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The current tax year is likely to set a new fundraising record for these popular tax-efficient funds
Thursday 10 Feb 2022 Author: James Crux

This year’s new VCT (venture capital trust) offer season, where investors can apply for new shares and enjoy immediate tax benefits, is in full swing. Each year, VCTs seem to attract money faster than the previous year, meaning interested investors need to act fast once offers go live, although it is important to understand all the risks involved before making an investment decision.

Experts believe the current tax year is likely to set a new fundraising record for VCTs, which have supported cutting-edge UK businesses for over 25 years and continue to invest in early-stage companies that will help build back the economy from the ravages of the pandemic.

Some popular names have already closed after hitting subscription targets, among them Amati AIM VCT (AMAT), Octopus AIM VCTs, Hargreave Hale AIM VCT (HHV) and the Gresham House-managed Mobeus VCTs, which achieved their latest £35 million fundraise target less than 24 hours after opening the offering.

FUELLING THE ECONOMY

Trevor Hope, chief investment officer, strategic equity at Gresham House, assured investors that the Mobeus VCTs will ‘continue its well-developed investment strategy of providing truly patient capital to younger companies, fuelling the UK economy and creating rich intellectual property and employment.’

His Gresham House stablemate Bevan Duncan, manager of the Baronsmead VCTs, agreed that ‘one of the key economic benefits of VCTs is job creation’. Within Baronsmead’s unquoted portfolio alone, where holdings range from digital health patient triaging service eConsult to online personalised pet products purveyor Yappy, Duncan has seen ‘a 41% rise in terms of jobs created and filled between December 2020 (1,273) and December 2021 (1,749).

‘In 2021, the Baronsmead VCTs invested £41 million into both new and existing companies, one of the highest years of deployment over the VCTs’ history. In addition to creating new jobs, this capital is being used to develop new technologies, launch new products and expand internationally.’

As we emerge into the post-pandemic world, Malcolm Ferguson, partner at Octopus Ventures, which manages Octopus Titan VCT (OTV2), stresses there is ‘a real opportunity to invest in early-stage businesses to help turbocharge our economic recovery.

‘These businesses have the potential to create thousands of jobs and become some of the UK’s most productive companies. Across our Titan VCT portfolio, over 880 jobs were created in 2020 alone.’

OPEN FOR SUBSCRIPTION

Offers currently open include generalist VCTs such as premium consumer brands investor Pembroke (PEMB), whose portfolio includes the likes of United Fitness Brands, the Maven VCTs and Northern VCTs, and also the VCT industry’s largest AIM-focused vehicle, Unicorn AIM VCT (UAV), which recently launched a new £25 million share offer.

Investors can also support Octopus Ventures’ first new VCT launch in over 10 years. Octopus Future Generations is looking to raise up to £100 million to support businesses that are ‘helping to build a sustainable planet, empower people, or revitalise healthcare’.

FUNDING FRENZY

According to data from HMRC, VCTs issued shares to the value of £668 million in the 2020-21 tax year, 4% higher than in 2019-20, despite less schemes being launched against the backdrop of the pandemic. The surge in investment coming as more people sought to shield their wealth from the taxman.

And they could be about to break fundraising records in the 2021/2022 financial year, as limits on tax efficient savings vehicles such as private pensions bite and in a low yield environment, investors clamour for the relatively high tax-free dividends VCTs offer.

As Wealth Club’s CEO Alex Davies told Shares: ‘The unprecedented demand for VCTs this tax year isn’t really surprising when you consider how investors are becoming increasingly squeezed by limits on pensions savings as well as increased taxes on dividends.’

Unicorn AIM VCT’s lead manager Chris Hutchinson highlighted several reasons for the VCT market’s increasing popularity. ‘The first is the attractive tax breaks associated, and when you ally that to the fact pension changes have reduced peoples’ lifetime allowances, annual contributions etc.. there are an awful lot of high income and high net worth individuals looking for sensible places to invest with sensible levels of risk, but where there are some good tax benefits to be had.’

Performance across the VCT sector is also attracting investors, insisted Hutchinson, who reckons this year’s fundraising tally could be close to £1 billion. ‘A lot of the generalists have been successful in achieving good exits from some of their underlying investments,’ he explained. ‘And over many years we’ve steadily built the platform by focusing on businesses with the potential to grow organically and deliver significant shareholder value. We’ve been delivering very good returns to our shareholder base without taking into account any of the tax reliefs.’

WHAT ARE VCTS?

VCTs are closed-ended funds which invest in early stage companies in order to help them grow. When you as a private investor buy shares in a VCT, you get access to a portfolio of small companies. The government is keen for experienced investors to invest in this kind of company, because they create jobs and support economic growth. However, investing in small businesses is risky, so VCTs are not suitable for everyone; they are aimed at patient investors that have used up ISA and pension allowances and are paying tax at the higher and additional rates.

To help compensate for the risks, the government offers generous tax benefits. You can’t get your money back for five years, but to compensate for that factor and the risk of investing in young businesses, you can claim up to 30% income tax relief on an investment of up to £200,000 a year. You will also have a capital gains exemption on disposal. If you do want your money back before the five years are up, you must pay back the tax relief.

By investing in VCTs, the idea is that you are helping Britain’s exciting, entrepreneurial businesses to grow. There is also the bonus of tax-free dividends, often funded by the money made from exiting companies. But VCTs will usually look to hold companies for at least five years and can sometimes hold them for more than 15 years.

CHASING UNICORNS

Unicorn AIM VCT’s net asset value (NAV) total return for the year to September 2021, after adding back dividends of 6.5p paid in the period, appreciated by an impressive 42.8% and the VCT has since shelled out (10 Feb 2022) a 3.5p final dividend for the year as well as a special interim dividend of 7p. The special was paid out of proceeds from the sale of waste management specialist Augean following a takeover by Ancala Partners and Fiera Infrastructure.

Privately-owned Interactive Investor is currently the VCT’s biggest holding, but it is being acquired by abrdn (ABDN) and Unicorn AIM VCT is firmly focused on the AIM market, with holdings ranging from life science research tools leader Abcam (ABC:AIM) to transport analytics software company Tracsis (TRCS:AIM) and commercial cell-engineering company Maxcyte (MXCT:AIM).

Seasoned AIM investor Hutchinson has ‘never witnessed the AIM index itself looking more interesting or offering more potential for strong returns through a selective approach to investing’. His view is ‘AIM has come of age’ and is ‘attracting a lot of really good businesses run by extremely capable management teams’, with business models ‘increasingly focused on providing very specific solutions to very intractable but niche problems, whether that is in the environment, climate change, clean energy, life sciences or even just in basic manufacturing or software.

Octopus Ventures manages the tech-focused Octopus Titan VCT (OTV2), the largest VCT in the UK market today, which has previously backed the likes of property portal Zoopla, used car website Cazoo and luxury hotels-to-holidays provider Secret Escapes, erstwhile consumer brand hopefuls that morphed into major household names.

Highlights for the VCT space in 2021 included the New York Stock Exchange listing of Cazoo, the fastest British business to reach ‘Unicorn’ status in June 2020, and the lucrative disposals of WaveOptics, a designer of components for use in augmented reality glasses bought by Snap, and Depop, the used fashion marketplace acquired by Etsy for a bumper $1.63 billion.

Among the next generation of investments that Ferguson believes boast ‘Unicorn’ potential are Quit Genius, a digital clinic treating substance addiction, financial crime-to-financial risk analysis software concern Elliptic and Big Health, a digital medicine business which helps to treat insomnia and anxiety.

Ferguson is brimming with enthusiasm about new launch Octopus Future Generations too. ‘It is our belief that the companies that generate the most returns in the next period will be companies that have a really positive impact on society’, he explained.

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