Review - Downing FOUR VCT - Healthcare
This new share class for the longstanding Downing Four VCT is looking to raise £10 million (with a further over-allotment of £10m) to invest in early-stage healthcare, biotechnology and life sciences businesses. Downing is the overall manager, but will use the skills of specialist healthcare investor BioScience Managers to source and manage deals.
- New £10 million share class
- Focused on exciting long-term growth area of healthcare and biotech
- Experienced, specialist investment advisers
- Healthcare driven by long-term trend of ageing population
- Monthly investment option
Downing launched in 1986 as a specialist in tax efficient investments, initially raising money for third parties but latterly managing its own range of VCTs, EIS, IHT and open ended funds. In total Downing manages £700 million of which £210 million is in its VCTs. In total Downing has over 20 investment professionals managing unquoted investments. Partners of Downing have £2 million currently invested in its range of VCTs.
Target return and strategy
This is a long-term growth orientated VCT that will invest in innovative biomedical companies including medical devices, drug discovery, diagnostic technology and e-health technology businesses. Investments will be made to aid development and expansion.
The targeted dividend is 4% from the fourth year onwards, not guaranteed.
The healthcare sector is driven by demographic factors, such as the age of the population, obesity and wealth. Diabetes is a disease common in the obese. There are now 387 million people with diabetes globally; this figure is expected to grow substantially over the next decade. Diabetes is a condition that costs many billions annually to treat therefore it is an ideal area for embryonic companies to focus on.
Another growth area is the treatment of rare diseases. There are approximately 7,000 rare diseases and currently only 5% are estimated to be treatable, however with the advances in technology this number is growing rapidly. Companies are paid on the effectiveness of their drugs, and in the US approval is becoming easier to obtain for rare diseases.
Globally annual healthcare spending is expected to top $9 trillion by 2018 and $13 trillion by 2023. In the UK the figure is expected to be £186 billion by 2020. It is a sector with high barriers to entry and a large regulatory burden, but substantial pricing power once a product has approval.
The industry is split into big global companies and often very small companies that drive innovation. The UK, through its golden triangle of universities in Oxford, Cambridge and Imperial College, has a huge part to play in the global healthcare sector.
This VCT will look to invest at the later stages of a company. Essentially the managers seek to invest once proof of concept is achieved but before the drug or product comes to the market. BioScience is looking for real innovation that can drive commercial leverage in the future. Companies will be in the following sectors: medical devices, breakthrough medical technologies, pharmaceuticals, medical consumables, hospital equipment, digital health. Investment will usually be made at the advanced pre-clinical stage.
BioScience has invested in a range of VCT qualifying companies, for example Adherium, which produces a range of smart inhalers with the money invested used for growth and development. BioScience helped with commercial advice, recruitment of key personnel and getting the company listed. Saluda Medical is another example. BioScience invested in February 2015 with funds being used for development and clinical trials. The company uses bioelectronics, which stimulate the body's own natural mechanisms to treat chronic pain.
BioScience has been investing at this stage for a number of years now and is typically looking at a three to six-year investment horizon. It tends to avoid long-term deals as they require too much capital. Equally, it doesn’t invest in businesses such as nursing homes or healthcare services as they aren’t cutting edge and have no real pricing power or innovation.
BioScience is a hands-on fund manager, taking board positions in underlying investments and helping advise and guide the company. Its expertise comes from both a financial and industry background.
It is anticipated this will be a concentrated portfolio with between five and ten investments.
This is an interesting addition to the VCT universe. It is a high-risk offer, down to both the sector and the likely concentration of investments. However Downing has partnered with a creditable and experienced manager in BioScience. This will not be a “normal” VCT that pays out a consistent annual dividend from the point of investment and will be more focused towards long-term tax-free capital growth.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment.