Review - Downing ONE VCT
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
This £80 million VCT is seeking a further £15 million. It is a “top-up” offer and investors will benefit from an existing pool of well-diversified investments.
Downing One is an unusual VCT as the portfolio is split into a mix of growth assets and income-producing ones. The Growth portfolio is mainly invested in AIM-listed companies, whereas the Income portfolio is all in unquoted companies, many with significant asset backing. Recent VCT rules changes restrict where managers can invest, with for example management buy-outs now precluded. However, that doesn’t stop VCTs backing successful management teams in new ventures. This is often the approach Downing takes.
The board makes the final decision on every investment within and is probably more experienced and hands-on than other VCT boards.
Downing LLP is a well-established manager of venture capital and EIS funds. There are three strands to their business, quoted equity and unquoted – with the unquoted split between asset backed and renewables.
The renewables team is led by Colin Corbally and will likely be a small proportion of this portfolio.
The asset-backed team is led by Jonathan Boss. Asset-backed investments are currently over half of this VCT.
Downing’s investment team includes 25 people managing over £230 million in VCTs. With the AIM investments Ms Mackenzie takes a private equity style approach: buying large stakes in the companies and being proactive with the management team.
Target Return and strategy
There is no target return as this is an “evergreen” VCT with no fixed life. However, the board is targeting annual dividends of at least 4% of Net Asset Value (NAV). Despite various recent rule changes, it is still possible to invest in asset-backed businesses and achieve a steady, high level of income from them.
One important factor though is that the VCT cannot simply invest in an already trading business, as was the case previously; effectively a “buy and build” strategy is banned. Existing management teams can be backed, but only in new ventures. For example, if investing in children nurseries, an existing building has to be converted or a new one built. The business can own the freehold premises though.
As this is a large well-diversified VCT, the new money raised will not materially impact the overall positioning, and doesn’t lead the manager into having to make quick investment decisions.
Wedding venues and data centres are two areas Downing currently finds attractive for new investment. In the existing portfolio, there is a wide variety of interesting businesses, including hotels, a biogas plant, an AIM-listed company that provides software to the rail industry and care homes.
Due to the high proportion of AIM-listed businesses, this VCT has arguably more liquidity than most. In addition the asset-backed businesses are structured to achieve primarily income. Exits have been quite fruitful over the last two years, largely down to a better banking environment according to Downing. They have been a mix of trade buyers and management teams refinancing to purchase businesses.
Due to the large percentage of assets held in AIM listed companies, the Net Asset Value of this VCT may be more volatile than other generalist ones. In addition, as the Board has final say over new investments, there may be times when the manager is keen to do a deal and the board refuses. However, this can also act as a decent safety check.
Overall the fee structure is among the most competitive in the VCT sector with an initial charge of 4% before any Wealth Club discount. The annual management fee is 1.8% and total running costs are capped at 2.75%. Similar to most managers, Downing may receive a “deal completion” fee from underlying investee companies; this fee is capped at 2%. Downing receive no performance fee – an unusual and welcome move in the VCT industry.
This is an extremely well-diversified VCT with about 90 holdings split across AIM companies, asset backed and some growth opportunities. This makes it a fairly unique VCT. Consistent growth and attractive dividends are the aim.
Downing’s management team is very experienced in all the key areas. In our view Downing tries to do the right thing for investors. For example, in this VCT there is no performance fee. Downing understands how to structure deals and is keen to back existing management teams. This comes highly commended.
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