British Smaller Companies VCT (BSV) has been one of the more successful Venture Capital Trusts in terms of fund performance – it is managed by YFM. The NAV Total Return has been 106.9 over the last ten years according to the AIC (i.e. investors have doubled their money), beating the sector performance for generalist VCTs of only 64. With high, tax-free dividends being paid, investors have probably been happy.
But back in 2009 the managers performance incentive fee was changed to be primarily dividend based. I protested strongly at the time because I had experienced the perverse outcome of such an arrangement previously at the Spark/Quester VCT where massive dividends were paid out when there were no profits to cover them. This resulted in a very large payment to the retiring fund managers which was totally unjustified.
VCTs often pay out more in dividends than the reported accounting profits because they can do so from investment realisations, while ignoring the unrealised losses on the portfolio.
The change at BSV has now resulted in a similar anomaly. Last year the company paid the manager a performance fee of £3.6 million on top of their base fee of £1.9 million when the balance sheet assets at the start of the year were only £96 million and fell during the year (year end is March) due to dividend payments.
The incentive fee was crystalised because of very high dividend payments including 22.0 pence paid in the year when reported earnings per share were only 4.6 pence. These massive payments have resulted in total fees (including administration costs) being 6.9% of net assets at the end of the year when it was 2.8% in the prior year and 2.6% in the year before that, i.e. more typical of the fees paid for managing VCTs albeit they are high anyway.
Now director Philip Cammerman who has links to YFM is stepping down from the board after 21 years of service (way too long of course), but I will be voting against Chairman Helen Sinclair who has consistently supported the above arrangements and probably against the other directors also. I suggest other shareholders might wish to do the same unless the board has a change of heart about the merits of these arrangements.
Incidentally BSV did raise more capital by a new share issue earlier this year. That raised £4.1 million. Will investors be happy when they realise that most of that may simply have been used to pay the manager’s performance fee? A quick read of the prospectus issued at the time does not appear to highlight the pending fee payment.
This case surely reiterates the necessity for publishing some guidelines on what are good and what are bad performance fee incentive arrangements for VCT fund managers. That’s if they need them at all when they already have a fixed base fee in place which I believe should be sufficient. Amati VCT2 whose AGM I will be attending today manage to do well without any performance incentive fee (total return last year of 22%).
Roger Lawson (Twitter: @RogerWLawson )
Addendum: ShareSoc will shortly be launching a special interest group for VCT investors. Watch this space for further details!