Despite the economic volatility of recent times, venture capital trusts (VCTs) have so far proven resilient in the face of market uncertainty.
They have raised more than £1bn annually over the past two years and have deployed record levels of capital in the UK’s brightest emerging businesses, helping to drive the growth of SMEs, as well as deliver good returns for investors. Investment in the right VCTs, which target high-growth sectors such as healthcare and technology, including AI, data analytics and cloud computing, can also be one of the best ways to build a balanced portfolio in difficult economic times.
Becoming part of the mainstream
Increasingly VCTs are becoming a mainstream part of investors’ portfolio planning. They are now included in regular financial advice, according to retail strategy directors at investment houses. A survey by the Association of Investment Companies (AIC) earlier this year found that 60% of respondents used VCTs as a way to save for retirement.
True lifetime allowance charges have been removed for the 2023/24 tax year and there are plans to abolish the allowance entirely from 2024, so retirement savers will no longer have an upper limit on the value of their pensions. However, the abolition of the lifetime allowance will not be a certainty until it is confirmed in a finance bill in 2024, and the Labour Party has promised to reinstate the allowance if it wins the next election.
Also, many investors, particularly those in retirement, look to sell investments in ISAs, as they don’t incur capital gains tax (CGT), to boost their cash flow. But if some investments are doing well and generating good dividends then this may not be a course they want to pursue, so VCT dividends, which are also tax free, can bridge the gap.
VCTs historic success
Recent history showcases the ability of VCTs to play a substantial role in both boosting the returns of investors’ portfolios and the speed of economic recovery. After the 2008 financial crisis, capital was scarce, and access to bank credit was restricted by new regulations. Investors who had committed capital to VCTs saw some of them back a raft of promising companies in that period, helping them to create new opportunities for these businesses, and launch the growth of household names, such as Gousto and Zoopla.
Current economic climate favours SMEs
Small, high-growth companies, offering disruptive technologies and products, are the engine of the UK economy. Their success has a disproportionate impact in driving productivity, economic growth, and job creation.
There are a number of reasons why the current economic climate favours the kind of high growth early-stage SMEs typically targeted by VCTs. For example, the recent round of redundancies among large technology firms has freed up a large pool of talent, which had hitherto been very difficult for smaller firms to secure, limiting their ability to grow. Also, there is now a concerted effort by the British Government to stimulate the UK’s science and technology sectors, with the March 2023 budget having announced over £3.5 billion in incentives, programmes, and inducements to drive investment into UK technology SMEs.
Adding further support, in July of this year Chancellor Jeremy Hunt announced a series of measures to reverse the general decline of UK business investment, which has fallen since the early 2000s to 6% – below the developed world average. These included the Government’s ambition to make the UK a ‘science superpower’ by enabling the financial services industry to provide the best opportunities for investments and pensions, as well as capital for businesses.
Focus on VCTs with strong management and track record VCTs
VCTs, managed by specialist investors with the expertise and resources to identify new firms with strong growth potential, are well placed to provide the growth funding companies need to succeed and the investment opportunities and returns for investors.
VCTs can help investors diversify their portfolios – and provide a useful tax-efficient source of income. Investors should look to VCTs that focus on businesses that benefit from a strong recurring or contractual revenue base, or are active in counter-cyclical sectors, which can reduce the impact of market volatility. Also, a diverse portfolio of investments can prove invaluable in weathering the kinds of sector and macroeconomic shocks to which we have now grown accustomed.
Having made more than 1,000 investments in over 530 SMEs since 2018, VCTs are well-placed to make a substantial contribution to the UK’s economic recovery. VCTs are becoming very much a part of the personal finance mainstream – by choosing the right trust, investors will not only benefit from the potential of tax free dividends but also actively contribute to the growth of the UK’s most innovative companies.