VCTs: A New Way to get money to Small Business Wales

The Development Bank of Wales has been up and running since the middle of last month, blessed with £440m to invest and a further £100m of borrowing available to it. A welcome development which will carry high hopes that as the successor to the largely unloved Finance Wales it can really make a difference in all those areas identified for action by the nine different named Funds it manages.
All the deficiencies that are considered to have held back Welsh entrepreneurial initiative over decades are assumed to have been covered. Lack of capital at initial concept stage? There’s the £7.5m Wales Technology Seed Fund. No-one for the retiring owner to hand the business on to except perhaps the management? How about the £25m Wales Management Succession Fund. Sole trader seeking to expand? Try the £18m Wales Micro-Business Loan Fund. And so on.
It appears comprehensive: it’s well funded; it has private sector partners; there will be 54 people in the offices where the various assistance packages will be decided; and the railway lines between Cardiff and Wrexham, where it will be headquartered in a nod to intra-Wales devolution, will be gaining a lot of new passengers. But necessity being the mother of invention it is very much a public-sector body dependent on Welsh Government finance, even if the partners range from Santander and Barclays to Oxford Capital, venture capitalists Venrex, and the British Growth Fund.
So far, so good but It would be even better, if, as both a competitor and a bureaucracy benchmark, the private sector venture capital industry could be persuaded to become more involved independently in financing Welsh growth businesses. This does not, however, mean the big US and UK venture capital houses buying up and trading Welsh businesses with no discernible long-term benefits to the Welsh economy. There is a different vehicle, the Venture Capital Trust (VCT), that does offer an alternative approach, providing benefits to both investors and investees, but conspicuous by its absence in Wales.
VCTs have over the best part of 20 years built up a powerful record of supporting some of Britain’s brightest new start-ups in Aim- and non-Aim-listed companies across a range of businesses from retailing and restaurant chains to high tech, from recruitment to the oil service industry. They are run by professional managers who are paid to get it right, picking companies that are going to be successful, from which they can at some point make a successful and profitable exit. They ensure this by good judgment and close supervision of the investee companies, offering them non-executive directors, where appropriate, and advice and consultancy.
Hundreds of millions of pounds are raised annually by these trusts – names such as Baronsmead, Amati, Mobeus, and Foresight – from private individuals keen to take advantage of the tax breaks offered in return for accepting a higher risk than is carried by money in savings accounts or shares. The breaks have indeed been very good – tax-free dividends, and tax relief on the initial investment of 30 per cent (reduced only in the past few years from an original 40 per cent. This means that an initial investment of say £10,000 will have an effective cost of £7,000 so that if a dividend of 5p is paid the yield will be 500/7000ths or 7.14 per cent, not the taxable 500/10000ths or 5 per cent that would be gained on such a sum in a savings account which would then itself be subject to tax.
The disadvantages are the risks run when investing in small companies and start-ups, and the lack of liquidity – VCT shares can generally only be sold at a discount and must be held for a minimum of five years by law to preserve the tax advantages. Nevertheless, the gains investors have been able to make usually result in new offers being quickly taken up and oversubscribed. Moreover, the managers of these funds have over the years honed their skills in selecting companies and have kept their failure rate within bounds.
Yet, while the sector now occupies a sizeable niche as a provider of “patient capital” to unquoted and Aim-listed companies, they have done nothing to narrow the North-South divide. Indeed, in some ways they are simply perpetuating it by helping modern, often higher technology, high productivity businesses in relatively limited areas of the country to prosper. |
A quick analysis of the portfolios of some of these VCT providers shows a heavy concentration on the south east of England and a total absence of Wales as a location for investments. Of the 70 investee companies held by Baronsmead, 28 were in London, a further 11 in the rest of the South-East, and 31 in the rest of the country, mainly the Midlands and South. In Foresight’s case 60 per cent were in London and the rest of the south east. Mobeus has a more promising 60 per cent away from the capital and its surrounds but in none of these examples is there evidence of support for companies from Wales. With some variations this pattern is reflected in the investment preferences of other leading VCTs.
Now there could be an element of chicken and egg here. Is the absence of Welsh investee companies due to a lack of start-ups and growing companies worth investing in (a possibility that should not be discounted instantly as outrageous) or is the relative dearth in Wales of highly successful quality start-ups itself the result of the lack of private sector backing and in consequence a much greater dependence on the public sector?
It is a difficult question to answer without detailed research but let’s think positively. How can we persuade VCTs to examine more Welsh businesses with a view to increasing their representation in portfolios? Perhaps this is too tough an ask. If they can find enough opportunities closer to London, why devote time and energy to Wales? If there are prejudices against Welsh businesses as investment opportunities, they are not going to be easily overcome.
So why not a Welsh VCT, raising funds in Wales or more widely, with an objective of investing say perhaps 75 per cent of funds in Wales with the rest going to promising businesses elsewhere. Again, it may be argued that the expertise does not exist in Wales for such an exercise or if it does it is already housed in the new Development Bank of Wales.
There is one option, however, that might be best of all. Why not a Welsh VCT run out of an existing VCT house by one of their investment teams. In this way it could draw on experienced VCT professionals in London (and Edinburgh) who had been invited to pitch to run a Welsh VCT. Its own success parameters could be set for such a VCT (recognising the likely higher risk), which the appointed managers could help to set and have as their target.
We rely too much on the public sector to lead in Wales. Here is an opportunity to start something outside its hegemony. Any takers?
Rhys David
rhys.david@btinternet.com
http://www.clippings.me/rhysdavid

May 2018

Cardiff: Whatever happened to planning?

The vision that led to the creation of Cardiff’s outstanding city centre more than 100 years ago has sadly gone missing in recent decades and an incoherent jumble has been created, Rhys David argues.

One of the joys of watching Michael Portillo’s Great Railway Journeys series on television – especially those focusing on the Continent and the US – is the sight of the magnificent railway stations he visits. National or provincial capital, big town or small, the arrival of the railway has usually been celebrated with an impressive building that could make a statement about the destination the visitor had arrived at.

In most cases the station main entrance leads out into a central square where civic pride could be further demonstrated with an open public space or small park, perhaps surrounded by dignified municipal or commercial properties. In Cardiff, too, the station was built to project pride in the growth of the new coal metropolis. Isambard Brunel even went to the trouble of moving the River Taff to get the right alignment for his railway through south Wales. The Great Western Railway put up a building in 1934 which has received perhaps the ultimate accolade – inclusion and three-star status in Simon Jenkins’ most recent buildings blockbuster, Britain’s One Hundred Best Railway Stations.

The work by architect Percy Culverhouse is described by Jenkins as clean and confident, and a rare example of proto-art deco. It captures, he claims, the moment when neo-Georgian was flirting with new decorative forms, its finest feature being the main concourse’s superb display of modulated art deco, its space lit by a superb sequence of hanging lights.

It dominated its location when constructed, the only other tall buildings in sight being Charles Bernard’s 1868 Royal Hotel in St. Mary Street and Henry Tanner’s General Post Office in Westgate Street. The new Cardiff General (now Cardiff Central) faced on to a square, originally the grid pattern working class streets of Temperance Town. This was bounded by Wood Street, the river and the rear of lower St. Mary Street. Following demolition of the properties, it was first an open space, and then the city’s bus station.

No longer. The area is named Central Square, but the description does not hold.  Into it have been crammed a series of concrete and glass monoliths that completely bully the station and fail to make the slightest nod to the history of the area and its original form. Government and commercial offices, lawyers, university departments, as well as the BBC’s Wales headquarters are being crammed into this area together with a token bus station for long-distance coaches.

Further development is planned on the other side of the station on the extensive Brains brewery and adjoining sites. The result: thousands of people, many of whom will want to be mobile during the day will arrive by car every weekday into an already heavily congested area, effectively accessible only along the bus-clogged Westgate Street and the Wood Street bridge over the Taff. It is little wonder the Royal Hotel has protested that existing high levels of atmospheric pollution can only increase.

The massing of the BBC building along Wood Street, whatever its modish green credentials, overwhelms its surroundings and joins several other uninspiring blocks completed or due for construction that look like they have been dropped in randomly from above. A corridor running through to the Principality Stadium tells you where priorities for the redevelopment lie – ensuring rapid access and egress to the stadium on rugby and pop concert days. Don’t be surprised if this processional way – and much of the rest of the Central Square environment becomes an unpleasant wind tunnel on winter days. The station frontage, too, is set to lose its clean, unobscured lines, buried under a steel and glass canopy for new retail – the obsession of Britain’s station owners. If money is to be spent on the station, how much more sensible and convenient it would be for passengers just to cover the exposed, elevated platforms against wind, rain and seagulls!

Cardiff’s planners have fallen in love with the idea that a landscape dotted with mini-skyscrapers equals prosperity so that it would seem anyone with a plan for a multi-storey building is shown the red carpet.  A towering stump has now emerged to overpower the former Pembroke Terrace Presbyterian Church of Wales in Churchill Way, catering for the latest developers’ fad – student accommodation. Another student block developer was sufficiently emboldened to put forward plans for a corner of Park Place previously occupied by solicitors, Blake Morgan, which would ruin the setting in which Cardiff’s most important ensemble of buildings – the City Hall, Museum, and Law Courts sits.

As marketing expert Roger Pride has recently pointed out, by contrast the few fine old buildings Cardiff possesses lie neglected and he rightly calls for more imaginative uses for architectural gems, particularly around St. Mary Street and not yet more bars and restaurants. He lamented the loss of Cory Hall opposite Queen Street Station and the neo-classical fire station in Westgate Street (now the site of a hideous car park). He could have mentioned others that have gone, including the old Taff Vale Railway’s Queen Street Station itself, Ebenezer Welsh Congregational chapel, (swallowed by Marks & Spencer) and the vast Wood Street Congregational Church (where Southgate House stands).

Other historic buildings have languished for decades in a state of decrepitude, bridesmaids at the redevelopment wedding but never the bride: the GPO building in James Street and the adjoining Cory’s Building, or the buddleia-bestrewn Bute Street (Cardiff Bay) Station, believed to have been the work of Brunel. The GPO in Westgate Street, too, lies empty, and House of Fraser’s James Howell store awaits an uncertain fate. In case it does not continue in something like its present use, have the city’s planners even thought about an action plan to try to find an appropriate use for this iconic building or will developers determine what happens to it?

The student block bubble could, too, be about to burst, as declining student numbers suggest. Some developers have been trying to escape the conditions under which planning permission was granted, seeking temporary dispensations to let the apartments to non-students until demand catches up. This brings with it the danger that Cardiff – and many other university cities – will be left with unsuitable buildings that because they were meant for students have been built to much lower standards than is required for normal domestic occupation. If too many are built, or student numbers fall, they will need to be adapted for other uses or will remain empty.

It must be said, of course, that Cardiff is a succes d’estime.  The chefs Sarit Packer and Itamar Srulovich, writing in the Financial Times this summer, seem to have been blown away by their first visit, loving the Castle Arcade, the animal wall at Cardiff Castle, and the buzzing atmosphere. Indeed, Cardiff has established itself as a visitor destination, able, like historic Bath, Bruges and Bologna to support Hop-On Hop-Off buses around its attractions. Visitors, drawn to a weekend break or to attend a sports fixture, opera or a pop concert, seem impressed. As a city it punches above its weight.

One cannot help thinking, however, that not a huge amount of thought has gone into how the city’s constituent parts should be organised, what concentrations of activity should be allowed where, and what is appropriate in which place, leaving it with what the visitor stepping out of that art deco concourse at Cardiff Central might now regard as a bit of a (congested) mess. Nearly 20 years ago the distinguished architectural critic, Deyan Sudjic described the Cardiff Bay redevelopment as a sad example of a city that, given a choice between the second rate and the excellent, had no hesitation in grabbing the former with both hands. Plus ça change.

Rhys David is an author and economic commentator. This article also appeared on the website http://www.WalesBusiness.org

August 22nd, 2018