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The amount invested in UK venture capital trusts fell by more than a quarter in the first nine months of the financial year, as challenging macroeconomic conditions prompted investors to choose less risky offerings.
According to data from Wealth Club, an investment service, investments into VCTs from April 6 2023 to January 15 2024 totalled £366mn, down 27.4 per cent from £504mn in the same period last year. The figures take into account new investments into VCTs through fundraising.
“The last couple of years have been historic highs, but we’re getting back towards norms now,” said Paul Mattick, head of sales and investor relations at Mercia Asset Management. “There are fewer VCT products available this year, and less demand due to challenging economic times.”
VCTs are listed vehicles that invest in other companies, usually at an earlier — and riskier — stage of their development. The amount invested across all VCTs is £6.2bn.
Investors can claim 30 per cent income tax relief on investments up to £200,000 per year, although investments must be held for five years to qualify. Profits are exempt from capital gains tax when VCT shares are sold, but relief for capital losses against income is not available.
The performance of several prominent VCTs has suffered over the past 18 months after the Bank of England started raising interest rates to fight soaring inflation. Octopus Investments’ Titan VCT’s net asset value per share (NAV) — measured by the VCT’s total assets minus liabilities — fell from 91.3p to 68.2p between June 2022 and June 2023. The company attributed the fall to companies raising smaller amounts at lower valuations.
“VCTs in the market last year have seen quite significant NAV drops, with some losing around 8 to 20 per cent,” said Madeleine Ingram, a director at Calculus Capital, an Enterprise Investment Scheme and VCT fund manager.
Fund managers and analysts said the downward trend of inflows this financial year was partly due to the high interest rate environment weakening investor appetite. Since April 2023, the Bank of England has increased its base rate from 4.25 per cent to its current level of 5.25 per cent.
“VCTs are higher risk, so they tend to be more volatile and responsive to economic conditions,” said Nick Hyett, a Wealth Club investment analyst. “And compared to a year ago cash rates are much higher, so if you want to invest in a VCT for tax relief you can afford to leave it until later in the tax year and be paid interest on your cash.”
Conditions have also been hurt by what has been a difficult period for technology companies.
“You need to look towards listed technology stocks, as outside the so-called Magnificent Seven [Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla], there was a period of writedowns which caused downward pressure on the UK venture capital market,” Mattick said.
Furthermore, due to weakened demand, VCTs have not completed their funding at the same rate as in previous periods. Although VCTs can be traded on the secondary market, investors must participate in the primary fundraising round to benefit from tax breaks.
Only two VCT offers, Foresight Enterprise and Octopus Aim, completed their funding in the past six months.
However, VCT market watchers say they expect activity to pick up in the remaining months of the financial year, due to more favourable economic conditions.
“Since inflation and interest rates have stabilised, in late 2023, we have seen investor confidence return and we expect a busy end to the tax year,” said Andrew Aldridge, chief marketing officer at Deepbridge Capital.
Some investors may have allocated cautiously due to uncertainty around the duration of the tax breaks on VCTs and Enterprise Investment Schemes before the Autumn Statement.
Chancellor Jeremy Hunt announced that the tax benefits, which were due to expire in 2025, would be extended until 2035.
“I think some investors were waiting to see what announcements there would be in the Autumn Statement,” said Christiana Stewart-Lockhart, director-general of the Enterprise Investment Scheme Association, a trade body with members from both the EIS and VCT markets. “The government announcing an extension is likely to boost confidence.”
Technology companies also announced over 250,000 lay-offs in 2023, which Hyett says may spur additional opportunities, as redundant workers sometimes found their own companies.
