The last few months have been a torrid time for Newcastle. The football club appears to be in turmoil while Northern Rock has been engulfed in the credit crunch. At least Jonny Wilkinson is fit and playing for the rugby team. One other thing prospering in Newcastle is NVM Private Equity but more of them later.
The sub-prime crisis has not been bad for all sectors of the economy. Many business and personal customers wanting to borrow money have probably been politely turned away, even those with good credit ratings, and this has a knock-on effect through the economy. However, this can prove positive and profitable for investors. Let me explain.
If small businesses cannot get finance from banks to expand, where do they get it from? At the current time, there is not much appetite for stockmarket flotations and therefore venture capitalists are often the only route to finance. This puts them in an interesting position.
Some may call it opportunistic while others will say it is just good business sense. Simple supply and demand will say that if you have money to spend and no one else does, you will get a good price for whatever it is you are buying. That is the same with businesses and venture capitalists. If banks will not lend but venture capitalists will invest, they will invariably be able to drive a harder bargain than normal and make better returns. This year’s venture capital trusts could prove to be a great vintage.
NVM Private Equity has been around since the 1980s and manages £195m split between four VCTs, a private equity investment trust and an inheritance tax portfolio scheme. The bulk of the money is in its four VCTs.
Having launched the second VCT ever to come to market, Tim Levett and Alastair Conn are not Johnny-come-latelys or fly-by-nights. They know the sector inside out. They have even been subject to a takeover themselves and completed a subsequent management buyout a few years later at a much better price. One thing they have come to realise over this time is what investors want from their VCT.
Their view is that investors want steady, consistent tax-free income with the occasional chunky dividend. Indeed, Tim sees this as an ideal way to supplement his eventual retirement (not in the near future, I hasten to add) and again I would probably concur with his view.
One of the things I like about the NVM team is that they do not try to be too clever or too sharp with their investments. They have 10 investment professionals looking for investments and are only looking for five to six different companies to invest in each year.
Managers are given the time and backing to find the right deal before presenting it to the whole of the NVM team and board. Levett is the investment director but a consensus view is needed before proceeding with the deal. They generally look to invest £5m to £7m in each company and on average they invest £30m a year.
Another positive in NVM’s favour is it is not greedy. It was easier to raise money last year in the VCT world but NVM took the view that it already had enough to manage and would not raise more funds. It could have done, it had the reputation but it did not want to harm performance so it waited before raising more money.
As this is a top-up offer, investors get access to the existing, fully invested portfolio, meaning that dividends are that much closer to being paid. The rough goes with the smooth and fruitions might be closer but so are failures. It is the nature of the beast that companies do fail and NVM has had its share in the past and I am sure it will have some in the future but its winners have more than made up for that.
These are long-term investments that should improve with age. The first Northern VCT has definitely done so and Northern 2 has paid out a high level of dividends over the last few years.
The NVM team are looking for profitable companies with quality systems and management which are not reliant on a single customer. Nothing clever, just simple and effective VCT management and I, for one, will be investing this year.
Ben Yearsley is investment manager at Hargreaves Lansdown