Is it time to buy Patient Capital Trust?

Schroders logo © K. Y. Cheng/South China Morning Post via Getty Images

Quick thing before we start: if you're not already subscribing to MoneyWeek magazine, you can get your first 12 issues for £12, plus a free report on Brexit, all by signing up now. Don't miss it!

Things might be looking up for (some) Neil Woodford investors.

Schroders is taking over Woodford Patient Capital Trust. The trust will be renamed Schroder UK Public Private Trust. The share price surged yesterday as a result.

Woodford had been set to run the trust for three months, but according to Morningstar, "Schroder is poised to take over the running of the trust by the end of the year."

So what happens now?

The future for Patient Capital

First things first you may not be surprised to hear that the (inadvertently) generous fee structure is going to change. Under Woodford, the management needed to deliver net asset value (NAV) growth of at least 10% a year before they became eligible to take a fee.

That never happened (although there was a 0.23% a year charge for annual expenses). So while Patient Capital investors have lost plenty of money (on paper, at least), most of that damage can't be blamed on fees.

Setting such an ambitious target for NAV growth presumably demonstrates the somewhat overstated sense of self-confidence Woodford had at the time. No one was going to take over the trust on the same terms, and so it has proved.

Schroders won't charge a fee for the first three months. But after that, the group will charge 1% a year on the first £600m of assets, and then 0.8% on anything above that.

There's going to be a performance fee too, although that does not kick in until 3 December, 2022. After that point, Schroders will take 15% "of any excess returns above a NAV per share of 77p". (At the moment, the NAV is 63.2p).

And then after that, there will be a 15% fee "of any performance above a hurdle of 10% of net assets a year, subject to a high watermark."

We don't like performance fees at MoneyWeek we feel that there are better ways to align managers' interests with those of investors. That said, if Patient Capital's NAV recovers to a point where investors actually believe that 77p is an accurate estimate, then Schroders will probably have earned the money.

More importantly, what does this mean for Patient Capital's prospects? Is it worth buying in?

The share price surged by almost a third on the news of Schroders' appointment. Yet despite this massive relief rally, the share price is still a good way below the 45p a share at which I said you shouldn't touch it with a ten-foot bargepole last month.

It's also still trading at a massive discount to its NAV of nearly 40%.

In other words, if Patient Capital Trust is genuinely worth buying, I don't think you've missed your opportunity. The question, of course, is this: is it?

Is Patient Capital worth buying now?

What do we know now that we didn't know this time last week?

The fact that Schroders is willing to take on Patient Capital suggests that it is not an entirely lost cause. And apparently Schroders aims to run it in line with the current plan to generate long-term capital growth by investing in both listed and unlisted, primarily UK-focused, companies.

So it's not yet being wound up. Therefore, unlike the open-ended fund, the risk of pressured, fire-sale assets is lower than it was before.

That said, we still don't know what the new management team is going to think when they get a proper chance to trawl through the portfolio.

As Alan Brierley of Investec points out, "Schroders will inherit a highly geared, highly illiquid and concentrated portfolio, predominantly consisting of venture capital investments we expect to see more gremlins before any unicorns."

There's also as Brierley alludes to the tricky question of gearing. The trust needs to sort out its debt levels to give it more room for manoeuvre. Arguably, that should be a bit easier to do now that there is more clarity on the fund's future, but it's still a challenge.

Overall, I'd say that the big change here is that Patient Capital has bought itself some time. That's very important.

The big reason that Woodford got into trouble in the first place is that the illiquidity of his portfolio meant that he had to make short-term decisions based on managing that exposure, rather than long-term decisions this investment style requires.

So getting some breathing space is a big plus. And if the Schroders handover goes relatively smoothly, then chances are that the main concern left will be the quality of the portfolio, rather than issues of running up against limits on leverage and unquoted holdings.

That means that if the underlying investments are genuinely decent, then they might just get the room they need to realise their potential. The question then, of course, becomes: do they have sufficient potential?

I can't answer that. Normally I'd say that a 40% discount to NAV was a wide enough margin of safety not to worry, but this is not a normal situation.

Long story short, I think that this has removed some of the uncertainty hovering over the fate of Patient Capital, and as a result, that does make it more appealing. I don't think it's a high-conviction bargain. And I'm not desperately tempted to invest myself.

That said, if you've been eyeing it up, then I think now could be the time to make a cautious initial investment. In more down to earth language, it's gone from being untouchable to "maybe worth a punt". That's about the best I feel I can say about it right now but that's a lot better than what I was saying a month ago.