Review - Triple Point Income VCT – E Share
This is a limited life VCT with a difference: it intends to wind up after 10-12 years rather than the more usual six years. The Triple Point team look for predictability of cash flow and excellent management teams, which is how they made their name in renewable energy offers.
- 10 to 12 year life anticipated
- Low volatility, cash generative businesses and sectors targeted
- 5 pence annual dividend target after year three, £1.40 total return target
- Four key sectors: crematoria, food production, electricity transmission networks and private hospitals
- Raising up to £30 million
Triple Point was set up in 2004 to take advantage of the attractive VCT tax breaks on offer. Since then it has expanded into EIS and Inheritance Tax Products. In total it manages approximately £330 million. James Cranmer and Ben Beaton are managing partners and the investment team comprises a total of over 25.
Target return and strategy
This new E share class of the existing Triple Point Income VCT is targeting a dividend of 5 pence per share per year from year three onwards. It is a limited life VCT, but rather than wind up after six years, it expects to wind up between years 10 and 12. The managers are targeting a total return of £1.40 per £1 invested at launch. Targets are variable and not guaranteed.
Triple Point’s investment philosophy is straightforward. It looks for potential investments with capital security, liquidity and predictable returns.
Cash generative businesses are preferred as they are more likely to be able to support dividends and increase the attractiveness to future buyers. A typical deal is structured so that 70% of the investment goes into equity and 30% into debt. There will often be a redemption premium on the loan and the coupon should typically be high enough to generate 8.5% annual return on the total subscription, although this is not guaranteed. As well as cash flow, Triple Point will also assess the potential of the market, competitors, and the exit opportunity, among other criteria.
There are four key sectors under consideration: crematoria, food production, transmission networks and private hospitals, although others may also be considered.
Triple Point has invested in crematoria and food production before. Food production is typically “hydroponics”. In simple terms this is the growing of salad crops year round under controlled conditions that can be sold to supermarkets, fulfilling the need for British produce.
It is currently in the process of finalising the first hospital deal in an EIS. It is focusing on small private hospitals (around 25 beds) that specialise in simple orthopaedic surgery and other minor operations that typically have few medical complications and require minimal recovery time, thereby maximising patient turnover.
Finally, transmission networks distribute gas and electricity to and from the National Grid on behalf of utilities companies. For instance, they may provide the last mile of wires bringing electricity to a new housing estate. They adopt and operate the wires and are paid by the utility company at rates set by OFGEM and typically increasing with inflation. Long-term (often 40-year) contracts are usually in place, adding to the transmission network’s resale value.
All deals go through Triple Point’s investment committee. The committee is made up of senior members of the Triple Point team; crucially however these are not the same as the individuals doing the deals. The committee meets weekly and must approve every deal. The VCT board must approve and sign off every deal. Separation of duty between investment deal makers and investment committee is an important feature helping control risk.
Whilst this is a 10-12 year VCT, some of the investments may be sold prior to this if the opportunity arises, typically via a trade sale. Other investments, such as the transmission networks may well be held for the life of the VCT as the value is unlikely to grow, but the income stream remains attractive.
With VCTs with lower investment targets it is crucial that anticipated returns meet expected returns as there is limited growth potential to make up any losses. There will be some construction risk in the portfolio. Typically this is limited to project overruns and the manager has stated they will not be taking planning risk.
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.
There is a upfront fee of 5% (before any Wealth Club rebate) and a 2% annual management fee. The annual running costs are capped at 3.5%. Included in the annual cap is a further 0.25% plus VAT payable to Triple Point as an administration fee and £7,500 in annual secretarial fees. Triple Point also receive deal completion fees of up to 3%. Finally, there is a performance fee of 20% of any distributions over £1 per share. It is unlike this will be paid until the VCT is wound up.
Whilst the return profile is modest, the managers are adept at delivering lower-risk VCTs and EIS. Their track record in this space is excellent. This might seem a departure from their prior products, but it is in many respects similar with investments made in companies that aim to have predictable cash flow and are underpinned in some way. Whilst not exciting, this could be a worthy addition to a VCT portfolio.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aim to highlight investments we believe have merit, but investors should form their own view on any proposed investment.