VCTS which are utilising share buyback schemes are offering greater shareholder value, according to ...
VCTS which are utilising share buyback schemes are offering greater shareholder value, according to John Gregory, director at Noble & Co and fund manager of the Enterprise VCT.
There is a definite drive to improve market liquidity and give shareholders a better deal when exiting a fund, said Stephen Edwards, managing director at ProVen.
VCTs offer a number of tax benefits on new issues provided the shares are held for three years. As a result, few investors want to sell for a number of years and even less want to buy old issues, which miss the tax reliefs. This supply/demand imbalance means any shares that come onto the market are sold at a very high discount, according to Edwards. He said: "This is negative for the market, the trust and the share holder who is selling, which is why there is growing recognition of the benefits of a share buyback arrangement."
VCTs have always traded below net asset value (NAV) but are often trading at more of a discount than the typical 10-15% discount on investment trusts, Gregory said. To prevent such large discounts, a number of managers have instituted an agreement ensuring that a share will be bought back at/or around the NAV.
The issue price of the ProVen VCT was 100p and the current spread to sell is 80p-100p, Edwards pointed out. He said: "This is not a good deal for the share holder and the board of a VCT should be happy to buy at a smaller discount, because people who sell under extreme circumstances should not be penalised. We buy it back for about 90p so the shareholder gets more than expected, the trust buys at a discount and the existing shareholders make a marginal profit."
Gregory said: "It is an excellent indicator to investors that a fund manager cares about its share holders and the market as a whole."
The system is a safety valve to help see the VCT through the first five years of the trust, after which time performance figures should inject more liquidity to the market, Edwards said.
There are two ways of avoiding highly discounted NAVs. Edwards said: "We can either make sure that the trust performs exceptionally well from the start, which is difficult, or have a share buyback arrangement."
The Enterprise VCT, which Gregory manages, can buy back a maximum of 15% of issued share capital based on the average of the previous five-day mid-market price or 1p below the NAV, whichever works out to be lower. "We usually look to reissue new shares to maintain the overall size of the fund.
"We get only a few requests a year to sell shares and all are distressed sales demanded by circumstances rather than wanting to get out. We can now do this without doing harm to the shareholder and help ongoing shareholders and the liquidity of the market."
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