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Broadly speaking, a VCT is a company whose shares trade
on the London stock market and it aims to make money
by investing in very small companies which are looking for
funding to help develop their business. This is a vital area
of the economy - it is estimated that small and medium
sized enterprises provide 95% of employment in the UK
and up to 50% of private sector turnover - and without
funding from venture schemes such as VCT and EIS many
companies would never be able to grow their businesses.
To encourage investment in this crucial area, the
government offers generous tax benefits to investors,
including tax relief of up to 30% when investing.
A VCT typically invests in around 20 such businesses.
These are chosen by the VCT manager – an expert in
identifying opportunities amongst fledgling companies, and
negotiating attractive deals for investors. VCT managers
have different specialties and manage their funds to
different objectives. Common VCT categorisations are
AIM focused, Generalist, Specialist and Limited Life. If
a VCT is right for an investor, there is a lot of choice.
VENTURE CAPITAL TRUSTS
Profits are paid to VCT investors as tax-free dividends,
which means they can complement traditional pensions.
The VCT manager will also provide expertise to help
their chosen firms expand and provide better returns
for their investors. They normally look to sell their share
of the business three to seven years after investing
and reinvest the capital in the next opportunity.
VCTs can be an exciting investment proposition, but they are
also higher risk as smaller companies can be prone to failure.
VCT shares are difficult to buy and sell – the market price
may not reflect the value of the underlying investments. The
value of the shares will fluctuate, income is not guaranteed
and investors could get back less than they invest.
VCTs are therefore aimed at wealthier, sophisticated
investors who can afford to take a long-term view. For
advisers, they represent a significant opportunity to add
value for their clients, but they come with additional
compliance and due diligence requirements over and
above what is required for more mainstream investments.
