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EXCLUSIVE: Insight into the Woodford investment diligence process

By Cynical Bear | Sunday 11 February 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

After much digging and talking to those in the know I have managed to piece together how Neil Woodford and his team assess potential investments and have actually managed to access a transcript of a recent investment meeting that makes very “interesting” reading!

To be honest, the clues were there already as there are a number of similarities with some of the investments particularly in Woodford Patient Capital Trust (WPCT). For example, there’s the investment in “smart” pallets – RM2 International (RM2); “smart” washing machines – Xeros Technology Group (XSG); “smart” labels – Thin Film Electronics; and the “smart” bank – Atom Bank. The list goes on and on and I’ve raised a few questions about many of these in the past and couldn’t fathom why such significant investments would have been made but it’s all a bit clearer now that I’ve seen the transcript below.

It relates to an investment in “smart” string and went something like this:

Neil Woodford: “Hi Tom, I understand you’ve got something really special for me today”

Thomas Midgley: “Sure have, Neil. I’ve developed a patented technology that inserts the internet of things type stuff into string so you’ll never lose that parcel ever again….or in fact anything as long as you wrap it in this string. I’ve called it Internet String and have come up with the snappy tag-line: “Internet String, that’s Interesting”. What do you think?

NW: “Love it - people always lose stuff don’t they and loads of people use string. I can see this working. Tell me more - how much will it cost?

TM: “Great question, Neil. The cost to us is about £4.50 per ball and we’ll be retailing it at a mere £5, slightly up from the 45p one can buy one from the pre-internet age in a hardware store today but a mere pittance when one compares this to the mental anguish and real financial loss when one loses something”

NW: “Ok, sounds Internet String, hahahaha! I’m in so far, what does your business plan show you making?”

TM: “Well, it’s early days so far and I only have a prototype so not sure.”

NW: “Let me help you here; let’s do some brainstorming. Hmmm, string is huge right? I reckon the global market for this stuff must be £10 billion or so. Let’s imagine as market leader, you can get 20% of the market and make 15% bottom line. How much would you make?

TM: “Um…£300 million”

NW: “Wow, £300 million per year??”

TM: “Yes…£300 million each year”

NW: “That’s incredible, with great growth too, I reckon you’d have a multiple of well over 20; how much would that company be worth, must be more than a billion surely?”
TM: “Six….billion?”

NW: “Incredible, a six billion pound opportunity, why didn’t you say that to start with? How much do you need?”

TM: “I need about £5 million for customer research, finalisation of the prototype and initial batch production”

NW: “Oh…..I don’t really get out of bed for less than £50 million. Where’s your ambition man? You have to believe it will succeed and plan for global domination. How are you going to build your state-of-art manufacturing facility capable of producing a billion balls a month with a mere £5m?”

TM: “Ok, £20 million?”

NW: “Think bigger, Tommyboy”

TM: “£100m?”

NW: “That’s better – any thoughts on valuation?”

TM: “Not really my area of expertise to be honest but I don’t want to be diluted too much.”

NW: “Sure, playing hardball are we? How about the following: I’ll throw in £90 million at £200m valuation and then in a few months’ time when you’ve got some traction (nudge, nudge), I’ll invest the remaining £10m at a billion pound valuation.

You’ll be the CEO of a unicorn; I will have quintupled my original investment, made a nice fee on the uplift, and everyone’s happy, right?”

TM: “Sure, sounds good!”

NW: “One last thing – does this invention bend the laws of physics?”

TM: “Er…no!”

NW: “That’s a shame, I love those ones - not to worry, I’m in!”

Note to any lawyers reading: I may have made some of the above up for comedic effect!

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