Investors hungry for income, especially those approaching retirement or in early retirement, have been turning to venture capital trusts and enterprise investment schemes.
According to Paul Mattick, head of sales and investor relations for Mercia Asset Management, pension savers have been attracted not only by the tax-efficient nature of the investments, but also the potential for income that, in a world of low growth, can help boost retirement pots.
He tells FTAdviser In Focus what the success of VCT and EIS fundraising has been over the past 12 months and whether too much pensions policy tinkering has turned people towards the asset class to fund their retirement.
FTAdviser: How successful has VCT/EIS fund raising been in the past 12 months, despite Covid?
Paul Mattick: The Northern VCTs, which are managed by Mercia, has delivered some major exits, which meant that we have enough unrestricted cash to carry on investing at the normal pace.
The exits include the sale of Agilitas (October 2020) and Its All Good, plus the recent IPO of Music Magpie (April 2021).
The evergreen Mercia EIS has had a record fund raise in 2020/21, and an impressive series of exits culminating in March with the sale of Oxgene at between 14 to 20x for our EIS clients.
Freezes on tax rate boundaries, pension lifetime allowance, and potential raids on CGT/IHT, all push more investors towards making better use of VCT and EIS.The EIS fund has quarterly closes, targeting deployment in 12 companies in 12 months; for example the tranche that closed at the end of September was 81 per cent deployed by 5th April.
Covid 19 certainly had an effect on our portfolio, and we braced for the worst, but overall the portfolio has been significantly stimulated both in value creation and realisation.
FTA: Word is that more people are using VCT/EISs for pensions. Why is that?
PM: As more and more people are being affected by the pension life time allowance and/or annual limits, advisers are looking at other tax advantaged products and VCT/EIS are seen as a perfect fit.
Both invest in area’s with little or no correlation to major markets and can therefore provide good diversification to a client’s portfolio. Even if clients are risk averse, with the right holistic approach having exposure to small/ micro-cap holdings can be beneficial in reducing risk.
For people looking to augment their income side, VCT’s provide tax free dividends, with Northern VCTs consistently paying strong dividends which can really enhance income, such as in retirement in conjunction with pensions.
For those who are looking to create and manage capital gain, we are seeing a number of advisers recommending annual EIS investments, with a view to the future where a well-diversified EIS portfolio will produce tax free annual exits to enhance income.
Creating an additional cash flow is useful for both pension clients, and those who are still working; reinvestment can be used to mitigate any income tax liability in the future, and take assets out of the estate.
FTA: In an era of low interest rates and lower-for-longer growth, are VCT/EISs still good for income generation?
PM: The tax free dividends are a huge benefit for VCT’s providing income, but EIS’s does not generally pay dividends (as they are taxable).
The regular exits from a well-diversified EIS portfolio can be used to increase tax free “income” or be utilised for re-investment reducing tax on other income.
FTA: What sort of investments within VCT/EIS portfolios tend to provide the best potential income?
PM: Within old VCTs there are a range of pre-2016 management-buyout style companies, most of which will be profitable and paying dividends to the VCT, which tend passes these onto VCT shareholders.
These can provide some level of dividend cover, however, as these companies mature and are exited, dividends from these companies will not support the VCT dividend to shareholders.
In addition, as the VCT raises more money, these historic assets will be progressively diluted, and replaced by the venture style investments in which Mercia is so well known.
Venture investing is the future of VCTs, and hence the best VCTs will be run by the best venture fund managers.
For that reason, the potential income from VCT and EIS will be parallel in the future, with VCT dividends becoming more “lumpy” and less consistent.
The lumpiness of the VCT dividend will be a result of the sale of companies within the portfolio, as it is already in EIS, reflecting the nature of the underlying asset.
FTA: If the big banks start raising dividends again, which market analysts expect, will we see a slowdown in new money coming into VCTs/EISs?
PM: No, we will not see a reduction in the c£700m going into VCTs each year, or the £2bn going into EISs, as we are seeing both markets maturing.
We are seeing exits being regularly delivered giving investors confidence to reinvest sale proceeds, and bring new investors into the tax-efficient market.
It should also be noted that the freezes on tax rate boundaries, pension life-time allowance, and potential raids on CGT/IHT, all push more investors towards making better use of VCT and EIS as part of their overall portfolio.
FTA: Will VCT/EIS money be what keeps UK entrepreneurs in business post-Covid/Post-Brexit?
PM: For decades, each successive government (Conservative, Labour and coalition) have recognised that UK PLC needs inward investment and this was the main reason for VCT/EIS and, before that, for those with long memories - Business Expansion Schemes.
Although the rules have been changed to stop abuse, the most recent being the changes introduced as a result of the Patient capital review.
There is no doubt that VCT/EISs play a vital role in providing capital for UK entrepreneurs, particularly in a post Covid/ Brexit environment.
simoney.kyriakou@ft.com
