Review: Baronsmead VCTs

The new top-up offer by Baronsmead Venture Trust (“BVT”) and Baronsmead Second Venture Trust (“BSVT”) is now open.

Launched in 1995, the Baronsmead VCT brand was one of the very first VCTs. Over the years it has earned a reputation for consistent performance and a loyal following amongst investors. 

The current offer aims to raise up to £25 million in aggregate (up to £12 million by BVT and £13 million by BSVT). Investors can choose to invest in one or both VCTs. 

Last year the two VCTs raised £45 million in 11 weeks. The current smaller offer is expected to reach capacity quickly. All applications will be processed on a first come, first served basis and there is no exclusive period for existing shareholders. The quickest way to apply is online, available through Wealth Club. 

Highlights

  • Two of the largest and longest established VCTs (combined net asset value of approximately £375 million as at 30 September 2018)
  • Target dividend of 6.5p per share where possible – variable and not guaranteed
  • Robust track record – the VCTs have paid average annual dividends of 10.3p (BVT) and 11.3p (BSVT) per share over the last five years. Past performance is not a guide to the future
  • Access to a large and diversified portfolio of quoted and unquoted companies
  • Investors can split their money across both VCTs or invest fully in just one
  • The directors of the VCTs and their families are personally investing £193,000 in the offer
  • Investors who apply by noon on 4 February 2019 and have shares issued in the first allotment should receive the proposed final dividend of 4.5p per share in March 2019, subject to shareholder approval
  • Low minimum investment of £3,000 per VCT – apply online by bank transfer

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value, so you could get back less than you invest.


The manager

The history of these VCTs goes back to 1995, the year VCTs were first established.

For years they have been managed by Livingbridge, a leading UK independent private equity firm with a presence also in Australia and the US.

In November 2018 Livingbridge’s fund and investment management business, including the Baronsmead VCT business, was sold to Gresham House, a specialist AIM-listed alternative asset manager. Gresham House manages assets of over £2.1 billion across five investment strategies: strategic public equity, private assets, forestry, new energy, housing and infrastructure.

The team responsible for the investment management of the two VCTs has now transferred from Livingbridge to Gresham House. The sixteen employees are led by a senior team of five who have been working with the Baronsmead VCTs for 12 years on average. It should, however, be noted that both Andrew Garside, the Head of Unquoted Investments, and Sheenagh Egan, the Chief Operating Officer – who were jointly responsible for the Baronsmead VCTs – have stepped down, although they are committed to two days a week in the office under a transitional agreement for up to three years. Steve Cordiner, who joined Livingbridge in 2010, will be responsible for unquoted investments and Ken Wotton, who joined Livingbridge in 2007, for quoted investments.

Investment strategy

Established in 1998 and 2001, the Baronsmead VCTs are around twenty years old. BVT is the result of the merger between Baronsmead VCT 2 (established in 1998) and Baronsmead VCT (established in 1995). BSVT is formed from the previous Baronsmead VCT 3 (2001), Baronsmead VCT 4 (2001) Baronsmead VCT 5 (established as Baronsmead AIM VCT in 2006).

Both are generalist VCTs and invest primarily in a diverse portfolio of UK growth businesses, either unquoted or AIM quoted, albeit with a stronger emphasis on the latter than other generalist VCTs. The AIM bias could make these VCTs more volatile than other generalist VCTs.

Until the rule changes in 2015 the VCTs’ investment strategy was predominantly to invest in management buyouts. As these are no longer allowed the investment strategy has had to change. Unlike other VCTs, Baronsmead has yet to recruit additional resources to help with the change in investment style, although it has plans to bolster the team this year.

In the short to medium term, returns for investors are likely to be dictated by the old investment strategy; medium to long term, by the new investment strategy. As with all VCTs the new investment strategy is likely to produce more volatile returns and dividends could become less predictable as the risk profile of the portfolio changes.

Exit track record

In the year to 30 September 2018, the two VCTs have fully realised 10 unquoted and AIM-listed investments (including three write offs), as well as three loan repayments, realising total proceeds of £46.9 million (including interest due at the time of the realisation) – note past performance is not a guide to the future. 

Key Travel – BaronsmeadKey Travel

Founded in 1980, Key Travel is a leading travel management company specialising in travel for the humanitarian, faith and education sectors. Its opening achievement was to successfully negotiate the first UK missionary air contract with British Airways.

Key Travel provides airline tickets, hotels, rail tickets, visas and risk management services to clients including charities such as Oxfam and Save the Children and universities including Bristol, Cambridge and Liverpool.

In 2013 Livingbridge supported a management buyout with a total investment of £9 million. Five years later, in May 2018, Key Travel was acquired by private equity firm Elysian Capital for an undisclosed amount. Livingbridge reportedly achieved a return of 3.2x its original investment – note past performance is not a guide to the future.

Crew Clothing – BaronsmeadCrew Clothing Co. 

Founded in 1993, Crew Clothing Co. is a clothing brand offering distinctly British casual wear. The founder, a professional skier and windsurfer, started off with a small collection of rugby shirts and sailing-themed clothes he took to Cowes Week, on the Isle of Wight, and sold out of all his stock. This success prompted him to sacrifice his place in the British Ski Team so as to focus on developing Crew Clothing.

By 2006, the business had grown to 34 stores. The founder wanted to continue building the business but also realise some of his cash. Livingbridge bought 25% of the company in 2006 as part of a £7.7 million deal. Since then it has helped materially expand the business, which by 2017 achieved annual revenues nearing £60 million from its portfolio of over 80 stores and e-commerce channel. In December 2017 Crew Clothing was sold to US-based apparel manufacturer Exquisite Apparel for an undisclosed sum. This resulted in a 2.3x return for Livingbridge – note past performance is not a guide to the future.

In The Style

As can be expected, not all investments work out. One of the most recent examples is fast fashion retailer In The Style. Founded in 2013, it grew rapidly, mainly through clever use of social media and collaborations with a string of reality TV celebrities. In 2017 it reported sales of £15 million.

Livingbridge invested £5 million in May 2017. Less than 12 months later the company’s accounts showed an increase of £3.4 million in its retained losses. 

The company was sold to Irish private equity firm Causeway Capital in December 2018 for £2.5m (€2.77m). The VCTs’ investment had been previously written off.

Portfolio

The VCTs' portfolios include 77 (BVT) and 75 (BSVT) companies (as at 30 September 2018). Of these nearly half are AIM-listed.

As the portfolio breakdowns show, the portfolio is well diversified across its four chosen sectors, with a bias towards technology, media and telecommunications.

The vast majority of the investments (82%) were completed three or more years ago, so under less restrictive VCT rules. During the year to 30 September 2018, the two VCTs have invested a total of £15.3 million (£7 million in BVT and 8.3 million in BSVT) in 13 new and three follow-on investments.

At 30 September 2018, 83% of the portfolio companies in BVT and 87% of the portfolio companies in BSVT were progressing steadily or better, although there are no guarantees this will continue to be the case.  

Source: Baronsmead. As at September 2018.

Example portfolio companies

SecureCloud+ – BaronsmeadSecureCloud+ (recent investment, unquoted)

SecureCloud+ delivers fully managed secure information and communications technology (ICT) services to the UK’s defence and security sectors and other government departments with complex and demanding security requirements. SecureCloud+ can handle government data in all classifications, including top secret.

The founder has been working in computing since 1979, when he left the Royal Navy, and in security since 1998. He started SecureCloud+ in 2014. Since then the company has experienced strong growth. The most recent published accounts, to March 2017, showed revenues almost doubling to £3.4 million, at a gross margin of 72%.

The Baronsmead VCTs invested a total of £1.5 million in September 2018. The manager believes SecureCloud+ is well positioned in a market with high barriers to entry and could take advantage of the increasing need to share information across organisations, departments, agencies and security domains. The business will use the investment to further extend capacity and capability as the business grows.

Ideagen – BaronsmeadIdeagen (AIM quoted)

Ideagen is a Nottingham-headquartered technology company listed on AIM, with main operational premises spread throughout the UK, EU, US, Middle East and SE Asia.

It provides risk management software and services to organisations in highly regulated industries such as aviation, banking and finance and life science, healthcare and manufacturing 

Currently it has more than 3,700 clients worldwide, including seven of the top 10 UK accounting firms, all of the top aerospace and defence companies, 75% of the world's leading pharmaceutical firms and 180 hospitals across the UK and US. The company listed on AIM in 2012.

The Baronsmead VCTs invested £5.5 million in aggregate in January 2013. The holdings are currently valued £14.2 million in total across the two VCTs (30 September 2018). As always, past performance is not a guide to the future. Ideagen is the largest holding in BSVT and the second largest in BVT (as at 30 Sept 2018).

Happy Days Nurseries – BaronsmeadHappy Days Consultancy (unquoted)

Started in 1991 by husband and wife founders, Happy Days is now the largest provider of nursery and pre-school care in the South West.

From a single nursery in Cornwall, it now operates from 21 sites, with plans to expand further in the region and the South Coast. The business focuses on delivering outstanding quality childcare in premium settings within its target geographic markets. Indeed, 60% of the 21 sites have achieved an Oftsed rating of Outstanding, which is remarkable considering only 20% of all UK early years providers achieve a rating at all.

The Baronsmead VCTs invested £7.6 million in aggregate in April 2012. The investment enables Happy Days to continue its UK expansion strategy through supporting the funding to develop new leasehold nursery settings in attractive markets.

The holdings are currently valued £11.3 million in total across the two VCTs (30 September 2018). As always, past performance is not a guide to the future. Happy Days is the largest unquoted holding in both BVT and BSVT.

Dividends and performance

The VCTs have a target annual dividend of 6.5p per share where possible, not guaranteed. The dividend track records for both VCTs are shown below.

The VCTs have paid average annual dividends of 10.3p (BVT) and 11.3p (BSVT ) per share over the last five years. However, please note, past performance is not a guide to the future, dividends are variable and not guaranteed. As the focus of the portfolio moves towards growth capital investments, dividends are likely to be less predictable in future.

Source: Baronsmead. Past performance is not a guide to the future. Total return is the NAV plus dividends, which are variable and not guaranteed. All figures are to the end of each VCT's financial year, which is now September for both VCTs. Previously, BVT had its year end on 31 March until 2006 and BSVT on 31 December until 2015. The 2018 dividend includes the proposed final dividend of 4.5 per share to be paid on 8 March 2019.
Source: Baronsmead. Past performance is not a guide to the future. Dividends are variable and not guaranteed. All figures are to the end of each VCT's financial year, which is now September for both VCTs. Previously, BSVT on 31 December until 2015. The 2018 dividend includes the proposed final dividend of 4.5 per share to be paid on 8 March 2019.
Source: Baronsmead. Past performance is not a guide to the future. Dividends are variable and not guaranteed. All figures are to the end of each VCT's financial year, which is now September for both VCTs. Previously, BSVT on 31 December until 2015. The 2018 dividend includes the proposed final dividend of 4.5 per share to be paid on 8 March 2019.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

VCTs are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Tax rules can change and benefits depend on circumstances.

VCTs can now only invest new money in growth capital deals. Management buyouts, replacement capital deals and investments in mature companies are no longer permitted. This results in considerably higher risks.

Within both VCTs the top 10 holdings represent nearly half of the total value of the portfolio, as at September 2018 (47% for BVT and 45% for BSVT). In addition, six of the top 10 investments are AIM-listed. The significant exposure to AIM could add volatility risk.

Fees and charges

A summary of the fees and charges is shown below. 

Full initial charge 2.75%
Wealth Club initial fee 1% (nil for existing shareholders)
Net initial charge through Wealth Club 3.75% (2.75% for existing shareholders)
Annual management charge (BVT) 2%
Annual management charge (BSVT) 2.5%
Performance fee 10%

More detail on the charges

Deadlines

Unless the offer becomes fully subscribed, the following deadlines apply:

  • 12.00 noon on 4 February 2019 – application deadline to have New Shares allotted in the First Allotment and benefit from the Final Dividend of 4.5p per share due in March 2019
  • 12.00 noon on 13 March 2019 – offer closes

Dividend Reinvestment Plan 

Baronsmead operates a dividend reinvestment plan which enables shareholders to use any future cash dividends to acquire ordinary shares. These shares should qualify for tax-free dividends, but not for the initial VCT tax relief of up to 30%. Please remember tax rules can change and benefits depend on circumstances.

Share buybacks

From time to time the VCTs may buy back their own shares through the market. They aim to maintain a mid-share price discount of approximately 5% to NAV. However, there is no guarantee that the VCTs will buy back shares and the discount to NAV could be greater or less than 5%. 

Our view

The Baronsmead VCTs are two of the longest established and best-regarded trusts.

Like many VCTs of the same vintage, they are having to adjust their investment strategy to comply with new and more restrictive VCT rules. In addition, the Baronsmead VCTs are also having to contend with the transition from Livingbridge to Gresham House and a change in management. 

That said, these have to date been excellent VCTs, noting that past performance is not a guide to the future. If you invest today you still get access to many of the old-style investments that have earned the Baronsmead VCTs their reputation. These investments should help support returns in the short to medium term whilst new investments mature, although there are no guarantees.   

If thinking of investing, it may be wise to do so promptly: it is a relatively small offer and could fill up quickly. In addition, investors that apply by 12 noon on 4 February 2019 should be allotted shares in the first allotment and therefore qualify for the Final Dividend of 4.5p, due to be paid in March 2019 subject to shareholder approval. 

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.

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