Review: Elderstreet VCT
Launched in 1998, Elderstreet VCT is a generalist VCT that provides development and growth capital and largely invests in unquoted companies but also offers investors some exposure to AIM. This is a £20 million top up offer of the existing share class, which is in now in its over allotment facility. Prospective investors will be buying into an established and diverse portfolio.
In November 2016 Elderstreet struck a deal with Draper Esprit to sell them a 30.77% stake in the business. Draper has the option to acquire the whole of Elderstreet Investments in the future. Draper Esprit is a leading and experienced venture capital investment firm with a focus on high-growth technology businesses. Since inception, Draper has invested more than £800 million into more than 200 tech companies. They also have a combined exited value of over £5 billion.
- Well-established VCT
- Merger with Draper Esprit adds weight and expertise
- Good history of dividends to date (past performance is
not a guide to the future)
- Dividend target return of 3p to 4p per share (not
- Well-diversified portfolio
- £6,000 minimum investment
Elderstreet Investment Limited is a venture capital company founded by Michael Jackson. From 1987 to 2006 Mr Jackson was the chairman of FTSE 100 company Sage Group and has directorships of several portfolio companies. The four key players that make up the investment management team have in aggregate more than 50 years of venture capital experience.
The deal with Draper Esprit should boost the capabilities and resources of the investment team. Draper Esprit’s focus is well suited to VCT and EIS investing. They are well-known for their respected growth EIS fund.
The Draper Venture Network – of which Draper Esprit forms a part – is comprised of ten independent growth and venture funds managing hundreds of companies in multiple territories. Draper Esprit believes its position within the network gives it a competitive edge when it comes to deal flow and due diligence. With headquarters in Silicon Valley, the Draper Venture Network is well placed to source funding from the US and open up new markets for portfolio companies.
At the same time as the deal was announced, a co-investment arrangement was also agreed. Draper Esprit and Elderstreet will share deals and investment resources.
In the long run, the combined investment expertise should prove a fillip to the VCT. However, it may take some time for the partnership to bed in. In due course investors can expect the existing portfolio to be turned over in its entirety and replace by new opportunities selected by Draper Esprit. Realising the portfolio may not be straightforward. On average, the unquoted companies within the portfolio have been held for eleven years.
Strategy and target return
Elderstreet’s investment policy is not set to change significantly as a result of the Draper Esprit deal. The intention remains to build a diversified portfolio of companies in need of growth capital.
The manager believes the merger will allow the Elderstreet VCT to access larger deals in companies with higher revenues and higher growth potential.
Investments are made across a broad range of sectors: from fields as far flung as property to logistics and from gas utilities to the manufacture of sports ammunition. Indeed their largest holding is Lyalvale Express, a producer of shotgun cartridges. Recent investments have included companies in mobile ecommerce and on-demand delivery.
The average deal size is £1 million. 30% of the portfolio will be allocated to early stage companies – usually with revenues of between £0.5 and £1.5m – which carry higher growth potential. The remaining 70% will be placed into later stage investments with revenues over £1.5m.
VCT rule changes will mean that more investments will be made into companies that are not yet profitable. This may see a shift in the portfolio makeup over time.
Whilst the Elderstreet team is sector agnostic, they will generally look for investments with the following characteristics:
- Businesses with proven sales and the ability to
grow, seeking growth capital
- Businesses with strong, balanced and
well-motivated management teams
- Investments which, where appropriate, include
loan notes and preference shares to enhance the security of the portfolio and
to provide income
- Investments where Draper Esprit plc and
Elderstreet Investments can typically act as lead investor and have an active
involvement in the business through a board position.
Elderstreet VCT has historically targeted an annual dividend of 4-5p per ordinary share. This target will reduce to between 3-4p per annum.
It’s worth noting Elderstreet VCT has relatively large reserves. Future dividends should be supported by this capital even if no disposals are made.
Example holdings of Elderstreet VCT
These are the five largest investments by asset value in the portfolio as of 31 December 2016:
Lyalvale Express Ltd
Elderstreet VCT first invested in Lyalvale Express in 1998. Currently, the VCT owns 44.2% of the company, which manufactures over 30 different varieties of shotgun ammunition. It was Lyalvale cartridges that Richard Faulds shot to win Olympic Gold in Sydney.
Fords Packaging Topco Ltd
Based in Bedford, the business manufactures foil capping and sealing equipment. Elderstreet first invested in 2009. The company has a presence in North America and has supported the world’s food and beverage industry since the 1920s. It benefits from global partnerships with packaging manufacturers.
Access Intelligence plc
Access Intelligence offers software as a service (SaaS) for PR and communications. As at the end of November 2015 the business was turning over £8.1m and had a market capitalisation of £11.81m
It counts the BBC, Penguin Random House and Debenhams amongst its clients.
Fulcrum Utility Services Limited
The AIM-listed organisation provides gas and multi-utility infrastructure design, technical engineering, project management, consultancy and audit services.
Fulcrum is the only independent utilities infrastructure provider covering the entirety of Great Britain. It has an established customer base of over 1,200 clients and repeat revenues account for more than 60% of its business
AngloINFO is a network of websites for British expatriates. The idea is to provide local business directory, classified advertising and information services in the English language. Elderstreet first invested in 2006.
Given the diverse nature of the portfolio – and the varying maturities of the business – there is no ‘one size fits all’ exit strategy.
The two most recent exits were from SMART Education limited and Wessex Advanced Switching Products (WASP), both significant ones.
The common risks associated with smaller companies investing exist within this VCT offer. VCT investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future.
There is a risk the Draper Esprit and Elderstreet merger is an unhappy one but the signs are positive thus far.
There is an initial charge of 5.5%, before any Wealth Club discount. Total annual running costs are capped at 3.5% of the company’s net assets. The performance fee is 20% of distributions more than 3.5p per share per annum. If the distribution is not met in any given year there is a catch-up position for the following year. Simply put: where the distribution is less than 3.5p the shortfall must be made up before a performance fee is levied.
The manager may charge an arrangement fee to each investee company and this is restricted to 3% of the gross amount invested in the business. Fees may also be due for monitoring services and non-executive director expenses.
There is a buy back facility in place: this is typically done at a 7.5% discount to Net Asset Value.
The majority of Elderstreet’s existing VCT investors will probably be very content. Dividends have been consistent and the management team have stuck to their guns. The portfolio is well diversified and gives investors access to multiple sectors.
We welcome the additional influence of Draper Esprit, although the impact of the merger may not be immediate.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment.
Download the Elderstreet VCT prospectusDownload prospectus