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Epic VCT targets superior returns

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Institutional private equity fund manager Epic Private Equity has launched a venture capital trust that will target annual dividends of at least 4p per share – equivalent to a tax-free inc

Institutional private equity fund manager Epic Private Equity has launched a venture capital trust that will target annual dividends of at least 4p per share – equivalent to a tax-free income of 9.5 per cent for higher rate taxpayers, taking into account income tax relief of 30 per cent -and plans to return capital to investors in year eight.

‘When the VCT rules changed to focus new investment into smaller companies, it played to our strengths as a specialist smaller company private equity fund manager,’ says Epic chief executive Giles Brand. ‘Our expertise at this end of the market means that private investors will now be able to access some exciting private equity deals, whilst also benefiting from the VCT tax breaks.’

Over the past few years, the Epic team has advised or arranged 18 deals that would have met the current VCT qualifying rules, involving companies with less than GBP7m in gross assets and fewer than 50 full-time employees. The average valuation or realisation of 270 per cent on the original investment is equivalent to an internal rate of return of 48 per cent, the firm says.

‘In the course of developing our VCT we found that IFAs were clearly disgruntled that the level of return shown by many VCTs was not commensurate with the risks,’ Brand says. ‘Too much emphasis appears to have been placed on the tax breaks with too little focus on the coherence of the investment strategy.

‘Investing in VCTs marketed as low risk purely for the tax breaks seems to have backfired for some investors, who could have achieved better post-tax returns from lower risk investments. The Epic VCT is first and foremost a private equity investment opportunity.’

Whilst using asset backing to minimise risk where possible, the Epic VCT will clearly focus on performance, Brand says, through an asset allocation model that will see the early deployment of funds into non-qualifying fixed-income and quoted mid-cap equity portfolios.

Funds will then be phased into three types of qualifying private equity opportunities, each with its own distinct investment characteristics: development capital, buy-outs and turnaround situations.

Epic believes that a strong deal flow is essential to ensure that the right deals can be selected, and says its network of professional connections ensures options on 300 deals a year. The team has already identified opportunities that might be suitable for the VCT.

‘The new rules mean that small company expertise is essential,’ says marketing and sales director Mark Hutchinson. ‘The idiosyncrasies of small unquoted businesses must be recognised, since the art of investing successfully is to nurture the entrepreneurial spirit, drive and expert market knowledge of people who run small businesses whilst instilling the necessary financial and operational discipline to achieve profitable growth.’

‘A level playing field has been created as some of the more established VCT fund managers will now have to prove themselves all over again. The IFA market may not be familiar with Epic right now, but its pedigree in managing money for the likes of Jupiter, New Star, Henderson, Deutsche and Lehman Brothers speaks for itself.’

Commitments of GBP500,000 from the management team and directors, together with up to GBP2m from the Epic group (subject to close company rules) means that the venture capital trust is already well on its way to its GBP15m fundraising target.

Epic is manager of two existing institutional funds, Equity Partnership Investment Company, a London-listed GBP100m fund providing expansion and buyout capital for small to medium-sized UK businesses, and Epic Reconstruction, a GBP18m AIM-quoted vehicle specialising in the turnaround of distressed businesses.

Over the past five years, the Epic team has advised and arranged more than 45 private equity transactions and advised on the management of a portfolio of some GBP30 million of invested capital. It has advised and arranged 10 investments in leveraged buyouts and development capital transactions and a further seven investments in businesses requiring restructuring, all of a size and type that would qualify for VCT purposes.

The quoted equity portfolio will be managed by John Lee, manager of the quoted equity element of Epic, which has increased in value by 296 per cent since 2001 compared with growth of 159 per cent in the FTSE All Share index over the same period. The portfolio focuses on 20 to 30 stocks usually representing between 2 and 3 per cent of the portfolio size.

Companies targeted for investment will typically have low price/earnings ratios and strong asset backing, together with the potential for good earnings progression and a future dividend stream. Epic Asset Management, which currently has approximately GBP2.5 billion in funds invested in high-quality corporate bonds, will manage the non-qualifying assets portfolio.

Authorised financial advisers recommending the Epic VCT will be eligible to receive initial commission of 2.5 per cent on applications, plus a renewal commission of 0.5 per cent for six years. The minimum investment is GBP5,000.

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