TPIM believes this combination of asset classes will provide attractive returns, low correlation to traditional asset classes and lower the risk of capital loss. It will manage the venture capital part of the portfolio and has appointed GAM to manage investments on the fund of hedge funds side.
In the first two years the VCT will invest mainly in derivatives providing hedge fund exposure. By the end of the third year it is intended to hold at least 70 per cent of the portfolio in unquoted companies on the venture capital side, with up to 30 per cent remaining exposed to funds of hedge funds.
TP70’s hedge fund exposure will be indirect through structured derivatives known as contracts for difference and directly by investing in the GAM diversity fund. Under the contacts for difference arrangement, the VCT will hold a portfolio of government and other bonds rated at least AA AA rated. A swap counterparty – either Barclays or Merrill Lynch International – will exchange the bonds for the excess return on a hedge fund index created by GAM. The index is similar to the GAM diversity fund, a global multi-strategy fund of hedge funds comprising 50 underlying hedge funds. TP70 will also invest up to 15 per cent of its portfolio directly in the GAM diversity fund.
On the venture capital side of the portfolio, TPIM will select cash generative businesses capable of producing income and capital growth. The companies will have clear objectives, strong relationships with customers and will ideally have tangible assets, since asset backing reduces risk. The firms are also likely to have a secure revenue stream through a contract with another company or predictable business with multiple client. Valuations should also attractive and an exit should be possible within five years.
With this offering, TPIM is bringing the popular multi-asset style of investing to the VCT market. While this should diversify risk, the resulting combination of funds of hedge funds, derivatives and unquoted companies makes the product more complicated than the average VCT. The £15,000 minimum TPIM has set for this offering underlines its suitability to sophisticated high-net-worth investors.