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Baronsmead counts the costs

Isis Equity Partners – Baronsmead VCTs Linked Offer

Type: Venture capital trusts

Aim: Growth and income by investing in unquoted UK companies, including those trading on Aim across Baronsmead, Baronsmead 1, Baronsmead 2, Baronsmead 3 and Baronsmead 4 VCTs

Minimum investment: Lump sum £4,000

Closing date: April 5, 2012

Charges: Initial 4.75%, annual 2% of the net assets of Baronsmead VCT and Baronsmead VCT 2, annual 2.5% of the net assets of Baronsmead VCT 3 and Baronsmead VCT 4, performance fee 10%

Commission: Initial 3% or initial 2% plus renewal 0.4% for four years


Isis Equity Partners is raising up to £16.45m across four of its Baronsmead VCTs in a linked offer.

Discussing how this offer is useful for IFAs and their clients, Michael Philips proprietor Michael Both says: “Starting with the assumption that a VCT is suitable for your client, the minimum subscription of £4,000 may be distributed across the four individual companies according to the investor’s taste.

“Collectively, the companies have a big pre-2006 pool of assets. As Baronsmead points out, these fall under less restrictive investment rules than would apply to a new issue floated today.”

However, Both adds that since the rule may be changed if the Draft 2012 Finance Bill is passed, this is something of a red herring.

Looking in detail at the portfolios, Both says: “A holding in S&W Wood Street Microcap deepens the spread with exposure to, currently, 31 Aim-listed companies.” He says that unlike a newly launched VCT, investors have a meaningful track record to consider, which Both says is relatively good.

He adds that Baronsmead has a history of high dividends and performance is broadly in line with the FTSE 100 since mid-2008.

Turning to the less attractive features of the offer, Both says: “Over the last few years the holdings of the four VCTs have become increasingly homogenised, with 92 per cent of holdings common to all four.” He feels that this makes the diversification of investing across four VCTs is less beneficial than it might at first appear.

Both also takes issue with the charges.“As with most VCTs, management costs are not low. I don’t like the fact that while there is a reference in the prospectus to performance fees for the manager, this is not disclosed in the offer document.

“Many VCTs have eye-wateringly expensive performance fees which can make the risk-reward equation uneconomic. An incentive can be justifiable but it should only be the thin icing on the cake and not extend to take all the profits, which ought to accrue to the investor.”

Both observes that the 10 per cent performance fees are not clearly stated in the current literature. For Baronsmead and Baronsmead 2, the fee is 10 per cent of outperformance over a hurdle rate of base rate plus 2 per cent on a compounded basis. For the other two VCTs, it is 10 per cent of outperformance over a hurdle of 8 per cent a year, not comounded.

“With base rates currently under 1 per cent that does seem more than a bit greedy especially if, as seems likely, it applies to returns from the Wood Street Fund and UK T-Bills, which with other listed securities, comprised about 25 per cent of the portfolio according to the latest VCT company accounts.” he says.

Both regards the British Smaller Companies VCT 2, Northern 2 VCT and the Matrix VCT linked offer as the main competition. Summing up, he says: “The prospectus is mostly well written and easy for the interested investor to understand where that was the intention.”


Suitability to Market: Good

Investment Strategy: Good

Charges: Poor

Adviser remuneration: Average

Overall 7/10


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