Review: Draper Esprit VCT
Draper Esprit VCT – formerly Elderstreet VCT – is a generalist VCT that will invest in unquoted technology investments, alongside its existing established portfolio which includes some AIM listed companies. This new offer seeks to raise £20 million.
- Established VCT which will now focus on unquoted technology investments
- The existing portfolio provides some exposure to AIM
- Elderstreet’s merger with Draper Esprit adds weight and expertise
- Target dividend of 3p per share – variable and not guaranteed
- Choose between 2019/20 and/or 2020/21 tax years
- Minimum investment £6,000
The VCT, founded in 1998 and previously known as Elderstreet VCT, is managed by Elderstreet Investments.
In 2016 Elderstreet was acquired by Draper Esprit plc, an AIM-listed venture capital group, to share deal flow, management experience, and investment opportunities. This coincided with a repositioning of the investment strategy from a generalist VCT into a technology focused fund. The VCT was renamed Draper Esprit VCT in January 2019.
Draper Esprit is one of the most active venture capital firms in Europe. The team of 26 have worked together for over 13 years and have significant experience with unquoted investments, having completed over 125 deals since 2006.
In total, Draper Esprit plc has over £330 million invested across its various funds. It focuses largely on knowledge intensive, early and growth stage technology companies. Draper Esprit manages an EIS fund and institutional funds alongside the VCT – it is expected that the EIS and VCT will co-invest on some deals.
Watch a video interview with manager William Horlick of Elderstreet Investments:
The Draper Esprit VCT has unaudited net assets of £45.2 million and a portfolio of 33 trading companies (as at 31 August 2019).
The current portfolio is spread across a wide variety of sectors: from property to logistics and from gas utilities to the manufacture of sports ammunition. Indeed, one of the largest legacy holdings is Lyalvale Express, a producer of shotgun ammunition in the UK.
Future investments will be made in unquoted technology investments, in line with Draper Esprit’s investment ethos. The VCT should be able to benefit from Draper Esprit’s deal flow and management experience, as well as access to companies requiring funds in excess of $10m and thus beyond the reach of a smaller fund manager. Draper Esprit reviews close to 2,500 opportunities each year. Of these, approximately 20 will go on to receive investment.
Within the technology sector, the VCT will look to invest across four areas: consumer, enterprise, hardware & deeptech, and digital health. It is expected that the majority of companies will fall within Series A to B.
An example of a Draper Esprit portfolio company – although not one held within the VCT – is Graphcore, a Bristol-based silicon chip maker developing AI processors. The Draper Esprit plc and EIS funds invested into Graphcore in 2016. In December 2018, Graphcore gained ‘unicorn’ status when it closed a $200 million funding round with a valuation above $1.5 billion. Please note past performance is not a guide to the future.
Other investors into Graphcore included Sequoia Capital, Atomico, Amadeus Capital, Robert Bosch Ventures, C4 Ventures, Dell Technologies Capital, Foundation Capital, and AI experts such as Demis Hassabis (co-founder of DeepMind).
Exit track record
Since inception, the VCT has realised investments of £24.4 million as well as losses of £16.2 million. The average realised return of the VCT’s successful exits is 3.3x cost, however, this does not represent the total portfolio return. It should also be noted that these exits were from legacy investments and the VCT has yet to achieve an exit under its current investment strategy.
Its last significant realisation was the partial exit of Fulcrum Utilities Group Plc in June 2018. The sale generated a profit of £0.5 million. The VCT has retained its remaining holding at an uplift. Please note, returns are not guaranteed.
Current portfolio overview
In the last year, the VCT has invested just under £10 million into 14 companies, of which 4 were follow-on deals and 10 were new investments. The VCT now has a portfolio of 33 companies, valued at £28.7 million (as at 31 March 2019).
The current portfolio is divided into legacy holdings (made prior to the manager’s acquisition by Draper Esprit plc), newer technology-focused investments, and cash which will be invested in further technology investments. As the new investment strategy is implemented it is expected that the legacy portfolio will begin to decrease. Accordingly, the VCT has made three disposals in the last year, one partial exit and two full exits, all from the legacy portfolio.
Four holdings account for 94% of the legacy portfolio, split between two AIM companies and two private engineering and manufacturing businesses.
Source: Draper Esprit, as at 31 August 2019.
Source: Draper Esprit, as at 31 March 2019.
Examples of portfolio companies
Fords Packaging Topco Limited – largest unquoted investment (legacy portfolio)
A packaging company, Fords specialises in sealed foil caps.
The company has been active within the food and beverage industry for almost a century. Due to the expansion of the business, Fords now assists leading brands in design and manufacturing from product concept to launch. A few of its clients include Tesco, Mars and Nestle.
Pod Point – new technology investment
Since forming in 2009, Pod Point has become a UK leading provider of charging points for electric cars.
In 2019 around 14,000 electric vehicles were sold in the UK, an increase of 70% compared to the previous year. As car sales increase, so does the demand for improved charging infrastructure.
The company has three revenue streams: home, commercial and workplace charging. To date, Pod Point has installed over 50,000 charging points nationwide, representing a 40% market share of the home-charging sector. New partnerships with Hyundai, Holiday Extra and Barratt Homes should help the company expand its network across the UK.
The VCT has invested just under £1 million into the company alongside other Draper Esprit funds, Barclay Capital and QVentures.
As is to be expected with early stage investments, not all succeed. One example is Worldstores Group, an online retailer of home and garden products.
One of the early Draper Esprit EIS investments, Worldstores Group had two associated companies: Achica, a membership-based luxury furniture retailer and Kiddicare, a nursery and childcare supplier.
Combined, Worldstore Group had sales of around £100 million as well as over 45 million website visits per annum. However, in 2016 the business began to struggle and became short of working capital. The company was set to go into administration but was rescued in a buyout deal with homeware retailer, Dunelm.
Draper Esprit invested £4.3 million in total and the investment was written down completely.
Performance and dividends
The future dividend target for the fund is 3p per annum. Dividend history, including special dividends (notably 19p in 2014), is shown below. Past performance is not a guide to the future.
In the past dividends were largely supported by loan interest repayments. This is expected to gradually change and future dividends are expected to be funded from portfolio exits instead.
Source: Draper Esprit. Past performance is not a guide to the future. Dividends are variable and not guaranteed. Dividends paid per year, as at 31 March 2019.
Source: Draper Esprit. Past performance is not a guide to the future. Dividends are variable and not guaranteed. The bar chart shows Net Asset Value and cumulative dividends (paid out) over ﬁve calendar years each year (YTD to 30 September), pence per share.
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.
Investors should note the legacy portfolio is almost entirely held in only four investments.
Charges, savings and deadlines
Please see the Draper Esprit VCT offer page for a summary of the main charges, savings and deadlines for the offer.
Draper Esprit’s experience and expertise in unquoted technology investments is without doubt. The merger of Elderstreet VCT with Draper Esprit could help reinvigorate the portfolio, although there are no guarantees.
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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Visit the share offer page for Draper Esprit VCTGo to offer page