Review: Downing ONE VCT
Downing ONE is Downing’s longest-established and largest VCT, with net assets of £104 million (Mar 2019). Downing ONE VCT invests both in unquoted and listed (mainly AIM) companies.
Under the current offer, the VCT seeks to raise up to £15 million (with a £25 million over-allotment facility).
- Large and diversified portfolio of 89 investments, mostly asset-backed or listed mature companies (81%) and growth investments (19%)
- Invests both in unquoted and listed companies (typically on AIM)
- Experienced and well-respected VCT manager
- Target dividend of 4% – variable and not guaranteed
- Minimum investment £5,000 – you can apply online
- Ability to invest monthly – from £500 per month
- Annual rebate of 0.10% for three years
The VCT is managed by Downing LLP, whose origins date back to 1986. Downing is an experienced investment house, with over £1 billion of funds under management. It advises four VCTs, with cumulative assets of £210 million (Mar 2019).
Because of its hybrid nature, the VCT is managed jointly by the Unquoted Investment team, headed up by Kostas Manolis, and the Public Equity team, headed up by Judith MacKenzie. Chris Allner, who has 35 years of venture capital and private equity experience, most recently as head of private equity at Octopus Investments, chairs the investment committee.
The VCT in its current form is the product of a series of mergers. The most recent was in November 2013, when Downing Distribution VCT 1, which dates back to 1997, merged with five other VCTs (which had themselves previously merged with other VCTs) and changed its name to Downing ONE VCT.
At the point of the merger, the portfolio included investments made by Downing, as well as by previous managers of the VCTs Downing took over, including Rathbones, Framlington, and Legg Mason.
Historically, the portfolio was split between yield-focused unquoted investments (typically asset-backed companies, such as pubs and care homes, and companies with predictable revenue streams, such as renewable energy plants) and listed investments (typically established, cash-generative businesses listed on AIM).
Following the introduction of new stricter VCT rules, Downing has had to tweak its approach.
Whilst its existing portfolio can still include its historic holdings, new investments need to be in growth opportunities. New investments are sourced and managed by Downing’s Ventures team, which has £198 million under management (31 March 2019). The VCT will often provide later-stage funding to companies previously backed by Downing Ventures.
As more funds are raised and new investments are made, the portfolio split is likely to shift more in favour of growth opportunities, which currently represent only 19% of the overall portfolio.
This means long term the risk profile of the VCT is likely to increase. The manager aims to mitigate this by avoiding start‐ups and focusing instead on companies that are already generating revenues, even though they may still be pre-profit, or companies that are profitable but which need cash to support their growth potential.
Exit track record
In the 12 months to March 2019, Downing ONE VCT realised 13 investments, of which three were AIM-listed and 10 unquoted, generating proceeds of £3.3 million and a modest profit over holding value of £30k.
In the previous 12 months to March 2018, it realised 24 investments, generating proceeds of £19.3 million and profits over holding value of £1 million.
Past performance is never a guide to the future, but even more so in this case. These were mostly disposals of old-style investments, which are completely different in nature to the new-style ones.
The latter are still too recent to bear fruit. For new investments, Downing is targeting unquoted companies where it believes there are reasonable prospects of a trade sale or clear exit strategy over a five to seven-year time horizon and the prospects of a reasonable level of capital growth. Exit options and timeframes are not guaranteed.
Current portfolio overview
Currently, the portfolio is split across three strategies:
- Unquoted yield-focused, typically asset-backed businesses (48%)
- AIM-listed established, cash generative businesses (33%)
- Ventures: unquoted growth opportunities (19%)
As at 31 March 2019, the quoted portfolio was valued at £27.6 million and comprised of 32 holdings quoted on AIM or NEX. Over 46% of the quoted portfolio is accounted for in the top 10 holdings, reflecting the manager’s focused strategy. The quoted portfolio saw relatively little investment activity during the year.
At 31 March 2019, the unquoted portfolio of 57 investments (including both asset-backed and Ventures investments) was valued at £56.8 million. During the period, the VCT invested a total of £11.5 million in unquoted companies, comprising 11 new opportunities and six follow-on investments.
In addition, the portfolio invests in Downing Strategic Micro-Cap Investment Trust plc, which is a non-qualifying investment. This is currently one of the top ten holdings.
Examples of portfolio companies
Tracsis – largest quoted holding
Tracsis was spun out from the University of Leeds's School of Computing in 2004, following the development of crew scheduling software for rail services by Dr Raymond Kwan. Tracsis’ scheduling and rostering software (which helps railways run more efficiently) and condition monitoring hardware (which identifies possible issues with rail infrastructure before a costly failure) are now used by virtually all of the UK train operating companies.
Tracsis was admitted on AIM in November 2007 at a valuation of £7 million. The latest figures value it at £176 million (August 2019). Downing ONE’s holding is currently valued at £4.9 million; the investment cost was £1.4 million.
Downing Care Homes Holdings Limited – second-largest unquoted investment
The company operates four residential care homes providing specialist services for adults with learning and physical disabilities. They are located in Hampshire and Surrey and are managed by an experienced team with many years of experience in the sector. The homes were either developed from scratch or acquired from other operators.
Downing ONE’s holding is currently valued at £4.5 million (vs. investment cost of £3.9 million). The VCT invested in a combination of debt and equity.
Rated People – recent unquoted investment
Rated People is the UK’s leading online marketplace connecting homeowners with quality local tradespeople. Over 50,000 tradespeople use the site to fill gaps in their diary, grow their reputation and expand their business. Between them, they specialise in over 30 trades. Over 1 million jobs are posted every year by homeowners.
In September 2018 Downing Ventures invested £4.2 million, of which £1.3 million was in Downing ONE VCT.
Performance and dividends
The VCT aims to pay dividends equivalent to at least 4% of its net asset value, paid twice a year, in February and August. I it has announced a dividend of 5.7% for this year, expected to be paid in February 2020. Please note, dividends are variable and not guaranteed and past performance is not a guide to the future.
Because of its exposure to AIM, the portfolio has suffered the impact of the stock market volatility in the last 12 months (to March 2019). In addition, some of the unquoted portfolio companies have faced significant challenges. As a result, the VCT reported an unrealised loss of £6.3 million. Overall 76% of the portfolio is held at a valuation equal to or above cost.
Source: Downing. Dividends paid in each calendar year since the VCT merger in November 2013. Dividends are variable and not guaranteed and past performance is not a guide to the future.
Source: Downing. Past performance is not a guide to the future. Dividends are not guaranteed. Chart shows Net Asset Value and cumulative dividends paid in each calendar year, pence per share.
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.
AIM shares can be very volatile and could suffer extreme fluctuations in value if the market falls sharply. The difference between the buying and selling price of AIM-listed companies is often wider than for those listed on the main market.
The VCT currently sits in two camps. Around 80% of the portfolio is in yield-focused, asset-backed unquoted companies or established, cash-generative AIM-listed companies with the potential to produce steady recurring income. The vast majority of these are no longer allowed for new investment, although investors benefit from exposure to the existing portfolio. The other half is in higher- risk / higher growth potential companies. Thanks to new VCT rules, the portfolio is likely to shift towards the latter camp as time goes by. Downing ONE is one of the very few VCTs giving investors exposure to asset-backed companies so could complement and add diversification to an existing VCT portfolio, in our view.
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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