Giving investors access to UK innovation
7 February 24
7 February 24
In recent years, Venture Capital Trusts (VCTs) have proven an increasingly important part of the advice toolkit for financial planners, helping to solve a range of tax-related issues for clients. But when it comes to recommending the right VCT, it’s also important for advisers and their clients to consider the value added by the underlying investments. Aside from the growth potential that comes with owning a portfolio of ambitious early-stage companies, one of the most important aspects of owning a VCT is the diversification it offers to investors.
You might think diversification is just another way of saying: ‘don’t put all your eggs in one basket’. But the Triple Point Venture VCT offers diversification across three distinct categories: portfolio level, sector level, and company maturity.
Investors can use a VCT to add another layer of diversification to their overall investment portfolio, using it to gain access to early-stage companies that are unlisted and growing. As these companies are unlisted, they are not directly correlated with broader equity and bond markets, and because they are backed by venture capital, they are less likely to experience the market volatility and short-term nature of listed companies.
A VCT will invest in a hand-picked selection of companies operating in different sectors and at different stages of their development. This helps to spread the risk associated with investing in young and growing start-ups. VCTs also have investment restrictions, such as limits on the maximum investment in a single company, which encourages further portfolio diversification.
Many start-ups fail – it’s in the nature of start-ups to take risks. So, it’s critical to spread the risk by investing in a large number of portfolio companies. The Triple Point Venture VCT is currently invested in 47 companies. So, should a company in the portfolio fail, the knock-on impact on the overall portfolio is limited.
Sector diversification within a VCT is another crucial aspect for investors, as if one sector is affected by a market downturn or changes in regulation, other sectors in the portfolio can still perform well. But here’s where the approach adopted by some VCTs can differ. Many specialist VCTs focus on specific sectors, such as technology, energy or infrastructure, making them more susceptible to sector-specific risks.
Instead, the Triple Point Venture VCT is diversified across several business sectors (20 and counting). We don’t constrain ourselves to any particular sector or industry, as B2B companies have the ability to transform or improve business models in all sorts of sectors. To make sure we can fully participate in any particular sector, we look to invest in companies managed by teams with deep market knowledge of their business sector, that are offering products that solve real needs for their users. Ideally, the product progresses that industry in some way, and is so important to business users that they will make sure they have the budget to pay for it.
Company maturity diversification
Finally, diversifying through the maturity stages of the companies within a VCT portfolio is essential because it has an impact on potential returns. Although investing in more mature companies reduces some of the risks of venture capital, investing at a later stage usually means paying a higher price for the shares. This can reduce the potential return VCT investors can expect to receive over the life of their investment. While a low-risk approach is understandable, we believe VCTs should be viewed as investments in their own right, not just a way of claiming tax relief. In other words, investing in a VCT should mean the higher risk is compensated for by higher potential returns.
At Triple Point, we believe early-stage investing significantly increases the available investment return. So, we don’t prioritise the maturity of a company we want to invest in. Instead, we want to unleash potential, so we invest at an earlier stage of the company’s growth journey, typically when it is generating less than £1 million of annual revenue. Although the VCT invests in early-stage companies, we add new companies to the portfolio each year, so now we have a good mix of businesses at different stages of their venture lifecycle.
Demonstrating better outcomes for clients
The new Consumer Duty rules require firms to act to “deliver good outcomes for investors”, and portfolio diversification is naturally an integral part of this. While the Financial Conduct Authority has said high-risk investments (such as VCTs) should only be about 10% of an overall investment portfolio, advisers should also ask themselves whether that proportion of the portfolio is also as well diversified as it could be.
A VCT that offers diversification on three levels: with a larger number of portfolio companies, is invested across multiple sectors, and holds investments at various stages of maturity, could be an excellent way of demonstrating that the VCT is being managed to deliver returns for clients that go well beyond just offering tax reliefs.
For more information about the Triple Point Venture VCT, visit vct.triplepoint.co.uk.
This article is an advertisement for the purposes of the Prospectus Regulation Rules and is not the prospectus. The Triple Point Venture 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. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority.