VCTs adjust focus following rule changes

Jason Hollands, who runs the VCT business at Bestinvest, within the Tilney Group, says he thinks it is unlikely that fundraising for the 2018-19 year will top the amount secured in the previous 12-month period. 

He explains: “Many of the VCTs that raised significant sums last year still have cash to deploy. The rules have also changed here, requiring them to achieve a minimum of 80 per cent invested in qualifying investments, up from 70 per cent. Some of last year’s fundraisers either won’t be back this year at all, or else will look for more modest sums.”

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Mr Hollands predicts future fundraising cycles will see VCTs raise more modest amounts, but on a more regular basis, in accordance with the fact that early-stage companies typically require several rounds of follow-on financing, rather than a single tranche. That would mark a notable change from previous activity, which saw many VCTs back management buyouts at profitable, relatively mature businesses.

But Mr Davies says he believes the total raised by VCTs this year will be similar to that seen in 2017-18, with demand again driven by pension investors.

Underlying investors

Will Fraser-Allen, deputy managing partner at VCT manager Albion Capital, says that while the tightening of the rules has narrowed the range of companies into which funds can invest, this had not led to an erosion of value for the underlying investor. He says this is because the rules encourage investment into businesses with intellectual property, and in particular technology businesses.

As a result, Albion has recently increased the resource it uses to seek out technology companies in which to invest. With more entrepreneurs seeking to enter this space, Mr Fraser-Allen says the supply of firms in which his funds can invest is expanding at least as fast as capital enters the VCT sector, despite the rule changes.

But not all managers are able to deploy capital quickly, and this is a particular problem for those running EIS. Mr Clark warns of a continued “capacity crunch” as the sector grows in size, with firms unable to use funds within the standard 12-month timeframe.

The consequences of this for investors is that they may not receive the EIS tax breaks as intended. Under HMRC rules, the investor only becomes eligible for the tax break once the capital has been deployed into a qualifying company, not the EIS itself. If it takes more than a year to invest the cash, the tax break may be triggered in a different year than was intended by the underlying investor.

Mr Clark says the way investors can avoid this is by placing the capital into the EIS early.