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