The VCTs will invest in a portfolio of 20-25 early stage companies and those that need development or expansion capital. They will typically invest £500,000-£2m in each company, focusing on those in the environmental, technology, media, telecommunications, consumer lifestyle and wellbeing sectors. It is expected that 75-85 per cent of the money raised will be invested in qualifying investments within three years, while 15-25 per cent will remain in a combination of cash, money market securities and Oeics managed by Octopus.
The VCT will focus on businesses with the potential to achieve a high level of profitability. These firms will have the potential to deliver services to new customers at a low cost and to generate repeat sales from customers. They will also be able to expand into different areas through customer and distributor relationships, new product development and brand positioning.
Companies will also be able to charge high but reasonable prices due to intellectual property rights, a strong brand and dominant position in a market niche. It is also important that the people involved in the companies have a proven track record.
Octopus will regularly review the portfolio and each company will be assessed in terms of its commercial and financial progress. As each company matures, action plans are made to achieve a successful sale.
A few VCTs are already raising money for the 2007/08 tax year and more are expected before the end of the calendar year. However, the attractiveness of VCTs has been dented over the last year as income tax relief was reduced to 30 per cent and the holding period to qualify for this was extended to five years from three years. VCTs can now only invest in companies with assets of no more than £7m – less than half the previous limit of £15m. More recently, companies looking for investment from a VCT only qualify if they have no more than 50 full-time employees and have raised no more than £2 m through VCTs over the last year.
These restrictions could mean that VCTs raise even less than they did last year. New VCTs such as the titan product will face competition from top-ups to existing VCTs but the reputation of Octopus as a small cap specialist should help to drum up support.