Core VCTs IV and V will finance management buyouts, acquisitions, balance sheet restructuring and other activities. The companies in the portfolio will have strong management teams, good financial prospects, cash flow and balance sheets but will typically be unable to find the right type of financing.
Mezzanine finance is different to private equity in that investments are made not through equity but through loan notes or junior debt. These rank above ordinary shares and other equities, but sit below bank debt.
The aim of mezzanine finance is to produce an income yield while offering security based on a company’s assets or cash flow – although the security is offset by the tendency of returns to be lower than private equity. However, other instruments such as warrants can be used to boost returns.
Core Capital has built three key relationships to help find suitable investments. Founding partner Caparo gives Core Capital access to its skills and, resources across the UK, USA and India. Indigo Capital, a specialist provider of mezzanine and junior capital to European businesses will introduce Core to mezzanine investment opportunities, while a co-investment relationship with a European mezzanine fund called Mediterranean Mezzanine is also expected to provide suitable deals, but the VCTs will not look at Aim companies.
Returns from investments will typically be 8-10 per cent a year on the amount invested. Companies may be prepared to offer a higher return to investors to keep greater control of the companies.
Aside from the mezzanine approach, this VCT offering differs from many other VCTs in that Core Capital is not paid an annual management fee because it believes managers should get paid only when they make a profit. Instead, they receive a performance fee, which means that annual operating costs will be capped at 1.5 per cent.
VCT investors receive 30 per cent income tax relief after the temporary enhancement to 40 per cent has expired and the value of eligible investments has been reduced from £15m to £7m, so demand is expected to be lower this year than in previous years. If this is the case and the market is smaller, this VCT offering’s distinguishing features could be attractive.