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The different types of VCT

There are a variety of different strategies to be found in the VCT market, but the most common categories are:

Generalist VCTs

Most VCTs fall into the Generalist category. These pursue a private equity approach of investing in unquoted companies, though some of the larger Generalist VCTs have over the years evolved into a more hybrid approach of investing in both unquoted and AIM-listed companies.

Investment into unquoted companies involves considerable work finding companies to invest in, conducting due diligence and negotiations before making an investment. Unlike investment into listed companies, where anyone can purchase shares in a business such as HSBC or Vodafone, in the world of private equity investment company management teams usually get a say in who they accept investment from. Highly regarded VCT teams with strong contact networks often get the best pick of new deals.

VCT investments in unquoted companies are typically made through a combination of loan notes or preference shares, as well as equity in the business. The loan notes or preference shares provide a potential source of income for the VCT and have greater security than equity since they rank ahead of the ordinary shareholders in entitlement to any assets in a potential wind-up situation.

Once invested, the VCT’s management team will often place directors on the Boards of a company to monitor their investment and help guide the business to an eventual ‘exit’ which could be a sale to another investor, a trade buyer or sometimes a listing on the stock market.

There is a variety of approaches to be found among Generalist VCTs. Some focus on earlier-phase companies that may not yet be profitable. Others focus on more mature businesses and some take an asset-backed approach similar to that used by Limited Life VCTs (see below) but without a commitment to wind the VCT up at a future date.

 

Limited Life or Planned Exit VCTs

While all VCTs should be regarded as higher-risk investments because of the illiquid nature of the companies in which they invest, Limited Life VCTs sit at the most conservative end of the VCT spectrum. Limited Life VCTs seek to reduce some of the uncertainty over how investors will eventually crystallise their investment. They do this by launching with the clear goal of winding up after the minimum five-year holding period required to enable investors to keep the 30% Income Tax credit available on their share subscription. As these VCTs are managed with a specific time horizon in mind, their investment strategies have a heavy emphasis on capital preservation rather than trying to maximise returns, so most of the overall return for investors will come from the 30% Income Tax credit. The main focus will be to invest in asset-backed deals, which is where the VCT will make investments where it can secure a first charge on an asset owned by a business, such as a freehold property, as a condition of its financing.

 

AIM VCTs

These VCTs focus on investing in qualifying companies that are also listed on AIM. AIM VCTs are typically managed by teams from fund management rather than private equity investment backgrounds. Investments are usually made through ordinary shares rather than loan notes or preference shares, unlike Generalist VCTs. Because AIM shares have a market price and these will fluctuate, AIM VCTs carry the potential for greater volatility than Generalist VCTs, which have holdings that are only revalued periodically. However, AIM VCTs do have a greater degree of flexibility than Generalist VCTs since shares can be more readily partially or wholly sold on the market – unlike a position in an unquoted company.

VCTs should be regarded as higher risk investments.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance is not an indication of future performance.

VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Historical or current yields should not be considered a reliable indicator of future returns, which cannot be guaranteed. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change, and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.

We aim to provide investors with information to help them make their own investment decisions although this should not be construed as advice or an investment recommendation. If you are unsure about the suitability of an investment or if you need advice on your specific requirements, we strongly suggest that you consider professional financial advice.

OUR AWARDS

Past performance is not a reliable indicator of future returns

The value of your investment can go down as well as up, and you can get back less than you originally invested.

The Bestinvest Online Investment Service, including any account analysis and investment reports provided by our guidance services, is an online execution-only dealing service for investors who want to make their own investment decisions. It does not provide advice on the suitability of products and investments; if you are unsure about the suitability of any investment you should seek professional advice. Clients of our Investment Advisory Service and Managed Portfolio Service can use the website to obtain current valuations of their investments but cannot trade on these accounts online and should call their adviser if they wish to discuss changes to their investments.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Restricted advice can be provided as part of other services offered by Bestinvest, upon request and on a fee basis. Before investing in funds please check the specific risk factors on the key features document or refer to our risk warning notice as some funds can be high risk or complex; they may also have risks relating to the geographical area, industry sector and/or underlying assets in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

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