Review: Pembroke 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.

Pembroke VCT is raising £20 million (with a £10 million overallotment facility) in B Ordinary Shares. New investors will access a maturing portfolio of growing businesses as well as new investments, across four sectors, focusing on consumer brands with premium pricing potential.

Highlights

  • Strong emphasis on capital growth
  • Preference for companies that are producing profits
  • One of the lowest-cost VCTs
  • Portfolio companies include Second Home, Five Guys and Chilango restaurant chains
  • Focus on four sectors: health and fitness, media and technology, hospitality, apparel and accessories
  • Talented management team
  • Minimum investment £3,000
  • Early bird discount of 1% until 12 January 2018

Watch an exclusive video interview with Andrew Wolfson, manager of the Pembroke VCT:

The manager

The Pembroke VCT is managed by Oakley Investment Managers which operates under the umbrella of Oakley Capital Ltd (a company co-founded by Peter Dubens in 2002). 

Mr Dubens is a serial entrepreneur. He started his first company in 1985 aged just 18, manufacturing and selling heat-sensitive t-shirts. Five years later, he sold that business to Coats Viyella for £8 million. He then acquired the UK licence to sell Vans trainers and six years later sold that firm to Vans for $16 million. By age 27 he was a multi-millionaire but carried on buying and selling companies. He was the "Pete" in the "Pete & Johnny's" — PJ Smoothies —range, eventually sold to PepsiCo for £20 million. After that he brought ukbetting (now renamed 365 Media Group) to the market for £6.5 million and sold it to Sky for £106 million. That was followed by Palmer Capital, Pipex (most of this was sold for £330 million in 2007) and Oakley Capital. 

Besides Peter Dubens, there is a core team of seven. Andrew Wolfson, a director of Oakley Capital, is the VCT’s Chief Investment Officer and is responsible for executing the fund’s strategy, leading the investment team, deal origination and supporting portfolio companies. Mr Wolfson has been working with Peter Dubens since his first company and also manages his private investments. 

The directors of the VCT have invested significant amounts (£1.15 million) invested in the VCT themselves, so their interests are aligned with those of investors.

Current portfolio and investment strategy

The current active portfolio consists of 27 investments, of which 26 have received funding wholly or in part from the B Ordinary Share class. Pembroke has raised a total of £43 million since 2013. 

Investments are spread across four sectors: hospitality (currently 35.8% of the B Ordinary Share portfolio); apparel and accessories (currently 28.7% of the B Ordinary Share portfolio); health and fitness (currently 19.5% of the B Ordinary Share portfolio) and media and tech (currently 16% of the B Ordinary Share portfolio). These figures are based on the latest valuation, as at 30 September 2017. 

Approximately 42% of the investments (by value) are in businesses which are now trading profitably. 

Pembroke intends to use the funds raised to make a number of follow-on investments in existing portfolio companies where further capital could accelerate growth plans.

Pembroke aims to continue to invest in a diversified portfolio of smaller unquoted companies, with a preference for companies that are producing profits. The objective is to generate significant returns – not guaranteed. 

The investment strategy is the same already pursued and successfully implemented by Peter Dubens at Oakley Capital since 2002. It concentrates on consumer-facing businesses with an established brand or with the potential to develop their brand, which the manager believes are capable of significant organic growth and sustainable cash generation. 

The connection to Oakley Capital and Peter Dubens means the team has good access to deals and also that it can co-invest in larger deals. 

Examples of current portfolio companies

Pembroke VCT – Five GuysFive Guys

Five Guys was founded in 1986 in the US. It’s a restaurant chain serving handmade burgers cooked on a grill, along with fresh cut fries, served with unlimited toppings. 

Pembroke became involved even before Five Guys had its first UK site and provided growth capital to fund the UK roll-out. Five Guys was also backed by Sir Charles Dunstone, founder of Carphone and an investor in Pembroke. 

The chain now comprises 75 restaurants across the UK with further sites in the pipeline and plans to expand into Europe. It recently ranked eighth in the Sunday Times Fast Track 100 league table of fast-growing companies.

Pembroke originally invested in 2013  through its Ordinary Share Class and to date has invested a total of just over £2 million. Four years later its holdings (across the VCT’s two share classes) are currently valued at £4.8 million (a 2.3x multiple).   Because of the company’s size, Pembroke VCT is precluded from making any further investment. However, the holdings remain part of the existing portfolio, so new investors could benefit from any further growth and an eventual exit. 

Pembroke VCT – Second HomeSecond Home

Second Home describes itself as “a new type of workspace and creative hub”. It is a place where “fast-growing creative companies” can move in and, if they wish and at short notice, move out. The Evening Standard describes it as “London's coolest shared workspace”. 

The first site opened in 2014 in a former carpet warehouse in Spitalfields, London (near Liverpool Street). It was fully occupied the day it opened. 

Three years on, the original site has expanded by opening a bookshop in a separate building and annexing two further floors of the existing building. 

It opened a site in Lisbon and one in Holland Park (London), with plans to open another London Fields and possibly one in Los Angeles. 

Pembroke originally invested in 2014 through its Ordinary Share Class and to date has invested a total of just under £1.5 million. Three years later its holdings (across the VCT’s two share classes) are currently valued at £4.8 million (a 1.7x multiple). 

Target return 

The B Ordinary Share targets an annual dividend of 3 pence per share and will also aim to pay special dividends where significant realisations occur from the sale of its portfolio assets. Please remember, returns are not guaranteed. 

Exit strategy

Although no defined exit strategy is in place, the managers believe many of the businesses they invest in, if successful, will be attractive to larger companies in the same or similar sectors. 

Risks

As this VCT generally invests in earlier-stage deals, it is higher risk. In addition, it is likely returns could be lumpier. Lastly, as it is a relatively new VCT, investors might have to wait longer for returns, although there has been an early uplift in NAV already for existing investors– note past performance is not a guide to the future.

Please remember capital is at risk. VCTs are high-risk investments and are not suitable for everyone. Investors should not invest money they are not prepared to lose. 

Fees

The initial charge to invest via Wealth Club is 1.5% until 12 January (normally 5.5%). Total annual running costs are capped at 2% of net asset value, extremely low for a VCT.

There is a performance fee of 20% of distributions more than £1 per share, assuming a hurdle rate of 3% simple interest per annum has been met. Whilst the hurdle is relatively low, the fact the investors must essentially receive all their original investment back prior to a performance fee being paid is positive.

The manager doesn’t charge deal or monitoring fees, a welcome move in the VCT world. There are other secretarial and administration fees payable, but not to the managers.

Summary

Despite being a relatively new entrant to the VCT market, the Oakley team is well worth considering, in our view. Oakley has been managing money since 2002 and has £1.5 billion under management. Few people in the industry can match the entrepreneurial credentials of Peter Dubens.

Unlike most VCTs, which focus on consistent dividends, Pembroke is more growth-orientated. Finally, the charges are low compared to other VCTs.

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.