The venture capital trust landscape will adapt and innovate to compensate for the new rules announced in the summer Budget, industry voices have said.
A number of rule changes were announced in the summer Budget for VCTs, including a proposed company ‘age limit’ drastically scaled back further with investment now to be directed to companies within seven years of their first commercial sale (10 in the case of “knowledge intensive” companies), clearly directing VCTs towards much earlier-phase businesses.
Current VCTs have backed companies that were first set up decades ago, but have helped them, often under new management, grow significantly.
Additionally, the lifetime limit for tax advantaged funding has been carved back from £15m in March to £12m, an adjustment that might partially reflect exchange rate changes, since these rules are being driven by Europe.
Tim Levett, chairman of NVM private equity, said that there will be some change and the consequence will be that funding for older companies will dry up because there won’t be any one to fund them.
“Other funds will have to be formed to fund those businesses but it won’t be VCTs.”
He added: “The VCT industry has had to adapt to rule changes in the past. This time around the industry will adapt so the funds will go on. However, there will be a change in the profile of investment but not a change in the level of investment activity itself.”
Eliot Kaye, director of Puma Investments and manager of the Puma VCTs said that due to the fact there are substantial differences in what is available in the VCTs industry, the new rules affect different areas to different degrees.
For example, looking at the Aim market, he warned that a lot of companies coming to the Aim market are over seven years old.
He said: “It appears that the universe for Aim VCT managers is restricted. For generalist VCTs, it should be easier.”
Mr Kaye said that the one unexpected rule which came about in the summer Budget 2015 states when a company takes money from a VCT it may not use the cash to acquire shares of another company or assets of another business.
Speaking to FTAdviser, he said: “The European Commission do not like management buyouts... these have been prohibited by the new rules, which was not expected.
“There are a number of generalist VCTs that have only done management buyouts [historically and they] are affected.”
Mr Kaye added that there are a number of potential unintended consequences of the rules as they are drafted, not just involving direct transactions but that the company is effectively restricted from a buy and build strategy to organic growth only.
“This rule has affected the industry. I’m not sure if that is the intention of the EU or not. Generalist VCTs often will give money to companies to go on a buy and build strategy. Planned exit VCTs are not affected by the rules at all or very little at all.”
ruth.gillbe@ft.com
