Type: Venture capital trusts
Aim: Income and growth by investing in unquoted UK companies
Minimum investment: Lump sum £20,000
Closing date: October 31, 2006
Charges Initial 5.5%, annual 2%, 20% performance fee from year six
Commission: Initial up to 2%, renewal 0.5%
Tel: 0800 2792501
Octopus Asset Management is aiming to raise up to £50m for the Apollo venture capital trust 1 and 2, a VCT with a dual structure.
Putting this product into its market context Arch Financial Planning managing director Arthur Childs feels the rug was pulled from under the feet of VCT in the last Budget.
“Not because of the reduction in tax relief to 30 per cent, which is still attractive, nor because of the increase in the minimum holding period to five years – no-one should invest for less than seven to 10 years anyway. The real problem was the more than halving of the maximum size of companies able to raise money under a VCT to £7m, which noticeably increases the risk of capital loss on an already high risk product,” says Childs. He thinks this was a shame as VCTs offer private investors a tax efficient method of investing in unquoted trading companies in the UK and it has been shown that a small amount of private equity in a portfolio is a healthy thing.
Looking in more detail at Octopus, Childs says: “From its establishment in 2000, Octopus has become the ‘New Star’ of the world of private equity. It has funds under management of more than £160m, of which over £100m was raised during the last two tax years. The company has a young team of directors led by Simon Rogerson who are majoring on providing innovative products and an excellent service. It also has a large and very experienced investment team lead by veteran venture capital investor Chris Allner. The company’s confidence is seen in being the first investment house to launch a new VCT following the Budget changes. By having a dual structure the VCT is able to invest double the £1m limit in any one company,” says Childs.
Provided they pay sufficient tax, investors will receive 30 per cent income tax relief up to the maximum investment of £200,000. Childs notes that once invested the VCT will be managed to produce at least 5 per cent tax- free income in each of the first five years. “The initial funds will be invested by Goldman Sachs in cash and cash equivalent assets. Although generalist VCTs are relatively lower risk because of investing across a number of sectors of the market, the fact that the qualifying investments will be structured almost entirely as loans reduces the risk still further,” says Childs. Importantly, Apollo will benefit from a good deal flow on the back of Octopus’s six existing VCTs and will be able to co-invest larger amounts where appropriate.
As soon as the minimum holding period of 5 years has been achieved shareholders will be asked to approve its conversion to an investment trust. “There will be a loss of tax free dividends and CGT free growth but the big prize of doing this is that it will greatly improve liquidity for shareholders,” says Childs.
He believes that Octopus has rightly identified this as the area of most concern to investors. “During the last few months two existing VCTs have suspended their much publicised buyback facilities and at least one other VCT is openly discussing doing so. As IFAs we need to make certain that our clients understand that a VCT manager’s promise to buy their shares is not a guarantee. At the same time the change will allow greater flexibility in how the fund is managed after the five-year period, “ says Childs.
He also points out that any VCT needs to raise at least £10m to achieve a spread of investments and lower company specific risk within the portfolio. “There would seem to be little danger of not reaching this target in this case,” he says. He adds that the 0.5 per cent renewal commission to IFAs is unusual in that it is payable for the life of the fund.
Turning his attention to the potential drawbacks of the VCT Childs says: “The proposed loss of VCT status after five years means that this particular VCT is not going to be so suitable for retired clients. Or those approaching retirement who have used VCTs in the past to build up an additional source of tax-free retirement income and who are not so concerned about liquidity. It is not just that the dividends will lose their tax-free status but the fact that future capital gains will not be able to be paid out as tax free dividends, “ he says.
He also feels that while the charges are typical for a VCT, the total running costs capped at just over 4 per cent a year, including trail commission, will look expensive on conversion to an investment trust. “This is in addition to the 20 per cent performance-related fee which is charged after the first five years once the return in any 12-month period exceeds the HSBC Bank base rate,” he says.
Childs says there are no other VCTs open for initial investment at the moment, although two of the other main players, Close and Foresight, have announced they will be launching VCT’s in the Autumn.
Heconcludes: “Not all IFAs seem to be aware that VCTs are not regulated by the FSA. Clients therefore do not have the same protection as if they invested in a unit trust or life assurance bond.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good