Foresight Williams: A unique collaboration in the tax-efficient space

Leading industry experts from Williams Advanced Engineering (WAE) and Foresight took part in our recent webinar. In this Debrief, we share with you the recording and key insights from Foresight Williams: A unique collaboration in the tax-efficient space.

To view the recording, please click here.

The Foresight Williams partnership began in July 2015 with the FWT EIS launch in November 2016. To date, the EIS has fundraised more than £50m, of which over £30m has been deployed into 19 investee companies.

Following the success of the EIS and feedback from both independent financial advisers and investors, the FWT VCT was launched in December 2019. The primary reason for this was to allow investors to access the unique collaboration in a tax wrapper which provides simplicity and speed in claiming income tax relief.

The partnership brings together an experienced investment manager with a 36-year track record of fundraising, investing in, structuring and exiting SMEs and a technology and engineering business with a 40+ year track record and highly renowned reputation.

The core investment strategy is to target companies where the complementary skills of Foresight and WAE give the partnership an unfair competitive advantage. Foresight is looking for companies that are led by an outstanding management teams with a clear plan to commercialisation and in sectors with an eventual revenue opportunity of more than £100m. WAE is focused on finding underlying technologies or processes which could create a new market opportunity or offer an order of magnitude improvement over the status quo. WAE is also looking for opportunities where it could add technical, commercial and operational support post-investment.

How has portfolio management changed since early March?

Since the start of March, the Investment Team has taken a more proactive and hands-on approach, helping companies to understand how Covid-19 will impact their operations and what operational and strategic actions must be taken to ensure long term success. They are encouraging early and decisive action and modelling of downside scenarios, and cash runway extension planning. Furthermore, investee companies have more direct involvement with Foresight, to identify and escalate any problems.

What is the outlook for the FWT portfolio and deal sourcing?

The Investment Management Team expressed that the FWT VCT is well funded and has enough cash to weather the storm over the next 12-18 months.

The type of investee companies which the FWT Team will target, post Covid-19, will be technology companies with a sustained or increasing demand. Such examples include automation, production efficiency and climate change.

In terms of pipeline, the outlook remains strong, with quality deals still looking for funding in an environment which appears to be less competitive. There is likely to be higher weighting to follow-ons for the next 12-18 months with its sister fund, the Foresight Williams EIS.

The Investment Team is looking to provide follow-ons to 3 investee companies (c.£3.5m total) by the end of August, subject to final IC approval. Meanwhile, there are 3 further new pipeline deals at the filtering stage, which are likely to complete by Autumn 2020.

The current economic downturn should allow the Investment Management Team to access better value deals than ever before. As the economy recovers from the worst effects of Covid-19, it is expected that valuations will be more attractive and several interesting opportunities for investment will arise.

What are the challenges facing more established VCTs?

As for many investments and investment teams, uncertainty is one of the biggest challenges.

Whilst short term Government support remains in place, smaller businesses are surviving during this current crisis. However, when Government support starts to phase out many small businesses could be left vulnerable as market demand may not be back at the pre-Covid-19 level.

This uncertainty will likely lead to many VCT fund managers becoming more cautious in their approach. Potential impacts include VCTs holding more to cash than expected to support businesses later in the year, reducing their ability to make investments or revise potential dividend expectations to support portfolio companies.

We’ve seen the impact on valuations of VCTs with Generalist VCTs down 10% in the last year. (Source, AIC).

How is the Foresight Williams Technology VCT Different? 

The VCT share class has no existing portfolio. Therefore, the issues established VCTs face are not faced by FWT VCT. With no existing portfolio requiring financial support and no pressure for the team to hold back from deployment, the FWT VCT should be able to take advantage of more realistic entry valuations and reduced deal competition

Who could benefit from investing and why invest now?

Investors in VCTs are eligible for 30% Income Tax Relief on their investment provided they hold the investment for 5 years (maximum Investment of £200,000 per year).

A variety of clients may be interested, including those with restricted pension allowances, a business owner looking to offset tax on dividends or even a residential landlord looking to offset income tax.

Investing in VCTs early in the tax year can also help improve a client’s cashflow. If a client pays tax at source through PAYE, they may want to reclaim tax relief through an adjustment to their tax code. This means instead of getting the tax back after filing their tax return, the income tax they pay each month is reduced until the tax relief is used up which enables them to benefit from the tax relief sooner.

Why invest now? Including the reasons mentioned above, VCTs are not open all-year round and demand often outweighs supply, investing now gives you an opportunity to invest in a VCT targeting capital growth within a fund which benefits from the expertise of Foresight and Williams Advance Engineering.

Disclaimer:

The value of an investment can fall as well as rise. Investments in smaller unquoted companies are higher risk than investments in larger quoted companies. Investors may not get back the full amount they invest.

Past performance is not a reliable indicator of future results.

We recommend investors seek professional advice before deciding to invest. Foresight is not able to offer investment advice.

Tax reliefs are dependent on the VCT maintaining its qualifying status and on investors’ individual circumstances.