Despite the gloomy economic backdrop, demand for Venture Capital Trusts (VCTs) remains buoyant this year and we could be set for another record.
So far this tax year an impressive £236 million has been invested into Venture Capital Trusts (VCTs). Whilst this is down 11% on the previous year we believe this is more to do with the timing of offers rather than any loss of investor appetite, with a number of popular offers opening slightly later this year.
The Mobeus VCTs, for example, opened on Monday 17th October and within 24 hours had raised £45 million, the fastest VCT raise we have ever seen. With many big name VCTs such as Octopus Titan, Baronsmead and British Smaller Companies set to launch over the next three months, demand for VCTs is expected to remain strong with a chance sales could eclipse last year’s record £1.1 billion.
Alex Davies, CEO and Founder Wealth Club the largest VCT broker said: “Whilst the economic backdrop has changed dramatically compared to last year, the reasons why investors have been turning to VCTs haven’t.
Firstly, VCTs provide a valuable tax efficient investment tool for wealthier investors affected by the pension restrictions.
Since 2009 successive governments have been restricting the amount wealthier individuals can put in a pension to raise extra tax revenues. 12 years ago, a high earner could invest up to £255,000 per tax year in a pension and get a significant percentage of that back in tax relief. Those days are gone. Now the annual pension allowance is £40,000 – reduced to as little as £4,000 for some top earners. Meanwhile, the pension lifetime allowance – the total most people can put aside tax efficiently in a pension over a lifetime – stands at £1,073,100 down from £1,750,000 in 2009.
With their simple annual allowance of £200,000 and generous tax breaks of 30% income tax relief and tax-free returns, VCTs have become the next port of call for those looking to invest for their future as tax efficiently as they can.
But it is not just about the tax relief. Investors are increasingly realising that growth and innovation are not likely to come from the large corporates you find on the main stock market, but rather from young, ambitious, and entrepreneurial start-ups. Not all will succeed but there’s now much more support compared to, say, 10 years ago – from incubators and accelerators to public and private funding – so they should have a better chance.
Moreover, over the last ten years VCTs have performed well with the 10 largest generalist VCT managers having on average more than doubled investors’ money (in terms of NAV total return), outperforming the FTSE All Share index. And that is before taking into account tax relief, which enhances effective investor returns considerably.”
But isn’t it a bad time to invest?
Alex Davies continues: “Certainly, the economy is looking rocky. That said, that should be reflected in the cost of investments. If company valuations drop, we would typically expect VCTs to revalue their net assets accordingly prior to allotting shares (this is what they did in March 2020, at the onset of the pandemic, for instance). That ensures new investors don’t buy today at yesterday’s prices and could mean there are bargains to be had. Finally, VCTs are a long-term investment, you need to hold them for at least 5 years, so short term noise now shouldn’t really bother more sophisticated investors.”
Alex Davies of Wealth Club’s top VCT picks:
- Albion VCTs – the six Albion VCTs give investors exposure to what the manager describes as an “all-weather portfolio”: c.70 companies in a broad spread of sectors, including healthcare, fintech, software, business services and renewable energy, across a range of maturity stages, from seed to Series B funding rounds. The VCTs target annual dividends of 5% of net assets, to be paid twice a year, each VCT in a different month. So, investors in all six VCTs could potentially receive tax-free dividends once a month throughout the year.
- Pembroke VCT – this is a VCT that’s coming of age. Launched in 2013, it has now started to achieve exits: fresh pasta delivery service Pasta Evangelists, then organic plant-powered drinks brand Plenish and most recently women’s fashion retailer ME+EM. These have helped the VCT pay 12p in special dividends. The portfolio still looks very promising, with a good number of fast-growing companies.
- Mobeus VCTs – these are some of the most popular VCTs. To date, the four VCTs have handsomely rewarded investors: they are the top four performing VCTs over both five and 10 years to September 2022. Over 10 years, they have on average trebled investors’ money. The current portfolio still looks promising, with most of the recent investments in technology-enabled companies.
