VCT mar 2023

VCT’s evolving client profile: take another look at your client bank

10

VCT’s evolving client profile: take another look at your client bank

By Karen Sullivan, Head of Strategic Partnerships, Puma Investments

he profile of investors in Venture Capital Trusts (VCTs) has evolved, largely driven by the mass affluent. Importantly, though, the majority are not considered to be high net worth individuals (HNWs.) That seems entirely reasonable, as, according to HMRC’s 2022 Venture Capital Trusts statistics, published in January 2023, those investing £10,000 or less have represented the largest group of VCT investors.

Those financial advisers not taking note of the changes could be missing out; the diversification on offer from potentially high growth equities, uncorrelated with turbulent public markets, could be excellent for some client portfolios, for a start.

Risks are high, but so is interest

Once favoured by older, wealthier investors, recent data from the Venture Capital Trust Association showed the average age of the current VCT investor is down from 67 (2017) to 56 (2022) (FT Adviser, February 2022).

Puma Investments has reported a similar decrease, particularly between 2018/19 to 2022/23 which saw a drop from 60.22 years to 54.69. But this average also masks a jump in investment from the under-40s who swelled to account for 10% of the VCT manager’s investor base in 2022/23, from just 2% in 2018/19. What’s more, the total amount this age-group has invested with Puma ticked up 74% in the same period.

Not only does this give today’s investors more time for their VCT investments to grow and mature, but it also demonstrates the growing appeal of VCTs to a younger generation of clients.

According to HMRC’s 2022 Venture Capital Trusts statistics, published in January 2023, those investing £10,000 or less have represented the largest group of VCT investors.

Middle class money

These shifts have a lot to do with the rise of those in the middle classes with money to spend, but whose assets still require careful management heading towards retirement, otherwise known as the mass affluent. Definitions of their wealth vary, but Accenture has suggested they have between £100,000 and £1 million of investable assets, with around 6 million households in the UK falling into this category. But only about 600,000 of them are HNWs (Accenture, 2019).

Many are well-paid professionals who have a high enough salary and investable assets to meet the criteria for investment applied by VCT managers to ensure their clients can understand and afford what they are investing into. Large numbers of them are headteachers, doctors, accountants and lawyers, as well as business owners.
They are not limited to London and the South East geographically, and another change in investor profile noted by Puma is a change in VCT investor location: 39% of VCT fundraising came from London in 2018/19 compared to 28% in 2021/22, with the biggest shift in more investors coming from South Central, as well as northern regions.

Unsurprisingly, the mass affluent can afford to invest and research has found that 70% of them are doing just that (RFI Global, August 2022). In the past, this group has been labelled as being ‘rich without realising it’, but Covid-19 has been credited with refocusing many on prioritising more considered spending and saving more.

39% of VCT fundraising came from London in 2018/19 compared to 28% in 2021/22

Market trends shaping the future

Other factors contributing to the change in VCT investors include the drop in entry levels for VCTs, with some products, like Puma’s VCT 13, having minimum investments as low as £3,000. The rise of alternatives and their role as diversifiers in an increasingly correlated world, and the availability of investments to match investor priorities like sustainability and levelling up, are also making a difference. So are the recent extensions to frozen tax thresholds and upcoming drops in Capital Gains Tax and dividend allowances. They are driving up tax liabilities, both for those pushed into higher tax brackets by rising wages and those seeking tax-efficient growth and income.

So, while client circumstances vary and individual suitability must be carefully scrutinised, simply excluding all consideration of VCTs on a single basis, such as HNW status, may not be the right approach. With valuable rewards on offer for clients, there is a danger of failing the standards of the Consumer Duty by excluding a potential route to the best client outcomes. We'd suggest taking a look at Puma's VCT 13 as a starting point for your VCT research.

For investment professionals only.

Investor’s capital may be at risk. Past performance is no guarantee of future returns. Tax benefits are subject to change and depend on the individual’s circumstances.

Puma Investments is a trading name of Puma Investment Management Limited (FCA no. 590919) which is authorised and regulated by the Financial Conduct Authority. Registered office address: Cassini House, 57 St James's Street, London, SW1A 1LD. Registered as a private limited company in England and Wales No. 08210180.

Karen Sullivan

pumainvestments.co.uk
advisersupport@pumainvestments.co.uk

Head of Strategic
Partnerships
Puma Investments

VCT: the underrated advantages of being the new kid on the block

09

VCT: the underrated advantages of
being the new kid on the block

At the intersection of healthcare and technology, advances in 'healthtech' are driving down costs, while improving patient access and outcomes.

By Shane Gallwey, Head of Ventures, Guinness Ventures

      ith the VCT sector turning 28 this year, it’s surprising how much of a rare breed new VCTs are, with only a few having been successfully launched in the past decade.

The rarity of new entrants into the sector could be down to many investors reflexively targeting the larger and longer-established VCTs, rather than diversifying into younger and often more promising VCTs.

However, this ongoing consolidation is reducing the manager diversification possibilities, even though investing in a new VCT can be a great way to spread risk and unlock new avenues for growth.
Guinness Ventures, sister company to Guinness Global Investors (both from the Guinness Asset Management stable), is a great example having made the leap to launch a brand new VCT in October 2022.
Although it is one of the precious few newcomers to the VCT world, Guinness Ventures brings its track record and experience of over ten years of EIS management with a batch of impressive exits under its belt.

VCT investors can now benefit from the experience and expertise of the team at Guinness Ventures through investment in the new Guinness VCT.

Guinness Ventures brings its track record and experience of over ten years of EIS management with a batch of impressive exits under its belt.

So, what are the main advantages of investing in a new VCT?

Market Timing

Valuations and legacy issues

Concerns that valuations of legacy investments in a VCT are too high can be an issue for VCTs, as the private investments they hold may not have been sufficiently marked down after a market correction. This is not a concern for investors in a new VCT, where the opening NAV is based on the cash raised.

The valuations of private companies are cyclical and follow a similar trajectory to public companies. 2022 saw a fall in the multiples applied to growth companies, particularly in the technology sector. This makes the current period an excellent time to be investing, and growth company investors with capital to invest are well positioned to get in at lower valuation multiples that have been available for several years.

We draw on the extensive investment management, venture capital and private equity expertise of our highly experienced investment team

Transparency and growth prospects

This lack of legacy issues means that there may well be more transparency on the current position, making it easier to achieve growth from a realistic starting point.

Unlocking new choices for profits

Number of VCTs raising and managing funds, 1995-96 to 2021-22

VCT raising funds

VCT managing funds

Source: ftadviser

Figures released by HMRC in January 2023 showed there were 52 active VCT managed funds in the 2021/22 tax year, down from 57 the year before. These funds were managed by [16] different fund management firms, which makes the VCTs a fairly concentrated market.

But this is not a new trend, back in 2018, HMRC stated: “The number of VCTs managing funds increased from 12 in 1995-96 to a peak of 131 in 08. Since 2007-08 the number of VCTs managing funds has generally been decreasing, dropping to 70 in 2017-18.”

This ongoing consolidation of VCTs by VCT managers has been slowly reducing the manager diversification possibilities and has made investing in a new VCT a very attractive way to unlock new choices for profits.

Shane Gallwey

Head of Ventures,

Guinness Ventures

guinnessgi.com/ventures
eis@guinnessfunds.com

Making a big impact on small businesses

08

Making a big impact on small businesses

By Lisa Best, Head of Financial Services Content, Intelligent Partnership

The following is taken from the AIC report, ‘Funding Opportunity: Making a big impact on small businesses’, published late last year. These extracts shine a light on some of the impressive history of VCTs, particularly over the last five years and the illuminating statistics paint a picture of both the mechanisms that make VCTs work and the strength of the companies they support:

In the last five years, VCTs have invested over £1.7 billion in more than 530 small, potentially high-growth UK SMEs.

Since 2018, 55% of investments have been follow-on investments from a VCT.

90% by value of VCT investment since 2018 was made via equity, but debt financing has also been an important part of the mix.

It is a common practice for a VCT representative to be appointed to the SME’s board. Since 2018, 178 unquoted SMEs have appointed a representative of the VCT to their board.

Of the 418 SMEs receiving investment since 2018, where data is available, 338 (81%) received only equity investments. This reflects the primary intention of the scheme to provide long-term equity investment.

Since 2018, 131 (51%) SMEs backed by VCTs have collectively reported exports of £400 million.

202 (79%) SMEs invested in by VCTs, since 2018, invested £482 million in R&D.

Since 2018, SMEs invested in by VCTs have employed 14,042 staff members. The average number of staff per SME is 55.

VCTs have sold their investments in 70 SMEs that have received an investment since 2018. (38%) of these have been at a profit. (61%) have been at a loss – nine of those losses have been a total loss.

Since 2018, 131 (51%) SMEs backed by VCTs have collectively reported exports of £400 million. This compares very favourably with the record of SMEs in the economy as a whole, where only 10% make sales abroad.

40% of VCT-backed businesses employ between 20 and 49 employees, compared with 3% in the rest of the economy. 38% of VCT-backed businesses employ over 50 members of staff. Only 2% can say the same in the wider UK economy.

VCTs have been able to adjust exposure in some situations to include a proportion of debt. 50 SMEs received a mix of debt and equity, with debt making up less than 50% of these investments. 17 SMEs received higher levels of debt, which reduced the equity dilution of earlier investors and founders.

To read the full report, click here.

LISA BEST

Head of Financial
Services Content

Intelligent Partnership

intelligent-partnership.com
lisa@intelligent-partnership.com