Baronsmead venture capital trusts (VCTs) shored up Strategic Equity Capital (SEC) with a £10m investment two months before the Gresham House stablemate announced a 100% tender offer due to take place in October.

Second quarter updates for the £200m Baronsmead Venture Trust (BVT) and £204m Baronsmead Second Venture Trust (BMD) revealed they each “invested £5m into one investment trust, Strategic Equity Capital plc” without disclosing that, like them, the £155m listed smaller companies fund also has Ken Wotton, Gresham House’s head of public equities, as fund manager.

Both VCTs were already significant investors in Wotton’s open-ended funds. At 30 June Baronsmead Venture Trust held 29% in his £136m WS Gresham House UK Micro Cap, £655m Multi-Cap Income and £297m UK Smaller Companies funds, down from 31% three months earlier. That represented £64.7m of its £223.4m net assets.

Baronsmead Second Venture had an unchanged 26% in its manager’s open-ended three equity funds at 30 June, or £58.7m of its £226.1m net assets.

Their £5m investments in Strategic Equity Capital in July would have lifted these figures to £69.7m and £63.7m respectively. This would have left Baronsmead Venture with just over 31% exposure to Wotton’s funds, unchanged from 31 March. Baronsmead Second would have had seen its allocation increase to 29%. However, these figures do not include the gains the funds made in the second quarter and so the actual level could be higher.

In their 2024 annual reports, the VCTs described the three open-ended Wotton funds as “a core component of portfolio construction”, providing the “hybrid” portfolios of unquoted and quoted companies with “additional diversification through exposure to an additional 76 underlying companies and access to the potential returns from a larger and more established group of companies that fall within the manager’s core areas of expertise”.

Stake lifted before tender offer

The addition of Strategic Equity Capital, trading at a 6.7% discount to net asset value when the tender offer was announced on 15 September, gives the VCTs cheap access to a portfolio with a similar AIM and small-cap focus as Gresham House UK Micro Cap.

Over the five years to 31 August under Wotton, Strategic Equity achieved a total 72.6% increase in net asset value, underpinning a 104% total return to shareholders. That beats the 20.9% from the UK Micro Cap fund he runs with Brendan Gulston, although the fund does much better over 10 years with a 95% return that’s closer to the 100% NAV return of the investment trust although its shareholder return over that period lags at 71%.

The tender offer announcement honoured a commitment made three years ago to allow investors to sell all their shares in the investment trust at close to net asset value.

We highlighted that Gresham House had lifted its stake to 17% without knowing it was the Baronsmead VCTs that had bought in. The move from 10% in early July could be seen as a defensive corporate strategy given that Gresham House has said it will not it sell its SEC shares through a tender that could threaten the trust’s viability if a large number of shareholders exit.

From an investment perspective, the purchases could have been better timed. According to Gresham House stock exchange filings, the VCTs made four purchases in SEC between 8 and 29 July, the largest of which was nearly £5m on 22 July. At that point the shares stood at 378p having rallied 40% from an April low of 272p, and up 14% since the start of the year. Since 29 July they have fallen 4% to 363p, widening their discount to over 12%.

Second quarter bounce

In the second quarter Baronsmead Venture grew 6.9% with net asset value per share of 52.8p at 30 June, though this dipped to 50.9p by 31 August. The 29% in AIM-listed stocks and the same amount in Wotton’s funds generated the bulk of this advance with an 11.1% return over the three months as global markets rebounded after first quarter falls over US tariff fears.

Unquoted investments, which make up 26% of assets, rose 2.2%, largely driven by an auction for Panthera Biopartners which completed in early August.

The company invested £4.2m in four new unquoted companies and two follow-on investments in two unquoted companies and declared a 1.75p per share dividend in September.

Baronsmead Second, a sister fund, grew 7.2% in the second quarter with NAV per share at 55p at 30 June that fell to 52.9p in August. It too benefited from the sale of Panthera, the rally in its quoted investments and declared a 1.75p dividend. It invested £4.1m in the four new unquoted companies and two follow-on investments.

Both VCTs invest in technology-led smaller businesses in consumer, healthcare and business service companies. It has been a tough five years with shareholder returns of just 10% and 7.9% for the two VCTs, according to the Association of Investment Companies. Over the same period, SEC has returned 49.2%.

However, Wotton is optimistic that the FTSE 100’s 12% rally this year will trickle down to smaller UK companies and reinvigorate fund raising by private companies. The Baronsmead VCTs plan to raise money in the 2025/26 tax year with prospectuses due next month.