Venture-capital trusts have backed several of today’s successful firms, and they are highly tax-efficient too. David Prosser surveys their prospects and highlights some promising options
The venture-capital trust (VCT) industry is hoping to pull off a hat-trick. In each of the past two tax years, it has raised more than £1bn from investors. VCTs offer a range of generous tax benefits to mitigate some of the risks of putting money into the small, early-stage companies that they back. If all the funds currently raising money eventually hit their targets, VCTs will repeat the trick in the 2023-2024 tax year.
Still, there are no guarantees. Some of the other tax-efficient savings routes open to investors now look more generous than in the past; the annual allowance for private pension savings has increased to £60,000, and the lifetime allowance (LTA) limiting the size of pensions is in the process of being scrapped. As a result, savers forced to look beyond these vehicles in recent years may not have to do so in 2023-2024.
More fundamentally, many investors are in a risk-averse frame of mind. Last year was a difficult one for equities, with plenty of volatility along the way, even if 2023 ended in positive territory for most exchanges. VCTs, which value their unlisted investments in line with public listings, suffered accordingly; many marked down their portfolio’s net asset values (NAVs).
These factors appear to be giving many investors pause for thought. In previous tax years, VCTs raising money have hit their targets and shut up shop to new investment before Christmas. This year, of the 25 VCTs soliciting investment, just two, Foresight Enterprise and Octopus Aim, are now closed to further subscriptions.
So, should investors take the plunge? Ben Yearsley, investment director of Fairview Investing, thinks they should at least consider it. “Normally, the best time to buy is in tough times because valuations are typically better and good-quality growth businesses can shine.”
He has a point. The valuations of VCTs investing in completely unquoted companies are down by around 5% compared with a year ago, according to the Association of Investment Companies. VCTs that invest in qualifying companies listed on the Alternative Investment Market (Aim) have, on average, slipped by more than twice that amount.
“VCTs have had a tough year, with higher interest rates hitting small company valuations a
