New Puma VCT offers 'downside protection' for investors (What Investment)
by David Thorpe
A new limited-life venture capital trust (VCT) from Puma aims to offer investors ‘downside protection’ by allocating capital to investments that are backed by physical assets.
The Puma VCT 11 fund, which aims to raise £30 million, will have a strong focus on ‘capital preservation’ according to the company.
VCTs invest in smaller UK companies which need not be quoted on the stock market. However, Puma VCT 11 will try to limit the risk of capital loss by investing in the senior secured debt of businesses, as well as taking equity stakes.
Jason Hollands, managing director at Tilney Bestinvest, explained that Puma will seek to secure ‘first charge’ on the assets of the companies in which the VCT is invested, which it can then seize in the event of that company going out of business.
It is structured as a limited life VCT, and will wind itself up after a maximum of five years, with the capital distributed back to shareholders.
Hollands commented, ‘It's worth bearing in mind that with the 30 per cent tax relief on VCTs, the effective net cost of a 100p investment is 70p, so just getting your initial amount subscribed back (via dividends and wind up value) would equate to an effective return of approximately 43 per cent on that 70p.’
But he cautioned, ‘To be clear, Puma's strategy is not risk-free and you could still lose money. VCTs are illiquid, specialist and not mass market investments.’
The income from VCTs is free of tax.
Hollands continued, ‘Puma's approach to managing risk is to focus on asset-backed investing. This means structuring deals they can typically achieve a first charge against a physical asset, such as a freehold property. If the company they invest in goes bust, they will seek to recover that asset and sell it.’
He added that the new VCT will ‘have a higher focus on capital preservation than maximising returns'.
Investors in the Puma VCT 11 will receive an extra 1 per cent of shares free if they subscribe by January 9 2015.
The minimum investment is £5,000, with an annual management charge of 2 per cent.
See the article on the What Investment website.