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Downing structures VCT

Downing Corporate Finance is issuing B and C shares in the structured opportunities 1 venture capital trust, formerly the protected opportunities 1 VCT, which raised £10.5m in January.

The VCT provides exposure to a portfolio of institutional structured products managed by Brewin Dolphin and asset-backed unquoted companies. The new shares will remain separate from the existing shares and the majority of the proceeds from this offer will be invested in structured products within six months. At least 70 per cent will then be invested into qualifying unquoted companies over three years. Downing says this should allow it to invest when entry prices are lower than they have been.

The VCT will look for unquoted companies that own substantial assets such as nurseries, health clubs, and pubs which the VCT can take a legal charge over to protect its investments. Risk will also reduced by restricting the ability of firms to borrow.

The structured product portfolio will comprise seven to 25 products with the aim of enhancing the potential returns from the unquoted companies. Structured products are designed to provide pre-defined returns linked to the performance of UK or overseas stockmarkets or exchanges, such as those dealing in commodities, combined with a degree of protection. The VCT board believes that some products offer attractive returns without the need for an increase in stockmarket values.

The maximum exposure to various indices and exchanges is limited and the maximum exposure to any single counterparty is 20 per cent. Some investors may be concerned about counterparty risk since the collapse of Lehman Brothers, but Brewin Dolphin will constantly monitor these risks.

The VCT aims for annual dividends of at least 5p for each new share. This represents a tax-free yield of 7.1 per cent a year on the net investment of 70p each share after the 30 per cent income tax relief. This is equivalent to 10.5 per cent a year to higher-rate taxpayers but the level of dividends is not guaranteed.

Downing intends to sell all investments after five years to provide an exit for investors and this fixed life could be an attractive feature for some investors. Investors in VCTs that do not have a fixed life may have to sell their shares in the market where the price could be more than 30 per cent lower than the net asset value. However, the structured product exposure could put off some VCT investors.

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