Appetite for venture capital trusts continues to grow, as investors flock to their generous tax breaks and the chance to back high-growth companies.
Venture capital trusts raise money from investors to invest in young, usually privately-owned companies that are not themselves listed on the stock market, or those with shares trading on the junior market Aim.
VCTs themselves are stock market listed and deliver much of their returns to investors through dividends, with some juicy tax breaks to encourage them to back fledgling companies and reflect the risk involved.
Over the last financial year VCTs which are part of the Venture Capital Trust Association’s portfolio have delivered an average total return of 24 per cent.
Younger investors are becoming increasingly attracted to VCTs’ generous tax breaks and the chance to invest in high growth startups
Traditionally, VCTs attracted older and wealthy investors encouraged to take advantage of the tax breaks by financial advisers, particularly to those focussed on more stable dividends.
However, rule changes shook up the VCT market and made trusts focus more on scale-up companies.
A period of good performance and interest in backing early stage businesses – fuelled by high profile tech-influenced growth success stories – means VCT managers have reported the demographic of investors has shifted in recent years, away from older, high net worth individuals to younger professionals.
Unicorn AIM VCT’s £25million share offer reached full capacity after two weeks while Mobeus VCT, a generalist manager, hit its target in less than a day.
We look at the new kind of VCT investor and whether it might be the right investment for you.
Why invest in a VCT?
A big attraction of VCTs has long been the generous tax breaks they offer. Investors can claim up to 30 per cent income tax relief on the amount they have invested in a VCT, provided they hold the investment for at least five years.
The amount of income tax investors claim cannot exceed their amount of income tax due.
HOW TO INVEST IN VCTs
VCTs raise funds periodically by issuing new shares through an offer for subscription. Investors can buy shares in new offers through a specialist broker like Wealth Club, or invest directly through an online discount broker or financial adviser.
As VCTs are listed companies, investors can also buy shares on the open market through a broker. But it is vital to realise that second-hand VCT shares do not offer the same upfront income tax relief that is available with new shares. Investors can still take advantage of any tax-free income and growth.
The maximum amount investors can invest in VCTs is £200,000 per tax year and the minimum depends on the VCT, but is usually around the £5,000 mark.
VCT initial charges can be as much as 5 per cent, partly because they require more management than more mainstream investments.
VCTs also offer tax-free capital gains and tax-free dividends.
Aside from the tax benefits, VCTs also offer investors exposure to the UK’s growing number of high-growth technology companies.
As an investment trust, when someone invests in a VCT they become a shareholder of the trust itself.
It means investors can get exposure to any investments the VCT makes after the investment, as well as the existing portfolio.
The UK is a leader in Europe for creating innovative start-ups and scale-ups but they are underrepresented in the main FTSE stock market indices.
Research by Wealth Club, a platform that offers investors the chance to invest in VCTs, shows that almost half of VCT investments are in businesses that have grown revenues by more than 25 per cent year on year.
This is in stark contrast to the UK main market, where just 5.9 per cent of companies have achieved growth.
Alex Davies, of Wealth Club, said:‘Whilst many UK main market companies have grappled with the headwinds brought on by the pandemic, many early-stage healthcare or tech-enabled businesses have thrived as changing consumer and business spending habits have favoured businesses that are taking full advantage of new technologies.’
One investor, aged 34, who asked not to be named, said: ‘I first made a VCT investment in 2015, and a strong flow of dividends from VCTs following successful exits has encouraged me to invest more over the years.
‘As a small private investor, VCTs provide the ability to invest in growth businesses that professional managers have carried out due diligence on and see significant potential in.
‘VCTs are a far more compelling investment opportunity than AIM shares where small private investors do not have the benefit of a professional money manager who can access more information and opportunities than a private investor.
‘I also like the fact that my subscription money is used in the real economy to support jobs and create value.’
Titan VCT backed serial entrepreneur Alex Chesterman’s used car marketplace Cazoo which listed last year
There have been a number of successful UK company exits from VCTs in the past year.
Titan VCT backed Depop and Cazoo which both achieved valuations of more than $1billion in their respective exits, while Pembroke VCT, which primarily invests in consumer facing brands, had profitable exits from brands like Pasta Evangelists and Plenish.
While the success stories have been much publicised, investing in high-growth private companies comes with risk – and there are many investments that fall flat along the way.
This is why VCTs adaopt a portfolio approach, backing many risky companies on the basis that those that succeed can outweigh those that don’t.
Much of the return from VCTs also comes from dividends and share prices can be relatively static, compared to the performance of stock market listed growth companies, and even fall below their quoted net asset value for prolonged periods.
Performance varies wildly across the sector. Some large VCTs have seen share prices jump between 20 and 30 per cent over five years, while others have plunged over 20 per cent.
Wealth Club clarifies that VCT investments are long-term and ‘not for everyone’. Prospective investors should be aware that they could wait years for investments to pay off and could lose their money on those that fail.
Investors need to be aware that VCTs come with relatively high charges compared to more standard investment trusts or funds. The tax benefits also come by investing directly into new shares, not from buying VCTs second hand on the market.
Are VCTs attracting a new type of investor?
Tax breaks mean VCTs have historically been the preserve of older, wealthier investors with a large number of trusts targeting stable, dividend-paying assets rather than high-growth companies.
But changes to VCT investment and limits on high earners pensions, mean they have become more mainstream and starting to attract a pool of new, younger investors, albeit often wealthy ones.
The average age of Wealth Club’s VCT investor is 57.6, with a quarter of clients between 50 and 60. However 28 per cent are between 20 and 50, suggesting a growing number of millennials are flocking to VCTs.
Wealth Club’s criteria for VCT investment is sophisticated investors or minimum £100,000 annual salary and/or investable assets of £250,000 or more, excluding their main residence and pension.
Alex Davies, founder of specialist VCT broker the Wealth Club
It means a large number of investors are headteachers, doctors, accountants and lawyers and not just high rolling City workers.
‘The typical investor invests only £15,000. They may well invest regularly, potentially, every year, or every other year,’ says David Hall, managing director of YFM Equity Partners and chair of the VCTA.
They are also adopting what Pembroke VCT CEO Andrew Wolfson calls a ‘scatter gun approach’ and investing in a few VCTs at the same time.
Women hold an average of 2.4 VCTs, according to Wealth Club figures, while men hold 3.1.
Another investor, also aged 34, said: ‘I started investing in VCTs four years ago and generally drip feed into one new VCT a year to derisk it. However, this year I have invested in four different VCT backed companies as I think they are a good mix of risk vs reward.’
How to pick the right VCT for you
Broadly there are different types of VCT: generalist, Aim and specialist.
The most common is generalist VCTs, which invest in a wide range of small, usually private companies in a range of sectors. They focus on diversification across many early stage companies, which they will often then try to actively work with to help them grow and succeed.
Often VCTs will look to back established entrepreneurs and some target particular types of company or sectors.
Aim VCTs invest in new shares issued by Aim-listed companies and target tax-free growth as well as income. Because they are investing in listed firms, the price of these trusts can be more volatile, because the companies are constantly being valued by the stock market rather than assessed periodically, as with unlisted businesses.
However, there is more flexibility for them to enter or exit investments, because ordinary shares are more easily sold on the market.
There are also specialist VCTs which focus on just one sector, and the more rare hybrid trust like Baronsmead VCT which invests in both generalist and Aim companies.
‘We’ve seen over the years a complimentary return profile and complimentary investment and divestment profiles,’ says Baronsmead manager Bevan Duncan.
‘It was evidenced if you looked immediately post the first national lockdown… We had public markets reacting quite quickly and the drop in public markets in our portfolio was quite significant. But they recovered quicker too as the government started introducing different support initiatives.
‘The private equity portfolio was down less but took a little bit longer to recover. Those dynamics mean that the overall investor gets a more balanced, steady return.’
What VCTs are on offer?
Baronsmead VCT, which targets a dividend of 7 per cent, is currently open to investment and has already raised £60.7million of the targeted £75million.
Wealth Club’s Davies says the ‘diverse investment portfolio and relatively low minimum investment (£3,000) means this could be a good starting place for investors looking to dip their toe in VCT investing for the first time.’
Pembroke VCT, which targets a dividend of 3p per share is seeking £40million before its offer closes on 5 April.
Investors can receive tax-free dividends every month of the year
Alex Davies, Wealth Club
Wealth Club’s Davies also highlights Albion VCTs, a well-established generalist VCT manager, which focuses on large business-to-business software companies and more mature asset-backed investments like renewable infrastructure and schools.
‘These more mature income generating asset help to underpin the dividend, and it’s this dividend which is Albion’s key differentiator.
‘By spreading your investment across all six Albion VCTs (a minimum overall investment of £6,000) investors can receive tax-free dividends every month of the year, not guaranteed – potentially making this an attractive option for those looking to derive an income from their investments.’
|Name||Type||Target dividend||Initial charge||Funds raised/sought||Deadline|
|Albion VCTs||Generalist||5% of NAV||2.50%||£50.5m / £85m||25 Feb 2022 for first allotment|
|Baronsmead VCTs||Generalist||7%||4.50%||£60.7m / £75m||23 Feb 2022 (noon) for next allotment|
|Northern VCTs||Generalist||4.5% to 5% of NAV||4.50%||£30.1m / £40m||31-Mar-22|
|Pembroke VCT||Generalist||3p per share||5.50%||£28.5m / £40m||5 Apr 2022 (noon) for 2021/22 allotment|
|Amati AIM VCT||Aim||N/A||N/A||£25m sought||Coming soon|
|Blackfinch Spring VCT||Generalist||5% from 2024||5.50%||£3.1m / £20m||4 Apr 2022 for early bird saving|
|Calculus VCT||Generalist||4.5% of NAV||5%||£2.8m / £10m||31 Mar 2022 for 2021/22 allotment|
|Downing FOUR VCT – Aim shares||Aim||Not specified||4.50%||£1.3m / £10m||11 Feb 2022 for early bird saving|
|Downing FOUR VCT – Healthcare shares||Specialist||4% of NAV||4.50%||£1.5m / £10m||11 Feb 2022 for early bird saving|
|Downing FOUR VCT – Ventures Shares||Generalist||4% of NAV||4.50%||£2.2m / £10m||11 Feb 2022 for early bird saving|
|Foresight Enterprise VCT (formerly Foresight 4 VCT)||Generalist||5% of NAV||5.50%||£300,000 / £20m||28-Feb-22|
|Foresight Williams Technology Shares||Generalist||5% of NAV from 2024||5.50%||£350,000 / £20m||01-Apr-22|
|Maven Income and Growth VCTs||Generalist||5% of NAV||5% of NAV||£18m / £40m||4 Apr 2022 (noon) for 2021/22 allotment|
|Octopus Future Generations VCT||Sustainability focus||5% of NAV from 2025||5% of NAV from 2025||£3.2m / £20m||1 Apr 2022 (5pm) for 2021/22 allotment|
|ProVen VCTs||Generalist||5% of NAV||5% of NAV||£11m / £40m||31 Mar 2022 for first allotment|
|Puma Alpha VCT||Generalist||5p from 2023||3%||£871,000 / £15m||11 Mar 2022 for early bird saving|
|Puma VCT 13||Generalist||4p-6p||3%||£17.8m / £25m||28 Feb 2022 for early bird and dividend|
|Seneca Growth Capital VCT||Generalist||3p per share||5.50%||£1.5m / £10m||28 Feb 2022 for initial saving|
|Triple Point VCT 2011||Generalist||5p per share||5.00%||£6.3m / £10m||5 Apr 2022 (noon) for 2021/22 allotment|
|Source: Wealth Club (as of 10 February 2022)|