While Brexit uncertainty has caused many investors to shun smaller companies, they could be missing out on a major opportunity.
Venture capital trusts (VCTs) are a type of investment trust aimed at providing much-needed funding to burgeoning businesses. Investors get generous tax breaks for holding the trust as compensation for the riskier nature of the companies they invest in, which are often at an earlier stage of their development and therefore more likely to fail.
Will Fraser-Allen, fund manager at Albion Capital, for example, says 9% of the group's VCT investments are in businesses with fewer than 20 employees. “Anything in that space is almost start-up level and obviously riskier,” he says.
But these smaller companies also offer the potential to grow at a much faster pace than more established businesses, and managers expect Brexit to provide a surprisingly advantageous backdrop for these growing firms.
Charlie Winward, manager of the Northern VCTs, says: “The attractiveness of this part of the market should overcome any Brexit worries. Smaller companies have the added benefit of being less correlated to things such as GDP growth.”
One theme Winward is keen to tap into is the Conservative government’s drive to get more investment and infrastructure to the regions of the UK. Indeed, the Northern VCTs focus on companies which originate outside of London and the south east, but offer the potential to scale up to national and international companies.
One favourite holding is Mojo, an online mortgage broker trying to digitise the process of applying for a mortgage for individuals. “The process has been digitised, people don’t want to go and meet a broker anymore,” says Winward.
Fraser-Allen likes Limitless, a business which helps big brands crowd source their customer service. Clients of the firm include Microsoft and National Express. Another investment is Speechmatics, a software programme that turns speech into the written word and can learn a new language in just six weeks.
Confidence is Returning
Uncertainty around Brexit has had an impact on this part of the market, says Dr Paul Jourdan, manager of the Amati Aim VCT (AMAT), which focuses on companies listed on the Alternative Investment Market. Often referred to as the junior stock market, businesses often choose to list here, where the regulatory requirements are slightly lighter, before graduating to the FTSE as they grow. But there has been a dearth of companies coming to market in recent years, limiting investment opportunities. Jourdan says: “Hopefully companies will now start to have the confidence to list.”
One of his favourite investments of recent years is AB Dynamics, which is involved in car safety testing. “We bought shares because we thought it was a good business, but had no idea it would end up tapping into one of the biggest trends in the world,” he says. A record number of cars are currently being developed with the boom in electric and autonomous vehicles, and every single one needs safety testing.
He thinks that while Brexit will continue to create uncertainty for businesses for at least another year, the quality of government decision-making over the coming years is more important to the fortunes of small and unquoted companies.
Indeed, one development that Trevor Hope, manager of Mobeus Income & Growth VCT (MIX), is excited by is the rollout of 5G. He invests in Access IS, which provides technology used in ticketing and transportation, used in more than 200 airports. It is currently working on new innovations which will need 5G technologies.
Annabel Brodie-Smith, communications director at trade body the Association of Investment Companies, says: “As the UK departs Europe and embarks on a new course, there has arguably never been a more important time for investment in our most ambitious businesses. Since VCTs were launched 25 years ago, they have created more than 27,000 jobs and driven more than £1.4 billion of exports.”
Albion’s Fraser-Allen says companies selling to EU customers are among those most likely to impacted by Brexit, as well as those with an EU workforce. He plans to avoid this issue by focusing on businesses which sell globally and for whom the US is their largest target market.
Trevor Hope, manager of Mobeus Income & Growth VCT, adds: “There are more than 5 million small and medium-sized businesses in the UK, many of which are reliant on important services and materials, exporting their goods and services, or requiring the ability to employ non-UK ntionals. All of these areas now have a level of uncertainty. Ultimately Brexit may create greater opportunities, but in the short term, this uncertainty will make an already difficult job much harder.”
