Review: Northern VCTs

Offers now closed

The Northern VCTs have now closed (15 November 2017). There are still some popular VCT offers with capacity left.  

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The Northern VCTs are now open. Northern has an extremely loyal base of shareholders. Its previous offer in February of this year sold out in under 48 hours. The three VCTs are now raising up to £60 million. We expect demand for this offer to be very high. 

Unlike previous Northern VCT offers, new investors could have the opportunity to invest. For the first three weeks the offer is open to existing shareholders only. However new investors wanting to benefit should apply now. Their application will then be held in a queue and allocations will be made on a first come, first served basis once the three week period is up.

Highlights

  • Longstanding and highly respected VCT manager
  • Good track record of dividends – although dividends are not guaranteed and past performance is not a guide to the future
  • A diverse portfolio of around 50 companies – 11 of which are in newer growth capital investments. The rest is a mature existing portfolio, predominantly from management buy-outs, which should support dividend and interest payments
  • Existing shareholders have exclusivity for three weeks but new investors are also likely to be able to participate
  • Investors can split their money across all three VCTs or make a specific choice
  • Minimum investment £6,000

The manager

Northern VCTs – Northern Venture Trust plc, Northern 2 VCT plc and Northern 3 VCT plc– are managed by NVM Private Equity, based in Newcastle-upon-Tyne. Northern Venture Trust is one of the UK's first venture capital trusts. The three trusts hold 34 unquoted companies and a number of AIM-listed companies. The team is very experienced, with over 155 years of private equity investment experience between them. Recently, NVM further strengthened its growth investment hand by hiring Charles Winward, previously of IP Group, where he was involved in deals such as Tracsis plc and Xeros Technology.

  Launched Net Asset Value (31 March 2017)
Northern Venture Trust 1995 £76.9 million
Northern 2 VCT 1999 £71.6 million
Northern 3 VCT 2001 £69.9 million
TOTAL £218.4 million

Source: NVM Private Equity LLP

The offer

Northern VCTs are raising £60 million in 2017/18 via an offer for subscription of up to £20 million in each VCT. For the first three weeks, the offer will be available to existing shareholders only, before being opened up to new subscribers on a first come, first served basis.

To date 11 investments have been made under the post-2015 rules; these have a combined value of £27 million. The rest of the portfolio is in investments made prior to the 2015 rule changes, the majority of which are management buy-outs. These investments have historically supported healthy dividends and offer the prospect of capital gains if the businesses are sold.

Investors will be invested in the current portfolio and the manager expects around two-thirds of money raised to be invested in new companies, with around one-third in follow-on investments. It is a diverse portfolio with no particular bias in any area. The current breakdown of the VCTs is shown below. 

Strategy

Northern will invest in businesses they think represent good value, have strong growth potential and a management team in which they have conviction. To provide investors with diversification, Northern will invest in companies in a range of sectors at different stages of their development. Typically, they’ll aim to hold businesses for three to ten years. 

Members of the NVM investment team are required to invest in any investment the VCTs make, which can align their interests with other shareholders. The NVM team and directors of the VCTs hold over 5.5 million shares and have committed £900,000 to this latest offer.

Example of a portfolio company

Rockar, an innovative car dealership, is typical of the kind of growth companies in which Northern will be looking to make new investments. Rockar is the brainchild of Simon Dixon, who spent 20 years building the UK’s third largest car retail group, Dixon Motors plc. He sold Dixon Motors to RBS in 2004 for £110 million.

Nobody really likes the traditional process of buying a car: it’s something to be endured rather than relished. Dealing with car salespeople is an aspect we love to hate. Rockar aims to turn this car-buying experience on its head.

Firstly, its stores are in shopping centres, rather than the more traditional out-of-town areas. This might seem odd, but the sites attract high footfall. Rockar has two stores, yet estimates a total of 52 million people have walked past them. They are designed as boutiques, akin to an Apple Store for cars, with few cars on display and interactive touchscreen tablets so customers can browse the product range independently, book test drives or even buy a car in a matter of minutes.

There are no pushy salespeople. Instead, there are Rockar Angels: knowledgeable staff whose job is to serve rather than to sell. You can buy in-store or complete the whole car buying process online: finding information about a car, ordering it to your exact specifications, booking a test drive, paying for it, part-exchanging your old car or arranging finance. Northern VCTs portfolio company, Rockar

The first car manufacturer to sign up was Hyundai in 2014 with an outlet in the Bluewater shopping centre in Kent. Within three weeks it had become the most visited Hyundai dealer in the UK. A second Rockar location was added in 2015 at the Westfield shopping centre in west London. In the 18 months to January 2017, almost 2,000 people bought a car from Rockar. Jaguar Land Rover followed as Rockar’s first premium franchise at Westfield in October 2016.

In June 2017 Rockar announced it is “actively engaged” with four other franchises and is close to developing a used car concept. It is also planning the launch of new Tesco Express-style Hyundai local dealerships on busy shopping streets.

The real key to Rockar’s success, and a likely source of future growth, is its innovative online technology that facilitates the vehicle purchase. This has potential to be licensed to other manufacturers and dealer groups.

Northern VCTs invested £2.5 million of development capital in July 2016 alongside Maven Capital Partners who also invested £2.5 million. If successful, the investment will enable Rockar to partner with new car manufacturers, open more stores in high footfall shopping areas and grow its technology platform. 

Dividends

The three VCTs have a good track record of paying dividends to date. The cumulative dividends paid per share since inception, as well as the history of dividends over the last five years, are shown below – remember dividends are variable and not guaranteed and past performance is not a guide to the future.

  • Northern Venture Trust (launched 1995) – 148.5p
  • Northern 2 VCT (launched 1999) – 101.4p
  • Northern 3 VCT (launched 2001) – 75.4p  

Figures above exclude dividends declared but not yet paid at the balance sheet date; totals to 30 September 2016 for Northern Venture Trust, and 31 March 2017 for Northern 2 and 3. 

In recent years, Northern Venture Trust has paid an annual dividend of 6p as a base with Northern 2 VCT and Northern 3 VCT each paying a base of 5.5p. Special dividends have been paid in addition to these. Under changes to VCT rules, Northern will have less opportunity to use income-yielding debt investments to fund the dividend. Investors should be aware future dividends will be increasingly dependent on exits, so dividends may be ‘lumpier‘ and some years may be better than others. That said, the balance of the portfolio will take time to change and the legacy investments should support dividend payments at least in the short term. There are no guarantees though.

Source: NVM. Past performance is not a guide to the future. Dividends are variable and not guaranteed.

Like several VCTs, the Northern VCTs operate a Dividend Investment Scheme under which shareholders can reinvest dividend payments and receive new shares. These shares should benefit from VCT tax reliefs.

Performance

Looking at net asset value total return over one, three and ten years, the Northern VCTs are the best performers of all generalist VCTs, according to figures from the aic. Over five years, all three Northern VCTs are in the top ten. Net asset value total return is the net asset value plus cumulative dividends. 

Source: NVM. Past performance is not a guide to the future. Dividends are variable and not guaranteed. Chart shows net asset value and cumulative dividends paid per share: note figures for 2017 don’t include dividends declared and not yet paid by Northern 2 and 3. Figures are for calendar years except 2017 which is to 31 March.

Since April 2016, Northern VCTs have exited five portfolio companies. Four were management buyout deals selling for between 1.8x and 4x. One was a growth investment which returned 3.6x. Remember, past performance is not a guide to the future.

Risks

Please remember your capital is at risk. VCTs are high risk investments and are not suitable for everyone: they are long term and illiquid. Investors should not invest money they cannot afford to lose. 

Tax rules can change and tax benefits depend on individual circumstances.

A specific risk with these VCTs is the change in investment strategy due to changes to VCT rules. Northern are committed to growing their investment team with an emphasis on recruiting experienced early stage investors. They are faced with the necessity of adapting to rule changes, as are all managers who have made their name with MBO investments. A £60 million raise represents a large proportion for the Northern portfolios. 

Venture capital schemes, including VCTs, are currently the subject of a Treasury consultation. The “Patient Capital” review is designed to review the options for ensuring access to long-term investment for young, innovative firms. The proposals are expected to be announced in the Autumn budget. This could have an effect on the investment policies of the VCTs, and on the levels of tax reliefs that are available.

Fees

There is an initial charge of 4% before any Wealth Club saving.

The annual running costs can be split in three. A basic management fee will be levied by NVM to the companies of 2.06% of the net assets. This will be reduced on the proceeds of the offer to 1% between the date of allotment and 30 September 2018. Northern should be applauded for this decision. A number of their peers will - having raised cash under VCT offers - be charging full annual management charges on portfolios with significant cash holdings. The adjustment here is a welcome one, in our view.

Accounting and secretarial fees form the second component of the annual running costs. The fees are payable from the companies to NVM are as follows:

  • £68,500 by Northern Venture Trust
  • £56,200 by Northern 2 VCT
  • £53,000 by Northern 3 VCT

The third element is a performance-related management fee, very much the norm in VCTs. The performance-related fees are capped at 2.25% of average net assets. The total annual running costs of the Companies (excluding the performance fee) are capped at 2.9% of average net assets with the excess being borne by NVM.

NVM are also entitled to receive arrangement, advisory and non-executive director fees. 

Summary

The team behind the Northern VCTs is highly regarded in the industry. Investors can expect a blend of legacy assets comprising management buy-out investments and newer growth deals. On the face of it, that’s what many other VCTs do. But as seasoned VCT investors know, the Northern VCTs are perhaps worth making a fuss over. This offer is expected to be popular, so if you are interested in taking part, both as a new investor or an existing Northern shareholder, please consider acting quickly. 


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. 22.09.17

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