This year’s annual VCT Manager poll by the Association of Investment Companies (AIC) finds the majority of VCT managers optimistic about current investment opportunities.
Almost half of respondents said that they are currently finding a similar number of investment opportunities to last year, before the rule changes; around a fifth said there were more opportunities than last year, although a third said there were fewer investment opportunities compared to last year. The AIC received responses from VCT managers representing 73 per cent of the VCT sector by assets.
This is not to say managers are complacent about the rule changes, either – all but one of the VCT manager respondents said that adapting to the rule changes would be the biggest challenge of 2016.
Stuart Lewis (pictured), Business line manager, Venture Capital Trusts, Octopus Investments, says: “There is no doubt that it has been a tumultuous time for the VCT industry. However, the changes are quickly put into context as the minor evolution that they are, when contrasted with the shifting landscape for pensions over the last few years. With change comes opportunity, and at Octopus we are excited about what lies ahead for the VCT industry and the role it can play in supporting the UK economy as a whole.”
Highlighting the role of VCTs in supporting the UK economy, it is interesting that research this month from HM Revenue & Customs suggested that around two-thirds (65 per cent) of VCT investee companies attributed an increase in their sales to the VCT investment.
Indeed three quarters of VCT managers are already reporting increased investor interest from private investors in light of the forthcoming pension rule changes, which will affect the amount that those who earn over GBP150,000 can pay into their pension each year, not to mention the reduction in the lifetime allowance. Two thirds of VCT respondents said that the pension rule changes give them the greatest cause for optimism in 2016, although there was also a strong consensus that advisers and investors should be mindful that VCTs are a ‘complement’ to existing financial plans, for those with an appropriate appetite for risk.
Having said that, it is interesting to note this month’s report by HM Revenue & Customs on the use and impact of venture capital schemes found that, in the qualitative research, several investors highlighted how well the VCT sector had held up since the 2008 crash compared to the wider stock market. VCT investors included older, retired, although not always high net worth investors who were attracted by the dividend payments.
The new rules allow VCTs to invest in larger and more mature companies if they are ‘knowledge intensive’ companies (GBP20 million can be invested over the investee company’s lifetime, rather than the usual GBP12 million). Some two fifths of VCT managers said less than a quarter of their portfolios are in ‘knowledge intensive’ companies, one fifth estimated it was about a quarter, a further fifth estimate ‘about a half’. Less than a fifth said that they had about three quarters of their portfolio in knowledge intensive companies. Just over a third of respondents said they would be changing their investment approach to target more knowledge intensive companies.
Commenting on the current investment climate, David Hughes, Chief Investment Officer at Foresight said that: “although we anticipate a healthy pipeline, the change in VCT rules means the universe of qualifying investments is naturally smaller.” David Hall, YFM Equity Partners echoed this, too, commenting that: “The rate of new opportunities across the country has remained steady and high with the market settling down after the rule changes.” Chris Allner from Downing concedes that: “New rules mean that different types of deal are being sought.”
Whilst London remains a VCT ‘hot spot’, the wider South East was the second most favoured region by two thirds of respondents. The North West of England was the third most favoured region, whilst the Midlands and East Anglia were also in the ‘top three’ regions for a third of VCT respondents. That said, Puma’s Eliot Kaye commented that: “We are genuinely seeing opportunities across the UK so no real prioritisation of area is possible.”
Tech/IT was far and away the most favoured sector, closely followed by Healthcare (including biotech and pharma). Construction also scored highly, alongside Leisure and Hospitality.
In terms of exports, North America accounted for by far the greatest amount of overseas growth followed by Europe and Emerging Europe.
Annabel Brodie-Smith (pictured), Communications Director, Association of Investment Companies (AIC), says: “The VCT sector continues to play a hugely important role supporting SMEs, and it’s encouraging that the sector continues to report good opportunities. Whilst there are clearly some VCT ‘hot spots’ for investment opportunities, VCTs are finding opportunities the length and breadth of the country. They are also participating fully in the knowledge economy, with a significant proportion of the sector’s assets in knowledge intensive companies.
“The VCT sector is extremely diverse, and the impact of the rule changes will depend on individual companies and strategies. But the sector has always been adept in dealing with change and for the end user, the VCT benefits remain, both from a tax planning, income and diversity perspective.”