In a world riding on a political and economic rollercoaster, small companies remain the lifeblood of the UK.
They are creators of jobs. They are creators of growth. However, support for growing businesses isn’t always widely available, with traditional lenders remaining parked on the sidelines.
So, how do companies fund themselves for growth and, more importantly, how can you, the investor, benefit from that growth?
The notoriety and growth of crowd funding, and its variations, has gathered a great deal of attention. For good and bad. Only last year, Lord Turner warned: “The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Whether you subscribe to such hyberbole, there are other, better regulated, means through which companies can source capital to take them through the early stages of growth – in particular, Venture Capital Trusts.
While investing in VCTs has its risks, just as any investment has, these risks are for more measured and disciplined with quality offerings. Many quality VCT providers have more recently felt lumped in the same bucket as the under fire feel peer to peer (P2P) lenders and equity crowdfunders (ECFs) both of which now the subject of a clampdown by the FCA.
Despite some of the misconceptions, VCTs raised £458m in the 2015-16 tax year, making it the third highest year for VCT investment since records began in 1995. In the tax year that has just closed, most but not all were fully funded by the end of 2016-2017.
There are, for the mainstream investor, many tax efficient means of supporting smaller companies available but the benefits of VCTs aren’t just about tax efficiency – they can provide significant growth too.
VCTs invest in small, largely unquoted, companies in the UK of up to £15m in size.
The aim is to invest in these companies to help them grow over five or so years at which point the successful companies will be ready to ‘fly the nest’, so to speak.
The initial funder will sell them and reinvest the proceeds in younger growing businesses, and allowing the proceeds to be recycled.
As an entrepreneur myself and managing a VCT backed by serial entrepreneurs, we’re genuinely driven by the growth of these companies and creating jobs.
That HMRC has granted investors 30 per cent tax relief on VCTs is an added bonus on top of already tax-free growth and dividend payments.
The benefits to the companies are clear. They are getting vital funding at a time when they need it and, particularly in our case, are also benefiting from experience, advice and guidance from investors with a trail of successes behind them.
Yes, there are risks and the ‘lemons usually ripen before the melons’ but quality VCT managers with vast personal experience in their field of investment will be able to spot far more melons than lemons. Clearly earlier stage investments bring higher risks alongside larger rewards.
However, a VCT will have 25 or 30 investments, if not more, so the risk is diversified.
With the impact Brexit has already had on stock markets across the world – I believe there is much to be said for apportioning a small part of a portfolio in well-regulated Venture Capital Trusts. The added benefit is that your clients are funding the UK’s entrepreneurial spirit!
Andrew Wolfson is managing director of the Pembroke VCT
