Get your share of £800m
Article Date: Aug 08 2005
Looking for expansion capital? Look no further than Venture Capital Trusts. As GrowthBusiness discovers, those running such funds – which must back small and growing businesses by law – have no less than £800 million to spend.
Venture Capital Trusts (VCTs) may not sound like interesting entities, but don’t be fooled by the moniker. Indeed, if you need expansion capital, VCTs should be making you very excited because they have a lot of cash to invest.
The funds – which are in essence investment trusts – were conceived ten years ago by the then-Chancellor Kenneth Clarke. Investors were given generous tax breaks to invest their money. In return, the Government stipulated that 70 per cent of the money raised by such trusts had to be invested in new shares of smaller UK businesses within three years of the cash being raised (for details of the tax breaks and the types of business which qualify for investment, see Table 1).
Last year the tax rules were relaxed further to make these vehicles even more attractive. This prompted a further flood of money to be committed – just over £500 million in all – which added to the £300 million already held by existing VCTs. All of this is now seeking a suitable home and much of it will go to fast-growing small businesses with annual sales below £10 million.
AIM is the target
If you’re thinking of floating your business on London’s ‘junior market’, it’s worth noting that £235 million, or almost a third of the spare VCT money, is destined for AIM new issues. The AIM funds are spread amongst 32 trusts. Artemis AIM 2 leads this group by some distance, with £38 million awaiting investment. Invesco Perpetual AIM is in second place with £25 million spare. Three others with more than £20 million are Framlington AIM, Unicorn AIM 2 and Pennine AIM 5, run by Rathbones.
Close Brothers, which is sixth in the table, raised £18 million in a ‘D’ share issue of the Close Brothers AIM trust. Interestingly though, Close fund manager Justin Jordan admits his company could have raised much more, saying, ‘We deliberately set out not to raise more money than we could manage last year. Having limited sums means we are sensible when it comes to investing.’
Close’s method, according to Jordan, is ‘to assess each new issue and work out which will work and which will be also-rans.’ He adds that this process ‘is not just a case of looking at valuations but is also partly an artistic rather than scientific skill.’ Because of a commitment to meet the management of every company seeking AIM money, he says, ‘It takes time but it’s worth it.’
New issue frenzy
Of course, VCTs aren’t the only backers of new companies on Europe’s biggest growth market. Since the start of 2004 no less than 571 companies have joined AIM, raising £4.3 billion between them. Jordan estimates that ‘VCT-qualifying issues probably only account for 20 per cent of the fundraisings by value, although slightly more by number since they tend to be smaller issues.’
Nevertheless, ‘Deal flow has been amazingly busy,’ he adds, and the types of business joining remain as diverse as ever. Two-thirds of the 1,200 companies listed on AIM at the end of May were worth less than £25 million. And only a third of the companies joining during the past month were worth more than that at flotation.
Valuation difficulties and differences
With this array of AIM new issues to choose from, brokers, in particular, have noticed that VCTs that were originally planning to back private businesses are now also choosing to invest in AIM companies as well.
Patrick Booth-Clibborn, head of institutional broking at boutique investment bank Noble & Co, comments, ‘Generalist VCT managers are definitely looking at AIM. There is a surfeit of deals at the moment with a host of companies queuing up to float. This means fund managers can sit back and choose those they prefer.’ For Booth-Clibborn, this scenario obviously has implications for entrepreneurs of aspiring AIM companies who have lofty ideas about how much their businesses are worth. He reckons many may have to reassess their opinions in light of the competition.
That said, not many VCT managers themselves will admit that valuations on AIM are temptingly low. ‘We believe AIM is definitely overvalued at the moment,’ says Nick Ross, manager of the two Electra Kingsway VCTs that have over £40 million between them to invest.
‘Our main concerns are the pricing of new issues on AIM, which has been high; the volume of flotations, which has been hectic; and also the fact that there has been little aftermarket. This means the smaller issues tend to drift off and hardly ever recover as there is little demand from retail investors. This is a big structural problem.’
The Electra trusts are part of a group of generalist trusts that back both AIM and unquoted companies raising fresh finance. Others include the Baronsmead range of four trusts managed by ISIS Private Equity Partners. Part of the large team at ISIS, which has £87 million of spare VCT money at present, is explicitly focused on assessing AIM new issues. One of the managers at Northern performs the same role for this group’s four trusts, which have £40 million to invest at the moment.
In addition, many of the AIM VCTs will also back private businesses on occasion.
Electra’s Ross, who has the ability to choose between these two paths, is certainly favouring the unquoted route at the moment. ‘Our last seven deals have all been in private businesses. You can achieve lower valuations as deal prices tend to be at a discount to public ones.’
