An economic slowdown could be a blessing in disguise for investors in small growth companies, according to Close Ventures.
Increased dealflow, lower entry prices and the prospect of selling companies in a resurgent market are all likely to boost the returns of Venture Capital Trusts (VCTs) over the next few years.
Close Ventures says growth businesses can do exceptionally well during times of recession as heavy competition can allow innovative business models to breakthrough into the mainstream.
Patrick Reeve, managing director of Close Ventures, says: “A recession can actually be a good time to invest in small growth companies. I think this could be a golden age for investors.”
The outlook is particularly good for VCTs, as there is likely to be less competition for growth companies during 2008, according to Reeve, largely due to the credit crunch.
“Banks are becoming more restrictive in their lending, and this is good for Close Ventures as we can step in and provide both equity and debt finance,” explains Reeve.
A lack of funding from banks means small companies are more likely to seek funding from VCTs and those VCTs that can offer both debt and equity are in a particularly advantageous position, according to Close.
Reeve says strong dealflow is also expected in 2008 as a result of changes to Capital Gains Tax taper relief.
As a result of the changes, many small business owners will face the prospect of paying 18% tax if they sell their business after the new tax regime is introduced in April, as opposed to 10% under the current system.
Reeve says this will cause many business owners to sell-up sooner than they might have otherwise, creating a wealth of opportunities for investors.
David Gudgin, director of Close Ventures, says: “Now is a great time to invest with a three to four-year investment horizon. You can buy low now and sell when the market is high again.”
Gudgin adds that many of the best vintage years for VCTs have been those during a recession, rather than shortly before or after, as assets often see high levels of growth in the years immediately after an economic downturn.
Close Ventures says fundraising in 2008 is likely to be difficult owning to economic conditions. However, those that do invest are likely to see good returns in the medium-term.
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