Downing FOUR VCT – Healthcare

Deadline: 30 Sep 2017

This new share class for the longstanding Downing Four VCT is looking to raise £10 million (with a further over-allotment facility of £10 million) 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. 

Highlights

  • 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


                                    The manager

                                    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. 

                                      Downing is responsible for the overall management of the VCT, but Melbourne-based BioScience Managers Pty Ltd will be responsible for finding deals, due diligence, monitoring and exit opportunities. BioScience manages life science investments globally and is headed by Jeremy Curnock Cook who previously managed the International Biotechnology Trust. Matt McNamara is chief investment officer and will also be heavily involved in this VCT. The latest BioScience fund is an Asia Pacific venture capital healthcare fund with $56 million invested.

                                        Target return and strategy

                                          This is a long-term growth-oriented 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. 

                                            Exit strategy

                                              Exits will be sought either via listing the company on a stock market or by way of a trade sale to a much larger global healthcare business.

                                                Risks

                                                  This will be a highly-concentrated portfolio of under ten investments in early-stage companies. The sector invested in can be viewed as high risk/high reward with failure a common theme. However, this VCT will typically invest in companies where a product has been proven, but not yet fully approved for sale. This proof of concept should help reduce – but not eliminate – the risk.

                                                    The usual risks with smaller companies exist with this VCT offer. For instance, VCT investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose.  The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future.   

                                                    Fees

                                                      The initial charge (usually 4%) is 1.75% for Wealth Club investors. There is an annual management fee of 2.5% and annual administration fees of £40,000 plus additional 0.1%. total annual running costs are capped at 3.5%. The performance fee is payable via a management share class and is first payable in 2021. The performance fee is 20% of dividends paid if the total return is at least £1 per share, which increases by 3 pence per share per year from 2021. If the performance fee takes the return below the hurdle then that portion isn’t payable. BioScience will receive 50% of the performance fee. Arrangement fees and monitoring fees may also be payable.

                                                      Deadlines

                                                      • Early bird saving of 0.5%: 3 March 2017
                                                      • Deadline for shares allotted in 2016/17 tax year: 5 April 2017 (3:00 pm)
                                                      • Final closing date: 30 September 2017

                                                        Summary

                                                          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.

                                                            The details

                                                            Targeted Dividend
                                                            4.0% (from year four)
                                                            Initial Charge
                                                            4.0%
                                                            Minimum Investment
                                                            £5,000
                                                            Sector
                                                            Specialist
                                                            Deadline
                                                            30 Sep 2017
                                                            WealthClub Saving
                                                            2.25%

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