Venture Capital Trusts (VCTs) are becoming increasingly popular with investors, as government figures have recently confirmed that 2018-19 was a record year, with £716 million raised.
VCTs are specialised investment trusts listed on the London Stock Exchange.
They can provide up to 30 per cent income tax relief on investments, as well as tax-free dividends and tax-free capital growth.
However, there are a number of elements that financial advisers need to consider when assessing whether they are appropriate for particular clients.
After confirming a client’s suitability for a VCT investment or investments, advisers must also assess the range of offers available in the market, carry out due diligence and select the most appropriate investments for their clients.
It is important that advisers properly document their research and assessments, so that they can compile a thorough research and due diligence process that is on the record.
Considering the managers
There are two main steps to this assessment process. First, an adviser must consider the VCT managers operating in the marketplace and the VCT offers that are open to investment.
It is likely that many of the managers will not only operate in the VCT space, but also offer other services such as Enterprise Investment Scheme (EIS) and perhaps Business Relief (BR) investments as well.
This is important to bear in mind, because it means that they will be looking at these wider investments and therefore may not be solely focused on the VCT environment.
It is also important to remember that, for income tax relief to be valid, the investment has to be held for at least five years.
Therefore, the financial stability and trading history of a VCT’s investment manager needs to be part of the adviser’s assessment process (although VCTs have minimum capital adequacy requirements as part of the rules allowing VCT investment managers to be authorised by the FCA).
Advisers should also consider a VCT’s deal flow.
A lack of deal flow could force the manager to invest in companies that may be more risky than originally anticipated in its investment strategy, or have higher valuations (thus making it harder to earn returns).
Furthermore, the experience and investment selection process of each VCT manager are important considerations.
Assessing the extent to which the manager considers the merits and potential of the companies it invests in needs to be closely considered, while reviewing a manager and their investment committee’s track record is a crucial indicator of a VCT’s capabilities (although not a guarantee of future performance).
The second main step when assessing an investment is to assess the performance history of the VCT itself (if it has one).
The performance of a VCT can be assessed by considering the dividends it has previously paid.
But there is more to it than simply looking at the past dividends: if the VCT’s Net Asset Value (NAV) per share or traded share price has fallen more than the amount paid in dividends, then the investor may have made an unrealised loss over that period.