Venture Capital Trusts ("VCTs") have shown themselves to be remarkably resilient to the macroeconomic factors affecting the wider UK economy. Collectively, VCTs have raised £1.079 billion in the 2022/2023 tax year despite a noticeable drop in the fundraising of many other funds across the market during the same period and virtually no IPOs. This resilience highlights the value of VCTs to investors and to investment managers seeking alternative methods of raising capital.
What are VCTs?
VCTs are a form of investment company listed on the London Stock Exchange. Investors are granted significant tax reliefs in the form of both income tax relief on investment and capital gains tax relief on sale of their shares in the VCT, as well as tax free dividends. In exchange for being able to offer these tax reliefs, the VCTs must deploy 80% of their funds into small private UK companies or small companies listed on the Aim Market. The tax reliefs compensate investors for the clear risks of investing in such early-stage businesses.
VCTs have been credited with being a key driver of the UK economy thanks to such substantial investment in smaller businesses which require a capital injection to grow, but are unable to access other sources of funding due to their lack of maturity and size. VCT investment has seen a handful of these investee businesses reaching Unicorn status (a valuation of $1 billion), with the UK boasting the highest number of Unicorn companies out of any nation in the European Union.
How has the money been deployed?
VCTs have deployed nearly £700 million in small UK businesses in the 2022/2023 tax year alone. The majority of investments have been made in technology and healthcare companies, as would be expected given those areas are currently showing the highest returns. The VCT rules dictate how quickly VCTs must deploy the funds they raise, thereby ensuring a constant flow of investment in the target companies and ensuring that the funds raised are quickly filtered back into the small business economy.
How does this year compare?
This year is the second highest fundraise total on record, finishing just £55 million behind the 2021/2022 tax year's record breaking total. Both years mark a noticeable increase in fundraising across the sector compared to the early 2020s and even more so compared to the £50 million total fundraise in 2004. Such an increase has seen the VCTs double their deployment of funds into investee companies compared to investments made in 2017.
Is there space for new VCTs?
The short answer is: yes. This year has seen a new entrant from an investment manager new to the VCT sector: Guinness VCT plc managed by Guinness Asset Management. Howard Kennedy were delighted to assist with the establishment of this new VCT, which raised £4m in its first round of fundraising. Further details of this successful launch can be found on another page of our website (https://www.howardkennedy.com/en/Latest/News/Howard-Kennedy-advised-Guinness-Ventures-on-its-first-VCT-launch).
I am interested in setting up a VCT, who should I contact?
The Capital Markets team at Howard Kennedy can guide any investment manager through the process of establishing a VCT, uniquely offering support as both a legal adviser and FCA sponsor. We represent over 75% of VCT funds raised in the sector and have strong relationships with the other necessary professional service providers, including a rich contact list of potential directors. If you wish to have an introductory discussion about establishing a VCT, we would be very happy to discuss your options. Please contact Keith Lassman (https://www.howardkennedy.com/People/Keith-Lassman) or Stephen Heinemann (https://www.howardkennedy.com/People/Stephen-Heinmann).
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