Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC) tells us why VCTs’ active support of the UK’s most ambitious businesses is important to investors.
Venture Capital Trusts (VCTs) play a key role in the UK economy. Their focus on ambitious early-stage companies with less than £15 million of assets gives investors the opportunity to invest in some of the UK’s most innovative businesses, which have the potential to offer healthy returns as well as stimulating growth across the country.
The sector has shown extraordinary resilience throughout the pandemic. Many VCTs invested in businesses directly engaged in the fight against COVID-19, from developing vaccines and testing kits to manufacturing antimicrobial curtains for hospitals.
VCTs have also played an important part in supporting companies through COVID-19, a time when many smaller businesses have struggled. In the first six months of 2020, for example, VCTs invested £695 million in small UK companies, including £219 million in follow-on investments.
A vehicle for change?
A recent AIC report on VCT activity, ‘Eager beavers: Enhancing the UK’s commercial ecosystem’ throws more light on how VCT investment spurs economic growth. In supporting a wide range of smaller companies, VCTs are helping to create new jobs all over the UK. In fact, among 288 VCT-backed companies surveyed by the AIC, the total number of people they employed was approaching 14,000, and 56% of VCT investment was directed outside London.
For investors looking to make a positive environmental and social impact outside of listed companies, VCTs are potentially attractive options. The ProVen VCTs back Social Value Portal, a company which helps businesses integrate social values into their operations to understand the economic, social and environmental effects of their actions. Luxury Promise is another holding, aiming to combat our society’s throwaway culture. It operates a worldwide marketplace that allows people to buy and sell preowned luxury goods from top brands.
Where are VCT investing?
When it comes to VCTs, innovation is the name of the game. By way of example, the Albion VCTs invest in Healios, which allows clinicians to deliver mental health services remotely to adolescents and children. They also back Quantexa, a data and analytics software company pioneering “contextual decision intelligence”. It is championing the use of data for good in areas such as tackling human trafficking.
In a world which is driven by a demand for data, VCTs are increasingly investing in deep tech. The Downing VCTs, for instance, invest in companies like Cornelis Networks, which makes hardware that help computers crunch numbers faster. Another holding, GENinCode UK, uses artificial intelligence to combine genetic and clinical data to risk-assess patients, giving doctors information to help predict the onset of cardiovascular disease.
Why use VCTs?
It’s no secret that VCTs are tax-advantaged vehicles, as they receive tax-free capital gains and dividends, as well as upfront income tax relief of 30%. Attractive as this may be, almost nine in ten VCT investors (88%) who took part in an AIC survey said it was important to them that VCTs help support the UK economy and 84% feel that by using VCTs they are helping UK entrepreneurs. Further research found that two- thirds of advisers’ clients with investments in VCTs (67%) value the growth potential of backing young companies early.
Clients clearly find it reassuring to know that by investing in VCTs, they can make a tangible contribution towards fostering economic growth and employment across the UK. Investors prepared to target smaller businesses through VCTs and accept the associated risks could be rewarded not only with good long-term returns, but with the knowledge that they are helping to back some of the most innovative companies of the future.
About Nick Brittan
Nick is Head of Intermediary Communications at the AIC and he provides training on investment companies and VCTs to financial advisers and wealth managers, including interactive online training, workshops, seminars and bespoke face-to-face sessions. He also liaises with financial adviser organisations to further their education programmes on investment companies.