Northern VCTs and Mercia

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The 3 Northern VCTs (Northern Venture Trust, Northern 2 VCT and Northern 3 VCT) are proposing to novate their management agreements with NVM Private Equity LLP in favour of Mercia Asset Management.

I looked at the NVM Private Equity LLP accounts and they show turnover of £12.5 million whereas the Mercia RNS says the bit they are buying has £7.5 million turnover (and £270 million AUM), but there is no explanation of the difference in the RNS.

However, a little hunting on the NVM website reveals that LP Investors is NVM’s institutional buyout fund (Size of fund: £142 million). Its NVM Vintage III will finance management buyouts of growing UK businesses, investing between £5 and £15 million in each transaction. The fund has completed six deals; one in December 2019 with a £11.6 million investment in King Construction, two in September 2019 with investments in Mobius RetailSecure Retail, one in July 2019 with a £7.0 million investment in Chemigraphic, one in February 2018, acquiring a majority stake in Dale Power Solutions for £9.0 million, and one in June 2018 with an £8.2 million investment in Flexioffices. All six businesses operate in highly attractive markets with clear catalysts to growth.

It is not clear where the best deals are allocated, or if all 4 companies get treated equally and fairly.

NVM Private Equity LLP has nine partners and 19 employees. 9 employees will be transferred to Mercia. 2 partners Tim Levett and Charlie Winward will continue to “lead” the “new VCT Division within the Mercia group”.

NVM Private Equity LLP latest accounts show the partners receiving £2.606 million remuneration and a further £3.684 million in partners’ profit share, a total of £6.290 million, i.e. approx £700,000 per partner, on average though no doubt some get more and some less.

If the Mercia deal goes through and if the earn out is achieved, the NVM partners will receive £25 million, i.e. an average of nearly £3 million each.

On top of this they will still have their highly profitable, fast growing institutional fund business.

NVM Private Equity LLP accounts show £12.5 income on £410m AUM so they are taking in 3% pa whereas investors returns were only 3.6% since launch according to Roger Lawson .

Too much is going to the well paid NVM partners who have sold out possibly at the very top. Well done to them, but not good for investors in the VCTs.

Mercia average pay is £110,000 so, if they can achieve the same cost base with the NVM VCT Division in the future, this is a great buy. There are three year non competes for Mercia to get this done.

Don’t forget that these people are not based in LONDON. They are in Birmingham, Manchester etc where the rates of remuneration are much lower.

However, there is a risk/hope (depending where you sit) that the Boards of the Northern VCTs will wake up, review the costs they are being charged and successfully negotiate down the management agreement. However, the intention is that the deal will complete on or around 23 December and the VCT AGMs will occur on 7 Jan 2020, too late for the best timing (from the VCTs’ shareholders point of view) for the management agreements to be renegotiated.

The problem issues of VCTs are high management fees, performance fees, directors’ tenure and independence. Please join the ShareSoc VCT Investors Group and help improve returns for VCT investors. Join here

I own shares in Mercia and Northern Venture Trust, 2 and 3.

Cliff Weight, Director, ShareSoc

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