David Prosser examines Woodford’s rationale for investing in the crowdfunding platform, Seedrs.
Given his reputation for outstanding stock picking, every investment decision made by Neil Woodford attracts attention. But the latest investment by Woodford’s Patient Capital Trust, the fund launched earlier this year to invest in developing companies, deserves particular scrutiny. The investment company is leading a £10m funding round for Seedrs, one of the UK’s fastest-growing crowdfunding platforms.
Unlike the better-known loans-based platforms such as Zopa, Ratesetter and Funding Circle, Seedrs facilitates equity investments in very small businesses seeking funding for development. Equity-based crowdfunding has yet to raise finance for companies on the scale of the lending sector, but has been growing at a much faster rate over the past three years.
This type of investment is clearly very risky – there’s every chance many of the companies that raise money on Seedrs will end up losing their new shareholders’ money. The hope is that a few big wins compensate for those disappointments – the UK has just recorded its first-ever profitable crowdfunding exit, with E Car Club selling out to Europcar - which implies that a portfolio approach is the way to go when investing in this area.
With its stake in Seedrs, Woodford Patient Capital is taking a different tack, of course, buying into the platform itself, rather than the businesses raising money on it. But there’s an obvious connection – Seedrs will only prosper if it continues to attract both companies that want to raise finance and investors who want to provide that finance; that won’t happen unless there are more success stories.
Woodford clearly believes in the concept of equity-based crowdfunding and it will be interesting to see whether other institutional investors follow his lead. Seedrs’ leading rivals, Crowdcube and Syndicate Room, may need their own funding sooner rather than later, given the growth of the sector, and there are almost 30 other players trying to establish themselves.
What we don’t have yet is an investment company offering investors a professionally-managed portfolio of equity crowdfunding projects. By contrast, there have been several launches of closed-end funds that buy up loans on the debt-based platforms – including P2P Global Investments, which has just raised £400m of new funding in a C share issue.
A closed-end fund launch in the equity crowdfunding sector is less obvious given that the companies on these platforms rarely pay dividends (the generous income stream on offer from peer-to-peer loans is what makes funds with these holdings so attractive). Nevertheless, the day may come.
In the meantime, however, the investment company sector offers plenty of other opportunities for investors to take stakes in young, developing companies with a potentially high-risk/high-return profile. There’s Woodford Patient Capital itself, naturally, but also more than 20 listed private equity funds, as well as a new crop of venture capital trusts (VCTs) each tax year.
Private equity fund managers do for a living what investors on equity crowdfunding platforms are doing as more of a punt. VCTs, meanwhile, offer tax-efficient investment in what are often smaller businesses than the private equity sector prefers (new VCT shares offer the biggest tax breaks).
Both are potentially exciting options for investors attracted to the idea of what Woodford is calling “patient capital” – taking long-term stakes in companies with the potential to deliver exciting returns if given the chance to do so. They also provide professional management and a portfolio approach – that may be especially valuable to those who don’t feel comfortable picking and choosing nascent businesses for themselves on Seedrs and its peers.