The news that Alliance Boots is opening its books to The Wellcome Trust as a potential rival bidder to its deputy chairman and Kohlberg Kravis Roberts has thrust the leading medical charity into the spotlight.
Founded in 1936 to fulfil the wishes of the American-born pharmaceutical magnate Sir Henry Wellcome, the trust has grown to be the world's second largest charity, investing more than [pound]500m a year in biomedical research "to improve human and animal health" and to promote the understanding of science. The trust is now partnering the financier Guy Hands in preparing a bid for Alliance Boots that threatens the [pound]10.1bn buyout plans of the deputy chairman, Stefano Pessina, with the private equity house KKR.
A move on the high street retail chain is seen by some as a change of strategy for the charity which severed its links with the pharmaceutical industry in 1995.
Sir Henry established a drug company in 1880 with his fellow American Silas Mainville Burroughs to promote a new form of compressed pill and import it into the UK. When Mr Burroughs died, Sir Henry took over the entire company, opening offices around the world, and set up a number of research laboratories employing leading scientists of the day. On his death, Sir Henry vested the entire share capital of his drug company, The Wellcome Foundation, in five trustees with instructions on how spend the income.
With a portfolio worth almost [pound]14bn, it is second in size only to the Bill and Melinda Gates Foundation. It is the UK's largest nongovernmental source of funds for biomedical research and has invested in projects ranging from stem cell research, the development of anti-malarials, obesity and the sequencing of the genome. As a private charity it is completely independent and responsibility for its activities lies with a board of governors.
In 1986, the trust decided to diversify away from a single asset and the Well-come Foundation was floated on the stock exchange. The trust sold 25 per cent of its shares to the public and the proceeds were invested in shares, property and investment funds. More shares were offload-ed in 1992 and the rest were sold off in 1995, when the company was bought by its historic rival Glaxo to form GlaxoWellcome. However, the name of the original founder disappeared all together in 2000 when the drug company merged with SmithKlineBeecham and Europe's biggest pharmaceutical firm Glaxo- SmithKline was born.
The trust is currently the UK's biggest investor in private equity and has around [pound]6bn invested in venture capital and hedge fund assets. Over the past 20 years its portfolio has generated average returns of around 15 per cent and its uses 4 to 5 per cent of what it makes to invest into the charity's chosen projects. Returns from venture capital have averaged 90 per cent over the past 10 years. The trust also invests in property and one of its cannier acquisitions was a large chunk of real estate in South Kensington in 1996 that has since rocketed in value.
The charity's chief investment officer is Danny Truell, who joined a year and a half ago after nine years at Goldman Sachs, where he was managing director. Under his leadership, a risk management function has been added and four new investment groups have been created: equity and equity short-long; property and infrastructure; absolute return and buyouts; and health-care and venture. This had led to less reliance on its traditional investments of equities, property and alternatives. Equities now represent around 55 per cent of the portfolio.
Another of Mr Truell's changes was implemented last May when Wellcome became the first charity outside the US to issue a bond, raising [pound]550m, which it said would increase "its funding power over the coming years". Wellcome employs more than 300 external fund managers who are tasked with achieving returns of 8-9 per cent.
Unsurprisingly given its investments, the Wellcome Trust has become a vocal supporter of private equity, which has been accused by the unions and MPs of being responsible for unnecessary jobs cuts, and interested only in short-term gains. Union leaders have called for the abolition of tax relief on debt used to fund its deals. In March, the trust joined forces with four other investors in private equity, SVG Capital, Hermes, Standard Life and 3i, to defend the merits of their investments. Mr Truell has warned that changes to the tax treatment of the industry could lower the trust's investment returns, with a knock-on effect on its donations to medical research. It could also drive the trust to withdraw more investment from the UK, he added.
Although the trust currently has direct stakes in more than 20 smaller life-science and healthcare companies, some of which are public companies, the addition of Alliance Boots to its portfolio would represent a return to investing in a major plc.
The Wellcome Trust is the UK's largest nongovernmental investor in medical research.
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