It’s clear to see why Venture Capital Trusts (‘VCTs’) have emerged as one of the most popular asset classes for high net worth investors. By investing in innovative early stage companies, the potential returns can be much higher when compared to other investments that make up a diversified portfolio. But whilst the rewards can be significant, there is also a greater degree of risk that needs to be carefully assessed. It is essential that investors select experienced managers that seek to actively address the challenges to early stage investing, as well as adjusting fully to the new rules.
Venture Capital Trusts (‘VCTs’) are fast becoming a mainstream option for sophisticated investors. They can be a great way to deliver income and diversification to a client’s portfolio. This is reflected in the statistics. In December, figures published from HM Revenue & Customs showed 18,890 VCT investors claimed income tax relief in 2017-18 – an increase of 24 per cent on the previous year. What’s more, some £731m was invested in VCTs in the financial year 2018-19 – the second highest amount on record. Advisers have reported that VCTs have become especially popular with high earners such as lawyers and doctors whose traditional methods for retirement planning, such as pensions, have become more restrictive in recent years.
The changing backdrop to VCTs, driven by the adoption of EU state aid rules in 2015, the 2017 Budget and Patient Capital Review has meant that VCT managers are now required to invest in early-stage companies that have been trading for less than seven years. As a result of these changes, many managers are taking a far closer look at their investment strategies and are developing ways to innovate and ensure that they have a strong pipeline of potential investments so they are able to identify the next high potential high growth company and limit their downside exposure.
Traditional venture investing has tended to focus on researching a broad cohort of companies with the aim of identifying those businesses that are likely to be successful. Investment is then made based on this research with the hope, rather than the expectation, that the market will validate the investment. The potential financial benefits of following this approach can be significant, but the central problem is that this analysis cannot always predict whether there is a genuine market demand for a product or service.
Research has shown that 40% of start-up failures are due to issues in the initial stage of testing market demand - as the companies encounter problems relating to their market fit and business model.
However, what we have started to see in the VCT landscape is a movement towards a new, distinct approach to venture capital investing based upon the need to address certain risks associated with nascent companies – establishing market fit.
The basic premise of a challenge led approach is to work alongside large corporates to identify the problems they face and then identify the early stage business with the innovative new product or service that can provide the solution to these real challenges. This ensures that a market fit has already been established, before investment, which results in the same potential early stage financial benefits, whilst reducing the risk of the business not achieving a market fit.
By investing at this stage, the challenge led approach aims to mitigate some of the risks of early stage investment, whilst continuing to maximise potential returns for investors.
Triple Point’s Venture Fund VCT follows a challenge led investment philosophy. By drawing on the specialist skills and experience of all its members, the Triple Point Network has developed a strategy which proactively helps early stage businesses increase their chances of success.
If you have any questions regarding our Venture Fund VCT, or if you have any questions about any other Triple Point products, which include our Estate Planning Service, Impact EIS and our Income Service, please contact us on 020 7201 8990.
Risk warning: The Triple Point Venture Fund 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. Tax rules and reliefs depend on individual circumstances and are subject to change.
This financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.
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