Review - Puma 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.
This latest offer in the Puma family of VCTs seeks to raise £30 million for Puma 12. The VCT is a limited life VCT and will have a wind-up vote between the fifth and sixth anniversary.
- Lends money to businesses with freehold assets
- Focus on healthcare, hospitality & leisure and development projects
- Tried and tested formula for accessing VCT tax breaks
- Emphasis on limiting downside risk
Shore Capital manage the Puma VCTs. Shore launched in 1985 and is itself listed on AIM. Shore provides equity research, market making, and corporate finance advice and manages about £200 million in VCT, EIS and IHT products. There is a team of 8 managing this £200 million pot, headed by Eliot Kaye. The vast majority of its VCTs have been limited life ones, similar to Puma 12.
Target Return and strategy
The philosophy is to keep equity exposure and risk in the VCT to a minimum; as such the target return of £1.10 per £1 invested at launch is uninspiring. The manager is more concerned with ensuring the net asset value doesn’t drop below 90 pence per share than growing it substantially above £1.
The strategy is to use as much of the funds in the VCT as possible to loan money to businesses with freehold assets that can be used as security against that loan. VCT rules obviously have to be complied with regarding the amount that can be invested in equity and loan stock. However the charge taken over the underlying assets or property will conservatively cover the entire investment. The loan pays a modest rate of interest to the VCT; the idea being that the loans are as risk free as possible and those that charge much higher rates of interest are consequently taking more risk with the capital. The underlying assets the business must have need to be easily saleable, property is the preferred asset. According to Mr Kaye, whilst they have had defaults on underlying investments, they have always had their original stake returned in full once they have taken steps to sell the property backing the loans.
The ratio of loan to value of the underlying property is usually in the region of 50-60% - giving adequate cover even in the event of a fire sale or downturn in the property market.
Healthcare, hospitality & leisure, and development projects are all expected to feature strongly in this VCT; the pipeline of new deals is strong according to Mr Kaye as the banks are still not keen on lending. Development and construction could be up to 50% of the portfolio.
It will take the full three years to invest in qualifying deals, in the meantime, they will still keep funds raised working and earning income for the VCT by investing in short term, asset backed loans that are not VCT qualifying. Similar to the longer term deals, they will still be asset backed and have first charge over the assets.
The investments are designed to repay after the fifth anniversary and aren’t your typical VCT deal as the emphasis is on returning the capital invested, and not on making a profit as is more usual with VCTs. However the ultimate exit strategy for loans and investments that aren’t repaid is to effectively foreclose and sell the property that underpins the value and achieve repayment that way.
As this VCT will be heavily exposed to the property market to back up the investments, if they had to rely on selling these assets in a property downturn to recover the investment, then there might be a shortfall. However, the typical loan to value is between 50-60%.
The initial charge is 3%, before any Wealth Club discount. The annual management fee is 2%, with an additional 0.35% each year in administration fees. The annual cap on running costs is 3.5%. The manager is entitled to receive deal completion and monitoring fees. In addition, the manager will receive 20% of any distributions over £1 as a performance fee. The charging structure is fairly standard; however the performance fee hurdle could be slightly higher in our view.
The Puma family of VCTs has become a tried and tested way of accessing VCT tax breaks. The manager does everything it can to limit the downside risk, and its limited life VCTs have broadly delivered on their objectives. The initial tax break forms the majority of the return for investors, and the underlying investment will always have a level of asset backing – normally freehold property. Whilst unexciting, the team is experienced in this style of VCT management, and although there are clearly no guarantees, the ingredients are in place for more of the same with Puma 12.
Read more about Puma VCT
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