With 30 years of history and £11 billion raised, Venture Capital Trusts (VCTs) remain underutilised. Mark O’Donnell from MICAP (part of Defaqto) explains why recent government support and strong investor interest highlight their potential to fuel UK growth – as well as greater investment and tax-planning opportunities for investors.
Although VCTs have just celebrated their 30th birthday and have raised £11 billion to date, they remain an underutilised and under researched asset class by many advisers. Despite many tax changes in the 2024 budget, the government extended its support for VCTs for the next 10 years with the extension of the sunset clause to 2035. The reason for the continued government support for this tax-advantaged investment vehicle is that VCTs, along with their EIS counterpart continue to invest into growth companies in the UK economy, providing that much needed investment into early-stage companies, supporting jobs and growth within the UK. A MICAP survey conducted post-budget indicates that advisors intend to maintain or even increase allocations to both EIS and VCTs, suggesting continued investor appetite for these schemes.
VCTs are closed-end investment companies that typically invest in unquoted trading companies, with the VCT itself listed on regulated markets such as the London Stock Exchange. VCTs typically raise funds once a year between September and March and each has a fixed fund raise. Once this is reached, typically including any over-allotment facility, the VCT will close for the year. This can make researching VCTs more difficult for advisers, as they need to be ahead of the curve, particularly for popular VCTs, if advisers wish to recommend them to their clients and get all the paperwork complete on time.
Why should advisers recommend VCTs?
There are a number of key factors as follows:
· Investors receive 30% income tax relief on newly issued VCT shares if they remain invested for five years, and there is no capital gains tax when selling the VCT shares. Investors can effectively recycle their VCT investments into another VCT after five years to get additional income tax relief. In comparison with pensions where the tax relief occurs just once, and funds are locked up until retirement and then taxed on exit.
· VCTs offer tax-free dividends, with established VCTs often targeting around a 4 – 5% annual dividend, with the potential for special dividends if the VCT has large successful exits from an investee company. Consistent annual investment in VCTs could generate a reasonable tax free income.
· There has been a positive trend over the last few years in the share buy back policy of many VCTs. Many VCTs now offer to buy back investors’ shares at a discount of just 5% of NAV,
down from approximately 10%. This has been a benefit to investors and also helps to limit the discount that the VCT shares trade at on the secondary market.
· VCTs provide investor access to the world of venture capital which can bring diversification benefits to an investor’s portfolio, Typically VCTs have a portfolio of 30 plus investee companies that are across a range of sectors and growth stages.
· Research undertaken by the Venture Capital Trust Association surveying over 100 fast growing firms highlights that scale-up companies identify insufficient capital as the most significant barrier to growth, with over a third (36%) identifying it above all other factors. VCTs play a crucial role in supporting these companies
· With the current economic climate reducing the valuations of some investee companies and therefore impacting the performance of many VCTs, it could be a good time to invest in these companies through a VCT, and it is fairly typical that after a period of economic uncertainty, there is often a period of growth, so it could be a very good time to be investing in growth companies.
Doing your due diligence on VCTs
The next aspect for advisers to consider is which VCT is right for your client and how do you research them?
When a VCT comes to market for a new rights issue, it will issue a prospectus typically providing details on the VCT, its holdings, investment strategy, team, fees and legals. These documents can be around 80 pages and while some VCTs launch the prospectus prior to launch date, many provide it on launch date. Each VCT also has its own website where you will be able to download previous annual and interim reports and if it has provided an updated valuation. However, analysing all this information across the c. 40 VCTs in the market would be time consuming. Third party reviews and impact score comparisons such as those provided by MICAP speed up the research process for advisers.
As part of this due diligence process on VCTs there are several important factors that should be considered in assessing which VCT is right for your different clients. Some VCTs focus on companies that are VCT qualifying but are listed on the AIM market, whereas most focus on unlisted companies with some VCTs targeting earlier stage companies than others at the point of initial investment, and some more sector focused too. VCTs which were established prior to 2017 may still hold investments which would not qualify under the current risk-to-capital condition, such as more asset backed investments and management buy-outs. However, with each subsequent funding round these investments are typically forming a smaller part of each VCT’s portfolio. VCTs have a large range in the number of investee companies they hold within their portfolio. While a new VCT will have to build its portfolio from scratch even established VCTs have a range of holdings, from those with around 40 companies and some up to around 100. In combination with this is the concentration levels of these holdings is another important consideration. It is not unusual in any private equity portfolio that the most successful investments dominate performance, and therefore account for a larger share of the portfolio by valuation. It is also worth considering the investment team managing the VCT and if it has had any significant changes in personnel and also the Investment Manager of the VCT and its own financial health. The VCT’s performance is also a key aspect of research, and whether it has a track record of successfully exiting invested companies at a profit, as well as its dividend track record and how its performance over different time frames compares to those of its peers.
Current Fundraising
The VCT fundraising landscape is forever changing. Looking at current fundraising for VCTs some have already reached their fundraising targets and closed to new investors, highlighting the importance of staying informed about launch dates and fundraising rates. MICAP data shows that £388 million has been raised this tax year to 12 January 2025, compared to £306 million to the same date last year. Of this, £220 million has gone into the now closed British Smaller Companies VCTs, the two Mobeus VCTs and the Foresight VCT and Foresight Enterprise VCT. However, the absence of Octopus Titan VCT from the market this year, due to an ongoing strategic review, is also a notable development, particularly given its fundraising target of £200 million last year, this has had the impact of reducing the total fundraising capacity across all VCTs this tax year. From September onwards, on a weekly basis, MICAP informs its panel clients on expected opening timeframes for VCTs, their target fundraising levels (including over allotment facilities) and how much each open VCT has raised so far. This is to ensure that MICAPs panel clients can keep on top of market developments. An advisor waiting to the latter stages of the tax-year before they conduct VCT research for their clients will likely only have a selection of VCTs that opened in the tax year open for investment.
The VCT landscape is also witnessing a degree of change, with some investment managers that manage multiple VCTs merging some of their offers, with Mobeus, Albion, and Foresight all merging some of their VCTs. In addition, a few VCTs have launched in recent years with Praetura, Guinness and Fuel Ventures entering the VCT market, and Puma who already manage several VCTs recently launching a new AIM VCT. As a result of these changes, MICAP data shows that on 12 January 2025 43% of all open VCTs’ target raise this tax year has been raised, which is in comparison to 32% at this stage last year. Staying informed on VCTs is key to making the informed decision to deliver smarter financial decisions for your clients.
About Mark O’Donnell
Mark is the Head of Research for MICAP, part of Defaqto, responsible for managing MICAP’s team of analysts and providing oversight on MICAP Reviews, MICAP Data, MICAP Impact Scores and MICAP Panel Support Services.
Mark was previously a researcher for Orthogonal Partners, where he was responsible for researching new investment opportunities across a broad range of esoteric investments opportunities, as well as monitoring current investments. During this time, he completed the IMC.
Prior to that Mark was a researcher for one of the largest UK family offices, supporting the chairman across a range of family interests. Mark holds a MSc in Corporate and International Finance from Durham University and a BSc in Rural and Environmental Economics from Newcastle University.
