Smaller companies are increasingly turning to venture capital trusts for funding and support during the credit crunch, a survey by the Association of Investment Companies has found.
Smaller companies are increasingly turning to venture capital trusts for funding and support during the credit crunch, a survey by the Association of Investment Companies has found.
Richard Power, manager at Octopus Investments VCTs, says banks have been pulling back on lines of credit creating a major impact on funding for small companies.
‘AIM is awash with investment opportunities – small growing companies that are feeling the double squeeze of banks withdrawing funding and the reduction in AIM VCT cash available to invest due to the changes to the VCT rules,’ he adds.
Similarly, Stuart Veale, managing director of Beringea, says: ‘Growing companies are finding it more difficult to raise bank finance and are increasingly turning to VCTs to fund their expansion plans. Furthermore, companies raising equity finance now have lower valuation aspirations, allowing VCTs to negotiate more attractive investment terms than have been possible over the last two to three years.’
The Association also found that managers believe this trend is set to continue in 2009 with more opportunities and more deals to be made.
Mark Wignall, chief executive of Matrix Private Equity Partners, believes that in 2009 VCTs will become a mainstream source of finance for smaller companies to grow and to finance change of ownership.
‘Set against the high street banks’ traditional commanding market share, this change will create a huge new flow of opportunities for VCTs to consider,’ he says, ‘With VCT cash as King, managers will be in a position to pick, choose and price the best quality proposals. But this change will not benefit all VCTs. Matrix judges the benefit will be to the generalist private equity and venture capital VCTs. It will provide no salvation for the hard hit AIM VCT sector where NAVs have been hit badly and liquidity dried up. Indeed, the winners will be those larger VCT houses with a stable of VCTs with significant liquidity still to deploy.’
Managers are generally optimistic about the prospects for 2009, although they recognise that fundraising will be challenging next year.
Donald Maclennan, partner at Foresight Group, says: ‘Most VCT managers are agreed that achieving decent levels of VCT fundraising in the current tax year is going to be a big challenge. VCTs are ideally placed to help the government in its objective of maintaining the flow of capital to small and medium sized companies and we may need to look to government to improve the attractiveness of VCTs to investors (by increasing the upfront income tax relief, for example) to allow VCTs to meet this role effectively.’
Annabel Brodie-Smith, communications director at the Association of Investment Companies, adds: ‘In tough economic times it’s encouraging to see this level of optimism within the VCT sector. With banks more reluctant to lend, VCTs are well placed to do deals to provide the much needed capital to small, growing companies in their early years. The economic slowdown may well provide good opportunities for VCTs to invest in quality companies at a reasonable price. As well as providing capital, VCT managers have a hands on approach and provide essential advice and support to develop smaller companies.’
