What are “Venture Capital Trusts”?
Venture Capital Trusts (VCTs) are London Stock Exchange-listed entities that specifically invest in early-stage companies. The early-stage target investments generally have very high growth potential and are therefore considered risky investments. The target companies receive capital to grow their business and also benefit from expert advice from the VCT. VCTs are extremely tax efficient as they offer exemption from corporate taxes on capital gains that arise from their underlying holdings.
Key Learning Points
- Venture Capital Trusts are closed-ended investment vehicles listed on the London Stock Exchange and trade like equities
- VCTs invest in small and emerging companies that have the potential to grow rapidly. In addition to the funds, they can also offer guidance and advice to the management
- These are risky investments as they provide capital to companies that are just starting to develop and may have no other sources of funding
- VCTs are also tax efficient and may offer significant advantages to their investors over the long-term
What Do VCTs Invest In?
VCTs can be quite concentrated depending on their investment philosophy and a typical number of holdings ranges between 20 and 70, sometimes depending on how long it has been running. They invest in small or early-stage businesses that are either unquoted (private companies) or listed on the Alternative Investment Market, which is the London Stock Exchange’s market for growth companies.
VCTs also tend to focus on specific sectors or industries. For example, this could be as specific as renewable energy projects, the development of biotechnologies, or consumer brands. Therefore, the investment risk may be elevated by sector-specific events, for example, the introduction of new regulation, alongside broader market events.
What Is the Process Like?
Just like mutual funds, VCTs are run by portfolio managers who have the knowledge and experience in their area of interest. By pooling their money into these companies, investors dedicate their money to these managers to make decisions on their behalf and in return benefit from potential profits.
Due to being high-risk investments, VCTs are generally deemed to be appropriate for experienced investors who have large investment portfolios and higher risk tolerance.
In addition, there are certain criteria that must be met by a fund in order to be considered as VCT. Some of these include being listed on a major exchange in the United Kingdom (LSE) or investing in companies that have no more than 250 employees.
While having an important role in the economy by supporting emerging companies and facilitating growth, VCTs also offer significant tax advantages. For example, when purchased at launch or during subsequent issuance of shares, investors benefit from up to 30% tax relief on their VCT subscriptions of up to a maximum of £200,000. However, this is subject to holding the investments for a minimum of five years. Further advantages include no income tax on dividends and no capital gains tax.
Should there be a purchase after the shares are listed on the LSE, there will be no tax relief on the purchase, but the other benefits remain the same.
Below is a multiple-choice question to test your knowledge, download the accompanying excel exercise sheet for a full explanation of the correct answer.