British and bullish with it

Albion – or ?????? in the original Greek – is the oldest known name for Britain. When Close Brothers' venture capital arm staged a management buyout in January this year, managing director Patrick Reeve chose to name the newly formed entity Albion Ventures in order to represent its “Britishness”.

Albion Ventures, which manages £200 million (€221 million; $293 million) across seven venture capital trusts (VCTs), takes advantage of a 30 percent tax break afforded by the UK Treasury to provide unleveraged investments of between £1 million and £10 million in small businesses.

The decision to spin out of merchant banking giant Close Brothers was prompted by a desire to retain high quality staff in the long term by giving them equity incentives, Reeve says. He took all seven partners and two investment managers with him in the move and – now ensconced in their new and rather swanky offices near the Bank of England – Reeve describes the staff mood as “generally very chirpy”.

It took a few months to persuade Close Brothers, which has retained an undisclosed equity stake in the VCT funds, to let Albion break away. “My job was to show them that the venture capital arm was not core. I put forward my arguments – Close had been in any event refining its fund management strategy – and, after some head scratching, they accepted them,” he says.

Few VCT managers are owned by large parent corporations. Among them is the team at Aberdeen Asset Management – reported to be a possible MBO candidate. Therefore, although it was a brave move for Albion to spin-out, there is a general opinion in the industry that a VCT arm works better as an independent entity rather than being subject to the whims of a parent company.

VCTs have raised around £2.5 billion over the past 12 years. They collected £152 million in the 2008-09 tax year, 30 percent less than the £220 million raised a year earlier. Nonetheless, the sector is still “resilient”, according to Mark Wignall of Matrix Private Equity Partners and manager of the Matrix Income & Growth VCTs.

In April 2007, the tax break for VCT investment was reduced from 40 percent to 30 percent, so that where an investor was previously getting 40 pence in cash back from the tax payer for every pound invested, margins were sliced overnight by 25 percent.

VCT managers have been lobbying the UK Treasury to make the tax terms more favourable, both to provide much needed equity for small, debt-starved businesses as well as create jobs. They argue that, because of the corporation tax and national insurance generated from boosting small businesses, the VCT tax cuts don't do any damage to government coffers and make commercial sense.

“VCTs pay for themselves. As a tax payer you get a good return from VCTs,” says Ben Yearsley, an investment manager at financial services firm Hargreaves Lansdown. “The lobbyists are asking for anything from a 50 percent tax break,” he added.

“I met with Stephen Timms [Financial Secretary to the Treasury] and an adviser to Shadow Chancellor George Osborne. Both are very keen on venture capital. They see early-stage backing to be one of the keys in unblocking unemployment,” Reeves says. Music to his ears, no doubt.

HOW VCT FUNDRAISING HAS SLUMPED
Number of VCT Managers: 40

Number of VCT Funds: 120

VCT fundraising: 2005/6 £777 million, 2006/7 £268 million, 2007/8 £220 million, 2008/9 £152 million