Capacity issues in the VCT market could constrain growth in the coming years, despite impressive returns and growing interest from younger investors in a sector that was once the preserve of older generations thanks to the significant tax advantages.
During his keynote address at a Financial Times event on tax planning and tax efficient investing in London this morning, Matthew Woodbridge, head of VCTs at Barclays Wealth, warned of a a “worrying” lack of fundraising from new entrants that could put the brakes on recent growth.
He cited figures from the Association of Investment Companies showing £436m was raised in 2013/2014, the highest of any year except 2004/2005 asnd 2005/2006, when the income tax relief was briefly 40 per cent instead of the current 30 per cent.
However, fundraising plans announced for 2014/2015 currently total just £342m, with one or two established names yet to release figures.
Mr Woodbridge said that while he was positive, over sentiment, a lack of new entrants in the wake of recent legislative changes and strong recent fundraising would mean that demand for investment might not be met.
Mark Wignall, chief executive of Mobeus Equity Partners, which raised a record £34m last year, said that demand was high and that the average investor age had dropped recently.
Tim Levett, chairman of NVM Private Equity, told FTAdviser that from its recent subscription analysis there appears to be a very gradual trend towards those aged less than 55 investing in VCTs.
He said: “The majority of investors are aged between 45 and 70, with the 26.8 per cent aged 70 or more being mostly long term holders.”
YFM Equity Partners also highlighted interest from first-time VCT investors, with its latest offer analysis revealing 60 per cent of funds raised this year came from new investors, compared to 46 per cent last year, and that new investors on average invested 32 per cent more.
Demand on behalf of clients from advisers has been growing, but from a low base and at a slower rate than some had predicted might be the case post-RDR, which some have blamed on product complexity, higher risks and lack of access.
Performance, which has historically lagged other fund sectors and forced advocates to rely on the up front tax relief to make the investment case, has improved strongly in recent years, adding to the case for VCTs.
Mobeus has led the pack over five years, with three of the firm’s VCTs featuring in the top 10 of generalist VCTs on the basis of net asset value total return, with the their Income + Growth VCT in particular returning £195.9 from every £100 invested according to AIC data.
In terms of dividend income, often the most attractive feature for older investors especially, the sector as a whole paid out £231m in the year to March 2014, up from £181m on the previous year, according to data from Tax Efficient Review.
The annual compound rate of return for investors that committed funds in the 2004/2005 tax year ranges from 11 per cent to 18 per cent across all of the four managers with a 10-year track record.
Mr Wignall said that recent performance has been down to a rich seam of realisations, meaning each of the firm’s three VCTs has paid at least a 14 per cent dividend this year.
He noted: “Over the summer, we’ve had four separate companies representing £18m of the cost we’ve invested on behalf of our VCTs, that have delivered back £54m in cash.”
Michael Probin, director of investor relations for ISIS Equity Partners, which run the mid-teen returning Baronsmead VCTs, told FTAdviser that there have been a higher than expected number of disposals this year, although this will inevitably lead to less in the future.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, suspected that younger VCT investors could be attracted by the high yields from more established managers, with AIC members in the generalist sector having an average yield of 5.2 per cent this year.
Mr Wignall admitted that the VCT industry has had “some hiccups along the way” but looking at the top performers in the market now, most have had products around for nearly 20 years.
He said: “Most of us have learnt from mistakes, concentrated funds under management and invested in the people and processes to be far more professional.”
