Mark Dampier: VCT that's not just a risky shot in the dark

The Analyst

Venture Capital Trusts (VCTs) have been around for more than 15 years, to encourage investment in small and medium-sized private businesses in the UK. They are higher risk and aimed at sophisticated investors, but to compensate for that various tax breaks are on offer, though these should be seen as the icing on the cake rather than the reason for investing.

Many VCTs have come and gone and some have evolved to invest in alternative asset classes, such as renewable energy. Northern Venture Management (NVM), however, has stayed true to the original spirit of VCTs. It was one of the first VCTs ever launched, back in 1995. This was followed by Northern 2 in 1999 and Northern 3 in 2001. All three invest in unquoted companies across the UK and are managed using the same approach by a team headed by the highly experienced Tim Levett, who set up NVM with Alistair Conn in 1988.

NVM was early out of the blocks this year in seeking investment to top up these three well-established VCTs. Fundraisings began in August and NVM has already reached its quota. However, Northern 2 and Northern 3 still have capacity available. The advantage of investing in existing VCTs via top-ups is that you are investing in an established portfolio with the prospect of early dividends, rather than a new VCT taking years to get fully invested.

These are "generalist" VCTs who invest in any type of company rather than a specific sector. They are also "evergreen", with no fixed life, unlike some VCTs which have a limited life and aim to wind up after five to six years.

The NVM team is based across the country and sources deals by directly contacting companies and through a wide range of contacts and industry events. They see 200 new investment ideas every year and are encouraged by the quality of the opportunities they are currently finding. Initially they are looking for companies that stand out in their industry, with a market-leading product or service, or a top management team. NVM takes a reasonably conservative approach, looking to invest in established, profitable companies with potential to grow market share or expand overseas. They use their experience to help the business and take a hands-on approach, generally appointing a chairman to the investee company and taking a seat on the board.

NVM tends to back management buyouts and they prefer management to invest alongside the VCT so interests are aligned. Capital is also provided to companies looking to expand and a small amount is in development and acquisition capital, where the team backs less mature, but still profitable, businesses with growth potential.

Investments range from £3m to £10m and all three VCTs tend to co-invest together. Each has around 40 existing investments and there is considerable overlap with around 90 per cent of holdings common to each. While Northern Venture Management has the longer track record, Northern 2 and Northern 3 are similar portfolios and managed in the same way. Both Northern 2 and Northern 3 aim to pay a dividend of 5.5p per share. The NVM approach is unlikely to lead to huge special dividends from achieving ten times their money when selling companies, but it should lead to a steady stream of dividends and hopefully a lower failure rate.

Any dividends paid are free of tax and this makes VCTs ideal for improving retirement income. Indeed, investors in new VCTs and top-ups such as this receive a tax rebate of up to 30 per cent of their initial investment (provided the shares are held for five years) and there is no capital gains tax to pay on disposal.

NVM's experienced team and robust approach focused on steady dividends has helped them become one of the top-performing VCT managers, so this top-up could be an ideal stepping stone for investors considering their first VCT investment.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent