Venture Capital Trust (VCT) providers are making millions by charging an array of fees to the companies in which they invest client cash - on top of the fees they charge to investors.
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.”
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.