A “failed experiment” of investing public money in risky biotech-style businesses cost Welsh taxpayers at least £28m but achieved all of its original objectives, a committee heard.
Giles Thorley, chief executive of the Development Bank of Wales, which is wholly-owned by the Welsh Government, largely blamed external factors for the poor performance of the now-closed Wales Life Sciences Investment Fund.
And the chief executive told the Senedd’s public accounts committee the venture could be repeated in future provided the lessons are learned.
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His detailed how the Welsh Government lost £28.2m investing into “very high risk”, unprofitable life sciences businesses.
According to the paper published this week, the fund, which was managed by Arix Bioscience plc, paid £7.7m in fees or 15% of the initial £50m invested.
The fund was launched back in 2013. The fund management procurement process was overseen by the Development Bank of Wales' predecessor Finance Wales, on behalf of the Welsh Government and awarded to Arthurian Life Sciences.
It was chaired by Port Talbot-born life sciences serial investor and entrepreneur Sir Chris Evans. It was later acquired by Arix Biosciences.
The development bank only took over responsibility for fund a few years ago, to effectively wind it up and writing off the value of the remaining live investments.
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The initial aim was for the fund to reach £100m. However, match funding the £50m Welsh Government money wasn't a condition of the fund management contract.
When investing the fund did though leverage significant co-investment into companies from other life sciences investors. It also created several hundred new jobs in the companies it invested in.
‘Overly concentrated’
Mr Thorley revealed the fund contract set no limits on the fees charged by the manager.
He claimed the fund, which ran for the decade to 2023, met all of its initial four aims: to increase access to finance, attract businesses, grow the sector and boost research.
The fund only made a £21.8m return. Managers ordinarily limit the investment into any one business to 10% but 40% of the fund was invested in only two businesses: Rutherford Health and ReNeuron.
Each received £10m from the fund and both later went under, returning nothing and raising concerns that the portfolio was “overly concentrated” in a handful of businesses.
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Mr Thorley wrote: “Normally the maximum investment from a fund into a single business is limited to 10%. This mitigates the impact to the fund should some of the investments fail.”
‘High-profile collapse’
The fund held investments in only nine companies, with three exceeding 10% each and totalling nearly 60% of all investments held.
By comparison, International Biotechnology Trust – a listed life sciences fund – holds dozens of investments to reduce risk, with none making up more than 5% according to its accounts.
That fund has returned roughly 60% to investors over the past decade compared with a -56% return for taxpayers from the Wales Life Sciences Investment Fund (WLSIF).
Mr Thorley said the failed investment strategy assumed the further £50m would be raised, which resulted in less diversification, increased risk and limited follow-on funding.
He also pointed to the pandemic, a big factor in Rutherfood’s failure, and the high-profile of the Woodford Equity Income Fund headed by disgraced investor Neil Woodford – a co-investor in some WLSIF businesses.
‘Disappointing’
Mr Thorley said disappointing clinical trial results were the main factor for businesses like ReNeuron, which as a private company in March after a year in administration.
He said: “The nine investee businesses represented a broad portfolio, … from lower risk established businesses with revenue streams to very high risk (potentially very high return) pre-revenue businesses where future returns were wholly dependent on successful trials.
“To that extent, the portfolio was considered balanced.”
Mr Thorley pointed to Simbec-Orion, the fund’s only success story, which provided a £19.7m (2.24 times) return on an £8.75m investment.
He wrote: “The fund did achieve all four of its objectives and it may have taken just one more portfolio company to succeed for the fund to have returned the full investment or profit.
“For that reason, provided all the lessons learnt from this fund are considered, the final lesson learnt is not to write off any future considerations for using a specialist fund manager with a dedicated fund as part of a wider approach to supporting growth in a business sector.”
‘Failed experiment’
But Senedd members seemed less keen as they briefly discussed the paper on May 11.
Arix Bioscience blamed a two-year Wales Audit Office of the fund as a major reason the extra £50m could not be raised.
However, match funding the Welsh Government's funding into the fund was not a condition of the fund management contract. However, when investing the fund secured significant co-investment for other life sciences sector investors. The companies invested in also created hundreds of new jobs.
The fund's only notable success for its investment in Merthyr-based clinical trial venture Simbec, following its acquisition by Orion.
Adrian Crompton, the auditor general for Wales who sits on the public accounts committee, said: “At a high level, the lessons learned report indicates that, the assessment is that all of the objectives of the fund were met and you, I’m sure, will have some observations on that.”
Describing the fund as a failure, Plaid Cymru’s Adam Price said: “I would suggest on the basis of this that we shouldn’t replicate this experiment.
“It’s fine to experiment but if an experiment fails and you say ‘oh well, it’s OK for us to try again’, I think there are some more basic questions.”
The public accounts committee, chaired by the Conservatives’ Mark Isherwood, decided to discuss the matter in more detail behind closed doors, excluding the public and press.