Seeking the armchair entrepreneur; VENTURE CAPITAL TRUSTS
Saturday 13 May 1995
Venture Capital Trusts, a new form of investment trust designed to fill the funding gap for smaller companies, are due for launch in late summer once Stock Exchange rules have been amended. On Tuesday Kenneth Clarke, the Chancellor, will be extolling their virtues in a keynote address to the Association of Investment Trust Companies, pointing to generous tax breaks for those willing to take the risk of investing in small, unquoted businesses.
VCTs offer the same income and capital gains tax reliefs as personal equity plans, but in larger amounts. The investment ceiling per person is £100,000 a year, against £9,000. They also give upfront income tax relief at 20 per cent, provided shares in the VCT are held for five years, and rollover relief from capital gains tax, if the gain is invested in a VCT. Private investors are keen to participate. A recent survey by the Association of Investment Trust Companies showed 83 per cent of sophisticated private investors had heard of VCTs and 50 per cent of those were likely to invest.
However, fund managers remain cool. So far only Murray Johnstone and Rothschild Asset Management have said they will launch VCTs and Rothschild's plans are on the back burner.
The largest provider of venture capital in Europe, 3i, looks set to announce its participation very soon. Its wide network of regional offices gives it unrivalled access to small companies and makes it a natural VCT manager.
Picking the right manager with good quality deals will be the key to VCTs, according to Hamish Buchan, investment trust expert at NatWest Securities. "VCTs are not about looking at a portfolio of stocks. Anyone going in has to do their homework on the managers and their contact base," he said.
The £1m maximum that VCTs are permitted to invest in each unquoted company makes the size of the deal too small for many venture capital managers.
Murray Johnstone, with offices in Glasgow, Manchester, Birmingham and London, believes its regional infrastructure gives it good access to deals and the right cost base to make money for itself and its investors.
Iain Tulloch, investment director, said: "VCTs should make a good return in their own right. The tax relief is just the icing on the cake." He believes a well managed VCT will outperform the FT All Share index over five years and the reward profile could be "extremely high" if the managers get it right.
Murray Johnstone is aiming to raise £30m and expects to pitch its minimum subscription at £5,000 per person. The VCT will invest in approximately 40 companies, giving a reasonable spread of risk, Mr Tulloch said. He hopes that business angels will use their Enterprise Investment Scheme tax reliefs to co-invest with Murray Johnstone.
VCTs are for consenting adults only, Mr Buchan said. They will invest in small companies (maximum gross assets £10m), which are inherently more risky than large.
Although the Government has decreed that VCTs must be stock-market listed and so technically tradeable, second-generation owners will not receive the 20 per cent upfront income tax relief or the rollover relief. They will be eligible for relief from income and capital gains tax generated by the VCT shares. They may also be able to take advantage of share prices at very large discounts to net asset value. "There will be no liquidity because nobody will sell. We will not be interested in making markets. VCTs are likely to go to discounts of up to 50 per cent to net asset values," Mr Buchan said.
The nervous investor may prefer a more tried and tested route into unquoted investment. There are 20 existing venture and development capital investment trusts on the stock market, the largest being 3i and Electra. The shares of these trusts trade in a liquid market at varying value.
Electra is presently trading on a discount to NAV of 13 per cent, but Candover is on an 8 per cent premium.
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