Venture capital trusts have been around for over 15 years. They were designed to encourage investment in small and medium-sized private businesses in the UK. They are higher risk and aimed at sophisticated investors but, to compensate for the extra risk, various tax breaks are on offer, though these should be seen as the icing on the cake rather than the reason for investing.
Many VCTs have come and gone and some have evolved to invest in alternative asset classes, such as renewable energy. Northern Venture Management, however, has stayed true to the original spirit of VCTs.
Northern Venture Trust was one of the first VCTs launched, back in 1995. Northern 2 followed in 1999 and Northern 3 in 2001. All three invest in unquoted companies in the UK and are managed using the same approach by a team headed by the highly experienced Tim Levett, who set up NVM with Alistair Conn in 1988.
NVM was early out of the blocks this year in seeking investment to top up these three well-established VCTs. Fundraisings began in August and Northern Venture Trust has already reached its quota. Northern 2 and Northern 3 still have capacity available.
The advantage of investing in existing VCTs via top-ups is that you are buying into an established portfolio with the prospect of early dividends rather than a brand new VCT which can take several years to get fully invested and mature.
Northern’s are ‘generalist’ VCTs, meaning they invest in any type of company rather than focusing on a specific sector. They are also ‘evergreen’, meaning there is no fixed life, unlike some VCTs which aim to wind up after five to six years.
The NVM team is spread across the UK and sources deals by direct contact with companies and through contacts and industry events. They see about 200 new investment ideas every year and are encouraged by the quantity and quality of the opportunities they are finding. Managing a VCT is time consuming, though, requiring a lot of contact with companies in the early stages.
Initially, the team look for businesses that stand out in their industry, which might be because of a market-leading product or service or simply good management. NVM takes a fairly conservative approach, aiming to in-vest in established, profitable companies with potential to take market share from competitors or expand overseas. It seeks to use its experience to help the business grow, generally appointing a chairman to the company and taking a seat on the board.
NVM tends to back management buyouts, providing funds to help existing management buy all or part of the company. It prefers management to invest alongside the VCT so interests are aligned. It also provides capital for expansion and a small amount is in development and acquisition capital, where the team backs less mature businesses with strong growth potential.
Investments typically range from £3m to £10m and the three VCTs tend to co-invest. Each has about 40 investments and there is considerable overlap with about 90 per cent of holdings common to all. While Northern Venture Trust has the longest track record, Northern 2 and Northern 3 are similar portfolios and are managed in the same way. Northern 2 and Northern 3 aim to pay a dividend of 5.5p per share.
The NVM approach is unlikely to lead to huge special dividends from the profitable sale of companies but should bring steady dividends and hopefully a lower failure rate.
All dividends paid are free of tax and this makes VCTs ideal for improving retirement income. Indeed, investors in new VCTs and top-ups receive a tax rebate of up to 30 per cent of their initial investment (provided the shares are held for five years) and there is no capital gains tax to pay on disposal. This, in my view, makes VCTs ideal for those who have used up their pension and Isa allowances.
NVM’s pedigree in venture capital investing, its experienced team and its robust approach focused on steady dividends has helped it to become one of the top-performing VCT managers. This top-up opportunity could be ideal for investors considering their first VCT investment.
Mark Dampier is head of research at Hargreaves Lansdown