Share buybacks and an ambition to become a more conventional global private equity fund are the best hopes for long-suffering investors in Schroder UK Public Private (SUPP ).

Shares in what was the Woodford Patient Capital Trust have fallen 26% since Schroders surprised observers by winning the mandate for Neil Woodford’s crushed closed-end fund in December 2019 after his business imploded following the suspension of his flagship Equity Income fund.

Net asset value of the healthcare-dominated portfolio has slumped 31% while the UK stock market has gained 13%.

Investors who backed Woodford from the start in April 2015 and hung on after he resigned have seen their stakes lose three quarters of their value. At 25p today the shares are just a quarter of their launch price and stand at wide 33.5% discount to their NAV per share of 38p.

Nanopore rise and fall

This dismal state of affairs comes despite an encouraging 2021 which saw fund managers Tim Creed and Roger Doig oversee a 37.4% investment return, with NAV per share ending December at just over 48p.

The mainstay of that performance was the successful flotation of Oxford Nanopore Technologies (ONT). This brought the trust a much-needed gain of £104.6m and proof that Woodford hadn’t entirely lost his stock-picking touch in medical startups, a sector he ended up preferring to the staid blue-chip dividend stocks with which the former star fund manager made his name.

Unfortunately, last year’s underlying rebound was not reflected in the shares, which crept up twopence to 33.1p at the end of the year. This gave rise to the dispiritingly large discount as concerns about the rest of the legacy portfolio undermined investor sentiment. These revolve in particular around the 4.9% holding in Rutherford Health, the operator of proton beam cancer treatment centres to which the trust provided a bridge loan while it sought long-term funding under new management. The business could collapse if the financing does not materialise, the trust warned.

Moreover, the ONT stake which accounted for 37% of assets at 31 December, and which until recently the trust was locked into holding, has hurt SUPP this year. The stock has tumbled 58% in the 2022 stagflation scare, which is the main reason the trust has slid 24%.

That leaves SUPP miles from the three-year 77p NAV target above which Schroders can start to earn an additional performance fee and investors can feel their patience has perhaps been rewarded.

Even Winterflood, the trust’s corporate broker is downbeat, with analyst Simon Elliott (above) admitting the ‘sense of frustration’ around the company, which remains dogged by a wide discount despite hitting a number of milestones, such as the listing of ONT and making its first post-Woodford new investments in email security provider Tessian, fintech Revolut, consumer research platform Attest and German app Ada Health.

Best of all were the first-half disposals that enabled the board to shed the trust’s £160m debt pile, which now leaves it free to consider using any surplus cash to buy back the undervalued shares and hopefully start to narrow the discount.

Buybacks will of course be set against the case for making new investments, but at such a big discount the board should be confident of making a good return for investors buying back the stock.

Confidence in valuation

Doig, who replaced Ben Wicks as head of quoted equities last year, said while it had not been reflected in the shares, there had been steady progress in the portfolio. He pointed to last month’s Euronext listing of BenevolentAI, the drug discovery platform that was SUPP’s third largest holding at 6.5% in December, and a recent funding round by Atom bank, the second largest holding at 10.6%, as tangible signs that ‘confidence in the NAVs has been rising’.

Doig (above), who mis-timed an investment in Johnson Matthey (JMAT) last year, buying before the shares plunged when the British chemicals company put its battery materials business up for sale, said access to the global private Schroders Capital platform would enable Creed to gradually dilute the bias to healthcare with investments in exciting unquoted companies.

Global proposal

While this year’s tech selloff had slowed down the pace of investment, he was confident deal flow would return. Chairman Tim Edwards thinks so too, proposing investors back a proposal at the AGM on 18 May to remove a restriction that it invests mainly in the UK. This, he said, was to take advantage of Schroders’ ‘unparalleled access to a global universe of top-quality opportunities … to give our investors exposure to the best venture and growth companies in the world.’

Edwards cited Schroders’ figures that claimed to show the group achieved a three-fold return on its global growth capital investments up to the third quarter of last year. That was before the tech bubble burst, which underlines the impression there is no quick turnaround for SUPP, however laudable the strategy.

Alan Brierley, the Investec analyst who maintained a ‘sell’ rating on SUPP, said the truth was the trust did not look cheap at all when quality private equity trusts such as HarbourVest Global Private Equity (HVPE ) and Pantheon International (PIN ) also languished on steep discounts of 35% and 30% respectively.

‘While SUPP continues to struggle with legacy issues and an ongoing portfolio rebalancing that will take some time, we believe these companies offer much stronger fundamentals, including high quality and mature portfolios, generating superior revenue/earnings growth, and significant levels of realisations at material uplifts to what are proving conservative valuations,’ he said.