VCT rule changes, a golden opportunity

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For many years VCTs have not featured as potential investors for young growing companies, particularly in the tech sector where most founders don’t even know who or what they are.  Well that is about to change dramatically for two reasons:  a massive increase in deployable capital and Government legislation forcing changes in investment strategy towards higher risk younger companies.

So what is a VCT?  Simply put it’s a tax efficient investment fund and as their full name of Venture Capital Trust suggests, it’s venture capital aimed at equity investment for capital return.  What makes VCTs unusual is that each VCT is a quoted vehicle and each investor is allowed to buy a maximum of £200k of shares in VCTs per annum in exchange for an immediate 30% tax relief on earnings.  That makes it a very attractive investment for high earners, particularly when VCTs have a solid reputation for not losing their clients’ money and often paying a steady tax free dividend stream before eventually closing the fund and distributing the tax free realised capital back to shareholders.  And the numbers are big, in FY 2016/17 VCTs raised £542m of new capital and FY 2017/18 looks on track be a record year at over £800m – that’s a lot of money to invest….

The 2017 Autumn budget had a lot to say on both EIS and VCT funds as a result of the excellent Patient Capital Review which I felt honoured to be asked to contribute to as part of a regional roundtable (although I was more focused on the lack of a credible IPO option for UK tech business – but that’s a subject for another post).  Again simplifying greatly, both EIS and VCT funds were instructed to focus on Knowledge Intensive Companies (KICs) and to stay away from any investment that smacks of capital preservation i.e. asset back businesses like care homes, crematoria etc.  VCTs were also told to invest their funds faster over the funds life but they can also now invest up to £10m in a single KIC up from £5m.

OK so VCTs have almost double the money to invest and are being steered towards riskier knowledge based opportunities – that should mean a feeding frenzy for early stage Tech businesses desperate for cash, right?  Personally I think that will be true in 2019/20 but this year will be a time of transition – new younger more tech savvy Investment Execs are being hired, revenue and profit thresholds for investment being reduced and quicker deals being done, but the underlying mantra of low risk investment is still the watchword of the Investment Committees made up of the original founders of the trusts in the late 90’s.  That said, the wall of money flowing into VCTs will inevitably bring greater appetite for risk and real completion for the best deals so I’m building great relationships with the VCTs ready to channel to our clients the flood of investment to come!