Venture Capital Trusts: Investment Opportunities January 2019

Venture capital trusts: investment opportunities January 2019

A venture capital trust (VCT) is a collective To benefit from all the tax advantages, you must hold investment scheme, similar in structure to an a VCT for at least five years. After this time, the VCT investment trust. VCTs offer significant tax could be sold via the stock market. However, there reliefs to individuals who are prepared to invest is no guarantee that a buyer would be found and, indirectly in a range of smaller, unquoted, higher- as such, VCT investments can be very illiquid. Even risk trading companies. where the funds are listed, they are usually structured as investment trusts and are likely to be trading at a Here are our views on the current round of discount to net asset value (NAV) - and NAV itself is an fundraising in the VCT market. The generalist is inexact science for unquoted companies. the most popular style of VCT again this time. Although VCT shares are fully listed on the London Stock Exchange, there is very little buying and selling There is always a risk that the launch of a VCT will because most shareholders face a tax penalty by not attract enough funds. The VCT will then either not selling early. Accordingly, very few shares are actually go ahead or will be such a small fund that expenses traded. Dealing spreads are often wide and there is have a disproportionate effect on the returns. We have only one market maker for some shares. borne this in mind when making our selection. Most VCTs have powers to repurchase shares in the event of a large seller or an excessive discount arising. Summary of VCT tax benefits: Some VCT managers have been much better than others at ‘managing the discount’. • Individuals aged 18 or over can obtain income tax relief of 30% on contributions up to £200,000 per We have described three of the more attractive tax year in newly issued ordinary shares in VCTs. schemes that are currently available on the following pages. Each of these VCTs invests in a different • Investors can only reclaim tax that they have paid. way, although the fundamental characteristics are • Income tax relief is withdrawn if the shares are similar. These schemes are also highly rated by other disposed of within five years (exceptions apply on independent analysts. transfer to a spouse and on death). • Individuals are exempt from capital gains tax (CGT) on purchases made up to the £200,000 level For more information, read our quick when they dispose of their VCT shares. There is no minimum holding period to qualify for this guide to VCTs, EIS & SEIS. CGT exemption. • Dividends paid by VCTs are free from any additional income tax, although the notional 10% suffered at source is non-reclaimable.

Whilst the tax benefits are attractive, your motivation for considering VCTs should be the opportunity to invest in new and innovative companies, not solely the tax breaks.

1 Further changes were announced as part of the Autumn Budget on 22 November 2017, which apply What types of business can a to new qualifying investments made on or after 6 VCT invest in? April 2018. New investments made through EIS, seed enterprise investment schemes (SEIS) and VCT must satisfy a ‘risk-to-capital’ test. This test is based on an • VCTs are not able to buy existing assessment that an investee company plans to grow businesses, nor use a new company and develop, and that investors have a significant risk as a basis for consolidation of of capital loss. existing firms. The rules for VCTs are more detailed. Loans to investee • VCT money cannot be used to companies will have to be unsecured and will be acquire shares in another company assessed to see whether they carry a commercial return. From 6 April 2018, certain rules that historically provided or the trade of another company more favourable conditions for some VCTs have been (including goodwill and removed. Since then, VCTs are required to invest at least other intangibles). 30% of funds raised in qualifying holdings, within 12 months of the end of the accounting period in which the • Companies must be under seven funds were raised. Further legislation takes effect from years old (with certain caveats). 6 April 2019. The percentage of funds VCTs must hold in qualifying investments, within three years of raising • There is a lifetime investment limit funds, will then increase from 70% to 80%. The period (per company) of £12m (£20m for VCTs have to reinvest gains will also be doubled from 6 knowledge-intensive companies). to 12 months.

We suggest acting promptly if you are considering VCT or EIS investment for the current tax year. Fundraising targets are lower than normal as companies get to The primary reason for considering VCT investment grips with the new regulations. should be a desire to invest in small companies with ambitious business models and innovative products that will inevitably be high-risk investments. Before reading ahead, please note that this information Whether listed on an exchange or currently unlisted, is provided as a ‘direct offer’ promotion. This means investments are hard for the manager to sell, and that, although clarity is offering product-specific any decision to invest should normally be made for selection, we are not testing the suitability or the long term. Listed share prices are often volatile, affordability of a VCT for your individual circumstances. and there may be no buyers if a VCT company’s We can only do this as part of our individual advice performance is disappointing. service. If you would like to speak with an adviser about whether VCT investment is appropriate for your On the plus side, investment returns can be highly needs, please contact your usual clarity adviser or impressive, and VCT management teams usually have email [email protected]. many years’ experience of managing this sort of investment. Please contact us if you would like an application form to invest in any of the following VCTs. You can also Remember, VCTs are fairly high-cost vehicles. They apply directly to the VCT provider, should you wish. usually invest in tiny companies and, historically, However, please note that only applications returns have often been disappointing for investors. submitted via clarity will benefit from the It is, however, an interesting period for this type of charge discounts we have negotiated. investment at present. With banks still reluctant to lend, venture capitalists often have the pick of investment opportunities.

2 Octopus Titan VCT If investing through clarity, the scheme carries an initial charge of 3% and annual fees of 2% (discounted from This is a top-up offer for the VCT that was formed 5.5% and 2.5% respectively), with a lower charge on in November 2014 from the merger of Octopus uninvested cash, plus fixed monetary amounts. Titan VCTs 1-5, with net asset value of £425m and There is a discount of 1% for existing shareholders in investments in around 50 companies. any of the Octopus VCTs.

The managers are currently seeking £120m-£200m In addition to annual fees, a performance-related fee is funding and the minimum investment is £3,000. There likely to apply. is no longer a monthly contribution option, as this was little used. Potential investors should be aware that a VCT targeting early-stage companies is inherently more risky than The fund aims to invest in early-stage companies that those investing in more mature businesses and that have the potential to deliver a 5- to 10-times return returns may not compensate for the additional risk. on investment, with follow-on investments funding development and growth capital. The dividend target is Full details can be found at: 5p per share, with the potential for special dividends in https://octopusinvestments.com/investor/our-products/ addition, typically following significant realisations from venture-capital-trusts/octopus-titan-vct/ holdings. In a relatively recent change to the company’s To request an application form, please email Articles of Association, it may now borrow up to 50% of [email protected]. its net asset value to make investments, although it has not yet used this facility.

Two aspects distinguish this VCT: Albion VCTs

1. the focus on early stage, expansion and Albion Capital manages VCTs with total net asset development investments value of £400m. This offer provides top-up access to the six VCTs: 2. the Octopus Venture Partners approach to investing • Albion VCT Octopus Venture Partners are a group of entrepreneurs and business angels who introduce investment • Albion Enterprise VCT opportunities, assist with due diligence and offer • Albion Development VCT support to the companies within the VCT, although • Albion Technology & General VCT they no longer co-invest. • Crown Place VCT The Octopus Titan VCT is managed by a very well- resourced and experienced team. Although we • King’s Arms Yard VCT consider the charges to be relatively high, including The minimum investment is £6,000 (either equally a performance fee whose hurdle has already been spread across the VCTs or in specific VCTs, subject to achieved, and the scheme to already hold a large a minimum of £1,000 in each). amount of cash awaiting investment, we believe its strategy and focus to be unique. We suggest spreading the investment equally across all six funds. Taking this option, Albion targets a monthly tax-free income yield of 5.5%. This offer targets fundraising of £36m across the six VCTs.

Through investment in all six VCTs, clients will have exposure to around 70 unquoted UK smaller companies, in most of which a number of Albion VCTs have invested.

Investors for the first £10m whose applications are received at Albion by 2pm on 28 February 2019 will receive a discount (see page 4 for details).

3 Existing shareholders in any of the Albion VCTs will Maven VCTs receive a 1% discount. New investors will receive a 0.5% discount. Maven Capital Partners is a specialist private equity The scheme carries an initial charge of 2.5%, plus manager and runs six VCTs. This is the eighth linked annual costs capped at 3%. In addition to annual fees, issue in the last ten years and the current offer from a performance-related fee is likely to apply. Maven provides top-up access to two established VCTs:

Full details can be found from the link: 1. Maven Income & Growth VCT https://www.albion-ventures.co.uk/investor-center/ 2. Maven Income & Growth VCT 5 current-offers. The minimum investment is £5,000 (either spread To request an application form, please email across the two VCTs, subject to a minimum of £1,000 [email protected]. in each, or in one specific VCT).

We suggest spreading the investment equally across both funds.

The Maven team includes over 25 private equity professionals with more than 200 years’ combined investment experience located in 10 offices around the UK. They hope to raise £30m-£40m and this offer will close for the 2018/19 tax year on 3 April 2019. Maven has a strong pipeline of new transactions and the funds raised will enable the VCTs to expand the number and range of investments in order to further diversify the portfolios, whilst also reducing the total expense ratio by spreading costs over a larger asset base.

As a result of the recent changes in VCT regulations, the quantum and timing of dividends is likely to be less predictable than in the past and more closely linked to realisation events. These two Maven VCTs have achieved exit multiples of up to 6.5x since January 2015. Since 2009, Maven and its staff have invested over £4million in the Maven VCTs, and senior members of the Maven fund management team intend to invest at least £335,000 in aggregate in these offers.

The scheme carries an initial charge of 2.5% together with annual fees of 2.5% plus fixed monetary amounts. There is the potential for a performance fee under specified conditions.

Full details can be found from the link: https://www.mavencp.com/investment-opportunities/ venture-capital-trusts/current-vct-offer

To request an application form, please email [email protected].

4 Risk warning: VCT investment Commissions and Fees

This warning notice draws your attention to the risks For the VCT offers outlined in this document, clarity will associated with investments in VCTs. make a one-off charge of 2% to cover research and administration, which will be paid from the amount Because this investment may go down in value as well subscribed. Where introductory fees greater than this are as up, you may not get back the full amount invested. available, the remainder will be rebated in the form of additional shares. Although the VCT is or will be quoted on the Stock Exchange, many of the investments made by the VCT are not quoted on any market. These unquoted Next steps investments carry a higher risk than those quoted and it may be difficult to obtain reliable information about If you are considering investing in any of the VCTs their value or the extent of the risks to which the VCT outlined in this document, you have two options: is exposed. 1. Direct Offer Transaction If the VCT shares are sold within five years any income Assuming you are happy to make your own decision tax relief obtained at outset will be forfeited. as to risk, suitability and affordability, then please The tax reliefs that currently apply to VCTs are, like all request a copy of the respective application pack(s) by tax legislation, subject to change. emailing: [email protected].

You should not subscribe to a VCT until you: 2. Advice

(a) have read and understood the terms and conditions If you have any questions, please do not hesitate to of the scheme particulars; and contact your usual clarity adviser on 0800 368 7511 or email [email protected]. (b) are aware of the risks involved in such shares and such schemes.

For more information, read our quick This investment is considered to be speculative and could involve considerable fluctuations both up and guide to VCTs, EIS & SEIS. down in value. Before investing you must read, sign and return our VCT risk warning notice. We can’t process your application without it.

The past is not necessarily a guide to future performance. The value of your investment and the income from it can fall as well as rise and is not guaranteed. This investment is considered to be speculative and could involve considerable fluctuations both up and down in value. You may not get back the full amount invested. Our views are based upon our understanding of current legislation in England and Wales. Levels and bases of, and reliefs from, taxation are subject to change and their value to you will depend upon your personal circumstances. You should not act on any of the information without seeking professional advice. clarity Ltd is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate all types of pension, mortgage or taxation advice.