Compass - October 2020
By Annabel Brodie-Smith
Autumn has arrived and the much anticipated second wave of coronavirus has come with it. President Trump is its most high-profile patient and his tweets are moving markets but there’s no widespread sell-off yet. In case there was any doubt, rising case numbers have confirmed that the pandemic is here for the long haul and the kitchen office is now my normality for the foreseeable future. COVID-19 is continuing to impact our lives and our investments, and in this month’s bumper UK issue of Compass we look at some of the sectors most affected – both positively and negatively.
However, there is still some good news. My Mother is out of hospital and looking after her is keeping me out of trouble. And the children are at school!
The COVID-19 crisis has changed our behaviour, leading to the largest carbon reduction ever recorded. But climate change has not gone away. As Mark Carney said: “We have a situation with climate change which will involve every country in the world and from which we can't self-isolate.” There are clearly opportunities for industrialised nations to invest in a greener economic recovery from the COVID-19 crisis. Only this week Boris Johnson’s speech at the Conservative Party conference highlighted his aspiration that wind energy will generate enough electricity to power every home in the UK within a decade. So it’s highly appropriate that Faith Glasgow, the former editor of Money Observer, covers investing in investment companies to combat climate change.
With Brexit rising up the agenda, two ambitious new investment company launches are aiming to invest in undervalued stocks here at home in the UK. We now know that one other prospective launch, Tellworth British Recovery & Growth, will not go ahead. Our investment expert, Ian Cowie, questions whether ‘cheap’ is the same as ‘good value’ when it comes to the UK. He quotes the well-known and always refreshingly honest manager of Finsbury Growth & Income, Nick Train, who when comparing two of his companies’ underlying holdings said: “It is hard to analyse the difference in share price performance between the two as being anything else than a punitive discount being placed by global investors on a company that is listed in London, rather than Hong Kong. Apparently global investors have an aversion to the UK stock market, but this is, in some cases, getting ridiculous.”
The pandemic is largely having a negative impact on commercial property. We talked to our UK commercial property managers to find out their views on what the future holds for the office, retail, and the fortunes of their tenants. However, the demand for warehouse properties has remained resilient boosted by a surge in online shopping since lockdown. My family are on trend and our online purchases include a gaming computer and screen, secateurs, a barbecue, moisturiser and oven gloves. Our managers comment on the shift to online and the winners and losers of the trend. Many of our purchases feature in the winners’ list – the beauty sector, which saw a rise of nearly 140% in the first week of April according to investment company Tritax Big Box, electricals (up 90%) and home and garden (up 70%). It’s no surprise that the alcohol category saw a significant rise in online demand following lockdown…
Finally, in these difficult times it’s wonderful to celebrate Venture Capital Trusts’ 25th anniversary. From humble beginnings when launched by Ken Clarke in 1995, the sector has grown to back winners from Zoopla to Secret Escapes. VCTs invest in innovative and cutting-edge UK businesses and VCT-backed businesses have been sold to Amazon, Google, Microsoft and Twitter. Find out more on managers’ views on the history of the sector, the many companies they’ve backed and the future of VCTs.
I hope October goes well for you.
Communications Director, AIC
Faith Glasgow looks at the Renewable Energy Infrastructure sector
Unprecedented forest fires in Siberia, California, Australia. Tornados, devastating floods, record-breaking summer temperatures, shrinking ice caps. There is plentiful evidence that the earth’s climate is changing rapidly as a result of human activity, with catastrophic consequences for society and the natural world.
As concern over the future of the planet has become a mainstream movement over the past two or three years, interest in broader ‘sustainability’ and ESG (environmental, social, governance)-focused funds has mushroomed. But the options for investors keen to invest part of their portfolio specifically to mitigate the effects of climate change are relatively limited.
This is where the AIC’s Renewable Energy Infrastructure sector comes into its own. The 13 investment trusts housed in this sector focus their attention on infrastructure projects designed to reduce carbon emissions, primarily through solar or wind power generation, energy storage or improved energy efficiency.
As Peter Walls, manager of the Unicorn Mastertrust fund of investment trusts, observes: “If you’re really worried about the climate, this is pretty much the only [collective] investment option available to you.”
Although most people think of investment trusts and companies as investing in listed equities, there has been massive growth in those focused on alternative assets, including not only renewable energy infrastructure but also the likes of property, debt, private equity and aircraft leasing. Over the six years to August 2019, AIC figures show that alternative trusts more than doubled in value from £35 billion to £80 billion, and they accounted for 70% of total new share issuance in 2019. In the renewable energy sector, the number of trusts has doubled over the past three years alone.
The big advantage of these trusts for particularly hard-to-sell assets such as renewable energy infrastructure is their closed-ended structure, which means that a fixed number of shares are issued and traded on the stock market. When demand falls, the trust’s share price drops and the discount to net asset value (NAV) widens; but, in contrast to open-ended funds, the manager does not have to keep cash available or sell assets if investors rush to get their money out.
David Gorman, head of research at Castlefield Investment Partners, adds: “Shares are traded on the stock market just like regular stocks, so they are very liquid investments and they enable investors to access a broad range of assets in a cost-effective way. For people interested in investing sustainably, trusts can invest for the long term in a portfolio of wind farms, an anaerobic digestion plant or maybe even social housing, all things which an individual would not be able to invest in directly.”
However, the appeal of renewable energy investment trusts extends well beyond anxious environmentalists. With reliable dividend-paying assets highly prized in these days of rock-bottom interest rates, income investors have homed in on the generous yields on offer. These currently average 5.2% and in many cases are linked to inflation (with any capital growth as a bonus).
As a consequence, all the companies in the sector are currently trading on hefty premiums to NAV, averaging 17.5%. That's a bigger premium than any other AIC sector.
Walls suggests that current premium levels mean “it may be worth waiting for the secondary share issues that happen from time to time”. It’s important to note also that these trusts are specialist investments and should only form a small part of any balanced portfolio - particularly as their performance will be influenced by external factors such as the wider price of fuel globally and the UK government’s policy on supporting renewable energy generation through subsidies and other initiatives.
If you’d rather look for a broader-brush investment response to environmental concerns, the leading option of the three trusts in the Environmental sector is Impax Environmental Markets, which invests in companies active in the growing resource efficiency and environmental arena, from sustainable forestry to pollution control. It trades on a modest 2% premium and has seen a share price rise of 21% over the past year.
On the contrary
Ian Cowie explains why it could be time to bag a British bargain
Doubts about how Brexit will work in practice after the transitional period ends in less than three months’ time have depressed many British share prices to the point where they look cheap. Unfortunately, ‘cheap’ is not always the same thing as ‘good value’ and it remains unclear which individual businesses will deliver income and gains to investors brave enough to buy today.
Fortunately, many UK investment companies’ shares are trading at double-digit discounts to their net asset value (NAV). Better still, they enable us to avoid the difficulty of trying to pick individual winners by diversifying our money over dozens of different businesses.
For example, the AIC UK All Companies and UK Smaller Companies sectors are both currently priced more than 11 per cent below their average constituent companies’ NAV, according to independent statisticians Morningstar. So buyers of these trusts obtain £1 of underlying assets for every 89p they invest.
That’s a good place to start because the first step toward making a profit is often - but not always - to buy low. Just how lowly-priced UK Plc is compared to overseas rivals can be seen in analysis by the German asset manager, Star Capital. This expresses share prices as a multiple of their corporate earnings - to calculate their price/earnings or P/E ratio - and refines that measure of value by placing it in the perspective of historic valuations, to give the cyclically-adjusted P/E or CAPE. Star Capital calculates that America’s CAPE ratio is currently 32; Japan’s is 19; France’s is 18; Germany’s is 17 and Britain’s is less than 13.
Put another way, the average CAPE ratio for developed markets around the world is 25 while emerging markets score 16. So Britain’s rating on this benchmark is about half the developed world’s average and even lower than emerging markets’ typical ratio. No wonder some senior fund managers are beginning to argue that politics rather than economics are depressing domestic valuations. For example, Mark Mobius, the founder of Mobius Investment (stock market ticker: MMIT) who has invested around the globe for three decades, said: “The UK is beginning to behave like an emerging market in terms of political uncertainty. The political situation has deteriorated, with more polarisation and less reliability in general.”
Similarly, Nick Train, who has managed Finsbury Growth & Income (FGIT) since the end of the last century, recently compared two of this companies’ underlying holdings. He observed: “It is hard to analyse the difference in share price performance between the two as being anything else than a punitive discount being placed by global investors on a company that is listed in London, rather than Hong Kong. Apparently global investors have an aversion to the UK stock market, but this is, in some cases, getting ridiculous.” Bear in mind that FGIT is the top-performer in the UK Equity Income sector over the last five and 10-year periods, when it generated total returns of 66 per cent and 252 per cent respectively. To put those numbers in perspective, Morningstar calculates that the average total returns from this sector over those periods were 3 per cent and 75 per cent.
Mobius and Train are not the only managers who have noticed how cheap British share prices look. A dynamic duo of new investment companies are aiming to capture the value in smaller companies trading in this country.
Keith Ashworth-Lord, founder of Sanford DeLand Asset Management, which aims to apply the principles of investment guru Warren Buffett, is launching the UK Buffettology Smaller Companies Investment Trust (BUFF).
Meanwhile, City giant Schroder Investment Management is launching the Schroder British Opportunities Trust.
When I asked Ashworth-Lord why anyone would buy a new UK investment trust when long-established rivals are trading at double-digit discounts to their NAV, he replied: “Price is what you pay, value is what you get.”
Whether Buffett’s words of wisdom prove right again remains to be seen. Here and now, it is encouraging to see several experienced fund managers, with impressive long-term outperformance, claiming that UK equities are unloved and undervalued. The best time to buy shares is often when we least feel like doing so, because that’s when investors’ confidence and share prices are likely to be low. Brexit Britain might yet prove to be a real bargain as part of a globally diversified portfolio.
Out of office
Investment company managers discuss the future of commercial property
With the government now advising workers to work from home where they can, the pandemic continues to ask big questions about the future of commercial property. What does the future of the office look like? What could happen to unused office space and how are tenants coping?
There are also big questions about the future of open-ended property funds. On Wednesday 30 September, new FCA regulations came into force requiring these funds to suspend if there is material uncertainty over 20% of the fund’s value. However, the regulator has already begun consulting on new proposals requiring notice periods of 90 or 180 days for investor withdrawals.
The AIC has gathered views from investment company managers in the Property – UK Commercial sector about the future of commercial property and the funds that invest in the asset class.
Annabel Brodie-Smith, Communications Director of the AIC, said: “Whilst some of us had begun a tentative return to the office over the summer, recent announcements from the government suggest a fuller return is going to be much further down the line. There’s been a lot of discussion about the new normal, but it remains to be seen what the longer-term impact will be on the office, its location and its purpose.
“While these questions are undecided, it’s important that investors who want to invest in commercial property can do so within a suitable fund structure with reliable redemption rights. Proposals for 90 or 180-day notice periods for open-ended property funds are a step in the right direction, but we would question whether they go far enough. In Germany, the notice period is a year. The basis on which an investor can leave the fund should not change, regardless of the level of redemptions.”
The future of the office
Richard Shepherd-Cross, Manager of Custodian REIT, said: “Betting against central London has not worked for anyone over the last 20 years, so by hook or by crook I suspect it will survive as an office location. That said, the days of the five-day-a-week commute into a central London office are perhaps behind us. Remote working, whether from home, suburban or regional offices is likely to be a feature for the future. I would back regional offices in towns and cities where people want to live, rather than choosing where to live because of the train timetable, and they can benefit from a short commute to a satellite office. Locations that support a high-quality built environment and access to open space are often the cathedral or university cities such as Cambridge, Oxford, Bristol, Guildford, York or Norwich. Offices will still be in demand for professional and service sectors, where collaborative teamworking and business meetings are required. Headquarters offices to promote corporate culture, brand awareness, staff training and board-level strategy will also remain in demand. Accessible city centre locations are likely to be the preferred location for these functions.”
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “There is likely to be an increase in the supply of available office space – with poorer quality offices becoming much harder to let, and suffering the biggest rental and capital value decline. It is too early to say what the extent of that will be, but our expectations are that central London and the West End in particular will be hardest hit, as long and expensive commutes will increase the desire to work from home. Generally we expect city and town centres to remain more popular than out-of-town offices, and that car-based commuting will only be a short-term solution.”
The future of open-ended property funds
Calum Bruce, Manager of Ediston Property, said: “The FCA’s recommendations are a step towards addressing the fact illiquid assets simply do not belong in open-ended funds. The lengthy redemption notice periods proposed by the FCA will effectively kill the viability of open-ended property funds for investors and turn attention to property investment trusts, which have long been superior vehicles for liquidity, performance and income. Fundamentally, the open-ended structure is not suitable for holding illiquid assets such as property.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “Open-ended funds have yet again proved themselves to be unsuitable structures to invest in real estate, particularly for retail investors. The funds are promoted on the basis of liquidity and investment in real estate. In truth they do not offer liquidity when it is really needed and they invest so little in real estate, often holding 25% or more in cash, that they cannot offer what is best about real estate investment, which is a high income return. I think that retail investors will be wise to this and will liquidate their holdings when the funds re-open. Should those same investors re-invest in closed-ended funds they will enjoy a low entry price in the current market, the prospect of significantly higher dividends than they have been used to and liquidity when they want it. Furthermore, over the long term they will see outperformance relative to the open-ended funds they left. I think the writing is on the wall and this will be re-enforced by the FCA’s recommendations which will make it very hard for retail investors to invest or for their wealth managers to advise investment.”
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “A huge amount of time has been spent with individual tenants discussing their needs. Some tenants, mainly the larger corporates, have refused to engage, or simply refused to pay rent even whilst they have traded. The vast majority of our tenants have engaged in constructive discussion. With our smallest tenants we have suggested a write-off of rent for a period – they need to be helped to have a future business, and during lockdown the safety and well-being of them and their families was the main priority. For our larger tenants we have agreed a range of solutions, based around their business needs. It has been heartening to have had so many positive conversations and to have been able to help those who have needed it the most.”
Calum Bruce, Manager of Ediston Property, said: “We are doing what we can to keep on top of events and will provide support, reassurance and appropriate assistance to those tenants struggling as a result of lockdown where necessary. We have agreed rent deferment and repayment plans with tenants who have demonstrated genuine hardship. To date, no outright rent-free period has been granted unless we have received some benefit, like a lease extension, in return. Unfortunately, several well capitalised businesses which can afford to pay their rent are taking advantage of the pandemic and are choosing not to pay any rent. A landlord’s ability to pursue these arrears is fettered because of the government-imposed moratorium on the use of the usual arrears recovery methods, which has recently been extended and will be in place until at least the end of 2020.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “In common with most landlords, we have supported tenants with rent deferrals, rent-free periods as part of lease renegotiations and in isolated cases have considered rent concessions. While government legislation has handed control in rent recovery negotiations to tenants, without any support being offered to landlords, it should be noted that collectively the commercial landlords of Great Britain, many of whom are individual savers and pensioners, investing via REITs and funds, have offered huge economic support to GB plc. Investors have foregone dividends, endured illiquidity as material uncertainty forced open-ended funds to close while at the same time suffering CVAs and administrations, which in turn have diminished asset values. Let us hope that the tenants of Great Britain return the favour and revert to paying rent as soon as they are able.”
Will unused office space be converted?
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “Over the last five years we have seen a great deal of conversion of old offices into hotels and residential units. That is likely to continue, although the demand profile for residential will evolve as people prepare to work from their home more of the time – and we are unlikely to see significant hotel demand for a while.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “The process of converting unused office space into residential space or student accommodation has been underway for some time. Permitted development accelerated this activity and created the opportunity for rental growth in regional office markets. Secondary office space that neither fits with current environmental standards nor provides a COVID-safe working environment will quickly fall into vacancy and disuse. Happily, in most towns and cities, the pricing dynamics of residential or student property will support conversion and I would expect this trend to continue. Even if we see a reduction in demand for office space, the conversion of the secondary office space will help to keep supply and demand sufficiently in balance to support office rental levels.”
The future of retail
Calum Bruce, Manager of Ediston Property, said: “It is our belief convenience-led retail warehouse assets, which constitute 61.6% of our portfolio, will prove to be more resilient than other parts of the retail market. Retail warehouse assets have proved to be more resilient than both high streets and shopping centres during the COVID-19 pandemic. During lockdown several out-of-town retailers were able to stay open for trade as they were classed as providing ‘essential services’ by the government. As lockdown restrictions were lifted, but social distancing continued, the attributes of out-of-town retail parks appealed to customers, as evidenced by higher footfall numbers. Their accessibility, ample car parking provision, and the space they provide for queuing (avoiding contact with other shoppers) plus the fact that they are open-air, make them the ideal location for shopping in the post-lockdown world.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “Town centre retail is oversupplied and rents are reacting accordingly. Too many retailers are misusing CVAs to drive down rents and circumvent their contractual obligations, which is in part made possible by the oversupply of shops. If we look beyond the pandemic, retail town centres are likely to be smaller but with a wider range of local operators, previously pushed out by the national multiple chains, and a strong mix of retail and leisure.”
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “Nearly all landlords have found rent collection difficult given the economic headwinds. Over 85% of rent owed to us has been paid. The majority of those tenants who are in arrears have agreed a schedule to repay the rent from Q2 and Q3 in the future, mostly in 2021, and several have agreed terms to extend their lease commitments in return for a write-off of some rent. In most cases where rent arrears exist, we anticipate recovery by way of an agreed repayment schedule for deferred rent, or a write-off in return for extended lease terms.”
Clicks and mortar
Managers discuss the future of online retail and their warehouse holdings
While much of the commercial property market has suffered during the pandemic, demand for warehouse properties among tenants and investors has remained resilient. This demand has been bolstered by a surge in online sales since lockdown, with Amazon deliveries and online groceries becoming a lifeline for many.
The AIC has spoken to the managers of investment companies in the Property – UK Commercial and Property – Europe sectors with holdings in warehouse properties to ask their views on the future of online retail and which regions and sectors have been the winners and losers of the pandemic.
Investment companies with holdings in warehouse properties. Source: AIC/Morningstar. AIC sector averages are for whole AIC sector, not just companies shown in table.
The shift to online
Andrew Bird, Managing Director of Tilstone Partners, the manager of Warehouse REIT, said: “The online shift is here to stay. The number of customers using internet shopping has increased, the amount each one spends has increased and the convenience has proved a saviour for so many. Combined with a likelihood of many people working from home part of the week, and therefore perhaps having less opportunity to visit the high street during lunchtime, our national commitment to online buying is here to stay and probably accounts for around 30% of market share.”
Richard Moffitt, Chief Executive of Urban Logistics REIT, said: “January saw 19% of all retail sales conducted online. By March this was more than 30% in comparison to research which predicted it would reach 25% by the end of 2022. The progression is here to stay, but perhaps at a more modest level. Groceries at 10-12% online have a long way to go, but it is hard for retailers to maintain margin.”
Colin Godfrey, CEO of Fund Management at Tritax Big Box, said: “UK online penetration peaked at 33.5% in May, reflecting the shift in consumer behaviour as non-essential physical stores were closed. From June to August this online penetration level has moderated and now stands at 28.1%. This change is a reflection of consumers starting to regain confidence and returning to shopping in physical stores, rather than a sharp slowdown in online sales. Online spending continues to be robust with year-on-year online sales growth remaining above 50% despite more people shopping at physical locations.”
Opportunities in the pandemic
Laura Elkin, Portfolio Manager of AEW UK REIT, said: “Trends such as online shopping, which have accelerated during the pandemic, have provided an additional boost to tenant demand in what was already an undersupplied market and as a result we have seen increased appetite from occupiers. For example, in May we were able to sell the largest industrial asset within the AEW UK REIT portfolio to an owner occupier for a value 25% ahead of its previous valuation.”
Nick Preston, Partner and Fund Manager of Tritax EuroBox, said: “The pandemic has highlighted the fragility of supply chains, with the realisation that supply chains must not only be efficient but also resilient to supply side shocks. It has also highlighted the reliance on humans working in them, whilst also emphasising the value of automation, which increases efficiency, resilience and flexibility to meet demand. Social issues and social value moved up the agenda, with increasing recognition of non-financial risks such as wellbeing of staff.”
Evert Castelein, Manager of Aberdeen Standard European Logistics Income, said: “As a sector, European logistics has outperformed most other European real estate sectors, benefitting from the shift to working from home and the social distancing rules. Strong growth in e-commerce and the restructuring of supply chains are key drivers supporting the demand for logistics warehouse space, which is increasingly becoming a favoured asset class among investors.”
Andrew Bird, Managing Director of Tilstone Partners, the manager of Warehouse REIT, said: “There has been strong buying demand for pandemic-proof income. Amazon’s covenant is becoming increasingly valuable, not only in the UK but across Europe, with yields below 4% being paid and becoming the norm. This is a trend we would expect to continue. There is also strong investment demand from both domestic and overseas investors. If the Brexit negotiations generate any weakness in sterling, this overseas demand would surely accelerate further.”
Winners and losers
Colin Godfrey, CEO of Fund Management at Tritax Big Box, said: “Unsurprisingly, online retail has been the standout winner, underpinned by a number of key categories. The real winners have been the beauty sector, which saw a rise of nearly 140% in the first week of April, while electricals rose 90%, and home and garden rose 70%. In contrast, clothing saw online sales drop 20% year on year and it has been a challenging time for car manufacturers. Amazon has also delivered record sales this year. The alcohol category saw a significant rise in online demand following the coronavirus lockdown. Naked Wines is one brand benefitting; it has forecast a £200 million rise in revenue for 2020 and is expected to invest between £20 million and £25 million on new customer recruitment.”
Richard Moffitt, Chief Executive of Urban Logistics REIT, said: “We saw 62 of our 64 buildings operational during the first two to three weeks of lockdown and then all 64 operated normally. Rather than regional variations, it is tenant covenants, unit sizes and user types which are more important.”
Nick Preston, Partner and Fund Manager of Tritax EuroBox, said: “As in the UK, the demand for modern logistics space is closely correlated to the growth in e-commerce which, in turn, has a direct correlation to demand. This surge in e-commerce adoption has further driven the demand for assets located within close proximity to dense population centres and infrastructure. In particular, it has resulted in strong demand for mega boxes (40,000 square metres plus), which provide affordable, flexible and efficient space, where occupiers capitalise on the cubic space, not just the floor area. Efficiency gains are driven by the economies of scale that are achieved, as well as the fact that these larger assets can accommodate the increasingly important automation.”
Andrew Bird, Managing Director of Tilstone Partners, the manager of Warehouse REIT, said: “The occupier demand for warehouse space has remained robust across all sub-markets and unit sizes. All online focused businesses have been the winners as have those logistics companies that serve the sector. This has seen increased demand for big box space as well as mid box. The annual take-up statistics for 2020 are anticipated to exceed those of last year, albeit Amazon has again become a materially significant contributor. The very small starter workshop units have had mixed fortunes depending upon the market segment of the operator and whether it has been able to operate through the lockdown.”
Laura Elkin, Portfolio Manager of AEW UK REIT, said: “The AEW UK REIT portfolio is focused on secondary industrial properties, most of which are unsheltered by the long leases typical of newer prime logistics property. This enables us to have more regular value adding discussions with our tenants, a number of which have continued to take place throughout the course of the pandemic. We have found that, due to the ongoing strength of demand in the warehousing market, we have still been able to create significant value in this part of our portfolio at the time of lease renewal by increasing rents and lengthening income streams.”
Evert Castelein, Manager of Aberdeen Standard European Logistics Income, said: “Our on-the-ground presence across Europe ensures that we are close to tenants and have an excellent ongoing understanding of their business operations. The relationships we have built with tenants, coupled with a deep understanding of their local logistics markets, ensured that all tenant discussions were highly productive from the start.
“Following these discussions, we agreed on six rent deferrals and seven rent-free periods in exchange for material lease extensions resulting in a total rent collection of 100% in Q1, 85% in Q2 and 96% in Q3 as at mid-September. All rents due under the terms of these agreements have been paid on time and no new requests have been made for further rent amendments. Based on current data, we believe the net impact on short-term cash flows will be limited as the majority of the deferred rents will be received in the second half of 2020 or early 2021. Over 95% of full year 2020 rental income is expected to be received by year end.”
Laura Elkin, Portfolio Manager of AEW UK REIT, said: “Throughout the pandemic our rent collection levels have so far been robust, in particular from our warehousing assets, where collection for AEW UK REIT is on average around 95%. During the lockdown from March to June, we had some tenants who were generally struggling with cashflow and tried hard to accommodate them by either deferring payments or offering short-term rent-free periods in exchange for, say, a longer lease term. Since lockdowns have eased, we have been encouraged to see that the vast majority of our tenants wish to continue operating their businesses as usual and this has included the full payment of rent which has been reflected in a greater speed of collection.”
Nick Preston, Partner and Fund Manager of Tritax EuroBox, said: “Our buildings are key operating assets for tenants' businesses providing the goods and services that the underlying customers continue to require. As at 31 July 2020, 100% of agreed rent due by that date has been received. As our consistently strong rent collection figures demonstrate, the logistics sector remains resilient despite the impact of the COVID pandemic.”
VCTs' silver anniversary
A toast to VCTs after 25 years of supporting budding UK businesses
Last month marked 25 years since the launch of the first VCT. From humble beginnings in 1995 the sector has grown to back winners from Zoopla to Secret Escapes and cutting-edge UK businesses such as Femtech provider Elvie, video games developer Frontier Developments and internet-of-things business Simulity.
To celebrate the 25th anniversary of VCTs the AIC has spoken to VCT managers about their best-performing investments, the many companies they’ve backed and the future of the sector.
Source: AIC as at 31 December for 1995 - 2019, as at 31 August for 2020
Annabel Brodie-Smith, Communications Director of the Association of the AIC, said: “VCTs have come a long way in 25 years. Today they back companies in sectors which would have been difficult to imagine in 1995 such as gene therapies and cloud computing. However, this is really a continuation of what VCTs have always done: provided vital finance to the UK’s most dynamic young businesses.
“VCTs offer a powerful way of bridging the finance gap for budding companies, something that’s more important than ever as the economy faces the challenges of the pandemic. Through supporting innovative businesses, VCTs provide important social and economic benefits. Since their inception, VCTs have generated over £1.4 billion of exports and created more than 27,000 jobs.”
Patrick Reeve, Chairman of Albion Capital, Manager of the Albion VCTs, said: “We’ve been managing VCTs for 25 years, so pretty well from the beginning – and it’s been a lot of fun. At the start, Ken Clarke spoke of funding ‘small, growing, technologically-advanced and innovative companies’. Well, in the early years there was a huge range of strategies, only a few of which could really be described as ‘tech’ – but that’s changed as successive governments have, very sensibly, made the industry sharpen their focus on to technology and risk.
“We launched our first technology-focused VCT in late 2000, just as the dot-com boom was collapsing, so we luckily missed the worst of that particular crash. Twenty years on, Albion VCTs have invested over £600m in 195 companies: areas as diverse as medical imaging, cyber security, alternative energy sources, gene therapies, AI and quantum computing. These businesses are changing the way we live, the way business operates, and safety and security across all areas of our lives.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “Octopus Titan VCT has backed 128 companies but ZPG (formerly Zoopla Property Group) is our best-performing investment. We first invested in 2009. Overall, Octopus Titan VCT invested a total of £3 million over several rounds of funding. Zoopla listed on the London Stock Exchange in 2014 and became the first UK start-up to reach a billion-pound valuation after having started out with VCT funding. The holding was completely exited in February 2017. The sale price of the last remaining shares represented a multiple of more than 33 times the price paid originally.”
Bevan Duncan, Investment Manager of the Baronsmead VCTs, said: “Since launch 25 years ago, the Baronsmead VCTs have raised more than half a billion pounds to back ambitious, high performing management teams in nearly 300 UK companies. Our most successful investments include Glide, which provides fibre broadband to under-served areas of the market, such as multi-tenant buildings and business parks. We sold our stake in May 2020 for a multiple of 6.3 times our original investment. Two years ago, we sold our investment in Symphony Ventures, a leading robotic process innovation and intelligent automation business. We invested £3.5m and sold our stake at a 2.4 times multiple just over a year later. Another good example is Scriptswitch, a software company supporting GPs with prescription information, originally developed by a small team at Warwick University. We exited our stake for 4.8 times our original investment.”
James Livingston, Partner of Foresight Group, Manager of the Foresight VCTs, said: “Our VCTs have supported 205 companies and in terms of internal rate of return Simulity was a particular highlight, an internet-of-things tech business we invested in and then sold to ARM within nine months for three times our money. In terms of value growth, working with App DNA, an application migration start-up, and selling it to Citrix for almost $100m generating a 32-times return was pretty exciting.”
Stuart Veale, Managing Partner of Beringea, Manager of the ProVen VCTs, and Chair of the Venture Capital Trust Association, said: “We have backed 120 companies and in terms of enterprise value at exit, Watchfinder is our top performer. Watchfinder, the platform for pre-owned luxury watches, grew during ProVen’s investment to become the UK’s fourth largest watch retailer – its growth and innovative use of technology motivated Richemont, the Swiss luxury group, to acquire the business in 2018. Mergermarket is another standout performer. Having been acquired by the Financial Times Group in 2006, Mergermarket has grown to become a cornerstone of the financial data and media industries – it has since been valued at £1bn, making it ProVen’s first ‘unicorn’.”
Trevor Hope, Partner of Mobeus Equity Partners, Manager of the Mobeus Income & Growth VCTs, said: “Since the day we started, we have played a successful role in the stories of 48 UK SMEs that have been realised. We’re very proud that by backing these driven and determined UK businesses over our 20-year history, those realisations have made a net £220 million of cash profits for Mobeus VCT shareholders and that, in more than half the cases, we more than doubled our initial investment.”
Dr Paul Jourdan, Fund Manager of Amati AIM VCT, said: “We made a series of investments between 2012 and 2015 which have proven to be truly scalable growth companies, each in their own way playing a role in the deployment of digital technology to transform the way that different industries work. Our strategy of running the winners makes us long-term investors in these businesses. Each has made us returns of between 15 and 20 times our original investment, taking account of the profits we have taken along the way. These companies now feature amongst our top ten positions in the VCT. Frontier Developments is one of the UK's leading video games developers and Keywords Studios is a service provider to the video games industry. GB Group provides online identity verification services and AB Dynamics is provider of crash testing and transmission testing services to the automotive industry.”
Now versus then
Kostas Manolis, Partner and Head of Unquoted Investments at Downing, Manager of the Downing VCTs, said: “It's safe to say that the VCT market looks very different today compared to 25 years ago, with one of the biggest developments being the rule changes away from management buy-outs and asset-backed companies towards earlier-stage investments. This renewed emphasis on early-stage companies has sparked some really exciting opportunities for us across a number of sectors, including cutting edge 'deep tech' and healthcare companies.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “The start-up ecosystem in the UK was in its infancy 25 years ago and now it’s one of the best places in the world to start and scale a business. The transformation over that time really is extraordinary and VCTs have played a crucial role in helping drive that change by helping to fill the funding gap that once existed. Just ten years ago, you probably wouldn’t have imagined that big American tech companies like Amazon, Google, Microsoft and Twitter would have acquired a VCT-backed business. Yet we’ve now sold businesses to all four, which I think is testament to how far we’ve come.
“Success breeds more success as all that experience of how to grow and scale businesses has compounded over time, especially now we have so many serial entrepreneurs. That means the quality of teams we are now able to invest in is better than it’s ever been. We’re also starting to see some positive signs in terms of increased diversity among the founders receiving funding from VCTs. There is clearly a long way still to go, and part of that is also about increasing the diversity of the investment teams themselves. It’s proven that more diverse investment teams achieve better returns, so there is plenty of incentive.”
James Livingston, Partner of Foresight Group, Manager of the Foresight VCTs, said: “I think investment sizes have grown quite significantly as funds have grown and consolidated. When VCTs were starting in the late 90s something called the internet was just getting established in consumer and investor consciousness. There have been some ups and downs along the way, but the internet has only gotten more important – from delivery of software to almost any consumer good imaginable. Female founded companies were a rarity ten or twenty years ago. Whilst the start-up and early stage ecosystem is a long way from parity it’s certainly improving.”
Patrick Reeve, Chairman of Albion Capital, Manager of the Albion VCTs, said: “Early on in Albion VCT’s history we invested in Active Hotels which went on to become Booking.com, now recognised as one of the most successful European software start-ups. More recent highlights include Grapeshot, an early-stage advertising technology business which within just four years was acquired by Oracle, while PSE, a spin out from Imperial College specialising in modelling for complex industrial processes, was recently acquired by Siemens. These three exits were all at ten times original cost. Current stars in our portfolio include Quantexa, a big data AI analytics business which has just been listed at No.14 in the Sunday Times Tech Track 100.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “If you were to ask the average person on the street, I think Secret Escapes is probably the best-known company in our current portfolio. It’s a free-to-join members-only travel website, which offers luxury hotel stays and holidays at up to 60% discounts by selling hotel rooms that would otherwise lie empty. While it has clearly had a challenging time over the last few months, it has bounced back incredibly well, and has benefited massively from the trend for staycations, with a huge increase in bookings for holidays in the UK.”
Trevor Hope, Partner of Mobeus Equity Partners, Manager of the Mobeus Income & Growth VCTs, said: “One of the most exciting and gratifying aspects of VCT investing is the chance to spot the potential in small but disruptive companies, as we did when we backed DiGiCo in 2007 and ATG in 2008, and to provide flexible and patient support over the longer term. DiGiCo provides audio mixing solutions for live sound, broadcast and theatre and Mobeus realised its investment in 2014. The sale returned more than £25m in cash over the life of the investment to Mobeus-advised VCTs. This return equates to a five-and-a-half times multiple of Mobeus’s original investment, a cash internal rate of return of 45%. As DiGiCo’s first investor, we were extremely proud when the business (now Audiotonix) reached a reported €1bn valuation in its latest sale at the end of 2019.”
James Livingston, Partner of Foresight Group, Manager of the Foresight VCTs, said: “In our portfolio right now we have investments ranging from a therapeutic drug which uses your own blood to repair diabetic foot ulcers, to another that makes a vaginal egg temperature sensor used to monitor fertility, to one that uses artificial intelligence and undersea robots to speed leak detection for undersea pipelines. As well as lots of more typical software, healthcare, distribution, consumer and manufacturing companies.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “For decades, healthcare products were designed with little attention paid to the physiological needs of women. ‘Femtech’ has emerged to change that, and Elvie’s co-founder, Tania Boler, is at the forefront of the trend. Elvie launched the world’s first silent, wearable, fit-in-your-bra breast pump, in late 2018. The first batch sold out within minutes, a phenomenon that has repeated itself several times on both sides of the Atlantic. This follows the success of the company’s first product, Elvie Trainer, an award-winning device which helps women train their pelvic floor more successfully, which has a number of health benefits. The market for health wearables is a multi-billion-pound opportunity, and we believe Elvie could be on course to be a go-to brand for 50% of the population.”
The next ten years
Stuart Veale, Managing Partner of Beringea, Manager of the ProVen VCTs, and Chair of the Venture Capital Trust Association, said: “As we emerge from the pandemic, the VCT industry has the experience, network and funding to drive forward the economic recovery, backing innovative companies to deliver substantial growth throughout the UK. This will undoubtedly be led by pioneering technologies shaping the future of healthcare, manufacturing, and financial services, such as cyber security, artificial intelligence and robotics. VCTs will also provide vital support to the government as it seeks to address the structural inequalities in the British economy, through supporting the levelling-up agenda as well as backing entrepreneurs from under-represented communities.”
Patrick Reeve, Chairman of Albion Capital, Manager of the Albion VCTs, said: “So where will the sector go from here? Well, the key strength of VCTs is that they are evergreen, so don’t have a fixed timetable for exit and can therefore take a very long-term view. They can be patient – and they can back true, longer-term value, which in turn tends to last and be resilient simply because it does some social good. This combination of cutting-edge technology and helping to find areas that can lead to longer-term socially positive results, seems to me where the VCT sector is heading.”