The VCTs investors can still buy

The fear that venture capital trust (VCT) fundraising offers would abruptly fill up in the autumn has not materialised this year. The Octopus Aim (OOA) and Foresight Enterprise (FTF) offers have closed, with some others, including British Smaller Companies (BSV), close to hitting capacity. But as the table below shows, plenty are still open – but investors may want to move quickly as the tax year end draws closer.

Be this as it may, the Aim market sell-off seen over the past two years means that some vehicles look especially cheap for those who want an allocation.

Ready, Aim....

With 'generalist' VCTs tending to focus largely on private companies, in contrast to Aim VCTs that typically hold listed stocks, we have in the past highlighted concerns that the former group had failed to sufficiently write down their net asset values (NAVs) in the face of challenging market conditions. Some of those worries have now abated given portfolio NAVs have fallen, but specialists continue to argue that Aim VCTs look more obviously cheap because of the extent of the plunge in their valuations.

As Fairview Investing's investment director, Ben Yearsley, puts it: "I think that there has been more realism, and we have seen valuations dip. Some [generalist VCT values] have gone down a few per cent, but Aim VCTs have halved."

Yearsley suspects such portfolios could enjoy rapid NAV upticks if sentiment does recover on the battered Aim market. "If we suddenly get confidence coming back to small and mid caps, they could be up in six or nine months," he says. "Deal flow is one thing, but because you invest in a listed portfolio your returns could come quickly."

This could have advantages in more ways than one. It's notable, for example, that many Aim VCTs tend to pay out a percentage of their NAV as a dividend: the Hargreave Hale Aim VCT (HHV) targets a payout of 5 per cent of its year-end NAV via semi-annual distributions, with the caveat that this can vary (to the upside or downside) in line with market conditions. Investors could therefore see their dividend payouts rise if and when NAVs recover.

Data does suggest that Aim VCTs more generally tend to rack up some big gains in the wake of a chunky sell-off. Wealth Club analysis from late last year has pointed to low Aim valuations previously leading to very handsome returns for VCTs dedicated to the market. Wealth Club investment manager Nick Hyett noted, for example, that Aim was trading on its lowest valuation in a decade as of late 2023, with a price-to-sales ratio just above one. "Historically, Aim valuations of that level have been associated with very attractive future returns for dedicated Aim VCTs – around 25 per cent in the next 12 months and 74 per cent over five years, excluding tax relief," Hyett said.

What's out there?

But not all Aim VCTs are raising funds at this point. The Octopus Aim VCTs have already sold out as mentioned above, while the Amati Aim VCT (AMAT) has opted not to raise fresh cash this year. That's indicative of a pressing issue for the sector: with sentiment in the gutter, companies have not been listing on the market or doing as much secondary fundraising, meaning the VCTs struggle to find a place to invest. 

"For this reason and having disposed of a number of qualifying holdings over the last 18 months, the board is choosing to accelerate the timing of dividend payments this year via the declaration of a second interim dividend," the trust announced in November.

However, some options are still out there. The Hargreave Hale Aim VCT (HHV) still has capacity, with around half of its £20mn offer remaining at the time of writing. Run by Canaccord Genuity Fund Management, the trust's holdings comprise a mixture of Aim-traded stocks, some unquoted companies, a position in Marlborough Special Situations Fund (GB00B659XQ05), some main-market UK equities, fixed income and cash.

Prominent holdings include Equipmake (EQIP), which makes electric motors and powertrains for the automotive, marine, aerospace, construction and public transport industries. The company listed on the Aquis stock exchange in July 2022 and has a number of contracts to convert diesel buses to electric, with customers including FirstGroup (FGP) and Transport for London. The fund also holds Engage XR (EXR), an Aim-traded company with a focus on the metaverse.

The high-risk nature of the immature companies backed by VCTs means failures do occur, and Wealth Club points to HonestBrew as one such case for this VCT. An online craft beer subscription service company, HonestBrew built up scale and then moved to a tiered subscription model, but ultimately announced in 2022 that difficult trading conditions meant it would go into administration. That holding was totally written down, equating to a £3.1mn loss for the VCT.

Elsewhere, Unicorn Aim VCT (UAV) is set to seek £15mn in fundraising later this month, with an overallotment facility of £5mn. Prominent holdings include Abcam, the global life science company, Hasgrove, which wholly owns software-as-a-service (SaaS) business Interact, and Aurrigo International (AURR), which focuses on autonomous vehicles used at the likes of airports.

Separately, Hyett has pointed to other VCTs with a sizeable Aim component in their portfolio – notably Baronsmead (BVT) and Seneca Growth Capital (HYG).

A private affair

VCTs with more of a focus on unlisted companies can be an option too, although in a higher-rate environment there are arguably still questions to ask over the accuracy of current valuations, and an immediate recovery might be less likely. Still, there are some old reliables that tend to crop up in this space: Yearsley points to Maven Income & Growth (MIG1) and Pembroke (PEMB), whose three sectors of focus are consumer, B2B business services and technology.

As Wealth Club puts it, the Pembroke VCT’s strategy "centres on finding and selecting strong founders", with holdings including LYMA, a company founded by husband-and-wife team Lucy and Simon Goff. It began by offering a premium dietary supplement and has since launched a skincare brand, among other offerings.

Hyett mirrors Yearsley's sentiment in noting that the Aim VCTs seem "demonstrably cheap". He adds that investors keen to use certain VCTs might still be able to enjoy somewhat discounted fees if they take part in early-bird offers, with Molten Ventures (MVCT), Maven Income & Growth and Guinness (GVCT) among these. Many such offers will close at the end of January, meaning those interested in taking advantage have limited time left to do so.

Investors do, however, need to exercise some caution. VCTs come with good tax advantages in the form of 30 per cent upfront income tax relief, tax-free dividends and a capital gains tax exemption, subject to certain criteria, but the investment risks are also elevated.

The increased pensions annual allowance and the abolition of the lifetime allowance mean that investors can, alternatively, now put more money into their pensions, a tax-efficient way of investing that typically comes with less risk than VCTs. The old saying about not letting the tax tail wag the investment dog still rings true: an investor's goals and risk appetite remain crucial.