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Downing ONE VCT opens limited £15m share offer 2019
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Kostas Manolis
Partner and Head of Private Market Investments
Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.
The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.
The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.
The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.
Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.
Systematic Liquid Derivatives: Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions.
Strong security: The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.
Key benefits
Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t. We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team isseeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”
How the Fund is expected to perform in different markets
In bullish markets: UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
In neutral markets and normal market corrections: UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
In a sustained sell-off: if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
The average Cover to Capital Loss is targeted at 35%: the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.
Fund key risks
Performance: Capital is at risk. Investors may not get back the full amount invested.
Liquidity: Access to capital is always subject to liquidity.
Counterparty risk: Other parties could default on the contractual obligations.
Fund Structure
UK regulated OEIC fund structure, fully UCITS compliant
Daily dealing, at published NAV
Minimum investment: £100,000
SRRI: 6 out of 7
Depositary: Bank of New York
Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
I share-class: SEDOL: BM8J604 / ISIN: GB00BM8J6044
F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term.
Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6AF.
Downing ONE is a large, sector diversified Venture Capital Trust (VCT)
Downing LLP is pleased to announce that Downing ONE venture capital trust plc (Downing ONE) has launched a new £15 million offer. Downing ONE is a large, sector diversified venture capital trust (VCT), with net assets of approximately £105 million. It invests in a range of unquoted and quoted companies across a number of sectors and stages of maturity and has a blend of both income-focused and growth investments.
Downing ONE is now seeking to raise £15 million to support the growth of its existing portfolio companies and take advantage of a strong pipeline of new investment opportunities.
The latest offer is designed for investors seeking a generalist strategy and gives the advantage of attractive VCT tax reliefs – 30% income tax relief[1], tax-free capital gains, and tax-free dividends. The target annual dividend is 4%, which is equivalent to a 5.7% tax-free yield on the current offer price (after 30% income tax relief).[2] Investors also have the option to reinvest dividends in new shares, which should qualify for the usual tax benefits.
Commenting on the fundraise, Kostas Manolis, Partner and Head of Unquoted Investments at Downing, said:
“VCTs remain hugely popular with experienced investors and are proving particularly attractive to wealthy investors who have large income tax liabilities or who want to generate tax-efficient income. The industry has seen levels of VCT fundraising go up in recent years[3], despite changes to tax rules that mean VCTs can no longer invest in businesses that are asset-backed or over seven years old. Downing ONE stands out because it has an existing portfolio which includes mature, profitable businesses which can provide returns for investors while our earlier stage, fast growing companies, scale up.
“Whatever the outcome of Brexit, we believe VCTs will continue to play an important role in the long-term investment landscape, providing essential small business funding and making a contribution to the wider UK economy.”
Downing ONE’s existing income-focused investments are predominantly in unquoted companies, such as hotels, children’s nurseries and health clubs, that own assets or have predictable revenue streams. In contrast, growth investments are often in technology companies, which typically are both higher risk and have higher potential for growth. For additional diversity, the portfolio also includes AIM-listed stocks. Unlike younger VCTs, the current split between income and growth investments is about 50:50 though this is will shift towards growth investments as the company deploys additional funds.
Kostas Manolis concludes:
“VCTs provide crucial business support to SMEs across the UK and in the 2018/19 tax year raised some £731 million. They continue to plug the finance gap for businesses, providing capital that is beyond the means of their angel investors but still too small to attract traditional private equity firms.”
The maximum individual subscription per tax year for Downing ONE VCT remains at £200,000, and the minimum investment is £5,000 as a lump sum. It is also one of the few VCTs that accepts monthly subscriptions, which can be attractive to high earners who want to set aside money from their monthly income.
The initial charge paid by investors, whether advised or direct, is 2.5% - while professional clients and investors that have been introduced on an execution only basis will pay 4.5%. Downing LLP is offering a discount of 1.5% on this initial charge for their existing investors[4] and 1% off for new investors whose applications are received by 13 December 2019.
Further charges, such as performance fees, may apply. Downing’s annual running charges, including investment adviser fees, secretarial and administration costs etc., are capped at 2.6% p.a. of Downing ONE’s net assets, one of the lowest in the industry.[5]
The benefits of investing in a larger VCT
In comparison to smaller VCT’s, investors in Downing ONE can benefit from:
Lower running costs: The annual running costs are capped at 2.6% of net assets – one of the lowest expense caps in the VCT sector.
Increased liquidity: This should help to facilitate the VCT’s intention to offer share buybacks at 5% discount to the latest published NAV (subject to VCT regulations, market conditions and liquidity).
Greater diversification: Currently no single investment accounts for more than 7% of the portfolio by value.
Risk factors
Set out below are some of the key risks associated with an investment in a Downing VCT. Please refer to the prospectus for a full list of the risk factors.
Capital is at risk and returns are not guaranteed: The value of shares may go down as well as up and shareholders may not receive back the full amount invested. In addition, there is no certainty as to the level of dividends.
Tax reliefs: The availability of tax reliefs depends on the VCT maintaining VCT qualifying status. If the VCT does not maintain qualifying status, investors could lose the upfront 30% income tax relief and all other tax reliefs. All tax reliefs are subject to change in the future and depend on personal circumstances. Please refer to the HMRC website for further guidance on the tax reliefs available on VCT investments.
Liquidity: It may prove difficult for shareholders to sell their shares at a fair price, or at all. The VCT’s policy of buying back shares at a discount of 5% to the latest published NAV is subject to applicable regulations, market condition, liquidity and is at the absolute discretion of the board.
Investment performance: The VCT will invest in small, unlisted companies or AIM-quoted shares which, by their nature, are higher risk than larger blue-chip companies. Shares in such companies may be difficult to sell. Past performance is not a reliable indicator of future performance. There is no guarantee that the companies’ objectives will be achieved.
Investment restrictions: The VCT’s ability to obtain maximum value from its investments may be limited by the VCT rules. Changes in the VCT rules may be applied retrospectively and may reduce the level of returns for investors.
VCT’s are long-term investments: Investors should be prepared to hold VCT shares for a minimum of five years to qualify for the available tax reliefs.
[1] Subject to personal circumstances and a five-year holding period
[2] Please note that this is not guaranteed, and is subject to liquidity and VCT regulations
[3] Source: Association of Investment Companies
[4] Investors who have previously invested in any Downing LLP fund or bond
[5] Subject to approval at the Downing One VCT Plc board meeting on 6 November 2019
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