When he set out to create his Patient Capital Trust (LSE: WPCT), Neil Woodford was at pains to explain the long-term nature of the company. With a focus on hi-tech start-ups, the investment trust’s performance should be judged over a three-to-five-year period, he explained.
Unfortunately, investors don’t seem to be willing to hang around for these returns to materialise. After initially proving to be a hit, as evidenced by the trust’s 15% premium to net asset value three months after its IPO in April 2015, investors have slowly drifted away.
Today, the trust trades at a 13% discount to the latest reported net asset value of 102p. Earlier this year, the discount blew out to nearly 30%.
High risk, high reward
I have never been entirely won over by Woodford’s patient capital strategy because I know how difficult it can be to pick early-stage tech and biotech companies successfully.
Based on various surveys and studies, we know approximately two thirds of venture capital funds fail to produced positive returns for investors and a similar percentage of venture capital-backed companies fail. Most of these early-stage investors pin their hopes on just one investment paying off, which usually produces such fantastic profits all the other losses are forgotten.
Now I’m not saying Woodford is following the same approach. He already has an impressive record of investing in private companies, established when he was managing his previous stable of funds at Invesco, but it’s difficult to ignore the data from the rest of the industry.
The Patient Capital Trust has focused its investments on the most promising companies, like Ultrahaptics, which has developed a technology that uses “high-frequency ultrasound to enable the sensation of touch to be felt in mid-air.” This company accounts for 2.8% of the trust’s portfolio, and recently completed another £35m fundraising. The technology is being used in Las Vegas in gaming machines and has also attracted other commercial partners such as Nike, Dell and IBM.
This isn’t the only company in the portfolio that’s pushing ahead. A few weeks ago, the trust told investors that three of its biotech startups, Immunocore, Mission Therapeutics and Spin Memory, have all signed landmark collaboration agreements with leading pharmaceutical companies and technology groups to help push forward product development.
Making progress
There has been a steady stream of positive news from the portfolio throughout 2018. And while they have also been some negative developments as well, broadly speaking, the investee companies are moving forward.
And for risk tolerance investors, now could be the time to consider taking a position here. A recent research note from City analysts pointed out that the number of the investee companies are now maturing and have reached “demonstrable milestones.”
So, while there is still plenty of risk that the portfolio could not perform as expected, recent developments have helped de-risk the trust’s investment portfolio. This doesn’t guarantee returns, but I reckon recent events have dramatically improved the quality of the investment vehicle. A mid-teens discount to net asset value only sweetens the deal, in my view.
If you’re happy with the risk that comes with investing in early-stage companies, the Woodford Patient Capital Trust might be worth further research.