Press centre
02 March 2010
VCT managers optimistic about 2010 and fundraising season
AIC collates manager views on VCT sector
VCTs have suffered during the recession however they are very much back on the news agenda as we approach the end of the tax year. Optimism seems to have returned to the VCT sector as it is expected that the 2010 fundraising season will see a marked improvement on last year. The average VCT’s performance is currently down 0.5% including charges over the last year and the question is whether performance will improve as investments are realised. With this in mind, the Association of Investment Companies (AIC) have spoken to VCT managers to find out their views on the prospects for the sector in the year ahead.
A vintage investment year?
It has been widely commented that with the recession and the restriction on bank lending, VCTs should be enjoying a ‘vintage’ year of investing. With reduced bank debt available to small, growing companies, the managers believe that this year should be a good one for new investments but are stressing the importance of maintaining a longer term view to investing as the recovery still has a long way to go.
Tony McGing, Director, Downing Corporate Finance Limited said: “With banks more interested in repairing their balance sheets than providing funding for small businesses, VCTs have been filling the equity gap. During 2009, Downing’s funds backed 20 businesses to the tune of £28 million. We expect deals completed in 2009-11 to be ‘vintage’ because of lower entry prices and less competition for funding.”
Matt Taylor, Partner, Foresight Group believes that over the longer term view the VCT sector’s prospects are looking good. He said: “Many people know about the effect of vintage years in private equity investing. Each time the economy emerges from a recession, the following 5 years tend to produce above average returns for investors that get in at the bottom. The question is whether 2010 proves to be the fine vintage of an emerging recovery? Of course the recovery is likely to be slow for many sectors of the economy due to the after-effects of the credit crunch. But VCTs are well-placed, because they tend to spread their investing over a 3 year period. And that means that the VCTs of 2010 should catch the recovery and gather a rich harvest.”
Andrew Garside, Fund Manager, Baronsmead VCTs said: “The Baronsmead investment performance has been sound in 2009, but last year was a slow year for private equity investment and this should not be a surprise. Good management teams were rightly focusing on getting their businesses in shape. Activity picks up as the economy comes out of recession; growth drives demand for working capital and there will be acquisition opportunities for stronger businesses. 2010 should be a good year for investing but lets not forget a good manager must aim to deliver positive returns in tougher years as well as receovery years.”
The impact of the new tax and pension rules
The overwhelming opinion of managers is that, in light of the new changes to income tax and pension relief, that there will be more investors looking to include VCTs as part of a diversified portfolio. All the managers questioned are therefore expecting a good fundraising season.
Matt Taylor, Partner, Foresight Group said: “With the increased tax rates, low interest rates on savings and the restrictions placed on pension contributions, VCTs are being increasingly seen as an alternative source of tax-free income to run alongside traditional tax and investment planning products. Whilst the industry will caveat quite rightly that it is not a like for like swap replacing monies set aside for pension contributions to go into VCTs, as part of a balanced portfolio it may well be appropriate for clients to take a greater percentage of their asset allocation in VCTs. This should see monies invested in VCTs increase considerably this tax year in comparison to the 2009/10 figures, and this is a trend that is likely to continue into the new tax year.”
Patrick Reeve, Managing Partner, Albion Partners LLP said: “We’re expecting a sharp increase in VCT fund-raising this year, principally as a result of the new pension legislation. Again and again, we meet with financial advisors whose pensions business has fallen off a cliff following the reduction in income tax relief for higher earners to 20%. Given the other restrictions on a pension, and in particular the fact that when you draw an annuity, you are effectively paying income tax on your capital as well as your income, a VCT, with its 30% tax relief, tax free income, and preservation of capital, becomes comparatively a much more compelling alternative.”
Tony McGing, Director, Downing Corporate Finance Limited said: “The VCT market has raised approximately £100 million to date during 2009/10 compared to £45 million at the same point in 2008/09. Downing expects the total market-size to reach £300 million this tax year compared to £135 million last tax year – a projected increase of 122%. This is being driven by the changes to pensions, increases in tax rates and better investor sentiment compared to last year.”
Tim Levett, Chairman, NVM said: “Prospects for VCT fundraising are positive this year with over 20 VCTs hoping to raise a combined target of £500 million. I predict that at least 50% of the target will be raised for the 2009/2010 tax year. Changes to the rules related to investments in SIPPs have resulted in people needing to find other tax efficient investment opportunities and VCTs, with their income tax relief on investment and dividends paid tax-free, are an obvious choice”.
Andrew Garside, Fund Manager, Baronsmead VCTs said: “The relative merits of VCT tax reliefs will drive significantly increased inflows into VCTs in 2010 and 2011. But there should be a word of warning here. The demand for VCT investment may not grow proportionately and managers should only raise quantums of capital that they are confident of delivering attractive returns to shareholders. Performance has to be judged on shareholder returns not funds raised.”
A long term investment opportunity
With companies still finding it hard to get new loans from the banks, VCTs are providing a welcome source of debt finance for growing companies. Before making an investment, managers need to look into the long term potential of the business before making an investment and it is no surprise that environmental and healthcare companies are proving popular investments.
Patrick Reeve, Managing Partner, Albion Partners LLP said: “We look for two things in an investee company. First, a really interesting market opportunity, and second a strong management team to take advantage of that opportunity. If you get both of those two right, then you really ought to make a decent return. The current climate, though, makes analysing what constitutes an interesting opportunity rather harder than normal. So we try to look ten years out, beyond the current economic fog banks, to see what will be those sectors that seem likely to be producing decent returns. Two spring to mind – healthcare (because it never goes away) and the environment.”
Matt Taylor, Partner, Foresight Group said: “The top priority for us is sustainable profitability. Now is a good time to judge winners and losers because the recession and credit crunch have exposed many unsustainable business models. We have always looked for sectors where demand is growing much faster than overall GDP, because this helps to build and sustain profits. The environmental sector is one of the few that meets this hurdle today. And that is why we are focusing much of our investment in sectors like recycling and renewable energy, where consumer interest and government action combine to drive massive growth.”
Tim Levett, Chairman, NVM, said: “As the UK starts to slowly emerge from the recession those companies that have survived are in a stronger position to grow their business and, with lack of bank funding in the SME sector, the opportunities for VCTs to find attractive growth deals has improved.”
- Ends-
Notes to Editors
The Association of Investment Companies was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 345 members and the industry has total assets of approximately £83 billion.
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