Elderstreet Draper Esprit VCT

Elderstreet Draper Esprit VCT is a generalist VCT that provides development and growth capital and largely invests in unquoted companies but also offers investors some exposure to AIM. This is a £10 million top-up offer of the existing share class, with a £10 million overallotment facility. Prospective investors will be buying into an established and diverse portfolio. 

Highlights

  • Established VCT
  • Merger with Draper Esprit adds weight and expertise
  • Good history of dividends to date (past performance is not a guide to the future)
  • Dividend target return of 3p to 4p per share (not guaranteed)
  • Well-diversified portfolio
  • £6,000 minimum investment 

The manager

Elderstreet Investment Limited is a venture capital company founded by Michael Jackson. From 1987 to 2006 Mr Jackson was the chairman of FTSE 100 company Sage Group and has directorships of several portfolio companies. The four key players that make up the investment management team have in aggregate more than 50 years of venture capital experience.

Elderstreet recently reached a co-investment agreement with Draper Esprit, one of the leading venture capital investors involved in the creation, funding and development of high-growth technology businesses. 

Draper Esprit will share deal flow, management experience and investment opportunities. In addition, the ability to join a funding syndicate of Draper Esprit funds will bring access to larger deals in companies that have higher revenue in high-growth sectors.

In the long run, the combined investment expertise could prove a fillip to the VCT. Investors can expect the existing portfolio to be turned over in its entirety and replaced by new opportunities selected by Draper Esprit. However, it will take time for the new investments to make a material impact and realising the existing portfolio may not be straightforward. 

Strategy and target return

Elderstreet’s investment policy is not set to change significantly as a result of the Draper Esprit deal. The intention remains to build a diversified portfolio of companies, generally with proven sales and always with the potential to grow, which are seeking development capital. 

The current portfolio is spread across a wide variety of sectors: from property to logistics and from gas utilities to the manufacture of sports ammunition. Indeed the largest holding is Lyalvale Express, a producer of shotgun ammunition in the UK. The average deal size is £1 million. 

In future, the average initial deal size is likely to rise to £1.5 million. However, Elderstreet is able to syndicate deals of up to £10 million with the Draper Esprit co-investment funds. The focus for new investments will be in four sectors: consumer technology, enterprise technology, hardware and healthcare.

Since April 2017, the VCT has committed to five new investments totalling £5.39 million, as detailed below:

  • £1.5 million committed to Push Doctor, Europe's largest online GP marketplace 
  • £1.285 million committed to StreetTeam / Verve Software, leading peer-to-peer sales and marketing software for live entertainment
  • £755k committed to IXL Premfina, which develops insurance broking software 
  • £1.5 million committed to IESO, which delivers one-to-one online clinical therapy 
  • £350k committed to Kaptivo, which developed and online collaboration tool for whiteboards

The VCT aims to provide good long-term tax-free returns to shareholders through a combination of dividends and capital growth. The target dividend is 3p per ordinary share, which is equivalent to a 6.7% tax-free return based on the estimated offer price after factoring in initial tax reliefs. Please note, dividends are variable and not guaranteed. 

Performance

Since its launch in 1998, the VCT has paid cash dividends of 99p and produced a total return of 159.1p per Ordinary Share, a 98.9% tax-free uplift on the net investment. This is based on unaudited Net Asset Value of 61.6p per Ordinary Share as at 30 June 2017.

The most recent unaudited valuation of the portfolio shows an overall unrealised loss of £1.3 million. Distributable reserves as at 30 June 2017 were £8.5 million. This is equivalent to 10.5p per share at a £10 million subscription, and 9p per share if the current offer is fully subscribed at the increased level of £20 million. 

Please note past performance is not a guide to the future. Returns and dividends are not guaranteed and capital is at risk. 

Exit strategy

Given the diverse nature of the portfolio and the varying maturities of the investee companies, there is no ‘one size fits all’ exit strategy.

The most recent exit was in April 2017. The VCT sold its holding in Concorde Solutions Limited realising a small profit over cost. There may be future returns of a further 10% of the realised proceeds if the escrow amount is paid in the future. Concorde had made good progress in building its software product but failed to make any meaningful sales headway. The VCT board decided it was, therefore, better to sell its holding and to recycle the funds into new investments or dividends.

Prior to that, the VCT sold its stake in SMART Education Limited in December 2015, realising a profit of £3.6 million. SMART is a fast-growing teacher supply agency in which the Elderstreet VCT first invested in October 2005, backing a previously known successful management team. A further contractual escrow of £1.5 million was paid in December 2016. 

Please note past performance is not a guide to the future. Returns are not guaranteed and capital is at risk. 

Risks

The common risks associated with smaller companies investing exist within this VCT offer. VCT investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future.

There is a risk the Draper Esprit and Elderstreet merger is an unhappy one but the signs are positive thus far. 

Fees & deadlines

The initial charge (usually 5.5%) is 2.0% for Wealth Club investors. This includes an early bird incentive of 1.0%, available for applications received and accepted before 4:00pm on 14 February 2018. After that, the early bird incentive will reduce to 0.5% for applications received and accepted before 4:00pm on 1 March 2018. 

The annual running costs (including VAT) are capped at 3.5% of the VCT's net assets.

Performance fees may apply, but the hurdles have not been met for this current financial year.

There is a buyback facility in place: this is typically done at a 7.5% discount to Net Asset Value – not guaranteed. 

Please see the Prospectus for full details. 

Unless the offer is oversubscribed before these dates, the following deadlines will apply:

  • Early bird saving of 1.0%: 14 February 2018 at 4:00pm
  • Early bird saving of 0.5%: 1 March 2018 at 4:00pm
  • Allotment in the 2017/18 tax year: 5 April 2018 at 10:00 am
  • Final closing date: 31 May 2018 at 4:00 pm

Our view

This is a well diversified portfolio that gives investors access to a wide range of sectors. Some of the existing portfolio companies are stagnant. The co-investment agreement with Draper Esprit should help reinvigorate the portfolio, with the addition of more dynamic early-stage companies with good growth potential. However, the impact of this may take some time to materialise.


Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based 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. 03.01.2018

The details

Type
Generalist
Target dividend
3p to 4p per share
Initial charge
5.5%
Initial saving via Wealth Club
3.5%
Net initial charge
2.0%
Annual rebate
 
Funds raised / sought
£150,000 / £10 million
Deadline
14 Feb 2018 for early-bird saving

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