Type: Venture capital trusts
Aim: Growth by investing in a portfolio of event companies involved in live or interactive events
Minimum investment: Lump sum £3,000
Closing date: April 4, 2007
Charges: Initial 5%, annual 2%, performance fee 20%
Commission: Initial 3%
Tel: 020 7024 3674
The Ingenious live VCTs 1 and 2 will invest in a portfolio of event companies involved in live or interactive events. Companies in the portfolio will typically be newly formed companies, funded principally by the VCTs.
Identifying the ways in which this product could be good for IFAs and their clients, Michael Philips proprietor Michael Both says: “This is an example of investment diversification into the entertainment industry, specifically live events. It is quite uncorrelated with other mainstream, but more readily realisable, instruments, he says.
Looking closely at the literature, Both notes that the prospectus stipulates that the VCT manager will only invest if the investee company has obtained performance warranties or similar contractual arrangements that will provide for the investee company to receive minimum revenues equivalent to at least 70 per cent of the VCT’s investment. “The majority of this initial capital will be provided through loan finance which should provide additional capital protection. There is clearly still plenty of capital at risk, but theoretically not 100 per cent,” says Both.
He points out that the VCTs aim to maximise distributions to shareholders in order to enable them to benefit from tax-free dividends, but thinks this offering might have more appeal to experienced investors than ‘VCT neophytes’.
Turning his attention to the potential drawbacks of this offering, Both says: “The prospectus seems to imply that most, if not all, of the live events will be a performance rather than, say, trade shows. Having such a narrow focus for the company means that the risk characteristics will resemble an EIS more than a typical VCT where the manager would invest in a number of companies with less correlated activities.
“A significant part of the VCT’s role appears to be short term funding of events but it is unclear what level of participation Live 1 and 2 will get if the events are successful. If there is an exit strategy other than via dividends, it is well buried in the prospectus,” he says.
According to Both, the greatest potential risk with live events is that they fail to attract the anticipated audience for reasons beyond the organiser’s control. “This could range from the mundane, such as exceptionally bad weather or the artist being ill, to the reluctance of the public to travel for fear of terrorism.
“Whereas Londoners have historically resumed their travel habits following bombings quite quickly, tourists are more likely to amuse themselves elsewhere. The event organisers should insure themselves against such perils so the risk to the VCT should be mitigated.”
He also thinks it is unclear if Ingenious promotes and manages the artist as distinct from their recordings. “There is the potential to manipulate which of the various links in the chain earn the profits and it was not clear from the prospectus how that central conflict of interest is addressed,” he says.
Discussing the main competition, Both suggests one could look at alternatives in two ways. “For investors seeking focussed leisure exposure, Ibis Media VCT might be considered. If the appeal is shorter term loans to qualifying companies rather than pure equity participation Matrix income & growth VCT might appeal,” he says.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good