Venture capital trusts (VCTs) remain front of mind for both SMEs and investors. In the 2016/17 tax period, fundraising stood at £542m – the highest figure in more than a decade – according to the Association of Investment Companies (AIC). Also, measures in last year’s budget and recommendations in the Patient Capital Review indicate that policymakers continue to see the strong value VCTs provide for both SMEs and investors and so, for 2018, the signs point to another strong year for the sector.
Here, Bill Nixon, Managing Partner at Maven Capital Partners, looks at the growth of VCTs as an asset class, their appeal to investors, and gives his view on the continuing value of VCTs as a source of SME finance.
The success of new share offers by the leading managers over the past few years illustrates how VCTs have increasingly been recognised as a mainstream asset class in investment planning and are becoming a common part of tax efficient and income-focused portfolios. Fundraising across the VCT sector as a whole has climbed steadily in each of the past five years, including a rise by around a fifth in 2016/17.
This burgeoning demand for VCT investments has been driven by strong long-term returns. Research by the AIC last year revealed that the top 20 VCTs returned on average 82 per cent by share price total return (a measure which takes into account both capital returns and dividends paid to shareholders) over the past decade. The very best performers achieved overall returns well into triple digits: for example, Maven’s Income and Growth VCT returned 187 per cent in that period. Top up share offers by Maven VCT 3 and Maven VCT 4 remain open, for both 17/18 and 18/19 tax years, with around £27m already raised from more than 1500 investors.
VCTs are attractive partly because they enable investors to enjoy significant tax benefits when putting their money into smaller, entrepreneurial UK businesses and participating in their growth. Investors in VCTs receive a 30 per cent upfront tax break, as well as tax free capital gains and dividends – provided they are willing to remain invested for at least five years.
The Government’s aim in providing these reliefs is to encourage more capital to flow into riskier, early-stage companies. While this investment risk is an inherent feature of VCTs, it can be managed effectively for an investor by carefully choosing the VCT manager. The leading managers have up to 20 years’ experience of VCT investment and will employ a range of measures to achieve significant diversification and robust asset selection. An experienced manager will work closely with every business it backs, providing strategic counsel and operational expertise as the business grows.
Despite some concerns ahead of last year’s Budget that the levels of tax relief might be reduced, it instead adjusted investment criteria to ensure than VCT schemes continue to focus on investment in companies for long-term growth and development, rather than ‘lower risk’ investment primarily aimed at preserving capital. These changes confirm the position of VCTs as a vital means of drawing private investor capital to the SME sector and should ensure that VCTs remain attractive for investors. The continuing availability of long-term patient capital, at what is an increasingly important time for the UK economy, should give comfort to dynamic smaller businesses that they can continue to access vital equity finance, whilst allowing investors a route to participate in their success.
During the past couple of years it had also become clear that significant improvements were needed to HMRC’s Advance Assurance process, which had resulted in unnecessary delays to receiving VCT clearance on a large number of potential VCT deals. Streamlining Advance Assurance had been highlighted by managers across the sector as an important step in more efficiently directing capital to entrepreneurial businesses, and potentially boosting returns for investors. It was therefore encouraging that the Budget also announced that HMRC aims to enhance that approval process during the early part of 2018, which should help to improve the rate of new investments receiving VCT clearance and allow VCT managers to provide funding to the best available companies in a timescale that suits their growth plans.
Overall, VCTs have shown their worth from both an SME and investor perspective and this year’s fundraising is going well, with one or two VCT offers having already closed to investments. In the three years to mid-2017, VCTs had injected around £1.4bn of investor money into SMEs, illustrating their role as growth company funders and their performance and returns should see them further consolidate their position as an increasingly mainstream asset class in tax efficient and income-focused investment portfolios.