The Northern venture capital trusts (VCTs) are considering raising money in the current tax year but would invest it via a new investment strategy with a less attractive dividend policy. The VCTs' manager, NVM Private Equity , is reported to be interested in raising funds because it is seeing a strong flow of deals and investor appetite for VCTs. It is expected to propose a raising to the VCTs' boards in the autumn.
In the 2015-16 tax year VCTs raised £457.5m - the third highest volume over the 21-year history of these funds. The increased demand follows cuts in recent years to the pension lifetime and annual allowances, which mean more investors are using up their allowances and looking for other tax-efficient investments. VCTs offer 30 per cent income tax relief to offset against your income tax bill when you buy new shares and hold them for five years, and the dividends they pay are tax-free, making them an efficient way to supplement pensions income.
Northern Venture Trust (NVT), Northern 2 VCT (NTV) and Northern 3 VCT (NTN) have proved popular with investors over the years due to their good returns and attractive level of dividends, and their fundraisings sold out very fast. The VCTs' last offering was in 2013 when they raised £50m.
The trusts have not needed to come back to the market since then because that fundraising had given them plenty of cash. However, the trusts' managers are now seeing more investment opportunities. The trusts are also accumulating more cash following exits from investments. These include the March sale of Kitwave Wholesale Group at a gross multiple of three times NVM's original investment, and the sale of Control Risks Group Holdings.
Changes to investment rules have also kept the Northern VCTs away from the market since 2013. After April 2012 VCT qualifying money (70 per cent of what they raise) could not be invested in management buyouts (MBOs), a type of transaction these and many other generalist VCTs favoured. The rules were further tightened last year, meaning that since November 2015 VCTs also haven't been allowed to invest non-qualifying money - 30 per cent of what they raise - into MBOs, or reinvest money from an MBO exit into a new MBO investment.
A further detrimental rule change for VCTs that came into force last November has been the prohibition on investing in companies seven years or older after their first commercial sale took place, or 10 years or older for knowledge-intensive companies. This effectively pushes VCTs up the risk curve because they have to focus on earlier-stage and potentially riskier companies. There is also a question over whether they will still be able to pay the attractive dividends which they used to be able to fund from their investments in MBOs, involving more mature companies.
The rule changes have resulted in other generalist VCTs such as the Mobeus funds not raising money in the 2015-16 tax year, and the merger of the Baronsmead and Baronsmead VCT 2 funds earlier this year. The merged entity is now called Baronsmead Venture Trust (BVT).
But NVM Private Equity is recruiting a new investment team specialising in early-stage investment so that its VCTs can invest in line with the new rules. The company has already hired Charles Winward, previously a director at IP Group (IPO), where he helped create and develop spin-out technology companies from university intellectual property, including Tracsis (TRCS), Xeros Technology (XSG) and hVivo (HVO).
Despite the UK's recent vote to leave the European Union, NVM believes the environment for smaller companies in the UK is good, and says the asset prices of these have come down. "Frequently companies with a strong proposition in a difficult market are the ones we like to hold," said Tim Levett, chairman of NVM. "We did some really good deals after the last financial crisis. There may be a recession ahead, but the sector you get involved with makes a big difference."
The Northern VCTs will continue to have a generalist focus, investing across various sectors rather than targeting specific areas. They have just invested £2m as part of a £3.4m funding round in AVID Technology Group, which designs and manufactures electrified vehicle power-train systems that improve vehicle efficiency and reduce emissions.
Having a focus on smaller, earlier-stage companies suggests that returns could take some time to come through and the underlying companies are unlikely to pay dividends. This means the Northern VCTs' are unlikely to able to maintain the strong level of dividends they used to pay, at least in the short term. They are, however, aiming to maintain dividends over the long term.
NVM VCTs annual dividend record
| Fund | 2011 dividend per share (p) | 2012 dividend per share (p) | 2013 dividend per share (p) | 2014 dividend per share (p) | 2015 dividend per share (p) |
|---|---|---|---|---|---|
| Northern Venture Trust | 6 | 6 | 15* | 6 | 12* |
| Northern 2 VCT | NA | 5.5 | 5.5 | 5.5 | 15.5* |
| Northern 3 VCT | 4.5 | 5 | 5.5 | 5.5 | 15.5* |
Source: NVM Private Equity. *Includes special dividend
