Venture capital trusts have suffered during the recession but optimism seems to have returned to the sector as it is expected that the 2010 fundraising season will see a marked improvement on last year, the Association of Investment Companies says.
The average VCT’s performance is currently down 0.5 per cent including charges over the last year and the question is whether performance will improve as investments are realised.
The AIC has spoken to VCT managers to find out their views on the prospects for the sector in the year ahead.
It has been widely commented that with the recession and the restriction on bank lending, VCTs should be enjoying a vintage year of investing. With reduced bank debt available to small, growing companies, managers believe that this year should be a good one for new investments but are stressing the importance of maintaining a longer term view to investing as the recovery still has a long way to go.
Tony McGing, director, Downing Corporate Finance, says: “With banks more interested in repairing their balance sheets than providing funding for small businesses, VCTs have been filling the equity gap. During 2009, Downing’s funds backed 20 businesses to the tune of GBP28m. We expect deals completed in 2009-11 to be ‘vintage’ because of lower entry prices and less competition for funding.”
Matt Taylor, partner at Foresight Group, believes that over the longer term view the VCT sector’s prospects are looking good.
“Many people know about the effect of vintage years in private equity investing. Each time the economy emerges from a recession, the following five years tend to produce above average returns for investors that get in at the bottom,” he says. “The question is whether 2010 proves to be the fine vintage of an emerging recovery? Of course the recovery is likely to be slow for many sectors of the economy due to the after-effects of the credit crunch. But VCTs are well-placed, because they tend to spread their investing over a three year period. And that means that the VCTs of 2010 should catch the recovery and gather a rich harvest.”
The overwhelming opinion of managers is that, in light of the new changes to income tax and pension relief, there will be more investors looking to include VCTs as part of a diversified portfolio. All the managers questioned are therefore expecting a good fundraising season.
Patrick Reeve, managing partner at Albion Partners, says: “We’re expecting a sharp increase in VCT fund-raising this year, principally as a result of the new pension legislation. Again and again, we meet with financial advisors whose pensions business has fallen off a cliff following the reduction in income tax relief for higher earners to 20 per cent. Given the other restrictions on a pension, and in particular the fact that when you draw an annuity, you are effectively paying income tax on your capital as well as your income, a VCT, with its 30 per cent tax relief, tax free income, and preservation of capital, becomes comparatively a much more compelling alternative.”
