The economic and environmental benefits of VCTs

Brexit has taken place, but there remains much uncertainty about the UK’s future relationship with the EU and how that will affect trade. What impact is Brexit having on the UK’s dynamic smaller companies? Where are managers finding investment opportunities today? What are the economic and environmental benefits of investing in small but ambitious companies?

Case studies below of investee companies in industries ranging from fashion to technology demonstrate the impact of VCT investment and support from the Downing VCTs, the Proven VCTs, Octopus Titan VCT and the British Smaller Companies VCTs. The accompanying comments from VCT managers explain why they invested in these companies and what effect their investment has had.

At a media roundtable held today by the Association of Investment Companies (AIC), Will Fraser-Allen, Manager of the Albion VCTs, Dr Paul Jourdan, Co-Manager of Amati AIM VCT and Charlie Winward, Manager of the Northern VCTs, discussed their recent investment activity, the effect of Brexit on smaller companies and their overall outlook for the sector.

Their views have been collated alongside comments from Trevor Hope, Head of Growth Investments at Mobeus Equity Partners, Managers of the Mobeus Income & Growth VCT and Rodney Appiah, Director at Foresight Group, Manager of the Foresight VCTs.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “This year marks the 25th birthday of VCTs. Since then-Chancellor Kenneth Clarke launched them in 1995, VCTs have channelled vital investment into the UK’s small companies.

“As the UK departs Europe and embarks on a new course, there has arguably never been a more important time for investment in our most ambitious businesses. Since their inception, VCTs have created more than 27,000 jobs and driven over £1.4 billion of exports. Venture capital investing also can have positive social and environmental impacts, making VCTs an interesting prospect for the increasing number of investors who are looking for returns on their money beyond the financial.”

What will Brexit’s influence be on smaller UK companies?

Will Fraser-Allen, Manager of the Albion VCTs, said: “Unsurprisingly the smaller unquoted companies most impacted by Brexit will be those selling to EU customers and those relying on an EU workforce living in the UK. The software businesses within the Albion VCTs’ portfolios tend to sell globally, with the US being the largest target market. It is reduced access to European software developers that poses the greater challenge, as well as the risk of a broader economic slowdown.”

Dr Paul Jourdan, Co-Manager of Amati AIM VCT, said: “Brexit will bring ongoing uncertainties into the business environment for at least another year, and more likely two to three, whilst a new trade deal with Europe is worked out and then implemented. Of greater importance to small unquoted companies will be the quality of government decision making in general and the emphasis that is put on continuing to cultivate an environment supportive of young and innovative businesses.”

Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “Successful smaller unquoted companies are by their nature and necessity fleet of foot and are used to reacting to factors outside their control. However, saying that, there are more than 5 million SMEs in the UK, many of which are reliant upon importing services and material as part of their offering, exporting their goods and services and/or requiring the ability to employ non-UK nationals. All of these areas now have a level of uncertainty. Ultimately Brexit may create greater opportunities but in the short term this uncertainty will make an already difficult job that much harder.”

Where are you finding opportunities?

Dr Paul Jourdan, Co-Manager of Amati AIM VCT, said: “We're excited about stocks in two sectors in particular: video games and healthcare.

“The video games market continues to grow steadily relative to other leisure areas as the graphic and design possibilities continue to improve. The demand for content shows no sign of abating particularly as Apple and Google enter the market. We think this is a trend set to continue. Amati AIM VCT's exposure is through Frontier Developments, one of the UK's leading video game studios based in Cambridge, and Keywords Studios, which provides a wide range of services to video games developers worldwide.

“The healthcare sector is seeing an extraordinary array of technologies which have been developed over the last 20 years reach commercial stages, which has created a rich seam of innovation. The VCT has a good deal of exposure to this theme through recent investments in companies such as Angle, which is commercialising Parsortix, a device which harvests circulating tumour cells from the blood, creating opportunities for early cancer diagnosis.”

Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “We are excited by the roll out of 5G – not only the significant improvement in person-to-person communication but also machine-to-machine communications. Access IS is a Mobeus VCT portfolio company which provides data capture technology for transportation and ticketing, with over 200 airports around the world currently using their technology. Access IS are working on innovative solutions for smart cities which will be supported by 5G technologies.”

Rodney Appiah, Director of Foresight Group, Manager of the Foresight VCTs, said: “There are a number of sector themes evident in our portfolio, namely e-commerce, B2B enterprise software and healthcare services. Since Foresight Private Equity’s inception in 1985, investing in tech-enabled businesses has been at the heart of what we do and this continues to be the case today. The impact of technology in driving disruption, accelerating innovation, increasing business productivity and supporting the rapid scaling of UK businesses provides a fertile ground for successful VCT investing and hence guides our sector focus.”

Will Fraser-Allen, Manager of the Albion VCTs, said: “Albion’s focus is on B2B software, healthcare and tech-enabled businesses in the UK. Current themes include Digital Risk Management, where we recently invested in Elliptic, a leading provider of anti-money laundering compliance and forensic investigative services in cryptocurrencies; and Machine Learning and Automation, where recent investment Speechmatics is leading the way in speech recognition and transcription technology.”

What are the economic, social and environmental benefits of VCT investing?

Rodney Appiah, Director of Foresight Group, Manager of the Foresight VCTs, said: “At Foresight, we believe that the incorporation of ESG principles into our investment approach will not only generate attractive economic returns, but also broader long-term benefits for the regional communities in which our investee companies operate. We formally integrate ESG principles into our investment decision-making and investment management practices.

“We believe that VCT funding can be a great enabler for companies to improve their internal processes and create a better workplace for employees whilst also creating new job opportunities within their communities. One of our portfolio companies, Mowgli, a chain of Indian street food restaurants, has nearly tripled its number of employees since investment from 120 to over 300 with the opening of new sites supported by our investment.”

Dr Paul Jourdan, Co-Manager of Amati Aim VCT, said: “AIM VCTs support companies at the initial stages of a flotation on AIM. Over the last decade AIM has become one of the most successful junior stock markets in the world, and much of this success can be traced back to companies which floated with the support of VCT investors. Some of these, such as Frontier Developments, which we invested in 6 years ago, now employ in excess of 500 staff in the UK.

“Because VCT-supported companies are often deploying new technology, it is inevitable that some of our investments will involve technologies which are aimed at tackling climate change and this is an area in which we are keen to support promising businesses. Last year we invested in Velocys, which has developed the technology to adapt the Fischer Tropz gas-to-liquids process to enable the production of jet fuel from waste products. Planning permission for the first full scale commercial plant is being sought currently at Immingham in the UK, in partnership with Shell and British Airways' parent company, IAG.”

Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “From an economic perspective, by investing in smaller and younger companies which might otherwise struggle to raise capital, VCTs are supporting their growth which provides a positive impact for the UK including increasing employment, knock-on economic activity and greater tax take.

“MPB, a Mobeus VCT portfolio company which provides a digital platform to facilitate the trading of used photo and camera equipment, has grown its number of employees from 20 to 120 post the Mobeus initial investment in 2016. MPB is also a great example of a ‘recommerce’ business as it is encouraging and facilitating the use of second-hand equipment rather than the production of new cameras and therefore is having a positive environmental impact.”

Female-founded businesses

Rodney Appiah, Director of Foresight Group, Manager of the Foresight VCTs, said: “Foresight understands the importance and value in backing a diverse range of entrepreneurs and we are proud of our track record in this area. At present, of the 1,800 opportunities our team reviews every year, fewer than 5% are founded or led by women, yet around 15% of our portfolio companies have female founders.

“From an environmental perspective, Foresight’s approach incorporates a tried and tested framework to improve the environmental footprint of the businesses we back. This can be achieved through established and adopting environmental policies, improved recycling and resource management, supporting responsible suppliers and helping to identify sustainable operating practices.”

Outlook for the sector

Will Fraser-Allen, Manager of the Albion VCTs, said: “VCTs have recently celebrated their 25th birthday and reflecting over those years the industry can be proud. VCT money has created thousands of successful companies and more than 27,000 jobs, adding millions to the UK economy. Over the next 25 years, VCTs will be critical to fostering even more business opportunity and success that can, despite Brexit, create growth and jobs for the smaller companies in the UK technology sector that are the future of our economy.”

Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “My outlook for the VCT sector remains generally positive. As a model for encouraging investment by individuals into what must be considered a relatively higher-risk financial product, it continues to attract strong levels of capital. VCTs are delivering on their remit of investing that capital into younger companies that might struggle to raise risk capital elsewhere. If VCT managers can continue to show positive returns to shareholders whilst also supporting the development of the UK’s future industry leaders then I believe the industry will be in a good place.”

Rodney Appiah, Director Foresight Group, Manager of the Foresight VCTs, said: “The UK remains an excellent place to start, scale and sell a business, with broad pools of talent and an entrepreneurial culture. As a regional investor, we know that entrepreneurial ambition is not confined to London & the South East. We believe the VCT funding environment, supported by fund managers like Foresight, plays a key role in supporting investment activity across the UK.”

“Notwithstanding Brexit, our outlook for the VCT market remains positive.”

The impact of VCT funding: company case studies

The Downing VCTs – ADAY

ADAY is a women’s apparel business with a mission to elevate the standard of women’s wardrobes using innovative fabrics with a low-carbon footprint. The business educates its customers on the cost-per-wear of garments they buy, encouraging more conscious consumerism and fewer purchases.

Downing One and Downing Four VCTs recently invested £2m in ADAY.

Kostas Manolis, Partner and Head of Unquoted Investments at Downing, said: “ADAY plays to the sustainability theme by using recycled or sustainable materials and encouraging smaller wardrobes as opposed to the single-use, throw-away mentality of many fashion companies. Resource efficiency is firmly woven into the DNA of ADAY’s operations, and one of the many things that impressed us about the company was the consistent double-digit growth they achieved with a remarkably small full-time staff of nine people. ADAY is truly a technology-enabled brand where data-driven decision making is used from product design to marketing optimisation.”

The ProVen VCTs – DeepCrawl

The ProVen VCTs invested £2m in DeepCrawl in 2019, taking their total funding for the company to £3.5m. DeepCrawl is a software-as-a-service business that allows many of the world’s largest enterprise brands to monitor and improve the performance of their websites. By fixing technical and performance issues, DeepCrawl helps accelerate the growth and profitability of its clients which include IKEA, Nestlé and MADE.com.

DeepCrawl has expanded since the ProVen VCTs invested. Its headcount has more than doubled and the company has significantly grown its presence in the US, with more than 20 team members based in its New York office and over 60% of its revenues generated through US customers.

Stuart Veale, Managing Partner at Beringea the Manager of the ProVen VCTs, said: “DeepCrawl has scaled over the course of our investment to become an international success story. When we first invested, the business had a compelling product and a talented team based primarily in London – the company has since scaled rapidly, built a substantial client base in the US, and secured further investment to enable its accelerating expansion.

“This story of growth is testament to the support that can be provided through VCTs, backing innovative entrepreneurs as they seek to scale up and build global businesses.”

Octopus Titan VCT – Elvie

Elvie is a femtech business whose mission is to improve women’s lives through smarter technology. Their products include a silent breast pump which has been a consumer favourite with tens of thousands of women currently on the waiting list to order.

Octopus Titan first invested in Elvie in 2016 and made a follow-on investment in 2019, taking its total investment in the business to £6.4m. This funding is helping the company accelerate research and development and distribute across America, Europe and Asia. Over the course of Octopus Titan’s investment, Elvie has grown its employees from 17 to 87 (412%).

Paul Latham, Managing Director of Octopus Investments, said: “At Octopus we’re passionate about supporting UK entrepreneurs and want to continue to support them to build the big businesses of tomorrow. Companies in our Titan portfolio have created more than 700 new jobs in the latest year recorded, adding to the more than 2,000 jobs created since 2015. VCT investment also helps companies scale internationally, with two-thirds of our Titan portfolio now having an international office and generating revenues from outside Europe.”

The British Smaller Companies VCTs – Panintelligence

The British Smaller Companies VCTs invested £2.5m in Leeds-based software company Panintelligence in 2019. The Panintelligence ‘Pi’ suite of software enables businesses to use data to visualise trends allowing them to lower costs and inform strategic decisions.

The company announced an expansion to the US in spring last year and the VCTs’ investment is helping it address this opportunity by growing their team in key areas such as sales, marketing and development.

Mike Clarke, Investment Director at YFM, Managers of the British Smaller Companies VCTs, said: “We quickly saw the value that Panintelligence delivers to its customers through an embedded product. The Pi Dashboard has the potential to be deployed across the globe.

“Panintelligence is exactly the type of high-growth business we want to support. We are bringing the capital that will enable the leadership team and first-rate executive board drive the business forward.”

-Ends-

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Notes

1. 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 363 members and the industry has total assets of approximately £202 billion.
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