Hargreave Hale VCT Top-up offer

Transcription

1 Hargreave Hale VCT Top-up offer VCT type: AIM Issue details: Top-up Max sought: 25m Min investment: 5,, or 2,5 in each VCT Offer closes: 215/16 tax year: 5 April /17 tax year: 16 November 216 EXECUTIVE SUMMARY Hargreave Hale have launched a 25 million top-up offer in the 215/16 tax year, looking to raise 15 million and 1 million into their AIM VCT 1 & 2 respectively. There is a further 1 million over-allotment facility in place, split equally across the two VCTs. The default in the application form is for an equal investment across the two VCTs, however investors have the ability to specify their own allocation. These VCTs, as the name suggests, will predominantly invest in companies listed on the Alternative Investment Market, the junior stock market in the UK. However, within the mandate both have the scope to invest in companies likely to list on the AIM market as well as private companies, offering them a broad investment universe. While it may appear that the VCTs are raising a high proportion of capital compared to their current assets under management, we are confident that this is appropriate given their current allocations to qualifying investments within the portfolio, coupled with the fact that cash drag is minimal due to their investment strategy, as detailed below. BACKGROUND VCT Name Launch date Size* (millions) Hargreave Hale AIM VCT 1 ( ) Oct Hargreave Hale AIM VCT 2 ( ) Apr * Size as of 2 November 215 ORGANISATION & MANAGEMENT Hargreave Hale was established in 1988, following the merger of stock broking business Marsden W Hargreave Charges: Annual Management Charge 1.5% Standard Initial Charge 3.5% EQ Investors Discount 1. and Hargreave Investment Management, the latter having been founded by the current Chairman and co-manager of the VCTs, Giles Hargreave. In 21 the business was converted to a limited company, having previously been a partnership, at which point Investec purchased a 35% interest, which remains the case today. Hargreave Hale offer a number of services to clients including investment management and stockbroking. In addition to these services, Hargreave Hale is a fund management firm with approximately 5.1 billion of assets under management. It specialises in investing in small and mid-cap companies predominantly in the UK. More specifically, the small-cap team manages approximately 3 billion of assets, in which the two VCTs sit. The openended funds at Hargreave Hale are marketed under the Marlborough brand, and the current asset split is as follows: Fund HH AIM VCTs Marlborough Nano-Cap Growth fund Marlborough European Multi-Cap fund Marlborough UK Micro Cap Growth fund Marlborough Special Situations fund Marlborough UK Multi-Cap Income fund Marlborough Multi-Cap Growth fund AUM 63 million 96 million 11 million 471 million 925 million 1.3 billion 9 million In comparison with some VCT providers where the management of VCTs is their sole responsibility, or at least a large proportion of assets under management, with Hargreave Hale this this is clearly not the case. However, we do not see this as a wholly negative factor. Hargreave Hale has over 225 employees across 9 offices in the UK, and has the benefit of in-house operations, including execution, Impact of latest regulations For those who have an understanding of the recent changes in VCT regulations, it may appear that AIM focused VCTs would be the most affected, more specifically with regard to the age of a company. However, Hargreave Hale have conducted an in-depth analysis and stress testing into how the regulations would have impacted the 26 deals completed in the 12 months of October 215. In summary, it is likely (although not guaranteed) that 2 of these investments would have qualified under these new regulations, representing 81.9% of invested capital. In light of this, there has been no direct change to the investment philosophy, strategy or investment focus.

2 2. settlement, custody and compliance. More specific to fund management, the investment team at Hargreave Hale comprises 14 members with a combined experience of over 18 years. The VCTs themselves are co-managed by two of the investment team, Giles Hargreave and Oliver Bedford, two extremely experienced fund managers. They are supported by Joshua Northrop, who joined Hargreave Hale in 213 as Fund Manager Assistant. Oliver Bedford joined Hargreave Hale in 24 after serving in the British Army for the nine years. We are encouraged by the fact the VCTs are his sole management responsibilities, albeit he also supports other funds managed at Marlborough through his contribution to the Investment Committee, as well as managing a multiasset portfolio service for individual clients. Oliver focuses on the qualifying portfolio within the VCTs. The non-qualifying portfolio is managed by co-manager Giles Hargreave. In addition to this Giles has managed the Marlborough Special Situations fund (since 1998) in which these VCTs will invest. We have highlighted the performance of this fund in Figure 1: under Giles management it has returned over 2 to shareholders. He also has management responsibilities for the Marlborough UK Micro Cap Growth fund, alongside Guy Field, and the Marlborough Multi Cap Income fund, alongside Sid Chand Lall. Giles heads the Hargreave Hale Investment Committee, and chairs weekly meetings in which both existing and potential underlying investments are reviewed. & each have a board comprising three nonexecutive directors. Giles Hargreave is a non-independent member of both boards, while the two remaining members on each are independent (: Sir Aubrey Brocklebank & David Brock, : David Hurst-Brown & Philip Cammerman). Their roles include overseeing delivery of investment strategy, monitoring compliance with VCT rules, maintaining corporate governance standards and producing reports and accounts for shareholders. Figure 1. Since 1998, the Marlborough Special Sitations fund has returned over 2 under Giles Hargreave s management Percentage return Jul '98 Jul ' Jul '2 Jul '4 Jul '6 Jul '8 Jul '1 Jul '12 Jul '14 Marlborough Special Situations IA OE UK Smaller Companies Figure 2. Proportion of qualifying investments within & as of 2 November 215, based on the HMRC Investment Test 9.7% 9.3% 9.7% 9.3% Qualifying Non-qualifying INVESTMENT STRATEGY & follow a near identical investment strategy, predominantly investing in companies listed on the Alternative Investment Market (AIM), the junior London Stock Exchange, and home to over 1 companies. However, within their mandate, the managers have the flexibility to invest in private companies, most commonly those expected to list on AIM in the future but not a requirement. As an AIM focused VCT, the universe of available opportunities includes both Initial Public Offerings (IPOs) as well as investing in secondary issues of companies already listed on AIM. However, these VCTs will typically invest in the latter, given companies raising secondary funds will typically have a more established track record, and more readily available data given disclosure requirements such as financial performance. Importantly, given the focus on AIM listed companies, the investment will typically be structured as equity, which is deemed to be higher risk relative to investing through loan notes or preference shares. However, as detailed below the team have the ability to use the non-qualifying portfolio to adjust the risk taken within the overall portfolio. The deal flow is sourced from a variety of channels, most notably through meeting the underlying management of investee companies. A basis of real added value, the team saw 13 management teams in the last year alone. The VCT managers benefit from the wider Hargreave Hale investment team, as a boutique UK small and mid-cap fund management house. The VCTs are sector agnostic, instead searching the broader universe for companies with certain key characteristics. The misconception that VCTs invest in earliest stage start-up companies can be dispelled by the Hargreave Hale investment criteria, which focuses on established, profitable or near profitable companies that are often global leaders with pricing power and a competitive position. These companies will be led by strong and experienced management teams and exhibit robust business models and a unique market opportunity, often with intellectual property. In terms of fundamentals, resilient balance sheet and cash flows, with revenue visibility are key.

3 Figure 3. Allocations to qualifying and non-qualifying investments within each VCT (2 November 215). Source: Hargreave Hale 74% 15% 2% 9% Qualifying Investments Non-Qualifying Investments Marlborough Special Situations Cash Corporate Bonds 55% 2 12% 12% The VCTs target allocation to qualifying investments are 8, compared to the HMRC requirement of 7. The next section of this report details the current portfolio allocations to qualifying and non-qualifying investments, as well as the underlying sector exposure. However, we highlight here just how conservative the portfolio positioning is with respect to qualifying investments from the perspective of the HMRC Investment Test, which takes account of when funds were raised in their calculations. Both and surpass the 7 qualifying investment criteria substantially, as shown in Figure 2. The implication of this is a higher degree of leeway when raising new capital, as there is less urgency to deploy capital if opportunities do not arise. This is an important consideration during the due diligence stage and in addition reduces any concerns of inadvertent breaches of HMRC regulations. Both and use the non-qualifying allocation to supplement the return generated from the qualifying portfolio, as well as to reduce the cash drag following a fundraise and finally to manage liquidity. This is achieved by investing up to 75% of the capital raised, subject to a maximum of 2 gross assets, into the Marlborough Special Situations fund managed by Giles Hargreave. This fund invests predominantly in UK smaller companies through a bottom-up stock picking approach. In addition to this, the VCT will also invest in non-qualifying listed equities, where the manager believes he can opportunistically and tactically take advantage of short-term opportunities to make additional incremental gains to the NAV with little additional risk. Essentially, this portion of the portfolio can be utilised to manage the overall risk taken by the VCT, as it also has the mandate to invest in lower risk fixed income securities although it has not had a significant position since 29. PORTFOLIO CONSTRUCTION & ACTIVITY As AIM focused sector agnostic VCTs, both & have a broad investment universe. As of 2 November 215, the two VCTs had approximately 7 and 6 qualifying investments respectively, with this differential largely due to the larger size of. The size of each investment within the portfolios reflects the manager s view on the risk and reward and ensure that diversification is sufficient to avoid any material exposure to a single stock. Given this, each position is likely to be 1-3% of net assets, unlikely to exceed 5% at any time. The two VCTs will co-invest, and currently have a 75% overlap by name. However, differences in cash levels and inception dates mean that the current portfolios do differ, in some respects quite significantly. Figure 3 highlights the allocations to qualifying and non-qualifying investments within each VCT as at 2 November 215. Please note that this allocation is a snapshot taken at a point in time, and is therefore distinct from HMRC s requirement that 7 of new VCT subscriptions be invested into qualifying investments within 3 years of subscription. Figure 4 outlines the sector allocation of each VCT and demonstrates the similar themes in both portfolios. Both have a high weighting to information technology, healthcare and consumer discretionary which is in line with the manager s commentary on the VCTs biases. Figure 4. Sector allocation across each VCT portfolio (2 November 215). Source: Hargreave Hale % 2% 48% 17% 24% 3% 3% 4% Information Technology Healthcare Consumer Discretionary Industrials Energy Materials Financials 3.

4 While it appears that there is a similarity across both portfolios, has a higher average market capitalisation, of approximately 152 million in comparison to which is much lower at 44.5 million. The average revenue and profit of the portfolio is 96 million and 5.7 million, compared to at 15.8 million and.8 million. RECENT ACTIVITY & raised a combined 2 million in the last tax year (214/15). In the 12 months to 3 September 215, the team had made 21 qualifying investments, deploying a total of 8.7 million. Of these investments, two were IPOs, 18 were secondary placings of which 14 were follow on investments into existing portfolio companies, and one was an investment into a private company. Given the investment strategy detailed above, this is a trend we would have expected. DISCOUNT CONTROL MECHANISM & initiated a buy-back policy at a 5% discount to Net Asset Value in April 212, reducing the level from a previous target of 1 to net asset value. In fact, Hargreave Hale were the first VCT providers in the industry to reduce the discount within the buy-back policy to this competitive level. The policy itself operates four days a week, and has not been suspended since inception. Within this time, the VCTs have bought back over 13 million shares, with a further 5 million shares having been acquired through a tender offer. The three year average since the more stringent policy was adopted in April 212 is 5. and 5.2% for VCT 1 & 2 respectively. As with all VCTs in the market, this policy is non-binding and subject to the Directors discretion. HISTORIC RETURNS Figure 6 highlights total shareholder returns, comprised of dividends since inception and latest announced NAV. 1 Figure 6. Total return to shareholders for each VCT, comprising dividends paid/declared since launch and latest announced NAV (31 October 215) pence Total dividends paid Latest NAV 1 The performance data in this report does not include any tax reliefs. We have annualised this data in Figure 7 in an attempt to make life-for-like comparison. The annualised data assumes that investors took part in the first allotment at inception of both VCTs. While we understand that the annualised return of does not look attractive here, if investors had participated in a top up offer after inception, their performance would have been superior. This is highlighted in Figure 8 by the impressive three year return data, based on the NAVs as at 31 October 215. By contrast, the annualised return of has been strong since inception. Figure 7. Annualised total shareholder return from dividends and capital growth since inception 6% 5% 4% 3% 2% % Figure 8. 3-year growth data for each VCT 42.9% 32.8% & both have an impressive dividend track record, having paid out cumulative semi-annual dividends of 38p and 41p respectively since inception, totalling 9.8 million and 4 million respectively. Figure 9 highlights the consistency of dividends since inception of both VCTs. FUTURE RETURNS Hargreave Hale AIM VCT 1& 2 both have a target distribution yield of 5%, which has consistently been achieved. Although management state that this is reliant on the VCTs ability to pay dividends based on the fund performance, available reserves and cash resources we are confident that this will continue to be achieved going forward given that both VCTs have approximately six years dividend cover within their special reserves. Furthermore, it is expected that future activity will produce additional profits eligible for distribution to shareholders.

5 Figure 9. Dividend payments since inception 7 6 Dividend (pence) Note: has yet to pay its final dividend for 215 Risk Warning The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance is not a guide to future performance. This report does not constitute personal advice. VCTs should be regarded as higher risk investments, suitable only for experienced investors who are able to withstand losses. If you are in any doubt as to whether this is a suitable product for you, you should seek professional advice. VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to those that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus. To download an application form please visit: eqinvestors.co.uk/vct/offers EQ Investors, Centennium House, 1 Lower Thames Street, London EC3R 6DL EQ Investors EQ Wealth, EQ Bespoke and Simply EQ are trading names of EQ Investors Limited ('EQ') which is authorised and regulated by the Financial Conduct Authority. Company number Registered address: One America Square, Crosswall, London EC3N 2SG. This document is intended for information purposes only and does not create any legally binding obligations on the part of EQ Investors Limited. Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. The information contained in this document is based on material we believe to be reliable. All information is current as of the date of publication, subject to change without notice, and may become outdated over time. The distribution of this document and availability of this product in certain jurisdictions may be restricted by law. You may not distribute this document, in whole or in part, without our express written permission.