Baronsmead VCTs

Extended: Early bird saving of 0.5% (existing shareholders 0.75%) until 30 October, or £12.5m raised in each VCT

Early bird saving extension 

The Baronsmead VCTs have announced an extension of the early bird saving (7 October 2020). 

The saving (0.5% for new investors and 0.75% for existing shareholders) was initially limited to subscriptions which represented the first £7.5 million received by each VCT. 

Due to investor demand, the Investment Manager has agreed to extend the saving to the first £12.5 million received by each VCT prior to 30 October 2020.

The Baronsmead name is well known and respected amongst VCT investors. Baronsmead VCT was one of the first VCTs to launch in 1995. Today the two Baronsmead VCTs – Baronsmead Venture Trust (BVT) and Baronsmead Second Venture Trust (BSVT) – are amongst the largest and most diverse of all VCTs. 

Both VCTs follow the same investment strategy and typically co-invest alongside each other. Combined, the VCTs have net assets of £346.8 million (August 2020) and a portfolio of more than 150 companies spread across legacy management buyout (MBO) investments, AIM-quoted companies and newer early-stage growth investments, as well as three Gresham House equity funds, and money market funds.

Over the last 10 years to 31 August 2020, the VCTs have generated a NAV total return of 103.8% (BVT) and 91.9% (BSVT) respectively: note past performance is not a guide to the future. The VCTs aim to make dividend distributions of 7% per annum – not guaranteed. 

The current offer is seeking to raise £40 million with an overallotment facility of £35 million.

VCT Offer capacity Funds raised* Early bird capacity Overall capacity
Baronsmead Venture Trust £20.0m £10.1m £2.4m £9.9m
Baronsmead Second Venture Trust £20.0m £9.5m £3.0m £10.5m
* As at 22 Oct 2020.

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value, so you could get back less than you invest.

Read important documents and apply

Highlights

  • Portfolio of over 150 companies – split between legacy MBO investments, AIM-quoted companies and newer early-stage growth investments
  • Preference for companies within the technology, services, consumer, healthcare and education sectors
  • Target dividend of 7% NAV, not guaranteed
  • 0.10% annual rebate for three years
  • Only available for this tax year (2020/21)
  • Minimum investment £3,000 – you can apply online

The manager

In 2018, the manager of the Baronsmead VCTs, Livingbridge VC LLP, was acquired by Gresham House plc. Gresham House is an AIM-quoted specialist alternative asset manager with a market capitalisation of £221 million (Sept 2020) and £3 billion assets under management across a range of investment mandates, including strategic public equity, private equity, forestry, renewable energy, housing and infrastructure.

The management of the two Baronsmead VCTs and the equity funds (LF Livingbridge UK Micro Cap Fund and LF Livingbridge UK Multi Cap Income Fund) and all 16 members of the Livingbridge VC team have moved across to Gresham House. 

The VCTs continue to be led by the same senior team of four: Bevan Duncan, Ken Wotton, Tania Hayes, and Steve Cordiner. Together, they have more than 50 years’ experience managing the Baronsmead VCTs and are responsible for all aspects of portfolio management and investment strategy. They are supported by an additional eight investment professionals, including two new investment managers and an associate. In addition, Gresham House has recently appointed a Technology Operating Partner, Tamer Ozmen, previously CEO of Microsoft in Turkey, and a Head of Portfolio Talent, Hazel Cameron, who has 20 years of private equity experience. Both appointments seek to provide assistance and add value to the VCTs’ expanding portfolio of early-stage investee companies. 

Investment strategy

The two Baronsmead VCTs are the result of a series of mergers over the years. 

Baronsmead Venture Trust (“BVT”) is the result of the merger between Baronsmead VCT 2 (established in 1998) and Baronsmead VCT (established in 1995). Baronsmead Second Venture Trust (“BSVT”) is formed from the previous Baronsmead VCT 3 (2001), Baronsmead VCT 4 (2001) and Baronsmead VCT 5 (established as Baronsmead AIM VCT in 2006).

Historically the VCTs have invested in a diverse portfolio of unquoted management buyouts and AIM-quoted companies. Following the rule changes to VCTs in 2015, new management buyout investments are no longer permitted, so the Baronsmead VCTs have developed a growth capital investment strategy. 

The VCTs seek to back companies with strong growth momentum, high-quality management teams, proven and profitable unit economics and a scalable sales model. The investment manager typically invests in businesses with annual recurring revenue of £1 million or more.

Investee companies are split into three stages of maturity – emerging, developing, and core – which will help determine the size of the investment. This helps Baronsmead manage risk and create future deal flow for the VCTs if successful investee companies mature. Moteefe, mentioned below, is an example.

In addition to unquoted investments, between 35%–42% of each portfolio is invested in AIM-quoted companies. This asset split helps provide diversification and helps add liquidity to the portfolio.

Exit track record

The Baronsmead VCTs have historically achieved a high level of realisations, which has allowed the payment of generous dividends to date. Over the last two years to August 2020, the VCTs have realised investments in 19 companies, generating total realisation proceeds of £88.6 million. Please note, past performance is not a guide to the future. 

Glide – Baronsmead VCTsGlide – example of previous exit

One of the leading providers of fibre broadband in the UK, Glide specialises in underserved areas of the market such as multi-tenanted buildings and business parks.

Originally known as Cablecom, the company has invested extensively in its own network. It now services more than 100,000 premises across 7 countries. The business has won multiple contracts with universities and property developers across the UK to develop or restructure existing broadband infrastructure.

The Baronsmead VCTs originally backed the MBO in 2007. In 2013, the VCTs sold a majority stake to private equity house Inflexion but continued to support the business. Earlier in 2020, the company was acquired by US infrastructure investor Alinda Capital for a 2.6x return on the original investment. Past performance is not a guide to the future.

CR7 – example of previous failure

Investing in VCTs is not without risk and there have been failures within the portfolio – payment processing company CR7 is an example. CR7’s management team had previous experience in building and exiting businesses in this sector and was looking to replicate the strategy.

The business was split between cash-generative terminal hire and software development, with the former supporting the latter. However, development was more costly and time consuming than originally anticipated. 

Eventually, the investment team decided to sell the company to DNA Payments as the VCTs could not provide further investment. The company was sold for nil proceeds in 2019, generating a total loss of around £4 million across both VCTs .

Covid-19 impact

As is to be expected, the VCTs’ consumer-facing businesses, particularly those with multi-site outlets, such as restaurant chain Pho, have been significantly impacted. However, they represent a small portion of the portfolio. These businesses have been supported by senior investors and encouraged to focus on downside planning and cash preservation. In contrast, a number of the unquoted and AIM holdings appear resilient.

At the onset of the Covid-19 pandemic the trusts’ NAVs fell from 77.1p (BVT) and 82.4p (BSVT) on 31 December 2019 to a low of 62.0p (BVT) and 62.5p (BSVT) on 23 March 2020. However, following a strong recovery led by the AIM portfolio, the trusts’ NAVs have risen to 71.5p (BVT) and 73.7p (BSVT). Each of the two trusts has also paid a 6.5p dividend during this period – past performance not a guide to the future. 

The investment team is confident in the level and quality of deal flow it is currently assessing. The pandemic has accelerated business transformation and changes in consumer preferences. For smaller and more agile businesses, this could provide a significant opportunity to scale rapidly. The team’s current pipeline is heavily weighted towards unquoted opportunities. 

Current portfolio overview

The combined portfolio contains more than 150 companies and has a net asset value of £346.8 million (August 2020). The portfolio is well diversified: £133.5 million (38.5%) is invested in AIM-quoted companies, £79.4 million (22.9%) in unquoted companies and £72.7 million ( 21%) in liquid assets. The remainder is split across three equity funds: LF Gresham House Micro Cap, LF Gresham House Multi Cap Income, and LF Gresham House UK Smaller Companies, with the majority allocated to the highly rated Micro Cap fund.

The portfolio has a bias towards technology and business service companies, particularly those with B2B models. Furthermore, the investment team has identified four sectors of interest: technology, services, consumer markets and healthcare & education. Currently, 68% of the portfolio by value is invested in companies with contracted or recurring revenue business models. 

Importantly, 62% of the investment portfolio is invested under the old rules. Baronsmead expects this part of the portfolio to be the primary driver of performance for the next 2-3 years whilst the newer growth capital portfolio matures.

Over the last 12 months to August 2020, the VCTs have invested £23.8 million, of which £15 million into unquoted investments and £8.8 million into AIM-quoted companies. The manager is seeing more unquoted opportunities in its pipeline at present, particularly as the unquoted portfolio matures and requires follow-on investment.

Source: Gresham House, August 2020

Source: Gresham House, August 2020

Examples of portfolio companies

Ideagen – Baronsmead VCTsIdeagen (AIM-quoted)

One of the world’s quickest growing software companies, Ideagen provides operational assistance to businesses in highly regulated industries. such as aviation, banking, and healthcare.

Ideagen offers a range of software packages, all aimed at optimising business processes and improving productivity whilst reducing costs and strengthening compliance and risk management . This has afforded the company with a wide user base, with clients ranging from Luxembourg Air Rescue to established brands such as Heineken .

In the last ten years Ideagen has expanded rapidly, acquiring 19 companies and increasing its client base by more than 23000%. Recently, it announced trading in the first quarter of 2020 had remained robust with strong demand particularly from the financial services and pharmaceutical sectors .

The VCTs first invested in Ideagen in 2013, backing the company’s buy-and-build strategy. Since 2013, the VCTs have invested £3 million and have realised proceeds and income of £9.9 million, with a remaining investment value of £10.2 million, representing a 6.7x return on investment. Past performance is not a guide to the future.

Moteefe – Baronsmead VCTsMoteefe (Custom Materials Ltd) 

Moteefe is a leading social commerce platform providing digital marketers and influencers with an instant opportunity to sell customised on-demand products globally. The Moteefe platform enables its sellers to market their products for sale to end customers globally, with Moteefe taking payment, organising fulfilment and logistics whilst providing a suite of data and analytics to the sellers. 

The Baronsmead VCTs initially invested £500k in 2017, and have since followed on in a further three funding rounds, taking the total investment to £4.5 million. The Baronsmead VCTs are now the largest shareholder.

Since the initial investment, Moteefe has grown gross sales from £2.9 million in the year to December 2016 to £32 million in the year to December 2019. According to the Deloitte Fast 50, Moteefe is now the fourth fastest-growing technology company in the UK. Baronsmead’s combined holding is currently worth £8.9 million, accounting for 2.6% of the combined net assets of the VCTs.

Performance and dividends

Over the last 10 years to 31 August 2020, the VCTs have generated a NAV total return of 103.8% (BVT) and 91.9% (BSVT) respectively. In 2020, both VCTs have been impacted by Covid-19, although the AIM portfolio appears to have recovered strongly, leading to a material recovery in the net asset value of both trusts. 

The current dividend policy is to pay dividends twice yearly. When setting the dividend for the financial year, the board will use, as a guide, the sum of 7% of the opening net asset value of the current financial year. In 2020, both trusts have distributed 6.5p per share in dividends.

As at 31 August 2020, the VCTs had a net asset value of 71.49p (BVT) and 73.71 (BSVT) indicating a target dividend of 5.0p to 5.2p, respectively. Please note dividends are variable and not guaranteed. The legacy unquoted portfolio along with the larger AIM holdings will be key to supporting the dividend payments in the short-term whilst the portfolio’s early-stage investments mature.

Source: Morningstar. Past performance is no guide to the future. Dividends are variable and not guaranteed. The bar chart shows net asset value and cumulative dividends per share for the period 31 Dec 2014 to 30 Sep 2020.

Source: Gresham House. Past performance is not a guide to the future. Dividends are variable and not guaranteed. Dividends paid per calendar year to 30 Sep 2020.

Risks – important

This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice. 

VCTs are high-risk so should only form part of a balanced portfolio and you should not invest money you cannot afford to lose. They also tend to be illiquid and hard to sell and value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks. 

Tax rules can change and benefits depend on circumstances.

VCTs can now only invest new money in growth capital deals. Management buyouts, replacement capital deals and investments in mature companies are no longer permitted. This results in considerably higher risks.

Charges and savings

A summary of the main charges and savings is shown below. The net initial charge shown includes the Wealth Club saving and any early bird discount. The investment may have additional charges and expenses: please see the provider documents including the Key Information Document for more details.

Full initial charge 4.5%
Early bird discount 0.5%
Wealth Club initial saving 1.5%
Existing shareholder discount 0.25%
Net initial charge through Wealth Club (new investors) 2.5%
Net initial charge through Wealth Club (existing shareholders) 2.25%
Annual management charge Up to 2.5%
Annual administration charge
Performance fee 10%
Annual rebate from Wealth Club (for three years) 0.10%

More detail on the charges

Dividend reinvestment plan

There is a dividend reinvestment plan which allows shareholders to reinvest future cash dividend payments by purchasing existing shares in the secondary market. As these are NOT new shares they will not be eligible for tax relief and therefore will not count towards the VCT annual subscription limit.

Deadlines

  • Apply by 30 October 2020 (noon) or before the first £12.5 million (extended from £7.5 million) is raised for each company (whichever is earlier) to receive a 0.5% early bird discount, or 0.75% for existing shareholders. The early bird rebate will be paid in the form of new shares issued at the relevant offer price.
  • First allotment deadline: 30 October 2020 (noon)
  • Second allotment deadline: 8 December 2020 (noon)
  • Third allotment deadline: 19 January 2021 (noon)
  • Fourth allotment deadline: 16 February 2021 (noon)
  • Final allotment for 2020/21 tax year deadline: 24 March 2021 (noon)

Share buyback policy

From time to time the VCTs may buy back their own shares through the market. The VCTs aim to maintain a mid-share price discount of approximately 5% to NAV. However, there is no guarantee that the VCTs will buy back shares and the discount to NAV could be greater or less than this. Historically, the discount on both Baronsmead VCTs has been closely managed, averaging 5% or less for much of the previous five years to 30 June 2020. 

Annual rebate when you invest through Wealth Club

Baronsmead VCTs include an annual rebate for Wealth Club investors, payable for the first three years. 

This is a rebate of our renewal commission and should be equivalent to 0.10% of the Net Asset Value of the Offer Shares issued to you when you invest. Terms and conditions apply.

Annual rebate when you invest through Wealth Club

The VCT includes an annual rebate for Wealth Club investors, payable for the first three years. 

This is a rebate of our renewal commission and should be equivalent to 0.10% of the Net Asset Value of the Offer Shares issued to you when you invest. Terms and conditions apply.

Our view

The two Baronsmead VCTs are amongst the largest and most diversified of all VCTs. The combined portfolio is spread across AIM-quoted companies, legacy MBO investments, newer early-stage growth investments, three Gresham House equity funds, and money market funds. 

Investors continue to benefit from exposure to the legacy MBO investments, which generate income and provide a source of realisations for both VCTs. This exposure has helped the board maintain one of the most generous dividend policies, and support a 7% dividend yield (not guaranteed). The AIM exposure has also been a source of liquidity, with profits from strong-performing stocks used to fund dividend payments.  

The new unquoted investment strategy, deployed after the rule changes in 2015 now, seems to be embedded within the team’s process. The VCTs have made a number of new and follow-on unquoted growth capital investments in the last twelve months. One in particular, Moteefe, is showing potential, although there are no guarantees. The team expects its unquoted portfolio to begin contributing strongly to deal flow as the portfolio matures, and as companies look to raise capital to take advantage of the changes in corporate and consumer behaviour caused by Covid-19. 

For investors considering adding to their VCT portfolio this year, in our view, the Baronsmead VCTs are a high-quality offering which could add diversification to a wider VCT portfolio.

Read important documents and apply

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision 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.

The details

Type
Generalist
Target dividend
7% of NAV
Initial charge
4.5%
Initial saving via Wealth Club
2% (2.25% for existing shareholders)
Net initial charge
2.5% (2.25% for existing shareholder)
Annual rebate
0.10%
Funds raised / sought
£19.6 million / £40.0 million
Deadline
30 Oct 2020 for early bird saving
Last updated: 16 September 2020

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