Venture Capital Trusts are celebrating a milestone anniversary. Alex Davies considers their performance and why they are a good choice for some investors.
On 29 November 1994, Kenneth Clarke, the UK chancellor, announced in his Budget “an imaginative set of measures aimed at generating equity investment in dynamic, innovative growing businesses”. And so, the Venture Capital Trust (VCT) was born – a VCT is a publicly listed company run by a fund manager. It aims to make money by investing in small, unquoted, entrepreneurial companies and helping them grow.
Since then – almost 25 years since the first VCT opened – individual investors have ploughed £8.48 billion into VCTs. They have backed numerous companies that are now household names, including Zoopla, Secret Escapes, Monica Vinader, Everyman Cinemas, and Five Guys to name just a few.
In the first tax year after the legislation was introduced, 12 VCTs raised £160 million. Fast forward to last year and 34 VCTs raised £731 million – the second highest amount ever. Technically, the record was £779 million in 2005/06, but this was when there was a temporary 40% tax relief in place. The current tax year looks poised to set a record under 30% income tax relief, and so far, £157.4 million has been raised.
Just 12 VCTs were available in the first year, but by 2007/08 this had rocketed to 131. Today, there are 61 VCTs, with the average raise per VCT standing at £22 million last year, an all-time high. The decline in the number over the past 10 years is owing to various VCTs consolidating.
Have they proved their worth?
Generally, VCTs have reaped rewards for investors over the years, and in the past decade the average VCT across all sectors has delivered a NAV total return of 160%. Furthermore, in the last tax year (2018/19) VCTs paid out £294 million in tax-free dividends.
Impressively, three of the first VCTs – Northern Venture Trust, British Smaller Companies VCT and Albion Venture Capital Trust (named Close Brothers VCT at launch) – still exist today with the same manager as at launch, and all three have proven to be very attractive investments. If you had made a £10,000 investment at launch, and reinvested all the dividends, your total returns would be:
- Northern Venture Trust: £47,837
- Albion VCT: £39,848
- British Smaller Companies VCT: £31,461
If you assume income tax relief was claimed on the initial investment and the subsequent dividend reinvestments, then your effective return on a £10,000 investment would rise to:
- Northern Venture Trust: £63,797
- Albion VCT: £52,177
- British Smaller Companies VCT: £42,680
For an investor who also reinvested their tax relief back into the VCT, their initial £10,000 would be:
- Northern Venture Trust: £95,658
- Albion VCT: £74,028
- British Smaller Companies VCT: £58,228
What does the future hold for VCTs?
Pension restrictions, the dividend tax and a worsening buy-to-let tax regime means that they are one of the last decent tax-efficient investments left for higher-earners.
As a result, new VCTs are being unveiled to capitalise on demand. Since 2018, three new VCTs have launched: Seneca Growth Capital VCT, Blackfinch Spring VCT, and Foresight Williams VCT, and I think more will follow soon. To add context, the last VCT to open before this was Pembroke VCT in 2013.
My advice to investors would be to get in early – VCTs have loyal followings and the best ones reach capacity quickly. So if you like one, don’t hang around - you don’t want to miss out on what could be a very fruitful investment.
Alex Davies is CEO and founder of Wealth Club.