Puma Investments completes a record fundraise and deployment of funds in a bumper year for VCTs.
Originally featured in IFA magazine, David Kaye talks about how 2022/23 tax year was a difficult period for advisers and clients due to market declines, but a successful year for Venture Capital Trust (VCT) fundraising.
The 2022/23 tax year was - for many advisers and their clients - tough going. Both global bond and equity markets suffered steep falls, which dealt a blow to those holding traditional 60/40 portfolios that rely so heavily on the hedging properties of bonds to protect against falls in equity prices. (1) Yet despite the ongoing turmoil, it proved to be another strong year for VCT fundraising.
Another bumper year for VCTs
According to data from the Association of Investment Companies (AIC) £1.08 billion was raised – the second highest sum on record 2. Demand for VCTs shows no signs that it is abating, despite VCTs being clearly positioned as ‘riskier’ investments. Whilst it is fair that VCTs are considered to be specialist high risk investments given they invest in small companies with shares that are illiquid, they remain a pooled investment vehicle and bring with them other benefits that are proving attractive to clients. So why have VCTs been resilient in the face of the choppy macro waters?
First, VCTs are a way for retail investors to access private equity investments into growing British businesses, historically the preserve of institutional investors. And through a fund listed on the LSE, bringing with it all the benefits of the rigour and transparency that comes with being a listed fund. First introduced in 1995, the objective was to encourage retail investors to make equity investments in UK SMEs, the backbone of the UK economy. The schemes have been a huge success, creating 1000s of jobs and tax revenues for the Exchequer. Whilst a higher risk investment, there is the opportunity to generate strong income through dividends and material capital gains where managers identify and support successful growth businesses.
Second, VCTs are a way for clients to invest their money tax efficiently, particularly where they have maximised contributions to both ISAs and pensions. And whilst pension contribution limits have risen (both the annual and lifetime limits have changed) there has been a reduction in the annual capital gains tax (CGT) exemptions as well as dividend allowances, making investments outside tax wrappers less attractive. Against this backdrop, VCTs offer tax free dividends, tax free capital gains as well as 30% income tax relief on investments up to £200,000.
This year, 27 share offers were open 3 – the same as the previous tax year – but a number were seeking increased funding. Octopus Titan – the UK’s largest VCT raised £237 million and there were six others that raised £50 million or more: our own Puma VCT 13 being one of them, raising £50 million.
What does the next VCT season hold?
The most recent fundraise was the second highest sum on record so it begs the question as to whether VCTs will continue to be such a desirable investment option next season?
Following the dividend and capital gains tax allowances being cut at the start of this tax year as mentioned above, advisers will be looking to find alternative options to help their clients invest tax efficiently. VCTs are one such option and we’d expect offers to be popular again next year with investors and clients who are prepared to take on some risk.
Furthermore, while the lifetime allowance limit removal provides another effective way for those saving into a pension, there are clearly question marks around its long-term future if Labour is to come into power – and advisers and clients alike will be conscious of this. In addition, VCTs are popular with higher earners who are more restricted with what they can save into their pension on an annual basis, notwithstanding the removal of the lifetime limit.
With VCTs also continuing to be important to the economy, providing essential capital for companies looking to scale their business, in turn creating jobs and supporting growth across the UK, another year of strong investments will be beneficial to many.
Investments need to be held for at least 5 years to qualify for income tax relief. Tax reliefs are not guaranteed, depend on Individuals personal circumstances and a five-year minimum holding period, and may be subject to change. Individuals' capital may be at risk. Past performance is no guarantee of future returns. Tax benefits are subject to change and depend on the individual’s circumstances.