Coronavirus – an update from the Foresight VCTs

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

From Foresight Group LLP

Foresight Group LLP, which manages Foresight VCT and Foresight Solar & Technology VCT (Foresight Williams Technology Shares), provides an update on the implication of the current situation for its VCTs (24 Mar 2020). Below we reproduce the article, which is also available to download as a PDF. 

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Foresight VCT update – implications of coronavirus 

Existing portfolio 

Foresight has been working closely with our portfolio companies to identify potential risk areas and encourage businesses to take the necessary precautions. More specifically, we have asked businesses to actively consider the following areas:

Preparedness in the Event of a Recession/Economic Downturn

We anticipate that the outbreak of the virus is likely to lead to weaker consumer and business expenditure and missed forecasts. Given the above, we are asking our portfolio businesses to stress test their cash position to ensure that they can withstand a significant downturn in trading. Foresight is encouraging Finance Directors at all of our portfolio companies to tightly manage central overheads, reduce capital expenditure and prepare both short and long-term cost reduction plans.

Impact of Reduced Travelling/Marketing on Sales Activity

Our portfolio companies are suspending or rescheduling all “non-essential” travel, particularly in countries with a higher risk of infection. There will be a direct effect on companies with exposure to the travel sector as well as businesses that rely on travel and entertainment to generate sales. Companies are being encouraged to use video conferencing and webinars in place of face to face meetings. Some are using this period as an opportunity to concentrate on strengthening relationships with key existing customers rather than searching for new business.

Investment in R&D and CapEx

We are encouraging Finance Directors to review any capital expenditure and R&D plans in light of the uncertainty caused by the outbreak. Foresight has appropriate controls in place to act as gatekeepers for any large spending events. A number of our portfolio companies in the consumer and leisure space have paused all plans for further rollouts and temporarily shut existing sites in line with government guidance.

Investment in Staff

In some cases, a temporary freeze on new staff hires has been introduced to manage payroll spend. Some management teams are proactively managing their staff by introducing flexible working, shift work and using contractors where needed.

Cash Conversion Focus

We have encouraged some of our portfolio companies, particularly those operating in the manufacturing sector, to improve stock turnover and to manage debtors more closely. Foresight are conducting weekly calls with all portfolio companies to help them manage their cash position. A number of portfolio companies could experience a period of declining revenues, therefore we are making sure that, if at all possible, cash levels are sufficient. For example, FFX, a multi-channel distributor of power tools, hand tools and fixings, will closely manage its inventory and maintain lower stock levels than usual in preparation for a slowdown.

Supply Chain Management

With a number of our portfolio companies either directly or indirectly reliant on Chinese suppliers within their supply chain, this has been a particularly important area of focus for Foresight. Steps taken in this area by investment managers include actively reviewing existing suppliers and considering other local options where possible. Where possible, companies are implementing dual supply chains to ensure there is less potential disruption to trading. Current indications are that Chinese suppliers have returned to 70%-80% of operational capacity, although it clearly varies on a case by case basis.

Remote Working and Contingency Planning

We are encouraging portfolio companies to put in place technical and operational plans now to avoid business interruptions if official advice is introduced for nationwide working from home where possible.

Government Schemes

We expect a number of our portfolio companies to benefit from the Coronavirus Business Loan Scheme and Job Retention Scheme, while cash grants and business rate relief will apply to all consumer, leisure and retail businesses in the portfolio. All portfolio companies are already in conversations with their banking relationship mangers to drawdown and extend credit facilities.

Actions taken by Foresight: new investments/deal flow 

We anticipate that the onset of a downturn may result in lower new deal activity in the coming months. Foresight continues to remain disciplined on valuations paid for new investments. Depending on the length and severity of the outbreak, we will likely see a higher proportion of our deployment focused on follow-on investments in the existing portfolio in the medium term, potentially alongside co-investors.

As the economy recovers from the worst effects of the virus, we expect valuations to be more attractive and there to be a number of particularly interesting opportunities for investment.

Other considerations: portfolio valuation impact

The companies in which Foresight invests are typically valued on a quarterly basis and we anticipate they will be impacted in the short term, reflecting the impact of the coronavirus outbreak on global market sentiment.

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