Nice Returns, If You Can Get Them

Published in Investing Strategy on 20 October 2009

The share prices of VCTs have modestly recovered, but there's still big tax-free yields on offer.

Things may be looking up for private equity firms. Last week US giant Blackstone told investors it's looking into floating up to eight of its companies.

"At least for private equity, the worst is behind the industry," Blackstone's CEO, Stephen Schwarzman, was reported as saying.

I start this article about Venture Capital Trusts (VCTs) with this news because ultimately most  of them also realise the value of their investments either through trade sales or through flotations, just like private equity companies.

Unquoted, illiquid investments such as non-public businesses were hit hard by the credit crunch; when investors felt unable to accurately value public companies, it's no surprise they took an even dimmer view of more opaque assets.

With equity markets depressed and financing for acquisitions hard to find, the opportunity for VCTs to realise investments was further curtailed by the credit crunch.

This climate -- together with perennial illiquidity and performance concerns -- had seen VCTs' discounts to Net Asset Value balloon, as we discussed in June.

The attraction was the potential to exploit the fear and uncertainty in the market, by buying VCTs on unusual discounts either in the hope of them narrowing, or for the generous -- often double digit -- tax-free yields.

Capital appreciation

The good news is VCT share prices have moved upwards, though not as far as the wider stock market.

The table below ranks generalist VCT funds by their total return over the past five years. Total return is defined as Net Asset Value (NAV) plus cumulative dividends paid.

We published a similar table in June; this time I've added two columns to the right, showing the share price then and its subsequent gain or loss to 16th October 2009.

VCTTotal returns over 5 years (p)Share price (p)Latest published NAV (p)Date of latest
published NAV
Discount to NAVLatest annual divi (p)Tax-free yieldShare price at 4th JunShare price change to 16th Oct
Northern Venture Trust146.5063.074.530-Jun-09-15.4%7.5011.9%54.016.7%
Proven Growth & Income145.5041.543.631-Aug -09-4.8%45.50109.6%51.0-18.6%
Baronsmead VCT 3131.9090.0100.431-Aug-09-10.4%7.508.3%91.5-1.6%
Foresight 4131.1084.5100.931-May-09-16.3%5.005.9%69.022.5%
Baronsmead VCT128.7065.073.031-Aug-09-11.0%8.0012.3%65.5-0.8%
Foresight 3123.0087.593.230-Jun-09-6.1%5.005.7%77.013.6%
Baronsmead VCT 2122.9079.388.531-Aug-09-10.4%7.008.8%78.51.0%
Albion Development VCT122.8060.076.830-Sep-09-21.9%12.0020.0%67.5-11.1%
Baronsmead VCT 4121.3082.091.331-Aug-09-10.2%7.008.5%84.3-2.7%
Albion Tech & Gen VCT120.7070.086.930-Jun-09-19.4%8.0011.4%67.04.5%
Northern 3 VCT118.4057.586.430-Jun-09-33.4%4.007.0%47.521.1%
Proven VCT118.0050.053.131-Aug-09-5.8%15.5031.0%45.011.1%
Albion VCT110.7061.582.830-Jun-09-25.7%10.0016.3%52.517.1%
Northern 2 VCT108.9057.077.131-Jul-09-26.1%5.509.6%44.029.5%
Matrix Income & Growth 4104.6081.0105.131-Jul-09-22.9%2.252.8%82.0-1.2%
Eclipse VCT104.369.076.131-Mar-09-9.3%14.5%14.5%74.0-6.8%
Aberdeen Growth Opp I98.6038.076.931-May-09-50.6%2.707.1%35.08.6%
Matrix Income & Growth 296.8052.070.231-Jul-09-25.9%0.000.0%48.37.7%
Aberdeen Growth96.6028.552.731-Jul-09-45.9%1.204.2%25.014.0%
Albion I & G VCT76.5049.565.730-Jun-09-24.7%3.507.1%49.01.0%

Source: NVM/AIC stats as of 4th June / 16 October 2009; Author's calculations

The VCTs' share price performance are a bit of a mixed bag, but in overall terms they are up an average of 6.3% since we last looked at them.

For what it's worth, the FTSE 100 rose from 4,386 to 5,190 over the same period, for a gain of 18.3%.

Better opportunities

Some VCT managers claim the downturn has thrown up better opportunities for venture capital firms to invest in smaller businesses who've been shunned by conventional lenders. This could bode well for NAV growth in future years.

To get an idea of the potential of the very best VC investments, consider the sale last month of medical diagnostics specialist DxS to Qiagen by an investment syndicate led by NVM Private Equity, the firm behind the Northern-branded VCTs.

At $130 million -- including $75 million in cash -- it was a record exit for NVM, who invested £1.25 million when DxS was founded in 2001, and then with other investors put in more money as DxS grew.

The initial $75 million cash payment alone represents around eight times NVM's total investment of £3 million -- an internal rate of return of 34%.

Specialist investments

Looking across the table suggests several VCTs from the big name companies that might still be worth looking at if you're an investor who particularly needs tax-free income and can afford to buy and hold illiquid assets.

This table should only be considered a first port of call in your research, however: The long-term performance of VCTs is decidedly varied, total expenses are a very high 3-4% a year, and some of the VCTs' market capitalisations are worryingly small.

Remember too that the dividends can be lumpy -- Proven Growth & Income's 109% historic yield includes a 31p dividend that's not going to be repeated anytime soon!

More from Owain Bennallack:

Disclosure: Owain has investments in a variety of VCTs, including some of those mentioned above.

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UncleEbenezer 20 Oct 2009 , 4:04pm

Don't forget, different VCTs have different policies. They range from the likes of Baronsmead with a fairly steady dividend stream, through those with much-varied and ad-hoc income, to terminating VCTs which dissolve themselves and repay investors money (adjusted for gains/losses and fees) after a qualifying period for the tax benefits.

As for big fees, look for those that tie them to investor returns passing a healthy threshold! I'd be unhappy with a fund manager taking 3% to make a loss, but 3% on returns above 130p on my 70p (net of tax) investment are another matter!

(Of those you list, I hold Baronsmead, Foresight and ProVen).

BarrenFluffit 21 Oct 2009 , 10:59am

Small funds also tend to have limited liquidity. You might have the money but not be able to buy the shares.

I'm guessing that the prices above are mid prices but with small funds spreads can be wide and this would distort the stats.

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