VCT guide

Research and due diligence Types of VCT Although all VCTs have the same structure and their investments are governed by the same rules, there are THREE common types of VCT. Generalist - which covers private equity, including development capital; Specialist sectors - for example, technology or healthcare; AIM - predominantly investing in companies issuing shares listed on AIM. Some VCTs previously operated as limited life VCTs. These aimed to invest capital and then wind up within 5-10 years. Given the new ‘risk- to-capital’ condition most VCTs now operate one of the above three strategies. However, within these categories, managers employ a wide range of investment strategies, with different levels of diversification, targeting different levels of growth and income, with different risk profiles and investing in companies at different stages of development. The most common type of VCT is Generalist, investing in unquoted businesses with no sector preference. Indicators of when a VCT recommendation may be right Does the client have a high tolerance for risk? Does the client have an income tax liability*? Would a loss on the VCT investment have a materially detrimental effect on the client’s standard of living? NO Is the client able to commit their funds on a five to ten year investment horizon? Does the client have some experience of investing in a portfolio of more conventional retail investment products? Is the client looking for a diverse portfolio of investments? *The income tax liability must be in the same year as the VCT shares are issued This is for guidance only and is not an exhaustive list YES YES YES YES YES VCT may not be suitable NO VCT may not be suitable NO VCT may not be suitable NO VCT may not be suitable NO VCT may not be suitable NO VCT may be suitable for client YES VCT may not be suitable 38 SUITABILITY PROS CONS GENERALIST VCTs Predominantly investing in unquoted companies (excluding companies on AIM) across a broad range of sectors • More influence on investee companies • Not generally correlated to public markets • Lower liquidity AIM VCTs Predominantly investing in companies issuing shares on AIM • Greater liquidity • High diversification • Publicly available information on investee companies • Managers are not the dominant shareholder SPECIALIST VCTs Predominantly investing in a specialist sector, for example technology or healthcare • Specialist skills and technical knowledge • Not generally correlated to public markets • Can be less diversified