VCT guide

16 RULES FOR VCTS 17 RULES FOR VCTS As investment companies, VCTs also have an independent board of directors who are responsible for looking after the VCT’s interests. Investors are shareholders of the VCT itself (not customers of the fund management company as is the case with open-ended funds) and therefore, in theory, they have a say on how the company is run in accordance with their voting rights and company law. Unlike open-ended funds, VCTs can use gearing (borrowing money to invest), which can magnify both gains and losses. However, the use of gearing is rare. VCTs can also retain some of their profits and pay them out later, which can allow VCTs to “smooth” dividend income. Fundraising Bearing in mind the closed-ended structure of VCTs, there are several different types of fundraising that VCTs might engage in. 1. A brand new VCT issuing shares for the very first time. There is no existing portfolio for investors to buy into. 2. A new share class in an existing VCT that will invest in a new portfolio of investments that will be kept separate from the existing portfolio. The investor will only enjoy returns from the assets allocated to that share class. The benefit over a new VCT is that the VCT’s performance thus far can be assessed (although the new share class investors won’t share in the performance of other VCT share classes, unless they already have an existing holding in the other class or classes) and the VCT’s costs can be spread across a larger asset base. 3. Top-up to an existing share class - Investors purchase shares that give them exposure to an existing pool of assets and can immediately start earning dividend income if income is available. The top-up will also spread the VCT’s costs across a larger asset base. VCTs do not necessarily raise new money every year, and some VCT fundraises can be relatively small and completed quickly. OPEN VCTS INVESTMENT METRICS There is a diverse range of sizes among VCT investments, as shown by the following target fundraises taken from MICAP, in relation to the 2018/19 tax year fundraising period. It is difficult to plot a correlation between a VCT’s target fundraise and other characteristics as, the varying fundraising capabilities of the managers must be taken into account. Typically, the majority of open VCTs do not have a sector bias and invest in General Enterprise, although there are VCTs that focus on Industry & Infrastructure and Pharmaceuticals & Biotechnology. OPEN VCTS AVERAGE MODE MIN MEDIAN MAX TARGET DIVIDEND 4.00% 5.00% 3.00% 5.00% 5.00% MINIMUM SUBSCRIPTION £3,900 £5,000 £2,500 £4,000 £5,000 TARGET FUNDRAISE £34,520,000 £40,000,000 £10,000,000 £25,000,000 £120,000,000 DIVERSIFICATION 43.1 43 5 43 90 SOURCE: MICAP (AT SEPTEMBER 2019) Budget 2017 The following measures were announced in the 2017 Budget and published in the 2018 Finance Act, which was enacted on 15 March 2018: • 30% of funds raised by VCTs now need to be invested in qualifying holdings within 12 months of the end of the accounting period in which the funds were raised, for accounting periods beginning after 5 April 2018. • VCTs will need to increase the proportion of funds held in qualifying companies within three years of the end of the accounting period in which the funds were raised from 70% to 80%, for funds raised in accounting periods beginning on or after 6 April 2019. Timing of deployment Accounting period 0 (ending on or after 6 April 2019) Accounting period 2 Accounting period 4 Accounting period 1 Accounting period 3 VCT FUNDS RAISED Deployment clock starts Deployment clock stops 1st regulatory deployment milestone 30% Funds in qualifying holdings* 80% Funds in qualifying holdings** 1 YEAR 2 YEARS 3 YEARS *For all new funds raised in accounting periods beginning after 5 April 2018. **For funds raised in accounting periods beginning on or after 6 April 2019. • These measures will mean that more money is invested in qualifying companies and that VCTs will hold less cash and liquid resources. During the period that the new money raised is not invested in qualifying holdings, it is usually invested in cash, certain short- term deposits, listed shares and securities (including investment trusts) until funds can be deployed in suitable qualifying companies.