What a difference a year (and some meddling by the Chancellor) makes. This time last year Venture Capital Trust (VCT) monies raised over the tax year were already above £300 million, the same figure this year is just £70 million. We wouldn’t be surprised if VCTs struggle to raise £150 million by the end of tax year, a paltry amount versus last year’s £750 million.
The drop off in demand appears largely to be a reaction to the Chancellor cutting the income tax rebate from 40% to 30%. Increasing the minimum holding period from three to five years and scaling back the size of company in which VCTs can invest also haven’t helped. Furthermore, we suspect a number of investors feel they already have ample VCT exposure, having filled their boots over the previous two tax years.
| "In general, we believe that the current tax benefits are barely adequate to compensate for the disadvantages of VCTs." |
In general, we believe that the current tax benefits are barely adequate to compensate for the disadvantages of VCTs in terms of high charges, restricted investment universe and the virtual certainty that their shares will trade at a discount to net asset value. This year we’ve seen a trend for VCTs to place an increasing emphasis on trying to reduce risk. However, we feel this is the wrong approach since the new tax benefits are inadequate unless the underlying portfolio generates reasonable returns. Most VCTs have annual running costs of around 4%; low risk investments are unlikely to generate returns much higher than this. By the time you factor in initial costs, transaction costs and the inevitable discount on the sale of VCT shares, even returning 100p to investors after five years (which would represent a net annual return in the region of 7%) is far from assured.
| "We believe VCTs should only be considered where the underlying investment proposition makes sense." |
We believe VCTs should only be considered where the underlying investment proposition makes sense and the manager has a tangible record of delivering performance. Even if you have previously bought VCTs, you should question whether further investment is worthwhile under the new rules. Also review how much smaller companies exposure you have in your equity portfolio, we suggest keeping this below 25%.
While many of the current launches are Generalist or AiM VCTs, there are also a handful of specialist options. Foresight 2 VCT C is one of the more interesting as it will include significant exposure to the fast growing market of clean energy and environmental protection. Foresight is one of the few groups that can boast a team that has the experience to cover this sector. Other more novel VCTs include Edge Performance VCT C, which intends to help finance live events such as music festivals, and Triple Point 70 VCT which intends to provide exposure to hedge funds returns while making qualifying investments into businesses with contractually secure revenues.
Of course, VCTs will still appeal to some investors, but we suggest treading very carefully.