29 March 22

Capitalising on the shifting market for VCT investment

Triple Point’s Anne Slater-Brooks examines the fundamentals driving the VCT market.

The current backdrop of widespread economic uncertainty has left both investors and advisers facing an increasingly changeable investment landscape. With inflation continuing to rise and an upcoming increase to dividend taxation, investors have been facing growing pressures on their income.

If carefully considered, VCT investment can offer income-seeking investors a solution to these challenges as well as the ability to back innovative start-ups at the earliest stage of their conception. As a result, demand for VCTs has been steadily growing with £812 million already invested this tax year.[1] However, with the landscape of VCT investment continuing to shift, it is essential to adapt in order to capitalise on the high rewards of this alternative investment strategy.

Demand is on the rise

Over the past few years, the VCT market has experienced steadily growing demand with this year set to be the biggest on record. In fact, with the amount raised this year already surpassing the previous record in 2005/06, many are anticipating a record £1bn to be raised by the end of the current tax year.[2]

There are a variety of factors contributing to this growing demand. With inflation reaching its highest rates in 30 years and expected to reach as much as 8% by April, investors are facing increased financial pressures.[3] Equally, the upcoming 1.25% tax hike on dividends and national insurance contributions could leave many investors prioritising tax relief.

VCT investment remains one of the most efficient tax planning tools with the ability to claim upfront tax relief at 30% of the amount invested, up to an investment of £200,000, and earn tax-free dividends. Therefore, as financial pressures continue to rise, income-seeking investors could become increasingly interested in the tax relief of VCT investment.

The new VCT investor

However, perhaps the most significant reason for growing VCT demand has been the emergence of a new VCT investor profile. Recent data shows that the average age of a VCT investor has dropped by 11 years since 2017.[4]This suggests that, as changes to pensions have left private clients with diminishing options for retirement planning, younger investors have begun to see the appeal of VCTs as a supplementary pension planning product.

However, while demand is growing, the landscape of VCT investment is not what many may be used to and adapting to these shifting demands is essential. For example, if VCT investment is increasingly being used as a supplementary pension planning product, diversification becomes an important argument as delivering consistent income in retirement becomes more important. The benefit of diversification in terms of spreading risk is a well-worn argument but it can also improve the consistency of income as different assets experience varying performances during different periods.

With VCTs increasingly being used as a pension planning tool, it may become increasingly important to highlight the value of diversifying investments to deliver consistent income and reduced risk.

And, with older millennials beginning to save for retirement at the average age of 25, younger investors may have less immediate income requirements.[5] This makes capital growth more important than obtaining dividends instantly. As a result, investors should pay more attention to the VCT dividend reinvestment schemes on offer in order to compound their returns and duplicate their 30% tax relief. Equally, making use of the ability to recycle between VCTs offers reduced equity risk and compounds returns providing an additional source of uplift.

Strategy is key

In order to truly capitalise on the current appetite for VCT investment, selecting the correct strategy is key. For example, it is crucial to be aware of the amount of money a VCT is raising due to VCT rules necessitating a timely deployment of capital. This can often create pressure to invest capital quickly if too much is raised which can impact selectivity and leave investors paying a premium on valuations. In light of the large offer sizes for many VCTs this year, investors may want to consider smaller offers to ensure a strong and selective deal pipeline. Especially in the current economic context of rising inflation, it is crucial to remember that bigger is not always better.

Equally, it is key that the new VCT investor is well versed in the associated risks of investing in early-stage companies. With 20% of start-ups failing within the first year, these investments are not without risk and thorough evaluation of VCT strategy is essential in order to mitigate these risks.[6]

For example, Triple Point’s Venture Fund VCT utilises a challenge led approach which primarily invests in pre-Series A B2B technology businesses. With high-growth B2B technology businesses accounting for 77% of all exits in 2019, VCT funds that target this sector tend to offer better valuation on entry and better returns to shareholders.[7]  Equally, while there are many reasons that a start-up may fail, research by CB Insights found that in 42% of cases lack of market need was the reason for failure.[8] Triple Point’s challenge led approach mitigates this risk by working with corporates to identify the problems they are facing and selecting start-ups which are offering solutions to these existing problems. This strategy can offer an answer to the crucial issue of market need and, as a result, reduces the risks of investing in these early-stage companies.

With the ongoing effects of the pandemic continuing to create economic challenges, it is clear that VCT investment can offer investors crucial benefits. However, with the VCT landscape continuing to evolve, advisors and investors may need to take a variety of new considerations into account. However, if VCT investment is thoroughly considered and the correct strategy is selected, investors and advisers can both capitalise on the growing appetite for VCT investment. Above all else, it is crucial to remember that strategy is key.

In September 2021, Triple Point launched a new top-up offer for the Triple Point VCT 2011 Plc Venture Shares (‘Triple Point Venture Fund’) for both the 2021/22 and 22/23 tax years. To find out more about investing for your client visit here.

Contact Triple Point.

Risk warning: The Triple Point Venture Fund VCT carries all the risks of investment in smaller companies and places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each client and is subject to change. Tax reliefs depend on the VCT maintaining its qualifying status. Investors should only subscribe for shares on the basis of information contained in the Prospectus which is available via the Documents section of the website.

[1] https://www.moneymarketing.co.uk/news/vcts-on-track-to-hit-1bn-mark-before-end-of-tax-year/

[2] Ibid

[3]  https://www.theguardian.com/business/2022/feb/16/uk-inflation-rises-amid-cost-of-living-crisis

[4] https://www.ftadviser.com/investments/2022/02/04/age-of-typical-vct-investor-drops-11-years/

[5]https://www.cnbc.com/2021/07/22/majority-of-older-millennials-believe-they-will-work-during-retirement.html

[6] https://www.forbes.com/sites/forbesfinancecouncil/2018/10/25/what-percentage-of-small-businesses-fail-and-how-can-you-avoid-being-one-of-them/?sh=f24111743b5f

[7] filedownload.php?a=750-5f802c8866add

[8] https://www.cbinsights.com/research/startup-failure-reasons-top/