Review: Mobeus VCTs
An 18-year track record, exceptional dividends and an enviable reputation. Mobeus VCTs are a perennial favourite of seasoned VCT investors and we think this new offer will be popular.
As this is a top-up offer, investors will be mostly invested across a mature portfolio – the same portfolio that has served investors so well historically. That said, it is important to remember past performance is not a guide to the future and dividends are variable and not guaranteed.
In the case of Mobeus VCTs, this is even more relevant. Rule changes in 2015 mean the manager has been forced to change tack. After a period out of the market, Mobeus is now back wearing fresh robes. New investments will be markedly different from those made under the old regime.
So, is now a good time to invest?
The acid test will be time. But, investors should be aware that after this fundraise Mobeus may not need additional capital for the next three years. If you are interested in investing this may be your only opportunity for some time.
Read important documents and apply
- Linked offer to raise £50 million (with £30 million overallotment facility) across the four Mobeus VCTs
- Mature portfolio of lower-risk MBO investments plus newer growth investments
- Target dividend of 4p-6p per share – variable and not guaranteed
- 311.5p per share paid in tax-free dividends in total since 2012 – an average of 12.97p per share per VCT per year, although past performance is not a guide to the future
- Minimum investment £6,000 across the four VCTs
- Apply online – exclusively through Wealth Club
Mobeus is raising up to £80 million in a linked offer across its four VCTs:
- Mobeus Income & Growth VCT (MIG): £15 million (+ £10 million overallotment)
- Mobeus Income & Growth 2 VCT (MIG2): £10 million (+ £5 million overallotment)
- Mobeus Income & Growth 4 VCT (MIG4): £10 million (+ £5 million overallotment)
- The Income & Growth VCT (I&G): £15 million (+ £10 million overallotment)
This is the first new offer since 2015 and the manager believes this may be the last for a while, as it should provide enough capital to deploy over the next three years.
Investment strategy and portfolio company examples
The Mobeus strategy can – broadly speaking – be split in two: Management Buy Out (MBOs) and Growth investments.
The 2015 changes to legislation prohibited further investments in MBOs. This type of investment was largely responsible for Mobeus’s previous success. Nonetheless, MBOs will remain the foundation of the VCT portfolios even after the current fundraise. Mobeus anticipates the portfolio will be weighted 60:40 in favour of MBO deals. This will move more towards growth deals in the coming years.
A well-known example is Virgin Wines. In November 2013 Mobeus Equity Partners backed a management buyout of the thriving UK online wine retailer. The syndicated transaction saw Virgin Wines move away from its parent company Direct Wines Limited. Mobeus provided £8.4 million of debt and equity as part of a £15.9 million funding package. The investment is structured predominantly in secured Mobeus loan notes with an annual running yield of 9%.
Virgin Wines employs 158 staff and has turnover of £38 million (June 2016).
Money raised by this top-up offer will be invested in growth deals. A typical investee company for Mobeus will be established, debt free and revenue generative. If the business is not already in profit it will need to have a demonstrable path to profitability within the next two years.
So far Mobeus has invested £31 million in nine growth capital deals. This equates to 22% of the portfolio, as at 30 June 2017.
These are very different investments from MBO deals. That’s why Mobeus brought in external expertise. Trevor Hope – formerly the Chief Investment Officer at Beringea, manager of the ProVen VCTs – joined in 2016 to lead the growth strategy. As Chair of the Investment Committee at Beringea he was responsible for £150 million of VCT assets. He played a central role in the sale of Fjordnet to Accenture in 2013 for £55 million, which was named ‘VCT exit of the year’ at the 2013 Unquote British Private Equity Awards.
It’s anticipated around 60% of new investments will be made in mid-stage growth opportunities. The remaining 40% will be split equally between earlier-stage and later-stage growth opportunities.
Earlier-stage growth opportunities
These are companies with annual revenues of approximately £500,000 with significant upside potential. Mobeus will initially invest in the region of £1.5 million with the potential for follow-on investment when the company matures.
One example already in the portfolio is MyTutor. It is an online marketplace operating in the £6.5 billion UK tutoring market. MyTutor matches school pupils searching for a tutor with university students looking for rewarding work. Tutees and tutors share an interactive whiteboard whilst being able to see each other via video call. You can watch the sessions back and parents can see what they are paying for. Alongside this B2C route Mobeus is excited about the B2B potential offered by tie-ins with schools which pay for their pupils to receive online tutoring.
MyTutor has grown at 3x year on year for the last three years, with 65,000+ bookings and applications from over 15,000 tutors. Mobeus believes it could be valued at more than £100 million if it can gain a 5% market share.
Mid-stage growth opportunities
Most of the funds raised will be deployed in established businesses with annual revenues of £1 million or more. Mobeus will invest around £3 million and the investment will be structured to give the VCT capital priority, security and a mixture of debt and equity.
Take for example Tapas Revolution, a chain of tapas restaurants founded by celebrity chef Omar Allibhoy. Mobeus invested £2.5 million to support the rollout of additional restaurants including sites in Newcastle and Bath. The investment structure benefits from prioritised capital, a yield of 8% on loan notes and minimum returns on the equity investment.
It’s an opportunity Mobeus liked for a number of reasons. The Spanish tapas concept is underrepresented when you compare it with pizzas, burgers, sushi and the like. The team has a proven restaurant concept with an existing estate of profitable restaurants.
Later-stage growth opportunities
Around a fifth of the capital will be invested in later-stage deals. These are companies with annual revenues over £10 million. Mobeus will likely pay a higher price but have the option to incorporate preferred capital or a minimum return. Shorter-term exit timeframes are expected.
Wetsuit Outlet is a prime example. The business is an online retailer of premium water sports equipment. The company sells to 160 countries and generates 52% of its revenue outside the UK. Mobeus invested to fund the company’s expansion into two new markets, equestrian and field sports. It was, and continues to be, a profitable and cash generative business at the point of investment.
The Mobeus VCTs invested £10 million, of which £5 million in secured loan stock with a 10% yield, and £5 million in equity. The equity is in preferred capital. If the company was sold for £10 million all the money would be returned to Mobeus and the VCTs.
Performance and dividends
The Mobeus VCTs aim to deliver annual dividends of at least 4p-6p per share (MIG and MIG 4 have a minimum annual target dividend of 4p per share; I&G’s annual target dividend is 6p per share, while MIG 2 has an annual target dividend of at least 5p per share).
Since 2012 the VCTs have paid total dividends of 311.5p per share – that’s an average of 12.97p per share per VCT per year, well above the target. Such exceptional dividends have contributed to the overall strong performance.
To put this in context, someone who invested £10,000 in 2010/11 in a linked offer would have received £7,983 in dividends so far, which is remarkable, especially considering the effective cost of the investment would have been just £7,000 after VCT income tax relief (currently 30%).
Source: Mobeus. Total return shows Net Asset Value per share and cumulative dividends paid or payable. Past performance is not a guide to the future. Dividends are variable and not guaranteed. Information for MIG2 for 2012 not available due to the VCT's year end.
Underpinning the strong performance are two main factors.
Firstly, the loan stock produces significant and predictable returns in the form of interest payments – it currently generates £9.34 million a year. If these payments are maintained they should help the VCTs continue to pay attractive dividends, although this is not guaranteed.
Secondly, the VCTs have so far benefitted from a regular flow of profitable realisations. Since 2014, Mobeus has sold 10 investments and returned an average multiple of 3.2x, generating cash gains of £99.4 million.
Please remember though, past performance is not a guide to the future and dividends are variable and not guaranteed. Moreover, the value of tax benefits depends on circumstances and tax rules can change.
The usual risks with smaller companies exist with this VCT offer. For instance, 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.
A specific risk with these VCTs is the change in investment strategy. The expertise Mobeus has hired and the wider changes made to the team alleviate this concern to some extent.
There is an initial charge of 3.25% before Wealth Club saving of 0.75%.
There is an early bird discount of 1% on the initial charge until 3 November 2017 or until the VCTs have raised £50 million in total, whichever is earlier. (Update 1 November: the early bird is no longer available).
The annual charges vary for each Mobeus VCT. The annual management fee ranges from 2.0% to 2.4%. More detail can be found in the Securities Note. There are annual fixed fees ranging from £104,432 to £170,000.
Mobeus is entitled to an annual performance fee of 20% but the hurdle rates differ for each VCT. Full details are in the Securities Note. There is a share buyback facility. Typically, the shares will be repurchased at a discount of around 10% to NAV. This is subject to change. During the five years in which the share buyback facility has been in place, investors have sold shares back at a 10% discount.
We believe this is a top-quality VCT offer. Investors are exposed to a mature portfolio with a core of strong MBO investments. Whilst this will change over the course of the investment the new additions will be selected by a team with stellar credentials and an excellent track record, although past performance is not a guide to the future. Mobeus is an investment house we like and we believe this offer is worthy of consideration.
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.08.09.2017