Type: Venture capital trust
Aim: Growth by investing in unquoted companies that generate electricity from solar power systems and benefit from the Government feed-in tariffs
Minimum investment: Lump sum £3,000
Closing date: April 5, 2011 for 2010/11 tax year
Charges: Initial 5.5%, annual 1.5%, performance fee 20% of distributions between 100p and 130p a year, 30% of distributions above 130p a share
Special offer: 2% or 1% of amount invested in extra shares
Offer period: Until October 31, 2010 for 2% extra shares, January 31, 2011 for 1% extra shares
Commission: Initial 3%, renewal 0.5%
Tel: 01732 471800
This venture capital trust invests mainly in unquoted companies that generate electricity from solar power systems and qualify for Government feed-in tariffs.
Considering how the VCT fits in to the market, Arch Financial Planning managing director Arthur Childs says: “This is one of those products into which many IFAs will choose to invest their own money before mentioning it to their clients. In essence it merges an income stream which is predictable as the result of Government guarantees with the tax advantages of a VCT.”
Childs says this sector has disappointed many clients and venture capital investment in the UK fell to £296m in 2009, a drop from the £359m invested in 2008 and £434m in 2007. “However, with the economy now beginning to favour smaller companies and the new restrictions to pension contributions for high earners ,this trend may well start to reverse,” he says.
Childs observes that the Foresight Group has for more than 12 years been one of a small number of successful and reliable VCT providers. “In this VCT, its expertise in unlisted companies combines with three years’ experience of investing in solar projects throughout Europe. It boasts 11 investment managers focused purely on the renewable energy and environmental sector and the experience gained from investing over £150m into solar power projects.”
The underlying product is ‘photovoltaics’, shortened to ‘PV’ which means generating electrical power by converting solar radiation absorbed by solar panels into electricity. “In simple terms you can stick some solar panels on the roof of your house or factory, use as much of the free electricity as you want and then any excess is automatically taken by the grid and you get paid a minimum price for this. As a homeowner you should cover your installation costs in between 6 and 15 years, depending on your electricity usage, and you have free electricity (plus income from the grid) for as long as you stay in the property. As the result of feed-in tariffs here is now a 25 year Government guarantee of an index-linked revenue stream.”
Foresight will invest in industrial and residential rooftops as well as brownfield sites, so this should be a substantial investment opportunity in Child’s view. “The Government spending review has had no implications for this as the long term prices set by the FIT scheme are paid by the major electricity suppliers rather than the UK Government,” he says.
With a minimum investment of just £3,000, Childs says it should appeal to a wider cross section of clients. “VCTs are typically high risk and investors need to be aware that this is an investment into mainly unquoted companies and the management will be leveraging the investment with third-party lending which could reach 90 per cent of the share capital of the company. However, the nature of the income stream coupled with the tax advantages, could make a moderate size investment acceptable to a number of more cautious investors, particularly those who are higher-rate tax payers. “
There is a target return of 30p on every £1 share over five years which is made up of a £1.10 capital repayment plus minimum total dividends of 20p. “On a net investment of 70p, after allowing for 30 per cent tax relief, this represents an 11.8 per cent a year compound return for a basic rate tax payer. Higher rate tax payers gain even more and on the same basis a 40 per cent tax payer would achieve a return equivalent to 19.6 per cent a year gross and a 50 per cent tax payer 23.5 per cent a year gross,” says Childs.
He thinks investors will like the flexibility of a planned exit after the first five years with an individual roll-over option into a permanent investment after four years. “Liquidity is enhanced by the offer of a zero discount buyback policy for the life of the VCT,” he says.
He adds that the prospectus is necessarily thick but there is an attractively produced five page investor guide and the application form is short and simple to complete.
Turning to the less attractive features of the VCT Childs says: “I think it is a pity that the only way to incentivise the management team is for them to take up to 30 per cent of the return that could otherwise have been paid to investors, once the target return has been achieved. As IFAs we have to educate our clients to expect lower returns from their investments in the future. I do wish that someone would get the same message across to those who manage our clients’ money or the drift to passive investing, which has its own problems, will continue.”
Discussing potential competitors Childs says: “ This is a ground-breaking VCT and as such has no direct competition. A number of ethical funds include environmental screening as part of their process. Some funds, such as the Triodos EIS green fund concentrate on renewable energy generation and technology but they are not generally used by mainstream investors. The Foresight Solar VCT will appeal to two separate audiences and by dealing with the VCT’s biggest negative factor – high risk – it may get business from IFAs who have been previously hesitant to recommend VCTs.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good