Demand for VCTs in the 2017-2018 tax year has been very strong. From 6th April 2017 to 31st January 2018 VCTs have raised £483 million, more than double the £221 million raised from 6th April 2016 to 31st January 2017.
However, following changes to the VCT investment rules in the 2017 Budget, new regulations are in place which affect how these funds can be invested.
On 7 February, the AIC held a media round table where, Jo Oliver, fund manager of the Octopus Titan VCT, Andrew Garside, fund manager of the Baronsmead VCTs and Trevor Hope, partner of Mobeus Equity Partners, manager of the Mobeus Income & Growth VCTs, discussed their recent investment activity, the effect of regulatory changes and where they are finding attractive investment opportunities.
Their views have been collated alongside comments from Stuart Veale, managing partner of Beringea and Eliot Kaye, investments director at Puma Investments.
Where are managers finding opportunities?
Stuart Veale, managing partner of Beringea, the manager of the ProVen VCTs, said “Beringea is currently seeing a strong glow of investment opportunities. Two areas which are proving particularly fruitful at the moment are software as a service, or SaaS, and e-commerce and mobile commerce.
“The ProVen VCTs recently invested in two companies which are linked to both of these sectors. SmartAssistant is a SaaS company whose technology allows its customers to create intelligent, digital advisers. These help shoppers make better purchase decisions when shopping online, on mobile or at point of sale, thereby increasing customer engagement and satisfaction. Beringea also recently provided a further investment into portfolio company Poq, an ‘app-commerce’ company which provides a SaaS platform that enables retailers to build engaging shopping apps for their customers.
“These two companies are typical of the ProVen VCTs’ strategy of investing growth capital into relatively early stage, high growth companies. As they have been pursuing this investment strategy for many years now, they have not had to change their approach following the rule changes introduced in November 2015, unlike VCTs which had previously focused primarily in investing in management buyouts.”
Jo Oliver, fund manager of the Octopus Titan VCT, said “Octopus Titan VCT looks to invest in companies led by talent teams with global ambitions, such as Secret Escapes or Tails.com. We are seeing a fantastic pipeline of investment opportunities thanks to the UK’s thriving and vibrant entrepreneurial landscape. More and more investors are keen to play part in that.”
Trevor Hope, partner of Mobeus Equity Partners, the manager of the Mobeus Income & Growth VCTs, said ‘Mobeus is seeing a large volume of investment opportunities from across the UK with an increase not only in software related technologies but also in engineering and advanced manufacturing opportunities.”
VCT investment activity
Eliot Kaye, investment director at Puma Investments, the manager of the Puma VCTs , said “We recently invested 33.75 million in Sweat!, an innovative fitness business set up by Virgin Active founder, Frank Read.
“The money will be used to support Sweat!’s planned roll-out of five new gyms in the next twelve months and includes an option for us to make a further equity investment of up to £2.5 million after twelve months. As with all our investments, we’re focused on supporting high-quality management teams and growth companies and we’re excited by Sweat!’s prospects.”
Trevor Hope, partner of Mobeus Equity Partners, the manager of the Mobeus Income & Growth VCTs said: “Midlands-based Biosite Systems has developed a unique fingerprint algorithm which works with low-grade fingerprints (a feature of the construction industry) to provide access control for workers coming on site. Around this, Biosite has developed a software system that allows customers to utilise the data collected from the access control platform to manage their workforce as well as providing broader security services including integrated CCTV, fire alarms and guarding. Mobeus has invested £4 million into the company after its origination team approached the company to discuss investment opportunities.”
The effect of regulatory changes
Andrew Garside, fund manager of the Barsonmead VCTs, said: “The VCT industry is looking forward to a period of stability and a renewed focus on investing in small, high-growth companies. VCT fund managers have been kept busy in recent years coping with significant change to the schemes regulations. The November 2015 budget changes triggered a significant shift in investment strategies for most VCTs in 2016. This was followed by the useful Patient Capital Review through 2017, which resulted in further changes. It appears that the industry and the Government’s main sponsor HM Treasury, are aligned on the intent for the scheme and it would be welcomed if we could all enjoy a period of stability in the rules. The fund managers can then turn all their efforts to what they excel in – investing for the long-term in small, high-growth companies and supporting their continued success.”
Stuart Veale, managing partner of Beringea, the manager of the ProVen VCTs, said: “The changes to the VCT rules announced in the November 2017 budget were designed primarily to ensure that VCT investment is focused exclusively on entrepreneurial, high-growth companies. As Beringea has invested exclusively in these types of businesses for many years, these changes will not have any impact on Beringea’s investment strategy. The ability to invest up to £10 million p.a in ‘knowledge intensive companies’ from 6th April 2018, compared to £5 million as at present, will be helpful in enabling Beringea to deploy more investment into these types of companies.”
Trevor Hope, partner of Mobeus Equity Partners, the manager of the Mobeus Income & Growth VCTs, said: “Mobeus, as a manager of four VCTs with over £250 million of capital, welcome the changes to the rules regarding investing in knowledge-intensive companies (KICs), allowing for a greater lifetime investment of up to £20 million in an individual company. This provides VCTs with the opportunity to continue to provide patient capital to companies creating rich intellectual property whilst also allowing VCTs to back their winners for longer.
Eliot Kaye, investments director at Puma Investments, the manager of the Puma VCTs, said “Following the Patient Capital Review and the government’s budget statement, it is good to see that Venture Capital Trusts remain a viable and valuable source of funding for smaller and growth companies, whilst continuing to retain their attraction to investors. The government obviously has to balance competing priorities, but we’re pleased the value of these schemes to businesses and investors has been recognised and reaffirmed.”
Outlook for VCTs
Trevor Hope, partner of Mobeus Equity Partners, the manager of the Mobeus Income & Growth VCTs, said: “The outlook for the VCT sector is positive with growth capital required to provided support to SMEs as they navigate the uncertainties and opportunities which will be presented by Brexit.
“However, as investment strategies focus on earlier stage companies VCT funds and their shareholders must expect a greater volatility in returns.”
Jo Oliver, fund manager of the Octopus Titan VCT, said: “There has never been a more exciting time for VCTs – it’s been a great fundraising season. Investor demand is rising for access to the growth potential of some of the UK’s most dynamic smaller companies, as well as the tax benefits that VCTs can offer.
“This appetite was boosted by the Chancellor’s endorsement of VCTs as a vital source of support for early stage companies, the backbone of the UK economy, back in November.”
Eliot Kaye, investments director at Puma Investments, the manager of the Puma VCTs, said: “It’s important not to see investing in a VCT backed company as only having an all-or-nothing outcome. Many good, solid businesses rightly qualify for investment through these schemes because they are unable to access capital from traditional sources. VCTs can continue to plug the funding gap faced by SMEs, support innovative enterprises and deliver high-quality returns for our investors. We can do more to highlight the funding options for entrepreneurs and raise awareness of the benefits these schemes offer investors.”