04/12/2011

By Modwenna Rees-Mogg, AngelNews

When you start to hang out in the VCT industry, there is one individual who crops up as the one person you must listen to. That person is Patrick Reeve, Managing Partner of Albion Ventures, a fund manager which manages some £230m of funds across eight Venture Capital Trusts. Patrick, amongst his many activities, sits on the Public Policy Committee of the British Private Equity & Venture Capital Association, as well as its Venture Capital Committee. He has been involved in raising and managing VCTs since their inception in the mid 1990s. He is man who is recognised by all as knowing what he is talking about.

It made sense therefore to capture his thoughts on the state of the VCT market in 2011, particularly in the light of current Government interest in the role Venture Capital funding of enterprises will play in the economic recovery.

Interestingly, considering that Albion invests across a wide range of sectors from IT and med tech to hotels, cinemas and gyms, top of head for Patrick at the moment is the importance to the UK of exploiting our world leading academic science base in the commercial world and the role that venture capital plays in this issue. He commented positively on the interest the government is taking in this issue and praised the focus on capitalising on the infrastructure projects being undertaken to benefit academic institutions with world beating scientific research — the new University College London campus being built near the Olympic Park in Stratford being a case in point.

In his view, government support for existing and new clusters of scientific excellence will create the pool of spinouts from which the Dyson’s ARMs, Autonomy’s and Oxford Instruments’ of tomorrow will emerge. Great tech opportunities like these will, without doubt, attract investment from expert investors, such as many of the VCT and other VC fund managers operating in the UK today. The trick long term will be to focus on “world-beating” research not just any old research.

We chatted about hi-tech investing generally. In Patrick’s view, to be successful tech investment should be balanced with investment in other sectors — ranging from the relatively much lower risk sectors such as service businesses and those with a degree of asset backing and across the spectrum of tech but not necessarily such heavily R&D dependent sectors, such as IT. Environmental investment of all types is also now an intrinsic part of this mix. He takes the view that if you only invest in the highest tech opportunities both you and your backers will go mad from the stress of managing the accompanying risks!

You also need to balance your portfolio with a range of investments that will mature at different times — go for some that will give relatively quick but lower returns and mix them with some where you are holding out for the £multi million return over the longer term. And he pointed out that in hi-tech it’s the nimble and continually innovating companies that not only win once, but time and again (he cited Apple vs. Nokia & RIM). Size does not necessarily mean “not risky” in rapidly developing sectors and markets.
Patrick is also keen on getting everyone on board to help the Government reshape the economy post the Credit Crunch. “Don’t moan about them; get on board with them and give them ideas to discuss and debate amongst themselves and with everyone,” he told me. In his view, no government yet has been as receptive to the views of the populace as the Coalition, today.

With the Government introducing changes to VCTs to enable them to make larger investments at any one time and into larger businesses, I asked him how the opportunities for VCT fund managers were changing.

“We are seeing an awful lot of opportunities and the quality is excellent. The smaller ticket MBO market is particularly lively at the moment as large corporates look to restructure, giving management teams an opportunity to extract a strong, but non core operation from its parent. These deals are great for VCTs because there is loads of growth potential, but you can see the historical trading record of the business and the performance of the management team. The team also has a good base upon which to build a much larger business based on their ideas and plans. These businesses will create a lot of jobs over the next decade, contribute to GDP, pay a lot of tax and will generate exports.”

Average investment per deal is inevitably on the rise given the fact that inflation is putting pressure on the costs companies wanting to grow will need to incur. It’s relatively rare for Albion to invest less than £1m in a first tranche these days; usually its more like £2.5-3m. Patrick did mention that Albion has recently put £750,000 into one life sciences opportunity, but that the overall trend is definitely upwards. “That is not a bad thing in itself — if there is any lesson to be had from the US, it’s that well funded companies can grow quicker — much quicker.”

The season is now well and truly open for VCTs. Patrick told me that Albion’s own fundraising across all its VCTs is going well — better than last year and that, interestingly, each investor is, on average, investing 30% more money into the Albion Top Up Offer than they did last year. And the wealth managers, such as the private banks, are now paying much closer attention to VCTs than in the past. “They like the fact that they are quoted and therefore transparent.” It seems from what Patrick is saying that investors can expect to hear more about VCTs in the future from their wealth advisers, as well as traditional channels, such as independent financial advisers. In my view, the VCT market will benefit hugely from the in house analysts at these firms, sliding their rulers over both new issues and secondary market shares.

In Patrick’s view, the reason for this is not just the general noise about backing entrepreneurship, although this is very important. It is because the relative returns for investors in different asset classes are shifting. Pensions in particular are now much less attractive and VCTs are picking up money because they are a legitimate and simple way to shelter tax, as well as because of the quality of the underlying businesses. VCTs deserve to stand shoulder to shoulder with other quoted Venture Capital businesses and indeed much of the investment trust market. And the wide variety of VCT funds on offer this year from high quality fund managers means that investors have a great ability to build a balanced portfolio of VCT shareholdings within their overall equity exposure.

Earlier this year Albion took over management of the Spark VCTs and separately Foresight took over the Acuity VCTs. Did Patrick think there would be more consolidation in the sector? “There will be further consolidation” he told me, “not least because there will be some players looking to leave the market. But what I am keeping an eye out for is some of the established VC Llp fund managers who do not current have a VCT offer in their mix to enter the market. It would be good for them, good for private investors to have an opportunity to back them and although you might think otherwise, it would be great for the existing VCT fund managers to be joined by other experienced VCs, especially those who have an international offer and can lend their knowledge to the market.”


Albion’s £15m top-up offer is now open. For more information or to discuss any of the issues in this article, please contact Patrick Reeve at preeve@albion-ventures.co.uk or call him on 0207 601 1850.


Join us on
Follow @freshbusiness