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VCT to buy into buyouts

Arch Financial Planning managing director Arthur Childs predicts this will be a bumper year for VCTs as 40 per cent income tax relief is expected to end in April 2006.

“This is one of a number of offers that I would expect to see oversubscribed. Matrix has a team of eight experienced managers specialising in private equity investment, which is one of the largest teams in this field,” he says.

Looking at the useful features, Childs highlights the structuring of up to 70 per cent of each investment as preference shares or loan stock, with the balance being ordinary shares. “This strategy is designed to maximise twice-yearly dividend payments. The manager will only receive its performance-related incentive fee once it generates returns that enable the fund to pay out at least 6p per share a year in dividends,” he says. He thinks this will attract higher-rate taxpayers as there is no further tax to pay on the dividends.

Childs notes that the VCT will focus on management buyouts where the incumbent management team invest their own money in the business, as this aligns their interests with the VCT. He explains: “As the majority of private equity investment comes from MBOs, this will not restrict the deal flow.”

The maximum size of a VCT investment is 1m but Childs points out that, with five VCTs under management, the Matrix team can invest 1m from each to make combined investments of up to 5m in bigger, more developed companies that would otherwise be beyond the scope of a VCT.

Discussing the possible drawbacks, Childs says: “The directors will enhance liquidity by buying back shares from those who want to sell. Any such sales in the first three years will forfeit the investor’s initial tax relief. This is fine but some competitors have a more formalised buyback policy and one has an annual tender offer from year four onwards at no more than 5 per cent discount to net asset value. Matrix would no doubt argue that their lower-risk approach makes this unnecessary.”

Childs believes competition will come from C-share issues from F&C’s Baronsmead and Close Brothers. “The main competition from another new issues is likely to come from the twin Eclipse VCTs from Octopus,” he says.

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