Survival of the fittest

With market turbulence and a buyer's strike in other product areas, several VCT managers were pleased to report very satisfactory fundraising in 2007/08. The £219m raised in total was 18% down on last year's £268m and well below the industry's peak years of £779m and £505m in 2005 and 2006, when investors received a 40% upfront tax break, rather than the current 30%. It was a highly respectable result though, when compared with the 2003 and 2004 lows of £65m and £50m.

Around half of the total funds raised went to managers that make traditional unquoted venture capital and private equity investments. Almost all the remainder was raised by limited life, structured finance products.

Venture capital orientated VCTs achieved a highly commendable £45m. Octopus Ventures and Foresight Group each deployed very effective fundraising machinery to secure significant support from investors prepared to accept higher risk in seeking to achieve higher returns.

The private equity VCT sector saw fruitful fundraising for five firms including Close, NVM, Yorkshire Fund Managers and Isis, the latter raising its £10m target through non prospectus top up issues. At Matrix Private Equity Partners we were very pleased to raise a short £12m, not far off our maximum target. For established VCT managers, consistent investment performance and clear evidence of returns were essential to garner investment support. In our case, a gross portfolio IRR of 25% and a particularly strong realisation pipeline that has produced five exits in 2008 underpinned the investment proposition.

As ever, certain firms without the requisite track record found fundraising challenging. A number raised negligible sums or missed their targets by some distance. Some managers decided not to come to market and one issue was pulled late on.

The end of the VCT fundraising season has coincided with consolidation in the VCT industry and produced something of a 'survival of the fittest' landscape. This has seen Aberdeen Asset Managers, Foresight and Matrix each recently winning contracts to manage underperforming VCTs and portfolios. Last May, Quester's VCT business was sold to New Media Spark and GLE Group has just announced the acquisition of YFM, which manages the British Smaller Companies VCTs.

These developments are very positive and the trend should continue. Scale and experienced resource are critical to the success of any investment management business and there are now seven managers - Isis, Close, Octopus, Foresight, NVM, Matrix and Aberdeen - each managing over £100m VCT assets. In aggregate, this VCT "Russell Group" manages a £1.3bn pool of semi-permanent capital, committed to investing in UK smaller unquoted companies.

The Government can take heart from their VCT intervention producing a robust industry in good health. Equally, companies and advisers can rely on easy access to a vibrant supply of risk capital that will continue to write cheques up to £10 million in the UK venture capital and lower mid-market. The leading VCT managers are in confident mood. Market turbulence and the credit crunch correction arguably offer the best medium-term new investment conditions for some time. It would not be too surprising if this year's funds turned out an excellent vintage year.

- Mark Wignall is chief executive of Matrix Private Equity Partners.

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