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Woodford Equity Income Fund - Transfer of unquoted assets

We wanted to let you know that the LF Woodford Equity Income Fund (the fund) has transferred some of the portfolio's individual unquoted stocks to Woodford Patient Capital Trust (the trust) in exchange for shares in the trust. This step signals the start of a strategy to switch the fund's unquoted exposure from individual unquoted holdings to shares in the trust.

Which unquoted positions have moved across?

Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory have transferred from the fund to the trust. All of them are existing positions within the trust portfolio. The combined value of these assets is £72.9m. A further £6.0m in cash has also transferred from the fund to the trust, to meet the anticipated capital requirements of these assets over the next twelve months.

Why have they chosen these particular stocks?

They have selected from a list of positions in which the trust already has a holding, and have avoided stocks where they believe there is a known likelihood of an imminent milestone being reached that would trigger a near-term valuation change. Indeed, an additional valuation report was commissioned by the trust's board which, as required under the Companies Act, independently verified the reasonableness of the valuations of the five stocks transferred.

Furthermore, several of the larger unquoted positions within the fund are also already well-represented within the trust portfolio. As these businesses are typically at a more mature stage of their growth cycle, other forms of corporate activity could arise in the short-to-medium term that would further reduce the fund's aggregate exposure to unquoted securities. Evidence of this was provided by Proton Partners International, which has listed on London's NEX Exchange Growth Market. The acquisition of the selected assets allows the trust to increase its position to companies that the board views as the "the second-wave of global disruptors".

How has the transfer taken place?

The trust has acquired this portfolio of assets for £78.9m (including the cash element) through the issuance of 81,639,238 new ordinary shares. The shares have been issued to the fund at a price of 96.67 pence per share which is equal to the net asset value (NAV) per share as at 27 February 2019, plus the costs associated with the transaction.

In buying the shares at the trust's NAV, the fund is buying its stake in the trust at a premium to the prevailing share price. They have explored how much it would cost the fund to purchase the equivalent position in the secondary market and their analysis suggests it would cost considerably more and take significantly longer, than buying at NAV in this way. The fund is paying what the trust's assets are actually worth and they are doing this with the belief that the assets will significantly appreciate over the medium-to-long term.

Why have they transferred these unquoted holdings?

This step signals the start of a strategy to switch the fund's unquoted exposure from individual unquoted holdings to shares in the trust. Neil is as passionate on the unquoted asset class as ever but having listened to feedback from clients they believe that moving the exposure to the asset class via a collective fund rather than individual unquoted stocks makes sense - both operationally and from an investor view.

- uploaded - 4 March 2019

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Elson Associates does not offer advice as to the suitability of investments. If you are unsure whether an investment is suitable for you, you should obtain expert advice. Past performance of an investment is not necessarily a guide to its performance in the future. The value of investments or income from them may go down as well as up. You may not necessarily get back the amount you invested.

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