Today (10 November) HM Treasury has confirmed its commitment to replacement capital for venture capital trusts.
Speaking today at an Association of Investment Companies conference on VCTs, David Gauke, financial secretary to HM Treasury, said: “I’ve made a commitment to introduce greater flexibility for replacement capital in the schemes.
“While this is subject to state aid approval my officials are already engaging with the European Commission to deliver this.
“Following the Summer Budget announcements, many of you made representations to me and my officials about the issue of replacement capital, which is the purchase of secondary shares when accompanied by a significant new investment into a business.
“While the primary purpose of these schemes is to provide funding for small companies many of you have put forward the argument that as part of new investment some reorganisation of capital may be needed. This can involve the need to purchase the shares of existing shareholders.
“I’ve listened to your concerns and as a result I’ve made a commitment to introduce greater flexibility for replacement capital in the schemes.”
The post-general election Summer Budget, which took place in July 2015, introduced additional new rules for VCTs.
As well as providing new capital, VCT deals often involve an element of replacement capital (to buy out an employee shareholder, external shareholder, or allow management to realise some capital) – this will no longer be permitted
The implications of this is if VCTs can no longer provide replacement capital, they will be seen as a less attractive source of funding.
The rule means management buy-out (MBO) transactions will no longer be possible – these are the bread and butter of many generalist VCT managers, chiefly because of their simplicity and lower-risk profile.
Experts predicted the investment universe will be reduced and a funding gap will be created.
Speaking at the same event, Guy Rainbaird, public affairs director at the Association of Investment Companies, said “We have to recognise that however much internally as an industry we find difficulties with these new rules the constraints that the government faces are pretty tough and if you think about replacement capital itself this is sort of illustrative.”
ruth.gillbe@ft.com
