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Venture scouts blaze the investment trail

The venture capital industry appears to know something that everyone else does not.

While most fund managers are still sitting on their hands and praying for the end of what has so far been an 18-month bear market, the VCT industry is about to try and raise more than £200m, despite investor sentiment being at its lowest level so far this year.

If fund managers are struggling to persuade investors to put their money into equities at all, it would seem that persuading investors to put their money into Aim-listed or unquoted firms in the current environment will be no mean feat. Nevertheless, around a dozen new funds are set for launch over the coming three months, with most VCT managers confident they will raise the money they are looking for.

Certainly, VCTs are much more popular today than they have ever been. The 2000/01 tax year saw record sales of £423m, up more than 50 per cent on the previous year&#39s total of £270m. But although the industry has been successful in breaking down some of the myths about VCTs being insanely risky, they are still rightly perceived as higher-risk investments – and will not be most investors&#39 first choice in the current conditions of volatility.

Hargreaves Lansdown investment manager Ben Yearsley believes that, des-pite current sentiment, now may be a very shrewd time to invest in VCTs.

He says: “I think this year&#39s VCTs will turn out to be some of the best-performing ones. If you look at the 10-year performance now of the VCTs which were launched in the early 1990s, their results are stunning because they were buying those companies at the depth of the recession. Although we are not in a recession, we have seen a complete turn-round over the past 18 months.”

Friends Ivory & Sime Private Equity managing director David Thorp agrees with Yearsley, pointing out that many investors do not realise that VCTs do not need to just be thought of as a bull market investment.

He says: “I think VCTs are a reasonably defensive investment in volatile markets. First, you have got three years to invest the money and if we are near the bottom of this market then you are going to be investing into an upswing. Second, you are putting your cash into a tax-free wrapper, so you have got a degree of protection.”

Thorp&#39s optimism may be warranted. The Baronsmead VCTs, which he manages, have reached their targets every year and the expected launch of fourth Baronsmead trust this autumn is likely to be well received.

Martin Churchill, editor of the Tax-efficient Review, a new internet publication which specialises in tax-efficient investments, believes the well known names such as Baronsmead, Northern and Quester will not have too many problems in reaching their targets.

The industry raised £423m last year while total target subscriptions came to more than £600m, meaning that many trusts fell well short of their targets. Newcomers to the market, such as LeggMason Investors, only just reached their minimum subscription levels, while three VCTs had to close after falling short.

Churchill says: “I think we are driving towards another year like last year. It will be lower in total but the good ones, the quality names, will take the money. The newcomers will struggle.

“It is a much more accepted product now. IFAs have had to get to grips with it because there has been so much coverage of VCTs.”

This year&#39s new names include an Aim offering from Unicorn Asset Management, to be promoted by Matrix, and a new generalist fund from Downing, to be managed by Electra Partners. These both have the advantage of experienced VCT promoters behind them although Matrix&#39s Sitka health VCT was one which fell well short of its target last year.

Of the old hands, all will be back either with new funds or top-ups. Baronsmead, Ques-ter, Northern and Aberdeen have all announced new launches for the autumn.

Churchill is predicting that the VCT market will total between £250m and £300m this tax year – a drop of between 30 and 40 per cent on last year. If his estimate is right, then well over £100m of subscriptions will be left unfilled by the end of the tax year. With many more launches and top-ups to be announced over the coming months, the target subscriptions are expected to total more than £400m for the year.

Yearsley predicts a £250m total for the year but believes that the majority will be filled by Christmas, with any providers launching in the new calendar year likely to have a difficult time.

Whether or not the VCT industry is likely to succeed in reaching its targets will become clearer as the year goes on. But for those outside the VCT industry, there will be some hope that, at the very least, the movement will begin to turn retail investors back to at least thinking about equity investment.


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