Industry opinions differ over whether the skills developed in one area of investment will be applicable to others
Fund managers are beginning to straddle venture capital trusts and small-cap funds, causing discussions over regulatory requirements for venture capital fund management.
As the VCT market matures, large fund management houses are recognising the opportunity and jumping on the bandwagon. A trend is emerging for new entrants into the VCT market to capitalise on the reputation of their star small-cap fund managers.
At first glance, the skills of a small-cap manager seem transferable to venture capital, especially as more VCTs invest in Aim quoted stocks. But some believe the investment dynamics are too diverse to be applicable to both.
Michael Denny, chairman at Northern Venture Managers, said the skill sets of a small-cap manager and a venture capital trust manager are very different. He said: 'To my knowledge, there is little evidence of small-cap fund managers having any success in unquoted companies. Aim stocks are quoted, however, so there is scope for managing both a small cap and an Aim trust.'
Others welcome the inclusion of small-cap fund managers into the venture capital trust industry, believing diversity can only add to skills across the board.
David Thorpe, managing director private equity at FIS and chairman of the British Venture Capital Association (BVCA), said: 'I think it is healthy to have different people in the venture capital market as investors get a greater choice and the managers can learn from each other.'
Despite agreeing that both types of managers will enhance the industry, he added that small-cap managers come at life from a different angle. He said they are not exposed to the in-depth due diligence and active management needed for investment in unquoted companies. 'I would certainly never regard myself as a small-cap fund manager,' he added.
A venture capitalist needs due diligence and has to take the investment all the way from investigating a company to monitoring it and sitting on the board, agreed Denny.
He added: 'VCT managers are far more involved in the actual running of a business and trying to add value to the company. There is also a lot more to do in terms of disposing the company. The timescale between the two types of funds is also different. It takes years to realise investments in a VCT. You can't just sell when you want to.'
If small-cap fund managers were to manage unquoted stocks they would have difficulty in identifying investable companies. Corporate financiers will often promote companies they want to get off their hands but managers would get into dangerous territory if they relied on this, according to Denny.
'The corporate financier will want a fee and is likely to embellish the truth in order to get the company away,' he said. 'This will inevitably result in the manager and the investor hitting rocky times. Venture capitalists really have to understand the fundamentals of a company.'
Denny questions the wisdom of a small-cap manager advising on a VCT, unless it is to help determine the sector weightings of the fund.
He added: 'As helpers on specific companies, I cannot see where small-cap fund managers can add value.'
The difference between the two skill sets is that small-cap managers have to understand markets, whereas venture capitalists have to understand companies and be able to contribute specifically to the business, Denny said.
He added that Imro requires VCT managers to have a certain level of experience and competency in venture capital. The named manager running a venture capital trust must have been in venture capital and deemed to be competent for at least three years.
Different sets of exams need to be taken in order to manage a venture capital trust and a more mainstream collective investment vehicle such as a unit trust.
Denny said: 'There is now some talk that new entrants into the VCT market must have two or more such qualified people on the fund. The fear is that large investment managers will buy a registered individual in order to comply with regulations and build a VCT around that person without having the proper experience on board to enter into the market.
'This would be a dangerous situation as the public will be sold the trust on the back of the fund manager name and will believe a lot of the marketing.'
The upcoming Unicorn Aim VCT is marketing itself on the fact that the managers also run the Eaglet Investment Trust. Denny said: 'This is worrying because the consumer can get taken for a ride and be taken in by the fact that a manager also ran small caps. Eaglet has a good track record but I cannot understand how you really make the leap from small-cap to venture capital.'
Robert Mitchell, director of private equity at Friends Ivory & Sime, said that as a proportion of the Eaglet trust is invested in Aim, this expertise can be a benefit to the Unicorn VCT.
Thorpe said: 'There are one or two fund management groups including our own that straddle unquoted and Aim VCTs. Bill Brown and Robert Mitchell run 3PC, which stands for private, primary and public capital. They invest in companies with a two-year period before flotation and then hang onto it once it floats. Additionally, they run the Aim VCTs at FIS.'
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