Demand among investors for venture capital trusts is weaker this year as the pandemic, alongside recent rule changes, changes how fund managers are positioning their portfolios.
Jason Hollands, who runs the VCT brokerage business at wealth management firm Tilney said: “There are a reasonable number of VCTs seeking new funds this year, which is perhaps unsurprising given many existing VCT portfolio companies will be in need of additional cash in the current environment.
"However, investor appetite is likely to be a little more muted than over the last couple of years, which is also unsurprising given the impact of the crisis on job security, bonus prospects and with some firms implementing salary cuts.
"Income tax relief is a major driver of VCT demand and so when investors expect to earn less, their need to seek tax relief is also impacted.”
Andrew Wolfson, who runs the Pembroke VCT, acknowledged the market has been somewhat slower this year due to market uncertainty.
In terms of how he is positioning his portfolio for the changing world brought about by the pandemic, Mr Wolfson is cautious about investing in new economy sectors that are fashionable now, such as biotech and property technology.
He said: "The thing about investing in something like biotech and in many new economy companies generally is that to have to be totally focused on that area, really you are investing in the management teams of those companies, and in a lot of cases with those types of companies, either the product works and the company is successful, or it doesn’t and you don’t really have an investment left.”
Mr Wolfson focuses on three areas where he believes he has experience, retail, education, and wellness, and those three areas as where the bulk of his VCT investments are focused.
He says that “some investors” are concerned about investing further capital into retail. He hasn’t made a new investment into a retail business since 2015 , though he has put additional money into retail businesses he already owned since then.
Mr Wolfson said: “What Covid has done is sped up trends that were already happening in retail, Debenhams went bust last year and it’s happened again, Marks and Spencer’s clothing division has been losing market share for years, but that doesn’t mean all retailers are doomed, people will still want to buy clothes.”
He said the pandemic has accelerated changes in the education sector, as the necessity of the pandemic forced the rapid adoption of new technology.
Mr Wolfson says: “The technology allows for more individualised education, and not just a focus on league tables and passing exams.”
Rule changes
In 2018 the government introduced new rules to encourage VCTs to invest in riskier areas and earlier stage businesses, to justify the tax advantages associated with these investments.
The rule change means Albion VCT manager Will Fraser Allen has exited his portfolio of pubs.
He says having acquired an estate of 40 pubs, he decided there was enough scale to sell in February.
Mr Fraser Allen was keen to emphasise that his decision to sell the pubs in December was not taken as a result of the pandemic, but because his aim had been to build the pub group to a sufficient size to sell.
The 2018 rules mean buying more pubs is no longer allowed under the VCT rules.
Mr Fraser Allen is keener to invest in new economy companies than is Mr Wolfson.
He said: “There are fewer opportunities in some of the areas we would have looked at in the past, such as private schools, but the valuations of nursing homes have held up despite the pandemic.
"We have hired a lot of new people, and are looking at technology. Albion actually run a couple of private funds in conjunction with University College London, and have had returns of 10 times our money on some of our investments.
"There is a shortage of start-up capital in the UK and a lot of younger people want to start their own business, there has been a culture shift and its very exciting.”
david.thorpe@ft.com
