What place do VCTs have in an investor’s portfolio?

This will ensure that investors in VCTs will continue to remain eligible for income tax relief. 

The confirmation of the long-term future of VCTs has reinforced the scheme’s status as a key part of wealth and financial planning, with its strong returns, tax benefits, and ability to complement pensions planning all attractive elements for investors.

VCTs are now a standard fixture in many investor portfolios, and a staple of retirement saving strategies.

Separately, the changes to the annual allowance of capital gains tax and dividend tax that came into effect in April have further highlighted the role of VCTs as an increasingly viable alternative for retail investors to access significant tax reliefs.

The economic climate favours the high-growth startups that VCTs typically target.

However, given VCTs invest in young, scale-up businesses, they are not risk-free and investors should remember to do their due diligence when selecting a manager.

VCT managers with long small-to-medium enterprise investment experience across multi-sectors and who prioritise investment aftercare in portfolio companies can help minimise some of the risks of investment in VCTs.

These include insufficiently diversified portfolios in terms of both sector and geographic exposure, and managers lacking the resources and expertise to provide strategic and operational advice to management teams as their businesses scale.

As such, choosing the right VCT manager is essential to ensuring that VCTs offer attractive returns while complementing an investor’s investment objectives.

Opportunity

While the historic performance of VCTs is not a reliable indicator for future performance, VCTs have achieved strong returns.

In the decade to December 2023, the 10 largest VCT managers delivered an average NAV total return of 77.04 per cent, outperforming the London Stock Exchange main market by 13 per cent.

As VCT returns are uncorrelated to the UK main market, they typically offer better returns in times of economic volatility.

With VCTs hitting their three highest years for fundraising on record since 2021, despite the uncertain market in that period, the VCT industry is able to back the growth of the UK’s most innovative and fast-growing small businesses.

Portfolio diversification helps investors hedge against economic uncertainty

The increased price of debt means that attracting equity investment is more appealing for small businesses. Being non-amortising and lacking interest costs, equity investment allows these businesses to use all the capital from funding to grow.

Furthermore, at Maven, we have seen more high-quality growth opportunities emerge over recent years, particularly in dynamic sectors including software, cybersecurity, medtech, and renewables.

Such sectors are less exposed to discretionary consumer spending, meaning that they are less volatile during periods of market uncertainty.

Diversification is key 

VCTs are best used as a part of a diverse portfolio, to complement existing assets.

These funds give investors access to early-stage private companies with high-growth potential that have a low correlation with the broader public market, helping reduce overall portfolio volatility while introducing higher return potential.

However, as early-stage, smaller companies are more likely to fail than well-established ones, while taking longer to scale,  a widely diversified VCT portfolio can reduce such risks by giving investors access to a range of high-growth businesses across various sectors.

Portfolio diversification helps investors hedge against economic uncertainty, mitigating risk and minimising the impact of failed investments within a portfolio.

VCTs played a vital role in fuelling UK economic recovery and fostered the emergence of a new wave of innovative businesses

Well-resourced, experienced VCT managers are more likely to be able to build a diverse portfolio of investments, having the team and expertise to rigorously source, research, and evaluate new investment opportunities.

A robust investment strategy will also allow a VCT to target businesses that offer the best potential for growth.

For example, some VCTs focus on companies which have strong defensive characteristics and benefit from a recurring, contractual revenue base.

Such businesses will typically be more resilient throughout changing market conditions, and offer the potential for greater investor returns as they scale and achieve profitability.

Championing the best of Britain 

Investing in VCTs also enables retail investors to participate in the growth of emerging British businesses, and to support wider economic prosperity.

By funding these high-growth businesses, particularly those in rapidly evolving sectors such as tech, renewable energy, and healthcare, VCTs support innovation and entrepreneurship while creating job opportunities regionally. 

VCTs have supported the growth of a number of UK household names.

Following the Global Financial Crisis, VCTs played a vital role in fuelling UK economic recovery and fostered the emergence of a new wave of innovative businesses, providing an alternative source of capital to ambitious, young companies at a time when traditional banks had closed their doors.

Disruptive startups such as Gousto and Zoopla received VCT backing.

With the UK falling into recession at the end of 2023, the economic climate favours the high-growth startups that VCTs typically target.

VCTs are here for the foreseeable future, and already feature in many investors’ financial planning, so now is a prime time to invest in VCTs.

Established, highly diversified VCTs can help people benefit from a tax-efficient investment, while enabling young, British companies to grow and scale. 

Ewan MacKinnon is partner at Maven Capital Partners