As 5 April approaches, some UK higher-rate taxpayers will be considering the benefits of investing in VCTs. With this in mind, the Association of Investment Companies (AIC) has surveyed VCT managers to hear their views on the prospects for the sector in 2011, covering fundraising, the role of VCTs, tax issues and where VCTs are finding investment opportunities.
Research published by the AIC this month highlights the key role which VCTs still have to play in plugging the funding gap for SMEs. Interestingly, Simon Rogerson, CEO of Octopus Investments, believes that VCTs are the only real funding solution for earlier stage UK companies. With bank lending still a real problem for smaller companies, Andrew Garside, manager of Baronsmead VCTs believes that the economic recovery will be fuelled by innovative smaller companies which adapt more quickly to changing markets. Mark Wignall, Chief Executive of Matrix Private Equity Partners and manager of Income & Growth VCT adds that: “Business owners now want to raise finance and do deals and the banks are just not there. VCTs have become first choice supplier. In the last couple of months, Matrix has completed four deals, investing £12 million.”
Some managers predict a bumper fundraising year this year for VCTs, whilst others have more mixed feelings. Concerns surrounding feed-in–tariffs on solar energy investments have caused hiccups for some planned launches but have also highlighted the input of VCTs into specialist sectors such as renewable energy.
Stuart Veale, Managing Partner of Beringea and manager of ProVen VCTs says: “The general consensus from VCT managers and industry commentators is that this will be one of the best years ever for VCT fund raising – almost certainly the best since the 40% income tax relief on investing in a VCT was withdrawn.”
Andrew Garside, manager of Baronsmead VCTs adds: “It should be another strong year of fundraising given the relative attractions of the VCT tax reliefs. However, investors will note that most of the established generalist VCT managers have relatively limited offers. This is completely appropriate as good managers make investment profits, part of which are recycled for new investments, so there is no point in raising more than can be sensibly invested. The stronger generalist VCTs have demonstrated good performance through a difficult economic period which should give confidence to their shareholders.”
Mark Wignall, Chief Executive of Matrix Private Equity Partners and manager of Income & Growth VCT sees generalist VCTs as the star performers: “Matrix believes this year’s fundraising year will be something of the curate’s egg – i.e. good in parts. “Bumper” was a consistent prediction early in the season, but this has been changing as the year has unfolded. The growth story lies with the generalists. The leading players have got out of the blocks quickly this year with Northern sprinting through the finishing tape in early February. Matrix expects a number of strong generalist fundraisings buoyed by good investment performance and attractive dividend yields.”
Peter Walls, Unicorn Asset Management is more cautious: “Successive governments have had a habit of putting a spanner in the works for VCTs in the middle of the fundraising season, this year’s bombshell on solar feed-in tariffs being a case in point. Even so, I expect to see a reasonable pickup in demand across the VCT market this year with total funds raised exceeding those seen in 2009/10. I also anticipate increased interest in AIM based VCTs where investors are increasingly recognising the long-term attractions of top-up issues by established VCTs.”
The AIC has recently published research demonstrating the VCT sector’s strong track record in providing development capital. This research shows that even prior to 2008, when bank lending was more freely available, VCTs were an important resource for SME funding.
Stuart Veale, Managing Partner of Beringea and manager of ProVen VCTs agrees: “VCTs play a vital role in supporting SMEs and therefore contributing to job creation and wealth creation for the country. They have a positive social and economic impact but the industry needs to continue to communicate this to Government and other opinion formers to ensure continued support for the scheme.”
Mark Wignall, Chief Executive of Matrix Private Equity Partners and manager of Income & Growth VCT views VCTs as a widely accepted solution to SME funding: “There’s much talk around relatively minor rule changes and relatively major potential tax simplification, but we think VCTs are now a well-established tool in the Government’s kit-bag to finance SMEs. With the scale of the continuing difficulties in bank finance for smaller companies, the Government should recognise how VCTs are helping fill this gap and continue with its support. And deal activity has come back strongly for VCTs. Business owners now want to raise finance and do deals and the banks are just not there. VCTs have become first choice supplier. In the last couple of months, Matrix has completed four deals, investing £12 million.”
Peter Walls, Unicorn Asset Management points out the positive economic impact of VCTs: “In this apparent age of fiscal austerity there is a danger that the government’s review of tax reliefs could impact further on the VCT market, following the crackdown on solar schemes. While there may well be a case for targeting the scheme on the coalition’s own priorities, any moves to dilute VCT tax reliefs across the board would strike me as bordering on madness as the sector plays an important role in bridging the equity funding gap and creating employment. If anything I think that VCT reliefs should be extended to provide IHT exemption.”
The increase in income tax for the top bracket of taxpayers has heightened interest in VCTs, as investors seek to make use of the 30% tax break available. Perhaps more influential will be the changed limits to pension contributions. These changes have been made against a background of subdued interest rates, encouraging investors to seek alternative solutions to wealth management.
Peter Walls, Unicorn Asset Management says: “Changes in personal taxation have certainly stimulated increased demand for VCTs over the last two years but, all things being equal, fundraising will pick up even more in the 2011/12 tax year as the significant reductions in allowable pension contributions start to bite. As an alternative to pension savings VCTs uniquely tick all the boxes regarding income and capital gains tax. Moreover, encouraging high net worth investors to back entrepreneurial businesses for the long term via VCTs ought to be seen as a sensible policy response to help stimulate economic growth.”
Simon Rogerson, CEO of Octopus Investments maintains that changes in personal taxation are key to another strong fundraising season: “We expect 2011 to be the largest year for inflows since VCTs were introduced in 1995. The driving force behind this is undoubtedly the changes to pension legislation and the increase in higher rate income tax to 50%. Investors are looking for Government-backed, tax efficient investments and VCTs are the answer.”
Stuart Veale, Managing Partner of Beringea and manager of ProVen VCTs acknowledges that factors other than tax planning have made VCTs attractive to investors: “VCTs have generally delivered excellent returns to investors over the past few years, compared to other assets, so investors have an increasing level of confidence in investing in VCTs. Innovation in product design, resulting in a wider range of different types of VCTs, has also been a factor. A key influence has been the low return available from other assets, particularly cash deposits.”
Stuart Veale, Managing Partner of Beringea and manager of ProVen VCTs says: “The primary sector targeted by ProVen Growth & Income VCT is digital media – its investment in mobile phone technology company Saffron Digital was recently sold for nearly 6 times cost. Other sectors include software, cleantech, leisure and luxury goods. ProVen Planned Exit is a new VCT which has a lower risk investment strategy, targeting companies where there is good security for the VCT’s investment from physical assets such as property and where there are reliable revenue streams from financially sound customers. Key sectors targeted by ProVen Planned Exit VCT are Health and Education.”
