Bad name, poor returns?

Venture Capital firm NewMediaSPARX has managed returns of just 1.5% a year. Ridiculous names can be a good way to spot poor investments - or just keep an eye on 'administration costs'.

If I were paying a team of seven directors a cool £5m for managing an investment portfolio valued at £79m I would expect something pretty damn good.

I would certainly expect something rather better than a share that has only managed to ascend from the 10p at which it was launched on the stock market back in 1999 to the 11.25p at which it stands today. And before you ask No, there have not been any dividend payments.

This return, equivalent to 1.5% for each year of its existence, has been the reward meted out to shareholders by NewMediaSPARK, a company that takes money from shareholders and provides it in the form venture capital to young companies in the areas of LifeSciences and Technology.

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As a diversion from the agony of travelling aboard Great Western Railways I read this on the train yesterday, and I cannot say that it did much to cheer me up. Except, that is, for the fact that my own money has not been invested in this other example of a slow moving vehicle.

I sent off for this report in order to prove a theory of mine, which is that any company with a silly name is to be avoided. And although I admit that NewMediaSPARK was not the original name it only became this after NewMedia had merged with SPARK I don't consider that any excuse.

Today, I see, the company has changed its name again, this time to SPARK Ventures (SPK), so I will be able to test another of my theories, namely to avoid any company that is so confused about its identity that it feels the need to waste shareholders money on changing it. Or undergoing a re-branding exercise' as the marketing men say.

Anyway back to the Annual Report and for a company that, by the size of the directors' pay packets, clearly thinks that it is doing something pretty valuable, you will not be surprised to hear that this is a long, glossy document featuring the smiling faces of the geniuses in charge.

Tanned faces beam from open necked shirts with the sort of self satisfied expressions known only to those who work in swanky offices and earn huge salaries while appearing to do nothing much to earn it.

The Annual Report is also written in the sort of breathless, folksy, techno babble that was invented in the late 1990s when the future of the world seemed to lie in the hands of Silicon Valley denizens who knew how to harness the potential of the world-wide web. Chairman Tom Teichman launches the report with the following cheerleader: It has been a remarkable year for us a solid year of achievement and building.'

If you say so, Tom

He then boasts that NewMediaSPARK has managed to cash in one of its investments (or exit' as the professionals say) for twenty times its original cost, a clear case of selective use of statistics I should say. Keen to give the impression that lucky shareholders are in exalted company Teichman oozes, We particularly welcome the arrival in our investor circle of several highly prestigious LLP (Limited Liability Partnership) investors including some of Europe's largest and most respected investment funds.'

Having directed such encomium at the shareholders Teichman then turns his flashing smile towards those who run the businesses into which NewMediaSPARK has invested their money. These, he assures us, are extraordinarily sharp, seasoned and determined entrepreneurs.'

With such a combination of acute investors and dynamic investees the conclusion is inevitable. We see today's conditions as an opportunity for New Media SPARK to stand in the middle of a great deal flow,' and We are well placed to build a sound and valuable business long term.'

On the evidence so far shareholders in this outfit must have an excess of optimism. They might wish to question why they are paying New MediaSPARK's management so very highly for investing their money or their own investors' money to be precise, to add one more layer of professional fees into the equation and getting so little in return.

Lapsing into candour, Teichman admits that Venture Capital has underperformed most major equity investment categories in Europe over the last ten years, something he attributes to the fact that such funds cannot supercharge their returns by using borrowed money.

But if I were him, or for that matter his faithful investors I would look a bit closer to home. After all NewMediaSPARK is now valued at £46m and has net assets of £72m. But since in the last two years £26m has been spent on Administrative Expenses' of which salaries are much the largest constituent, the value of NewMediaSPARK's investment portfolio has got to achieve an annual growth rate of close to 20% just to prevent shareholders' interests from going backwards.

Welcome to the world of venture capital. I think we know who makes money out of this triumph of hope over experience. And it certainly is not the outside shareholders in such failed babies of the dot-com era as NewMediaSPARK.

This article is taken from Tom Bulford's free daily email Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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