VCT Managers Comment on Rule Changes and Outlook for 2016
2015 was a good year for VCTs in performance terms with the average VCT up 9% to 31 December 2015, whilst the fundraising for the tax year 2014/15 was £429 million, the fourth highest ever. The VCT sector is also meeting investor demands for income, with the VCT sector average yield being 8.6%* at 31 December 2015.
However, with rule changes having recently come in to effect, how will these impact VCTs and what is the outlook for the sector in 2016?
Interestingly, VCT fund raising for the current tax year is just slightly down from last year's strong levels, demonstrating confidence in the VCT industry this tax year. From 6 April 2015 to the end of January 2016, VCTs have raised around £150m which compares to around £165m in the equivalent time period from 6 April 2014 to the end of January 2015.
Today, the Association of Investment Companies (AIC) hosted a press roundtable lunch on the VCT sector with Dr Paul Jourdan, CEO of Amati Global Investors and Manager of Amati VCTs, Stuart Veale, Managing Partner of Beringea LLC and Manager of ProVen VCT, and Tom Thorp, Director, Foresight Group. Their views have been collated, along with those of Eliot Kaye, Director of Puma Investments and Paul Latham, Managing Director of Octopus Investments.
Navigating the rule changes
Stuart Veale, Managing Partner of Beringea LLC and Manager of ProVen VCTs said: "The changes to the regulations will have minimal impact on the ProVen VCTs, whose qualifying investment strategy has for the last seven years been focused exclusively on growth capital investing. The ProVen VCTs will continue to seek out UK SMEs with potential for rapid growth and provide them with the investment and management support they need to be able to take full advantage of their potential. Sectors of particular interest to the ProVen VCTs include digital media, software-as-a-service, disruptive online business models and branded consumer goods retailing."
Dr Paul Jourdan, CEO of Amati Global Investors and Manager of Amati VCTs said: "The need to achieve compliance with the EU state aid regulations has led to the most far-reaching changes to the rules since they began. Fortunately for investors in VCTs the responsibility for dealing with the much increased level of complexity rests with managers and Boards, and the products remain simple for the end user.
"We had anticipated a six month period of hiatus over the introduction of these rule changes, during which time the number of qualifying investments opportunities we would see would be much reduced whilst the new rules are digested, so both the Amati VCTs are around 85% invested in qualifying holdings right now, which is well ahead of where they need to be. As a result we are under no time pressure to make new investments.
However, we are confident that AIM will continue to be the destination for many of the best growth companies in the UK, and that we will be able to continue to invest in them early on through the VCTs, albeit that some of the deals we would have been able to do previously will no longer be available. There will also be situations where the VCTs can invest in a deal, but the amount they can contribute collectively will be much reduced. We will continue to play an active role behind the scenes to help new potential investee companies through the IPO process, and to support those we have already invested in, so that we fully expect that once the detailed workings of the new rules are fully understood, normal VCT and EIS activity will resume on AIM by the autumn."
Tom Thorp, Director of Foresight Group said: "The VCT sector remains a significant opportunity for Foresight to invest growth capital into excellent UK based SMEs with ambitious management teams. Foresight continues to build on its successful base of growth capital deals over the last 30 years. However, the landscape has changed for SMEs and their advisers with the recent VCT legislation changes in particular preventing investment in MBOs and in businesses over seven years old.
"We are seeing a wide variety of growth capital deals across the tech and more traditional industry sectors. The issue of no longer being able to support existing portfolio companies (that are not less than 7 years old or 10 years old in the case of knowledge intensive industries) is something we are working hard on, to assess possibilities in these specific situations. Clearly we would welcome adjustment to the VCT rules in time, to allow replacement capital deals to be included but in the meantime we continue to work hard to deploy existing VCT funds and new VCT fundraises that we are targeting over the coming three months."
Paul Latham, Managing Director of Octopus VCTs said: "While some VCT providers are tweaking their investment mandates to fit in with the new rules, others whose mandates fit the new legislation have announced large fundraises to tie in with this tax year end. VCT investors themselves are unlikely to feel much of an impact from the changes, as the legislation does not materially affect the way VCTs work. A VCT looks no different to investors and, crucially, the new rules don't apply to investments already made. Investors will still hold portfolios of what they hope will prove to be well-performing businesses, across a diverse range of sectors, which meet the VCT eligibility criteria."
Eliot Kaye, Director of Puma Investments said: "The much anticipated uptick in demand for VCTs following last year's pension reforms is coming to fruition. Savers looking to mitigate sizeable income tax bills on their pensions are helping to drive appetite for our current VCT offering, with fundraising up on last year. Combined with the continual need for funding into the SME sector, the future holds exciting prospects for the VCT industry. The sector is particularly adept at responding to regulatory changes, and while the ultimate impact of the new rules becomes clearer in the short term, VCT managers will continue to adapt in response to these changes. We are confident that we can continue to deploy capital and meet our investment objectives going forward."
Demand for VCTs
Stuart Veale, Managing Partner of Beringea LLC and Manager of ProVen VCTs said: "Private investors are turning to VCTs in ever greater numbers, attracted by the sector's strong historic performance, including regular tax-free income, enhanced by the initial 30% income tax relief. At the same time, many VCTs are having to adjust to the new VCT regulations, which mean that in future VCTs will only be able to provide growth capital to qualifying SMEs - MBOs have effectively been outlawed."
Paul Latham, Managing Director of Octopus Investments said: "VCTs have now entered their 21st year and as such are now a well-established initiative and a mature market. Investors are increasingly using VCTs to complement their existing portfolios and to take advantage of the tax incentives available, which we believe is demonstrated by the 74% increase in £50,000+ VCT applications Octopus received in 2015 compared to 2013. This also seems to be an indication that the government's recent efforts to address tax avoidance, has moved many investors towards government-approved schemes that are recognised as a vital source of funding to grow the UK economy."