The climate for VCTs making new investments

Credit crunch impact

Michael Probin of Isis Equity Partners: "Making new, worthwhile investments at any stage in the economic cycle is not easy to do consistently well. In the current environment, it is made harder by greater uncertainty over forecasts of future earnings, exacerbated by the fact that business owners will be concentrated on securing the short to medium-term future of the existing business, and are less interested in a corporate transaction."

Paul Bedford at Ingenious Media Investments: "After a period of caution on both sides of the investment fence, we are seeing a marked increase in the number of good quality investment opportunities. We are finding that the lack of alternative equity sources means that we have been able to negotiate pricing that we feel sits comfortably in terms of balancing risk and reward."

Mike Currie of Foresight Group: "We are finding it easier to find worthwhile investments. We are as a consequence being more picky, but companies are at sensible market valuations at a time when banks are reducing or withdrawing facilities, making the investee companies cash hungry and prepared to do deals."

Shane Elliott of Beringea: "We have seen a stratification of deals into two forms. The first being stronger more developed businesses who are concerned that banking facilities are less robust and are looking for investors who share their aspirations and aligned interests. These businesses normally generate enough investor interest to create competitive offers of investment. The key is not to be drawn into an overpriced deal, or be too optimistic in terms of the company's growth prospects in a period of continued economic uncertainty. Second are companies effectively requesting 'rescue' funding. Some may be great businesses but a quick evaluation of their core value and future potential is needed, not easy if the company’s bank is trying to reduce exposure or their key clients are going bust."

Looking forward

Although predictions of rampant inflation just round the corner have subsided of late, there is still the potential for inflation to rise. Asset valuations are still difficult, even though recent volatility has tended to be in a positive direction.

Mike Currie: "Currently the jury is out on whether there will be rapidly rising inflation, but it is unlikely we will see this any time soon. Given that we split most of our assets with a high degree of loan stock, usually at base rate plus a margin, there is an inherent protection against inflation. In addition, for our environmental stocks inflation can be good as energy prices rise."

Michael Probin: "Once greater certainty returns, owners will once again look to sell all or part of their businesses or expand through acquisition etc. The key will be visibility of future earnings with a careful eye on inflation, though inflationary expectations seem to be far less of a concern to the economy than deflationary expectations at the moment."

Paul Bedford: "We certainly feel that we need to select investment opportunities that are going to be robust in the medium-term and not excessively price sensitive as we still have a long way to go in the current economic cycle."

Shane Elliott: "Evaluating businesses for the forthcoming two to three years remains as important and difficult as ever. Businesses are unique and must be evaluated as such whilst taking into account the macro environment, e.g. Sterling currency trends, and the drivers of their specific market place, e.g. reduced Government healthcare spending."

In conclusion, as inherently higher risk investments, there is a case to see current conditions as more of an opportunity than a threat for VCTs.

Philip Rhoden is a director of Clubfinance Ltd