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The Importance of Liquidity Management

Meriel Hodgson-Teall and Jonathan Garvey discuss the latest market updates on the Woodford Equity Income Fund.

Posted on 01 February 2021

Investors in the former Woodford Equity Income Fund (WEIF) will be disappointed by the recent news that investments previously held by the fund have been sold on for significantly more than WEIF sold them for, generating profits that WEIF investors have missed out on.

WEIF’s two per cent stake in Kymab was sold by Link Fund Solutions Limited (Link), WEIF’s authorised corporate director, in August 2020 to global life sciences Malin Corporation (Malin), an existing large shareholder in Kymab. The holding is thought to have been sold to Malin for around €7m.

On Monday, 11 January 2021, Malin sold its holding in Kymab to French pharma company Sanofi, in a deal worth as much as $1.45bn. $1.1bn will be paid upfront, with up to a further $350m dependent on targets being met.

The deal done with Sanofi values WEIF’s former stake at around €23m, more than three times the amount received by Link.

Kymab was one of WEIF’s unquoted securities, and in the period 15 October 2019 to 17 January 2020, WEIF’s unquoted assets were subject to valuation adjustments totalling £462 million (comprising £288 million in revaluations and £174 million in liquidity adjustments). Link has explained that it has needed to make liquidity adjustments to the valuation of some unquoted assets to deliver their realisation in an orderly and efficient manner.

The announcement about Kymab follows Link’s deal done with Acacia Research which included several WEIF healthcare assets. Nineteen assets were packaged together and sold in a deal valued at £223.9m. Collectively, these assets received roughly 43 per cent of their valuation they held in the 2019 semi-annual report (this figure does not include Open Orphan which was not in the 2019 portfolio and so has been left out of the calculation).

In related news, the Schroder UK Public Private Investment Trust, formerly known as the Woodford Patient Capital Trust, announced an extension of its £107.3m credit facility in a 24-month term to 30 January 2023. It is thought that without an extension, a fire sale of assets would have followed. Interest on the facility will be set at the Bank of England’s base rate + two per cent. It is expected that gearing in the fund will fall gradually from its current level of 26 per cent of Net Asset Value (NAV). According to the trust’s prospectus, gearing should not exceed 20 per cent of NAV.

Shares in the trust recently traded at a discount to NAV of 27.4 per cent compared to 43.9 per cent on 30 June 2020. Comparable funds such as Jupiter’s Chrysalis and Baillie Gifford’s Schiehallion each trade at a premium of 17.1 per cent and 9.5 per cent respectively.
Taken together, these events illustrate the importance of liquidity management, and point to failures by Link in its management of WEIF’s liquidity.

Regardless of whether the assets in the former Woodford Equity Income Fund were sound, where an open-ended fund does not maintain its ability to redeem shares, investments will not have the opportunity to attain maturity.

Had Link properly managed the fund’s liquidity, investors in WEIF may not have suffered the significant losses that they have sustained to date.

We believe Link should be held accountable for its failings in relation to WEIF and that investors should be compensated for their losses. Leigh Day have therefore launched a claim on behalf of investors in WEIF against Link on the grounds of liquidity mismanagement.

Meriel Hodgson-Teall
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Meriel Hodgson-Teall

Meriel is a partner in the consumer law team