In the first in our series of exclusive interviews with industry experts, David Hall, Executive Chairman at YFM Equity Partners, provides his insight on the biggest growth opportunities and most common risks for investors, as well as discussing his company’s approach to investing.
1. What tax-efficient schemes does your company work with, and how do you offer a unique/compelling approach for advisers?
We manage the British Smaller Companies VCT and VCT2 which, following this season’s fundraising, will have a combined value of around £420m. Our primary goal has always been to deliver the best possible returns, which, for VCTs, come in the form of total return with distributions through tax-free dividends. Over 5 and 10 years, the returns have consistently fallen within the range of 8-10% per annum, excluding all tax reliefs. This track record has consistently positioned the trusts at the top of performance tables, garnering strong recommendations and support from advisors.
2. How active are you in providing education to advisers on the types of clients that are suitable for these types of investments, as well as any changes in regulation or nuances in the existing rules?
We’ve always striven to ensure that advisors receive all the communication that the investors receive. In addition, we conduct two workshops a year: one face-to-face in London and one on-line. We also hold a series of workshops and meetings throughout the year, ensuring these take place both inside and outside the fundraising periods. Many of these sessions are conducted on a one-to-one, either online or in person. For advisors with larger teams, we make ourselves available to both the “technical assessment” team and the wealth planners and advisors.
3. Where and in which types of companies are you seeing the biggest growth opportunities?
We strongly support initiatives that enhance business efficiency, particularly with a B2B focus. This remains a constant area of opportunity, encompassing cyber, workflow efficiency, and now, of course, artificial intelligence. Overlaying this, we observe sectors experiencing substantial growth, such as medical applications, initiatives related to decarbonization, energy efficiency, and the comprehensive management of data (from collection and analysis to movement and protection). A third aspect is geography; many of the businesses we invest in initially start in the UK but, as they expand into global markets, experience significant growth overseas, with the US currently presenting a substantial opportunity.
4. What do you see as the biggest risks for investors?
There’s no escaping the fact that each individual investment that any VCT makes is risky. In exchange for the tax relief, the Government requires that the investment is into a young business, (< 10 years for a “knowledge intensive” business, < 7 years for others) and that they use all the capital we invest in them within 24 months. It takes these businesses another 7-10 years to mature and some won’t make it at all and some won’t achieve as much as they wanted. In that period each individual investment is in an unquoted asset that can’t itself be readily realised. So for investors it’s about investing the right amount for you, that can remain invested for the medium to long term- coming out early where funds are following long term strategies is what you want to avoid.
5. Should advisers be worried about a lack of diversification, and why?
I would recommend thinking of investment in VCTs like any other class of assets- there’s a choice of managers and strategies, each offering funds that have different maturity profiles for the underlying assets. The diversification is perhaps best by spreading investments across a number of VCTs which can be built over time.
