The Venture Capital Trust (VCT) market could suffer a sharp contraction in fundraising as it attempts to cope with incoming EU restrictions, according to Tilney Bestinvest.
Some 90 per cent of the 11 VCT groups responding to a survey by the wealth manager believed fundraising will be less than £350m in the current tax year, with the average estimate standing at £273m. In 2014/15, £429m was raised.
The survey follows the announcement in the summer Budget of proposed changes to VCT rules in order to comply with European state aid regulations.
These include the prohibition of the use of VCTs for acquiring a new business - meaning they can only be used for development capital purposes - and the introduction of an age limit on companies eligible for VCT financing.
The new rules will also prevent funding provided by VCTs from being used to finance acquisitions by companies held in the portfolio.
Jason Hollands, a managing director at Tilney Bestinvest, said: “These latest changes, which emanate from the European Commission, are more disruptive in scale than previous incremental adjustments. In the near term this is expected to adversely impact fundraising as VCTs adjust to the potentially narrower investment universe available.”
Any contraction in fundraising could come as a blow to advisers expecting to increase their use of VCTs to support individuals affected by the recent reductions in pensions lifetime allowance and tax relief for high earners.
Mr Hollands added: “VCT investors need to be mindful that over time there will be a gradual shift in the risk profile of many VCTs, as new investments are ploughed into development capital deals in earlier phase companies than those backed in the past.”
