VCTs a compelling option for savvy investors that want to back UK growth businesses

By Ewan MacKinnon, Partner at Maven Capital Partners

With inflation at a thirty-year high and uncertainty plaguing global markets, investors are looking for ways to achieve attractive returns despite the turmoil. One avenue investors can explore is Venture Capital Trusts (VCTs), which now have a 25-year track record of delivering strong, resilient, returns, including 30% initial relief and tax-free dividends, while also offering a way to share in the growth of some of the most innovative UK businesses.

Once considered a niche or “alternative” investment, VCTs are now firmly established in the mainstream, with the top 20 VCTs, for example, having at least doubled investors’ money on NAV total returns in the last decade, according to research from the AIC.

Of course, investing in smaller companies involves taking more risk than investing in larger listed businesses and investors should be prepared to hold VCT shares for a minimum of five years. However, mature VCTs also tend to have large, highly diversified portfolios of carefully researched businesses, which in Maven’s case also offers the benefit of selected AIM assets alongside core private company portfolios.

Robust returns

VCTs can deliver attractive returns that are uncorrelated to the performance of the wider economy, with the 20 largest VCTs making an average return of 8.4% in 2020, 18 percentage points better than the FTSE All Share in the same period.[1] Although a 2015 rule change required VCTs to focus on earlier stage private company investments, experienced VCT managers have been able to boost their investment capabilities to identify younger companies with high potential. That combination of existing SME market knowledge and early stage tech expertise has translated into sustained strong returns.

One example of this is Maven VCTs’ recent exit from Quorum Cyber during the pandemic, which delivered an overall money multiple return of 6.5x for shareholders just 18 months after investment. Another example involved the 2020 exit from the investment in Edinburgh based Symphonic Software through a sale to an NYSE listed US tech firm, achieving a 2.9x money multiple return for investors in less than two years.

Resilient portfolios

An AIC survey found that VCTs were remarkably resilient in 2020 amidst the turmoil caused by Covid-19. Two thirds of managers reported that trading conditions for most of their investee companies had either improved or been unchanged.[2] And, according to a recent study of the constituents of 10 randomly selected VCT portfolios, 45.7% of invested assets are in companies which have grown revenues by a year-on-year average exceeding 25%, while only 4.6% of the invested assets of FTSE 350 companies achieved this. VCT activity also recovered quickly from the 2008 financial crisis, and this resilience is something investors may well come to appreciate with an uncertain year ahead.

Helping growth companies across the UK

Investor priorities can differ greatly, and can involve objectives as varied as maintaining a sustainability focus or gaining exposure to opportunities outside the South East. Well resourced VCT managers can accommodate these, and the Maven VCTs’ recent investment in Cheshire based eco-ethical baby care business Pura is a case in point. VCTs have a valuable role to play in the UK economy, providing essential support for growth businesses at a crucial stage in their development, with VCT backed businesses including some of the UK’s most exciting SMEs.

With SMEs accounting for 61% of employment and 52% of turnover in the private sector, sustaining this cohort of businesses will be critical for the UK’s future economic prospects. Indeed, VCTs have raised more than £9bn for funding SME growth, have supported approximately 1,000 companies, and have created upwards of 27,000 jobs.

Finally, VCTs’ tax efficiency remains an attraction, particularly now that investors face an additional 1.25% tax on share dividends from April, which could equate to 38.1% for additional rate payers. This appeal ensures that VCTs continue to focus private investor capital on the SME sector. Overall, VCTs remain one of the most attractive ways investors can gain exposure to well researched, actively managed and diversified portfolios of early stage companies that help to drive innovation while creating jobs and increasing exports. Investors would be wise to consider them this year.

[1] https://www.ftadviser.com/investments/2021/02/12/tax-rules-funnel-investors-towards-vcts/

[2] https://www.theaic.co.uk/aic/news/press-releases/new-research-reveals-vcts-resilience-in-face-of-the-pandemic