VCT MARKET GOING BACK TO ITS
ROOTS Darius McDermott, Managing Director of Chelsea Financial Services, says opportunities abound in the VCT market
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spate of regulatory changes is slowly forcing the VCT market to return to its roots and re-affirm what the product is all about - backing small growth businesses with big futures.
The changes have been taking place over a number of years and are designed to bring VCTs back to their original guise – and for once, it’s government tinkering I agree with. VCTs had started to move away from their origins. It made them lower risk investments, but that wasn’t what they were designed to be. The very spirit of venture capitalism is risk-taking and the generous tax-relief of VCTs was the ‘pay-back’ for investors for taking said risk.
In 2015, then Chancellor George Osborne set the ball rolling and took the decision to stop VCT money being used to fund management buyouts and acquisitions. More recent changes have focused on cashflows, with VCTs now having to invest 80% rather than 70% - of their funds in qualifying companies; while 30% of a raise must now be invested in the first full accounting year. Finally, they can no longer invest in a company which has been trading for more than seven years. That’s a lot of changes and has raised challenges for many VCTs. But despite these changes and ongoing concerns over Brexit, VCTs have remained resilient, with the 2018/19 fundraising for the sector coming in at £731 million, edging the amount raised in the previous tax year to be the second highest annual raising since the products were launched in 1995.
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GB Investment Magazine · September 2019
The tax-free dividends and the 30% income tax relief on investments have both played big roles in this resilience. But another reason for the resilience is that flows are now coming from numerous directions: five or six years ago the market was execution-only led - investors aged between 50 and 70 years old were placing reasonable sums of money each year and getting strong performance. Today the investor base is larger thanks to the cap on pension contributions: higher rate taxpayers who have maxed-out on their pensions are turning to VCTs as an alternative. This is one of the principle reasons I believe VCT fundraising will stay strong in the next couple of years. WHAT IMPACT WILL THE CHANGES HAVE? With fundraising remaining robust, the challenge for many VCT players is what to do with those assets in a climate where tightening rules has shrunk the pool of investments available to them. A smaller pool of companies means there is likely to be more competition from VCTs to invest – which could result in valuations increasing. This is where existing providers offering top-ups have an advantage – for now. They can still hold existing investments in some of the less risky investments. The fact VCTs must now invest 80% of the portfolio in qualifying investments, up from 70%, places them under more pressure, as does the decision that they now have to invest 30% of funds raised in the first 12
