VCT managers comment on the impact of the pandemic, the Brexit deal and ESG.
VCTs are a vital part of our economy and have been investing in and supporting cutting-edge UK businesses for over 25 years. As we find ourselves in yet another lockdown, with serious implications for the health of the economy, providing investment to these new companies has arguably never been more important.
AIC research has found that VCT-backed businesses have created tens of thousands of new jobs since the scheme was created. But how can VCT investment help young British businesses survive and even thrive during the pandemic and beyond? What is the outlook for the sector, and what are the implications of the recent Brexit deal?
To discuss these issues, a media webinar was held today by the Association of Investment Companies (AIC) featuring Stuart Veale, Managing Partner at Beringea, which manages the ProVen VCTs, Warren Rogers, Head of Downing Ventures and Partner at Downing, which manages the Downing VCTs, and David Hall, Managing Director at YFM Equity Partners, which manages the British Smaller Companies VCTs.
Their comments have been collated alongside views from Jo Oliver, Manager of Octopus Titan VCT, and Rupert West, Managing Director at Puma Private Equity, which manages the Puma VCTs.
Impact of the pandemic on VCTs’ portfolios
Stuart Veale, Managing Partner at Beringea, which manages the ProVen VCTs, said: “We have been remarkably impressed by the resilience, innovation and leadership shown throughout the ProVen VCTs’ portfolio during the past twelve months. During this period we have worked alongside leadership teams to guide companies through the commercial and operational disruption of the pandemic and Brexit, while grasping the substantial market opportunities that have emerged for some businesses as a result of the social and economic constraints of lockdown.”
Warren Rogers, Head of Downing Ventures and Partner at Downing, which manages the Downing VCTs, said: “Many of our portfolio companies have found themselves right in the thick of the pandemic and have seen their businesses grow exponentially during this unprecedented time.
“Across our healthcare portfolio, companies such as Touchlight have been critical components in developing the vaccine with their revolutionising DNA technology. Within our enterprise portfolio sit some of the very best education technology companies in the world, such as EdPlace, who have made the transition to home learning that bit easier for teachers, parents and children. Behind the scenes are the deep tech companies, such as Cornelis Networks, whose technologies are being used to enable huge amounts of data to be processed for COVID-19 research, working alongside the likes of the US government. In all the chaos and sadness, we are proud to see our portfolio rise up to the challenges of this pandemic.”
Investing during the pandemic
Rupert West, Managing Director of Puma Private Equity, which manages the Puma VCTs, said: “COVID-19 restrictions have forced private equity fund managers like us to face the question of whether we’d ever close an investment without meeting management teams face to face. Ultimately the answer has had to be yes, but while video communications have come a long way our model rests on working extremely closely with the companies we back and video calls do have their limits.”
Warren Rogers, Head of Downing Ventures and Partner at Downing, which manages the Downing VCTs, said: “The pandemic has actually driven positive changes to investing. One of them is the pronounced focus on deeper due diligence and data analysis. With the continuing unknowns in the current economic picture, it has forced us to be far more exacting in our assessments. From a logistical perspective, we spend far less time travelling or arranging in-person events. The time and money saved there have been reinvested into research.
“We are, and have been, proactively originating long-term opportunities with top companies who are, or are becoming, category leaders, rather than working on a reactive basis. This requires us to have a strong pipeline of opportunities with different investment timelines. We typically have longer initial engagements where we get to intimately know the company, their technology, and how it fits into our thematic view, rather than just meeting a company, doing quick work, and investing.”
David Hall, Managing Director at YFM Equity Partners, which manages the British Smaller Companies VCTs, said: “Much like our portfolio we spent a few weeks changing our processes and adapting working so that new investment activity could continue. What I think was probably the biggest challenge was reduced face-to-face meetings. Companies choose investors as much as we choose them; making a decision about who your partner is going to be over the next few years is a big one and getting time together was the one factor that it turned out we couldn’t change. So it just became essential to meet, there were more masks, hand sanitiser and open windows on cold autumn days, but it had to be done.”
Implications of the Brexit deal
Warren Rogers, Head of Downing Ventures and Partner at Downing, which manages the Downing VCTs, said: “We see a limited impact due to Brexit. However, we are conscious that there are bound to be unintended consequences that we need to pay attention to. The UK has been working hard to build an economy based on innovation. Despite this, interestingly, the UK government has considerably underinvested in the innovation sector. After the divorce, it remains unclear if many EU agencies and organisations, that have supported some of our portfolio, will continue to fill the void that it seems the UK government is not prepared for yet.”
David Hall, Managing Director at YFM Equity Partners, which manages the British Smaller Companies VCTs, said: “It’s early days and for those moving goods across borders there’s a lot more friction. For many it’s the lack of clarity about what needs to be done and no real source of information other than hard yards on the internet. We’ve also got some financial service businesses that in the short term are seeing revenues with Europe dropping by around a third as a result of the inability to passport. This is meaning that we are, in some cases, perversely increasing headcount outside of the UK and Europe rather than in the UK. This isn’t something we want to do but until we get clarity it will hold us back. It is to be hoped that the friction will reduce and clarity increase, but it is likely to dampen growth in 2021 rather than help it. Thereafter, it will depend on the approach to trade and freedoms.”
Jo Oliver, Manager of Octopus Titan VCT, said: “The companies we invest in tend to have global ambitions and often look beyond Europe to the US and Asia when they start thinking about international expansion. There may be some adjustments required in the short term, but entrepreneurs are uniquely able to adapt and find solutions in changing environments.”
Opportunities and risks
Jo Oliver, Manager of Octopus Titan VCT, said: “There is massive innovation going on wherever you look. Adoption of digital health was already growing before the pandemic, but that has accelerated rapidly in the last 12 months due to COVID-19 and this will undoubtedly continue. E-commerce is another area that’s booming as people adjust their shopping habits and spend more online, with some sectors experiencing a decade of growth in a few months. Some of that online spending will return to the high street once things get back to ‘normal’, but the majority will represent a permanent shift, creating new opportunities for start-ups within e-commerce.”
Stuart Veale, Managing Partner at Beringea, which manages the ProVen VCTs, said: “E-commerce businesses in the ProVen portfolio, such as MPB, My 1st Years, MYCS, and Papier, have been able to harness the spike in consumer demand that arose from the shutdown of physical retail and the shift to online spending. Similarly, software businesses that enable retailers to tap into online demand, like Zoovu, and enable automated customer communication, like ContactEngine, have also thrived.”
Approach to ESG and wider economic and social benefits of VCT investing
David Hall, Managing Director at YFM Equity Partners, which manages the British Smaller Companies VCTs, said: “Over recent years ESG, or impact investing, has been an increasing part of business activity. It may be a high aim but our investors look not only for a financial return but a social return, and there is much evidence that being a ‘better’ business enhances the financial return. Where we can we’ll always have as a goal that a business should be better after the end of our ownership than at the beginning; of course that won’t always work out, but from the outset we’ll agree some objectives with each business that they want to work towards. For many businesses this is around culture, employee engagement, community impact and employee development. This can be anything from developing apprenticeship schemes to skills enhancement, allowing volunteering days to managing home/work balance, a particular focus over the last 12 months. As an example we’ve widened all our medical policies to include families and are undertaking a living wage review of our suppliers. It’s different things for different businesses.”
Rupert West, Managing Director of Puma Private Equity, which manages the Puma VCTs, said: “The ESG mindset has real momentum and is an investable trend which features prominently in our portfolio through companies such as My Kinda Future, a tech-enabled HR firm that works with a blue chip client base to enhance and maintain diversity in the workplace, and Tictrac, a health and wellness platform provided to corporate clients and their staff by major insurers.”
What is your outlook for the sector?
Warren Rogers, Head of Downing Ventures and Partner at Downing, which manages the Downing VCTs, said: “We feel bright and hopeful about all that is to come. Our strategy is to invest thematically into companies that are pioneering in the deep tech, enterprise and healthcare industries. We are working with founders who are focused on the largest global value propositions that drive significant trend shifts and innovation across the industry and plan on continuing to do so. It’s a busy time and we feel like we’re in the forefront of some momentous changes.”
David Hall, Managing Director at YFM Equity Partners, which manages the British Smaller Companies VCTs, said: “We are very, very lucky to work in a sector where the main goal is to seek out and invest in growth. The ‘only constant is change’ adage probably applies. There is always opportunity, and our sector continues to raise cash and deliver returns and as long as it does that its future and that of the businesses in which it invests should be positive.”
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Notes to editors
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 359 members and the industry has total assets of approximately £229 billion.
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