The venture capital trust market is likely to see a surge in investor appetite as fears of tax hikes loom large, experts have predicted.
Alex Davies, founder and chief executive of Wealth Club, told FTAdviser that he expected appetite for VCTs to grow as investors forecast imminent tax rises and further changes to pensions.
He said: “The more pensions are restricted, the wider the appeal of VCTs will become. Likewise, if income tax goes up, VCT investment will go up.”
Tom Sparke, investment manager at GDIM, agreed, saying the tax benefits of VCT products could be “considerable”, so there would likely be a “higher demand” for VCTs if the UK saw increases in certain taxes.
He added with “careful selection and a discerning eye” there were many opportunities to invest in young companies with excellent prospects within the VCT market.
VCTs are like investment trusts but only invest in small, young and typically unlisted companies.
Although such companies are riskier and statistically more likely to go bust, investing in a VCT comes with a 30 per cent income tax relief from the government and returns are tax free.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, said: “Today there is wide recognition of the benefits VCTs provide – a good long-term performance record and attractive tax-free yields – and demand has been boosted by changes to pension allowances.
“We expect this to continue, especially if further restrictions are imposed on pension saving.”
VCTs have performed well in recent years. Before the coronavirus crisis saw global markets plummet, the top 16 VCTs had all at least doubled investors’ money over the past 10 years.
Over the past five years, the VCT Generalist sector has returned 13 per cent.
There are individual success stories which can be pulled out, too. The Octopus Titan VCT, the UK’s largest VCT, announced just today (October 26) it was exiting one of its investments, global funds network Calastone, as the company had been acquired.
The sale represented an 18 times return on Octopus’s initial investment.
Paul Latham, managing director at Octopus Investments, said the VCT market would likely see increased demand if pension tax rues were tweaked following Covid.
He said: “Limits to pension allowances have been a big driver of VCT demand in previous years and if any changes were made that further restricted contributions, we would certainly expect to see increased demand for VCTs as a result.
“We’ve seen this pattern consistently following changes to pension legislation as investors have looked to VCTs to provide them with a credible way of investing in a tax efficient manner.”
But Mr Latham added tax reliefs were not the only factor driving interest in VCTs, noting that smaller technology companies, popular among VCT managers, were more adaptable during times like this and would be “incredibly important” to driving a post-Covid economic recovery.
Mr Davies agreed. He said: “If you look at the majority of the VCTs today, they are packed with exactly the types of companies you should be investing in — technology companies that in many cases have had their business models validated by the crisis.
“Some 38 of the companies in Titan VCT’s portfolio are expected to grow revenues by over 50 per cent in 2020 while 26 of these are expected to double it.”
imogen.tew@ft.com
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