As managing director of Close Ventures Limited, Patrick Reeve leads a team that runs seven VCTs with total net assets of £250 million. These funds have already returned £65 million to shareholders since 1996.

‘There are three things that we try to achieve for our investors,’ explains Reeve. ‘The first is that we try to secure a regular, rising and quite high dividend yield, which is tax free in a VCT. Secondly, we try to provide some degree of capital protection, investing in core holdings that provide stability to the portfolio, so that we can use the balance of a fund to take a little more risk. This brings us to our third objective, which is to offer the possibility of an improvement in capital value.’

Such a strategy would seem to run counter to the perceived risk profile of VCT-qualifying investments, but, as Reeve points out, ‘You have to start with a good, solid base of companies with strong asset backing, for example a freehold fitness and leisure club or a freehold pub. If you can establish a core of these asset-backed investments within a portfolio, that is a real bonus.’

Doing the splits
He says, ‘You have a rough general split of 50 per cent in asset-backed companies and 50 per cent in growth companies. Then you want to make your actual investments as different

as possible from their peers by, for example, investing in a pub in a particular area or in a healthcare company or software developer that are the leaders in their particular fields. That way, sooner or later, someone is going to want to buy them because they are the only way that they can get into a particular area.’

Reeve and his team construct portfolios that stick to the particular restrictions of the VCT rules. This, he argues, is the core of the Close Ventures approach to identifying growth companies. ‘For example, on the asset-backed side, one of our investments is The Weybridge Club, a freehold health and fitness club on 30 acres in Weybridge. That is a pretty unusual investment proposition and at some point someone is going to find that there is considerable value in acquiring that business.’

He adds, ‘On the software side, we are invested in Helveta, a company that provides the only current tracking system for tropical timber. That is a very specialised, niche area, but the way of the world these days is that there is a growing demand to track this type of product and this company is in a strong position to benefit from that.’

Not that a distinctive business niche alone is any guarantee of success. Reeve stresses, ‘Of course, you need to have good management in place. When we come to the business of actually making the investments, there are two key questions to ask. The first is how good is the market opportunity for a specific company, which is where the question of its uniqueness is so important. The second is to determine whether the management team is good enough.’

A healthy spread
Growth companies in the portfolio are drawn from across a range of market sectors with evident growth prospects. Reeve reports, ‘We like healthcare a lot, be it providers of actual healthcare services, such as Grosvenor Health, high-tech services supplying the healthcare industry, including Xceleron, which provides an analysis service to drug development companies, or, indeed, medical instruments suppliers, for example Dexela, which is developing scanning equipment to detect breast cancer. The rest of the portfolio will be in companies that could be in healthcare or in high technology industries, but could equally be in low-tech services or even manufacturing sectors.’