Draper Esprit VCT
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Review of the 2019/20 share offer
Draper Esprit VCT – named Elderstreet VCT until 2019 – is a generalist VCT that will invest in unquoted technology investments.
The VCT has recently undergone a change of management following a period of muted performance. Now it adopts Draper Esprit’s investment strategy and invests in early-stage digital technology businesses.
Draper Esprit is a renowned investor in cutting-edge digital technology businesses and has backed a number of companies which have achieved unicorn status. Examples include Graphcore, the Bristol-based AI processor developer, and Revolut, the digital challenger bank.
The new investment strategy seems to be bearing fruit. The sale of Pod Point, the UK’s leading installer of electric vehicle charging points, delivered a 2.2x gross return for the VCT: note past performance is not a guide to the future.
Legacy investments now account for £12.2 million, or 33.2% of the net assets of the trust, key underperforming assets have been removed and, in our view, the change of management and investment strategy could reinvigorate the portfolio, although there are no guarantees.
- Established VCT which now focuses on unquoted technology investments
- Managed by one of Europe’s leading venture capital managers
- Sector focus on consumer and enterprise technology, deep tech, and digital health
- Portfolio is making a transition towards digital technology
- Target dividend of 3p per share – variable and not guaranteed
The VCT, founded in 1998 and previously known as Elderstreet VCT, is managed by Elderstreet Investments. In 2016 Draper Esprit plc, an AIM-listed venture capital group, acquired a significant minority stake in Elderstreet Investments, with an option to acquire the remainder of the business. In January 2019 the VCT was renamed Draper Esprit VCT.
Draper Esprit was founded in 2006 with the ambitious goal of empowering Europe to invent the technology companies of the future and compete with the US and Asia. To date, its team of 34 has made 125 investments.
Today, Draper Esprit Plc has net assets of £660 million and is one of the most active venture capital firms in Europe. The manager has a reputation for backing some of Europe’s most innovative growth companies, having invested in several tech unicorns, including Transferwise, Revolut, Graphcore, UiPath, Peak Games and Cazoo.
The manager tends to invest in Series A and B funding rounds of knowledge-intensive, early and growth-stage technology companies. Draper Esprit also manages an EIS fund and its plc balance sheet alongside the VCT – it is expected that the EIS and VCT will co-invest on some deals.
Watch a video interview with fund manager William Horlick:
The collaboration with Draper Esprit plays a key role in the investment strategy.
Draper Esprit’s reputation could allow the VCT to punch above its weight, enabling it to attract deals normally out of reach for a small VCT. Indeed, the VCT’s investment strategy focuses on four sectors in which Draper Esprit has considerable experience and an impressive track record.
1. Consumer technology
Companies the manager believes have exceptional growth opportunities in international markets underpinned by new consumer facing products, innovative business models and proven execution capabilities.
Online money transfer service Transferwise and digital challenger bank Revolut are two examples, although they are not part of the VCT portfolio.
2. Enterprise technology
Companies developing the software infrastructure, applications and services that could improve productivity and reduce costs for enterprises.
Employee benefits and rewards platform Perkbox is an example, although not part of the VCT portfolio.
3. Hardware and deeptech
Companies developing differentiated technologies that underpin advances in computing, consumer electronics and other industries.
Graphcore, which has created a processor for machine learning and AI applications, is an example, but not part of the VCT portfolio.
4. Digital health and wellness
Companies using digital and other technologies to create new products and services for the health and wellness markets.
Online medical consultation service Pushdoctor is an example. It was backed by Draper Esprit and is in the VCT portfolio.
In addition to supporting deal flow and co-investments, the association with Draper Esprit provides potential exit routes and follow-on funding, particularly if a company becomes too large to qualify for VCT investment.
Exit track record
Over the five financial years to 31 March 2020, the VCT realised investments worth £15.4 million, generating gains of £2.3 million. It should be noted the track record of the VCT spans a period of change both of the manager and the investment approach: please bear this in mind when forming a view on performance.
Pod Point – recent exit
Pod Point is an example of a new investment sourced by Draper Esprit which recently achieved an exit. The Draper Esprit VCT invested £0.86 million into the business in 2018 alongside other Draper Esprit funds, Barclay Capital and QVentures.
At the time Pod Point was becoming a leading provider of electric vehicle charging points, having installed more than 40,000 throughout the UK. Since the investment, Pod Point has continued to grow rapidly, partnering with leading housebuilders, car manufacturers and supermarkets.
In 2020 Pod Point was acquired by EDF Energy. The acquisition is expected to return approximately 2.2x gross multiple on investment cost to the VCT.
Worldstores Group – example of failure
As is to be expected with early-stage investments, not all succeed. One example is Worldstores Group, an online retailer of home and garden products.
One of the early Draper Esprit EIS investments, Worldstores Group had two associated companies: Achica, a membership-based luxury furniture retailer and Kiddicare, a nursery and childcare supplier.
Combined, Worldstore Group had sales of around £100 million as well as over 45 million website visits per annum. However, in 2016 the business began to struggle and became short of working capital. The company was set to go into administration but was rescued in a buyout deal with homeware retailer, Dunelm.
Draper Esprit invested £4.3 million in total and the investment was written down completely.
Covid-19 has impacted the net asset value of the trust, which has fallen from 57.1p per share in September 2019 to 46.0p in March 2020.
The VCT has reduced the value of several of its holdings, total impairments amount to £5.7 million. StreetTeam Software Limited, trading as Pollen, which operates a social ticketing system for travel, festivals and nightlife, accounts for £3 million of this reduction. Its holding value now stands at £0.14 million. However, the business has since raised a substantial new funding round in May 2020, which could support it through the current challenging trading conditions.
Current portfolio overview
The current portfolio is split between legacy holdings (made prior to the manager’s acquisition by Draper Esprit plc), newer technology-focused investments, and cash which will be invested in further technology investments. As the new investment strategy is implemented, it is expected that the legacy portfolio will continue to decrease.
The Draper Esprit VCT has net assets of £36.7 million and a portfolio of 24 trading companies, 18 of which are new growth technology investments made by Draper Esprit (31 March 2020).
In the financial year to March 2020, the VCT invested just under £5.2 million into 9 companies: 4 follow-on deals and 5 new investments.
The legacy investment portfolio now accounts for £12.2 million or 33.2% of the net assets of the VCT.
Examples of portfolio companies
Hadean Supercomputing – recent investment
The VCT invested £400,000 in Hadean Supercomputing Limited in March 2019. Hadean has developed a cloud computing platform that supports developers in running their applications at any scale. Hadean’s ambition is to provide developers with unlimited computing power to unlock new understanding, ideas, and innovations.
Initially, the application, known as the Aether Engine, was developed and tested by holding a massive multiplayer online battle involving 10,000 players, the largest ever fought, without any interruptions. The previous world record was 6,142 players. With further development, the team believes its technology has wider commercial appeal outside the gaming sector, in areas such as medical research. Hadean has recently begun work with the Francis Crick Institute to simulate cancer cells undergoing metastasis.
The investment forms part of a larger $9.1 million funding round led by Draper Esprit.
Fords Packaging Topco Limited – largest unquoted investment (legacy portfolio)
A packaging company, Fords specialises in sealed foil caps. Based in Bedford, the business was founded by two brothers in 1924. It pioneered the manufacture of sealed foil caps for milk bottles, allowing the glass bottles to be returned.
The company has been active within the food and beverage industry for almost a century. Due to the expansion of the business, Fords now assists leading brands in design and manufacturing from product concept to launch. A few of its clients include Tesco, Mars and Nestle.
The VCT has invested a total of £2.43 million into the company since 2013. It is currently its largest holding, representing 17.8% of the portfolio’s value (as at 31 March 2019).
Performance and dividends
The dividend target for the fund is 3p per annum, not guaranteed. Dividend history, including special dividends is shown below. Future dividends will be increasingly reliant on successful exits as the portfolio transitions away from legacy investments towards new digital technology investments.
Past performance has historically been held back by a small number of legacy investments. These have recently been written off and will therefore no longer negatively impact the portfolio, in particular; Baldwin and Francis Limited (-£1.53 million), AngloINFO (-£3.53 million). Past performance is not a guide to the future.
Source: Draper Esprit. Past performance is not a guide to the future. Dividends are variable and not guaranteed. Dividends paid per calendar year to 30 June 2020.
Source: Morningstar. Past performance is not guide to the future. Dividends are variable and not guaranteed. The bar chart shows net asset value and cumulative dividends (paid out) per share for the period 31/12/2014 – 30/06/2020.
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.
Investors should note the legacy portfolio is almost entirely held in only four investments.
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||5.5%|
|Early bird discount||—|
|Wealth Club initial saving||2.5%|
|Existing shareholder discount||—|
|Net initial charge through Wealth Club (new investors)||3%|
|Net initial charge through Wealth Club (existing shareholders)||3%|
|Annual management charge||2%|
|Annual administration charge||See documents|
|Annual rebate from Wealth Club (for three years)||—|
More detail on the charges
This offer has now closed.
Dividend Reinvestment Scheme
There is no dividend reinvestment scheme.
Share buy-back policy
From time to time the VCT may buy back their own shares through the market. From 1 April 2019 it aims 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.
Annual rebate when you invest through Wealth Club
There is no annual rebate.
This is a VCT in transition.
The change of management and investment strategy could help reinvigorate the portfolio. Draper Esprit is a renowned investor in cutting-edge technology businesses, having backed a number of companies which have achieved unicorn status.
In our view, Draper Esprit has the ability to breathe new life into the portfolio.
Legacy investments now account for £12.2 million, or 33.2% of the net assets of the trust. The legacy portfolio is likely to be diluted further as the VCT continues to raise new capital. In addition, the more challenging legacy investments, which weighed heavily on returns, have been written off.
The offer may appeal to long-term investors who are keen to gain exposure to early-stage digital technology businesses, backed by one of Europe’s leading venture capital managers. Investors may be encouraged by the progress of the turnaround to date.
How to invest
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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
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