Demand for VCTs remains strong

espite tougher economic weather, VCTs have continued to see strong demand from advisers. In the 2022/23 tax year, £1.08 billion was raised by the tax-efficient vehicles, just shy of the record £1.13 billion raised in 2021/22. It was the second highest annual fundraising total ever. This is good news for ambitious young UK companies. VCTs have become a reliable source of funding, continuing to back businesses through the Covid pandemic and the stagflationary period that has followed.

By Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC)

THOUGHT LEADERSHIP

- Van Hoang, Investment manager, Blackfinch Investments

The clearer market environment post-Brexit, as well as a tighter grip on the pandemic, creates an outlook conducive to increased listings on AIM.

Companies to have received investment include DeepStream, backed by the ProVen VCTs. The company takes some of the hassle out of procurement for its clients, which include shipping company Maersk. It has already developed a product that incorporates ChatGPT to help companies find new suppliers within minutes. Or there’s iMist, a developer of high-pressure fire-fighting systems which offer an alternative to conventional sprinklers. The system works by creating steam which helps to suffocate the flames. This received investment from the Foresight VCTs, allowing it to drive national and overseas expansion. Many VCT-backed companies offer wider social or environmental benefits. For example Eneraqua, backed by Hargreave Hale AIM VCT, provides systems that allow several properties to use heat and hot water generated from a central energy centre. This saves energy costs, reduces carbon emissions and increases water efficiency too.

VCT companies in focus

VCTs have become a reliable source of funding, continuing to back businesses through the Covid pandemic and the stagflationary period that has followed.

Such investments offer the potential for high returns, alongside high risk. From the government’s perspective, this is exactly what VCTs are for – they back companies that would struggle to secure funding from traditional sources. But a key advantage of the VCT structure, from an investor’s perspective, is diversification. By combining dozens of businesses such as the three mentioned above into a single portfolio, risk is not eliminated – but it is considerably dampened. This makes investing in such early-stage companies a palatable proposition for clients, especially when combined with attractive tax reliefs. There has been much talk about how the pension changes in the last Budget will affect demand for VCTs. The annual allowance is to be raised from £40,000 to £60,000, and the lifetime allowance scrapped altogether (though the Labour Party says it will reverse this). These changes are likely to have an effect, but much of the commentary around them ignores the fact that the tapering of the annual allowance remains in place, having only been slightly tweaked. And it was the introduction of the taper in 2016 that is widely thought to have contributed to a boost in demand for VCTs. The strong fundraising for VCTs in the 2022/23 tax year is a sign of advisers’ confidence in the sector, even in more difficult economic times. VCTs have, after all, been through a few tough times before, including the dotcom crash and the global financial crisis. Their evergreen, closed-ended structure provides stability as managers can invest for the long term and there is no incentive to exit investee companies in poor markets. Instead, VCT managers can focus on supporting portfolio companies and spotting opportunities for the future.

Nick Britton

Head of Intermediary Communications Association of Investment Companies (AIC)