Last year’s Autumn Statement proved positive for the outlook on venture capital trusts, with the chancellor Jeremy Hunt announcing an extension to the the VCT and EIS sunset clause until 2035.
This will ensure that investors in VCTs will continue to remain eligible for income tax relief.
The confirmation of the long-term future of VCTs has reinforced the scheme’s status as a key part of wealth and financial planning, with its strong returns, tax benefits, and ability to complement pensions planning all attractive elements for investors.
VCTs are now a standard fixture in many investor portfolios, and a staple of retirement saving strategies.
Separately, the changes to the annual allowance of capital gains tax and dividend tax that came into effect in April have further highlighted the role of VCTs as an increasingly viable alternative for retail investors to access significant tax reliefs.
However, given VCTs invest in young, scale-up businesses, they are not risk-free and investors should remember to do their due diligence when selecting a manager.
VCT managers with long small-to-medium enterprise investment experience across multi-sectors and who prioritise investment aftercare in portfolio companies can help minimise some of the risks of investment in VCTs.
These include insufficiently diversified portfolios in terms of both sector and geographic exposure, and managers lacking the resources and expertise to provide strategic and operational advice to management teams as their businesses scale.
As such, choosing the right VCT manager is essential to ensuring that VCTs offer attractive returns while complementing an investor’s investment objectives.
Opportunity
While the historic performance of VCTs is not a reliable indicator for future performance, VCTs have achieved strong returns.
In the decade to December 2023, the 10 largest VCT managers delivered an average NAV total return of 77.04 per cent, outperforming the London Stock Exchange main market by 13 per cent.
As VCT returns are uncorrelated to the UK main market, they typically offer better returns in times of economic volatility.
With VCTs hitting their three highest years for fundraising on record since 2021, despite the uncertain market in that period, the VCT industry is able to back the growth of the UK’s most innovative and fast-growing small businesses.
The increased price of debt means that attracting equity investment is more appealing for small businesses. Being non-amortising and lacking interest costs, equity investment allows these businesses to use all the capital from funding to grow.
Furthermore, at Maven, we have seen more high-quality growth opportunities emerge over recent years, particularly in dynamic sectors including software, cybersecurity, medtech, and renewables.
Such sectors are less exposed to discretionary consumer spending, meaning that they are less volatile during periods of market uncertainty.
Diversification is key
VCTs are best used as a part of a diverse portfolio, to complement existing assets.
These funds give investors access to early-stage private companies with high-growth potential that have a low correlation with the broader public market, helping reduce overall portfolio volatility while introducing higher return potential.
