The flurry of new investment trusts and investment companies launching in London has continued with the UK's first healthcare bond fund, BioPharma Credit, attracting over £610 million from investors.
Managed by New York-based Pharmakon Advisors, the Guernsey-based company will trade on the London Stock Exchange's specialist fund segment.
It will invest in the debt of life sciences companies and aim to generate an annual total return after charges of 8-9%. Most of this will come in the way of dividends, with an initial yield of 4% anticipated to rise to 7% after the first year. It can use borrowing - or gearing - of up to 25% of net assets to boost returns. Its lead fund manager is Pedro Gonzalez de Cosio who co-founded Pharmakon in 2009, investing over $1.3 billion in life sciences debt.
In the first of two share placings the company yesterday raised $373.3 million and plans to issue an additional $338.6 million of shares to acquire a seed portfolio, taking total proceeds up to $761.9 million.
BioPharma Credit will be the biggest and only life sciences debt trust in the UK. BB Biotech, which is Swiss-listed but has a secondary listing in the UK, is the largest life sciences equity trust at £2.4 billion, followed by Worldwide Healthcare (WWH) at a little over £1 billion.
Last March, Connecticut-based HealthCare Royalty Management cancelled plans to launch a Healthcare Royalty trust when pre-European referendum uncertainty froze flotations on to the stock market.
Under a shared services agreement, the team will have access to the expertise of Royalty Pharma, a New York-based investor in pharma royalties. Senior staff at Pharmakon and Royalty Pharma have invested $106.2 million in the trust, representing 13.9% of share capital.
The team plans to acquire a seed portfolio that is valued at $338.6 million. It includes a note, estimated to be worth $185.1 million, issued by RPS BioPharma Investments that is secured by royalties on 21 pharmaceutical products, offering a 12% coupon, or annual interest rate. The portfolio also includes five loans to pharmaceutical and medical device companies, valued at $153.5 million, with a blended gross return that is forecast to be around 11.4%.
Discount control mechanism
The fund will pay Pharmakon an annual management fee of 1% of net assets, plus a performance fee of 10% of returns in excess of 6% per annum. If the fund trades at a discount, then 50% of the performance fee, less taxes, will be used by the manager to buy back shares. Ongoing expenses are estimated at 0.59% per annum.
There will be a continuation vote after five years and every three years thereafter. A continuation vote will also be triggered if the average discount to net asset value exceeds 10% over any 12-month rolling period.
If in any three-month period, the average discount exceeds 5% the team will look to bring the discount down by using 50% of capital and income proceeds to repurchase shares until they trade at an average discount of 1% or less over a two-week rolling period. This will only be the case if the team has achieved its target dividend,