Today I’m looking at two stocks in the FTSE 250 index. Woodford Patient Capital Trust (LSE: WPCT), which is managed by Neil Woodford, and IP Group (LSE: IPO), a company in which he has a 19% stake.
Launched in April 2015, Patient Capital is a growth-focused investment trust that invests largely in early-stage and early-growth businesses. It has steadily ramped up its exposure to unquoted companies.
Today, its make-up is not dissimilar to that of IP Group, which is an incubator of potentially “world-changing” life sciences and technology businesses. Indeed, as well as owning shares in IP, Woodford is a fellow cornerstone investor in quite a number of its investee companies.
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Discount prices
Tangible net asset value (TNAV) is the appropriate measure to look at for investment trusts and investment companies like Patient Capital and IP. Currently, the shares of both are trading at a discount to their last reported TNAVs, and so appear to offer good value.
As I’m writing, Patient Capital’s share price is 84.6p — a 12.2% discount to its TNAV per share of 96.35p. IP’s share price is 103.6p — a 15.5% discount to its 122.6p a share TNAV. However, I’m not convinced these discounts are wide enough to offer investors a sufficient margin of safety. Here’s why.
High paper values
Around this time last year, I drew readers’ attention to a controversial report on IP by US short-seller J Capital Research (JCap). The report suggested that a relatively small number of cornerstone investors, who set the valuations of IP’s unquoted companies, had “a collusive interest creating high paper values.” JCap put a value on IP that was a 40% discount to the group’s accounting TNAV.
By way of testing this in a small way, I’ve searched out IP investee companies that have floated on the stock market to see what happened to their valuations when they were subjected to scrutiny and assessment by a much wider pool of investors.
I found five unquoted companies in which IP is a cornerstone investor that came to market via an initial public offering (IPO) in the last five years. The table below summarises my findings.
| Flotation date | IPO market cap | Current market cap | IPO share price | Current share price | Market cap increase / (decrease) | Share price increase / (decrease) | |
| Applied Graphene Materials | 20/11/13 | £26.2m | £13.8m | 155p | 28p | (47.3%) | (81.9%) |
| Xeros Technology | 24/3/14 | £80m | £41.4m | 123p | 16.1p | (48.3%) | (86.9%) |
| MedaPhor (renamed Intelligent Ultrasound) | 27/8/14 | £10.1m | £11.9m | 50p | 7.6p | 17.8% | (84.8%) |
| Diurnal | 24/12/15 | £75.2m | £19.7m | 144p | 32p | (73.8%) | (77.8%) |
| Mirriad Advertising | 19/12/17 | £63.2m | £16.6m | 62p | 15.75p | (73.7%) | (74.6%) |
The average current value (market cap) of the companies is 45% below their average value at IPO. On a per share basis, the picture is even worse, with an average decline in value of 81%, due to dilution via further fundraisings.
I think this provides some support for JCap’s view that IP’s unquoted investee companies go in its books at over-rosy valuations. Of course, with Woodford being another cornerstone investor in this area of the market — not infrequently alongside IP — much the same criticism can be levelled at Patient Capital.
On balance, I’m inclined to avoid these two stocks at their current prices. I’d want much bigger discounts to TNAV than Patient Capital’s 12.2% and IP’s 15.5% to feel I was getting value for money and a margin of safety.
