NVM Private Equity brought its venture capital trust (VCT) offer to market particularly early this year, in August, and already two out of its three VCTs have sold out, despite the £50m size (read more on early launches). Low interest rates, a desire for higher risk and return assets, and a reduction in annual and lifetime pension limits have no doubt contributed to this. However, the NVM VCTs typically fly fast regardless of when they are launched, helped by their strong performance and attractive dividend. So how do they make their returns and find the investments that drive them?
Northern Venture Trust (NVT), Northern 2 VCT (NTV) and Northern 3 VCT (NTN) are generalist funds: they focus on companies across various sectors, largely focusing on unlisted ones, though hold a few quoted companies, too. They typically invest between £2m and £10m into an investment.
"We are looking for potential investments all the time," says Tim Levett, chairman of NVM Private Equity. "We directly approach companies, go via intermediaries and have our own networks. Plus we get a whole stream of applications for funding, and meet around 200 companies a year.
"When selecting a company to invest in we look at three fundamental things:
■ management
■ market; and
■ financials - historic numbers and pipeline going forward.
"We like businesses in growth sectors which are capable of taking a strong position in them, with decent management teams. We also like evidence of cash generation."
NVM's VCTs have invested £30m in six companies since April 2012, five of which were management buyouts (MBOs). "There is a good supply of deals," says Mr Levett. "Small- to medium-sized enterprises have been recovering for a while. They are generating growth and wanting to expand aggressively. Lots of owner managers want to sell and there is a better supply than two years ago. The banks are providing working capital but their term loans are unattractive, so they are not providing mergers and acquisitions finance."
He says sectors providing a strong flow of deals include information technology, while "manufacturing is really pleasing. Software manufacturing is particularly strong, much of this export-driven. This is predominantly to the European Union, and also the US".
Recent investments include Silverwing, a developer of non-destructive testing solutions for the oil and gas industry. NVM invested £6m into a MBO, taking a 47 per cent equity stake.
"There are many old assets that need updating around the world, so this is a growing market," says Mr Levett. "We like the market, the products, and the managing director. We looked at the financials and there is a lot of scope for growth."
Silverwing has grown its revenue by 244 per cent since 2006.
Finding investments is important, but equally crucial are exits - the way private equity funds such as VCTs make their money. NVM's VCTs have made four exits over the last financial year: three trade sales and a sale to a mid-sized private equity group. "All were done for a strategic price above the latest valuation," says Mr Levett. "Mid-market private equity houses are looking to do deals. They see VCT portfolios as an interesting area for companies they can try to make bigger. Their interest is not new, but is accelerating."
Possible threats to NVM's portfolio companies include a fall in sales and a rise in interest rates. "Exporters also worry about the US dollar getting weaker," he adds.
A hold up in the US recovery and more economic problems in the EU could also pose a problem to the kind of small UK companies the NVM VCTs invest in.
Around 15 per cent of NVM's investments don't do well. With private equity, typically around 20 per cent of investments do very well, 20 per cent have problems, while 60 per cent are satisfactory.
Aim
The NVM VCTs hold some Alternative Investment Market (Aim)-listed companies, though prefer unlisted ones. "We are less comfortable with Aim investments because there is limited information," says Mr Levett. "With a direct investment we can get under the bonnet and do more thorough due diligence. When we are assessing a listed company we look at the management, its track record and price."
He adds that it is hard to invest in Aim because many new issues come from resources companies, which VCTs cannot invest their qualifying money (70 per cent of their funds) into, or from high tech ones which are not profitable at the time of the float. "We predominantly want companies which are profitable at the time of investment," he says. "Exceptions are if it is a business in a very high growth market, we are confident on its pipeline of business and it looks like it will get to profitability in the near future."
The Northern VCTs' Aim-listed investments include Advanced Computer Software (ASW) and IDOX (IDOX).
Looking ahead
Even though the NVM VCTs' £50m offering has almost sold out, they will not be rushing to do another big one in the future. "We have enough cash," says Mr Levett.
New rules also mean that VCT qualifying money raised after April 2012 cannot be invested in MBOs, and these are considered to be attractive types of deal. "With MBOs, you are backing an incumbent management team, so the people risks are much lower," he says. "The ability to do due diligence and forecasts is much better, and our interests are aligned with those of management.
"We will do little top ups but there will be no NVM 4 VCT in the near future. We will focus on maintaining dividends - our main preoccupation - and growing the net asset value. We are not driven by amount of funds under management."
