VCTs: A hit with investors | Private Equity | Maven

Steve Marshall, Sales and Marketing Director


With 5 Maven VCTs having recently announced new £18m aggregate offers, it’s been encouraging to see continued positive VCT sector profile in recent times, as the industry and press have reflected on the successful 2013-14 fundraising season which saw investors commit over £400m of new money to VCTs, a marked increase on 2012-13.

In my view that success reflects the confidence of investors that mature and well managed VCTs can generate consistent and attractive tax-fee dividend streams from portfolios of well researched and profitable private companies. Established VCT managers have regularly raised new and top-up funds in recent years, while a number of newcomers to the market have struggled to gain traction when raising new VCTs.

We talk to increasing numbers of investors and advisers who are using VCTs as an extra route to tax planning, or supplementing retirement income in view of the increased restrictions on pension relief, which supports the generally positive picture for VCTs.
Among other things, they tell us that they are investing with established VCTs due to:

• the potential to beat the returns on offer from annuities, bank savings, collectives or taxable equities.
• the likelihood of a strong tax-free income
• mature portfolios with a regular flow of new investments and exits
• high quality asset selection, with an emphasis on later stage companies
• access to large specialist investment teams, that remain close to each investment
• use of disciplined and extensive risk management models, giving a high level of confidence in what is a higher risk asset class.
• the range of tax benefits, after big hits on pension tax relief and the tax-free lifetime allowance, and alongside maximising their ISA contributions.

The overriding message though is the growing awareness that investment in smaller companies can generate very attractive returns when the VCT manager’s team understand how entrepreneurial businesses and their management teams work.

The quality of the resource and intensive selection process behind the way that good managers select VCT assets has probably been widely underestimated in the past – it’s hard to think of a greater contrast than between the construction of a VCT portfolio and the ‘standard’ asset selection of a large quoted equities fund which by definition has a limited universe of potential assets that are also in the sights of many competitor funds.

VCT managers by comparison can access high growth private company assets by developing long term relationships with SMEs and their professional advisers, and the better managers have a reputation for being able to add value to the companies they invest in – so a high quality manager is able to differentiate itself in a market where only a few have the resource and expertise to investor across a range of sectors and all UK regions, and critically they can offer retail investors access to assets they otherwise wouldn’t see.

And whilst it’s important that investors recognise the higher risk that comes with investment in smaller companies, good managers have developed proven models for reducing and managing investment risk – whether that be a specific focus only on proven businesses, rather than early-stage of start-ups, or the use of loan-stock based investment structures to offer investor protection and a stable and reliable investment income to the VCT.