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“VCTs have the ability to structure some investments as convertible loans, which serves to reduce
overall volatility and increase income”
Douglas Lawson, Amati Global Investors
As the second chart on the previous
page demonstrates, Specialist VCTs with
higher concentration risk, operating in
industries where sentiment can change
rapidly can be very volatile.
We think that the take-away is the
same in every case: don’t let short term
volatility influence your decision making.
Don’t try and time your entry, or panic
and exit at the bottom.
SECONDARY MARKET
The report has been focused on buying
newly issued shares (the primary market)
but we should take a brief look at the
possibility of buying shares on the
secondary market. Purchases of shares
on the secondary market do not attract
the 30% Income Tax relief but are still
Capital Gains Tax free and they still pay
tax-free dividends (purchases on the
secondary market also count towards
your £200,000 annual allowance). Buying
at a discount might be a good strategy
if you expect the share price to catch
up with the NAV in the future. It’s also a
way to invest in popular funds if they are
not doing any fundraising or if you have
missed the window to invest. However,
the spread (difference between the
buying and selling prices) may be wide
on some thinly traded shares – another
transaction cost to watch out for.
It’s not immediately clear how deep
the secondary markets are: because
many VCTs buy back their own shares,
it’s next to impossible to ascertain how
much demand there is beyond that. We
know that many VCT providers are keen
to encourage the development of the
secondary market as they know that a
successful secondary market will mean
a successful primary market as investors
will no longer be deterred by the lack of a
definite exit.
THE OPERATION OF
BUYBACKS, CLOSE PERIODS
AND OTHER WAYS OF
RETURNING CAPITAL
The purpose of buybacks is to offer exit
opportunities to investors. As we noted
above, it’s hard to gauge the depth of
the genuine secondary market for VCT
shares, but it is probably safe to say
that it is very limited, so the buyback
policies are vital for the functioning of
the market. Buybacks take the form of
either the VCT operating as the buyer
of last resort for a market maker, or by
dealing with investors directly.
There have been cases in the past
where the buyback policy was abused by
investors who would exit, reinvest in a
new issue in the same fund, or with the
same provider, and then claim Income Tax
relief again on what was essentially the
same investment. Some VCTs facilitated
this, and the schemes were known as
“Enhanced Buybacks.” Some even gave
investors who committed to reinvesting
their money a more favourable price.
Even more sophisticated versions of this
- “cascade” arrangements - would use
the VCTs cash reserves to continually
repurchase small tranches of shares,
recycling all of the investors’ money
without ever raising new funds.
These kinds of arrangements were
deemed to be exploiting, rather than
operating in the spirit of, the rules, and
so in 2014 the government legislated to
prevent these kinds of arrangements.
The wording of buyback policies needs
to be examined in detail. Very often it
will use phrases such as “subject to the
availability of distributable reserves”
and/or “subject to board approval”. This
is reasonable - the board has to operate
in the interests of all of its shareholders,
and as we noted earlier shareholders
should not be disadvantaged just
because other investors want to get out.
For these reasons most boards can’t
commit to a full buyback policy, but it is
worth looking at their track record and
‘business as usual approach’. However,
it does mean that the buyback policy is
likely to be suspended just when people
need it the most - in times of market
distress. Once again, we emphasise that
these are long term investments. (We
do note that OEICs can and do put a soft
close or exit fee on their funds when
there is a period of high redemptions,
so one shouldn’t assume these sorts of
issues are limited to VCTs).
Advisers and investors also need to
be aware of “close periods” - the time
between a financial period end and the
announcement of the results to the end
of that period. VCTs are not permitted to
buy shares back directly from investors
during close periods.
ADDITIONALCONSIDERATIONS
Buyback
policies
Close
periods
NAV vs.
share price
Cash position
Deal pipeline
Valuation
policy
Fundraising