04/01/2012

By Modwenna Rees-Mogg, AngelNews

As you know I am a fan of VCTs and the people who manage them. It grew further recently after I chatted to Jamie Richards of Foresight Group. Foresight is one of the UK’s leading Venture Capital, and indeed VCT fund managers, which has recently built strong credentials in green energy investing.

A VC which is almost 30 years old

Founded some 27 years ago by Bernard Fairman and Peter English as a tech venture capital fund manager, Foresight’s first £20m fund delivered a 4x cash return to its investors. In 1997 it raised its first VCT, which remains one of the best performing VCTs to date. Foresight now has five VCTs under management with in excess of £230m, as well as £50m of EIS funds. It also manages a £60m UK environmental fund for institutional investors.

Since 2008, it has ventured into continental Europe with its E35m Foresight European Solar Fund. Teams in Madrid and Rome also manage solar investments for major European investors. The group is going from strength to strength in the UK too - it has just been appointed to manage the Albany Ventures Fund III Limited Partnership by Alliance Trust Equity Partners - a significant vote of confidence by the institutional fund management community.

A recent Foresight investment delivered a 32x return
Managing VCT money is both an art and a science. Typical headlines around VCTs will stress the tax breaks, tax free dividend yields and, occasionally, highlights of a particularly newsworthy investment or exit. Indeed Foresight itself recently made the headlines for its 32x exit of App DNA which was acquired by Citrix for $92m.

Whether or not your money will be safe in their hands

But what whets my appetite is not this obvious stuff; instead it’s the people and investment strategies behind the numbers and headlines. Only if you are armed with this deeper knowledge can you understand whether or not your money will be safe in their hands and the chances of being able to get it and more back one day. So it was good to get some time with Jamie Richards to explore the depths of Foresight.

Jamie is a former chartered accountant with years of venture capital investing experience. Today he focuses on solar and infrastructure investing, having brought with him from, inter alia, Macquarie Bank, relevant international experience, as well as more conventional early stage tech investing. He also knows what it is like to be an entrepreneur, having been part of a team that set up an internet start-up in the dotcom boom. Jamie leads the infrastructure team at Foresight – all of whom can boast experience of investing successfully in solar projects across Western Europe.

Two recent additions to the team are David Conlon (ex Aleltho Energy, KPMG and Grant Thornton) and Arnoud Klaren (ex US solar technology provider SolFocus). These appointments exemplify Foresight’s determination to appoint individuals who really know what they are talking about when it comes to solar and infrastructure.

Extensive international solar investment experience

This is good news for VCT investors, who benefit from the extensive international sectoral knowledge base of the team. Jamie contributes, in particular, new product initiatives and traction in new markets. And, whilst it rarely gets talked about, it’s the ability to dig into the meaning behind the contractual structure and risk allocation of a project that makes the difference.

We started by discussing Foresight’s extensive solar credentials. It was interesting to hear that it makes investments across the board from large to small projects, with a particular focus on PV energy systems “because solar panels represent low risk capital equipment and predictable cashflows. He made a convincing case to me that Foresight is a safe pair of hands in this sector.

Something startling about Foresight

Then Jamie dropped something startling into the conversation. I am not sure if he really realised at first what an impact his words had on me. It all came about because I asked why the firm’s latest fund had been labelled an infrastructure VCT rather than a solar one.

It was not, he told me, because solar investing has been surrounded in controversy in the last 12 months thanks to changes to Feed-in Tariffs etc al. but because the arrival of David Conlon on the team had opened Foresight’s eyes to a new investment area to which they could directly apply their skills - namely undertaking a buy and build strategy in existing small scale PFI projects around the UK.

My own knowledge of PFIs, until now, has been populist chatter around controversial large scale projects such as hospitals. I certainly had no idea that everything from new street lighting systems to fire stations and libraries across the country (some 750 of them!) have typically been financed by the PFI route, whereby private contractors are granted stable, low risk 25 year build, operate and maintain contracts by HM Government and local authorities to keep our vital services up and running.

Nor did I understand that the ability of the contractors who typically undertake these smaller contracts – to be honest the ones that make a real difference to the quality of my daily life (my family is a regular and enthusiastic user of our local library!) - is being hampered, in this credit crunch era, by the fact that many contractors have considerable capital tied up in existing contracts with little hope of an exit. This is preventing them from releasing the capital needed to tender for steady flow of new projects being tendered by government, towards which they could turn their skills.

Foresight realised that they could use UK private investor money, via a VCT, to buy out these contracts, post build, to enable the contractors to release capital to invest in new projects. In return, the VCT would own a series of well managed stable businesses with contracted reliable cash generative models (thus providing the cash to pay the dividends so loved by many VCT shareholders!) whose principal customer is the British Government in one guise or another.

These businesses have strong operating contracts in place with companies experienced in providing public services – that is why the Government will have awarded the contracts to them in the first place. The contractors are experienced in meeting the operational and maintenance obligations of the contracts. Unlike so many VC investments, these businesses therefore have a much lower commercial risk profile.

UK VCs are typically good at creating value for investors out of buy and build strategies

Many people can invest; a few can maintain a strong investment portfolio, and less can get a regular pattern of positive exits. Where Foresight has been particularly astute is that Jamie’s team has worked out that in this sector it can package up a number of these small PFIs into a bigger entity, which should make a juicy morsel for one of the large scale PFI specialists to acquire at some point. In doing so, it has created a plausible exit strategy.

A regular flow of opportunities for years to come

Thanks to HM Government intention to continue investing in local UK infrastructure, there is likely to be a regular flow of opportunities into Foresight’s pipeline for years. And because PFI projects are a matter of public record from the moment they are announced, Foresight has plenty of lead time to decide which ones are the best to pursue. Meanwhile Jamie told me that Foresight already has a good pipeline of deals waiting for the VCT to be raised.

This is the Big Society VCT style

In my view as long as the day is long, British financiers will be looking for ways to make superior returns by exploiting inefficiencies in commerce. There is nothing wrong with that per se. As always the challenge is whether they do some good for others by using their skills in the way they do.

Via the VCT structure, and thanks to Foresight seeing a commercial opportunity for itself and for its investors in small scale PFIs, it is now easy for private individuals for the first time to get a direct financial interest and therefore influence in how their taxes are being spent on things that will make a difference to their own and their neighbours’ lives. Is that a bad thing? No it isn’t. It’s a good thing.

And in striving to be a successful fund manager in this way, Foresight has also inadvertently created a new way for local and government to be called to account. That’s a very good thing too!

But most of all I am charmed by the idea that both you and I can now invest in something that will ensure that our children can be better educated and that our homes and streets are safer. But most importantly of all, it will help us to retain and develop that quintessential British characteristic of local public sector services financed by the private sector, out of which will emerge, not only the great financiers of tomorrow, but also the great innovators and entrepreneurs that will be so instrumental in human advancement thereon.


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