Jack Rose: How VCTs are shaping up in 2019/20

All the early signs are that, yet again, it is shaping up to be another very strong year for Venture Capital Trust (VCT) fundraising. As it currently stands there is around £650m of capacity available (through a combination of initial offers and over-allotment facilities) with at least a couple of the established VCTs yet to announce their intentions.

As we head into October things are already in full swing with close to £50m already raised for offers open this tax year. Encouragingly, and on the back of a number of successful new VCT launches last year (Seneca and Draper), there looks to be one or two new entrants potentially coming to market this year illustrating the continued growth and interest in this space as VCTs continue to benefit from the changes to pension legislation.

Of the 16 offers open, broadly two-thirds are for offers of £30m or less (including overallotments). This means that, as per the last couple of years, for those looking to access a specific offer, it is a case of acting sooner rather than later.

With the average fundraise size slightly smaller than last year it will continue to be the case that the most popular offers will yet again be in extremely high demand - and those leaving it until the end of the tax year will be disappointed.

The case for diversification 

It is often the case with VCT investing that you can find there is a potential danger for investors to revert to what they know, continuing to invest in the same one or two VCTs year in and year out.

This bias can be for a multitude of reasons; continued good performance in the investor's initial choices, a comfort from familiarity, or for other reasons. The danger for investors in allowing this results in the same conclusion - concentration increases risk to both their capital and also potentially the consistency of their income stream.

This is a pretty crucial point because given that the majority of people purchase VCTs not just for the upfront income tax relief but the tax-free income they generate, that income stream is hugely important. It is likely that VCT dividend income will become less consistent in the future, due to the changes affecting how managers will be able to structure their investments.

Managers these days are bound by rules to invest in the equity of the underlying investee companies rather than convertible loan notes etc. As a result, dividends are increasingly going to be, for all managers, derived from realisations of the investee companies in the portfolio, not the predictable and regular income thrown off by the debt like investment structures of old.

It is therefore imperative that investors build a well-diversified portfolio of VCTs so they are not relying on any one VCT to provide income and that it is coming from a much wider portfolio of VCTs. There are a plethora of excellent managers out there for people to pick between from established and mature VCTs, such as Northern and Mobeus, to newer products from established managers such as Triple Point, Puma or Draper.

Jack Rose is strategic sales director at Triple Point

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• Topics
• Tax planning
• Tax-efficient Investing
• VCT
• Triple Point