Type: Venture capital trust
Aim: Growth by investing in asset-backed unquoted companies
Minimum investment: Lump sum £5,000
Closing date: April 5, 2008 for 2007/08 tax year, April 30, 2008 for 2008/09 tax year
Special offer: 3% in bonus shares for investors in previous Protected VCT issues, 1-2% in bonus shares for other investors
Offer period: Until November 30, 2007 for 3 and 2% bonus shares, until February 15, 2008 for 1% bonus shares
Charges: Initial 5.5%, annual 1.35%, performance fee up to 1.25%
Commission: Initial 2.5%
Tel: 020 7416 7780
This dual VCT offer aims to preserve capital, reducing the risks normally associated with VCTs, primarily through asset backing. The portfolios will be invested half in loans to qualifying companies, a quarter in ordinary shares in VCT qualifying companies and a quarter in fixed interest and property loans that are classed as non-qualifying investments.
Introducing the VCTs Allenbridge Tax Shelter Report Ewoud Karelse says: “These are the eighth and ninth Downing Protected VCTs to have launched, each aiming to provide investors with an opportunity in a VCT with a lower-risk, asset-backed, capital preservation strategy.”
Karelse believes advisers looking to diversify some of the inherent risks associated with managing large VCT portfolios for their clients may see this offer as part of de-risking these portfolios.
“As these VCTs are so-called limited-life VCTs they can also be used alongside the regular trusts and by people who wish to maximise their 30 per cent income tax rebates. The focus of the VCTs will be to invest in asset-backed companies by providing these companies with a mix of two-thirds debt finance and one-thirds equity,” says Karelse.
He notes that the loan-stock provided will mature after five years allowing for a revenue stream to the investors.
“The equity will be kept in the company after year five and will be disposed of during year six and seven at the manager’s discretion. However, it is intended that a small capital growth should be achieved during this period.
As is customary with Downing Protected VCTs, the costs are lower compared to some of their counterparts. This is in line with the limited exposure to risk resulting from the way the investments will be structured,: says Karelse.
According to Karelse, the incentive scheme is also competitive; rewarding the management only if they have paid out a minimum of £1.06 for each £1 invested. “The aim for the manager is however to pay out at least 110 pence over the seven year lifespan, “ he adds.
Karelse regards the incentive scheme where the management has imposed a cap on the potential pay-out as an innovative feature. “We like this as it will encourage the managers to limit the VCTs exposure to unnecessary risk. Downing has a proven track record in identifying and investing in qualifying asset backed opportunities, and we expect the VCTs to perform according to plan,” says Karelse.
Karelse has no real dislikes. However, he observes that this is not a product for investors who seek to achieve substantial capital appreciation or large dividend payouts over a long period of time.
Discussing potential competitors Karelse says: “There are no other VCTs that aim specifically to protect the capital of the investors by pursuing a capital preservation strategy. However, several are in the pipeline including new offers from Triple Point, Ingenious, Edge and Epic.
“Each of these VCTs will pursue a different investment strategy and in different sectors, resulting in different portfolios. However, as has been common with more and more VCT offers over the past two years, aspects such as a limited life VCT and strategies aimed at reducing exposure to risk and thereby limiting prospects of capital appreciation have become more popular.”
Summing up Karelse says: “The government introduced some more restrictions for this year’s crop of VCTs including an investment limit of £2 million for companies seeking finance from new VCTs and a stipulation that these companies should have no more than 50 employees. As a result we will see more VCTs looking for top-ups of existing trusts that will continue to make investments under the rules governing them when they were launched initially.”
He thinks that new VCTs will either have to invest in smaller companies and increase their risk profile or co-invest alongside money raised in previous years. “The way that Downing Protected VCTs structure their investments will not restrict their potential deal flow as there will be a combination of co-investment with earlier VCTs not restricted by the new rules and new investments in smaller sized deals,” he says.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average