British Smaller Companies VCTs
Both British Smaller Companies VCTs are now fully subscribed and closed to further applications.
Following the end of the existing shareholder exclusivity period, applications from new investors are now being processed, subject to capacity, in the order they are received.
British Smaller Companies VCT (BSC) and British Smaller Companies VCT 2 (BSC2) are longstanding generalist VCTs managed by YFM Equity Partners, with net assets of £101.6 million and £70.9 million respectively (December 2020).
The two VCTs have shared the same investment strategy since 2010. Today they give investors exposure to 37 companies – 34 of which shared between the two VCTs – across a range of sectors, with a bias towards technology.
Over the last ten years to 31 December 2020, the two VCTs have generated a NAV total return of 123.5% (BSC) and 66.0% (BSC2) and over the last five years have paid total dividends per share of 49.75p (BSC) and 22p (BSC2). Past performance is not a guide to the future; dividends are variable and not guaranteed.
The current top-up offer – the first since 2018/19 – is seeking to raise a relatively small amount: a maximum of £7,050,000 per VCT.
- Two of the longest-established and best-regarded VCTs
- Combined net asset value of £159.6 million (30 Sep 2020)
- Concentrated portfolio with a bias towards technology
- First fundraise since 2018/19 tax year
- Experienced management team, over £300 million assets under management
- Excellent track record to date – past performance is not a guide to the future
- Only available for this tax year (2020/21)
- Minimum investment £3,000 per VCT – £6,000 in total
The British Smaller Companies VCTs are among the longest standing VCTs – BSC launched in 1996 and BSC2 in 2001. Both have built a loyal following amongst investors.
Established in Yorkshire in 1982, YFM Private Equity (“YFM”), the investment adviser, is a specialist private equity business independently owned by the senior management and investment team. It has a strong regional presence with offices in Leeds, London, Manchester, and Birmingham, and has over £300 million in assets under management. YFM has been investing in young, fast-growing companies for over 35 years. It was one of the first asset managers to launch a VCT and is now one of the most recognised and well-regarded names in the industry.
The investment team is led by managing director, David Hall. Mr Hall, a chartered accountant, joined YFM in 2000 and has over 30 years of private equity, venture capital, and fund management experience. Supporting Mr Hall is a dedicated team of 21 investment professionals with over 200 years’ experience between them. The team is subdivided between New Investments (North), New Investments (South), and a Portfolio team, responsible for providing support to its investee companies. In 2020 YFM strengthened the team considerably with six new hires: a new head of growth, two new investment directors, a new portfolio director, and two new investment managers.
Historically, the two VCTs pursued different investment strategies, resulting in different portfolios. BSC focused on management buyouts and growth capital deals, whilst BSC2 focused on very early-stage technology companies.
Since 2010 the VCTs have co-invested alongside one another. Since the 2015 VCT rule changes, which prohibited management buyout investments, the VCTs have followed the same growth capital investment strategy.
The VCTs seek to invest in companies that require funding to support future growth. Typically, a company will be headquartered in the UK and have ambitions to expand internationally. Founders must demonstrate a clear strategy and have a plan to scale the business.
The VCTs will seek to invest £2 to £6 million into companies with at least £1 million in turnover. There is no requirement for investee companies to be profitable at the point of investment.
Whilst the VCTs will consider investments in any sector, there is a strong bias towards technology. Exposure to manufacturing, a sector popular within the old Management Buyout strategy, has reduced substantially. Technology now accounts for four fifths of new investments activity. The VCTs’ exposure to manufacturing has fallen from 30% to less than 1%.
Exit track record
Both VCTs have a history of exits. Over the last three years to 30 September 2020, they have experienced 10 exits, generating proceeds of £64.9 million on an investment cost of £28.5 million. Past performance is not a guide to the future.
A recent example of an exit in 2020 is Business Collaborator.
Business Collaborator – example of previous exit
Business Collaborator, trading as Group BC, is a software business operating within the construction industry. Group BC supplies collaboration software that helps the construction supply chain and asset owners manage all aspects of a construction project: design, procurement, health and safety, and construction management.
YFM Equity partners backed the management buyout of the business in November 2014, investing a total of £3.3 million (£2 million BSC, £1.3 million BSC2). After improving the product and sales proposition and strengthening the company management team, the company was sold to Bentley Systems in March 2020, delivering total proceeds including investment income of £14.5 million.
Hutchinson Networks – example of previous failure
VCT investing is not without risk and some failures are to be expected. One such example is Hutchinson Networks. Established in 2011, the business delivered IT network solutions including a secure, in-house developed multi-cloud platform and a network operation centre to blue-chip and SME customers, both in the UK and internationally.
The company experienced a period of rapid growth as a result of significant new contract wins and forecast this trajectory to continue in 2019 and beyond. Unfortunately, some of the larger contracts suffered delays which resulted in increased funding needs. Although there was still demand for the services, YFM believed the level of additional funding required was such the investment would not generate an adequate return. Consequently, with no other funding forthcoming, the business failed. The VCTs had invested £2.2 million.
The pandemic has had a material effect on the performance of the VCTs’ portfolios, particularly on companies operating within the Retail & Hospitality and Travel sectors, where valuations have been marked down substantially. ACC Aviation, an aircraft charter and leasing brokerage, and Traveltek, a software provider to the travel industry, were marked down by 23.5% and 45.2% respectively. ACC Aviation is a large holding in both VCTs (4.7% of assets in BSC, 8.1% in BSC2).
The Retail & Hospitality Sector contains three companies: Tonkotsu, a ramen restaurant chain, Friska, a coffee shop and café, and Frescobol Carioca, a high-end beachwear designer. Each has enough funding to last through this calendar year on a reasonable worst-case scenario basis. The valuations of the three businesses have been cautiously marked down by 74.5% on average (September 2020). The sector now accounts for 1.7% (BSC2) and 2.4% (BSC) of net assets.
At the onset of the Covid-19 pandemic the trusts’ NAVs fell from 76.1p (BSC) and 55.2p (BSC2) on 31 December 2019 to a low of 64.5p (BSC) and 46.4p (BSCT) in March/April 2020. However, following a strong recovery led by the VCTs’ technology exposure, the trusts’ NAVs have risen to 73.6p (BSC) and 55.0p (BSC2) as at 31 December 2020. In addition, BSC paid 6p in dividends in 2020 and BSC2 paid 3.5p – past performance not a guide to the future; dividends are variable and not guaranteed.
Current portfolio overview
The BSC and BSC2 VCTs have net assets of £97.0 million, and £62.6 million respectively.
Both have relatively concentrated portfolios. The top 10 holdings account for 41.3% (BSC) and 44.3% (BSC2) of their respective net assets. The largest holding in both VCTs is Matillion, featured below, which accounts for 10.2%–11.9% of net assets.
Investments made after the 2015 rule changes now account for 57% (BSC) and 54% (BSC2) of net assets.
The VCTs chiefly invest across five sectors: Technology, Media & Telecoms, Business services, Travel, Retail & Hospitality and Manufacturing. Exposure to technology has grown considerably: the sector now accounts for four-fifths of new investments made since 2015.
The current portfolio breakdown is shown below.
Example of portfolio companies
Unbiased EC1 Limited – recent investment
Unbiased is an online marketplace that connects consumers with Independent Financial Advisers, mortgage brokers and accountants. The company has more than 27,000 such professionals registered on its platform and claims to have helped more than 10 million people find unbiased advice. Over 2 million people visit the site each year.
The VCTs invested a total of £4.9 million (£2.94 million BSC, £1.96 million BSC2) in the business in December 2019 at a pre-money valuation of £11.7 million. The funds are expected to be used to continue to develop the product and to support the expansion of the brand into other sectors.
Matillion Limited – largest holding
With dual headquarters in Manchester and Denver, and offices in Seattle and New York, Matillion is a leading software company. Its software allows customers to extract data from a wide number of data sources, load it into cloud data warehouses, and then transform it into useful, analytics-ready data.
Customers are reported to include Cisco, Amazon and Accenture.
Today Matillion is one of the UK’s fastest-growing private technology companies, ranked 21st in the Sunday Times Sage Tech Track 100, with an average 120.2% p.a. sales growth over the previous three years. Recurring revenue grew to in excess of $33 million in 2020.
The VCTs first backed the business in November 2016, investing £3.5 million, and later followed-on with a further £0.88 million investment as part of a larger investment round with some high-profile US technology investors (Battery Ventures, Sapphire Ventures, Scale Venture Partners). Matillion has since raised a $35 million investment round from the same US investors in June 2019.
The business is the largest holding within both VCTs, accounting for 10.2% (BSC) and 11.9% (BSC2) of net assets (September 2020).
Performance and dividends
Over the last ten years to 31 December 2020, the VCTs have generated a NAV total return of 123.5% (BSC) and 66.0% (BSC2) – past performance is not a guide to the future.
The difference is largely due to the historical difference in investment strategy and portfolio. For instance, some of the companies, such as GO Outdoors, that achieved significant profitable realisations were held in BSC, not BSC2. In future performance is expected to converge.
Over the last five years to December 2020, the VCTs have paid total dividends per share of 49.75p (BSC) and 22p (BSC2) – dividends are variable and not guaranteed.
The VCTs have not set a specific target dividend. In future, as newer growth capital investments take over from old-style ones, dividends could be lumpier.
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.
Please note, capacity – for the offer or any early bird savings – can be reached early, and we may not be notified of this by the VCT in real time.
|Full initial charge||4.5%|
|Early bird discount||—|
|Wealth Club initial saving||2%|
|Existing shareholder discount||—|
|Net initial charge through Wealth Club (new investors)||2.5%|
|Net initial charge through Wealth Club (existing shareholders)||2.5%|
|Annual management charge||2%|
|Annual administration charge||£68k (BSC), £69k(BSC2)|
|Annual rebate from Wealth Club (for three years)||0.10%|
More detail on the charges
The offer will be open to existing shareholders only until 2 March 2021 and, unless fully subscribed, it will be available to new investors from 3 March 2021. New investors can apply now: their applications will be placed on a waiting list and processed from 3 March 2021, subject to capacity, in the order they are received. Previous offers have usually reached capacity very quickly.
The top-up offer closes 1 April 2021 (11am), subject to capacity.
Dividend Re-investment Scheme (DRIS)
A dividend re-investment scheme is available if shareholders wish to reinvest dividend payments by way of subscription for new shares. As these are new shares they should be eligible for tax relief (you will need to claim this on your tax return or directly with HMRC) and the shares will count towards the VCT annual subscription limit.
Each of the VCTs has a current policy of buying back shares at a discount of 5% to the latest published NAV, subject to available liquidity in the VCTs, applicable rules and regulations and market conditions.
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.
Having developed a loyal following over the last two decades, seasoned VCT investors will be familiar with the two British Smaller Companies VCTs.
Once renown for management buyout deals, since 2015, the VCTs have focused exclusively on growth capital investments. Today the two VCTs give investors exposure to a concentrated portfolio of predominantly technology-based early-stage investments, picked by an experienced and well-resourced investment team. The VCTs may add diversification to a wider VCT investment portfolio.
Realisations from the legacy portfolio have aided the payment of generous dividends, whilst the newer investments have supported the net asset value of the trusts. In particular, technology investments, which represent four-fifths of the new investments, appear to have served the VCTs well during the pandemic as they drove the recovery in their net asset value.
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.
- Target dividend
- Initial charge
- Initial saving via Wealth Club
- Net initial charge
- Annual rebate
- Funds raised / sought
- £14.1 million / £14.1 million
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