I can forgive most readers yawning as soon as I mention the specialist fund segment (SFS). It’s supposed to be an institutional focused market for closed-end funds and investment trusts where the underlying investments are a little more adventurous than normal.
Ordinary private investors are not really supposed to be involved as many of the funds are regarded as a little risker than normal and they also tend to invest in less than liquid assets. But with increasing frequency we see these specialist funds starting to grow in size and move up to the main market, via a premium listing.
I regard the SFS as a kindergarten for the main market where relatively new – to the public markets – fund managers try out a strategy and then steadily build the assets under management before graduating to the ‘adults’ market. Crucially in my view, many of the funds on SFM should interest ordinary private investors as they operate in specialist niches which I think are full of opportunity.
A prime example is RTW Venture (RTW) which is a venture capital fund that invests in life sciences businesses – mainly in the biotech and medical technology spaces. Its key differentiator is that it invests in later stage private businesses which are aiming to list on the public markets in the next few years.
Now my guess is that despite being in a very exciting space, most investors will not have heard of the fund and that’s largely because it’s SFS listed. RTW also has a much better-known peer in the shape of Syncona (SYNC), which is a main market life sciences venture capital investor with a similar strategy. My suspicion is that if an adventurous type is interested in this risky niche, they’ll probably be invested in Syncona – which also boasts fairly extensive research coverage by the big brokers.
Last but by no means least I think it’s also fair to say that RTW didn’t have the most auspicious start to its life as a public fund. According to Numis the fund raised $15m (£11.4m) back in October 2019 but had intended to raise up to $350m. The fund had net assets of around $168m at launch, including cash and seed assets rolled over from existing shareholders.
But I think that inauspicious start is not representative of the potential for this fund. My core view – a little adventurous I grant you – is that the life sciences revolution more broadly and genomics more specifically is the single greatest secular opportunity of the next few decades.
I rather bullishly think that exposure to this space, either through private or public listed businesses, warrants exposure of as much as 20% for adventurous types – which is certainly my portfolio exposure. For the record I own Syncona and RTW Ventures, both of which manage very active portfolios as venture capital investors in this space.
I also think there is a rather more tactical opportunity. My hunch is that RTW will be on the road soon to raise fresh capital and I would be astonished if the fund’s managers didn’t make the move to a full market premium listing. At that point the shares could trade even higher above the existing 16.8% premium to net asset value (NAV).
RTW describes itself as a full lifecycle healthcare investor with a special focus on transformative biopharmaceutical and medical technology assets. Jargon aside RTW is a classic later stage venture capital investor, a bit like a biotech version of Merian Chrysalis (MERI). A flotation within the next one to three years is likely for many of the portfolio businesses.
There is also a crucial difference with Syncona. The latter has a much more focused, in-house approach where its managers picks key therapies, usually on a common or shared technology platform (based on genomics insights) and then build up a bunch of world-class businesses by assembling the right team.
By contrast RTW has a more classic venture capital perspective. It invests in businesses and therapies it likes but has slightly less operational involvement than Syncona. There is also a much more global focus to RTW with a growing side specialism in Chinese investments.
As the fund is still very young, it’s not worth dwelling too much on performance numbers but I would pull out some useful stats from recent shareholder reports. While the shares have risen 55% since flotation, the NAV is up by 32%, currently sitting at $1.37 per share, or $245m in total. There’s also cash of $49m, which should be enough ready capital to invest in new firms and follow-ons. What is in that portfolio?
- 13 portfolio company investments
- 21 of 26 portfolio companies’ pipeline products are in clinical stage programmes
- nine new investments since flotation
- geographical focus: US 84%, China 8%
- niche focus: 23% oncology, 23% rare disease
The biggest holding is a firm called Rocket (RCKT.O) which at one stage was over 50% of total fund value but is now down to a still chunky 26% of fund NAV. That makes RTW Venture very dependent on this publicly listed biotech firm and the direction of its share price. But the extra cash raised in a future new fund raise will allow the managers to build a more diversified portfolio and over time that weighting should steadily come down to more manageable levels of around 10% to 20%.
David’s daily blog is available at www.adventurousinvestor.com.
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