- Maven's VCTs invest in both unquoted companies and Aim stocks
- They have found their best deals outside London
- Sectors such as software, healthcare, funeral care and cybersecurity have performed well over the course of the pandemic
Investor demand for venture capital trusts (VCTs) shows little sign of letting up. Fundraising levels for the 2021-2022 tax year in late December suggested that inflows will exceed those in 2020-2021 which was also a bumper year. VCTs' tax breaks, which include 30 per cent upfront income tax relief if you hold a VCT's shares for at least five years and tax-free dividends, have been buttressed by the growth of technology businesses in the UK.
This is a key point in favour of the VCT market, according to Bill Nixon, managing partner and head of the investment team at Maven Capital Partners. “The UK has become a world-class technology economy with some great companies emerging,” he adds.
Nixon thinks that this makes VCTs, which gravitate towards tech-facilitated businesses, more attractive. And reductions in the lifetime and annual pension allowances mean that VCTs and Enterprise Investment Schemes (EIS) are “one of the last few mediums available for investors to get a tax shelter on their investments,” he says.
Maven Capital Partners, which was acquired by wealth manager Mattioli Woods (MTW) in July 2021, runs four VCTs with a combined net asset value (NAV) of about £270m. The VCTs co-invest in many of the same assets. Two of them hold nearly 120 investments and the other two have just under 100, and this scale helps with diversification and risk management.
A few VCT managers, such as Maven Capital, invest their funds in both private companies and Aim-quoted companies, rather than just focusing on one or the other. Maven's VCTs have “around 10 to 15 per cent” of their assets in Aim stocks alongside unlisted investments. Nixon says that “using the blend of the two asset classes” has benefited Maven’s investors due to Aim’s strong performance in recent years and the flexibility “different liquidity characteristics” of listed investments offer.
Aim stocks held by the Maven VCTs include software business Ideagen (IDEA), Maven Income and Growth VCT 5's (MIG5) largest holding, and biotechnology company Avacta (AVCT) which has developed a rapid Covid-19 test. While Aim has performed well over the course of the pandemic, Nixon recognises that the market “has also been extremely volatile in the past”. Generalist VCTs, which invest in unquoted companies across various industry sectors, have outperformed Aim VCTs over the longer-term, with 2008 and 2009 a notable nadir for the latter due to the impact of the financial crisis.
Maven has focused for the past several years on “sectors with extremely sticky income [including] software, healthcare, data analytics, training, funeral care and cybersecurity,” says Nixon. The largest holding in Maven’s biggest VCT by NAV, Maven Income and Growth VCT 4 (MAV4), is a private crematoria business valued at £4m.
While many of these sectors were hit as the pandemic emerged, the direction of travel is positive. “These are all sectors that are insulated and resilient against the impact of the pandemic, and have now recovered to or exceeded pre-pandemic positions,” says Nixon.
Maven is a UK-wide manager with 10 offices across the country including in Newcastle, Manchester and Edinburgh. Edinburgh has been Maven’s busiest office over the past two years, and Nixon says that he has found that there are “better deals in the regions” than the “heavily intermediated market” in London. Price pressures “are less acute in the regions” which helps drive better deals.
Maven aims for steady growth and stable returns. Nixon doesn’t like “investors to be up 20p one year and down 20p the next year, in terms of their NAV.” According to the Association of Investment Companies, Maven Income and Growth VCT 5 delivered a NAV total return of 145 per cent over 10 years making it the best performing Maven VCT over that period.
As we look ahead to the end of the tax year, the VCT fundraising season is going at full throttle. At time of writing, Maven Income and Growth VCT 3 (MIG3) and Maven Income and Growth VCT 4 were seeking to raise £20m and, if necessary, a further £20m via an over-allotment facility. Nixon “expects pretty much all of the major [VCT] offers to comfortably sell out, including our own."
While the VCT market’s fundamentals and prospects look promising, Nixon says that it doesn’t mean things can’t be improved. There are some “wrinkles” in the market that could be addressed, and one reform he would like to see is a change to cash out rules. “It would be helpful if we could fund an element of cash out for retiring shareholders,” he says – something currently prohibited by VCT regulations.
Nixon also argues that VCTs can play a part in the portfolios of “most investors with diverse holdings.” Many financial advisers would caveat that on the grounds that VCTs are a very high risk product due to their focus on less liquid, unlisted investments and riskier assets - hence the tax reliefs on offer