Bill Nixon, Managing Partner of recently acquired Maven Capital Partners discusses Venture Capital Trusts (VCT).
It seems evident that the widely predicted economic recovery in the UK has now begun to take hold and we are currently seeing high levels of mergers and acquisition activity, both in terms of new investments and acquisition interest in Venture Capital Trust (VCT) portfolio companies. Post-Brexit, and hopefully post-Covid, the UK has once again become an attractive market for investors and corporate acquirers, and notably we have seen the re-emergence of US investors, who have a strong interest in the UK technology sector.
Although the pandemic has been a terrible event, from both a human and short term economic perspective, the impact has been very different from the financial crisis of 2008. At that time there was a serious shortage of liquidity in the market, which had far reaching consequences for many companies who could not access critical capital to allow them to trade. This time around we have seen staff dislocation, supply chain disruption, and raw material cost price inflation, but no lack of available capital.
Although the impact of Brexit is now clearer, which has helped both investor and market confidence, the UK is going to have to invest heavily in training people in the coming years to satisfy the resource needs of many sectors.
The Maven VCTs exited or had liquidity events for several portfolio companies over the summer months. We sold education safeguarding business eSafe to a trade buyer for a return of 1.4x cost and have conditionally exited (subject to FCA approval) Mojo Mortgages to RVU, which is part of Zoopla Property Group, generating a return of up to 1.8x cost.
Notably, our Alternative Investment Market (AIM) team were instrumental in helping portfolio company GENinCode achieve a listing on AIM, just one year after the Maven VCTs invested in the business when it was privately owned. On completion of the flotation, the VCTs achieved a 2.7x cost uplift on the value of the initial investment. As a consequence of these transactions, and good commercial progress elsewhere across the portfolio, the Maven VCTs have reported uplifts in Net Asset Value Total Return over the last few months, which is encouraging in the context of the wider market conditions experienced over the last 18 months.
As the Maven VCTs have grown in recent years, we have been able to continue to expand the portfolio by size and sector and build a complementary portfolio of private company and AIM listed holdings. After many years of reduced investor demand, AIM VCTs have performed very strongly in the last two years in line with good market performance. But at the same time, we are mindful of past volatility with AIM and, therefore, prefer to keep a controlled level of exposure to that asset class, to counteract the risk of adverse market movements.
We feel that the two asset classes sit well together as part of a hybrid VCT strategy, private companies may require multiple rounds of finance over an extended period but, at the same time, have the potential to grow over time to become large businesses and achieve very meaningful returns when they are ultimately sold. AIM offers greater liquidity, and the opportunity to either hold investments for the long term, or to lock in early gains.
It has now been six years since the VCT rules changed and, over that period, we have steadily built a diversified portfolio of VCT investments that we believe offer strong medium to long term return potential. We have also focused on ‘backing the winners’, electing at times to exit investments which did not perform, or where there have been changes to the sector which may impact future buyer appetite.
Currently, we are maintaining a run rate of one new private company investment per month from our team across the UK and, since 2015, have sourced and completed investments in some of the most attractive growth sectors. The recent exits and initial public offering (IPO) are signs that this strategy is bearing fruit, and we are focused on continuing to build the VCT portfolios in the years ahead.
Two of the Maven VCTs have announced new offers this year, seeking to raise up to £40 million to continue this growth strategy and achieve further scale, diversity, and cost efficiencies. Our investment team and the directors of those VCTs are making a commitment to the new offers, to ensure alignment with investors.
The offers include a valuable ‘Early Bird’ incentive, which allows early investors to receive extra shares, in tandem with the initial tax relief of up to 30%, and an immediate entitlement to any dividends declared after new shares are allotted.
VCT shares should be seen as a long-term investment. A VCT’s underlying investments will normally be in unlisted companies whose securities are not publicly traded and are therefore likely to be illiquid and carry substantially higher risk than investments in larger, listed companies. The value of VCT shares, and the level of income derived from them, may fall as well as rise and investors may not get back the money originally invested. Existing tax levels and reliefs may change and the value of reliefs depends on personal circumstances. Past performance is not a guide to future returns.
As VCTs are higher risk investments, they are not suitable for every investor. If you are unsure whether VCTs are suitable for you, you should seek advice before investing.