the group's growth opportunities VCT offers investors the chance to invest in flexible, smaller unquoted companies
In an uncertain stock market environment where investors have suffered heavy losses and see little chance of recouping those losses over the near term, the attractions of investing in smaller unquoted companies via a venture capital trust may at first appear limited.
However, manager of the new Aberdeen Growth Opportunities VCT, Bill Nixon, says that smaller companies, whether unquoted or Aim-listed, can offer distinct advantages over larger sized companies when it comes to growing their businesses quickly.
'Entrepreneurial management and shorter lines of communication can allow smaller companies to be much nimbler in their chosen markets, and they can often gain market share quickly from their larger competitors,' he said.
In addition, well-managed, cash-generative, and profitable businesses still exist despite the economic downturn, he claims. It is just that they are cheaper, and this is obviously good news for investors.
Traditionally, demand for VCTs picks up towards the end of the tax year due to their generous tax breaks. These include the potential for tax-free capital gains, as well as the ability to defer up to 40% of existing capital gains from other investments.
But Aberdeen wanted the trust up and running for when this trend kicks in later this spring, and, as such, decided to go ahead with the trust's launch at the end of September last year, despite the events of 11 September. The tax advantages associated with VCTs are attractive, but the case for investing in private equity is also undoubtedly strong. According to the British Venture Capital Association, the returns achieved by private equity funds raised between 1980 and 2000 measured to the end of December 2000 were 26.4% over five years and 20.4% over ten years.
During both periods private equity funds outperformed the FTSE 100 and FTSE All-Share indices.
The Aberdeen Growth Opportunities VCT is a generalist VCT meaning that it invests in a wide spread of industries and is not limited to certain areas such as technology or only companies listed on the Alternative Investment Market (Aim).
Nixon, who has more than 11 years of experience of private equity investing, says that the time is right to launch a generalist VCT as opposed to a technology-focused one, as the technology sector remains a difficult area.
He said: 'We will look as this area if we feel it is appropriate, although we have currently rejected most companies in this sector on the basis that they are too expensive.'
One of the key criteria for making a successful VCT investment is making sure that the people seeking the finance have the same vision, according to Nixon. As such, Aberdeen has strict controls in place to test this vision, and whether it is compatible with other members of the group.
The exit vision of these people is also tested to see whether they feel the same about what point it is best to call it a day if the project does not go according to plan.
Historically, Nixon has invested in well-established unquoted companies in the food, distribution, manufacturing, transport, leisure and service industries.
The new fund is set to follow a similar pattern and while Nixon has not ruled out early stage investing, he says the bulk of the fund will be in later stage opportunities.
The degree of risk attached to investing in VCTs tends to be higher than other collective investments exposed to larger companies quoted on the stock market, but Nixon explains that this risk is reduced with the new fund as it aims to keep a diversified portfolio.
He said: 'It is a case of if we have invested in a furniture manufacturer, then we clearly would not invest in a second one if it came along. With one or two exclusions, we would consider any sector. At any particular time, there are going to be sectors that are in favour and others that are not, depending on what is happening in the world.'
Nixon goes on to say that VCTs are set to deliver excellent returns over the next 12 months, as the collapse in some of the quoted stock markets means that there are now cheaper deals than ever before.
He said: 'While money is difficult to come by this year, the current round of VCTs this year will be the best of the bunch. There is less competition to win mandates and the price we are buying into these companies at is cheaper than it has been for some time. Until a year ago, valuations were outrageous.'
Investors must weigh up the advantages and disadvantages of these investments to see whether they are suitable for them. One of the arguments against such investments is that they can be highly illiquid.
Whereas fund managers who invest in quoted companies can generally sell their shares quite easily, it can be many months ' or even years ' before a buyer can be found for a private company.
Nixon explained: 'This is accepted in our business. It always has been and always will be.' In addition, many early stage companies fail to achieve their full potential or even go out of business.
On a more positive note, the fund managers of VCTs may have greater influence on the company invested in as they will often take a prominent place on the board.
He said: 'You are much closer to the companies with VCT investing and you are in a position to make a difference,' says Nixon.
'Quoted fund managers are slightly more removed from the process. If the companies we invest in ever underperform, then we will lobby for changes. We are a meaningful shareholder.'
To qualify as a VCT, at least 70% of the portfolio must be invested in new subscriptions in 'qualifying holdings' within three years from launch. These are smaller companies which are quoted or whose shares are traded on Aim. With the Aberdeen Growth Opportunities VCT, money will be gradually invested in quoted companies over this three-year period. In the meantime, any monies not invested in these areas will be kept in a range of gilts, fixed interest bonds, and a small amount of stock market-based investments (these will be Aberdeen funds, and there will be no double-charging).
While most of the companies in the portfolio approach Aberdeen in the first instance, Aberdeen also approaches companies which it sees as attractive contenders for the VCT portfolio.
Last year, however, Aberdeen Murray Johnstone Private Equity Managers was approached by more than 1,000 companies requiring funding. In this kind of environment, generalist VCT managers should benefit from a rich stream of quality deal flow.
Aberdeen Murray Johnstone Private Equity, which is a division of Aberdeen Asset Managers, has seven offices throughout the UK, making it one of the largest regional office networks of any UK investment manager specialising in private equity.
Nixon said: 'Overall, VCTs are recognised as an excellent investment vehicle to gain exposure to private equity. They bridge the funding gap for smaller growing businesses; at the same time, they offer the investor access to a diversified range of companies with exciting potential rewards in the long term; not forgetting the various tax benefits.'
The trust has an initial charge of 5% and annual management charge of 2%, which increases to 2.5% after November 2003. Minimum lump sum investment is £3,000 and maximum lump sum investment is £100,000.
Fund manager: Bill Nixon
Nixon joined Clydesdale Bank in 1980 holding roles within the Corporate Banking and Commercial Credit divisions.
Between 1991 and 1999 he was an Investment manager for Clydesdale Bank Equity, the private equity business of National Australia Bank (UK).
In 1996 he was appointed a director of CBE and in 1998 became head of that business. He managed the sale of CBE to Aberdeen Development Capital in 1999 and joined the Aberdeen Group as director in charge of the private equity team in Glasgow.
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