Draper Esprit VCT

Draper Esprit VCT raised £20 million in an oversubscribed share offer in 2020-21.

An intention to fundraise has been announced for 2021-22. The offer is expected to open in November, with the amount sought not yet confirmed. We will update this page as soon as new information is available. 

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Register your interest – Draper Esprit VCT

Review: Draper Esprit VCT 

Below is our review of Draper Esprit VCT’s previous offer (February 2021). This page will be updated when the new offer opens. 

Draper Esprit VCT – formerly Elderstreet VCT until 2019 – is a generalist VCT that invests in early-stage digital technology businesses, often co-investing alongside Draper Esprit Plc. 

The latter, which is listed on the London Stock Exchange, 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, Revolut, the digital challenger bank, and TransferWise, the money transfer service.

The VCT portfolio continues to transition towards Draper Esprit’s early-stage digital technology focus: 50% of the trust is now invested in Draper Esprit-sourced investments, 23% is in cash, and 27% is in legacy investments (February 2021). Recent Draper Esprit-sourced investments include Thought Machine, named one of Europe’s top 50 fintech companies to watch, Endomag, one of Britain's top 50 fastest-growing private tech companies which has developed technologies to improve breast cancer care, and Freetrade, an innovative share dealing service provider. 

In our view, the new management and investment strategy could reinvigorate the portfolio, although there are no guarantees. 

Draper Esprit VCT has net assets of £55.3 million. The 2020/21 offer seeks to raise £5 million with an overallotment facility of £15 million.

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.


Highlights

  • 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 now transitioning towards digital technology
  • Target dividend of 5% of NAV– variable and not guaranteed

The manager

The VCT, founded in 1998 and previously known as Elderstreet VCT until 2019, is managed by Elderstreet Investments. In 2016 Draper Esprit plc, an AIM-listed venture capital group, acquired a significant minority stake in Elderstreet Investments and in February 2021 Elderstreet Investments became wholly owned by Draper Esprit Plc.

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 35 has made 125 investments. The team is supported further by the Draper Ventures Network (“DVN”). Based in Silicon Valley, and with connections in 60 cities across the globe, DVN is a community of funds and startups, founded by Tim Draper (an early backer of Skype, Baidu, and Tesla) which seeks to provide support to portfolio companies looking to scale globally. 

Today, Draper Esprit Plc has a market cap of £1.1bn (Feb 2021) 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.

Investment strategy

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 – Draper Esprit VCTPod 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 returned 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 acquired from Morrisons in 2014.

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 impact

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 NAV per share has since risen to 49.9p (September 2020), after paying dividends of 3p in 2020. 

In its year-end report March 2020, the VCT 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, and previously one of the UK’s fastest-growing companies, accounted for £3 million of this reduction. Its holding value stood 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. The holding value of the business has since been written up by £1.7 million in the six months to 30 September 2020. 

Current portfolio overview

The Draper Esprit VCT has net assets of £55.3 million and a portfolio of 39 venture capital investments, with the top 10 accounting for 50.7% of net assets (September 2020).

The current portfolio is split between legacy holdings (made prior to the manager’s acquisition by Draper Esprit plc), newer technology-focused investments sourced by Draper Esprit, 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.

In the eighteen months to September 2020, Draper Esprit Plc invested £10.6 million into seven new and seven follow-on investments. The Prospectus also provides details of £2.4 million of commitments to invest into four companies made after 30 September 2020.

As at the date of the prospectus (February 2021), investors in the offer will by buying into a portfolio made up of 50% Draper Esprit sourced investments, 23% cash, and a legacy portfolio of 27%, 26% of which is invested in four companies: two are AIM quoted (Access Intelligence Plc, and Fulcrum Utilities Services Plc) and two are unquoted (Fords Packaging, and Lyalvale Express).

Source: Elderstreet Investments, September 2020.

Examples of portfolio companies

Thought Machine – Draper Esprit VCTThought Machine – recent investment 

Thought Machine is one of the UK’s leading fintech companies. It was founded in 2014 by former Google engineer Paul Taylor (pictured) along with a senior team of ex-Google employees to try and “fix the foundations of banking”. 

They saw the majority of the banking industry runs on outdated technology built in the 1970s, which is expensive to maintain and doesn’t allow it to keep pace with young fintech companies and innovate fast enough. To address this, Thought Machine has built a core banking engine, Vault, which uses cloud-native technologies – the same technologies which underpin Google, Netflix, and Spotify. It is cheaper to run and scale up than legacy systems, could give better insight into customer data and make it easier to launch new products quickly. Thought Machine’s customers include established institutions like Standard Chartered, Lloyds Banking Group, and Sweden’s SEB, as well as challenger banks like the UK banking startup Atom. Thought Machine is expected to save banks such as Lloyds in excess of £100 million.

In the six months to September 2020, the VCT invested £2.4 million into the business alongside Draper Esprit Plc, which invested £16 million as lead investor in a £63.8 million Series B funding round to fund a major expansion drive in the US and Asia. 

Endomag – Draper esprit VCTEndomagnetics (trading as Endomag) – largest Draper Esprit-sourced investment 

Endomag’s mission is to improve the standard of cancer care by helping women with breast cancer avoid surgery when it isn’t needed, and experience better outcomes when it is.

Endomag has developed a minimally-invasive, and radiation-free surgical guidance system, which can locate early-stage and impalpable tumours, and help determine if the cancer has spread. The system has been used in over 130,000 procedures across 550 hospitals in 40 countries and is the subject of 12 clinical publications, all confirming its efficacy compared with current standards. 

The business is ranked as one of the fastest-growing private technology companies in the UK, according to the Sunday Times Sage Tech Track 100, having grown sales by an average of 80% per annum over the past three years – past performance is not a guide to the future. In November 2020, Draper Esprit Plc provided additional support, investing $14 million as the lead investor in a $30 million investment round.

The Draper Esprit VCT has invested £0.9 million into the business, the holding is valued at £2.9 million, 5.2% of net assets. (September 2020) . 

Performance and dividends

The dividend target for the VCT is 5% of NAV per annum, not guaranteed. Dividend history, including special dividends is shown below. 

The portfolio is transitioning towards a new investment strategy deployed by a new investment manager. The management of the VCT is likely to diverge significantly from its historic activities, with any future dividends increasingly reliant on successful exits from the new digital technology investments.

Source: Morningstar. Past performance is no guide to the future. Dividends are variable and not guaranteed. The bar chart shows dividend per share paid in each calendar year to December 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 Dec 2015 – 31 Dec 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. 

To retain the tax benefits, VCTs should be held for at least five years. If you sell VCT shares and reinvest in new shares of the same VCT (including any mergers) within six months, tax relief can be restricted. 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.

Please note: the publication of an Investment Summary document is expected shortly. It will be available on this page as part of the offer document as soon as published. 

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
Performance fee 20%
Annual rebate from Wealth Club (for three years) 0.10%

More detail on the charges

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

The VCT offer 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. You will find the terms and conditions for annual rebates within our Terms of Business.

Our view

This is a VCT in transition. Draper Esprit, which has in the past backed some of the most successful UK tech startups – from Graphcore to Transferwise and Revolut – is starting to make its mark on the VCT. Now 50% of the trust portfolio is in Draper Esprit–sourced investments, including some of the UK's fastest-growing early-stage tech companies.

Recent Draper sourced additions to the portfolio include Thought Machine, one of Europe’s leading fintech companies, Ravelin, a global leader in fraud prevention, Freetrade, an innovative new share dealing service, and Endomag, a developer of innovative cancer treatment. Each of these is held within the larger Draper Esprit Plc investment portfolio and could perhaps provide a guide as to the types of company investors might expect in the portfolio as the new manager deploys its investment strategy.

The legacy portfolio now accounts for 27% of net assets of the trust and 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 in the past, are no longer in the portfolio. 

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. 

How to invest

An intention to fundraise has been announced for 2021-22. We will update this page as soon as new information is available.

Register your interest here

https://www.wealthclub.co.uk/venture-capital-trusts/draper-esprit-vct/#register

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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.

The details

Type
Generalist
Target dividend
-
Initial charge
-
Initial saving via Wealth Club
-
Net initial charge
-
Annual rebate
-
Funds raised / sought
-
Deadline
Coming soon
Last updated: 16 February 2021

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