VCTs had a good year in 2014. In terms of share price performance, the VCT Generalist sector was up 10% over one year, outperforming the investment company sector average by 2 percentage points. The Generalist sector was also up 33% over three years, 64% over five years and 97% over ten years. In the VCT AIM Quoted sector, the average VCT was up 2% over one year, an impressive 58% over three years, up 73% over five years, and 19% over ten years.
The VCT sector has a strong story to tell when it comes to income, too, as demand for yield continues. 58% of VCTs are yielding over 5%, with the VCT sector average yield being 7.4%. The average VCT Generalist company offers a yield of 8.1%, and the average VCT AIM Quoted offers 5.6%. But with markets off to a shaky start this year, and global growth slowing, what is the outlook for investing in small and unquoted businesses? Will the strong performance of 2014 continue?
The AIC today hosted a press roundtable lunch on the sector with Tim Levett, Chairman of NVM Private Equity, managers of the Northern VCTs and Oliver Bedford, Investment Manager of the Hargreave Hale AIM VCTs. Their views have been collated along with those of David Hughes, Chief Investment Officer of Foresight, Patrick Reeve, Managing Partner of Albion Venture and Bill Nixon, Managing Partner of Maven Capital Partners, manager of the Maven VCTs.
David Hughes, Chief Investment Officer of Foresight, managers of the Foresight VCTs, said: “Outperformance stems from strong profits and sales growth. The relatively benign economic conditions and the stable low interest rate environment have been a helpful backdrop for high growth companies to deliver exceptional performance. When combined with high stock market ratings, this has led to particularly attractive offers from potential acquirers.”
Tim Levett, Chairman of NVM Private Equity, managers of the Northern VCTs, said: “For the past few years, the leading generalist VCTs have consistently provided a tax-free dividend yield of between 5% and 8%, with some funds outperforming, whilst seeking to maintain or grow the underlying net asset value per share. In an environment in which interest rates are very low, VCTs have naturally become very attractive to investors. The consistent returns have been generated by a combination of exits at high money multiples, unrealised gains in the portfolio and the yield from investee companies. Recently all the leading generalist VCTs have enjoyed a number of quite high profile exits, with the investee companies often being sold to mid-market private equity firms, as well as corporate buyers.”
Bill Nixon, Managing Partner of Maven Capital Partners, manager of the Maven VCTs said: “2014 has been a positive year for generalist VCTs and saw many private equity deals, which were completed in the aftermath of the financial crisis, reach a natural exit point. I suspect this vintage of transactions may have been completed on better terms, contributing to some healthy exit multiples being achieved. Mid-market private equity managers also began to look at VCT portfolios as a source of secondary deals, due to a dearth of opportunities in that space, with perhaps a focus on smaller deals due to a lack of bank debt to help leverage returns. Good VCT managers have established a track record of nurturing smaller companies to the point where they are attractive to larger houses, which should be looking at VCT portfolios as a source of new deals off market, especially as many intermediated transactions are now extensively auctioned.”
The AIM market
Oliver Bedford, Investment Manager of the Hargreave Hale AIM VCTs, said: “2014 was a good year for fund inflows into AIM VCTs, which rose from £15m to £50m. In contrast, AIM had a poor year, returning -18%. Despite this, the AIM VCTs posted an average return of 1.45%, ahead of the FTSE 100 and considerably better than AIM. The events of 2008 and 2009 cast a long shadow over AIM and its VCTs: funds were consolidated, managers moved on, lessons were learned and strategies were adjusted. Seven years have passed since those dark days and we feel the refined AIM VCT proposition that has since emerged is stronger and more robust. Many AIM VCTs now have mature portfolios generating strong risk adjusted returns.”
Opportunities for VCTs in 2015
Patrick Reeve, Managing Partner of Albion Ventures, manager of Albion VCTs, said: “2015 should be a strong year for VCTs – the economic fundamentals support investment in growth companies, while private investors struggle to find homes for their cash which can deliver satisfactory returns. This, in turn, makes VCTs an important part of portfolio diversification for those either seeking a pension supplement or a source of tax free income.”
David Hughes, Chief Investment Officer of Foresight, managers of the Foresight VCTs, said: “We see attractive prospects for VCT fundraising in 2015, with healthy appetite from investors seeking good yields. The recent changes in the caps to pension contributions mean that VCTs are an increasingly mainstream option for generating income through a tax efficient shelter. The volume and quality of investment opportunities has substantially improved over the past 18 months, and we are seeing good opportunities to deploy these funds in various sectors including business services and especially companies leveraging new technologies.
“When it comes to exits, we are seeing high levels of demand for fast-growing, well-managed companies in attractive markets. We see no reason for this to change currently unless there are major macro-economic upheavals.”
Bill Nixon, Managing Partner of Maven Capital Partners, manager of the Maven VCTs said: “In terms of outlook, the market for capital is strong again this year for generalist VCTs, and deal flow remains at healthy levels. I expect that larger PE houses will continue to be an important source of exits for VCT managers, who can very easily transition certain businesses through into the ownership of a larger PE buyer. VCT managers are able to help instil a range of disciplines and good governance in a private company for the first time, giving a secondary private equity acquirer some reassurance that the business is investor ready.”