The Association of Investment Companies’ (AIC) sixth annual survey of venture capital trust (VCT) investment reveals that a total of 13,508 new jobs have been created at the SMEs surveyed since the beginning of the VCT investment scheme.
According to the survey – ‘Nurturing success, delivering growth: VCT investment 1995-2015’ – on average 51 jobs have been created per investee company since VCT investment. At the companies that received funding in 2013, on average 15 new jobs have been created per investee company.
Ian Sayers, Chief Executive of the AIC, says: “VCTs address market failures which prevent smaller UK businesses securing development capital. It’s encouraging to see that, when it comes to both sector and geography, there is a depth and breadth to VCT investment and its impact on SME growth. The role of VCTs is as important today as it was when the scheme was introduced twenty years ago.
“The survey also provides evidence to support changes to the VCT rules to allow greater flexibility in VCT investment in respect of ‘replacement capital’ (i.e. the ability to provide an exit for shareholders in investee companies short of a full buy out). The Government has committed to seeking state aid approval for this change and we look forward to working with it to secure this outcome as soon as possible.”
The top sectors for VCT investment last year were Technology and IT, Business Services and Manufacturing and Engineering respectively. VCTs reported investing almost twice as much into Technology and IT companies in 2014 compared to 2013. The Technology and IT companies that have received VCT investment boast a 212 per cent increase in employment levels. This makes the Technology and IT sector the top job creator in current VCT portfolios.
The majority of VCT investment, (55 per cent) was invested outside London and the South East and across the UK. Whilst London continued to attract the largest share of VCT investment in 2014 (26 per cent), it attracted less than the average of the previous years (34 per cent).
Given the Government’s desire to deliver economic growth across the UK it is particularly significant that Scotland received 20 per cent of VCT investment, compared to an average of 8 per cent in previous years. The North of England received 13 per cent of VCT investment (up from an average of 11 per cent in previous years) and the rest of the UK received 22 per cent of VCT investment (down from an average of 27 per cent in previous years).
VCTs address the ‘finance gap’ issue affecting SMEs seeking funding between GBP250,000 and GBP5 million. This level of investment is beyond the means of most individual investors, but too small to attract investment from private equity firms. The average size of the initial VCT investment in an SME is GBP2.31m which rises with follow-on investments to an average GBP3.01m. In 2014, 80 per cent of reported investments were within the ‘finance gap’, reinforcing the idea that VCTs are crucial business support providers for SMEs requiring an investment amount within this gap.
The benefits of VCT investment are often immediate and analysis of SMEs that received initial VCT investment in 2013 show that 77 per cent of companies increased their turnover by an average of GBP1.5 million the following year. In Scotland alone, there was an increase in turnover of 34 per cent for investee companies. The average turnover increase in each SME since initial VCT investment is GBP12.71 million, representing growth of 183 per cent.
In 2014, VCT-backed SMEs spent more than GBP120 million on research and development, and approximately a third of investee companies reported making an investment in this area. Results show that the average SME investing in research and development spent GBP920,000.
Survey results revealed that, in 2014, 39 per cent of investee companies generated turnover from exports. This figure is higher than results from last year and is also higher than the average for SMEs across the UK. Overseas markets accounted for 30 per cent of the turnover of exporting investee companies.
The total fundraising figure for the 2014/15 tax year was GBP429 million. A conservative estimate suggests that VCTs have up to GBP832m of capital to make further investments in SMEs over the next three years. With an average total investment size of GBP3.01 million in 2014, the current resources available to VCTs could fund a further 276 enterprises. On current trends, these businesses would then have the potential to create over 14,000 new jobs