Times reports the boutique bank has been lining up investors from around the world, including the USA and China. It has also spoken to experts it wants to bring in as operating partners, including Cambridge-based entrepreneur Andy Richards.
However, there are still doubts around whether the move will prove successful. One anonymous healthcare investment banker quoted by The Times commented:
“I don’t think there’s been a huge amount of progress. It’s taken a fair while.”
An investor who claims to have turned down an approach from WG Partners to contribute capital to its raise, is also reported to have scathingly explained why with:
“You have to understand that Neil did not have an investment process. They didn’t do due diligence.”
WG Partners is said to plan to base its new investment fund in the Cayman Islands, with the management team in the UK. It has declined to comment on its progress towards finding the whole £550 million it needs in place before the end of the week. The biotech start-ups whose equity the bank is trying to buy up as part of a new fund will be as interested as Woodford fund investors waiting to get part of their money back in WG’s progress. It could go a long way towards defining their futures.