‘This is a regulatory matter which is confidential in nature and therefore, I am unable to make any further comment at this time.’ 😉
Surprise decision a blow to fund manager’s efforts to limit the size of unquoted portfolio
Veteran investor Neil Woodford has been dealt a blow following the suspension of three of his stakes in unquoted private companies on the Guernsey stock exchange last night, following his decision to list them offshore in order to reduce his flagship’s funds exposure to unquoted holdings.
Mr Woodford shifted his stakes in the biotech company Benevolent AI, cold fusion company Industrial Heat and technology investor Ombu offshore between the middle of last year and March 2019 amid pressure to keep his flagship equity income fund within the financial regulator’s 10 per cent limit for unquoted stocks.
However according to company notices uploaded to Guernsey’s International Stock Exchange Authority on Friday Mr Woodford’s stakes in all three companies were suspended on 11 April, at 6pm.Stocks are usually suspended if there are question marks over whether they have complied with the exchange’s listing rules. The preference shares could now either be cancelled or the suspension lifted.
Mr Woodford has been battling to keep his flagship fund compliant with regulations that restrict investments in unquoted securities for more than a year.
His Equity Income Fund had peak assets of £10.2bn in May 2017 but investors have withdrawn capital every month since then, with the fund now shrinking to £4.7bn. To satisfy investor redemptions, Mr Woodford has had to sell liquid investments in his quoted stocks, in the process elevating the weighting of his unquoted portfolio. The fund last year had a weighting of more than 9.5 per cent in unquoted stocks, dangerously close to the 10 per cent cap imposed by the Financial Conduct Authority. However, the rules allow unquoted companies planning to list within 12 months to be reclassified from the unquoted segment to the quoted segment. The fund had 7.76 per cent of its investment in unquoted securities earlier this month. A Woodford Investment Management spokesperson said: “We have worked with businesses across different markets including Nasdaq, AIM and TISE and instances where we decided that it is in the companies’ interests to remain private.”He added: “It is a fluid journey. A company may initially intend to list but then circumstances change. Other opportunities may come their way, or a market listing may no longer be in the interests of the company given market conditions.”However, one of the corporate sponsor of the companies involved said it was “surprised” at TISE’s decision.
Jonathan Gray, Director, Belasko Corporate Finance said: “We are surprised at the decision. We were not consulted in advance and have been given no clear justification for it. The companies concerned have complied fully with TISE Listing Rules at every stage.”The suspension of dealings in the three shares has no impact on the investments held in the three companies within Mr Woodford’s flagship fund.
Mr Gray said Belasko was now in discussion with TISE.
Mark Nicol, managing director of The International Stock Exchange Authority, which is the market operator of The International Stock Exchange (TISE), said: “This is a regulatory matter which is confidential in nature and therefore, I am unable to make any further comment at this time.”
The Guernsey stock exchange has dealt a blow to Neil Woodford’s attempt to reduce unquoted holdings in his Equity Income fund by suspending dealing in three of the stakes in private companies he recently listed on the Channel Island.
The International Stock Exchange Authority, which regulates the exchange, suspended the listing of Woodford’s stakes in unquoted companies Benevolent AI, Industrial Heat and Ombu yesterday evening, amending the measure to a suspension of dealing this afternoon.
In separate announcements for each company, the authority said it had ‘suspended dealings in the following securities with effect from 11 April 2019 at 18:00’.
Mark Nicol, The International Stock Exchange managing director, said: ‘This is a regulatory matter which is confidential in nature and therefore, I am unable to make any further comment at this time.’
The Guernsey authority’s shock move is a significant setback for Woodford, who had listed his stakes in the companies in the Channel Islands as a means of remaining within the City regulator’s rules on the amount of unquoted company stocks a fund can hold, as Citywire revealed last month.
The three stocks account for around 7.2% of his £4.7 billion Woodford Equity Income fund and the dealing suspension risks the fund committing a passive breach of the Financial Conduct Authority’s (FCA) 10% limit on funds’ unquoted company exposure.
Should the Guernsey authority ultimately cancel the listings, the Woodford Equity Income fund’s unquoted exposure would rise above 12%, based on the fund’s current weightings.
Woodford’s stake in artificial intelligence provider Benevolent AI is his largest unquoted company holding, representing 4.1% of the Woodford Equity Income fund.
His controversial stake in cold fusion specialist Industrial Heat is a 2.3% position while Ombu, an early stage company investor, is a 0.77% position.
The only Woodford holding listed in Guernsey that has escaped a suspension of dealings is Sabina Estates, the Ibiza property developer.
While dealing on the three shares has been suspended, it is understood this will not have an immediate effect on the Woodford Equity Income fund and its unquoted company exposure in relation to the regulatory limit.
As with suspensions to trading of shares on the UK stock market, Link, the Woodford Equity Income fund’s authorised corporate director, is likely to continue classifying the holdings as quoted until the suspension is resolved.
Should the holdings ultimately be deemed unquoted, any passive breach by Woodford’s fund would require the manager to bring the fund back below the 10% limit, with the FCA likely to impose a deadline of up to six months.
Options available to the manager would include selling unquoted stakes to rival investors or to other funds he runs, such as the Woodford Patient Capital (WPCT) investment trust, which took five stakes in an £79 million share swap that saw the fund take a 9% holding in the trust. Woodford’s Equity Income fund also sold a £48.8 million stake in Benevolent AI to the Patient Capital trust in late 2017.
The news is understood to have come as a shock to Woodford Investment Management, which is not involved in the listing application process. It is seeking clarification from Guernsey.
Belasko Corporate Finance, which acted as sponsor for all of Woodford’s stakes placed on Guernsey’s International Stock Exchange, is understood to be in discussions with the stock exchange authority following the suspensions.
‘We are surprised by the decision,’ said director Jonathan Gray. ‘We were not consulted in advance and have been given no clear justification for it. The companies concerned have complied fully with The International Stock Exchange listing rules at every stage.’
A Woodford spokesman said the fund group remained committed to the companies.
‘Many of the businesses are maturing companies and at some stage we would expect a crystallisation event,’ he said.
‘We want to maintain our exposure to these businesses and they want us to remain an investor.’