VCT managers defend costs

Venture capital trusts (VCT) are tax-efficient vehicles which let people invest in early stage companies.

There has been a dash of investors scrambling to invest in VCTs, largely due to the lower limit imposed on both the annual and lifetime pension allowance.

Industry professionals have questioned what impact this surge in demand could have on VCTs, with research director at Intelligent Partnership, Dan Kiernan, pointing to the high barriers to entry.

He also said there has been no pressure on VCT managers to cut costs or improve transparency. 

Yet Patrick Reeve, managing partner at Albion Ventures, said costs have gradually been coming down for VCTs over the years.

While there was no cost restriction imposed on VCTs when they were launched 20 years ago, Mr Reeve said the charges have eventually fallen to around 3.5 per cent and now sits closer to 2.5 per cent.

Managing a VCT is a lot more work and it’s very fiddly.Patrick Reeve

Mr Reeve said one reason costs have shrunk over the years is because VCTs are getting bigger, but he also said there is a growing acknowledgement that fees need to come down further.

“There is a high level of fixed overheads, so it was quite hard to manage a VCT with fees of less than 3 per cent a few years ago, yet now it’s very easy,” he said, adding he didn’t think criticism of VCT costs was fair.

“Running a trust that invests in small-cap firms is very complicated; you’ve got to be on the ball, you get dirty fingernails and you’re talking to the chief executives of these firms most days; it’s very intensive.”

He therefore said it makes sense to have a typical VCT management fee of 2.5 per cent, rather than the 0.75 per cent charge which is common across the rest of the fund management industry. 

“Managing a VCT is a lot more work and it’s very fiddly,” Mr Reeve said, adding there is a limit to how much fees can come down.

This comes at a time when the financial watchdog has been probing fees across the asset management industry.

David Hall, managing director of YFM Equity Partners, agreed scale helps, but said there is a flip side.

“The thing with VCTs is you can’t scale up because you’re forced to have a really small investment of less than £5m year-on-year.

“So if you scale-up the VCT, you’ve got to scale-up the number of investments as well, which means you’ve got to scale-up the number of people running each investment.” 

Mr Hall said the current nature of the business means it is actually more work, pointing out that the length of time it takes to make an investment has almost doubled to 22 weeks since the rules were changed in 2015.

“We have to put more effort in because the businesses need more help to be shaped, which means we have to deploy more money.”

Bear in mind the entire VCT industry this tax year will raise in total what Neil Woodford gets every few days.Jason Hollands

Dan Farrow, director of SBN Wealth Management, said many advisers don’t understand that VCTs are private equity models that invest in unquoted companies.

He said the 30 per cent income tax break offered by these trusts is a big driver of demand, far more than the performance of the trusts, adding: “The tax tail always wags the dog.”

“There is a significant lack of pressure on VCT managers to pull down fees because of the opaqueness of the private equity business model,” Mr Farrow said.

Yet Jason Hollands, managing director of wealth management group Tilney, defended the sector.

He said: “Those unfamiliar with VCTs might baulk at the costs, but in my view they are understandable. 

“VCTs are very specialist vehicles which are small in size, have to operate within complex constraints around qualifying investments (which change periodically) and have much more intensive investment processes than a vanilla UK equity fund.”

He said it was therefore inevitable that these funds would have much higher costs.

“Bear in mind the entire VCT industry this tax year will raise in total what Neil Woodford gets every few days, so the effort per square foot for VCT assets is huge and not in any way comparable with a bog standard fund.” 

Unlike funds which invest in listed companies, VCTs have to source new deals which means scouring the country and conducting months of due diligence and negotiations with company management teams before agreeing to invest, Mr Hollands said.

Mr Hollands also pointed out that managers need to deal with HM Revenue & Customs to get ‘advance assurance’ on whether a planned deal will qualify under the increasingly complex rules.

“Once invested in a small, illiquid, unquoted company they are in the deep end,” Mr Hollands said, pointing out that managers often have to take seats on the board, actively advise the business and ultimately steer it towards an exit/sale.

katherine.denham@ft.com