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Performance goes straight to the core

Core Growth Capital is aiming to raise up to 15m each for its Core VCT II and Core VCT III

The VCTs will contain eight to 12 larger, more established unquoted companies across a range of sectors. Having a concentrated portfolio with the possibility of co-investing across the VCTs mean larger amounts can be invested, enabling the directors to get a seat on the board of the companies to ensure the VCTs interests are protected as a major shareholder. This will also make it easier to exit after three to five years because larger holdings are easier to sell than smaller stakes which carry no influence at board level.

Around 70 per cent of the money raised by this offer will be invested in a diversified portfolio of unquoted companies, The rest will go into cash and cash equivalents and will be distributed back to investors after three years. The managers will look for companies that have a clear and sustainable competitive advantage with proven management teams. These opportunities will be found through a wide network of contacts.

A feature which makes the Core VCTs stand out from the crowd is the way that the manager is rewarded only once the investors have their original capital back including income tax relief. Usually VCT managers are paid annual fees before any return is made to the investors but the Core VCTs do not work this way. Instead, the manager will receive a share of future returns through B shares and this is effectively a performance incentive.

The managers can subscribe to half the number of B shares and the remaining B shares will be issued as a bonus to ordinary shareholders on the basis of three B shares for every four ordinary shares they hold. The B shares only have a value when ordinary shareholders have had their capital and a minimum return. This structure ensures the annual running costs are limited to 1.5 per cent of the total funds raised compared with the usual 3.5 per cent.

The managers will align its interest with the shareholders by investing 1m of their own capital in the VCTs rather than directly in the underlying investments, so they also have to pay the charges.

The VCT market is likely to be competitive this year as the temporary enhancements to income tax relief are expected to come to an end in April. This VCTs novel way of rewarding the manager and keeping running costs low may be attractive to some investors but others may prefer VCTs with longer track records such as the Baronsmead VCTs.

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