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Investment: Seneca Growth Capital VCT
Aim: Investing in established and well-managed businesses with a turnover of up to £100 million
Tell us about the fund
Seneca is an experienced growth capital investor that has invested more than £50 million over the last five years into growing companies through the Seneca Growth Capital EIS Fund and the Seneca EIS Portfolio Service. The VCT being launched is an extension of our deal flow and deployment capability and offers investors a different access point to growth opportunities from that offered via EIS.
With over 70 experienced professionals, Seneca is an established, award-winning SME specialist based in the North of England providing equity and debt through a number of different specialist channels to businesses with annual turnover of up to £100 million. Seneca also has a fully integrated corporate finance division, which can act on both buy-side and sell-side mandates alongside general restructuring and advisory assignments. Essentially, Seneca has a well-developed footprint and a strong intermediary network in the Northern regions of the UK, which provides a buoyant deal flow pipeline from which it selects its investment candidates.
For some time, Seneca has been looking to establish a VCT as a new offering for its client base and has reached agreement with the board and existing shareholders of Hygea VCT to issue a new, separate ‘B’ share class with this new pool of assets being separately managed by the Seneca investment team with a more generalist investment policy than the one that applied to the existing ordinary share class. The new ‘B’ share class will form a separate pool of capital (distinct from the existing pool of capital represented by the ordinary shares) and will be managed by Seneca on behalf of the company, focusing on investment into growth companies which reflects the experience and expertise of the Seneca team.
This investment experience is of particular relevance in view of recent changes in VCT legislation. The Finance (No2) Act 2015 introduced a number of significant changes to the VCT rules, imposing restrictions on the types of transactions and companies into which VCTs are able to invest. While this may result in a strategy shift for many VCT managers, Seneca’s growth capital investment experience is well matched with the changing landscape.
Crucially, the ‘B’ shares will also benefit from the availability of distributable reserves and potentially allowing the company to pay dividends on the ‘B’ shares by the end of the first year.
How much is being raised?
The company is seeking to raise £10 million under the offer, with an over-allotment facility of a further £10 million. The company intends to distribute a large proportion of the net profits it receives by way of regular and special tax -free dividends.
The company expects to make its first allotment of ‘B’ shares by the end of summer 2018 and the offer closes on 5 April 2019.
What types of investments are being sought?
Seneca has pursued a generalist investment strategy focused on providing capital to established, wellmanaged businesses with strong leadership teams that can demonstrate proven concepts, revenue generation and at least a visible route to profitability in addition to the potential to grow.
The strength of Seneca’s network of introducers, professional contacts and interaction with the region’s entrepreneurs provides a consistently abundant range of opportunities. Seneca will typically review hundreds of investment opportunities each year and will progress to second stage meetings with many of them. The filtering process then continues through a detailed due diligence process, applying strict investment criteria and extensive screening to
ensure the focus is purely on those businesses which it believes offer the best investment potential. Quality and capability of management teams and valuation entry point will be highly influential in our analysis.
So, from a starting point of several hundred, only a fraction of these will ultimately be transacted.
Seneca is sector agnostic with clear emphasis on the investment credentials of each business although we will stay away from highly specialised or businesses which may lack longevity. Our current spread of growth capital investments has no single sector representing more than 25% of the total value of our investments.
Another key feature is that, to date, approximately 45% of our portfolio of investee companies are AIM quoted. This feature is expected to be replicated through the ‘B’ share class as we believe that such a strategy increases diversification, provides a certain level of liquidity through capital market exposure and access to some of the UK’s most innovative businesses.
What is the minimum investment?
Minimum investment is £3,000 and currently, investors can claim income tax relief when buying newly issued VCT shares at the rate of 30% on investments of up to £200,000 per tax year.
Investors must hold shares in a VCT for at least five years to keep the income tax relief. There is no capital gains tax from selling VCT shares no matter how short the holding period and there is no tax to pay on dividends.
What is the targeted return?
The Company aims to exit each of its qualifying exits in the ‘B’ share pool after approximately three-to-five year holding period. Broadly, we target a return of 15% internal rate of return, excluding tax reliefs, in a blend of growth and dividends through the holding period, making distributions to ‘B’ shareholders accordingly although of course this is not guaranteed.
Provide details of the top three fund holdings
As this is a new ‘B’ share class examples of our top three holdings are best demonstrated by reference to our EIS growth capital investments.
c.£1.25m investment on IPO in June 2015
Operating from a head office in York and distribution centres across Europe, the group sells musical instruments and music equipment, globally.
Having developed its own e-commerce platform, with multilingual, multi-currency and fully responsive design websites covering 19 countries, the group has rapidly expanded its database and continues to build its overseas presence.
Highlights for 2018 included a 43% increase in revenue to £80.1 million.
On IPO the share price was £1.39. The current share price (27/06/18) is c.£7.20, representing a return of c.5.2x on investment.
c.£900,000 investment on IPO in March 2016
Yu is a challenger energy supplier to the corporate market, targeting SMEs in verticals such as healthcare, hotels and leisure, and construction.
Highlights for 2017 were revenues of £47 million, c.£2.8 million ahead of forecast and EBITA was £3.1 million, c.£500,000 ahead of forecast.
On IPO the share price was £1.85. The current share price (27/06/18) is c.£8.35, representing a return of c.4.5x on investment.
c.£3.8 million invested to date
Wejo leverages the data derived from connected cars, through unique journey and other data capturing technology, to deliver business insights for a range of companies. These include OEMs and leading insurers and enable businesses to better connect with their customer base.
Following Seneca’s recent investments, the company has continued to progress on all fronts, particularly through its proof of concept work with numerous OEMs. The next six months should prove to be pivotal in the company’s development as it looks to go live on two major contracts. Successful delivery of these contracts would see the company break-even in the short-term and would secure Wejo’s position as the dominant player in this sector.