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VCTs crash on the rocks of recession

Last week&#39s news that Gartmore was to withdraw its VCT from the market came as little surprise to the industry&#39s pundits. In better market conditions it would no doubt at least have passed its minimum, but in a season where less than £50m has so far been raised across the entire industry Gartmore had little chance.

Like Artemis and Legg-Mason Investors before it, Gartmore had made the assumption that the name and reputation of a reasonably well known small-cap manager – Gervais Williams – would ensure the fund&#39s success. But of these three groups only Artemis had any real success with such a plan.

Hargreaves Lansdown investment manager Ben Yearsley says managing small-cap funds is not the same as managing an Aim VCT. Of the Artemis, LMI and Gartmore offerings only the Artemis team had any real experience of the venture capital market.

He says: “Artemis had an excellent smaller companies team and good marketing, but more importantly they also had venture capital experience.

“The problem with Gartmore was that it was very difficult to see the story. You have got managers already running more than a £1bn in small-cap money, so why would they want to run a £20m VCT?”

Yearsley believes that one of the biggest problems for the VCT market this year has been a lack of foresight on the part of the marketeers. With much tougher market conditions than last year and a lot less capital gains to be sheltered, he believes VCT firms need to adjust their sales pitches – something most have not done.

He says: “If you go to any VCT presentation at the moment they go on about the tax advantages. But that is irrelevant – particularly at a time when people do not have any capital gains to shelter. They should be making more of the investment story.”

It would be unfair to label the whole VCT industry as unsuccessful this year, as one or two VCTs have already done very well. At the start of February, Matrix&#39s Unicorn VCT had taken almost £14m, accounting for more than 30 per cent of the £45m total industry sales for the current tax year. Downing&#39s Electra Kingsway is another which is well past its minimum, having taken some £6.2m.

However, we are likely to see more misery and more withdrawals from the market before this season is over. Isis technology is now widely tipped to be the next to pull its offering, having taken only £300,000 of its £25m target.

Specialist VCT website www.tax efficientreview.com editor Martin Churchill, says: “I still believe Isis must be giving a lot of consideration to pulling their VCT.

“Basically, they have three options – pull it now, reduce the minimum subscription of £3m it need to launch to £2m or put in some of their own money. I think they are going to have real difficulties raising the £3m otherwise.”

Churchill urges Isis to be responsible and pull the fund sooner rather than later, so that its investors have a good chance to shop around for an alternative VCT. Last year, Seymour Pierce withdrew its VCT in the last few days of the tax year, leaving its investors in a difficult position of quickly trying to find an alternative.

Isis was unavailable for comment.

The only other VCT which Churchill believes could now be in danger this year is Teather & Greenwood&#39s offering. Like Gartmore&#39s, this is an Aim offering, betting on the name of a talented small-cap manager – John Sweet – to sell its shares.

So far it has taken £750,000 of its £1m minimum but looks as though it will probably scrape through. All the other issues have now passed their minimum levels.

Teather & Greenwood marketing executive Ben Wereik hopes his firm&#39s VCT will pick up some of the business from the recently pulled Gartmore fund. He says: “We are confident that we will exceed the minimum. We are very close to it now. We are expecting a late season this year.”

Churchill believes that VCT total sales for this year will not be a total disaster and expects a rush of business in the final weeks of the tax year. It is not in investors&#39 interests to be part of a very small fund and Churchill believes many investors are waiting to see where the money goes.

He says: “Unless you are sitting on a capital gain, my advice is to sit on your money. You do not want to end up in a small VCT – size is very important in this business. I think the minimum amount for a good VCT is around £8m – first, to keep the manager interested, and second, to give you a spread of investments.”

For those that end up in smaller funds, it is not the end of the world. Most will come back to the market for top-ups next year, while the industry is also lobbying for a change in legislation which will allow VCTs to merge.

The Government has indicated these requests are likely to be granted soon, allowing the houses that have several trusts to merge their smaller funds into their larger trusts.

From an investment perspective, the VCT market presents some good opportunities this year but their continued, often invalid, association with extreme risk turns many investors off.

For those with capital gains to shelter they continue to be a must-buy. But even for those without CGT liabilities to worry about the VCT market is worth a look. Whether or not the investment houses and IFAs will be able to convince their clients of this is a different matter.

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