I regularly splutter over my cornflakes when reading articles that refer to Venture Capital Trusts as ‘companies that invest in a portfolio of start-ups’. This is just not the case.
VCTs have been around for 18 years and it is really disappointing to find them incorrectly described. The vast majority of funds raised are invested in portfolios of growth companies (both pre-profit and post-profit) and management buy-outs. Start-ups are just too risky for the taste of most VCT investors.
All new VCTs are categorised to allow comparison with their peer offerings. At present I categorise VCTs as either:
- Generalists who invest mainly in unquoted companies seeking growth
- AIM-based invest mainly in AIM firms
- Clean/green offerings investing in unquoted companies in renewables
- Planned exit (was limited life) where the approach is to invest in limited downside situations and return capital as soon as possible after a five-year holding period.
The Tax Efficient Review Ranking Tables rank the open VCTs against several criteria with different weightings attached to each of four criteria: strategy (30%), track record (40%), team (20%) and fees (10 %).
Some form of buy-back policy is essential to help manage the after-market and keep discounts low. We award a higher strategy score where the VCT board is implementing a buyback policy (the norm at present is 10% moving to 5%).
Not all Generalist VCTs invest in firms at the same stage of development.
We divide the stages into:
Seed capital/early stage – High risk with hopefully high return, all equity investment, need potential for rapid growth.
Pre-Profit/Post-Profit Development capital – should have potential for rapid growth and exit within three to five years, some VCT loan interest may be deferred until exit, usually no bank debt because of lack of assets for security.
Management buy-outs/buy-ins and later-stage development capital deals – lower returns but should be lower risk, firms should be able to sustain loan interest payments, profitable companies seeking capital for expansion.
Asset backed opportunities – should be able to support interest on debt.
AIM stocks – some stocks are dividend paying, limited liquidity, potential volatility.
Looking at the expected investment strategies of some of the major generalist VCTs fund raising this year shows how various providers have differing strategies.
Albion has 10% in seed capital/early stage, 30% in development capital, 20% in management buy outs and 40% in asset-backed opportunities.
Beringea (ProVen) has 90% in development capital and 10% in management buy outs.
ISIS(Baronsmead) has 100% in management buy outs.
Mobeus has 5 per cent in development capital and 95% in management buy outs.
Northern Venture Managers has 5% in development capital and 95% in management buy outs.
Martin Churchill is editor of Tax Efficient Review