VCT firms making 'millions' from extra fees

VCTs invest in higher risk unquoted companies and come with a 30 per cent tax relief if held for five years, with any dividends earned also tax free. 

At the end of September 2021, there was a total of £6.39bn invested in UK listed VCTs, according to data from the Association of Investment Companies (AIC). In the 2020/21 tax year, VCT providers raised £685m of new capital from investors.

But in addition to charging a fee to investors, most VCT providers also levy charges on the companies in which they invest, FTAdviser has learnt.

The fees typically hover around the 2 per cent mark meaning collectively they could amount to millions of pounds. 

Simon Porter, investment director at Pembroke, a VCT provider which does not levy charges on investee companies, said the fee meant the VCT was effectively taking back some of the money it invests in those companies. 

He said: “These charges could be as high as 2 per cent of the amount a VCT invests in a company. So while they say they are investing a certain amount of their clients' money in a business, they then take some of this back in fees."

He said the charges would typically be for supplying a non-executive director, for the legal fees the VCT incurs when making an investment, due diligence costs, as well as monitoring fees for monitoring the investment, which he said "seems a bit odd as monitoring it is what they are paid to do by their clients".

Jason Hollands, who runs the VCT broking business within Tilney Smith and Williamson, said: “Unlike funds investing in public companies, VCTs investing in private businesses will be much more involved, doing due diligence, agreeing the strategy and placing directors on the boards.”

These charges could be as high as 2 per cent of the amount a VCT invests in a company. So while they say they are investing a certain amount of their clients' money in a business, they then take some of this back in fees.Simon Porter

Alex Davies, chief executive at specialist tax efficient investing firm Wealth Club, said none of the VCTs investing in AIM companies charged these fees "which makes sense as all of this should have been done as part of being listed (i.e the due diligence has already been done, the non-execs are on the board and there is no need for monitoring as the company has to report its results to the market).

"I would say typically arrangement fees will be around 2 per cent with third party legal and due diligence on top. The fees also depend very much on each deal."

He calculated that of the VCTs with a market cap of at least £70m, which is the majority, the average level of such fees is about 0.29 per cent of the funds' net asset value, a sum which equates to many millions of pounds across the sector.

Davies said: “The thing with these fees is, many of the companies being invested in are not really investor ready, and so due diligence has to be done and that costs.

"And the reality is, these fees are still a lot cheaper than some of the other funding options that might be available, such as a stock market listing. Pembroke has performed well, but so have other VCTs that charge the fees, and in the end, performance is what matters.”  

Fee funk

In its prospectus, the British Smaller Companies VCT said its fees were capped at £40,000 per year per company.

In the prospectus for the Octopus Apollo VCT, the company said its fees would not typically exceed 1.5 per cent of the capital invested. 

Octopus takes the view that monitoring fees provide a wide range of services to an investee company, including helping to develop the business plan. 

The reality is, these fees are still a lot cheaper than some of the other funding options that might be available, such as a stock market listing.Alex Davies

Jessica Franks, head of retail investment products at Octopus, said: “Managing an early-stage fund of this nature is resource intensive. For example, Apollo VCT has an investment team of 12, as well as a support team with responsibility for legal, finance, operations and talent.

"That’s partly because sourcing investments in private markets is time consuming, but it’s also because we take a very active role when we invest, with the aim of maximising the success of portfolio companies. Typically, this will involve us taking a board seat and providing in depth advice on growth strategies, hiring, financing, and exit options, for example."

She said as Apollo VCT was still relatively small in size, the annual management charge did not cover the cost of this activity.

However, she expects the fees to keep trending downwards as the fund grows in size and starts to benefit from economies of scale.

But Richard Manley, managing partner at VCT provider Seneca, said the fees were out of line.

"Monitoring is an interesting one, because companies would have to pay for non-executive directors anyway if they were on the stock market, and the job of a non-executive director is to represent the interests of shareholders, though they are paid by the companies."

He added the level a VCT provider may charge for a service may also be an indication of the level of quality of the company in which it is investing, and so the company to which the client is exposed.

Advisers should remember that VCT boards are in place to protect the interests of their clients as shareholders in the VCT, and that fees to investee companies will be considered as part of the overall negotiation between a VCTs board and its manager.Nick Britton

For instance, he pointed to syndication, which occurs when VCTs won't invest the full amount the company is looking for but will find another VCT to invest alongside of. 

He said: “If they were not paying the VCT manager for that, they would be paying someone else. But as a client, what I would be looking at is, what rate is the investee company paying?

"I have seen VCT providers charge 10 per cent for this, while the market rate is between 3 and 4 per cent. So frankly, if a company is paying that much above market rate, it can’t be a very good company to have your clients invested in."

Nick Britton, head of intermediary communications at the Association of Investment Companies, a trade body which represents VCTs, said: “Venture investing is laborious and costly, from the process of due diligence to the very hands-on involvement that VC investors have in investee companies.

"Fees charged to investee companies help fund these operations. VCT shareholders don’t bear the full cost of these fees, because they are borne by all shareholders in the investee company, in which the VCT will have only a minority stake.

"Advisers should remember that VCT boards are in place to protect the interests of their clients as shareholders in the VCT, and that fees to investee companies will be considered as part of the overall negotiation between a VCTs board and its manager."

david.thorpe@ft.com