The VCT Market – Drivers and Trends Behind a Strong 2020/21 Performance

We cast an eye over the 2020/21 tax year, and look at the trends, the drivers behind and highlight some encouraging signs for VCTs over the next few years. 

At a time when arguably UK businesses and entrepreneurs needed it most, the VCT sector has raised GBP685 million for investment in small, innovative UK businesses, data released by the Association of Investment Companies (AIC) told us earlier this month.   Somewhat incredibly, this makes it the 4th  highest fundraising year on record of all time, and the 3rd highest in the last 15 years under the current rules.  

As Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said: 

“It’s really positive that during the pandemic 11 per cent more was raised to support the UK’s most innovative and fast-growing businesses than the year before. This investment will support healthcare, science and technology businesses which have helped in the battle against coronavirus and supported us to adapt to life in lockdown. It demonstrates that demand for VCTs and the benefits they bring investors remains high at an extremely difficult time.”

As one might expect, the year was not a traditional one for fundraising, with many VCT fund managers testing the waters with their initial raises followed by some quite substantial over allotment facilities, which were, in most cases, put into play as the positive sentiments and flows increased.  Baronsmead VCTs (£65M) and Pembroke (£40M) are good examples of that approach, both achieving record raises for a single tax year.  As has been the case for the last few years, the market was dominated in fund raising terms by the Octopus VCTs, Titan (£120M) and Apollo (£65M) respectively, giving Octopus a 27% share of all VCT funds raised, which is broadly consistent with previous years, and few would bet against a similar share for Octopus in 2021/22.  

Some managers came relatively late to the market, and many of these saw very good quick flows. The ever popular Albion Capital launched a considerable £45M raise in early January, and following on from flows of over £20M in the first fortnight, completed their entire £58.5M raise in a little over 50 days.   One of  the most eye-catching forays into the market was the much smaller Amati £7M raise, which sold out to new investors in a little over 90 minutes, and was only open for 3 days in total (existing investors had to move quickly on this as well).     This type of speed and turn around  was of course only possible as digital application through platforms and portals has become much more widespread.   It is certainly the case that advisers and their clients now need to be alert and stay on top of developments and offers throughout the tax year. We can help with this, as information is updated daily on the platform and can be easily downloaded or shared with clients. Our weekly Market Download provides an additional easy way to keep an eye on movements  – sign up here. 

We are delighted to be able to offer digital applications across the market, with the vast majority of providers allowing for direct allotment into CREST, helping with the move to a single centralised portfolio and all the various benefits that brings including reporting, diversification across sectors and managers, and consolidating the flow of dividends, and potentially increased liquidity after the 5 year required holding period has elapsed.  We have seen an increase in investors who are attracted to secondary market VCTs by the combination of  reliable dividends and growth potential alongside low volatility, and expect and hope that this interest will grow in the coming years. 

The long term assumption that VCT investors are only interested in the tax relief has probably always been too crude, but it is certainly the case that  much of the £8bn+ that has flowed into VCTs  over the last 25 years was attracted by the tax relief on offer, particularly when it moved briefly to 40% in 2004-2006.   There are, however,  several longer term trends that mean that this is no longer the case, and a closer look at investors’ drivers is called for. Tax relief may be the biggest draw to investors, and it is clearly important that it remains, but other factors are at play: 

Life Time Allowance – a significant draw  to VCTs nowadays is the introduction of pension taper relief which has placed limits on how much high earners can save into their pension. This is backed up  by recent research from the AIC which shows the majority of respondents are saving into VCTs as part of their retirement planning.  

Almost nine in ten respondents to the research (88%) said it was important to them that VCTs help support the UK economy and more than four-fifths (84%) believe that by using VCTs they are helping UK entrepreneurs.

The use of VCTS (or indeed EIS/SEIS) to provide a clear percentage of  Venture Capital in investors’ portfolios is an important consideration for advisers, and VCTs provide a tidy way of doing so.  In the post pandemic world, the investment case for involvement in the smaller tech driven companies that are concentrated in VCTs is stronger than ever, and the research shows that investors are wise to this, and is a clear consideration: 81% of VCT investors feel that by using VCTs they’re supporting cutting-edge science such as healthcare and technology innovations. 74% invest in VCTs for the growth potential of backing young companies early and two thirds (67%) appreciate they can support green technologies by using VCTs. 

Whatever the specific drivers of each individual investor, it is abundantly clear that the attraction of Venture Capital Trusts continues to grow, and should be taken to a much wider audience than the 20,000 or so investors per annum who currently are participating.   

We expect that the combination of continued tax relief and governmental backing, support of smaller UK businesses, and the need to find solutions for retirement in the face of the Lifetime Allowance,  and perhaps above all the immediate access to real growth investment opportunities and the technology unicorns of tomorrow will see VCTS continue to go from strength to strength.   Few would bet against more record VCT fundraising years to come,  and hopefully the question is WHEN not IF we will see the £1bn mark reached.