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VCTs: Deployment slows in challenging environment but holds up better than wider Venture Capital industry

by | Feb 7, 2024

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In the 2023 calendar year, Venture Capital Trusts (VCTs) invested £506 million in new and follow-on investments in small private companies, and in companies on the Alternative Investment Market (AIM). This was a 28% decrease from 2022 when VCTs invested £705 million in new and follow-on investments in private companies and AIM companies.

The wider venture capital industry in the UK and Ireland in 2023 suffered a 46% decline in investment (deal activity) to €19.4 billion from €35.6 billion in 2022, according to the Pitchbook European Venture Report1. The lion’s share of VCT investments in 2023, £454 million, was in 251 private companies, with a further £52 million in 24 AIM companies. In 2022 VCTs invested £658 million in 341 private companies and £48 million in 22 AIM companies.

Over the last three years (2021 to 2023), VCTs invested a total of £1.89 billion in private companies and AIM companies, providing vital support for these companies to achieve their growth ambitions.

 
 

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said

“Last year VCTs’ investment in private companies slowed due to challenging investment conditions. It took time for businesses to adapt to higher interest rates and sluggish economic growth which impacted valuations and deal times. However, VCT investment activity held up better than the broader venture capital industry.

“VCTs have many advantages for investors, including attractive tax benefits and good long-term performance, and their investee companies create jobs and social benefits for local communities across the UK. These advantages help to shore up capital raising in difficult economic conditions and give VCT managers confidence to continue investing in tough times, when other venture capital investors are pulling back.”

 

Managers’ views on the pipeline for VCT investments

Chris Lewis, CFO and COO of Pembroke VCT, said:

“We have seen an improvement in the quality of our investment pipeline during Q4 2023 and into Q1 2024. Pembroke’s most recent investment, B2B software company Transreport (the UK’s fastest-growing accessibility technology company) is reflective of this. The software-as-a-service platform and app provides a comprehensive solution for booking and managing travel assistance for older and disabled individuals. The business secured a £10 million funding round together with Puma Private Equity to help expand its flagship passenger assistance technology.

 

“We have noticed that both new and follow-on investment rounds are taking longer to close. However, we are beginning to see confidence return as some economic indicators show signs of improvement. As long-term investors, we remain optimistic about the mid- to long-term potential of many excellent companies out there as we move further into 2024.”

Ewan MacKinnon, Partner at Maven Capital Partners, managers of the Maven VCTs, said:

“The first half of 2023 was certainly sluggish in terms of quality new opportunities, in line with the trend across the market, due to uncertainty arising from the Budget turmoil in late 2022. However, in H2 2023 and early 2024 we’ve seen an encouraging increase in activity and opportunities as economic conditions have improved and deal flow has now largely recovered across our UK regional teams.”

 

Malcolm Ferguson, Fund Manager of Octopus Titan VCT, said:

“While many funds have considerably slowed or stopped investment activity, Octopus has been investing actively. We are strong believers that periods of challenging economic activity can present some of the best times to be making investments, driven by improvements in talent availability and reduced competition. As a result, we may be in one of the most exciting periods in over a decade that sees the creation of the next generation of technology-enabled companies. We look forward to seeing those opportunities across 2024.”

Trevor Hope, CIO, VCTs at Gresham House, investment manager of the Baronsmead VCTs and investment adviser to the Mobeus VCTs, said:

 

“While the macroeconomic environment has presented challenges in the last year, we have continued to deliver strong deal flow during this period and have completed eight investments with a total value of £22.4 million in the last quarter alone. We continue to see compelling opportunities for investors to support outstanding early-stage companies in their growth journey and currently have a significant pipeline across a wide range of sectors.”

David Hall, Partner and Executive Chairman of YFM Private Equity which manages the British Smaller Companies VCTs, said:

“We’ve continued to see demand for equity capital increasing through the year with the pipeline at the end of 2023 extremely strong. Overall, the levels of equity investment since 2020 continue to run at significantly increased levels compared to the 2010s and that long-term trend looks set to be maintained.”

 

Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs, said:

“Despite economic uncertainties, we have continued to support both new and existing innovative companies and have a healthy pipeline of new opportunities for 2024.”

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