It was a good year for venture capital trust (VCT) managers. After funds raised by the tax-efficient vehicles dwindled as low as £158 million in 2008/9, forecasts of a revival in interest were vindicated, with the total amount raised doubling to £340 million.
The boost may reflect greater warmth towards growing companies on the part of investors, but fund managers agree that the main explanation is simply changing tax policies. In turning the screw on high earners through a new 50p top rate and less generous pension allowances, former Chancellor Alistair Darling proved to be a friend to VCTs, adding lustre to the tax breaks they offer (see “VCT Rules”, opposite). In fact, some managers have all but declared VCTs the new pensions. Tim Levett, chairman of NVM Private Equity, says, ‘VCTs were in a secondary position to pensions when it came to opportunities to mitigate tax. They are now in the number one spot.’
There was further good news in Darling’s final Budget, a recognition that ‘there may be a case for reviewing the investment criteria’ for VCTs. These criteria were tightened in 2006, for example by restricting the maximum number of staff in an investee company to 50. That particular restriction has been criticised by many fund managers – Patrick Reeve, managing partner at Albion Ventures, brands it ‘completely barking’ because it cuts out most investable AIM-quoted companies and makes it impossible for VCTs to follow investments in businesses that succeed in growing their headcount. So the former Chancellor’s hint that this, and other unpopular rules, may be relaxed was greeted with relief.
Unfortunately, a helpful approach from the Treasury is not enough. The EU will have to agree that any proposed changes are allowable under its “state aid” rules, which restrict the extent to which governments can offer a helping hand to enterprises. According to Reeve, the VCT industry must now ‘give the Treasury sufficient evidence to go to the EU and negotiate along the lines laid out in the Budget, to persuade them to change their rules’.
Mountain of cash
Research from M&A’s sister title Business XL shows that, following last year’s fundraising, established VCTs have £765 million to invest. That includes the money sitting on their balance sheets in the form of cash (some £214 million) as well as that invested in companies or securities that do not qualify under VCT rules. Add to that total the £340 million raised in the last tax year and there is a potential £1.1 billion available for growing companies.
Baronsmead VCT 2 tops our ranking by funds available for investment, with £23.8 million in cash and non-qualifying holdings, including nearly £18 million in interest-bearing securities (see table, right). The fund raised some £8.8 million in the 2008/9 tax year. Andrew Garside, a partner at ISIS Equity Partners which manages the Baronsmead VCTs, says their success is built on ‘a very good underlying portfolio of private equity investments, which have historically delivered good returns’.
For growing businesses, the value of VCTs has been clearly demonstrated over the past two years when other sources of funding, including bank loans, have been in short supply. London pub chain Antic secured £4.2 million from VCTs managed by Downing in early 2009 to buy the leasehold of three pubs from Punch Taverns.
‘From my perspective, standard debt would have been a better option, a simpler scenario too,’ says Antic’s founder Anthony Thomas, who adds that his bank pulled out of funding the deal despite initially appearing interested.
Antic now runs 13 outlets and has seven more in the pipeline. Thomas, an ex-Army man, is brutally frank about what he wanted from his VCT saviour. ‘It was about the money, just the money. I didn’t need someone to tell me how to run pubs.’
It is a quite different story for innovative search engine True Knowledge, which aims to answer users’ questions intelligently rather than simply combing the web for certain phrases. The company raised seed funding of £650,000 in 2007 from Octopus Ventures in conjunction with the firm’s network of private investors. That was followed in mid-2008 with a further £2 million from Octopus funds, including the Titan VCTs.
‘I’m not going to pretend that cash isn’t a very large part of why you do a deal with a VCT,’ says True Knowledge’s founder William Tunstall-Pedoe, adding that the equity injections have boosted the company’s headcount from two to 25. ‘But we’ve also been supported in a lot of other ways. [Octopus director] Alan Wallace attends our board meetings, and the shareholders in the investor network also offer advice and support on an ad hoc basis. Octopus also introduced our chairman, William Reeve, who was one of the founders of Screen Select [later acquired by LoveFilm].’
While VCT money fuelled growth for Antic, it has been the lifeblood of True Knowledge. Such an early stage company could never attract bank funding, even in rosy economic times, and big-name VC houses are focusing on larger deals. Simon Rogerson, chief executive of Octopus Investments, says, ‘Virtually every other finance provider has left the £1 million to £5 million space. There is a real shortage of capital.’
VCT Report 2010
The full report reveals:
• Financial details for each and every VCT, including cash levels and funds available for investment
• Contact details of VCT fund managers, and a ranking by assets under management
• The views of the market’s leading managers
• Details of those funds currently open for investment, and the cash they have raised so far
• A guide to VCT rules and categories, together with a comparison with the equivalent French scheme, the FCPI
• And, for the first time, annualised performance information by sector, revealing whether VCTs have made money for investors beyond the tax breaks
See also: The role of VCT finance – Fund managers have described VCTs as ‘coming of age’, but how do businesses benefit from accessing their finance?