- VCTs are especially popular this year, in part down to the likely prospect of impending tax changes
- Interesting options are still available, but time is short
Venture Capital Trusts (VCTs) have been flying off the shelves in recent weeks, with good reason. With the March Budget looming and an imminent tax grab viewed as not entirely implausible, they represent one way to stash money away before any changes kick in. VCTs have also held up well in performance terms through the pandemic: much like private equity funds, many of them have benefited from a strong preference for growth companies with tech-enabled business models.
This means that the selection of VCTs still available is rapidly shrinking as we approach the end of this tax year. As of 22 February the 22 new VCT offers had raised £482.2m, representing a good chunk of some £610m in total capacity, Wealth Club figures show. Several offers had already sold out, with others not too far off (see chart).
As such, it is worth considering what is still on offer, provided a VCT is appropriate for you (see the 'Do I really need a VCT?' section). We outline a number of compelling offers.
Horses for courses
Shore Financial Planning's Ben Yearsley splits the options into three rough camps: those that focus on Aim-traded stocks, funds seeking high growth and a 'hybrid' option with different forms of exposure.
Aim-focused VCTs have sold out, potentially due to a combination of excitement about the market’s huge gains in the last year and a more cautious approach to fundraising from some providers. Unicorn Aim VCT’s Chris Hutchinson recently told Investors’ Chronicle that the firm had deliberately capped its latest fundraising target to £15m, down from the previous year’s £25m, in order to find a sum that is “manageable in terms of investing in new VCT-qualifying opportunities”.
“People say you could have raised a lot more and disappointed people who want to invest. But we focus on long-term outcomes for existing shareholders and won’t compromise,” he says.
Yet this missed opportunity could work out well for investors in the shorter term. While Yearsley highly rates the investment teams behind the Aim VCTs, he believes valuations have grown “toppy” – meaning it might make sense to instead invest in the next tax year. “I like Aim VCTs but wouldn’t buy today because they had such a strong run,” he says. “It just looks too expensive.”
When it comes to high-growth funds, both Yearsley and Wealth Club chief executive Alex Davies are fans of Pembroke VCT (PEMB), which focuses on high-end consumer brands. Chief executive Andrew Wolfson identifies education, wellness, digital services, design and media and food, beverage and hospitality as sectors the team will tend to focus on, and describes the offering as "a maturing portfolio of of 37 growth-stage companies". The fund, established in 2013, only recently made its first disposal, selling Pasta Evangelists and roughly doubling its money.
“Pembroke’s investment strategy is to back passionate entrepreneurs building premium consumer brands,” notes Davies. “It is packed with innovative fast-growing companies including Plenish, one of the UK’s leading providers of nut milks, digital blood testing firm Thriva and Popsa, which allows smartphone users to compile photo albums quickly and easily.” He adds that some 42 per cent of the businesses in the portfolio are experiencing year-on-year growth of more than 25 per cent.
Interestingly, Yearsley views an offer on two Maven VCTs, another high-growth option, as a good complement to Pembroke because of a focus on business-to-business activity. The Maven team says it backs “ambitious smaller companies across a range of the UK’s most vibrant sectors”: recent investments include cybersecurity platform Quorum Cyber, genetic testing specialist Gen inCode and learning and development software provider Filtered Technologies.
Separately, Davies favours Octopus Titan VCT (OTV2), the biggest of the funds and one with a stated focus on tech-enabled businesses. As he puts it, the fund has “earned a well-deserved reputation for spotting, supporting and exiting rising stars”. Two of its portfolio companies, Zoopla Property Group (ZPG) and used car purchase platform Cazoo have achieved “unicorn” status, while previous exits include sales to the likes of Microsoft (US:MSFT) and Amazon (US:AMZN). The fund has a good level of diversification, with exposure to more than 80 companies.
In the hybrid category, Yearsley suggests Downing One VCT (DDV1) as an interesting option. This admittedly stands out from its peers for some discouraging reasons: Yearsley notes that the portfolio includes many businesses that are more reliant on activities that have not been possible during the pandemic. As such, in its reports and accounts for the year to 31 March 2020 the board noted a number of valuation write-downs within the portfolio.
This has not helped what Yearsley describes as a “lacklustre” performance track record. Yet the portfolio may appeal to certain investors – unlike many other VCTs it could serve as an interesting recovery play in the next year or so.
Do I really need a VCT?
The tax benefits of VCTs remain especially compelling – especially with a tax grab potentially on the horizon. Investors receive up to 30 per cent income tax relief on the initial investment, with £60,000 income tax relief on the full yearly VCT allowance of £200,000. There is no lifetime limit on VCT investments, dividends are tax-free and you do not incur Capital Gains Tax by selling their shares. Individuals who have already used up their Isa and pension allowances would, from a tax planning perspective, be wise to consider them.
Yet, as always, tax planning should not lead your investment choices. Do bear in mind that while VCTs have fared well in performance terms, they still carry substantial risks, given their focus on Aim stocks and unquoted companies. Changes enacted by the government in recent years have forced VCTs back to their old remit of backing riskier, early-stage companies. In recent history VCTs have not been able to invest in management buyouts (MBOs), and have only been allowed to buy companies whose first commercial sale occurred in the last seven years. More recent changes mean VCTs' holdings also need to meet a 'risk-to-capital' test.
This has two important effects: while certain VCTs have some less risky legacy holdings, the portfolios are generally becoming riskier, with a greater focus on growth. A knock-on effect is that the base income from these portfolios should fall back over time. "People buy these for dividends, but compared with five years ago you still need to expect lower dividends going forward," Yearsley notes. However, he adds that investors could expect more special dividends as and when VCTs make disposals. VCTs could also increase their regular dividend in a given year on the back of successful disposals.
VCT investing also requires a level of patience: to keep the relief you must hold the investment for a minimum of five years.
