Review: Foresight 4 VCT

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

Foresight 4 VCT is raising £50 million, with an over-allotment facility of a further £50 million. Foresight 4 VCT plc has a long history of takeovers, mergers and diverse investment mandates: the most recent of these was with its smaller sibling, Foresight 3 VCT in 2017. 

Highlights

  • Established, mature VCT portfolio with a weighting towards technology, media and telecoms
  • Experienced, well-resourced team
  • Raising up to £100 million
  • Minimum investment £3,000
  • New: 0.10% annual rebate through Wealth Club

The manager

Foresight Group was founded in 1984 as a specialist technology venture capital manager. In total, the group has £2.6 billion under management. £292 million is invested in its range of three VCTs (four prior to the merger of Foresight 3 and 4). David Hughes, Chief Investment Officer, is supported by 17 others in the private equity team. 

The merger of Foresight 4 VCT with Foresight 3 VCT, which took place in July 2017, was intended to save costs and improve administrative efficiency: the holdings of the two VCTs were similar. David Hughes of Foresight believes the new VCT will also provide enhanced liquidity for investors: previously the two VCTs were constrained for cash. 

As background, Foresight 4 started life as the Advent 2 VCT in 1998, and after becoming Foresight 4 merged with Foresight 5 VCT, Foresight Clearwater VCT and Acuity VCT. Foresight 3 was originally the Advent VCT, and in 2008 was merged with Noble VCT. 

As at 30 November 2017, the Foresight 4 VCT has net assets of £67 million, with 28 portfolio companies. 

Watch a video interview with Foresight partner James Livingston:

Strategy

Foresight 4 seeks to invest in UK unquoted companies with high growth potential. The broad aim is to deliver attractive returns to shareholders from a combination of dividends and interest payments from investments, as well as distributions from capital gains from trade sales or flotations. Foresight will focus on making investments in the following sectors: 

  • Technology, media and telecommunications 
  • Business services
  • Industrials and manufacturing
  • Consumer and leisure
  • Healthcare 

Foresight 4 VCT was originally a technology-focused portfolio. In the late 1990s, Foresight changed the emphasis of the fund to a mix of environmental investments, MBOs (Management Buy outs), MBIs (Management Buy Ins) and replacement capital deals. The latter worked well whilst the environmental investments didn’t. 

This acted as a damper on the whole VCT: there was no dividend payable in 2010 from Foresight 4, for instance. As a result, the portfolio was refocused. According to Mr Hughes, around 60% of the current portfolio is now is held in MBO, MBI and replacement capital investments and 40% in growth capital investments. 

Foresight sources deals from a network of 1,300 intermediaries: legal firms, accountancy firms and insurance brokers are prime examples. It hosts events for entrepreneurs and small businesses across the country and sees deals from numerous non-executive directors in Foresight's extensive personal and professional network. 

Typically, Foresight sees 700 or so opportunities every year and will select 15 to 20.  

Note in the 6 months to 30 November 2017, no new investments were made by the VCT: six disposals were made.

Example holdings in Foresight 4 VCT

Datapath is by far the largest holding and represents over a quarter of the VCT. 

Datapath is a Derby-based manufacturer of PC-based multi-screen computer graphics cards and video capture hardware, specialising in video wall and data wall technology. 

Picture a traffic control room. Several people are sat behind desks in front of a large video wall. Datapath provides the hardware and control box which manages the whole video wall. 

A video wall can be anything from four TVs in a square to sixty-four. Video walls have multiple applications: they are used in advertising, universities, betting shops and retailers. Datapath has around half the total global market share of the controllers for video walls. The business has a turnover of £20 million per annum and profits of around £7 million. Two years ago, it paid £16 million in dividends. 

Foresight first invested in 2007 and now owns around 40 percent of the business across its VCTs. We asked David Hughes, Chief Investment Offer at Foresight, if he was worried about the size of the holding. He concedes it does represent a large portion of the portfolio and Foresight has held it for some time – ten years being at the far end of their investment timeframe – but it is a cash-generative business and one he doesn’t want to let go prematurely. 

TFC Europe is a well established and, according to David Hughes, “very slightly boring” business, turning over £20 million per annum. It accounts for around 6% of the enlarged portfolio. Based in East Sussex, TFC is one of Europe’s leading suppliers of fixing and fastening products. From eight sites in the UK, Germany and the Czech Republic, it supplies injection-moulded technical fasteners and ring and spring products to customers across a wide range of industries, including aerospace, automotive, hydraulics and petrochemicals.

Take a Bosch lawnmower, which has around 171 parts. 11 are large, 160 are small. The smaller components – washers, springs and clips – are provided by TFC on a just-in-time basis to Bosch’s production line. 

TFC Europe has a UK and German licence to distribute Smalley springs. These are made of flat wire and take up about a third of the space of traditional springs but perform the same role. 

As is to be expected, not all of Foresight’s investments have worked out as intended. One such investment is Trilogy Communications Holdings.

Trilogy enables communication devices to speak with one another. The formal term is interoperability. Trilogy’s black box could connect a mobile phone to an ambulance communication system or a police radio. 

An example of its potential use was demonstrated during Hurricane Katrina. When the storm hit New Orleans the various rescue services realised they were unable to communicate with one another. Four Landrovers equipped with Trilogy’s device (and other hardware) were parachuted in, to allow the emergency services and authorities to communicate. 

The company turned over £10 million per annum and was making £1 million EBITDA. Then unforeseen events took hold. In 2012 President Obama introduced military cutbacks. This was hugely detrimental. Military sales fell off a cliff and remained low for four years. 

Foresight stepped in, cutting costs and pushing sales towards civilian institutions such as oil rigs and hospitals. It managed to recoup 40 percent of its investment when the business was sold for approximately £4 million. 

Although the investment did not go as intended, it shows Foresight can salvage an ailing business. 

Risks

This is a concentrated portfolio. Datapath represents a large chunk of the enlarged VCT and problems with that business will have a significant impact on performance. 

Foresight may raise up to £100 million in new money. A large portion of the portfolio will then be in cash awaiting investment, which could be a risk. The management is confident it will invest the cash in a relatively short period - investors need to decide is this is realistic.  

As ever the usual risks are in play. Foresight is investing in smaller companies with little or no asset-backing. Investments of this nature are more prone to failure.   

Please remember capital is at risk. VCTs are high risk investments and are not suitable for everyone. Investors should not invest money they cannot afford to lose. Tax benefits depend on individual circumstances and tax rules can change.

Fees

The initial charge (normally 5.5%) is 2.5% through Wealth Club. Existing Foresight 3 and Foresight 4 investors benefit from a further loyalty saving of 0.5%. 

The annual management charge is 2%. There is an administrative cost capped at £157,000 and dealing fees of typically 3% levied against the investee companies. The total expense ratio is capped at 2.95%. 

Foresight also levies a performance fee of 15% of dividends paid to shareholders. For Foresight to take this fee, the NAV must exceed 108.5p. However, if a dividend is paid the hurdle increases by the amount of the dividend. For instance, if a 5p dividend is paid the new hurdle is 113.5p. Currently, the NAV is well short of the hurdle.

Early bird savings and deadlines

Unless the offer is fully subscribed before these dates, the following deadlines apply:

  • Deadline for early bird saving of 2.0%: 31 July 2017 (12 noon)
  • Deadline for early bird saving of 1.0%: 30 November 2017 (12 noon)
  • Deadline for shares allotted in the 2017/18 tax year: 5 April 2018 (12 noon)
  • Final closing date: 30 April 2018 (12 noon)

NEW! Annual rebate when you invest through Wealth Club

The Foresight 4 VCT now includes an annual rebate for Wealth Club investors, payable for the first three years. 

This is a rebate of our renewal commission and should be equivalent to 0.10% of the Net Asset Value of the Offer Shares issued to you when you invest. Terms and conditions apply.

Summary

To judge this VCT wholly on its past is perhaps unjust. The foray into environmental investments proved costly, but that according to Foresight is now water under the bridge. Realising these poor investments and integrating other VCTs has dampened down the long-term performance of the VCT: note however past performance is not a guide to the future. 

Foresight benefits from good deal flow and the enlarged Foresight 4 VCT should now have a more settled investment mandate. In addition to new growth capital investments, this offer and the enlarged VCT give investors the chance to access a mature VCT portfolio with an experienced private equity manager.  In recent years, Foresight 4 has been cash-constrained. This new fund raise, if successful, should allow it to participate in new deals.  Fundraising has been muted to date, however.

Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based 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.