Accredited by:
venture capital trusts
Industry Update
QUARTER 1 2021
performance in a storm What Brexit means for VCTs Geographical considerations Market composition and targets The spring budget Beyond Covid
FIND INSIDE
INTRODUCTION
1
MARKET UPDATE
2
industry analysis
4
considerations for investment
3
MANAGERS IN FOCUS
5
WHAT'S ON THE HORIZON
6
FURTHER LEARNING
7
The latest news, updates and statistics on VCTs
In partnership with:
1. Introduction
Foreword Opening statement Update overview Key findings
1. INTRODUCTION
A look at 2020 Performance in the storm Using VCTs to their full potential What does Brexit mean for VCTs What the managers say
2. market update
Covid dents fundraising Geographical considerations
4. INdustry analysis
Market composition Targets
3. considerations for investment
Blackfinch Puma Seneca Comparison table VCT Showcase Content
5. managers in focus
Beyond Covid The spring budget What the managers say
6. what's on the horizon
Learning objectives CPD and feedback About Intelligent Partnership
7. further learning
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
guy tolhurst
foreword
MENU
Foreword
INTRODUCTION / FOREWORD
I
t gives me great pleasure to introduce our first VCT Update of 2021, as we look at how the historic events of 2020 - many of which are still affecting us today - have impacted and will impact VCTs, and the potential appeal of them for investors. For the past 12 months, Covid-19 has dominated the headlines. During this time, phrases like ‘the new normal’ have become old hat. Many traditional business practises have undergone severe stress, and companies have had to adapt to a wildly different environment compared to before. For small and medium sized enterprises (SMEs), these times have been especially tough as they lack the reserves and credit lines bigger businesses tend to benefit from. That said, they do possess some advantages. As smaller companies, they can be quicker to react, and are better able to pivot to address current market trends. They can also benefit from various Government schemes to provide them with capital - of which VCT is a prime example. 2020 marked VCTs 25th anniversary. During this time investors have provided billions to SMEs in funding, and never was this more required than during the pandemic. For many businesses, venture capital will have been the difference between staying in business or not. Of course, Covid was not the only big news story of 2020. A Brexit trade deal was finally struck towards the end of December, bringing to a close years of negotiations. For businesses and investors alike, the news was welcome. It guaranteed there would be continued access to the European Union (EU) markets, and helped provide an element of certainty that had been lacking ever since the 2016 referendum. Although all of the above may have made 2020 a tough time for many, it also means that 2021 might be a great time to consider investing. With several vaccines now making their way into circulation, and Brexit settled, there is a sense that the UK economy is primed for a recovery. More investors could now be entering the market at the ground level, and earning good returns. That is not to say the risks have all gone away. Despite the existence of the vaccines, I am writing this Foreword during the third national lockdown, and it could be months before the virus is fully under control. And while the trade deal has settled nerves around Brexit, we are still in the early days of our post EU lives, with many details still to be determined. Who knows how that will develop. A big advantage VCTs have in this respect is the number of companies they invest in. This diversification provides them with a level of strength in uncertain times. Their regular dividend payouts continued at above inflation rates in 2020, providing investors with a regular tax free income when many mainstream income funds dried up. At the same time, the long term nature of the investments should help smooth over some of the volatility markets have faced over recent years. With this in mind, 2021 could be a great year to introduce the idea of VCTs to clients with the correct risk profile who might be looking for their money to work a little harder for them.
managing director, intelligent partnership
Source: The AIC
welcome
nick britton
opening statement
vcts continue to deliver
INTRODUCTION / OPENING STATEMENT
Most VCTs have maintained their dividends since the pandemic, an important source of tax-free income for their investors. And, for the first time, assets managed by VCTs surpassed £5 billion in December."
Last year, AIM accounted for 60% of all European growth market IPO and follow-on equity capital raised. While IPOs often get greater attention, it’s worth noting that in 2019 AIM companies raised £3.4bn in 351 follow-on issuances. This underlines the essential function of public markets to enable companies to return to market to raise additional capital, as needed, to continue to grow, innovate, create jobs and support economic development. London Stock Exchange also launched two innovations in 2019, which will support AIM companies and the investor community. In November, we announced a collaboration with Primary Bid to broaden retail investors’ access to IPOs and follow-on equity raisings. Through the collaboration, retail investors will be able to access capital raisings on the same terms as institutional investors. And in October, London Stock Exchange launched the Green Economy Mark, shining a spotlight on listed companies and funds on the Main Market and AIM that derive 50% or more of their revenues from products and services contributing to the global green economy. There are currently 78 companies that have received the Mark, 38 of which are admitted to AIM. In the short-term global stock markets are likely to remain volatile as countries around the world navigate their responses to the pandemic. However, there is much to celebrate about AIM and the dynamic companies it supports. As the world’s leading growth market, AIM plays a key role in supporting UK and international companies, providing access to growth and opportunities for investors and connecting issuers with the capital they need to drive innovation, economic growth and job creation.
Head of Intermediary Communications The Association of Investment Companies
- nick britton
V
CTs are high risk. There should be no doubt about that. Investing in small companies at a formative stage of their development can bring rich rewards, but it can also result in a total loss. And while tax incentives mitigate this risk to some extent, they do not remove it. So it was somewhat surprising to see VCTs generate a positive total return last year. The average return of VCTs was 4%, not accounting for tax relief. That’s below the ten-year average of 8%, but still a respectable showing in a year which saw swathes of the UK economy shut down. It certainly beats the FTSE 100, which endured a 12% loss. Small, private companies outperforming the titans of the FTSE 100 in a pandemic year may seem a little topsy-turvy, but dig a little deeper and it makes sense. To begin with, the very smallness of VCT-backed companies can protect them. They are nimble and adaptable, and not burdened with high fixed costs. They are not dependent on general GDP growth, but can prosper in their own niche markets even when the overall economic outlook is glum. These are young companies. They are not struggling to adapt to this new world where we are doing more and more online – they were purpose-built for it. The pandemic has, in many cases, accelerated trends that these companies were already capitalising on – whether that is online delivery, e-learning, home entertainment or cyber-security. And many VCTs invest in healthcare or biotech – among last year’s best-performing sectors. Before we get carried away, it needs to be said that many VCT-backed businesses did suffer in the pandemic. In a survey of VCT managers we conducted in December, 40% of respondents said that trading conditions had improved for their portfolio companies in aggregate, while 33% said it had worsened. 2020 was not an easy year for VCT-backed businesses in hospitality, leisure, travel, tourism and retail. Yet the overall resilience of VCTs is still remarkable. Most VCTs have maintained their dividends since the pandemic, an important source of tax-free income for their investors. And, for the first time, assets managed by VCTs surpassed £5 billion in December. All this goes hand in hand with VCTs’ wider mission to support economic growth, create jobs, drive exports and fuel innovation. AIC research has found that 28% of VCT investments since 2017 are in knowledge-intensive companies. Companies backed by VCTs have also contributed to the UK’s response to COVID-19 through a broad range of services: testing kits, disinfection and cleaning, recruitment of medical staff, mental health support and risk assessment tools. The diversity and resilience of VCT-backed companies is matched by the robustness of the VCT structure, which has endured for 26 years. As London-listed investment companies, VCTs meet high standards of transparency and governance, while their closed-ended format ensures an appropriately stable pool of capital. With tax reliefs to take the edge off the risks, there is simply no better way for ordinary investors in the UK to get access to an exciting range of early-stage opportunities.
update overview
INTRODUCTION / UPDATE OVERVIEW
We couldn’t do this without the help and support of a number of third parties who have contributed to writing this report. Their contributions range from inputting into the scope, sharing data, giving us their insights on the market, providing copy, and peer reviewing drafts. So, a big thanks to Nick Britton, John Davies, Jessica Franks, Jo Oliver, Gillian Roche-Saunders and Dr Reuben Wilcock. Their input is invaluable, but needless to say any errors or omissions are down to us. We have relied upon MICAP for most of the data that we have based the report upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The report is made possible by our sponsors, who have contributed copy to the report and supported us by helping to meet production. So, a big thanks to: Blackfinch, Octopus Investments, Puma Investments and Seneca Partners
Business relief qualifying shares and share sales Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
acknowledgements and thanks
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learning objectives for cpd accreditation
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INTRODUCTION / KEY FINDINGS
£685
raised for SMEs through VCT in 2020
million
£3227.27
that went out of business by September due to Covid-19
average minimum investment
22
open VCT funds (as of 12 January 2021)
open VCT funds
£5
billion
51%
of all VCT investment
4%
from VCTs in 2020
average return
£9
raised, helping to create over 27,000 jobs
billion funds
VCTs celebrated their 25 year anniversary in 2020
years
25
key findings
goes to London based companies
total VCT assets under management as of December 2020
2. Market update
a look at 2020 performance in the storm using vcts to their full potential what does brexit mean for vcts? what the managers say
a look at 2020, a historic year
MARKET UPDATE / a look at 2020
VCT celebrations over it’s 25 year anniversary may have been muted thanks to wider economic issues, but the tax relief remains a key cog in the UK’s SME funding scene.
t can point to over £9 billion of vital funding raised for SMEs over it’s life, as well as over 40 open offers for investors to consider each year over the past decade, bar one. It offers investors a diversified investment opportunity alongside some generous tax benefits, connecting them with SMEs in desperate need of funding.
VCTs generated over £1.4 billion of exports and created more than 27,000 jobs during the first 25 years of the scheme.
There needs to be clarity on which elements are subject to VAT and which are not. Just to say that VAT is charged as applicable is not sufficient and each fee should clearly have its VAT status given. The net amount of an investment that will be used to purchase shares should be clearly stated.
05
Initial fee for investor* Annual Management Charge for investor* Arrangement fee for company Monitoring fees for company A performance fee of a percentage on all gains above a certain threshold on returns* On occasion, an exit fee may be charged*
typical eis fees charged
*may or may not include VAT
- aic, january 2021
£9 billion
over
funding raised through VCT
Silkfred
An online marketplace for ladies fashion, Silkfred is ideally placed as more and more shopping is done online. It is now trading at levels in excess of £50m annualised and forecasting growth of over 50% as it enters 2021. It boasts a diverse supply chain of c.900 brands and minimal stock risk, enabling it to remain flexible in the face of constantly evolving consumer demands.
VCT success stories
01
Ron Dorff
In 2020, men’s premium athleisurewear business Ron Dorff received £3.6 million VCT investment. It has gained recognition in titles such as Vogue and GQ magazine. As well as 5 own-brand stores, it’s 70 wholesale partners and strong e-commerce business gives it access to customers in over 80 countries. Over the course of the Covid crisis, it grew its online sales by over 50%.
Pasta Evangelists
Pasta Evangelists recieved £2 million VCT investment at the start of 2020. As Covid pushed luxury eating towards food delivery services, the company saw strong growth. At the start of 2021, it was sold to an Italian food company for a 2.3X return.
02
03
A number of household names have received VCT funding during their lives, including Zoopla (the first VCT-backed £1 billion company), Five Guys and Secret Escapes. The Government recognises it’s important role in SME fundraisings, and a National Audit Office report on UK tax relief costs found that VCT reliefs did have their intended impact of helping capital flow to SMEs. All in all, VCTs have been very successful in connecting investor capital with SMEs looking to grow. And 2020 was a year in which many SMEs needed funding more than ever thanks to the covid pandemic and the various economic and social measures that were taken to combat it. For many businesses, the effects of the various lockdowns and other restrictions have been devastating. The hospitality and leisure sectors and their suppliers were particularly hard hit. However in and amongst these struggles, there have been companies which have grown rapidly. As VCTs tend to invest in a large number of companies, it is likely they will have investments in some of these so called winners and losers of the Covid situation, and this diversification should have provided some level of protection for investors.
eis success stories
8
MARKET UPDATE / performance in the storm
AIM VCTs performed exceptionally well over the past year, with an average return of over 25%. This is reflected in the overall strength of the AIM market at the start of 2021. It should be remembered that this data is a snapshot at a time when AIM is trading at record levels. If this snapshot was taken in March 2020, for example, NAV total returns in AIM would likely not look so impressive. For the industry average VCTs (i.e all VCTS, including those focused on unquoted underlying investees and those focused on AIM quoted underlying investees), a positive return on NAVs for the past year is a good sign of VCT managers performing well. 2020 will have been a tough year for many SMEs, and many will not have survived. Although it may not be as high as AIM VCT returns, or some of the famous US tech companies, this compares extremely favourably to many mainstream funds and indexes. For example, the FTSE was down looking at 2020 as a whole. It’s also worth looking at the 5 and 10 year NAV returns - as VCTs are designed to be held for this long (and more). An average 25% return is extremely healthy (especially when dividends are brought into the equation), and all this gain is tax free.
performance in the storm
For this section, we are grateful to the Association of Investment Companies (AIC), which has given us permission to analyse its data. Unless otherwise stated, the information here is a compilation collated through Regulatory News Service (RNS) announcements, the AIC Monthly Information Release and Morningstar calculated estimates, brought together by the AIC and correct as at January 2020.
NAV total returns
NAV Total Return
duration (years) industry average vcts vct aim quoted 1 3.44% 26.6% 3 10.22% 31.4% 5 25.38% 59.91% 10 85.70% 148.05%
Dividends are a key attraction of VCTs for many investors, and AIC data suggests they performed well over 2020, in spite of all of the macro economic difficulties faced. While a dividend yield of 4.36% for industry average VCTs, and 3.86% for AIM quoted VCTs is down year-on-year, they look especially healthy next to more mainstream, traditional investment options. Link Group research found UK listed company dividends fell 44% over 2020 to a nine year low on the back of the pandemic. Traditional safe bets, such as BT or banks stopped their dividends, and it appears these dividends won’t reach pre crisis levels for some time. These dividends were slightly below the target dividends recorded by funds listed on MICAP (which were 4.86%). However as the MICAP average was only for open funds, while the AIC data includes funds not currently raising, the two figures are not directly comparable.
Dividends
dividends
industry avg vcts vct aim quoted dividend yield 4.36% 3.86% 5 yr dividend growth* 5.64% 4.99%
VCTs are not widely traded, and where they are, trades usually occur at a discount. Generally speaking, a larger discount can be seen as a symptom of lower market confidence. In simple terms, increased demand for the VCT shares will drive up prices. Many VCTs offer some form of buy back option for investors, for which a predetermined discount will be used (usually somewhere between 5% and 10%). Given the continued market uncertainty, it is therefore no surprise that the size of the discount increased across the entire VCT market over the course of the last year. Still, the discount remains smaller than that of two years ago, suggesting confidence and demand in VCTs remain. This is not the same for AIM quoted VCTs, where discounts have been steadily increasing over the past 2 years, and now stands at 13% (compared to under 6% in 2019). This is somewhat surprising, as the AIM market has bounced back strongly from the initial Covid crisis, and at the time of writing is trading at record highs. As shown, while dividends for AIM VCTs tend to be a little lower, they remain competitive, and NAV returns are potentially higher. It could be that recent volatility in the AIM is dragging down demand. Although AIM stocks are currently doing well, uncertainty will remain until Covid is fully dealt with through a vaccine, and that could be months away.
Trading discount
- Reuben Wilcock, Head of Ventures, Blackfinch
VCTs strike a very clear balance between the risks that come with investing in young ambitious companies, and the potential rewards that investors today want to have greater access to.”
trading discount
industry average vct aim quoted
2019 7.94% 5.61% 2020 5.87% 8.79% 2021 7.43% 13.28%
9
industry avg vcts vct aim quoted
dividend yield 4.36% 3.86%
5 yr dividend growth* 5.64% 4.99%
*Dividend growth over the past 5 years annualised to give a compound percentage rate per year
jessica franks
thought leadership
Are you using Venture Capital Trusts to their full potential?
market update / using vcts to their full potential
These investments, which incentivise investors to support early-stage companies by offering a range of tax benefits, have become popular with advisers to complement a client’s wider investment portfolio.
Head of Tax Octopus Investments
- jessica franks
O
ver the last 25 years, a growing number of investors have sought ways to invest tax-efficiently other than through their pensions and ISAs. Venture Capital Trusts (VCTs) are a part of that picture. These investments, which incentivise investors to support early-stage companies by offering a range of tax benefits, have become popular with advisers to complement a client’s wider investment portfolio. This is especially the case for clients impacted by the lifetime allowance on pensions – more on that in a moment. But are advisers using VCTs to their full potential? VCTs won’t be right for every client, particularly given their risk profile, but there are likely to be more clients than you would first think that could benefit from a VCT investment. Complementing pension and ISA planning VCTs are increasingly being used to complement pensions and ISA planning. Why? A VCT is a listed company that invests in a diversified portfolio of smaller unlisted companies. They offer attractive tax reliefs on investments up to £200,000 each year. VCT investors can claim up to 30% upfront income tax relief, provided they hold the investment for five years. And there’s no tax to pay on any dividends received. The tax reliefs exist to compensate investors for some of the additional risk they take by investing in small companies. So where a client has built up significant pension and ISA investments, a VCT can be a way to continue investing tax-efficiently for the future. A great diversifier VCTs offer diversification benefits. That’s because they invest in early-stage smaller companies, either unquoted or not listed on a main market, which many clients won’t have much exposure to in their existing portfolio. These companies can be flexible and adapt quickly to shocks, such as a global pandemic. Compared to larger companies, they are often more able to turn the ship quicker and exploit new opportunities. Unquoted companies are also less likely to be affected by market sentiment, as their shares aren’t traded on a main stock exchange. Instead, their share prices are calculated periodically, based on the underlying performance of the business rather than the emotions of the herd. A key driver for demand In addition to annual pension and ISA contribution limits that can put a cap on saving into these wrappers each year, changing legislation has placed tighter limits on how much clients can contribute to their pensions in their lifetime. And that’s caused the demand for VCTs to climb. Individuals can incur additional charges if their pension pot exceeds their lifetime allowance when they start to access it (currently set at £1.07 million). Many are now worried about the potential for their pension to grow and trigger these charges, even at a relatively early age, and are looking for additional ways to plan for retirement. Once a client expects to hit or exceed their lifetime allowance, a VCT can become an attractive way to complement their investments. It’s an investment that can be accessed, subject to liquidity, ahead of a pension. And it offers the possibility of tax-free income. More clients could benefit than you think Clients impacted by the lifetime allowance is a very common scenario. But many advisers have identified clients in other situations where a VCT can help. Take clients who own a business. Given the changes to dividend taxation in recent years, the effective rate at which dividends are taxed has increased for most and that means that business owners who pay themselves through dividends could face higher tax bills and lower take-home earnings. VCTs could be a way to offset these costs and help to extract money from a business tax efficiently. Likewise, some clients who own rental properties and want to invest for the future have turned to VCTS. Until 2017, buy-to-let landlords could deduct their mortgage interest from their rental income and only pay tax on the net income. From April last year, landlords can now only receive a tax credit equivalent to the basic rate of tax. Higher or additional-rate taxpayers won't get all the tax back on mortgage interest payments. VCTs offer landlords a way to invest their rental income tax-efficiently. This is especially powerful, because entitlement to make pension contributions requires ‘relevant earnings’, typically from employment that many landlords will not have. Bear in mind the risks It is, however, important that any client understands the risks before they make a decision to invest. VCT shares are by their nature high risk, their share price may be volatile and they may be hard to sell. The value of a VCT investment, and any income from it, can fall as well as rise, and investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on the VCT maintaining its VCT-qualifying status. Clients will also need to be comfortable with holding the shares for at least five years in order to keep any income tax relief they claimed. A driver for new business As outlined above, it’s very possible that you have more clients that could benefit from VCTs than might first appear. Now is a great time to take a closer look at VCTs and how they could help your clients. As the largest manager of VCTs, Octopus is well placed to help you do that. Visit here to watch our on demand CPD webinar on VCT planning opportunities.
VCTs are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: February 2021. CAM010726
10
What does Brexit mean for VCTs?
market update / what does brexit mean for vcts
After several years of tense negotiations, the end of 2020 saw the UK and the EU finally sign a trade agreement to govern their post Brexit relationship.
The existence of a trade deal will be of comfort to VCT investors and managers alike - it provides an element of certainty for the future, as well as information around how British companies will trade with the EU, and vice versa from now on. A key part of the negotiations and resulting trade deal from a VCT perspective relate to agreements around state aid rules. These rules were designed to create a level playing field between EU states. These rules have been cited as one of the reasons for the limits in tax reliefs as well as the restrictions to those companies that could qualify for funding via VCT. This remained a sticking point until the end of the negotiations with the UK wanting more independence from the rules, and the EU wanting to tie the UK into them (including the use of EU courts for enforcement). The final deal in many ways shows a good deal of compromise from both parties from these positions. Although the deal includes provisions around state aid and the level playing field, in which the UK agrees to stick broadly to the EU’s state aid principles, it allows the UK to develop its own policies and priorities within this. The situation is further muddied by how the deal seeks to enforce this. Typically, the EU would look to assess the impact of any subsidies before they came into force. Under the trade agreement, however, each side reserves the right to retaliate if they believe the other side is gaining unfair competitive advantage through state aid, after an arbitration process fails. This may prove significant, as it will allow the UK Government to ‘try its luck’, and push the boundaries in the future, and only pull back where the EU objects strongly. However, that can only be speculation at the moment. For now, it remains too soon to fully understand what impact, if any, the trade deal will have on the future of VCTs.
- boris johnson, prime minister
The destiny of this great country now resides firmly in our hands."
EU-UK trade deal, Title XL: Level playing field for open and fair competition and sustainable development
1.1.4: The Parties affirm their common understanding that their economic relationship can only deliver benefits in a mutually satisfactory way if the commitments relating to a level playing field for open and fair competition stand the test of time, by preventing distortions of trade or investment, and by contributing to sustainable development. However the Parties recognise that the purpose of this Title is not to harmonise the standards of the Parties. The Parties are determined to maintain and improve their respective high standards in the areas covered by this Title. 1.2.1: The Parties affirm the right of each Party to set its policies and priorities in the areas covered by this Title, to determine the levels of protection it deems appropriate and to adopt or modify its law and policies in a manner consistent with each Party's international commitments, including its commitments under this Title.
11
what the managers say
MARKET UPDATE / WHAT THE MANAGERS SAY
So how are the managers feeling about the VCT market and overall investment market conditions? Here's what they have to say.
How have you adapted your investment strategy during the Covid Crisis?
Dr Reuben Wilcock
Ventures Director Blackfinch Ventures
The way we adapted to the coronavirus crisis was simply to “talk more”. This meant more communication with financial advisers and investors, supplying as much information as we could, as well as ramping up our communication with our portfolio companies. We wanted to give them all the support, advice and strategic input they needed to weather the crisis.
managers:
The UK-EU trade deal brings with it some desperately needed certainty. But now the hard work really begins. VCTs can provide the investment catalyst that outstanding UK start-ups and scale-ups need to achieve their potential. The UK Government now needs to encourage growth capital and boost VCT investment incentives.
rupert west
Managing Director Puma Private Equity
John Davies
Investment Director Seneca Partners Ltd
jo oliver
Partner Octopus Investments
What has been your highlight of the past 12 months?
The highlight of the past 12 months for us has been the way our portfolio companies managed to innovate and creatively adapt their way through the coronavirus pandemic. It was a true test of entrepreneurial mettle, and it demonstrated that start-ups have the ability to disrupt old practices and meet changing circumstances.
How have you adapted your invested strategy during the COVID-19 Crisis?
The opportunities Seneca sees as an experienced Growth Capital investor uniquely positions our VCT as the UK looks to recover from the pandemic. Our current levels of cash (50%) and new subscriptions will be invested in businesses that have demonstrated resilience and who have emerged from COVID-19 with strong growth potential ready to capitalise.
What might the UK-EU trade deal mean for VCTs?
With more certainty for the market that should mean that businesses can move forward with their planning even if all the finer details are not yet fully known. The Brexit ‘risk’ has been part of our due diligence analysis for several years and our existing portfolio companies have not been directly impacted by the UK-EU trade deal. Going forward however, the opportunities arising from Brexit should be much more quantifiable.
The wider economic challenges presented by the pandemic have clearly been significant, but we have managed our growth capital exit track record to 21 during the last 12 months achieving a 1.6x blended return for our investors before any charges and tax reliefs. Whilst this includes both profitable and unprofitable outcomes across the portfolio companies it does demonstrate that our generalist approach to investing in a mix of AIM quoted and private companies speaks for itself and has been sustained over time.
How have you adapted your invested strategy during the Covid Crisis?
After the initial intensive crisis work, we refocused on new investments. We consider each company and opportunity on a case-by-case basis, taking into account a number of factors including the potential medium to long-term impact of Coronavirus on the sector the business operates in. Ensuring we continue to maintain a robust investment discipline is key to the ongoing success of Titan VCT.
What might the UK-EU trade deal mean for VCTs
The companies we invest in tend to have global ambitions and often look beyond Europe to the US and Asia when they start thinking about international expansion. There may be some adjustments required in the short term, but entrepreneurs are uniquely able to adapt and find solutions in changing environments.
Despite the macro headwinds, we are in a golden age of technology investing in the UK and Europe. Success breeds more success and there is a depth of experience from entrepreneurs – many of whom have successfully sold their first businesses - combined with increased ambition that means we should start to see more and more global technology companies emerge from the UK.
Our strategy has and continues to be focused on supporting growing SMEs with proven market fit and strong commercial traction. There are many businesses that continue to show strong growth or have pivoted strategies to ensure relevancy throughout this time. We remain committed to supporting these growth opportunities.
As a fund manager with a generalist investment strategy our portfolio is impacted by the deal in a number of ways – with the ecommerce businesses we support, Le Col and Ron Dorff, arguably impacted to the largest extent as they have manufacturing or trading activities in the EU. To them the deal is welcome news, as it continues to foster trading benefits between the UK and EU.
Seeing the continued strength of the portfolio, with management teams working tirelessly to ensure their businesses are set up for success during and after the pandemic, and adding four promising new positions to the portfolio despite the uncertainty surrounding us.
market update / WHAT THE MANAGERS SAY
john davies
12
3. Considerations for Investments
targets
market composition
13
CONSIDERATIONS FOR INVESTMENT / MARKET COMPOSITION
lthough MICAP recorded a slight drop in the number of open offers from 2019 to 2020 (from 25 to 22), this could be due to the data being a snapshot of a market and the timing of when offers open or closed varies markedly. There remained a high amount of activity compared to recent years, with a large number of funds opening and closing. The ongoing activity points to continued high interest in VCTs from managers.
How do we use MICAP?
In this section we look at the overall VCT market, and what the average open offer looks like after the traditional Autumn fundraising season was broken up by the Covid pandemic. Unless otherwise stated, all data used in this section has been obtained from MICAP, and is correct as of 12 January.
Founded in 2013, MICAP provides quality independent due diligence, research tools and panel support services on the tax-advantaged investment market. It is a sister company of Intelligent Partnership, and a part of the Indagate Group of companies.
Tech General Enterprise Media & Entertainment Pharmaceuticals Industry & Infrastructure Food & Drink Blend
NEW LAUNCHES AND FUNDS CLOSING
New launches
Funds Closing
40
30
20
0
2015
2016
2017
2018
2019
2020
2021
open offers JAN 2021
The drop in the number of offers launching might indicate some managers chose to hold off on launching a new offer until the uncertainties caused by Brexit and Covid passed. Already, by the 12th January, 5 new funds had launched in 2021, almost as many as launched in the entirety of January 2020, suggesting this could be another big year for VCTs. Unsurprisingly, every single VCT fund on MICAP has a Growth & Income strategy - which is unchanged from previous years. One slight change is that in January 2020, 96% of funds were general enterprise, and 4% were technology focused. Now, 100% of funds are general enterprise. This is not a huge change, and it should be remembered that many VCTs will have invested heavily into technology companies (a sector which performed well during 2020’s Covid crisis). However, by going the general enterprise route, it allows managers a bit more freedom in where to invest money, something important for funds managing a portfolio of potentially dozens of companies over a medium to long term hold.
Investee Companies
Thanks to the relatively high churn rate of new offers opening, and old offers closing, the profile of companies receiving VCT funding has changed somewhat over the past 12 months. Whereas in January 2020, almost half of funds were investing in early stage/later stage, and just 12% looked for early stage/later stage/seed stage companies, now the situation has totally reversed, with almost a third of funds looking at the latter, and just 13% looking at the former. This could suggest that the risk to capital requirements are pushing VCTs to cast their net increasingly wide as time goes on, and therefore managers are searching across more and more of the market as we move forward. Additionally, with Covid and Brexit causing an unusual amount of disruption to national and global markets, companies have become increasingly short on capital. Potentially, VCT managers may have sensed an opportunity to find bargains across the market. Additionally, with Covid allowing for whole new business models to flourish, this may be providing managers with a rare opportunity to invest in companies with immediate high growth potential for a comparatively small amount of capital. This is reinforced by a growing number of funds looking to invest in AIM as well as outside of it (18%, compared to just 8% last year), at the expense of purely AIM focussed companies. This could also be a symptom of the volatility of the AIM market, even if AIM has since recovered from it’s Covid dip and is now trading at new record levels, with managers looking to diversify their investment base.
open offers by sector
Early Stage/Later Stage/Seed Stage 31.8% AIM Listed/Early Stage/Later Stage 18.2% Early Stage 13.6% Early Stage/Later Stage 13.6% Later Stage 9.1% AIM Listed/Early Stage 9.1% AIM Listed 4.5%
The past year saw fees generally rise among VCTs. The average initial charge as of January 2021 is over 10% higher than the initial charge at the same point in 2020. The increase in fees came after fees remained relatively flat between 2016 and 2020. The average initial charge from VCTs grew for both investors and investees. This was not the case for AMCs, however. Average AMCs for investors actually fell slightly between Jan 2020 and Jan 2021, while AMCs for investee companies almost doubled. While this might suggest funds are trying to keep investor fees down to attract more capital, investors need to remember that fees paid by underlying investee companies can impact their returns. Slightly higher charges point to funds having to work harder during the crisis to find viable companies to invest in, which would make sense in a global pandemic.
Charges
- Jo Oliver, Octopus investments
It is an incredibly exciting time to be investing in early stage technology companies. We’ve seen a massive acceleration in the adoption of technology, meaning the long-term outlook for our portfolio is extremely positive.”
charges (jan 21)
initial Charge to Investors Excluding Adviser Fee Initial charge to Investee Company Total Initial Charge AMC Charged to investor AMC Charged to Investee Total amc Annual Performance fee Annual Performance Hurdle Annual Admin Charge
Mode (%) 2.5 0 2.5 2 0 2 20 0 0
avg (%) 2.93 0.76 3.39 2.01 0.45 2.14 14.32 6.59 0.09
Median (%) 3 0 3 2 0 2 20 0 0
Min (%) 2.5 0 2.5 1.675 0 0 0 0 0
Max (%) 4.5 4 7 2.5 2.5 4.5 20 120 0.5
A
average charges
Initial charge Amc
Jan 2021 3.39% 2.14%
Jan 2020 2.96% 2.06%
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charges (JAN 21)
CONSIDERATIONS FOR INVESTMENT / TARGETS
Despite the economic chaos that followed Covid 19, targeted dividends have remained reasonably flat over the past 12 months, and by January 12th averaged 4.86%.
It's worth comparing target dividend to actual yield. AIC yield data for VCTs suggests actual average dividends may be slightly below this at 4.36%, as of the end of 2020, suggesting some funds earned slightly below target in 2020. These falls in average target dividends seem minor in the context of a global pandemic that caused such huge economic damage. As a point of comparison, mainstream income investing suffered serious setbacks over the past 12 months. In August, for example, the Investment Association released data showing dividends had fallen by over 50% by the end of the second quarter. In this context, the dividends on offer through VCTs are more appealing than ever. It should be noted that there is a chance current dividends are being inflated by older investments from before the risk to capital condition. These older investments are in theory more stable, and allow for easier exits and regular dividend payments. As these older companies are gradually replaced with new companies, this may increase the pressure on future dividends. That said, all companies will have been affected by Covid, including these older investments, so the fact that dividends continued is a credit to VCT managers and their skillful portfolio management.
Target Performance
- name surname, company
quote
% 4.86 5 5 3 7
Average Mode Median Min Max
target dividend
An average target fundraise of £18.3 million is over £1 million less than in our 2020 Q1 VCT Update. While it might be tempting to blame this on Covid-19, and managers lowering their expectations as a result, the reality is 2020’s figures were inflated by a fund with a target raise of £120 million. With that fund not currently raising, the average has dropped as a result. Evidence for this is that the mode target fundraise remains £20 million, while the lowest target fundraise has actually increased from £4 million to £6 million.
Target Fundraise
target fundraise (£M)
Average
mode
median
min
max
18.3
14.5
80
Minimum subscriptions fell over the course of 2020, as managers sought to encourage more investors into their funds. An average minimum subscription of £3227 is a notable drop of almost £600 compared to the year before. This marks a continued downward trend in minimum subscriptions, and they are now over £1,000 below where they were just five years ago. With cash accounts continuing to provide below interest rates below inflation, and access to products such as P2P and crypto currency being limited for retail investors, the relative low buy in for a VCT product may offer some investors with the right risk appetite an appealing option.
Minimum Subscription
3227.27 5000 3000 1000 5000
minimum subscription
VCTs are known for their wide diversification targets, with funds typically invested in dozens of smaller companies at any one time. This compares to EIS funds, which typically target somewhere between 6 and 12. The reason for this diversity is to help mitigate the risks involved in investing in smaller companies. Therefore it is a bit surprising to see the average number of investee companies funds targeted remain fairly flat over 2020, at 52, despite the increased risks associated with the pandemic. This could suggest VCTs are balancing the need for diversification with the additional burdens that come with investing in too many companies, and that managers have found the number they feel comfortable at.
Diversification
avg
52
70
55
90
diversification
- Matt Currie, Investment Director, Seneca Partners
vcTs are a compelling option for taking advantage of any UK economic recovery -tax free growth and income from a diverse portfolio of businesses at a relatively low entry cost for investors
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4. Industry Analysis
covid dents fundraising geographical considerations
16
COVID DENTS FUNDRAISING
industry analysis / covid dents fundraising
he past decade has seen the amount of funds raised through VCTs more than double, as a number of factors contributed to their appeal. The Patient Capital Review in 2017 outlined the Government’s intention to encourage investment into the kinds of companies VCTs invest in. At the same time, changes to the pension regime (such as reductions in the lifetime allowance and increasing the freedoms allowing parts of pension pots to be cashed out) created a boom for alternative tax efficient investments, such as VCTs. This peaked in the 2018/19 tax year with £716 million funds raised. 2019/20 saw a slight fall to £685 million. While this was lower than the prior two years, it is important to note this was only the fourth time more than £600 million had been raised through VCTs. HMRC credited the drop to a reaction to the VCT reforms introduced in 2017, which came into effect during 2018 and potentially due to the impacts of Covid-19 from March 2020. It noted that investor demand for VCTs remained high throughout the year, meaning the drop likely came from the supply side.
T
A combination of the risk to capital condition and the beginnings of the Covid crisis meant there was a slight year-on-year decrease in the amount of fundraising in the tax year ending April 2020, however the decline was mild, and the number of VCTs managing funds remained stable.
VCTs raising funds
VCTs managing funds
total funds raised
While there was a slight decrease in the funds raised, the options available to potential investors remained stable at 42 - the same number of open offers as in the tax year ending April 2019. 62 funds managing capital (including those not raising funds) was 1 more than the prior year. Although not exactly a large increase, it did mark the first time the number of VCT funds managing money had increased since 2010-11. It remains well under half the number of VCTs that were managing money at that point, however, and remains the third lowest number recorded this millennium. All this points to consolidation within the industry as a longer term trend, with fewer funds but more money being managed. 2019/20 saw a slight reversal in the situation (with slightly less funds raised and 1 extra firm). Whether this is a one off resulting from Brexit uncertainty, Covid or the Risk to Capital conditions taking greater affect (as the churn of older investments that weren’t subject to the conditions makes way for new investments that do and are subsequently much more risky), or the start of a new trend, only time will tell.
vcts raising funds
Unfortunately HMRC only has information about investors until the tax year ending April 2019, meaning there is no data for 2020. As the 2018/19 saw VCTs raise their largest amount since the income tax relief fell from 40% to 30% in 2005/06, it is no surprise the year also saw a high number of investors - 19,805, to be precise. This was a 4% increase year-on-year. It’s important to note this number only includes those who made claims through self assessment and does not include those who made relief claims through other systems (e.g. PAYE), or did not make any claims at all. The majority of investors (82%) invested less than £50,000, with almost 1 in 5 (18%) investing between £5,000 and £10,000. Given the fact that £5,000 is a common minimum investment amount for funds, it is perhaps not too surprising to see that amount as the most common. It is also worth noting that the proportion of investors investing less that £10,000 grew substantially in 2018-19 compared to the prior year. With VCTs becoming increasingly popular, it is possible that the scheme is attracting a wider pool of investors, including some who have less capital to invest (or view it as too high risk to invest more capital).
Investor profile
number of investors
Up to 1 1 to 2.5 2.5 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 50 50 to 75 75 to 100 100 to 150 150 to 200 Total
2016-17 1,115 780 1,625 2,800 1,445 1,485 915 2,550 775 670 410 730 15,300
2017-18 1,280 825 1,745 3,500 1,730 1,895 1,160 3,410 1,030 995 540 1,005 19,105
2018-19 1,425 995 1,950 3,575 1,800 1,865 1,260 3,390 1,040 950 530 1,025 19,805
investment band (£000s)
Rupert West, Managing Director, Puma Private Equity
The last year has provided opportunities for nimble, innovative SMEs to grow their e-commerce activity, shift swiftly to virtual operations and utilise dynamic tech platforms to take market share from larger, less dynamic incumbents. For many SMEs and their investors, 2020 was a surprisingly successful year.”
17
geographical considerations
industry analysis / geographical considerations
The UK economy as a whole is extremely weighted towards London. It’s population of nearly 9 million people makes it the largest city in Europe outside of Turkey and Russia, and it generates approximately a fifth of the UKs GDP, making it the largest economic contributing region by some distance (followed by the South East).
n total, London and the South East make up over a quarter of the UK population, and generate 37% of the UKs GDP. As a result, it also tends to receive the most investment from private equity and venture capital. The same is also true of VCT investments as, according to AIC data, over 51% of all VCT investments between April 2017 and April 2020 were placed in London. A further 12% was invested into SMEs in the South East, meaning the two regions received 63p for every £1 invested into a VCT over the past 3 years (excluding any fees). Considering the GDP and population size of London and the South East, these regions received a disproportionate amount of VCT investment. Other regions are clearly losing out to some extent. In many respects, VCT managers are just following wider trends. Looking at the British Business Bank’s SME Equity Finance Tracker, in 2019, London accounted for 48% of all UK equity deals, while accounting for two thirds of investments. VCT regional investments are not that different from the wider market trends.
of the UKs GDP is generated in London and the South East
37%
London is over represented across the SME investment spectrum. Part of the reason for this is its international reputation as a centre for tech start up. Part of this imbalance can be attributed to the density of young companies. According to the Centre for Entrepreneurs, in 2020 30.1 new businesses launched for every 1,000 people in the capital, almost 3 times as many as the next most dense region. It also saw the largest increase in the number of new startups. Although VCTs tend to invest in slightly later stage companies, these figures will apply to these companies as well. As VCTs tend to invest in a large number of companies (averaging over 50 per fund), this should provide some element of geographical diversity. However if this is an important requirement for a client, this may be an area advisers speak to managers about.
london South East South West East Midlands West Midlands East of England Yorkshire & Humberside North East North West N. Ireland Wales Scotland
UK Deal Share (2019) 48% 9% 5% 2% 2% 6% 3% 3% 6% 1% 4% 12%
UK Investment Share (2019) 66% 9% 2% <1% 2% 11% 1% 1% 4% <1% 1% 3%
vct investment distribution by value
15%
16%
2%
12%
- the aic
VCT's track record of investments since 2017 shows that they have a truly national reach. There are an important means to achieve the government's ambition to rebalance the UK economy.
Source: The British Business Bank
18
5. Managers in Focus
blackfinch puma seneca comparison table vct showcase video content
19
Blackfinch Group is an award-winning investment firm that specialises in early-stage, tax-efficient and sustainable investing. With a heritage dating back more than 25 years, Blackfinch is entrusted with more than £450 million in assets under management and administration. Founded on evolutionary principles, Blackfinch continuously adapts to offer strong solutions that meet the needs of investors and advisers. Its products and services are known for flexible, innovative design and lower fees, while its investment professionals focus on capital protection, security and growth. Blackfinch’s tax-efficient range covers Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) that invest in early-stage businesses with great ideas and strong management teams. This includes technology and technology-enabled companies. The opportunities in this space are broad, with chances to invest at different stages in a company’s life. Clients can then benefit from investing in high-performing companies that are on track for success.
About the manager
managers in FOCUS / blackfinch
Transreport offers a technology platform to make it easier for people with disabilities or limited mobility to book travel. It also allows its customers to receive all the assistance they require throughout their journey. It has recently secured a long-term contract with all UK rail companies, and it has exciting prospects in other forms of transport. In addition, it is creating a consumer app that will allow passengers who need assistance to book their own journeys online, helping to make travel as easy for them as others who already take it for granted. The company’s close relationships with disability charities ensures its services are genuinely beneficial to users, as well as helping its business customers meet their regulatory obligations. Transreport is a great example of the kind of innovative, technology-enabled company with strong environmental, social and governance (ESG) credentials in which the Blackfinch Spring VCT invests.
The Blackfinch Spring VCT is open for investment, with a new share offer of up to £20 million Ordinary Shares and an over-allotment facility for a further £10 million. Investors can claim an ‘early-bird’ discount of 1% for applications made before 3pm on 1st April 2021. The Blackfinch Spring VCT focuses on technology companies at an exciting growth stage of development, and will also make follow-on investments in the highest performing firms emerging from the Blackfinch Ventures EIS portfolios. By 2024, it plans to return profits to investors as tax-free dividends of 5% per year. As well as the potential for long-term investment growth, investing in the Blackfinch Spring VCT offers investors the chance to claim tax reliefs including 30% income tax relief and the prospect of tax-free dividends.
blackfinch.com 01452 717070 enquiries@blackfinch.com
contact
our offer
investment case study
Puma Investments is part of an organisation that raised its first private equity fund in 1996 and has a 25-year track record of investing in small and medium-sized enterprises in the UK. Our parent company, Shore Capital, started operating VCTs in 2005 and Puma Investments was created specifically to focus on VCT investing. Today, VCTs remain core to what we do: we now have 14 under our belt and launched our latest, Puma Alpha VCT, in 2019. Our other offers include Puma VCT 13 (our older VCT which recently reopened for investment), Puma Alpha EIS (an Enterprise Investment Scheme fund), the Puma AIM IHT Service, the Puma AIM ISA IHT Service (both investing in the Alternative Investment Market) and the Puma Heritage Estate Planning Service (investing in private trading companies that qualify for Business Relief). Our mission is to provide the best tax-efficient investment opportunities in the industry and we are proud to have helped thousands of investors access investments that deliver attractive tax reliefs whilst also supporting the UK's economic growth.
managers in FOCUS / puma investments
In 2020 our funds invested £5 million of equity into Tictrac – an insurance technology provider with an advanced health and wellness app for insurance companies and corporate clients to provide to their user bases. The app integrates data from wearable technology, delivering it to end users in a digestible format to increase engagement and customer loyalty. Tictrac’s clients range from global insurance providers such as Aviva, Allianz and Prudential to government health bodies and corporates. With health and wellness being a central topic in today’s climate, both for consumers and employers, who are increasingly focused on the wellness of their employee base, Tictrac has been well-positioned to serve audiences during the pandemic, and proved its responsiveness by pivoting its strategy to provide a free trial service to numerous corporates, increasing its client base significantly and achieving revenue growth. As a result of its existing market share and innovative response, the business continues to perform well with ongoing growth in client numbers.
Puma Alpha VCT is our 14th VCT and the 26th Puma fund. It seeks to provide the full range of tax reliefs that come with VCT investing and to deliver exposure to companies that have graduated from ‘start-up’ to ‘scale-up’ across any sector. Avoiding the volatility attached to the riskier start-up space, it aims to provide attractive but stable returns from more established companies that are still small enough to create meaningful investment exits. Our private equity division facilitates the investments made by Puma Alpha VCT as well as Puma VCT 13 and Puma Alpha EIS, both of which were launched in 2017 and have the same investment mandate. Puma Alpha VCT has the capability to raise up to £30 million and merges our Alpha EIS experience of investing in higher-growth companies with our expertise in managing VCTs. Currently, the team manages a portfolio of 22 companies across nine sectors, accounting for £100 million of invested capital.
pumainvestments.co.uk 020 7408 4070 advisersupport@pumainvestments.co.uk
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Formed in 2010 Seneca is an experienced, award winning growth capital investor with £100 million of EIS and VCT funds raised and deployed into more than 50 SME companies, through over 100 funding rounds. We have also completed 21 growth capital exits to date producing an average return of 1.6x excluding fees and any tax reliefs. Our VCT and EIS products are used by hundreds of advisers across the UK. Seneca’s strong network and extensive footprint in the Northern regions of the UK provides excellent proprietary deal flow and opportunity for investors seeking regional exposure to growth opportunities within a VCT. We target established, well managed businesses with strong and proven leadership teams, diversifying the portfolio across private and AIM quoted companies. Since launch in 2018, the VCT has already completed 3 full and partial profitable exits, paid 6p per share in dividends and built a diverse portfolio of 10 exciting SMEs, primed for growth.
managers in FOCUS / seneca partners
SkinBioTherapeutics Plc is a life science company, which focuses on commercialising the beneficial properties that probiotic bacteria can have on skin health, targeting significant healthcare markets including cosmetics, infection control, and eczema. During 2019, the company announced its first commercial deals with two large corporates, and those deals have already progressed ahead of plan, with commercialisation expected in 2021. In addition, during October 2020 the company raised £4.5 million by way of a placing to new and existing institutional investors, with the funds being earmarked to commercialise the Company’s three other areas of focus and drive increased value for investors. Since the VCT invested the share price has ([26th January 2021]) increased by c.2.5x our investment cost, highlighting the significant progress the company has made and the enormous potential of its current commercial contracts and broader applications.
The current Offer is a target raise of up to £10 million with an over-allotment facility of a further £10 million. The VCT will invest funds across private and AIM quoted companies, targeting a minimum 2x return on investment for each investee company. Target annual dividends of at least 3p per share with an ambition to increase this to c.5% per annum of the B Share NAV by 2023 ([6.0p] dividends already paid since inception). The VCT has a current portfolio of 10 investments in the B Share Pool, including a stable and diverse spread of well-funded private and AIM quoted companies. The VCT is well positioned to take advantage of new post COVID investment opportunities, with c.50% net assets held in cash. Having delivered against its strategic objectives since launch, Seneca believes that the B Share pool is now positioned to deliver capital growth and dividends in the current economic climate.
senecapartners.co.uk 01942 271 746 enquiries@senecapartners.co.uk
managers IN FOCUS / VCT COMPARISON TABLE
go to website
Blackfinch Spring VCT Plc 2019 £484m/£5.4m Generalist Blackfinch Spring VCT plans to invest in a diversified range of early stage innovative technology firms operating across sectors. These companies are poised for growth and success and by 2024 we plan to return the profits to investors as tax-free dividends of 5% per annum Nov-19 Growth & Income New share issue £20m with £10m over allotment facility Targeting an annual dividend of 5% from 2024 plus the potential for special dividends £3,000 2.5% advised, up to 5.5% execution-only 2% Effective Blackfinch Annual Advisory Fee.Please refer to the VCT brochure/prospectus for full details 20% over 130p hurdle or high watermark Admin fee being the higher of 0.3% of Net Asset Value or £60,000 (plus VAT if applicable)
offer name year founded aum (total) type of vct description of offer launch date investment objective type of fundraise target fundraise target return / yield minimum investment initial fee amc performance fee other fees
Octopus Titan VCT (20/21 Fundraise) 2007 £958m Generalist Octopus Titan VCT invests in pioneering tech-enabled businesses with high growth potential 21/10/2020 The Company’s focus is on providing early stage, development and expansion funding to unquoted companies New Subscription £120m (including over allotment) 5p dividend per share per annum £3,000 3% up to 2% 20% 0.30%
Puma Alpha VCT 1985 £1.3bn / £84m Generalist Puma Alpha VCT is Puma’s fourteenth VCT and builds on the company’s 25-year track record of investing in small and medium-sized companies. Puma Alpha VCT provides scale-up capital to companies with high growth potential July 2020 The company aims to give investors exposure to quality operating businesses with strong management teams in sectors providing structural support for growth. - £20m with an over allotment facility of £10m Targeting average dividend yield equivalent to 5p per share p.a. from 2023, with potential to pay special dividends generated through exits of portfolio holdings. £5,000 3% of amount subscribed 2% of net asset value p.a. 20% over 120p hurdle or high watermark Annual costs cap of 3.5% of net assets. Refer to Prospectus for full details.
Seneca Growth Capital VCT (B Shares) 2018 £150m/£9m Generalist investing in both AIM quoted and private companies The Seneca VCT Portfolio has no specific sector bias and is focused most on valuation entry point which will ultimately dictate the strength of performance for our investors. However, we target a mix of both AIM quoted and private companies over and above any specific sectors and our deal flow has a regional flavour. 13.10.20 Generalist investment strategy seeking capital growth with a minimum 2 X return on investment and attractive dividends Public Offer into existing portfolio Up to £10 million (with over allotment of a further £10 million) 2X Return on investment ; 5% dividend yield £3,000 3% (Advised) 5.5% (Direct) 2% 20% of distributions above a hurdle of 5% Capped at 3% per annum including 2% AMC
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managers IN FOCUS / VCT showcase video content
New vs Mature VCT: Aiding diversification
Video content
showcase video content
Video Channels
How business owners could benefit from VCTs
how to add real value to your clients' pension planning
Why are VCTs Growing in the Mainstream - Utilising VCTs to complement Tax Efficient Retirement Planning ?
VCT in challenging times
measuring the pandemic’s impact on vtcs
6. What's on the Horizon?
beyond covid the spring budget: what to expect what the managers say
24
beyond covid
WHAT'S ON THE HORIZON? / beyond covid
As 2021 progresses, and more and more of the population receive their Covid vaccinations, eyes will increasingly turn to the future, and what is next. For VCT managers and investors, there could be real opportunities coming out of the crisis.
ig questions remain around how long the Government intends to keep its support measures in place. While infection rates are decreasing and the percentage of the population who have been vaccinated is increasing, it could still be months before the UK returns to normal. For many businesses that have just come out of an extremely tough 2020, Government support in the coming months may be the difference between continuing and not. On the other hand, Government debt is continuing to balloon. UK Chancellor Sunak will need to balance the needs of the populace with the financial security of the realm when deciding which support measures to ease up on, and when. In the next section, we look at some of the options the Government may consider employing in the Spring Budget. However tax levers and austerity are just two of the possible options.
B
- Rishi Sunak, UK Chancellor
We are hellbent on trying to protect as many jobs as possible and expect more from me on that
A third would be to attempt to inflate some of the debt away, while growing the GDP. It seems likely the Chancellor, along with the Bank of England, will attempt this in combination with tax rises. Doing so will require interest rates to remain low - below inflation. As seen before Covid, a low interest rate environment would make options such as VCT appealing. As long as interest remains below inflation, savers will in effect be losing money by the simple act of keeping it in a cash account. With the Financial Conduct Authority (FCA) removing other options for many consumers, such as mini bonds and P2P, VCT might become an increasingly popular option, with regular tax free dividends generally targeted at around 5%.
the Spring Budget: what to expect
what's on the horizon? / the spring budget
deep dive into fees and charges
2020 was a year of historic Government giveaways. The Furlough Scheme, various business support schemes, and a temporary break in a number of business taxes were all designed to give people and businesses a fighting chance while a number of Government imposed restrictions sought to combat the virus.
These schemes (combined with a fall in tax revenue) saw Government debt balloon over the year, surpassing 100% of GDP for the first time in decades. It is estimated that UK government spending increased by £400 billion for the year. Even though the start of 2021 saw a continuation of these trends (most support measures were still in place, and the country entered the new year in a national lockdown), the March budget is expected to see UK Chancellor Rishi Sunak outline his vision for how to pay for these measures. We’ve seen some hints at what is to come - many public sector workers have had their pay frozen for the year. Many are speculating a rise in fuel rates could be on the cards as well. It seems unlikely he will look to close the deficit entirely through cuts to public spending. Any cuts to the NHS or care workers, for example, would come with an extremely high political cost after last year, one it is unlikely the Government wishes to pay. Instead, it seems likely the Government will attempt to reduce the debt to GDP ratio through a combination of tax rises and continued support measures.
Source: OTS
An area Sunak may look at is Capital Gains Tax (CGT). Towards the end of 2020, the Office of Tax Simplification (OTS) recommended CGT rates were aligned with income tax. The current system, the OTS argues, causes taxpayers to create complex salary structures, in order to funnel as much money into the realms of CGT, as opposed to income tax. Of course, aligning rates in practical terms will mean increasing CGT (as opposed to reducing income tax). Such a move would make investments such as VCT - which are CGT exempt - more appealing. Other areas that have been speculated on include an increase in corporation tax, changes to inheritance taxes, and possibly a wealth tax, although it is currently rumoured the Government has decided against the latter. Although some tax increases seem likely, it is impossible to know where Sunak will look. Tax increases are just one tool Sunak may look to, but not everyone agrees it is the way to go.
VCT fundraise record (2005-06)
£780m
- ICAEW
the Spring Budget should focus on delivering existing Covid support plans, and achieving longer term tax goals, rather than launching short term tax changes to alleviate borrowing from the prior year.
One option Sunak may explore would be to attempt to generate more private investment into the economy. This could include expanding existing tax efficient options such as VCTs, something that could be much easier to do now the UK has left the EU and is no longer subject to the EU State Aid rules). Looking at past Government figures, for example, we can see that increasing income tax relief for VCTs to 40% could have a dramatic effect on the amount of money invested into SMEs (VCTs raised a record £780 million in 2005/06 when the relief was 40%, more than any year since). Although the Government would lose some income tax as a result, the amount lost would be minor in the grand scheme of UK national debt. At the same time, it could result in more SMEs receiving funding via VCTs, which would help turn them into job creators and tax payers, all the while helping the UK economy bounce back. While there is also the worry that he could look to close some of the tax efficient options, this will lead to a drop in private investment, and stifle any recovery. Therefore such a move would be counter productive, especially compared to other potential tax rises.
Possible tax increases
Increasing private investment
26
what's on the horizon? / WHAT THE MANAGERS SAY
What are your expectations for 2021?
Much will depend on how the UK government chooses to respond to the strain on its purse strings caused by coronavirus. If income tax hikes or further restrictions on pensions are introduced, the tax incentives of VCTs will look even more appealing to investors.
How can the government better support SMEs and SME investors as we move on from the crisis?
We know this government recognises the role start-ups and scale-ups play in driving the UK economy. We hope it loosens existing funding limits and time restrictions, so that more companies can qualify for VCT investment, and do so for longer.
What market sectors are you keeping an eye on for the year ahead?
After having their business models tested in 2020, and with most coming through those tests handsomely, we expect technology-led companies to have another good year, as they continue to benefit from the coronavirus fallout and disruption to older business practices.
The new investment opportunities we are working on currently suggest the time is excellent for backing businesses which have shown resilience during the pandemic, have emerged in good shape and are in a strong position to capitalise on their growth objectives. Whilst the last few months may have been difficult for investors to get their heads round the second half of this year in particular should see a strong rebound and we are ready to help them take full advantage.
With tax increases to pay for the UK government’s COVID-19 spending being widely touted in the press in our opinion this would be counterproductive. Adding to the burden of many businesses and individuals who have suffered in the last year would be catastrophic not least for employment figures. Job creation brought about by greater incentives for private sector investment seems a far more sustainable route to economic prosperity and tax advantaged products should be in the vanguard.
Digitech, AI and Biotech have all been tipped as sectors to ‘be in’ post COVID-19. But the analysis must run deeper. Entry point valuations are always critical to the eventual investment outcome and being in the right sector at the wrong value will be doomed to failure. We will remain open minded and search out the best businesses which demonstrate all the right attributes and have defined cash runways to be able to deliver value for our investors.
We believe change can also create opportunity, from which enterprising management teams can reap rewards. Across the portfolio, short term challenges have been turned into medium to long term advantages. We continue to work closely with all companies and are confident that many will emerge stronger when the effects of the pandemic abate. Despite the pandemic we see all the signs of the next generation of tech giants emerging this side of the Atlantic. Europe has reached an entrepreneurial tipping point. There now exists a potent mix of research and innovation, talent, experience, domestic and international venture capital. With this has come – at last – the belief and ambition to build European tech businesses worth hundreds of billions.
Adoption of digital health was already growing before the pandemic, but that has accelerated rapidly in the last 12 months due to Covid-19 and this will undoubtedly continue. E-commerce is another area that’s booming as people adjust their shopping habits and spend more online. This will solidify a permanent shift, creating new opportunities for start-ups within e-commerce.
How have you reacted to Covid-19 and the lockdown? (in terms of investment attitude, not operationally)?
While the impact of Covid-19 has undoubtably been a challenge, our attitude to investment has not changed. As long-term investors we have sought to support and advise our management teams on how best to navigate through this phase, ensuring they have sufficient cash runway in place and strong Board/shareholder engagement. Our portfolio companies have shown real resilience through this period.
How have SMEs been able to weather the economic storm?
The Covid-19 crisis has really concentrated the minds of founders, it has brought out the best in them as they have streamlined and improved their businesses to cope with and take advantage of the situation. For example, one of our portfolio companies, Artfinder (online art marketplace) recorded its best sales quarter in its history for Q2 2020 as consumer behaviour shifted online.
What has been your 2020 highlight?
Delivering our second deep-tech exit within 6 months in June was a definite highlight. Our portfolio company, Ultrasoc was acquired by Siemens, UltraSoc’s chip design technology has applications across multiple industries, including new chips designed for the autonomous cars of the future. This followed the acquisition of Latent Logic to Waymo (part of Alphabet Inc/Google) in December 2019.
We still have funds to deploy and remain open for business. Over the course of 2021, we expect to continue making investments in growing SMEs whilst supporting our existing portfolio with their growth strategies.
VCTs and EIS have been a vital lifeline for many businesses throughout this pandemic. VCTs – and the Government’s ongoing support of this scheme – will help to bolster growing SMEs throughout the country.
As a fund manager with a generalist investment strategy, we want to support businesses across industries. There are many sectors that have fared better than others. The services and technology that supports those sectors will be of interest throughout 2021. However, there are also numerous strong businesses that have been unduly affected by the pandemic, and there are still good investment opportunities in sectors that have suffered.
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learning objectives cpd and feedback about intelligent partnership
7. Further learning
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learning objectives
further learning / learning objectives
HOW DID YOU DO?
Covered over Section 2, particularly in ‘2020 - a look back at a historic year’
Define the typical charges investors can expect with VCT
Covered in Section 3 using data from our sister company MICAP
Outline How the average VCT fund performed over 2020
Covered in Section 2, ‘Performance in a storm,’ using AIC data
Evaluate how potential tax changes might affect the appeal of VCTs
Covered Section 6, What’s on the Horizon
Describe how it’s popularity has grown over recent years
Covered using HMRC data in Section 4, Covid dents fundraising, but options remain
Identify the main themes and trends in the VCT market
Explain some of the geographical variations in VCT investments, and why this is the case
Covered in Geographical considerations in Section 4
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CPD and feedback
further learning / cpd and feedback
Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
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eaders of the VCT Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to test your knowledge and obtain a CPD certificate readers will need to complete a short online test. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
about intelligent partnership
further learning / about intelligent partnership
Intelligent Partnership is the UK’s leading provider of insights and education in the tax advantaged and alternative investments space.
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e provide a wide variety of ways in which we keep advisers and industry professionals up to date with the latest developments. Alongside our E-learning courses, we provide a range of engaging, accessible and CPD accredited resources as well as industry leading events. These include:
A deeper dive into individual providers giving their input on particular market issues and more detail on the strategies and offerings they have developed to address them.
PROVIDER SPOTLIGHTS
Intelligent Partnership produces INTERGEN, an immersive three-day virtual experience that will focuses on the wealth, tax and estate planning needs of different generations and aims to reshape the future of professional advice for every generation. The event takes place towards the end of the year. For more information, contact:
chris@intelligent-partnership.com
Conferences
Free, award winning series including EIS, VCT, BR and AIM Updates offering ongoing observations and intelligence, the latest thoughts and opinions of managers and providers and a comparison of open investment opportunities.
quarterly industry updates
Unlocking the practical and regulatory aspects of various areas across the tax-advantaged and tax planning spaces including estate planning and business relief, our guides for advisers, lawyers and accountants are updated annually to provide handy, accessible and everyday resources.
Professional Guides
Free events across the country, giving advisers the opportunity to build their knowledge of tax wrappers and less mainstream asset classes and ask questions. Providers present their investment opportunities on a like for like basis.
showcases
Heading into their sixth year, the Growth Investor awards and the Growth Finance awards celebrate the role of the UK SME investment and finance communities in job and wealth creation.
awards
A weekly snapshot of the latest articles, commentary and market data for financial services professionals, in two easy-to-read briefings on Tax Efficient Investments and Alternative Finance.
WEEKLY INVESTMENT BRIEFINGS
Our CPD accredited e-learning programme is aimed at regulated advisers, wealth managers, paraplanners, accountants and solicitors that require a recognised level of knowledge & understanding in areas of Tax & Estate Planning.
e-learning
Free events online and across the country, giving advisers the opportunity to build their knowledge of tax wrappers and less mainstream asset classes and ask questions. Providers present their investment opportunities on a like for like basis and online events include additional content from independent expert commentators.
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Blackfinch Puma Seneca Comparison table
