VCTs becoming 'increasingly mainstream'

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
VCTs becoming 'increasingly mainstream'
REUTERS/Simon Dawson

Venture capital trusts are becoming increasingly mainstream, according to the chief executive of Wealth Club.

Alex Davies said the speedy fundraise by Amati AIM VCT this month was evidence of the growing interest in the funds.

Amati’s fund, the first to launch an offer in the current tax year, raised its £40m fundraising target in four working days, making it one of the quickest fund raises for a large VCT, according to Wealth Club.

Just under two thirds of the funds raised came from existing investors, and the fundraise was done completely digitally.

The £255m trust has delivered a return of 276 per cent since 2010, against a 91 per cent return seen by the Numis Alternative Markets Total Return Index.

Davies said to raise this amount in four days was an “outstanding achievement”.

“VCTs are becoming increasingly mainstream and the drivers causing this are not going to go away,” he said.

Paul Jourdan, chief executive of Amati Global Investors, said the firm realised there would be strong appetite for the fundraise after a top-up offer earlier in the year reached double the amount they were aiming for after an hour and a half.

“We realised that we were going to have a lot of latent demand for shares in the VCT so we had to plan it quite carefully so that this time around we didn’t sell out so quickly,” he said.

“It’s great to sell out fast, but if you sell too fast you end up with a lot of unhappy potential investors and that’s not really a good thing.”

He added: “Conventional wisdom says don’t try and raise money in July - it’s too quiet. Actually, we thought it would be helpful for us to raise money when it was not traditionally a busy time of year, because it would take the edge off the speed at which things happened.”

The investment case for VCTs

VCTs have up to 30 per cent income tax relief, as well as tax-free dividends and a £200,000 allowance.

They are “one of the last relatively simple and tax efficient investment options left,” said Davies.

“If you are wary of potential tax increases on the way, then those tax benefits are all the more valuable,” he added.

These incentives have become even more alluring due to the tapering of the pension annual allowance for higher earners.

Davies said: “Restrictions on buy-to-let and pensions - the freeze in the lifetime allowance was the final nail in the coffin for many - combined with increased tax on dividends, mean it is now much harder for people to invest tax efficiently.”

Another of the benefits of VCTs is that they invest in unlisted firms, said Nick Bird, head of strategic growth at Octopus Investments. 

“Therefore they’re not at the whims of market moves,” he said, pointing to the turbulence seen in the public markets in the past 18 months.

“As a venture investor in an unquoted business, [the investment] comes with risk, and you can’t get away from that. It’s not that those companies don’t need a healthy economy, but it does come with a different sort of investment journey...they are at the beginning of their lives.”

Amati’s VCT does have exposure to the public market as it invests in AIM companies, however Jourdan explained the rises and falls could be muted.

“The private market valuations are always a derivative of public market valuations in the end,” he said.

He added private firms take longer to react to public market moves as they publish their NAV quarterly, which had a benefit.

“If you get a flash crash like we had in February and March last year when the lockdown started, you wouldn’t see that in the private company NAVs because there wasn’t time.”

Then there’s the firms who run the VCTs.

Bird outlined how these investment firms have come a long way in the 25 years they've existed, and have grown to be significant funds.

“If you haven't looked at VCTs for a while, as an adviser, I'd always say take a fresh look, because they've changed a lot in the last sort of five or six years,” he said.

He added the firms offering VCTs now have track records of ten years or more, so for people who want established funds run by well known fund managers the information is there for them to analyse.

Ultimately, all agreed that encouraging this kind of investing was beneficial for the UK economy.

Bird said: “The tax relief that [the government] has provided has proved to be a very influential way of encouraging investors to make investments that really benefit UK plc, and this is very much about growth, jobs, employment, and corporate taxes.”

Jourdan added that Amati will be focussing on “everything connected to net zero” in the future.

“[Achieving net zero] requires a huge amount of innovation. But it is also a big opportunity if you can bring the right technologies to market.”

sally.hickey@ft.com