VCT fundraising season kicks off

The starting gun has well and truly been fired on venture capital trust (VCT) fundraising for the 2023-24 tax year, with more than a dozen funds unveiling their offers in recent weeks. 

VCT fundraising announcements have come thick and fast in September, with some 15 names having set out their fundraising efforts at the time of writing, and that cohort seeking just shy of £400mn. VCTs, which back relatively immature companies – both private and those listed on Aim – are likely to seek to feed money to their existing portfolio companies as well as seeking some new investments. "The persistent decline in equity markets continues to create opportunities for those prepared and able to invest for the long term," said Hargreave Hale AIM VCT (HHV) in a prospectus for its raise of up to £40mn. 

Those offers appearing in recent weeks should form most of what's available this tax year, according to industry specialists. "We are expecting 70 per cent of the market to go in September," said Nick Hyett, investment manager at Wealth Club, a firm focused on tax-efficient investments. "That's unusually high, as it's normally spread out in February."

Hyett put the rush down to the fact that panels on the likes of advice and wealth firms, which serve to select investments, were forming earlier this year, prompting VCTs to launch their offers earlier so as to be considered. With wealth firms consolidating, there is also greater competition to win business from a smaller number of panels.

Some also expect VCTs to raise less money this year, in part because investors have greater scope to put money into their pensions. The lifetime allowance, or the threshold above which pension assets incur extra tax, has been abolished, while the annual allowance for pension contributions has risen from £40,000 to £60,000. VCTs have also raised plenty of cash in recent times, with the sector taking in some £1.08bn in 2022-23, slightly down on the record £1.1bn taken in 2021-22. 

These factors might explain why some of the more popular offerings could sell out quickly. "One pattern is that more mature VCTs with a strong following and lots of shareholders fill up first and fast, so if you leave it too late you only have what is left," said Jason Hollands, managing director at Evelyn Partners. He picked Pembroke VCT (PEMB), Hargreave Hale AIM VCT and British Smaller Companies VCT (BSC) as among the more mature names in the space. However, investors do have plenty of reason to exercise caution when parsing the VCT deals on offer.

What's in the price?

Investors can claim up to 30 per cent up-front income tax relief on the amount they put into VCTs, provided they hold onto the shares for at least five years. What's more, the proceeds won't be liable for capital gains tax if investors sell their shares and make a profit. But VCTs do carry a great deal of investment risk, given they must invest in relatively young and relatively small companies. With greater flexibility to put money in a pension, investors are less reliant on such vehicles than before.

As such, they might be especially aware of certain issues facing the sector. Ben Yearsley, investment director at Shore Financial Planning, warned in the last tax year that he felt "circumspect" about backing VCTs for two reasons: firstly, a bumper round of fundraising could translate into too much money chasing too few deals, meaning investment managers either overpay for companies or settle for lower quality. Secondly, Yearsley worried that those VCTs investing in unquoted companies had failed to write down their portfolio valuations.

"Those concerns are still relevant," he said. "All the money raised last year and the year before, a lot of it probably still has to be invested. But I think there will be less money raised this year because the pension rules have been relaxed – that eases the pressure." On the valuation front, Yearsley noted that some, but not all, of the VCTs focusing on unquoted companies had carried out writedowns.

That partly informs his preference for VCTs focusing on Aim-listed companies rather than those invested in private companies. "Given the choice I would invest in Aim VCTs this year because they have been absolutely annihilated," he said. "The stock market has largely priced in a lot of bad news, you're buying a very big dip in the case of Aim VCTs, they peaked about two years ago on valuations." One issue here is a lack of choice, however, with Yearsley warning that HHV was the only Aim VCT definitely raising money so far.