Venture forth How to spot the next Uber or Facebook
The stock market took a tumble last week, as fears of continuing interestrate rises in the US spread around the world.
After one of the longest bull markets in history, American stocks listed on the Dow Jones index fell by around 5pc in just two days, causing the FTSE 100 – made up of Britain’s largest companies – to fall to its lowest value in six months.
British retail investors are also pulling their money out of domestic funds, opting for global shares or other alternative investments.
A total of £217m was drawn out of British funds in August, according to the Investment Association, a trade body, with domestic companies remaining out of favour in the run-up to the country’s formal departure from the European Union.
For those looking to shield themselves from the volatility of the open market while still making a return, one answer could be investing in private companies, although that is not without significant risks of its own.
A number of well-known British brands remain private, making them less accessible to investors. Retailer John Lewis, media group Virgin and technology company Dyson are all private businesses. So how exactly do you invest in unlisted companies?
Investors could invest in a venture capital trust ( VCT) or enterprise investment scheme (EIS). VCTs offer greater diversification than EISs, according to Alex Davies of the Wealth Club, an investment platform, and so are slightly less risky. They are essentially funds with stakes in around 30 to 60 private businesses. EISs are similar, but invest in fewer and typically smaller brands.
Will Fraser-Allen, of Albion Capital, an investment manager, said VCTs are increasingly offering exposure to the country’s “dynamic and fast-growing tech sector”.
They are also tax efficient. VCTs receive 30pc income tax relief on the amount invested up to £200,000, and dividends are exempt from income and capital gains tax.
Shares in Albion’s Development VCT have returned 70pc since its launch in 1999. It previously invested in Booking.com, the price comparison site, in 2001. It sold its stake in the company in 2004.
It is now invested in a number of technology companies, including: Healios, a digital therapy business; Quantexa, a digital security company that works with banks and other institutions to detect financial crime using data analytics; and Egress, a cloud encryption platform that provides cyber security for companies and government departments.
Mr Davies said that if any VCT is going to discover the “next Facebook” it will be Octopus Titan, which has invested in Amazon, Google and Twitter, as well as Zoopla, Secret Escapes and Graze. He also suggested Maven Income & Growth, which he said invests in “a number of decent, if often unglamorous businesses”.
However, Mr Fraser-Allen said investing in unlisted companies is inherently high risk. Picking the right manager is key, he said.
Another option is to invest in trusts or funds that have their underlying investments in other private equity funds, offering another layer of diversification. Richard Hickman of HPVE, an investment company, argues that this approach is safer than investing into a small number of start-up companies – not all of which may succeed.
“Listed private equity fund strategies vary widely, although many are broadly diversified. These may provide a convenient solution for investors making their first foray into private markets, as ultimately they are being offered a ready-made private equity programme of the type normally only available to larger institutional investors,” he said.
HPVE has held social media companies Facebook and Snap, the developer of Snapchat, as well as tech companies Alibaba and Netflix, during their early stages.
For seasoned investors, one very high-risk approach that can offer high returns if all goes well is investing in individual private deals.
There are a number of opportunities currently available through the Wealth Club.
CityUnscripted, a global city tour operator, is looking to raise £1m to accelerate its growth. It currently takes 500 bookings a month, according to Mr Davies.
Firglas produces sustainable fish food from algae and is raising £3m in funds for two new production plants. However, there is only £500,000 of investment opportunity left.
Mr Davies said there were over a million private companies in the UK that could make investors “a lot of money if they get it right,” adding that the risks were far larger than mainstream investing.
“By not looking at them you are potentially missing out on some first-class opportunities.” he said. “In many cases your returns will be uncorrelated to the stock market and to the health or otherwise of the general economy.”
‘Venture capital trusts are offering exposure to our dynamic tech sector’
James Dyson’s company is a privately held innovation powerhouse. Here he introduces the Airwrap in New York earlier this month