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Patience matters with VCTs

Since a relatively high proportion of early-stage businesses fail, the selection of the right investments is critical. As with other investment trusts, you’re paying VCT fund managers for expertise that you don’t have. The difficulty in selling struggling businesses means that wrong choices at this small end of the market will probably become stranded in the trust or written off. VCT companies suffer similar pressures to the wider market – when demand suddenly dried up with the lockdowns in early 2020, many plunged in value. So, both the selection and the monitoring of the businesses are labour-intensive processes. Considering that a typical VCT also tends to be much smaller than many investment trusts, it’s hardly surprising that ongoing annual fees are typically higher, at about 2 per cent, with possibly performance fees on top.

Aim VCTs are similar to generalist ones, except that they prefer to invest in early-stage companies just before, or just after, they list on the Aim market. They tend not to place directors on boards and are not so close to their investee companies, but since most of their investments are listed, Aim VCTs have greater flexibility in choosing when to sell.

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