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Woodford fallout: Merian to switch funds' unquoted stocks to trust

10 September 2019

Merian plans to switch unquoted stocks held by five of its funds into its Chrysalis investment trust as Woodford fund suspension throws spotlight onto illiquid investments.

Fund group Merian is planning to switch some of its funds' holdings in unquoted companies into its Merian Chrysalis (MERI ) investment trust, as the fallout from the Woodford fund suspension throws the spotlight onto illiquid investments.

Merian Chrysalis, which invests in rapidly growing, unquoted fintech companies, is looking to raise at least £100 million from investors on top of the £200 million it has already raised in under a year since launch.

Half of the proceeds will be spent on acquiring unquoted stocks held by five of the fund group's open-ended funds.

Some of the funds will meanwhile support the placing by adding to their existing stakes in the investment trust's shares.

The move comes amid scrutiny of hard-to-trade unquoted investments held in open-ended funds following the suspension of the £3.1 billion Woodford Equity Income fund.

Fund manager Neil Woodford's heavy holdings in these stocks contributed to his difficulties in funding withdrawals as performance deteriorated, ultimately culminating in the gating of his flagship fund.

Dan Nickols, Merian head of UK small- and mid-cap equities, acknowledged the 'heightened level of interest regarding this type of investment in open-ended funds'.

'Having established Merian Chrysalis as the primary vehicle for unquoted investments, and received considerable demand for the strategy, now is an opportune time to transition a proportion of unquoted shares from our open-ended funds to the closed-ended strategy,' he said.

Unlike open-ended funds, which are forced to sell assets when investors withdraw money, investment trusts feature a fixed number of shares, so do not come under this pressure. Open-ended funds are limited to holding 10% of their assets in unquoted companies but investment trusts do not face this restriction.

Five of Merian's funds invest in unquoted companies, including the £3.2 billion Merian UK Mid Cap fund run by Citywire A-rated Richards Watts and AAA-rated Nickol's £1.3 billion Merian UK Smaller Companies funds.

Along with the smaller Merian UK Smaller Companies Focus , UK Dynamic and UK Specialist funds, they own stakes in five of the companies held in the Chrysalis portfolio.

Watts and Nick Williamson, managers of the trust, are looking to up their exposure to Transferwise, Starling Bank, Graphcore, Secret Escapes and The Hut Group by buying up stakes from the funds.

Merian emphasised that those funds' exposure to unquoted companies was within the 10% limit.

'We have always maintained a prudent approach to unlisted holdings, investing only in established businesses, combined with strict compliance oversight,' said Nickols.

Based on the most recent annual reports for the funds, the £484 million Merian UK Dynamic Equity fund featured the highest exposure to unquoted companies, at 7.3% of the portfolio at the end of last year.

The Merian UK Smaller Companies fund held 6.2% of its portfolio in unquoted stocks at the same date, while the £501 million UK Specialist fund held 5%.

At the end of January, unquoted company exposure stood at 4.9% in the Merian UK Mid Cap fund and 3.8% in the UK Smaller Companies fund.

While those stakes will be reduced as Merian Chrysalis takes on some of the assets, the funds will retain some direct unquoted company exposure.

Four of the funds meanwhile hold a stake worth a combined £29 million in Merian Chrysalis, having been among the trust's seed investors, a position they will add to as part of the placing.

Woodford comparison

Merian's move carries echoes of Woodford's controversial swap deal earlier this year, when the manager swapped some of his Woodford Equity Income fund's unquoted stocks for a stake in his Woodford Patient Capital (WPCT ) investment trust.

The Merian deal is not a straight swap, however. The Merian funds will aim to preserve their percentage stake in the trust as the share capital is enlarged, rather than buying shares in the trust in proportion to the unquoted assets they are offloading.

Merian said the trust would buy the funds' unquoted company stakes at 'a modest discount to the latest available valuation of those assets' given the saving on transaction fees that would apply outside a company-sponsored fundraise.

The new trust shares will meanwhile be issued at a premium to net asset value (NAV), but a discount to the prevailing market price.

Shares in Merian Chrysalis closed yesterday at a 19.6% premium to NAV. They fell 4.4% this morning on news of the placing.

Investment company news brought to you by Citywire Financial Publishers Limited.

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