February 11, 2011 7:28 pm

VCT providers rethink energy schemes

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Private investors are expected to increase their use of tax-efficient venture capital trusts (VCTs) this tax year, in spite of a government move to restrict the renewable energy tariffs available to projects backed by some of these schemes.

Last year was a “vintage year” for VCTs, according to the Association of Investment Companies, with new inflows into the sector totalling £340m – making it the fifth most successful fund-raising season since the schemes were created in 1995. In the current tax year, however, total investment is forecast to rise to £450m, based on projections by Tax Efficient Review, the VCT industry publication.

VCT manager Octopus believes the availability of 30 per cent tax relief on contributions has made the schemes an attractive alternative to pensions for high earners. “With continuous changes to pension legislation and the highest rate of income tax now 50 per cent, the trend for using VCTs is gathering pace,” it says.

Beringea, which manages the ProVen VCT and ProVen Growth & Income VCT, estimates that £105m has already been committed this tax year, with a rush of investments expected before the year-end in April.

But this week, energy secretary Chris Huhne announced a review of the Feed-in Tariffs (FITs) scheme for small-scale low-carbon electricity generation, which was to be used by a number of specialist VCTs backing solar power installations – including new schemes being marketed by fund managers Matrix, Ingenious and Foresight.

As result, Tax Efficient Review has warned private investors that some VCT managers will have to change their strategies or withdraw their schemes altogether.

“I see a clear message from the government: the FITs regime is to be targeted away from large installations backed by financial groups including VCTs,” says Martin Churchill, editor of Tax Efficient Review. “VCT providers can respond only in four ways: continue to market a product aimed at low-end rooftop and residential solar; withdraw their products; install projects prior to July; or move the investment emphasis towards other renewable energy categories. Overall, the effects of this announcement must surely be to increase the risk attached to solar VCTs, and reduce potential returns.”

Foresight’s Solar VCT was to have invested in three types of solar energy: residential rooftop, industrial rooftop and ground mounted – but the manager believes it can do enough deals in un-affected residential projects to give investors its target return of £1.30 per £1 share after five years. “The portfolio base may be different, but the message to investors is ‘nothing’s changed’,” says Mike Curry, Foresight director.

Ingenious, which is looking to raise £30m for its Solar VCTs 1&2, is also planning to stay in the market. Many of the projects that it is backing will be able to install their solar panels before any review decisions come into force. “Our understanding is that if there are any resulting changes, these will not affect projects previously accredited for the current FIT,” explains Sebastian Speight, director.

But Matrix, which last month announced the launch of two Clean Energy VCTs investing “predominantly in industrial rooftop solar energy projects, suspended its offer on Friday. In a letter to investors, it says: “The initial view of Matrix and the Boards of the VCTs is that the future of the FIT scheme is now uncertain, which is a material risk to investors.”

As a result, financial advisers are warning investors to exercise caution when choosing a VCT.

“The risk is not low,” says Adrian Lowcock of Bestinvest, the advisory firm. “To be certain of obtaining current FITs rates, they must be operational by July 19. But we see relatively few solar projects currently under development being grid-connected by then.” He has already removed Matrix Clean Energy and Hazel Renewable Energy from his list of recommended funds.

AWD Chase de Vere is awaiting clarification on the government review. “We are not recommending any solar VCTs to our clients until we have this clarification,” says spokesman Patrick Connolly.

Tax Efficient Review is now revisiting its ratings for renewable energy VCTs – but expects investors will simply shift to similar plans. “Our clean/green energy VCT reviews are in abeyance, but I still see the market as around £450m this tax year as money not going into clean/green will go into other planned-exit VCTs.”

These “planned-exit” schemes now account for half of all investment in VCTs as they offer all the tax advantages but with the prospect of a return after five years.

Investments into VCTs earn 30 per cent upfront tax relief on contributions of up to £200,000, if held for five years, with no tax on capital gains or dividend income.

But unlike “generalist” VCTs, which back higher-risk start-up companies, planned-exit VCTs back lower-risk, lower-growth businesses with the aim of keeping capital intact – and generating most of their gains from the tax relief.

Among the new planned-exit schemes open for investment this year are the Ingenious Entertainment and Edge performance VCTs, which back live events with revenues underpinned by licensing deals; the Proven Planned Exit VCT with a focus on health and education; and the Downing asset-backed plan.

Bestinvest is currently “positive” on Edge Performance and Edge Encore, as well as the generalist Matrix VCTs fundraising offer. Chase de Vere prefers traditional generalist VCTs that invest in a diversified portfolio of small companies such as Northern Venture Trust, ProVen Growth & Income and Baronsmead 5.

 Venture capital trusts Investment sought   Tax Efficient Review comment Tax-Efficient Review score 
Open Generalist VCTs   
Downing Absolute Income VCT C share offer £20m  For investors who are looking for a strong exit policy and an attractive tax free return as a potential alternative to pension savings, but with a lower risk than some VCT investments  85/100
Northern Venture Trust -further issue of Ords  £15m  Strong track record, highly diversified portfolio of 40 maturing venture capital investments, and high income: dividend target of 6p represents a tax-free yield of 10% per annum 85/100
ProVen Growth & Income CT O share class  £15m  Focus on unquoted companies generally, with a slight bias towards the media sector. Major personnel changes in 2003 have produced seven good years of performance 85/100
Albion VCTs & Crown lace VCT Linked Top up Offer  £15m  An unusual offer which is a top-up to seven VCTs managed by Albion Ventures, investing up to 50 per cent of the net funds raised in lower risk, asset-based businesses, principally operating in the leisure sector and related areas 84/100
Foresight Clearwater VCT  £20m  Gives investors access to Clearwater and Foresight Group’s proprietary deal flow in UK buy-out and growth capital opportunities 84/100
Matrix VCTs linked offer  £21m  Manager has a focus on structuring investments to back MBOs of established larger, profitable and cash generative businesses 83/100
Octopus Titan VCT 5  £30m  An interesting, and presently unique, product  for investors interested in the potential growth offered by early stage investments 84/100
Open Specialist VCTs   
Foresight 3 & 4 VCT - Attractive to investors looking for top performing mature VCTs, with significant latent value in the renewables portfolio and potential faster exits 85/100
Longbow Growth & Income VCT  £10m   To be reviewed
Open Planned Exit VCT   
Downing Planned Exit VCT 2011 Structured Class £10m Investment in asset backed businesses combined with the attractive returns that might be generated from institutional structured products means Downing’s VCTs may be more attractive than some of the other Planned Exit VCTs 85/100
Downing Planned Exit VCT 2011 General Class  £10m  Aims to invest in low risk asset-backed companies, keep as much as possible of the investor’s capital intact and return approximately 110p (against a net of tax relief cost of 70p) within five to six years 85/100
Edge Performance G share offer  £30m  Aims to invest in a portfolio of entertainment companies, which will promote music, theatre, sports, festivals, family shows and other live events whose returns are underpinned by event licensing arrangements 84/100
Ingenious Entertainment VCT 1 & 2 E & F shares  £20m  Aims to invest in a portfolio of entertainment content & live event promotion companies whose returns will be underpinned by event licensing arrangements and contractual revenue streams equivalent to at least 75 per cent of the amount invested 83/100
ProVen Planned Exit VCT  £25m  Focus will be on lower risk investments generally, with a slight portfolio bias towards the health and the education sector. However ProVen have not run a Planned Exit VCT before 82/100
Open Clean/Green VCTs   
Foresight Solar VCT  £40m  Could prove attractive to investors looking for capital preservation, regular income with an exit strategy and a diversified exposure to solar investing in the UK and Europe. Under review
Downing Planned Exit VCT 2011 Low Carbon Class 320m  Unlike others in the renewable sector is that Downing has already completed investments in solar and wind… which demonstrates both dealflow and that they have received HMRC advance assurance. Under review
 Ingenious Solar VCT 1& 2   £30m Aims to return in the range £1.08 to £1.30 per share based on a low cost, lower risk asset class, with further upside potential. Expertise of manager’s team and the investment adviser should be of significant benefit To be reviewed
Source: www.taxefficientreview.com

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