Ven­ture forth How to spot the next Uber or Face­book

Pri­vate com­pa­nies

The Daily Telegraph - Your Money - - FRONT PAGE -

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?

Ven­ture cap­i­tal

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 Book­, 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.

Listed funds

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.

Di­rect deals

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

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