Venture capital trusts are not ‘unusual, speculative or complex', writes Paul Latham of Octopus Investments
Ever since the FSA announced proposals to ban the promotion of unregulated collective investment schemes (UCIS) and their “close substitutes” to what it terms as ordinary retail clients, questions have been raised as to whether venture capital trusts (VCTs) will be included within the restrictions.
Although VCTs are not directly referenced in the FSA’s consultation paper on the subject, there is concern they may well be affected by falling within the FSA’s definition of “non-mainstream pooled investments”. Investment trusts, which share the same close-ended structure as VCTs, have been granted exempt status but VCTs, conspicuously, have not. As it stands, VCTs look like being branded “complex, unusual and speculative” investments, taking bigger risks than most individual investors would consider acceptable. This is not an accurate description of the asset class.
A bit of history
VCTs were first introduced in 1995, allowing retail investors access to pooled funds comprising smaller, higher risk, companies, but doing so in a tax-efficient manner. Indeed, VCT tax incentives were all designed to compensate the investor for the additional risk associated with investing in smaller companies.
Since their inception, VCTs have not only a strong track record of delivering value to individual investors, but they have also delivered for HM Treasury, providing a vital source of funding to UK smaller companies, particularly at a time when many small and medium-sized enterprises have found bank lending much harder to come by.
Additionally, VCT investors are often reassured by the fact their investment is listed on the London Stock Exchange and therefore operates within a highly visible environment. All VCTs have robust safeguards in place, including an independent board of directors, and are subject to strict corporate governance and investment rules designed to protect investors. They also have a clear investment strategy, investing in well-regulated and recognisable assets, namely trading companies. Furthermore, HMRC has strict rules in place regarding which companies qualify for inclusion within a VCT.
What the investors think
Octopus is currently carrying out a survey of its VCT investors, to get their views. The initial findings of the survey indicate that:
• The vast majority (over 80%) told us VCTs represent less than 10% of their overall investment portfolio.
• Over a third told us they were currently invested in five or more VCTs.
• 97% of survey respondents thought that the VCT prospectus clearly explained the investment strategy.
• 96% of respondents felt the risks associated with investing in VCTs were clearly set out in the product literature.
• Based on their current investment experience, 97% believe retail investors should be allowed to continue to have access to VCTs.
So, in our experience, if an individual has chosen to invest in a VCT, they know what they are getting. There is no evidence to suggest VCTs have been mis-sold. In those instances where the FSA has chosen to fine financial advisers for mis-selling UCIS, it has not been for selling VCTs.
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