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Industry Update | Oct 2023
VENTURE CAPITAL TRUST
Thought Leadership
Why it’s worth getting to grips with VCTs
Do VCTs have the edge over EIS?
How a sector agnostic approach can benefit your VCT portfolio
Analysis
Demand for VCTs remains strong
Mercia Northern VCTs: In conversation with Dr Paul Mattick
An asset class of its own? Look North for diversified and tax efficient investments
Triple Point Venture VCT – In conversation with Seb Wallace, Investment Director
Enterprise investment scheme
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Photography by Interview by
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Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
Welcome
The VCT universe today
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learning objectives
The Venture Capital Trust (VCT) fundraising season has finally kicked off and the market has witnessed a flurry of VCT managers launching their latest share offerings for the 2023-2024 tax year in recent weeks.
VCTs have certainly raised plenty of cash in the last couple of years, with the sector raising nearly £1.08bn in 2022-23, which is only slightly down from the record taking of £1.1bn in 2021-22. Against a continuing backdrop of market volatility, it’s expected that alternative investments will continue to present as an attractive solution for investors. Along with the tax relief shelter and opportunity for impressive growth, VCTs are able to remain agile in a tougher economic climate given the portfolio company’s lack of correlation to listed markets. Diving into this issue, one investment manager takes a look at the key differences between EIS and VCT funds in Do VCTs have the edge over EIS? What are the benefits of using a VCT manager that undertakes a sector agnostic approach? In this thought leadership piece, one manager examines why this investment strategy can sometimes be the winning ticket for boosting diversification and weathering market volatility in How a sector agnostic approach can boost your VCT portfolio. In this interesting video interview, we sat down with Seb Wallace Investment Director at Triple Point, to talk about what makes a compelling VCT of choice in Triple Point Venture VCT - In conversation with Seb Wallace. Considering VCTs for all clients can be a great way to enhance the holistic financial planning you are providing, as well as delivering better client outcomes. In Why it’s worth getting to grips with VCTs, one manager dives into why offering advice on VCTs can help win new clients and offer support in growing your business. In a recent video interview with Intelligent Partnership, we sat down to talk with Dr Paul Mattick, Head of Sales and Private Investor Relations of Mercia, to gather his insights on the wider market and to hear more about what the Northern VCTs have to offer in Mercia Northern VCTs: In conversation with Dr Paul Mattick. At a time when demand for tax efficient investments is high, both advisers and investors are becoming more intrigued by the North’s potential for capital returns. In An asset class of its own? Look North for diversified and tax efficient investments examines the North’s early-stage business landscape. Finally, Nick Britton of the Association of Investment Companies analyses the wider VCT fundraising landscape in Demand for VCTs remains strong.
It’s been a bumper couple of tax years for VCTs, so what’s on the horizon for 2023-2024?
The EIS Universe today Do VCTs have the edge over EIS? How a sector agnostic approach can benefit your VCT portfolio Triple Point Venture VCT – In conversation with Seb Wallace, Investment Director Why it’s worth getting to grips with VCTs Mercia Northern VCTs: In conversation with Dr Paul Mattick An asset class of its own? Look North for diversified and tax efficient investments Demand for VCTs remains strong About Intelligent Partnership
One question on the financial planning community’s mind is how long should you wait until deciding to place a client's money with a VCT manager? Of course, waiting a little longer means that other funds will become available to choose from as the year progresses. However, it’s also incredibly important to bear in mind that the most popular VCTs will fill up fast and close once they have raised their target amounts. That said, rules permit investors to place cash into multiple VCTs and diversifying across different offerings could be another route to go so that client’s don’t miss out. This VCT industry update therefore comes at a pivotal time to take a look at some of the key happenings in the marketplace, as well as provide valuable insights from prominent VCT managers to arm you with all the knowledge you need when talking to your clients. Please retain this publication for your CPD records.
MORE AIM POSITIVITY
ver since the Patient Capital Review and the Finance Act that followed it, there has been a great deal of similarity in the types of investment that an EIS fund and VCT can make. Ignoring any legacy investments, this should mean that an investor can access similar investments via either vehicle, with the most appropriate perhaps dependent upon the tax reliefs they are seeking to take advantage of.
Opening Statement Update Overview
1. INTRODUCTION
Market Composition Fees and Charges
3. Considerations For Investment
Are Hostile Takeovers A Danger To AIM? AIM In FCA’s Proposals
4. Industry Analysis
What Has The Market Been Doing? More AIM Positivity 2021 AIM Listing What's Driving the Market? The Autumn Budget 'AIM' for success, not perfection Focus Drives Pandemic Return Small is Beautiful Combatting Climate Change Health is Wealth What the Managers Say
2. market update
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stellar investment TIME investments Unicorn Comparison Table
5. managers in focus
More AIM-focused EIS Future Market Changes Considered What The Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
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You can also invest up to ten times more in an EIS investment when compared to a VCT (if you include Knowledge Intensive investments) and, in theory at least, only have to hold your investments for 3 years rather than a minimum of 5 for VCT to retain the tax reliefs. VCT investments do however provide some advantages over EIS and therefore remain a very popular choice amongst investors and advisers alike with the high levels of fundraise seen in recent years continuing into the most recent 2022/23 tax year (see Nick Britton’s commentary for more on this). We have explored below some of these often less spoken about advantages that VCTs provide over EIS:
A VCT will typically allot shares more quickly than an EIS fund. For VCTs it can be as quickly as a few weeks.
Speed of Investment
A VCT will typically allot shares more quickly than an EIS fund. For VCTs it can be as quickly as a few weeks (depending on the timing of the next allotment, whilst for EIS some managers can take up to 18 months or longer). This can provide more certainty that an investor gets the income tax relief in the year they intended.
Spring Budget 2023: a plan to make “Britain a technological superpower” VCT investing on AIM: how to navigate the investment cycle for maximum returns 5 myths about Venture Capital Trusts What to do for an encore How will VCTs perform this year? Making a big impact on small businesses VCT: The underrated advantages of being the new kid on the block VCT’s evolving client profile: take another look at your client bank Who’s afraid of higher interest rates? Why now is the best time in 10 years to buy private markets The opportunity in healthcare
Diversification
A VCT will likely be invested in many more companies than an EIS fund. Whilst wider diversification does impact the potential upside of a portfolio, it reciprocally should help reduce the chances of an overall significant or total loss.
Tax Certificates
With a VCT, you receive a single tax certificate shortly after your shares are allotted. With an EIS fund, you will likely receive a number of EIS 3 tax certificates (or a single EIS 5 certificate for an approved fund) in the months after your shares in the underlying investments have been allotted. The immediacy of receipt of a tax certificate for a VCT investment should allow investors to claim Income Tax relief more promptly.
Liquidity
Many VCTs offer a buy back facility which provides an exit route for an investment in a timely manner (often once the minimum 5 year hold period). Many EIS investments are made into private companies for which there is no market on which they can be sold which can lead to a more uncertain exit horizon.
Minimum Investment Period
Whilst it is true that an investor must hold their VCT shares for at least 5 years (whereas EIS shares need only be held, in theory, for 3 years), the VCT itself can sell some or all of the shares it holds in an underlying investee company at any time, crystallising any shorter-term gains made in the underlying investments without affecting the investor’s tax reliefs.
The extent to which the relative advantages that EIS and VCT investments have over each other, impact an investment decision will of course be a matter of personal preference and individual investment planning requirements. There is certainly a place in financial planning for both EIS and VCT investments and the choice between the two will no doubt be heavily influenced by the tax reliefs available, but we would also encourage investors to look beyond the tax reliefs when making their investment decisions.
www.senecapartners.co.uk sarah.wakefield@senecapartners.co.uk
Business Development Manager, Seneca Partners
Sarah Wakefield
On the face of it, EIS investment offers a range of tax reliefs which, to some observers, may seem more wide ranging and more attractive than those offered by a VCT investment. These EIS tax reliefs include:
Up to 30% Income Tax relief which can be used in the current tax year or carried back to the year before CGT free gains Deferral of CGT on a gain recent made or about to be made IHT exemption Loss relief against Income Tax (or CGT)
Whereas the tax advantages offered by a VCT investment ‘only’ cover the following:
Up to 30% Income Tax relief which can only be used in the current tax year CGT free gains Tax free dividends.
By Sarah Wakefield, Business Development Manager, Seneca Partners
SARAH WAKEFIELD
In Conclusion
ector specialist or sector agnostic? Two regular sparring partners and the undeniable yin and yang of the investment world, it’s a question mark that advisers often face when it comes to selecting a VCT manager. Which investment strategy has the edge? Of course the answer isn’t as black and white as that, but in Puma's eighteen years of experience managing VCTs, following a sector agnostic approach has served us incredibly well. It’s given us an understanding and access to opportunities across the whole economy, whilst providing the ability to withstand any headwinds, which has been especially beneficial in the current period of sustained economic uncertainty. Puma VCT 13, which now has a five year track-record, has invested into 20 UK qualifying businesses across several industries and operating models. We look beyond the core offering (such as software or consumer) and focus on the markets our portfolio companies operate in and the value they bring to their customers. The portfolio is currently diversified across multiple industries with exposure to: logistics technology, HR technology, advanced manufacturing, consumer, consumer services, hospitality, software and other technology, business services and financial and insurance technology. Here we take a closer look at some of the key benefits of this investment approach and the types of investee companies that we believe are currently bringing exciting opportunities to investor’s portfolios.
- 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.
What are the benefits of using a VCT manager that undertakes a sector agnostic approach? Ben Leslie of Puma Private Equity examines why this investment strategy can be the winning ticket for boosting diversification, weathering market volatility and can lead to significant value creation within a portfolio.
Essentially, a diversified sector approach means you are not only hedged against a particular company’s performance but also against any sector wide volatility.
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Investment across sectors can improve the overall yield of a portfolio while reducing the risk of overexposure to specific sector bubbles or headwinds. In the last few years we have seen headline valuations for certain sectors, such as software companies, rise at an alarming pace before normalising in 2023. Our approach of consistently balancing the portfolio ensured our experience of investing within this sector bubble was limited and we remained cautiously mindful of how software valuations were beginning to significantly outstrip valuations in other sectors, a trend that we did not see as sustainable in the long term. Conversely, we have also been able to invest at attractive entry valuations in other sectors that some funds may not have focused on at the time. Essentially, a diversified sector approach means you are not only hedged against a particular company’s performance but also against any sector wide volatility. This was notably witnessed during the Covid-19 pandemic, with certain sectors caught in the headwinds of socio-economic pressures whilst others’ performance was unexpectedly accelerated. Our agility in looking across the entire market for those businesses that have demonstrated resilience during unprecedented levels of turbulence enables the team to be opportunistic in seeking the best possible scenarios for investment.
The benefits of a diversified approach
By Ben Leslie, Investment Director, Puma Private Equity
Sectors in the spotlight: responding to emerging trends and opportunities
When investing in the smaller company growth market, it’s inevitable that an investment manager will pick winners and losers. The rise and fall of industries can be difficult to predict and one of the most prominent advantages of choosing a VCT provider that undertakes a sector agnostic approach is the manager’s ability to respond to emerging trends that are transforming their respective market landscapes. Here, we take a look at three investments made by Puma Funds ("Puma"), all of which are operating across vastly different sectors and are being distinctly impacted by their own sector-specific demands and thematic trends.
A sector agnostic approach that delivers growth and creates cross-sector synergies
By investing in a diverse range of companies, we have found that the individual VCT portfolio companies themselves have been positively impacted by our ability to tap into cross-sector synergies that may not be as apparent in a sector-restricted portfolio. Firstly, a diversified sector approach equals a diversified pool of founders. While the commercial landscape of each industry is different, the challenges founders face can be remarkably similar. We work closely with founders who have come from a range of backgrounds and bring different professional experiences. We therefore get to witness first-hand the benefit of seeing how teams from different industry backgrounds approach scaling a business and can then share successful approaches between teams. Secondly, investing across a wider range of sectors means that we are able to understand and assess a broader range of commercial and operating models that may not be possible to witness in a sector-restricted portfolio. This allows us to look at hybrid business models with attractive entry valuations that not all funds will consider, therefore further enhancing opportunities for significant value creation within our VCT's. To give a bit more colour on this, we’ll take a closer look at a potential barrier a hardware enabled software company may encounter when looking to secure financing. This type of company may not be considered by specialist software funds, given the additional working capital complexity of holding stock. However, we are able to draw on our experience in the consumer space to help portfolio companies manage their working capital and cashflow efficiently, and access the appropriate facilities for them. We are not just a source of capital that then takes a backseat for the rest of the growth journey. We pride ourselves on being a hands-on manager that is able to provide the framework and guidance to make the right strategic decisions, whilst knowing that the founding team are best placed to drive the commercial strategy. If you would be interested to hear about our diversified offering and more about the exciting companies we invest in, the Puma VCT 13 is now open for investment. Please reach out to our dedicated Business Development team to find out more.
www.pumainvestments.co.uk advisersupport@pumainvestments.co.uk
Investment Director, Puma Private Equity
Ben Leslie
Global influencer market size 2023 | Statista Escalent | 2023 Dubbed “Year of the Rebound” for Fleet Technologies
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Influencer - Software and computer services
In August 2019, Puma invested into Influencer, a leading influencer marketing platform with proprietary technology that is simplifying the entire process for both brands and creators. Influencer marketing is an increasingly popular marketing channel that enables businesses to collaborate with influencers who have a social media following for increased brand exposure to sell its products or services. As a sector, it’s a fairly new marketing solution that entered the landscape in recent years and has signalled a shift in consumer behaviour for younger generations which has largely been driven by the influence of social media. The industry is now valued at $21.1 billion as of 2023, maintaining an impressive growth trajectory and an overall market size that has more than doubled since 2019. Foreseeing the growing market opportunity in this emerging sector, Puma invested £3 million into Influencer to fuel its expansion plans, continue the onboarding of global clients and further innovate the proposition’s platform.
CameraMatics - Fleet technology
CameraMatics is an award-winning fleet management solution which delivers disruptive technology incorporating AI, machine learning, camera technology, vision systems and telematics to help fleet operators reduce risks and enhance safety standards at all levels of an organisation. Ideally placed in one of the world’s fastest growing sectors, CameraMatics has grown steadily since launching in a market that is impacted by many macroeconomic mega-trends, such as ESG awareness and road safety. Earlier this year, the latest ‘Fleet Technology Index’ report demonstrated increased market readiness for key, emerging fleet technologies in a sector that is technologically advancing at a rapid pace. Recognising the importance of this sector in years to come, Puma made its first investment into this exciting growth business in 2021 and has continued to back the founding team with £7.6 million of capital deployed across three tranches. This investment has funded the expansion of CameraMatic’s operations into both the US and Europe and has bolstered the existing product suite, allowing the Company to enter into new market verticals.
Ron Dorff - Consumer goods
Having launched in 2012, Ron Dorff saw a gap in the market to redefine men's modern sportswear. Focusing on more sustainable production and offering timeless pieces, the business has since gone from strength to strength to meet a growing demand of consumers looking for quality. Ron Dorff now counts a number of high-profile celebrities as its brand ambassadors and has opened five own-brand stores across major global cities. In addition, the business has accumulated over 70 high-end wholesale partners and operates an e-commerce store that sells to customers in over 80 countries. Impressed with the traction already made and seeing the market opportunity for luxury-yet-affordable menswear, Puma made its first investment in 2020 into the business and has deployed £7.6 million to date. This investment has successfully funded Ron Dorff’s launch into the lucrative US market, brand collaborations, and enabled a significant upgrade to the online store’s e-commerce capability.
By Ben Leslie, Investment Director, Puma Investments
Risk warnings An investment with Puma Investments carries risks, for more information please see below and visit www.pumainvestments.co.uk. Past performance is no indication of future results and share prices and their values can go down as well as up. Minimum returns are not guaranteed. An investment with Puma Investments can be viewed as high risk. Investors’ capital may be at risk and investors may get back less than their original investment. Tax reliefs are not guaranteed, depend on individuals’ personal circumstances and a five-year minimum holding period, and may be subject to change. Investors should take independent tax advice. Some investments should be regarded as illiquid and it may prove difficult for investors to realise immediately or in full the proceeds. Legal Disclaimer Puma Private Equity Limited is an appointed representative of Puma Investments. 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. 11506024.
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riple Point has launched a new offer for subscription for its Triple Point Venture VCT plc to raise £10 million, with an over-allotment facility of a further £20m. This additional capital will enable Triple Point to fund a pipeline of new investments in ambitious early-stage companies and provide follow-on funding for existing portfolio holdings. Now in its sixth year, the VCT gives access to a diversified portfolio of more than 45 already growing B2B startups across 20 different sectors. In addition, the VCT identifies businesses that are finding solutions to corporate challenges within growing markets, where there is a sustainable long-term demand for their product or service. In this insightful interview with Intelligent Partnership, Triple Point’s Investment Director Seb Wallace discusses what makes a compelling VCT investment, why they look to invest in B2B over B2C companies and why investing in people is just as important as product.
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By Seb Wallace, Investment Director, Triple Point
Watch now
in conversation with Seb Wallace
We are focused on backing the next generation of promising, fast-growth British businesses. In just the last year, our newest 14 investments have been associated with the creation of over 100 new jobs, distributed across the country, injecting fuel into the economy. Each investor in the fund gains exposure to a number of high-quality teams with innovative products, each harnessing the dynamism of Europe’s largest startup ecosystem to drive future investment returns.
www.triplepoint.co.uk contact@triplepoint.co.uk
Seb Wallace
Investment Director, Triple Point
Look North for diversified and tax efficient investments
onsidering Venture Capital Trusts (VCTs) for all clients can be a great way to enhance the holistic financial planning you are providing. In addition to delivering better client outcomes, offering advice on VCTs could even help you win new clients and support in growing your business.
It’s worth spending the time to research Venture Capital Trusts
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BIDDER JURISDICTION (FIRM OFFERS)
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VCTs give clients access to a portfolio of early-stage, private companies with high growth potential, while enabling them to claim upfront income tax relief (worth 30% of the amount invested, up to an investment of £200,000), earn tax-free dividends, and exemption from capital gains tax on the sale of VCT shares. Not so long ago, it was typical for an adviser to recommend a VCT to just a couple of their most wealthy clients. But today, the demographic for VCT investing is broader and the average investment amount has reduced. We work with advisers who now have a much broader proportion of their client bank invested in VCTs. Typical VCT investors are high earners and tend to make these investments annually as part of their planning, similar to utilising their ISA allowance. This leads to long-term reoccurring advice to ensure the planning is still suitable.
Smaller stakes have little choice
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. But, on the other hand, in the vast majority of takeovers seen in the first half of 2021, there was a substantial bid premium where the share price increased during the offer period. The highest was an eye-watering 79%, although more commonly, it was in the lower, but still very pleasing 20% - 50% range.
role, Intelligent Partnership
An important part of an adviser’s proposition
Often clients have limited exposure to early-stage businesses in their existing range of investments. VCTs offer diversification benefits, since private, smaller companies can be flexible and adapt quickly in challenging market conditions, meaning a VCT's performance can be less correlated to main markets. Dr Brian Morretta, Head of Tax-Enhanced Services at Hardman & Co, believes advisers should be considering VCTs for everyone in their client bank, even if it is then to discount them, because VCTs can add diversification benefits. “Adding venture capital can lead to better outcomes and many clients could be underweight in venture capital – even for medium risk investors, a low to mid-teens weight will be appropriate.” Under Consumer Duty, advisers are obligated to consider all available solutions for their clients. So considering VCTs not only helps them achieve greater diversification, but can improve the likelihood of delivering good outcomes.
A great diversifier
The tax changes in recent years have resulted in business owners who pay themselves dividends facing higher income tax bills. VCTs could be a way to offset this tax and help extract money from a business tax efficiently. Likewise, some clients who own rental properties have turned to VCTs. They offer landlords a way to offset their tax on rental income and invest that income tax-efficiently.
More clients could benefit than you think
Bear in mind the risks
The EIS Universe today Spring Budget 2023: SMEs receive tax-friendly policies and investment incentives Unlocking EIS opportunities all year-round: don’t wait until tax-year end Breaking the glass ceiling: the rise of female entrepreneurship Why EIS is compelling right now MICAP statistical analysis: EIS open offers Welcoming the new tax year: maximising tax-efficient investments Consumer Duty: Considering ESG/Sustainability in EIS Continuing Professional Development About Intelligent Partnership
Adding venture capital can lead to better outcomes and many clients could be underweight in venture capital – even for medium risk investors, a low to mid-teens weight will be appropriate.
It is important that your clients understand the risks before they make a decision to invest. VCT shares are 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 holding the shares for at least five years in order to keep any income tax relief they have claimed.
octopusinvestments.com support@octopusinvestments.com
Head of Investment Products, Octopus Investments
Jessica franks
As the largest manager of VCTs, Octopus is well placed to help you discover how they can benefit your clients. Visit this webpage to explore resources to help you get to grips with VCTs.
A driver for new business
1 By Funds under management, The Association of Investee Companies, June 2023.
VCTs are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Personal opinions may change and should not be seen as advice or recommendation. 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: August 2023. CAM013218.
Notes
By Jessica Franks, Head of Investment Products, Octopus Investments
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Mercia’s Northern Venture Capital Trusts (VCTs) have unveiled a new share offer of up to £60m to pursue new investment opportunities and provide scale-up funding for existing portfolio companies.
he fundraise - which consists of a £42 million share offer divided equally between three VCTs, with an £18m over-allotment option - builds upon Mercia’s proven track record and follows a series of successful exits. The three VCTs are among the longest-standing in the industry and have combined net assets of £343 million across a diversified portfolio of over 50 companies, with exposure across different sectors and regions. Over the past 18 months, the Northern VCTs have exited from eight portfolio companies. Highlights include Glasgow-based health and safety platform Evotix; London-based multi-channel advertising company Lineup Systems; Nottingham risk management software specialist Ideagen; Boclips, an education platform based in Greater Manchester; and Manchester-based IT consultancy Intechnica. In this interview with Intelligent Partnership, we sat down to talk with Dr Paul Mattick, Head of Sales and Private Investor Relations of Mercia, to gather his insights on the wider market and to hear more about what the Northern VCTs have to offer.
The three VCTs are among the longest-standing in the industry and have combined net assets of £343 million across a diversified portfolio of over 50 companies, with exposure across different sectors and regions.
By Dr Paul Mattick, Head of Sales & Private Investor Relations, Mercia
What’s the effect of the wider macroeconomic landscape? Are turbulent valuations filtering down to VCTs and the private high-growth company market? What sectors are seeing opportunities at the moment? What can the Northern VCTs offer investors?
in conversation with paul mattick
Watch this interview to find out more and visit the Mercia website for further information about the Northern VCTs’ latest share offer.
www.mercia.co.uk Paul.Mattick@mercia.co.uk
Dr Paul Mattick
Head of Sales & Private Investor Relations, Mercia
Your capital is at risk. Investing in early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution. Please read the full risk warnings in the Fund documentation before applying. Past performance is not a reliable indicator of future performance. You should not rely on any past performance as a guarantee of future investment performance. Mercia is not able to offer financial advice and this email should not be construed as advice. Before applying, we always recommend seeking advice from an independent financial adviser. Tax relief depends on an individual’s circumstances and may change in the future. In addition, the availability of tax relief depends on the company invested in maintaining its qualifying status. Although we provide these links for your convenience, we have no control over these external websites and they are solely responsible for their own content and information presented. Therefore, Mercia cannot be held liable or responsible for any content presented on these external websites and for any damages resulting from them.
rom the tranquil Lake District to the hustle and bustle of Leeds, Manchester and Liverpool, the North of England is one of the most varied parts of the UK. The varied northern landscape is also reflective of the region’s thriving early-stage businesses, which along with the region’s tech and life sciences sectors are growing more and more diverse. At the same time, frozen income taxes are set to push over 1.5m UK residents into higher tax bands by 2027, with a further 301,000 becoming additional rate taxpayers. Exemption limits for dividends and capital gains tax are also set to halve this April and again the following year, meaning many will have to change tact. At a time when demand for tax efficient investments is high, both adviser and investor are becoming more intrigued by the North’s potential for capital returns.
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By Sam McArthur, Partner, Praetura Investments
The North’s early-stage business landscape is coming into its own
The varied northern landscape is also reflective of the region’s thriving early-stage businesses, which along with the region’s tech and life sciences sectors are growing more and more diverse.
It’s no secret that the number of early-stage businesses in the North is growing, with our research showing that 73% of founders believe it’s become more attractive to start a business outside of London in the last decade. Motivated by lower costs, an abundance of graduates from top universities, a supportive public sector, and the post-covid migration of talent from London to other parts of the UK, more and more early-stage businesses are deciding to stay put in the North. But instead of being limited to one or two specialisms, growth has been evident in fintech, AI, CleanTech, blockchain, cybersecurity and life sciences, with breakout Northern businesses like Matillion, Modern Milkman and Peak leading a charge. These success stories are then filtering talent and capital back into their home-grown ecosystems and so offering support to the next generation of start-ups. According to the Department of Culture Media & Sport, 2022 even saw Manchester’s tech sector alone raise a record £532m in funding, putting the city above Lisbon, Warsaw and Rome. The high-growth business database Beauhurst also reports that 1,101 equity investment deals were agreed in the North in 2022 – doubling 2013’s count.
But finding the funding remains a challenge for businesses in the North
Unfortunately for businesses up North, London still undeniably wears the crown, with 81% of UK venture capital funds based in the capital, leaving towns and cities north of the Midlands with a c£9.7bn early-stage equity shortfall. However, this funding gap has started to make the investment community take notice of the North, where the competition for deals is lower and the valuations are more competitive when compared to the equivalents in London. Early adopters have used tax efficient schemes to further bolster their investments into the region. Government-backed initiatives, such as the Venture Capital Trusts (VCT), are increasingly being used in the North to support early-stage businesses in equity deals. These reliefs help mitigate a portion of risk and maximise potential returns for investors who are willing to explore this asset class. VCTs offers 30% relief on income tax, capital gains free growth and tax free dividends. And despite the government desire to increase tax revenues, the VCT scheme was extended in last Autumn’s mini budget, where the treasury decided to scrap the deadline on the reliefs known as the ‘the sunset clause’. This has given both investors and entrepreneurs confidence that they can leverage the scheme in the years to come. The number of businesses using government-backed investment schemes in the North has given rise to regional fund managers who are now attracting more deal flow into venture capital, where previously it may have been lost to private investors. Due to its unique conditions many are seeing the North as its own asset class, as companies here operate in a different way to those in London and overseas. When 61% of VC funding goes into London businesses and only 7% goes into Northern businesses, diversifying by fund manager as well as geographic location is becoming more popular with financial advisers looking to offer their clients the best outcomes. For more information on the Praetura Growth VCT please visit: www.praeturainvestments.com/vct/
www.praeturainvestments.com Sam.McArthur@praetura.co.uk
Sam McArthur
Partner, Praetura Investments
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. 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.
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By Nick Britton, Research Director, Association of Investment Companies (AIC)
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.
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.
www.theaic.co.uk Nick.Britton@theaic.co.uk
Research Director, Association of Investment Companies (AIC)
Nick Britton
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Our dedicated programme includes a variety of in-person and virtually hosted events, across the country. Supporting financial advisers and the tax planning community, we facilitate knowledge building of tax wrappers in a workshop environment. We host webinars and conferences that focus on specific areas of tax and estate planning and celebrate the role of the UK SME investment and finance communities through our annual Growth Investor Awards.
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