Investor interest in venture capital trusts (VCTs) continues to soar in the UK. In fact latest data from broker Wealth Club suggests the 2022/2023 tax period will be the second straight year of exceptional inflows.
During the 10 months to February 6, VCTs in the UK had attracted £661.9 million worth of investment. This capital had been accrued across 25 offers spanning some 45 trusts.
Alex Davies, chief executive and founder of Wealth Club, notes that “this year’s VCT season has delivered a second consecutive bumper year and there are still two months left to run.”
He describes this year’s surge as “a break in the darkness” during a difficult time for many British businesses. That’s even though investment so far in the current tax year is below the record levels recorded during 2021/2022.
Pros and Cons
VCTs are popular ways for investors to make market-beating returns with early-stage companies. These trusts are traded on stock exchanges and pool funds to help small companies to develop and grow.
Start-ups can deliver rapid profits growth and, as a consequence, superior capital appreciation to what the more mature companies on the London Stock Exchange can.
Wealth Club notes that, in terms of net asset value (NAV) total return, “the 10 largest generalist VCT managers have on average nearly doubled investor money” during the decade to December 2022. That puts the returns produced by the FTSE All-Share Index in that time firmly in the shade.
VCTs are also in vogue because of the tax advantages they offer. Investors don’t have to pay income tax on dividends and are also excluded from capital gains tax when they sell up. Individuals can also get up to 30% income tax relief when subscribing to new VCT fundraisings.
The drawback is that investing in small companies via these financial vehicles can be highly risky. Start-ups usually operate on extremely tight budgets and lack established sources of income.
Furthermore, it can also be difficult for a VCT to sell the shares in these companies due to poor market liquidity. This means that an investor may have a problem if they need to withdraw money quickly.
3 British VCTs for Investors
The Octopus Titan VCT is one option that’s available to investors. It’s the largest such trust in the UK and as of last June had £1.2 billion spread across more than 115 early-stage companies.
Octopus Titan has a focus on unlisted entities that operate in the field of technology. More specifically, it seeks to give individuals exposure to the sub-sectors of fintech, health, deep technology, business-to-business (B2B) software and consumer tech.
E-commerce company Depop and car retailer Cazoo are a couple of businesses the VCT has backed at one stage of another.
The Foresight Enterprise VCT meanwhile concentrates on a broader range of sectors. As of June 2022 it had net assets of £134.8 million spread across 35 companies.
More than a quarter (28%) of funds here were dedicated to businesses in the technology, telecommunications and media sectors. However, it also has high weightings towards healthcare, industrials and manufacturing.
Finally, Pembroke VCT boasted net assets of £196.8 million holdings in 46 early-stage companies as of last September. It’s biased towards firms in the design, food, food, beverage and hospitality, wellness, education, digital services and media sectors.
More specifically, the trust seeks out businesses that have the potential to develop market-leading brands. These include fashion business Ro&Zo, premium ice cream maker Hackney Gelato and leisure operator Secret Food Tours.