New venture trust is only for the brave

THE INVESTMENT COLUMN

Yorkshire Fund Managers and Equity Ventures of Bristol appear to be putting hope before experience in pushing ahead with plans to raise pounds 15m for the British Smaller Companies VCT, the latest offering in the venture capital trust stable.

For despite two years of gestation, VCTs have not been the runaway success the Treasury had hoped. Launched by Kenneth Clarke in his first Budget in November 1993, it was hoped VCTs would ease the birth of the enterprise investment scheme, a system of investment tax breaks designed to replace the business expansion scheme. But Mr Clarke's hopes the new trusts would channel pounds 2.5bn into small companies now look sadly misplaced.

The latest launch, planned for February, follows last week's news that Friends Provident had pulled its offering because it could not attract the planned pounds 10m in subscriptions. Even the more successful trusts have not had an easy time. Murray Johnston, which has a strong track record, could raise only pounds 18.4m of the pounds 31.5m originally intended for its VCT in September. The shares were launched at 100p, briefly hit a high of 105p, and have now slumped to 93p.

Northern Venture Trust, a fund with a regional flavour run by Newcastle- based Northern Venture Managers, had better luck in October, raising most of its planned pounds 15m. But the shares, also placed at 100p, have fared little better than the Murray VCT and now stand at 95p. It has been a similar story for Baronsmead, which floated its VCT in the same month and has seen the price slide from 100p to 96p.

The prospect of extensive tax breaks has clearly not yet proved of sufficient attraction to the wealthier investors who are the main targets of VCTs. For those with up to pounds 100,000 to put at risk for five years, the trusts offer income tax relief at 20 per cent on the initial investment, the ability to defer tax on existing capital gains and a potential stream of tax-free returns from the underlying investments.

After the bad press surrounding losses from the original BES and the volatile fortunes of smaller companies, many investors will be well aware of that they should be prepared to lose their shirts. Baronsmead and British Smaller Companies will attempt to minimise the risks by investing only in established businesses.

The new trust is offering a yield of 3.2 per cent in its first year, which the company claims is equivalent to a gross return of 16.7 per cent after all tax reliefs. Like others, it is also holding out the prospect of distributing any realised capital gains as tax-free dividends. Even so, this one is only for the brave.