A slow start to 2023 may have led investors to question how many good UK companies are available to invest in, but there are increasing numbers of potential investments, senior VCT managers have said.
Simon King, manager of the Octopus Future Generations VCT, and Kate Tidbury, senior fund manager, said although there seemed to be a disconnect with headlines showing huge fundraising among British VCTs and what is available to invest in, both the unquoted and small quoted markets are showing promising signs.
As of July 2023, the number of companies trading on the London Stock Exchange stood at 1,900.
According to analysis from Statista, this marked a slight decrease from the previous month, and is still one of the lowest number of companies listed over the past decade.
Quoted markets have also been volatile through the year, particularly at the smaller end, which means some planned flotations have not happened and some companies have even delisted.
A more stable period should encourage the companies which have been weighing up a stock market float to come.Kate Tidbury, OctopusIn general, fundraising was slower in the first half of the year.
"Public markets have been volatile, particularly at the smaller end and this has meant that planned floats have not materialised and fundraising in general was slower in the first half of 2023", she said.
However, Tidbury said she believes there as been a strong pick-up in recent months.
She told FTAdviser: "We have seen a pickup in VCT qualifying opportunities over the summer, particularly for existing AIM companies needing further funding rounds and this is continuing.
"As with the private sector, valuations are lower, but we are still seeing companies with ambitions to float later this year."
Octopus's AIM VCTs have opened with a raise of £20mn, with the option to extend to £30mn, subject to deal flow visibility in line with a measured annual approach to fundraising.
Subdued market
She said while IPOs have been subdued in the main market and on Aim over the past year to 18 months, there have been some "strong VCT-qualifying opportunities" among the ones that have come to market.
Tidbury added: "The reason behind this slowdown is a prolonged period of uncertainty caused by a steep rise in inflation and interest rates, which has in turn, caused market volatility.
"We hope that signals that inflation is now coming down and interest rates are peaking, will restore confidence in what is now looking like a very undervalued stock market if we compare it internationally.
"A more stable period should encourage the companies which have been weighing up a stock market float to come - we saw this happen immediately post-covid."
In terms of opportunities, Tidbury said the team was seeing existing companies needing further funds, which may have floated two or so years ago.
She added: "In some cases, we might have turned them down on the basis that they would need further funding or alternatively invested a portion knowing a further funding would be a likely outcome.”
Unquoted companies
The issues that may have plagued the listed company side of British enterprise have not been so profound among unlisted companies, according to King.
He said: “On the unquoted side, yes, there are still many great companies out in the market that need capital and, as valuations have become more reasonable, now is a great time to be investing in these companies."
In the first half of 2023, King said the UK did see a slow-down of companies fundraising, though there are some areas where this has not happened, such as in AI, biotech or climate tech.
He added: "Our wide focus areas include all of these and so while, for example, we may have seen fewer fintech opportunities, we have made several investments in biotech companies this year.
"In the second half of 2023 we have started to see more companies out fundraising generally and we expect that trend to continue into 2024."
Now is a great time to be investing in these companies.Simon King, OctopusIn the unquoted market, there are approximately 3,000 companies in which Britons could invest, but Octopus's managers would only explore between 300 to 500 of them, with a view to investing in, maybe, 30.
This could mean that Octopus is chasing the same 'sweet spots' that other managers are investing in, but King believes that rigorous due diligence helps the team to find the best opportunities for growth.
He explained: "We invest in the companies we think have the best chance of becoming £1bn+ businesses in the future.
"To do so we have a rigorous due diligence process that we’ve built and refined over the 15 years we’ve been investing to help us find the best opportunities."
King's team focuses on:
- The teams - can they hire great people and sell effectively?
- The market - is it big and ripe for disruption?
- The ability to scale quickly - typically this means tech or tech enabled companies
- The 'unfair advantage' - why will this company will win, compared with others who might be doing the same thing?
King added: "With our focus on early stage, high growth tech companies, we rarely compete with other VCTs.
"Even when we have done, our successful track record of investing in great companies has typically meant entrepreneurs prefer to take our funds, though in some cases we have co-invested together with other VCTs.”
simoney.kyriakou@ft.com
