While the government has control of the fiscal levers that shape the overall economic climate, venture capital trusts directly stimulate UK enterprise by providing founders with the vital capital they need to grow their businesses.
VCTs are becoming increasingly popular. The sector raised £685mn in the tax year 2020-21, which is an increase of 11 per cent on the previous year and double what it was a decade ago, according to data from the Association of Investment Companies.
Part of the attraction for investors is the opportunity to support early-stage, high-growth companies – a survey by the AIC earlier this year showed 84 per cent of investors in VCTs stated it was important to them to help UK enterprise and that by using VCTs they would achieve this.
The investors also felt the Covid-19 pandemic made supporting smaller UK businesses more important.
In addition to their support of early-stage businesses, a key appeal for VCT investors was the tax breaks, which include income tax relief up to 30 per cent of the investment amount, as well as zero capital gains tax and tax-free dividends.
The rationale for this favourable tax framework is that it incentivises investment in riskier early-stage businesses.
The government’s planned dividend tax increase of 1.25 percentage points from April 2022 could drive yet more investors’ money to VCTs.
Research released in September from Wealth Club, a tax-efficient investment platform, showed £61mn had been invested in VCTs in August, four times the amount invested in the equivalent period last year.
An important role of a VCT manager is to find the very best early-stage growth companies to invest in.
Once in its portfolio, the VCT can help support the company’s growth, maximising its performance and hence eventual return to the underlying VCT investors.
When a portfolio company is successfully sold, cash is paid to the VCT by way of special dividends.
As with any such investment, there are some fees and charges involved. Typically, this is a management fee of 2 per cent for investors, though some VCTs also charge their underlying portfolio companies fees for costs such as supplying support, legal fees and due diligence fees.
As well as the management charge, VCTs also charge a performance fee that is typically 20 per cent of profits. Some only charge this fee on net realised investment gains, which includes making up any losses in the portfolio.
A key advantage to investing in a VCT is that the investor gets immediate access to its entire portfolio, including existing investee companies as well as those yet to be added. This provides diversification, which is considered significantly lower risk than investing directly in individual companies.
VCT fundraising is expected to be higher than usual this year, and several popular VCTs have already opened their offers, filled to capacity, and closed again. If investors do not move quickly, they may lose the opportunity to invest in the top-performing VCTs.