Review: Foresight 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.
One of the ten largest in the UK, the Foresight VCT has been active for over two decades.
It is a generalist VCT which has an emphasis on regional opportunities with experienced management teams in high-growth areas.
The VCT last raised in 2017 and the offer was fully subscribed in six weeks, raising £40 million. This year, the VCT is looking to raise up to £20 million with an over-allotment facility of £5 million.
- Net assets of £132.3 million in a portfolio of 42 companies
- Generalist VCT with a preference for technology businesses
- Large manager with a strong regional network, experienced team and high deal flow
- Target dividend of 5% – not guaranteed
- Available for investment in the 2019/20 and/or 2020/21 tax year
- 0.10% annual rebate through Wealth Club for three years
- Minimum investment £3,000 – you can apply online
Foresight Group LLP (“Foresight”), was founded in 1984 as a specialist technology venture capital manager. In total, the group has £4.2 billion under management, including £450 million in VCT and EIS funds.
The VCT is overseen by Russell Healey, Head of Private Equity. Mr Healey has more than 25 years’ experience in fund management and is responsible for fundraising, new investments and portfolio allocation. He sits on the VCT’s investment committee along with Bernard Fairman (Chairman), David Hughes (CIO), and two other members of the private equity team.
Mr Healey is supported by a team of 30 who have backgrounds ranging from venture capital to hands-on operational and financial expertise. The team is split between London and Foresight’s regional offices and is collectively responsible for sourcing deals and portfolio management.
Launched in 1997, Foresight VCT has seen a number of share restructures and mergers over the years. The VCT has incorporated three other VCTs, most recently Foresight 2 VCT in December 2015.
Like many other VCT managers, Foresight has adapted its investment strategy to stricter VCT rules. The new regulations resulted in a number of assets, including energy and infrastructure, being excluded as new qualifying investments. Foresight had previously specialised in both areas and had a specific infrastructure share class with the Foresight VCT. Since the rule change, Foresight has moved toward a generalist strategy and has reduced the VCT’s exposure to energy assets, now less than 0.5% of the portfolio’s value.
Today, the VCT aims to provide a portfolio balanced between high-growth opportunities and cash-generative, legacy investments. For new investments, the VCT targets companies with significant growth potential in non-cyclical markets, particularly those with experienced and successful management teams.
Foresight will often source companies using its regional deal network. By concentrating on companies outside London, Foresight believes it can secure quality companies at competitive valuations. This strategy generates close to 1,700 opportunities a year across all of Foresight’s funds.
Where possible, Foresight prefers to structure its investments as a combination of ordinary shares, loans notes and preferred shares, which can help support the dividend and can put Foresight ahead of other investors if things don’t work out as planned – although this is not guaranteed.
Once a company has received investment, Foresight will look to build value through the professionalisation of the business, appointing board members, and assisting with possible exit. Foresight believes the latter is often overlooked as an experienced team can potentially enhance a company’s exit prospects if the business is positioned correctly.
Exit track record
Since the year end of 2014, the VCT has generated proceeds from the sale of assets of £26.7 million – and generated a realised loss of £2.4 million, an average realised return of -8.9%. Whilst returns from exits have improved over the previous two and a half years, exits have not been a key driver for performance since 2014. Past performance is not a guide to future performance.
An example of a recent exit is Thermotech.
Based in Stockport, Thermotech designs, installs and maintains air conditioning and fire sprinkler systems.
The company operated nationally and had a number of blue-chip clients such as Marks & Spencer, John Lewis and Waitrose, alongside a wider portfolio of commercial offices and shopping centres. Foresight invested £2.5 million into the business in 2013 with the capital used to expand the company’s client base and support the acquisition of Oakwood, an air conditioning specialist, in 2016.
The business was sold in 2018 to Atalian Servest Group, an international facilities management group. This generated a total return of £2.0 million and an exit multiple of 1.3x after a five-year holding period. Past performance is not a guide to the future.
Autologic Diagnostics Ltd
As can be expected, not all investments work out. An example is diagnostics company Autologic, which designs software and hardware for vehicle servicing and repair. Its equipment enables mechanics, dealerships and garages to identify complex problems along with access to a technical support infrastructure.
Foresight originally invested in the company in 2009, alongside Octopus Investments. At this point, the company was growing well and had expanded to over 50 markets worldwide, doubling its revenue in two years. As a result of its success, the company completed a £46 million management buyout in 2012. Foresight partially exited its holding but chose to continue to support the MBO alongside Livingbridge.
The investment has subsequently underperformed and following the repayment of some loans in 2017, Foresight revalued the investment to nil.
There are currently 42 companies in the portfolio, valued at £112.8 million (30 Jun 2019). Historically, Foresight VCT and Foresight 4 VCT have had similar investment mandates so there is an overlap of 90–95% between the portfolios. In future, it is expected the two VCTs will split deals equally.
In 2019 the VCT deployed just over £15 million into four companies, with a further pipeline of £20 million.
The latest portfolio breakdown of sector split and financing stage (both by value) are shown below.
Example portfolio companies
Datapath – largest holding (MBO)
Founded in 1982, Datapath was originally launched as a manufacturer of computer graphics products. Today it is recognised for its display and video technology with its products used for control rooms, distance learning and medical applications.
Foresight invested £3 million into the company in 2007 as part of £12 million MBO. Shortly after investing, it introduced Simon Hunt, an accomplished private equity investor, as the company’s new chairman. Mr Hunt had significant experience within the electronics and software industries and was able to provide Datapath with valuable market insight and access to new distribution channels.
The company has subsequently more than tripled its revenues and operating profits since Foresight’s initial investment. Datapath is the largest holding in the portfolio, currently representing 6% of NAV (30 Sep 2019).
Ollie Quinn – largest holding (growth capital)
Self-branded as the “friendly neighbourhood optical”, Ollie Quinn is a chain of boutique shops providing handcrafted frames at an affordable price.
Founded by the same team that established Bailey Nelson in the UK, Ollie Quinn began with a collection of 50 styles. Today, the business has ten locations each with its own in-house design team.
Foresight invested £3 million into the company in 2017, appointing Keith Pacey, former CEO of Maplin Electronics, as a director. After the investment, the founders began an aggressive rollout strategy, which resulted in a number of good developments but also led to an unsustainable cash burn rate. Rather than write off the investment, Foresight provided an additional £2 million of follow-on capital and restructured the management team. The company is now profitable and is the seventh-largest holding in the VCT, representing 4% of the portfolio (30 Sep 2019).
Spektrix – recent investment
Spektrix is a cloud-based ticketing system designed for the arts and entertainment industry. It was founded by Michael Nabarro — who has a degree in Computer Science from Cambridge University and has worked as General Manager of the ADC Theatre — and Matt Scarisbrick.
Spectrix manages all aspects of bookings, data collection and reporting. This not only provides a smoother client journey but offers better insights into audience behaviour and trends. To use the software, companies only need an internet connection.
Since launching in 2007, the company has grown to a market share of around 30% and works with more than 400 organisations across the UK and US, from Regent’s Park Open Air Theatre in London to the National Opera House in Ireland.
Foresight invested £5 million in February 2019 split across ordinary shares and loan notes. The funding will be used alongside additional funds from Santander to help the company expand into the US.
Performance and dividends
The dividend target for the VCT is 5% per annum, with an average dividend of 6.4p paid since 2015. Dividends are variable and not guaranteed, past performance is not a guide to the future. The dividend track record for the VCT is shown below.
Please note, while Foresight still expects to provide consistent returns, it is likely that dividends will become much more volatile as the portfolio balance shifts in favour of growth capital investments.
Whilst the dividend target has been achieved, this has come at the expense of the net asset value. In terms of key drivers to performance, whilst unrealised returns have been healthy, when Foresight has come to sell assets, this has often resulted in sales below net asset value, hampering returns through 2014–2016. However, returns from the sale of assets seem to have picked up in the last two financial years.
Past returns have also been impacted by underperforming environmental assets. In 2012, over a third of the VCT was invested in companies in the sustainability sector. This position has subsequently been reduced to less than 0.5% of the portfolio.
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. Asset-based investments are no longer permitted. This results in considerably higher risks.
What to consider next
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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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