Thames Ventures VCT 2 (formerly Downing FOUR VCT) – Healthcare Shares

Thames Ventures VCT 2 – Healthcare is one of three active share classes in the VCT (formerly Downing FOUR VCT).

The Healthcare share class launched in 2017 and is managed by Downing, an experienced investment house with around £1.8 billion of funds under management and a dedicated Healthcare Ventures team. 

It seeks to invest in early and mid‐stage healthcare companies – particularly those involved in digitalising healthcare.

The share class has net assets of £16.4 million spread across a portfolio of 14 companies and two Downing funds (September 2022).

Over the five years to June 2023, the share class generated a NAV total return of -15.29%. This included paying out cumulative dividends of 8.75p, equivalent to 11.2% of the average net asset value. Past performance is not a guide to the future, dividends are variable and not guaranteed. 

• Seeking to raise up to £10 million, with a £15 million overallotment facility
• Target dividend of 4% of NAV a year, variable and not guaranteed 

The manager

The Healthcare share class is managed by the Downing Healthcare Ventures team, a division of Downing LLP, an experienced investment house, with over £1.8 billion of funds under management.

The Healthcare Ventures team is led by Dr Nigel Pitchford, who joined Downing in 2022. Nigel is an experienced venture investor, having previously been a Partner at 3i, DJF Esprit (now Molten Ventures) and Touchstone Innovations, and was most recently CEO of ieso Digital Health, a leading UK digital mental healthcare and therapeutics business. 

The rest of the team consists of Dr Will Brooks, who has over 30 years’ experience, including 18 years in Venture Capital across Europe and the US, and Chartered Accountant Matt Pierce, with prior sector experience at Deloitte and Berenberg. 

The investment team has access to the wider resources of Downing Ventures, including its Investment Committee and network of Venture Partners.

Investment strategy

The Healthcare share class targets investments into early and mid‐stage healthcare companies. In particular, it seeks to invest in companies applying new technologies to long-existing problems, including addressing access, improving outcomes or helping reduce the costs of healthcare provision. That could range from new medical devices to software for clinical trials or healthcare staff management tools.

Companies are expected to have between £300,000 and £1 million in revenue at the point of the first investment. Following the appointment of Dr Pitchford, the fund does not plan to make any further direct investments in therapeutic or drug discovery businesses, given their significant capital requirements and long investment horizons. 

Downing believes its network can also add value. Downing will source deals from its network of Venture Partners and sector experts. Downing's Venture Partners are industry specialists with experience of working with healthcare companies and may provide input to the Investment Committee as they review opportunities. It is expected Downing will coinvest to some extent in every deal. 

The non-qualifying element of the portfolio is invested in Downing-managed funds.

Current portfolio overview 

As at September 2022, the Healthcare share class had net assets of £16.4 million, of which £13.4 million is invested across 14 companies. 

In addition, the Healthcare share class held £385,000 of its net assets in Downing Strategic Micro-Cap Investment Trust and £2.6 million in cash. 

The graph below shows where the fund was invested by sub-sector as at its financial year end, March 2022. Please note while the manager does not expect to make further investments in drug discovery and therapeutics, these two sub-sectors currently account for a large portion of the legacy portfolio.

Breakdown of Healthcare shares sectors

Examples of portfolio companies

Arecor Therapeutics – largest holding

Spun out from Unilever in 2007, Arecor Therapeutics is a global biopharmaceutical company. It enhances existing therapeutic medicines to bring safer, more effective and convenient treatments to patients: it develops its own products and partners with other pharmaceutical and biotechnology companies.

The company is currently focused on two areas: diabetes and specialist hospital use. The diabetes division is developing an ultra-rapid acting insulin formulation that clinical studies show to be superior to existing insulin products for patients with diabetes who self-administer insulin. The business aims to enter into licensing agreements with pharmaceutical and biotechnology companies, potentially generating significant payments and royalties, not guaranteed. The specialist hospital use division looks to partner with leading pharmaceutical companies to enhance existing product lines. An example is Arecor’s partnership with Hikma, the multi-billion-pound London-listed pharmaceuticals business. 

The Healthcare share class first invested £1.1 million alongside a £300k investment from the Ventures share class (previously called Generalist) in September 2018. In June 2021 the company was admitted to AIM. The Healthcare share class holding is valued at £2.9 million September 2022, accounting for 17.6% of the portfolio. Past performance is not a guide to the future. 

DIA Imaging Analysis EU – recent investment

Historically, ultrasound images have been read visually by a human. That makes it subjective, time-consuming and heavily reliant on the users’ experience. DIA Imaging Analysis was established by a group of Israeli doctors and academics to address this.

The company aims to speed up the process and increase accuracy by using an AI-based system to analyse images. Its initial product range focuses on cardiovascular scans, although it has recently expanded into abdominal imaging. It is already available across most major ultrasound devices and serves thousands of end users around the world.

The company is headquartered in Israel, with the VCT Healthcare Shares invested in a UK-based subsidiary. The Healthcare shares invested £415,000 in 2021 as part of a $14 million round, the position is valued at £568,000 (September 2022), accounting for 3.5% of the portfolio. Past performance is not a guide to the future.

Exit track record

The Healthcare share class first launched in 2017 and has since invested into 15 healthcare companies. One investment, Live Better With, has been written off. Another, ADC Biotechnology, was sold for £187k, a realised loss of £1.31 million.

In June 2022, the VCT experienced its first exit, selling Future Health Works for £798,000, 1.5x investment cost. A year earlier, two investee companies, Arecor Therapeutics and GENinCode, floated on AIM. Together with gains in some of the other holdings that has led to a material uplift in the net asset value of the share class.

Future Health Works – example of previous exit

Future Health Works has developed a mobile app called Myrecovery to support patients through their orthopaedic care. Created by surgeons who have themselves been orthopaedic patients, the app helps patients prepare for and recover from surgery, with information tailored to each patient. The app is designed to improve the efficiency of care, reduce waiting times and deliver data analytics and insights to healthcare providers, saving time and money for both patients and practitioners. 

The Healthcare share class first invested £278,000 in November 2018, and provided £250,000 in follow-on funding in 2019. Since receiving investment from Downing, the business has secured partnerships with several NHS trusts. In June 2022m, it was acquired by US-based Healthcare Outcomes Performance Company, generating exit proceeds of £798,000, a 1.5x realised return on the total investment cost. 

Live Better With - example of previous failure

As is to be expected, not all investments work out. Live Better With is an example. 

Founded in 2015 by entrepreneur Tamara Rajah, Live Better With is a healthcare platform that aims to help people with long-term medical conditions – focusing on non-medical products that make day-to-day life better for patients. The company sells a range of products worldwide from its online platform and launched its first shop in St Thomas’ Hospital in London, the UK's first physical shop for people living with cancer.

The share class first invested in the business in March 2018; however, in the year to March 2020, the board of the VCT fully wrote down the value of its investment as the business appeared unable to achieve its business plan following disappointing trading performance. The investment is still held at nil value (March 2022).

Performance and dividends 

Over the five years to June 2023, the Thames Ventures VCT 2 Healthcare Shares have delivered a NAV total return (including dividends) of -15.29%. 

The performance of the share class is shown below. Since launching in 2017, the share class has endured two failures within the portfolio which materially impacted performance, due to the concentrated nature of the portfolio. The net asset value has since recovered to some degree, although declines in the trust’s AIM quoted holdings detracted from performance in 2022. Note, we show VCT returns over a five-year period as a minimum, where possible. Where a VCT has followed the same investment strategy for longer, we also show returns over 10 years.

The share class aims to pay dividends equivalent to at least 4% of its net asset value. Please note, dividends are variable and not guaranteed. 

NAV and cumulative dividends per share over five years (p)

Dividends paid per calendar year

Dividend reinvestment

The VCT does not operate a dividend reinvestment scheme.

Share buy-back policy

The VCT intends to buy back shares at a 0% discount to the most recently announced net asset value. This is not guaranteed – please see the offer documents for details. 

Discount history

VCT shares are traded on the London Stock Exchange. Similar to investment trusts, the share price can fluctuate and can be different from the VCT’s net asset value (NAV), i.e. the value of the VCT’s underlying investments. The difference between the share price of a VCT, and its net asset value per share, is called a discount.

Based on data from Morningstar, the discount to NAV as at 30 June 2023 was -5.86%. Over the previous five years the average discount to NAV was 1.35%.

The discount history is based on the closing share price of the VCT at the end of each month, divided by the latest net asset value at the time. Past performance is not a guide to the future. Investors looking to sell their VCT shares may get a better price using the VCTs’ share buyback facilities, although this is not guaranteed.

Risks: important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

VCTs are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

To retain the tax benefits, VCTs should be held for at least five years. If you sell VCT shares and reinvest in new shares of the same VCT (including any mergers) within six months, tax relief can be restricted. Tax rules can change and benefits depend on circumstances.

Charges and savings

A summary of the main charges and savings is shown below. The net initial charge shown includes the Wealth Club saving and any early bird discount. The investment may have additional charges and expenses: please see the provider documents including the Key Information Document for more details, offer price and share allotment calculation methodology.

Please note, capacity – for the offer or any early bird savings – can be reached early, and we may not be notified of this by the VCT in real time.

Annual rebate when you invest through Wealth Club

This offer includes an annual rebate for Wealth Club investors, payable for the first three years. 

This is a rebate of our renewal commission and should be equivalent to a percentage of the Net Asset Value of the Offer Shares issued to you when you invest (shown in the table above). Terms and conditions apply.

Our view

The first three years of the Healthcare share class’s life proved challenging. The concentrated nature of the portfolio meant two poorly performing investments, Live Better With and ADC Biotechnology, had a disproportionally large negative impact on the value of the portfolio and contributed to the decline in NAV per share to a low of 65.2p by September 2020. Both investments have since been written off and will no longer act as a drag on the portfolio. 

Since then, the share class has experienced an uplift in performance. In June 2022, it achieved its first exits. At the same time, two AIM flotations a year earlier – along with positive upgrades among some of the share class’s private companies – have led to a material recovery in net asset value. However, AIM-quoted companies can be volatile, and investors should note this remains a highly concentrated and single sector-focused portfolio. 

For experienced investors looking for exposure to the healthcare sector, the VCT contains some interesting investments which may complement a wider VCT portfolio, in our view.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.