Woodford Patient Capital Trust WPCT LN S W
April 03, 2019 - 5:08pm EST by
2019 2020
Price: 0.80 EPS N/M N/M
Shares Out. (in M): 909 P/E N/M N/M
Market Cap (in $M): 956 P/FCF N/M N/M
Net Debt (in $M): 197 EBIT 0 0
TEV ($): 1,153 TEV/EBIT N/M N/M
Borrow Cost: Available 0-15% cost

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Woodford Patient Capital Trust, (“WPCT”) or the (“Company”) is a closed-ended public investment vehicle launched in April of 2015 by Woodford Investment Management.  As of February 2019, the Company had total gross assets of £1.02 billion and a market capitalization of £712 million.  Adjusting for net debt the shares now trade at a ~17% discount to NAV. 

A discount on a sleepy investment trust may strike investors as a buying opportunity. Yet rather than a “patient” manager of shareholder capital, we view WPCT as a collection of overvalued and in some cases highly questionable businesses, veiled by its direction by one of the UK’s most venerated fund managers - Neil Woodford.  We believe Neil Woodford uses the capital entrusted to WPCT to bail out his flagship fund, the Woodford Equity Income Fund (“WEIF”).  Rather than investing in high quality stocks, WPCT buys start-ups of questionable value from WEIF at absurd valuations all in a futile attempt to artificially bolster performance at WEIF.

WPCT’s portfolio consists primarily of UK companies. As part of the portion of its portfolio held in unquoted stocks WPCT invests in early-stage companies, describing this strategy as “buying stakes in businesses with outstanding intellectual property and helping them fulfil their growth potential through the deployment of long-term patient capital”. The rest of the portfolio is comprised of positions in quoted/listed companies with larger market capitalisations.


Investment Thesis:

1)      WPCT bailing out WEIF to distort WEIF’s performance and avert its collapse.

After an illustrious career at Invesco, Woodford established his own fund in 2014 - Woodford Equity Income Fund (“WEIF”).  This flagship fund had AUM of £15 billion in 2014.  However, poor performance has triggered redemptions and the fund has shrunk to £4.8 billion as of January 2019.

WEIF is an open-ended fund with daily redemption rights. The Financial Conduct Authority (FCA) imposes a 10% limit on the proportion of unquoted holdings held by such funds. As of the beginning of March however, WEIF had as much as ~18% of its assets tied up in unquoted holdings particularly after a significant fall in the share prices of a number of its listed holdings such as Provident Financial, Prothena and Allied Minds. Given the difficulty of selling unquoted positions in startups combined with the illiquid nature of most of the AIM-listed stocks that WEIF holds, the fund has had trouble keeping within the 10% threshold of unquoted holdings set by the FCA.

  • WPCT/WEIF swap transactions

WEIF has resorted to the transfer of portions of its unquoted positions to WPCT in return for WPCT shares. The latest such transaction involved the transfer of stakes in Atom Bank, RateSetter, Cell Medica, Spin Memory and Carrick Therapeutics worth £73M and £6M in cash to WPCT in return for a stake in the latter of 9%.

While performance at WEIF was already dire, it would have been far worse based purely on quoted holdings.  Performance at WEIF is held up by the marking up of biotech startups with multi-billion-dollar valuations where Woodford funds and related parties are often the only material investors. Without the high mark ups of these UK startups, WEIF would have reported dire performance and redemptions would have been even higher. 

The marked up valuations of these unquoted businesses that WEIF has relied on for its performance, however, also implies that the valuations at which the swap transactions have taken place have most probably been very high, resulting in WPCT having no choice but to pay large amounts for WEIF’s unquoted positions, for no other reason but to ensure the latter’s compliance with regulatory requirements.

WPCT, on the other hand, is left holding a gradually increasing share of these unquoted stocks, which are (as expanded on below) often of questionable quality and value. Moreover, the aforementioned transaction which took place in Q1 2019, is only the first stage in a process where most of WEIF’s unquoted positions will be transferred to WPCT, as WEIF starts to focus solely on publicly listed shares rather than private companies.


  • Listing of WEIF’s stakes in unquoted companies

Along with swap transactions where stakes in unquoted companies are transferred to WPCT in return for WPCT shares for the purposes of remaining within the FCA set threshold for unquoted holdings, Woodford has been resorting to the listing of some of these unquoted companies.

While not being a key part of our short thesis, we believe these listings are worth considering given their suspect nature and what they imply about the quality of the listed assets. While initially expected to float stakes in some of these unquoted companies on main exchanges such as the London Stock Exchange, Woodford ended up listing them (e.g. Industrial Heat, Benevolent AI) on the much smaller International Stock Exchange in Guernsey. In addition, the issuing of preference shares has allowed Woodford to list solely WEIF’s stakes in these companies, obviating the need to list at least 25% of a company and avoiding having to involve other investors in the process.

Overall, the choice of exchange for the listings as well as their structuring is a red flag most likely implying that these companies were unsuitable for listings on the main markets where much more stringent regulatory requirements would have revealed more than Woodford would like to reveal about its unquoted holdings.


2)      Reliance on the mark up of unquoted biotech stocks for returns.   

WPCT performance is entirely reliant on the mark up of unquoted positions (as in the case of WEIF described above). Note the dire performance of the portfolio where Woodford cannot control the valuation of the stocks (i.e. in the case of quoted positions):

WPCT dependent on unquoted write ups    
    2016 2017 H1 18 Cumulative
Quoted   (26.6) (57.0) (41.6) (125.2)
Unquoted   13.8 22.7 51.1 87.7
Fair value gains (12.8) (34.2) 9.5 (37.5)

 Source: Company Filings

WPCT’s largest holdings are now dominated by unquoted biotech stocks. Contrasting WPCT’s holdings as of January 2016 with the latest fact sheet of February 2019, one can see the increase in the proportion of the trust held in unquoted stocks.  Note that the quoted stocks named in the 2016 top 10 holdings have been declining in recent months, with Prothena for example having fallen 70% to date, evidencing WPCT’s reliance on the mark up of unquoted stocks for bolstering returns. 

February 2019 holdings dominated by unquoted biotech
Name   % of NAV Value Quoted?
Benevolent AI 9.2% 93.5 N
Industrial Heat 8.9% 91.0 N
Autolus   8.1% 82.8 Y
Ox Nano   7.2% 73.6 N
Atom Bank   7.0% 71.4 N
Proton Partners 6.4% 65.0 N*
Immuno A   4.9% 49.9 N
Ox Science   4.0% 40.9 N
Prothena   2.3% 23.9 Y
% of holdings 58.0% 592.0  
Total portfolio   1020.0  

 Source: February 2019 Fact Sheet



Source: January 2016 Fact Sheet


3) Industrial Heat: the £2.6Bn cold fusion start up – 2nd biggest holding seems to be of questionable value


WPCT’s 2nd biggest position is Industrial Heat LLC.  This holding is the largest and most egregious manipulation of asset value in a portfolio of speculative overvalued assets.

 Industrial Heat constituted 1.88% of WPCT’s $796 million investment portfolio in 2015.  Implying a value of £15 million for the position.  No underlying share ownership is disclosed.


Source: WPCT Annual Report 2015


WPCT refer to Industrial Heat in their 2016 annual report.  The underlying holding is also disclosed.  As of this point in time, 14.2% of Industrial Heat and 45% of Industrial Heat A2 are held by WPCT. 


Source: WPCT Annual Report 2016


We use disclosures above to derive the 2016 implied asset values.  Assuming no change in ownership during the year, Industrial Heat appears to have been marked up from a value of £15 million to £17.6 million over the duration of 2016, implying a total value for Industrial Heat amounting to £101 million.


Fair value of Industrial Heat as of 2016 annual report     £ M
Equity type       A1 A2 Total
Total portfolio value       841.2 841.2  
Weight in portfolio       0.56% 1.53%  
Value         4.7 12.9 17.6
Holding in Industrial Heat Shares     45% 14%  
Implied value of entire Industrial Heat  Equity   10.5 90.6 101.1

Source: WPCT Annual Report 2016, own calculation


By contrast, the WPCT website states that the value of shares in Industrial Heat were marked down in 2016.


Source: WPCT Website


In 2017, Industrial Heat’s value once again appears to have been marked up.  Industrial Heat is also disclosed as a holding in WEIF. 


Source: WEIF Annual Report 2017


Note that WPCT’s holding in Industrial Heat at this point was just 1.4% and 11.6% across A1 and A2 shares.   


Source: WPCT Annual Report 2017


From this information, we can calculate the 2017 total equity value for Industrial Heat.  We note that the value of Industrial Heat had increased 7x from the £101 million valuation the year before.


Fair value of Industrial Heat as of 2017 annual report       £ M
          A1 A2 A3 Total
Total portfolio value       905.3 905.3 905.3  
Weight in portfolio       0.76% 0.44% 0.04%  
Value         6.9 4.0 0.4 11.2
Holding in Industrial Heat Shares     1.4% 11.6% 0.2%  
Implied value of entire Industrial Heat  Equity   491.4 34.3 181.1 706.8

Source: WPCT Annual Report 2017, own calculation

The share of Industrial Heat held by WPCT as of 2017 had fallen from 45% to just 1.4% in A1 shares and 11.6% in A2 shares.  But the value of holdings in Industrial Heat held by WPCT had only decreased from £17.6 million to £11 million.   

Without forensically following the multiple percentage changes across the fifty or so names in the WPCT portfolio, it would be easy to think that Industrial Heat was marked down 37.5% (11/17.6-1).  As we have shown, there was actually a valuation mark up of 7x. (706.8m/101.1m)

In the interim half year accounts for June 2018 - the latest available for WEIF, Industrial Heat is marked up an additional 66%.  Note that the underlying shareholdings have not changed in WEIF filings since 2017 but the holding values have increased.


Source: WPCT Annual Report 2017, own calculation


By 2018, WEIF held 2.44% of the entire fund in Industrial Heat stock.  This sum of these holdings is valued by Woodford at £113 million.


£4.7bn WEIF fund holds £1113m of Industrial Heat
% of Portfolio $M
1.56% 72.9
0.69% 32.2
0.15% 7.0
0.04% 1.9
2.4% 113.9

Source: WPCT Annual Report 2017, own calculation

WPCT has at least 8.92% of its funds in Industrial Heat as of February 2019.


Source: WPCT Website


Taking the ownership as it was last disclosed in 2017, we calculate a marked-up value of £2.6+ billon for Industrial Heat:


Fair value of Industrial Heat as of 31st December 2018        £ M
          A1 A2 A3 Total
Total portfolio value       969.0 969.0 969.0  
Weight in portfolio       2.76% 6.25% 0.04%  
Value         26.7 60.6 0.4  
Holding in Industrial Heat Shares     1.4% 11.6% 0.2%  
Implied value of entire Industrial Heat  Equity   1910.3 522.1 193.8 2626.2

Source: WPCT Annual Report 2017, WEIF Interim 2018 Report, own calculation

Woodford reported a mark-up of Industrial Heat of 357% in October 2018.


Source: WPCT Website


Bearish financial news website - Share Prophets, calculated that this implied a total value for Industrial Heat of $112.9 million post mark up. 


Source: Share prophets


However, we calculate that Woodford has actually marked Industrial Heat up to an enterprise value north of £2.6 billion. We believe this aggressive mark up of Industrial Heat to $2.6 billion is unwarranted. 

An analysis of Industrial Heat’s underlying business makes us question the value of this investment.


  •  Industrial Heat.  A lot of hot air?

 Woodford teamed up with Cherokee Investment Partners (Cherokee) to invest in Industrial Heat in May 2015.