6 / 92
6
OPENING STATEMENT
2015 was the Venture Capital Scheme’s
20th anniversary. A Government
initiative established to deliver
investment to SMEs across the UK, the
scheme has grown from just three funds
at its launch to nearly 70 in 2015. The
success and maturity of the scheme
today is unsurprising given that VCTs
are able to offer retail investors access
to a unique asset class, with generous
tax reliefs to compensate them for the
higher risks involved.
VCTs provide finance and support
to some of the most dynamic small
businesses in the UK to help them
grow. They give clients exposure to a
diversified portfolio of investments in
small and up-and-coming companies
managed by a professional manager.
Though the companies VCTs invest in
start small and are high risk, they can
become household names in the future,
helping to create jobs and future growth.
VCTs have generally performed
well over the long term, with a £100
investment in the average VCT growing
to £158 over five years and £179 over
ten years. In addition, as the sector
has matured, many VCTs are offering
consistent and attractive yields. The
average yield for the VCT Generalist
sector, which as the name suggests
invests in a range of investments in
different sectors, is 8.9%. The average
yield for the VCT AIM Quoted sector,
which invests in companies listed, or
about to be listed on AIM, is 5.6%.
These returns, whether in the form of
dividends or capital profits, are free
from any Income or Capital Gains Tax.
Combined with the 30% upfront Income
Tax relief available when subscribing for
new shares, this makes VCTs an attractive
prospect for tax-efficient portfolio
planning for clients for whom VCTs are
suitable, one that is likely to become even
more relevant for higher earners facing
further pension restrictions.
It is not just the benefits to investors
that make VCTs so special. They also
make a significant contribution to the
UK economy by providing finance to
smaller companies that find it difficult
to raise finance from traditional sources
such as banks; something that has been
made worse by the banking crisis. These
growing companies often need a lot of
funding in these early stages, well beyond
the means of most individual investors.
VCTs help to bridge this ‘finance gap’.
The broader benefits for UK employment
are also clear. A recent AIC survey of VCT
investments revealed that, on average, 51
jobs have been created at each company
supported by VCT investment. In total,
13,508 new jobs have been created since
the start of the VCT scheme.
The Government’s recent announcement
that it had secured State Aid approval
from the European Commission provides
certainty over the future of the scheme
and also makes clear the UK’s continued
support for the growth and development
of the VCT industry. In order to gain State
Aid approval some of the VCT scheme
rules have changed. Though not all of
these changes are welcome, adaptability
is one of key strengths of the sector. The
sector has faced such challenges in the
past and has coped well with them and
we are confident it will do the same again.
A new development in the latest
round of State Aid negotiations was
the introduction of the concept of
‘knowledge intensive’ companies. These
provisions seek to direct support to
companies that employ a significant
number of highly skilled professionals
and have high levels of research and
development (R&D) expenditure. There
are clearly public policy benefits to
this move, but they may also refocus
the attention of VCT managers on
businesses with unique potential for
future growth.
The popularity of VCT shares with retail
investors is clear, as is demonstrated
by the strong round of fundraising in
the most recent tax year (2014/15),
when £429m was raised. In a recent
development, the rules have also
changed to allow VCT shares to be
offered via platforms. The take-up of
VCT shares by adviser platforms is
something we expect to see grow in the
future.
To help advisers and wealth managers
gain a better understanding of VCTs,
the AIC runs both face-to-face and
online training sessions dedicated to
the sector. These sessions are free and
open to all, with the next series of face-
to-face seminars taking place in January
and February 2016. Bespoke training
can also be arranged by interested firms
on request.
We very much welcome this initiative
by Intelligent Partnership to produce a
report that focuses on the opportunities
that VCTs offers investors and to raise
awareness of the scheme among
advisers. We hope you find the content
both stimulating and relevant and that it
helps provide you with the information
you need when considering VCTs for
your clients.
We couldn’t do this without the help
and support of a number of third
parties who have contributed to
writing this report; their contributions
range from inputting into the scope,
sharing data, giving us their insights
into the market, providing copy and
peer reviewing drafts.
So a
big thanks
to: Adviser Home,
the AIC, Bovill, Portunus Investments,
St James’s Place, Ram Capital and
Transact.
Their input is invaluable, but needless
to say any errors or omissions are
down to us.
The report is made possible by our
sponsors, who have contributed
copy to the report on pages 74 to 83
and supported us by helping to meet
production and printing costs. They
are acknowledged in the
Providers in
Focus
section.
ACKNOWLEDGEMENTS AND THANKS
Ian Sayers, Chief Executive,
The Association of Investment Companies