Investors and advisers tempted into the venture capital trust market by strong performance and tax advantages could be set for disappointment as lower fundraising leads to a lack of available products early in the new year.
Mark Wignall, chief executive of Mobeus Equity Partners, told FTAdviser that there is the beginnings of a supply and demand mismatch in the VCT market.
“Demand is strong because there’s been decent performance, some greater comfort around the risk profile of products, low returns on alternatives and clampdowns on unapproved tax avoidance schemes.”
He added that the supply situation has “caught a few people off guard”, stating that while one of the most popular fundraisers, Baronsmead, is launching a small offer next year, another key fundraiser, Northern, is not.
Mr Wignall suggested that a lot of clients and some financial advisers do not understand that these products are based on a private equity and venture capital operation, where a balance must be struck between having cash available and being able to actually deploy it.
“For the long-term health of the market we need to make sure that all interested participants continue to be satisfied and if advisers find that the products run out by the time we get to February, that’s going to create a lot of disappointment.”
Tim Levett, chairman at Northern Venture Managers, told FTAdviser that the firm raised a lot last year and has invested most of that since, but wanted to reduce liquidity as cash is a drag on performance.
“Of course we’ve had some disappointed shareholders who want to invest with us each year, but for those already invested we’ve got a nice flow of deals - we expect to do six to eight - and several realisations, so I can see the basis of sustained performance and dividends in 2015.”
He added that on the back of this NVM would probably go into 2016 looking to raise more money.
Michael Probin, director of investor relations for Isis Equity Partners, which runs Baronsmead’s VCTs, noted that while fundraising was down sharply this year, the Baronsmead VCT 5 currently intends to launch a subscription offer early in 2015 to raise approximately £4m.
“I think that fundraising is always a balance between the needs of the VCT and the needs of the market and the directors of the Baronsmead VCTs consider this matter very carefully. However, on this occasion, raising further new funds was not considered necessary.
“In order to avoid having too much cash, which, given the current returns on cash, might prove to be a drag on investment performance, the directors of each of those VCTs decided not to raise new funds at this time.”
Earlier this autumn FTAdviser reported that capacity issues in the VCT market could constrain growth in the coming years, with Matthew Woodbridge, head of VCTs at Barclays Wealth, warned of a a “worrying” lack of fundraising from new entrants that could put the brakes on recent growth.
End of year figures from the Association of Investment Companies showed that combining both new issues and existing companies issuing new shares, the investment company sector raised £5.7bn in 2014, compared to £6.3bn in 2013.
Looking ahead, Mr Probin expects to see these VCTs raise new funds in the future, possibly in the 2015/16 tax year, “depending on the future level of new investments and realisations”.
Jason Hollands, managing director for business development at Tilney Bestinvest, told FTAdviser that there’s still plenty of supply this year, with around 17 offers open, but the absence of Baronsmead and Northern from the new fundraising scene means limited capacity from the very top generalist managers.
“In both cases this is because they already have plenty of cash to invest in new deals as a result of strong fundraisings last year and having successfully sold a number of holdings in recent months.
“We therefore believe that Mobeus and British Smaller Companies will see very strong demand as two other managers we rate five stars who are raising funds. My hunch is that both will complete their fund raisings ahead of tax year end and therefore investors should act sooner rather than later.”
peter.walker@ft.com
