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Heavy cash piles spark VCT warning

Investors have been warned to watch the cash drag of venture capital trusts, with some keeping large swathes of their portfolios in the bank. 

However, VCT managers say cash levels look higher than they are because they take cash in bulk and dispense it throughout the year.

Association of Investment Companies statistics show the average cash level of VCTs is 16.6 per cent while fundraising in 2013/14 gathered £440m, the highest in eight years. 

Charles Stanley Direct head of research Ben Yearsley says: “They are all selling companies and they are all raising lots of cash so there’s a bit of nervousness. But you can pay the dividends and fund the share buybacks with the cash.”

There is also a need to hold cash to combat the structural weakness in VCT share prices, he adds.

The £31.3m Foresight 2 VCT had 6.3 per cent cash at the end of March but it can no longer embark on share buybacks to keep the value at net asset value, Yearsley explains. It currently trades at a 43 per cent discount, according to the AIC. If there are no buybacks, they would all be at a massive discount because there are no natural buyers in the market,” he adds. 

Maven Capital Partners managing partner Bill Nixon says most generalist VCTs say it is difficult to match cash inflows with outflows due to the unpredictable nature of both investments and exits.

There is also a need to hold cash to smooth dividends in the lean years, he adds. “There is a risk that some of the offers are too large to match to the available deal flows. Investors should be cautious that there is not a drag on performance from cash.” 

Triple Point investment head Ben Beaton says the firm is “investment-led” in its fundraising, securing deals first before asking investors for cash.

This constrains the VCTs’ growth but ensures portfolios are free of a cash drag, he explains.

The firm raised almost £46m in 2008 and found it difficult to invest the money straight away, impacting returns, Beaton explains.

According to the latest accounts, Triple Point’s two generalist VCTs hold less than 5 per cent cash.

Beaton welcomes recent changes to eligibility rules that prevent VCTs from getting double tax relief from solar and wind power investments.

He says: “It’s completely levelled the industry again because some of the big boys went so big on solar that people just kept giving them their money. Now it’s down to who can snap up the best transaction.”

The firm’s £14m Hydro VCT, which launched last year, has secured about nine more Scottish projects and is looking for an extra £40m from investors. 

YFM managing director Dave Hall says the two British Smaller Companies VCTs account for about a 10th of the total VCT purchases and the firm is investing at a rough rate of £8m a quarter. 

Hall says: “After you’ve raised the money, you want just enough to get you through the next year to 18 months.”

YFM closed £32.2m of purchases in the past year and is tapping the capital markets for another £30m.



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