Following Neil Woodford’s decision to gate his flagship £3.7bn Equity Income Fund on the 3rd of June, investors have rushed to withdraw their money from his other open-ended fund, the £325m Woodford Income Focus Fund, and dump shares in the Woodford Patient Capital Trust (LSE: WPCT).
Unlike his other funds, the Patient Capital Trust is a closed-ended investment trust, which means it doesn’t have to sell investments to meet redemption requests. Instead, the trust trades like a company, with the value of its shares determined by supply and demand.
As investors have rushed to reduce their exposure to Woodford, shares in the trust have plunged in value. They’re currently changing hands for around 55p, down from 76p at the beginning of June, and 90p in January.
However, following this decline, the shares are now dealing at a substantial discount to the published net asset value per share of the trust. This presents an interesting question. Does the current discount to net asset value make the Woodford Patient Capital Trust a buy?
Complex calculation
According to the company, the value of its portfolio is worth around 84p per share. That means, at the time of writing, these shares are trading at a substantial discount of around 36% to the underlying net asset value. It’s common for investment trusts to sell at a discount to the underlying net asset value, but a gap of nearly 40% is extremely rare.
Unfortunately, it’s not easy to determine if this net asset value is reliable or not. Virtually all of Patient Capital’s portfolio is invested in private companies, which are notoriously difficult to value. The trust’s board does carry out independent evaluations of the businesses, but even these are subject to a degree of guesswork.
For example, the second largest position in the portfolio, accounting for 8.5% of assets under management, is BenevolentAI, which claims to use artificial intelligence to improve medical outcomes. In theory, this business is worth £1.5bn, based on previous fundraising rounds. But we don’t know if this valuation would hold up today. The last time the company raised money was in April 2018.
This is just one investment in the portfolio, but I think it clearly illustrates why it’s difficult to trust the company’s published net asset value.
Cheap, but not cheap enough
Having said all of the above, I believe if the value of the Patient Capital keeps falling, then it might be worth a second look. A discount of 50% or more to net asset value would, in my opinion, provide an attractive margin of safety for investors if the value of some holdings is marked lower in the future.
So I’m not a buyer of the trust today at the current 36% discount. However, if the share price continues to fall, I think the investment might be worth a second look.
