Successful biopharma exits mostly happen in the years immediately before clinical stage commercialisation. This means that returns are heavily weighted towards the later years of a venture capital investment. The length of time between the scientific research which leads to a biopharma venture investment and the date it comes to market is difficult to predict and may be long. And the 10-year life of a typical biopharma venture capital fund (a structure carried over from tech venture capital) is not ideally suited to bridging this interval. Venture capital investors therefore tend to avoid the earliest stage investments as they are not certain they will be able to last the journey, and they tend to crowd around later-phase opportunities where the path to clinical success is clearer.

We at Hosking Partners have been materially underweight health care – a position that has benefitted the portfolio’s returns in the last 18 months – and have rarely throughout our history held biopharma investments. As global generalists, we do not have expert knowledge of molecules or gene therapy. However, as capital cycle investors, we have a great advantage in paying attention to industry structure, competitive dynamics, capital flows, and likely returns on capital, as well as on reviewing management teams and their capital allocation track record. It was these observations that made Syncona a compelling investment within the otherwise not-so-attractive biopharma space.

Syncona was founded in 2012 as an investment trust with permanent capital by the Wellcome Trust to exploit this inefficiency and narrow the vast funding gap between the UK and US biotech sectors. The permanent balance sheet capital and the long-term horizon enabled by this gives Syncona a structural advantage over its venture capital fund peers. It invests in early-stage opportunities where its access is unrivalled, competition is less fierce and valuations are sensible, in the knowledge that it can continue to hold the investment through to exit. Meanwhile in the intervening years, its investee companies can access the funding they need more cheaply from venture capital investors keen to deploy capital closer to clinical success, enabling Syncona to deploy its own capital more efficiently.

We began investing in Syncona in 2023, attracted by the widespread withdrawal of capital from the biotech sector post-COVID, driven by rising interest rates, and we have engaged extensively with management and other key stakeholders throughout our ownership. The combination of Syncona’s differentiated structure, proprietary local deal flow, and proven track record of delivering two of the largest biotech exits from the UK and £1bn exit proceeds in its first decade made for a compelling investment case.

At the time of our initial investment, the shares traded at a roughly 30% discount to net asset value from a historical premium for much of the decade. As the biotech downturn extended a further two years into the worst cycle in decades, the discount widened to 55%. The XBI biotech index fell 60% from the January 2021 peak, followed by a 3-year stasis where funding collapsed. A classic capital cycle induced by the free money era, with too many nascent biotechs built and IPOed, resulting in the industry requiring a much-needed consolidation.

Over the same period, Syncona's NAV fell by just 12% (Mar-21 193.9p to Mar-25 170.9p). During this period, we continued to increase our stake because we believed management was doing everything to protect and shift the portfolio's value toward later-stage assets. Nevertheless, many shareholders, including ‘investment trust experts’ grew impatient with the steep discount and lack of exits from the portfolio. Amid this pressure, in 2025, Syncona launched a strategic review to explore ways to strike a balance between maintaining the value of the portfolio and shareholder returns.

Many proposals were put on the table, including splitting and selling a portion of the portfolio and creating a new private fund for investors who wished to maintain exposure to early-stage life science assets. We were strongly opposed to altering the structure and investment objective at the low point in the cycle. We raised our concerns to the board and the executive team and had multiple conversations with them over the last 12 months.

We provided our backing to the Syncona team, led by Chris Hollowood, and to the board, chaired by Melanie Gee, who felt strongly that this was the wrong time to fire-sell assets. The team had protected the portfolio's value during the downturn, shifted it to a few promising late-stage assets, and the biotech sector was starting to show signs of life. Our proposal was to stay the course and not pander to short-term investors.

With the support of the Wellcome Trust's 30% shareholding and several other long-term investors, the board ultimately decided on a solution to maintain the portfolio’s value while adopting a new investment policy of returning the first £250m from any exits before resuming its existing investment strategy of building a portfolio of 25 companies. We voted for this proposal because we felt a significant return of capital had already been on the cards from our discussions with management over the previous two years. However, the formal policy satisfied a group of disgruntled shareholders who needed reassurances about capital returns during the recovery.

In addition, we were consulted on a new long-term incentive plan (LTIP) that aligned management with maximising the value of any exits over a multi-year time horizon. In short, it is structured as a performance fee of 15% on cash exits above a hurdle of £1.2bn. A sufficiently challenging target, as their package is ‘in the money’ only after delivering two times the current market capitalisation in exits.

Furthermore, the award will vest over four years, incentivising management to maximise value rather than liquidate the portfolio to deliver a short-term reward. Importantly, we also felt this structure signalled management confidence in the inherent value in this portfolio of assets.

We were pleased to see the board and the management team choose the correct course of action. The outlook for Syncona today is better than it has been in years: among its 15 portfolio companies, 85% is in clinical assets; the biotech sector has recovered, as indicated by the 62% gain in the XBI (State Street SPDR S&P Biotech ETF) in the last year; and M&A deal value for the biopharma sector rose significantly in 2025 vs the prior five years.

Despite these favourable developments, Syncona trades at ~47% discount to its Dec-25 NAV of £1,058m based on the current £560m market capitalisation. However, we remain excited about the next two years, with three late-stage assets reporting critical data, putting them in the crosshairs of big pharma. The biotech downturn seems to have ended in June 2025 with the XBI rising ~70%, the highest level since 2021, but still ~15% off the peak. M&A and IPO activity in the sector has picked up. This should all be a leading indicator for Syncona's NAV over the coming year.