Just to rub salt into the wounds of embattled fund manager Neil Woodford, the FTSE powers that be last night confirmed his Patient Capital Trust (LSE: WPCT) is to be kicked out of the FTSE 250 index.
The move follows a 39% collapse in the growth trust’s share price since the last quarterly review of the FTSE indexes. The shares closed yesterday at 45p, representing a discount of 40% to its last published net asset value (NAV) of 74.43p.
On paper, Patient Capital appears to offer great value. Here, I’ll explain why I see it as a stock to avoid.
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Discount
A month before the gating of his flagship Equity Income fund in June, I warned readers the House of Neil Woodford could be about to collapse. I’d been bearish on his Patient Capital Trust from way back in January 2018 (when the shares were 83p and trading at a discount of less than 10% to NAV), explaining why I believed the discount should be much wider.
However, due to the ramifications of the gating of his Equity Income fund, which has significant cross-holdings with Patient Capital, even the current 40% discount isn’t wide enough to tempt me.
Cornerstone investors under pressure
Woodford is in the process of clearing out the unlisted stocks from his Equity Income fund to raise cash in order to meet redemptions when the fund is ungated. Meanwhile, he’s also a seller with his Patient Capital hat on, having agreed with the trust’s board to clear a maxed-out £150m overdraft within 12 months.
Elsewhere, IP Group, another early-stage investment company, is backed by Woodford, as well as being a fellow cornerstone investor in many of the same unlisted companies. IP’s shares have also collapsed to a steep discount to NAV, making it difficult for it to raise fresh cash to support the investee companies.
Another under-pressure cornerstone investor is Invesco Perpetual. When Woodford left Invesco, he left his protégé Mark Barnett with big positions in many of the same unlisted companies he went on to buy for Patient Capital and his new Equity Income fund.
Omnishambles
With Woodford now a seller and key fellow cornerstone investors not best placed to take shares off his hands, the valuation of the investee companies will inevitably come under pressure. Any new investor willing to relieve Woodford of his shares will want a hefty discount.
Furthermore, with many of the investee companies being loss-making, and requiring more rounds of funding to have any hope of reaching commerciality, it’s not in their interest to see Woodford sell his shares to a new investor. This raises no cash for the companies themselves.
Far better for them to keep Woodford locked in by offering any interested investor new shares at a discount to Woodford’s selling price. This raises cash for the companies, rather than for Woodford, but puts further downward pressure on their valuation and on Patient Capital’s NAV.
Frankly, I think the situation is an omnishambles, and it’s impossible to estimate what Patient Capital’s true NAV might end up as when everything’s played out. For now, I see the trust as uninvestable.
