Wednesday, 20 August 2014

Nothing Ventured...(Portfolio Buy)

Source
Venture Capital Trusts (VCTs) are fairly exotic investment vehicles that offer tax incentives to invest in start-ups and unlisted companies, with the proviso that your money stays put for at least five years. However, VCTs have not interested me in the past, as - thanks to ISAs, SIPPs and tax allowances - I don't pay any tax on my investments and savings.

But what I didn't realise until recently is that you can also buy and sell shares in VCT companies - and some of these have really attractive yields.

To quote my latest purchase: "Venture Capital Trusts are fully-listed companies whose shares are traded on the London stock market and whose principle activity is investing in other companies that are seeking capital. Those underlying investments must be predominantly in businesses which meet specific qualifying conditions (for the purposes of obtaining and retaining the associated investor tax benefits), and are usually in private (unlisted) companies, but can also include those quoted on AIM and ISDX.

A VCT manager aims to provide not only capital but also significant input and advice in helping each company to achieve its business plan, in order to generate capital profits at exit when the business is sold. A VCT will typically look to exit each investment after between three and seven years, by way of a trade sale, a public flotation or a sale to another private equity manager. All or part of the gains generated on the sale of an asset can then be paid out to the VCT investors as a tax-free dividend and the remaining proceeds are reinvested in further investment opportunities.

Consequently there is potential for significant rewards from VCTs which invest in these successful companies, but there is also more risk attached to owning such shares than there is with larger companies. VCTs do offer significant advantages for UK tax-paying investors, whether purchased as new issues or in the open market. They are principally aimed at investors who understand the nature of smaller company investment, can afford to take a longer term view and accept that the value of their investment can go down as well as up."

Now, I don't pretend to fully understand the inner workings of VCTs. As far as I can see, it boils down to this: they provide capital to smaller companies in exchange for a stake in the company - if the company is successful the VCT can sell that stake at a profit. VCTs invest in many different companies, to offset the risk of any of them failing. Because investors' money is 'locked in' for years, the VCTs can invest for the medium term. And because of the diversification, there is some risk mitigation - but it must be understood that VCTs are often working at the very risky end of the market: not all of them make money for their investors.

Choosing the right target is obviously the key skill and VCTs use professional managers to help them do this. Knowing when to cash in and - conversely - when to walk away (at a loss) are also key skills. Much like running the DIY Income Investor portfolio.

Rather than investing in VCTs by subscription, there is another way to invest in VCTs: via the shares of the VCT company itself, which are quoted on the LSE. This is a new area of the market for me, thrown up by the Google Finance Stock Screener, which identifies a number of VCT companies with attractive yields.

My first choice in this field is Maven Income & Growth VCT PLC (LSE:MIG1 - there are other quoted shares for different funds operated by this company), which has been running since 2010 and is described on their website as "a generalist VCT which aims to achieve long term capital appreciation and generate maintainable levels of income for shareholders". A 'generalist' VCT invests in a wide range of sectors.

A first look at the numbers is somewhat discouraging - although there is a chunky dividend yield of over 8%, the dividend cover is only 0.4. This would be a flashing red light for any other type of company but you have to remember that VCTs are different: they must distribute 85% of their investment income. They do not usually generate a lot of income but rather rely on making net capital gains: the dividend is paid mainly from (hopefully judicious) liquidations of holdings in companies. On the good side; there's no debt, and over the yearsthe Net Asset Value has risen and the  dividends have increased.

The Annual Report for 2013/14 makes interesting reading: the range of investments is impressive.

This is new territory for me and there may be disadvantages to VCTs generally (or this particular one) that I am not aware of, so I urge anyone considering this type of investment to Do Your Own Research.

[Purchase price: £0.665]


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

6 comments:

  1. Very interesting - thanks. Unfortunately not available through iWeb.

    ReplyDelete
  2. -- "Unfortunately not available through iWeb." --

    The changes to what we can and cannot buy are very recent and sometimes you have to remind your broker about this. I had the same problems with iii but one email solved the problem. They simply have to add the company to their database. I think that iweb is owned by Halifax which is owned by Lloyds, so should be no problem.

    Steve

    ReplyDelete
  3. Anonymous - Re iweb - as VCTs are listed on the stock exchange they should allow you to buy - are you sure they dont allow purchase perhaps you have to do over the phone

    Diy Income - love the blog. Here are a few comments on VCTs (I am not an expert but have subscribed to a few new issues in the past). HL and Best Invest (among others) have quite good guides to the pros and cons and summaries of current open offers which are worth reading

    They tend to be highly illiquid i.e. difficult to sell at a good price with a large bid offer spread
    Usually trade at a high discount to net assets
    Worth checking out their buyback policy and looking for those trusts with a clear discount control mechanism
    Annual charges are usually huge (2-3% plus performance fee is not unusual)
    There are a huge range of different vcts with substantially different aims from lower risk limited life, through to those investing in early stage tech companies or even in past windfarms, generalist and aim vcts.

    Re your comment on no debt while the vct itself might not have any debt the companies it invests in may well be geared.

    The tax advantages are quite good - subscribing to a new issue you would qualify for 30% tax relief if you keep for 5 years and whether bought new or from the market dividends and capital gains are tax free.

    Out of interest is there any reason you didnt go for a new issue?

    As ever DYOR

    ReplyDelete
    Replies
    1. Hi Michael - as I note in the article, I don't pay any tax on my investments, so I don't need these particular tax breaks. That means I can buy & sell when I want...

      Delete
    2. Anonymous here (the first one - actually I'm Colin!)

      iWeb withdrew investing in VCTs earlier in the year. I don't think they gave a reason and I can't find the announcement on their dreadful website. They also withdrew their regular investment facility as well. Annoying - I moved to them in January to escape Alliance's hike in fees. You get what you pay for I guess.

      Great blog BTW!

      Delete
  4. Hi, What's your latest thinking about Maven, it seems to taken a bit of tumble lately?

    ReplyDelete