Venture Capital Trusts Industry Report Disclaimer Publication

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VENTURE CAPITAL TRUSTS INDUSTRY REPORT DISCLAIMER PUBLICATION

This report is provided for general The information has been compiled information purposes and for use from credible sources believed only by investment professionals to be reliable, however it has not and not by retail investors. been verified and its accuracy and completeness are not guaranteed. Reliance should not be placed on the information, forecasts and opinions set The opinions expressed are those of out herein for any investment purposes Intelligent Partnership at the date of and Intelligent Partnership will not accept publication and are subject to change any liability arising from such use. without notice.

Welcome to the second edition of the annual VCT Industry Report

We know that advisers are increasingly interested in VCTs. It will Editorial be no surprise to any of our readers that our market research Daniel Kiernan found that lower limits on the amounts that can be saved in Lisa Best pensions are starting to have an impact. Advisers looking for alternative tax efficient investments have naturally turned to VCTs. Ryan Zeng

We also know that the amount of funds raised through VCTs has continued to increase: from a low of around £200 Creative million in 2008 to consistently raising £435 to £440 million Mar Alvarez over the last three tax years. However, this year is proving to be different. VCTs are still digesting the money they raised over the last few years, and the rule changes announced in Sub-editing 2015 mean that the universe of potential investments has shrunk. Therefore, fewer VCTs are raising, and most of those Daniel Kiernan that are raising are seeking relatively small amounts. Lisa Best Ryan Zeng What does this mean for advisers? Well, advisers who want to use VCTs for tax planning purposes this year will need to be quick – or perhaps more accurately, they will need Research to be prepared. Carrying out research and due diligence on providers and open offers, finalising investment panels Lisa Best and shortlists and identifying suitable clients early on will Ryan Zeng mean advisers can secure the investments they favour. Alan Sheehan This report should form part of that preparation. It won’t replace Adrian Scales the product specific work that is required, but it will quickly bring Katie McCarthy readers up to date on the sector, the changes to the rules, issues to be mindful of, and which new offers are coming to market.

Marketing There’s also a campaigning element to our work: we believe that by surfacing some of the issues that exercise advisers – such Michelle Powell as transparency around charges for example – and collating data on them, we will make the market more transparent and consequently more responsive to what advisers want. Print Palina Limited Taken together, the market update, adviser survey and industry analysis will all help advisers to develop an informed opinion on the VCT sector, and feel confident that their research has covered the whole of the market.

I hope you find the report useful and informative, and that it continues to be an important resource for you over the next twelve months.

GUY TOLHURST Managing Director Intelligent Partnership

INTRODUCTION MARKET UPDATE ADVISING ON VCTs

03 FOREWORD 06 OPENING STATEMENT 07 KEY FINDINGS 08 REPORT OVERVIEW 17 DEVELOPMENTS IN VCTs 35 CONSIDERATIONS FOR ADVISERS 09 EXECUTIVE SUMMARY 18 VCTs’ IMPACT 37 CLIENT CASE STUDIES 11 OVERVIEW OF VCTs 23 FUNDRAISING OUTLOOK 38 DUE DILIGENCE & 12 TYPES OF VCT 26 THE IMPACT OF POLICY SUITABILITY CHANGES 13 WHY CONSIDER VCTs 39 TYPES OF VCT 30 VCT vs EIS 14 PERFORMANCE 40 OVERCOMING THE PII 32 REGULATIONS OBJECTION 15 SMALLER COMPANY INVESTING 33 CONCLUSIONS 40 CONCLUSIONS

* Please note: unless otherwise stated, all charts and graphs have been provided by Intelligent Partnership

Intelligent Partnership is committed to the very highest professional standards as embodied by its accreditation and membership to these industry associations.

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MARKET RESEARCH INDUSTRY ANALYSIS FINAL CONCLUSIONS

56 TERMINOLOGY 57 OVERALL MARKET 71 REPORT CONCLUSIONS 42 ADVISER SURVEY 60 CONCLUSIONS 72 USEFUL ORGANISATIONS 45 ADVISER ROUNDTABLE 62 MANAGERS IN FOCUS 73 POLICY CHANGES 48 INDUSTRY ROUNDTABLE 67 VCT COMPARISON TIMETABLE 54 CONCLUSIONS 69 PROVIDER DIRECTORY 74 CPD AND FEEDBACK

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5 OPENING STATEMENT A WORD FROM THE ASSOCIATION OF INVESTMENT COMPANIES

Access to patient capital is vital for the investment companies by advisers UK’s dynamic smaller businesses, and have almost tripled since the RDR, and LEARNING OBJECTIVES VCTs have been a natural home for the average investment company is patient capital since their inception currently outperforming the average We are required to state these in over 20 years ago. The closed-ended unit trust over one, three, five and ten order to qualify as accredited for structure provides the ideal vehicle for year periods. Structured CPD. By the end of the longer-term finance for companies, report readers will be able to: Reductions in the amounts that and the generous tax reliefs help offset can be saved in pensions have also Describe how recent rule changes some of the risks investors face in this encouraged advisers to consider VCTs, have impacted VCTs sector. with higher earners and those who Identify the latest VCT offers VCTs boost the UK economy by are close to maximising their pension raising money, and describe how providing vital finance and expertise allowance looking for tax efficient this year’s open VCTs compare with and stimulating high levels of job alternatives. Upfront tax relief, and previous years’ offers creation. VCT-backed businesses have tax-free growth and income, mean high levels of innovation and significant that many advisers are turning to VCTs Benchmark current VCT offers levels of exports, indicative of their to supplement their clients’ pension against each other and against potential value to the UK economy. saving. previous years, based on key Moreover, VCTs are good value for investment criteria such as cost, Furthermore, now that the sector taxpayers, as our research shows that target returns, liquidity and has had time to digest the changes investee companies contribute more in minimum investment levels, and be to the rules that were made last year tax than the cost of the initial tax relief. able to break this information down to ensure ongoing compliance with by VCT type and sector In our recent survey of 409 companies European State Aid rules, we should be that received VCT investment, we found in for a period of regulatory stability. Explain what VCTs are to their that over 20,000 new jobs had been This will mean that VCT managers will clients created across the country by these be able to get on with what they do List the different tax advantages firms, with an average of 60 jobs per best: investing in dynamic small UK that are available investing in VCTs company since VCT investment. Where companies. Carry out due diligence and VCT investment had been in place for All of this means that there is a positive assess the potential risks and over five years the average increase in backdrop for the VCT sector. However, benefits of VCTs jobs was 103 per company. the signs are that fewer VCTs will be Identify clients and investment In 2015, VCTs participating in our raising money this year than in the objectives where VCTs could be survey provided £225 million in recent past, and demand might well suitable finance to 115 smaller companies, split exceed supply. Advisers and investors primarily between business services, will need to be ready and prepared digital, creative and information in order to secure the investment services and retail and manufacturing. opportunities they want. Therefore It was also another successful year for we encourage advisers who are new fundraising, with VCTs raising £457 to VCTs to read this report and make million in the tax year 2015/16, the use of the educational materials on third highest total ever and proof of the AIC website, www.theaic.co.uk; and their ongoing popularity. for advisers who are more familiar with VCTs, we think this document will Advisers are also getting increasingly provide a useful refresher and serve as familiar with VCTs and investment useful reference material for the next companies. Purchases of shares in twelve months.

IAN SAYERS, Chief Executive, The Association of Investment Companies (AIC)

6 KEY FINDINGS HIGHLIGHTS FROM OUR RESEARCH

COMPETITION

DECREASES SUPPLY with 25% fewer VCTs in 2015 raising the same DEMAND amount of money as in 2014 2016’s demand for VCTs may 20,000 NEW JOBS well outstrip supply, leading created by VCT-backed companies to a capacity crunch

RULE 38 CHANGES £4,545 VCT INVESTEE COMPANIES AVG MINIMUM SUBSCRIPTION on average more are having an impact. All for 2016 VCTs raising funds diversified than VCTs launched this year are in 2016, £103 less than the historical VCTs Growth & Income funds historical average

AVERAGE R&D 2016’s FUNDRAISING 7/10 OF ADVISERS £181 MILLION is higher than believe that VCTs happily coexist historical VCTs, alongside ISAs and pensions 75% of VCT-backed but max value is companies had significantly undertaken some lower VCT ISA PENSION form of innovation

1/3 CHARGE EXIT PERFORMANCE FEES 82% OF ADVISERS while only 13% of historical recommend VCTs to their VCTs quoted the fee 64% clients OF ADVISERS see their use of VCTs increasing over the next two years

7 REPORT OVERVIEW WHAT CAN READERS EXPECT?

This report has been written with Read our Manager Roundtable say any errors or omissions are down advisers in mind. We want to provide Discussion to see what the fund to us. our readers with a balanced and managers themselves have to say We have relied upon MICAP for the informative review of the current about the current state of play within data we have based the report upon. state of play in the VCT market, so the VCTs, what impact Brexit might have MICAP are part of the same group of report will cover negatives as well as on the market, whether advisers companies as Intelligent Partnership. positives and therefore it is NOT sales should be concerned about the recent We also carried out our own extensive or marketing literature. legislative changes and whether there desktop research, examining is enough capacity in the VCT market The report comprises a summary brochures, investment prospectuses, to meet demand of the VCT sector, an update on the mystery shopping providers and market today, tips on how to advise Learn more about research and crawling through the websites to on VCTs, an analysis of current due diligence on VCT funds and client verify their product data. investment opportunities, and suitability in our special Advising On... The report is made possible by our surveys and interviews with both section, which includes several client sponsors, who have contributed IFAs and investment providers to get case studies. copy to the report on pages 62 to 69 a temperature check on how they We strike a balance between and supported us by helping to meet perceive the sector. We don’t expect covering old ground for the benefit production and printing costs. readers to pick it up and read it from of new readers, and looking at new cover to cover (although we’d love So a big thanks to: Amati Global developments and interesting areas it if you did). Instead we expect that Investors, Beringea, Calculus Capital, that we haven’t covered before. most people will dip in and out of the Downing, Octopus Investments and New readers who want more depth report, picking out sections of interest Pembroke VCT. on some of the basics, such as the and using it as a resource over the benefits of a portfolio approach or next twelve months whenever they how to carry out due diligence, should are considering VCTs. download copies of previous reports All of this content is CPD accredited, to find more detail. so by the end of the report readers will be better informed about VCTs ACKNOWLEDGEMENTS AND and have the knowledge they need to THANKS approach the market with confidence. We couldn’t do this without the help Readers can expect to: and support of a number of third parties who have contributed to Find out what their peers are thinking writing this report. Their contributions by reading the Market Research section. range from inputting into the scope, Intelligent Partnership surveyed 124 sharing data, giving us their insights advisers to find out what they thought into the market, providing copy and was good and bad about VCTs, and peer reviewing drafts. Some of them hosted a roundtable discussion to have inputted directly and some of discover how some of the most active them were good enough to share their advisers use VCTs with their clients thoughts and ideas over coffee or at KEY SECTIONS Use the Industry Analysis to help various conferences and events. Advising on VCTs page 35 them benchmark open offers against So a big thanks to: Ian Sayers of the each other based on key investment Market Research page 42 AIC, Gillian Roche-Saunders from criteria such as costs, target returns, BWB, Brendan Llewellyn from Adviser Industry Roundtable page 48 liquidity and minimum investment Home and all of the advisers who levels Industry Analysis page 56 took the time to stop and chat after Managers in Focus page 62 Evaluate the latest open offers in the one of our events or who sent us market, and see how they compare to feedback on the last report. Their VCT Comparison Table page 67 each other and to previous years input is invaluable, but needless to

8 EXECUTIVE SUMMARY HIGHLIGHTS FROM OUR RESEARCH

1 ADVISERS ARE POSITIVE ABOUT VCTs

According to our survey, 82% of advisers recommend VCTs, up from 67% last year. A quarter of those advisers recommend VCTs “frequently”. 64% of advisers expected their use of VCT to increase over the next two years. When we followed up, most respondents cited lower pension limits as the driver for their use of VCTs.

2 THE RULE CHANGES ARE HAVING AN IMPACT

In last year’s report we described the rule changes to VCTs in detail. This year we are seeing the effect of those rule changes on fundraising. With a smaller pool of potential opportunities to invest in, and plenty of money left over from previous fundraising, it appears that the sector will raise less than the £430 to £440 million raised in each of the last three tax years. All of the VCTs that have announced fundraising so far have been growth focused VCTs: the more conservative funds with a business model based on supporting management buy outs are unlikely to raise money this year.

3 CAPACITY CRUNCH

You don’t need a master’s in economics to read the two points above and spot the difficulty: demand may well outstrip supply, leading to a capacity crunch. Advisers and investors who want to invest in VCTs this tax year need to be well prepared from the earliest possible stage in order to be ready to move quickly and grab the opportunities they favour. There’s a certain amount of this rhetoric from providers every year as they try and get their sales under way – “buy now while stocks last” – but this year it looks like it could be true.

4 VCTS ARE EFFECTIVE

The Government – in fact every government over the last few decades – is keen to support small businesses and sees the UK’s tax advantaged venture capital schemes as one of the keys to achieving that objective. Prominent politicians from both of the main parties have voiced their backing for the UK’s tax advantaged venture capital schemes. The evidence justifies this support: HMRC concluded in February 2016 that the VCT scheme was working as intended where it was used (“The Use and Impact of Venture Capital Schemes”, HMRC Research Report 355, February 2016).

9 “VCTs boost the UK economy by providing vital finance and expertise and stimulating high levels of job creation.” – Ian Sayers, The AIC

5 IT’S TOO SOON TO SAY WHAT THE IMPACT OF BREXIT WILL BE

On the one hand, Brexit might – and note it is only “might” – give the Government the opportunity to rewrite some of the changes to the VCT rules that were imposed by the EU. On the other hand, an economic slowdown or less access to EU markets might – and again, this is only “might” – have a negative impact on the UK SME sector. At this point in time, it’s too soon to say anything definitive.

6 IS COMPETITION DECREASING?

There is a short term trend of fewer providers raising money, and the nature of VCTs means that investors inevitably favour established funds over new entrants as they can buy into an existing portfolio and income stream. If the trend continues, the balance of power in the market may shift to favour providers over consumers.

DEFINITION OF TERMS

INVESTMENT TRUST: A UK domiciled company formed with the express purpose of investing in other companies.

INVESTMENT COMPANY: As above, but domiciled outside the UK (for example, in the Channel Islands). The two terms are often used interchangeably.

VENTURE CAPITAL TRUST: A special type of investment company which primarily invests in earlier stage companies than most conventional funds, and has significant tax benefits for its investors.

All three are listed, closed ended funds, and therefore the share price is determined by demand for the shares and may be higher (trading at a premium) or lower (trading at a discount) than the value of the underlying investments (net asset value, or NAV).

Another major distinction of investment trusts/investment companies is that investors are shareholders in the trust (rather than customers of the investment manager, as is the case with OEICs and Unit Trusts), and their interests are looked after by a board of governors who appoint the investment manager.

10 OVERVIEW OF VCTs WHAT’S CHANGED AND WHAT MIGHT THE FUTURE HOLD?

In this section we will provide an Investors are shareholders in Readers should note that the Income overview of VCTs and the latest an investment trust, which is a Tax relief is only available on primary changes to the rules around them. collective investment overseen by issues of VCT shares, and VCT This year’s report puts less emphasis an independent board and run by an investments have to be held for a on the tax benefits and history of investment manager who allocates minimum of five years. If the shares VCTs as these were covered last the investment funds to small are disposed of earlier than the year. Instead this edition focuses on businesses on behalf of investors (the minimum five-year period, any initial new developments in the sector and shareholders). They are governed by Income Tax reliefs will be clawed back updates on statistics of the market. regulations that define the sorts of by HMRC. Readers who want more depth on the underlying investments they can make The Income Tax relief can be claimed “what” and “why” of VCT investments and are subject to UK Listing Authority by completing the SA101 additional should refer to the 2015/16 VCT rules. information form issued by HMRC Report (available for download on the along with the standard self- Intelligent Partnership website) which TAX RELIEFS assessment form. The investor needs covered the background to VCTs in There are three major tax reliefs: to enter the total value of the VCT greater detail. investment on the form, and then the Income Tax relief of 30% WHAT ARE VCTs? amount of tax they have to pay will be Tax-free dividends reduced accordingly. A Venture Capital Trust (VCT) is a type Tax-free capital gains Alternatively, investors who pay their of investment trust launched by the tax by PAYE can request a change of Government in 1995 to encourage The Income Tax relief is usually the their tax code by writing to HMRC, investment into UK SMEs by offering most appealing benefit to investors. reducing the amount of tax they pay investors Income Tax relief and A £10,000 investment in a VCT would each month. Investors who do this favourable tax treatment on dividend remove £3,000 off the investor’s will need to include their national payments and capital gains. However, income tax and the relief is paid up insurance number, a P60 form if they investors are not the only beneficiaries front. The relief can also be claimed have one and a copy of their VCT tax of the scheme. What is perhaps against both earned and unearned certificate. more meaningful is the significant income (such as rental income from contribution that VCTs make to the a property). Investors can purchase Although there is an active secondary UK economy by providing finance to a maximum of £200,000 VCT shares market for VCTs, purchases made on smaller businesses. These small and per tax year to offset their Income Tax the secondary market will not qualify medium sized enterprises (SMEs) bill, meaning the maximum Income for Income Tax relief. However, shares would otherwise find it difficult to Tax relief one can achieve is £60,000 purchased on the secondary market raise money from traditional sources a year. More shares can be purchased would count towards the £200,000 such as banks; something that has in any given year, but an amount in annual allowance and can still receive been difficult since the financial crisis excess of £200,000 would not qualify tax-free dividends and capital gains. more than eight years ago. for Income Tax relief.

VCT TAX RELIEFS

RELIEF RATE OF RELIEF MIN. HOLDING PERIOD RELIEF OF SECONDARY MARKET PURCHASES?

30% of the value of subscriptions INCOME TAX RELIEF 5 YEARS NO for newly issued shares in a VCT Dividends are not subject to TAX-FREE DIVIDENDS income tax and do not need to be NONE YES shown on investors’ tax returns 100% Capital Gains Tax exemption TAX-FREE GROWTH NONE YES on disposals of VCT shares

11 TYPES OF VCT FOUR TYPES OF VCT

Depending on underlying GENERALIST VCTs investment, investment strategy and sector, there are Generalist VCTs focus on investing in a broad range of unquoted companies. The management identify small companies looking for investment that they four types of VCT provided by think have excellent growth prospects and this can be viewed as a private managers. Although all four equity style investment. Their strategies can vary. Some invest in early stage types of VCTs are structured companies, providing ‘development’ or ‘expansion’ capital and seeking high returns. Others will use a mixture of loans and equity, looking for more secure as investment trusts and are opportunities, or possibly asset backed opportunities, and sacrificing potential governed by the same set of returns in exchange for lower levels of risk. Others simply look for larger, better rules, the investment metrics established firms to invest in, with less risk and a more stable return profile. can be significantly different across different types. We will LIMITED LIFE VCTs explore this in more detail in the Industry Analysis section. Limited Life VCTs, also known as Planned Exit VCTs, aim to wind up and return cash to their investors soon after the five-year minimum holding period. These tend to be more conservative funds with a focus that is as much about capital preservation as it is about growth, and for this reason they may use loan notes in conjunction with equity investment.

AIM VCTs

As the name suggests, AIM VCTs focus on investing in companies that are listed on the Alternative Investment Market, the junior market to London Stock Exchange. These VCTs are closer to traditional stock market based funds. AIM VCTs are the most liquid and most diversified among the four types of VCT, with some AIM VCT managers holding 70 to 90 companies in their portfolios.

SPECIALIST VCTs

Specialist VCTs operate in the same way as Generalists, but focus on investing in niche areas where the management team has extensive experience. Specialist VCTs generally focus on a particular industry, with the most common ones being Media & Entertainment, Industry & Infrastructure and Renewable Energy. As Specialist VCTs are highly specialised in a certain area, they are generally less diversified than Generalist VCTs.

Readers should note that Generalist VCTs and AIM VCTs are not mutually exclusive to each other because AIM VCTs generally invest in a broad range of sectors (which are equivalent to the definition of Generalist VCTs). In addition, there are VCTs that hold both AIM companies and unquoted companies in their portfolios. For example, the Baronsmead VCT as at 31/3/16 had AIM traded investments of £63m and unquoted stocks of £53m.

12 WHY CONSIDER VCTs POTENTIAL BENEFITS

Obviously the tax benefits associated DIVERSIFICATION with VCTs provide a great incentive Historically, smaller companies have KEY FACTS for investing, but as with other tax shown they do not move in lockstep efficient investments the investment with values of larger companies. Instead case doesn’t stop at tax reliefs of moving closely with the economic 6/10 (and shouldn’t start there either). cycle that larger companies do, smaller Supporting UK small companies, PEOPLE ARE EMPLOYED companies’ performance tends to lead gaining venture capital exposure and BY SMEs or lag the economy for a period of time. diversification benefits all contribute It is also worth noting that while VCTs’ to a strong investment case for VCTs. share prices correlate with the markets, SMALL COMPANY INVESTING the NAV of VCTs and their dividend 20,000 payments do not. This means investors NEW JOBS HAVE BEEN There is a strong investment case can potentially add extra diversification CREATED THANKS TO for investing in smaller companies. to their existing portfolios by investing THESE SMEs Despite the risks, these companies in smaller companies. have greater potential to generate much higher percentage returns SUPPORTING UK PLC than established corporations as The next reason for investing in £1.19 million their business models are untested smaller companies is less about the and often undervalued, so there are AVERAGE SPENT ON investment merits for investors and more opportunities for investment R&D. 75% OF VCT more about the contribution to the managers to identify bargains that can BACKED COMPANIES wider economy. Small business is then turn into household names. HAVE UNDERTAKEN R&D a crucial part of the UK economy, accounting for 99.3% of all private GROWTH VCT investments effectively promote sector businesses, and employs a total SMEs, research and innovation. Without Small companies can offer significantly of 15.7 million people, representing venture capital schemes like VCTs, many higher returns than quoted companies 60% of all private sector employment small businesses in the private sector in the mainstream market. From in the UK. The combined annual would not be able to grow. November 2015 to November 2016, turnover of SMEs was £1.8 trillion Generalist VCTs have generated a in 2016, 47% of all private sector IN SUMMARY total return of 5.6%, excluding income. turnover in the UK. Over the same period, AIM VCTs have The following is a list of benefits generated 6.9%. Although these figures VCT investment is an important that come with investing in smaller are comparable to the FTSE 100 and part of that picture. According to companies: the AIC, VCTs provided £225 million FTSE AIM All-share indices, of course Higher growth potential than of funds to 115 SMEs in 2015. 44 of investments made through VCTs benefit mainstream assets those investments were provided to from the additional tax reliefs that Income effectively enhance the total returns. companies that raised VCT finance for the first time, while the rest (71 deals) Economic growth and job creation INCOME were ‘follow-on’ investment. VCTs Diversification. have successfully helped to fill the In addition to capital gains, many VCTs SME funding gap, which is commonly Overall, there are several benefits are focused on generating income for estimated as being widest where that justify investment in smaller their investors. The average target funding between £2 million and £10 companies. Holding VCTs allows an dividend yield is about 5p per share million is sought. VCT investments investor to benefit from the above invested, higher than that of most ranged between £50,000 and £5 advantages that small companies mainstream funds. For many VCTs, million in 2015. Over 20,000 new jobs offer and also provides generous tax the majority of the total return comes have been created and on average reliefs. That said, investing in smaller from income. As income on VCTs is not £1.19 million has been spent on R&D companies is inevitably perceived as taxed, there is also a considerable level by VCT backed businesses. 75% of more risky than mainstream equity of return that can be generated from companies supported by VCTs have and bond funds. We will examine the reinvesting income. Investors are basically undertaken some form of R&D as a risk of VCT investments in more detail exposed to tax-free compounding. result of their investment. in Section 3. 13 PERFORMANCE FTSE 100 VS VCTs

5 YEAR CUMULATIVE PERFORMANCE 70% 60% 50% 40% 30% 20% 10% 0% -10% DEC 11 MAR 12 JUN SEP DEC MAR 13 JUN SEP DEC MAR 14 JUN SEP DEC MAR 15 JUN SEP DEC MAR 16 JUN SEP

CUMMULATIVE PERFORMANCE 1M 3M 6M 1Y 3Y 5Y 10Y SINCE LAUNCH FTSE 100 -2.5% -0.1% 13.2% 12.5% 14.1% 59.7% 61.1% 1,456.8%

IT VCT AIM QUOTED -1.3% 2.9% 3.0% 4.5% 24.1% 62.7% 4.0% 8.6%

IT VCT GENERALIST 1.1% 3.4% 4.7% 6.0% 19.8% 32.6% 17.1% 19.3%

DISCRETE PERFORMANCE 0-12M 12-24M 24-36M 36-48M 48-60M FTSE 100 12.5% -3.1% 4.7% 18.9% 17.6%

IT VCT AIM QUOTED 4.5% 8.6% 9.3% 25.4% 4.6%

IT VCT GENERALIST 6.0% 5.1% 7.5% 7.8% 2.7%

ANNUALISED PERFORMANCE 1Y 3Y 5Y 10Y SINCE LAUNCH FTSE 100 12.5% 4.5% 9.8% 4.9% 9.3%

IT VCT AIM QUOTED 4.5% 7.4% 10.2% 0.4% 0.4%

IT VCT GENERALIST 6.0% 6.2% 5.8% 1.6% 0.8%

SOURCE: FE TRUST NET

The graph shows the five-year volatile than the FTSE. Among the steady growth out of the three. cumulative performance of FTSE three indices AIM VCTs have had Although historical performance is 100, AIM VCTs and Generalist VCTs the highest level of growth (62.7%), not a reliable predictor of the future, respectively. From the graph we can followed by FTSE 100 (59.7%) and VCT it does show that the performance see despite the fact that investing Generalist (32.6%). of VCTs is comparable to mainstream in smaller companies is riskier than By a simple eyeball analysis we can investments. investments in mainstream asset conclude that FTSE 100 has the classes, VCT investments can deliver All of the figures above do not include highest degree of volatility while the solid returns and can even be less any tax relief. VCT Generalist sector shows the most

WHO IS IT FOR? – RISK PROFILE/SUITABILITY

In general, clients who are suitable for VCTs will need a high tolerance for risk. While some VCT opportunities are more risky than others, all VCT investments should be considered as carrying the potential for capital loss. For this reason, suitable investors should already possess a well-diversified portfolio of mainstream assets and have a need for tax planning.

Lack of liquidity can be another major issue with VCTs. Although secondary markets exist for VCTs, shares often need to be sold at a discount to their NAV in order to realise cash quickly.

14 SMALLER COMPANY INVESTING RISKS AND VCTs ADVANTAGES

VCTs are an established tax advantaged venture capital scheme that encourage investment into smaller UK companies. The generous tax advantages offset some of the risks of investing in smaller companies.

SMALLER COMPANY INVESTING AND VCT ADVANTAGES

POTENTIAL RISKS OF SMALLER COMPANY INVESTING VCT ADVANTAGES

They can be more reliant upon a small HIGHER GROWTH Tax-Free Growth number of customers

They can have less capital available to DIVERSIFICATION 30% Income Tax Relief withstand a downturn in their fortunes

They can take a long time to bring new CAN ACCESS INCOME Tax-Free Dividends initiatives to fruition and become profitable

Where they are listed on AIM, they can SUPPORT UK PLC VCTs are listed on the Main Market of the LSE experience significant share price volatility

Recent changes to pension limits have led some advisers to seek out VCTs as an alternative to pensions (see previous AiR reports on tax efficient investments for more details) and this, combined with growing awareness of VCTs and the still-ongoing adaptation to life after RDR, has made VCTs more popular.

However, recent changes to the rules that govern VCTs have had an impact on the composition of the market and – potentially – on the sector’s capacity for new investment. We look at some of these issues in the next section.

VCT KEY POINTS

VCTs have performed well over the last five years

Investing in smaller companies can provide additional sources of growth, income and diversification within a conventional portfolio

VCTs can be placed into four broad categories: Generalist, AIM, Specialist and Limited Life

There are three tax reliefs available for VCT investors: 30% income tax-relief, tax free growth and tax-free income

Suitable clients will have a high tolerance for risk

15 MARKET UPDATE

16 DEVELOPMENTS IN VCTs FUNDRAISING SUCCESS

This section discusses developments No. OF VCTs VS FUNDS RAISED in the VCT sector. Several major changes were made to the scheme last VCTs MANAGING FUNDS VCTs RAISING FUNDS FUNDS RAISED year and we examine how the industry 150 900 has responded. 800 700 FUNDRAISING SUCCESS TO DATE 100 600 MILLIONS (£) MILLIONS HMRC STATISTICS 500 400 Every year HMRC releases statistics

NUMBER OF VCTs 50 300 on the fundraising of VCTs. The latest 200 issue was released on 20 October 100 2016. The document provides 0 0 statistics on the amount of funds raised by VCTs, the number of VCTs 2011-12 2010-11 2016-17 2012-13 2013-14 2014-15 1997-98 1996-97 1995-96 2009-10 1998-99 2001-02 1999-00 2000-01 2007-08 2006-07 2002-03 2005-06 2003-04 2008-09 2004-05 raising funds and the number of existing VCTs managing funds. FUNDS RAISED No. OF VCTS RAISING FUNDS No. OF VCTS MANAGING FUNDS

Looking at the latest available data 2013/2014 £440m 66 97 at the time of writing (the October 2016 issue), we can see that in total 2014/2015 £435m 57 94 VCTs have raised £6,375 million since inception in 1995. In 2015–16, the 2015/2016 £435m 43 80 amount of funds raised was £435 million, the same as the amount raised SOURCE: HMRC STATISTICS (OCTOBER 2016) in 2014–15. However, the number of Since 2014 the amount of funds raised The global financial crisis in 2007-08 VCTs raising funds has been falling has remained flat and we believe it is had also had a negative impact on the significantly in recent years, dropping likely to have been impacted by the VCT industry before the fundraising from 66 in 2013-14 to 43 in 2015-16. rule change that restricted enhanced started to recover in 2009-10. This means the market has become share buy backs from April 2014. more concentrated, with some VCTs The number of VCTs managing funds Enhanced share buy backs allowed merging with others and some VCTs was 12 in 1995–96 when the scheme VCT investors to sell their current being wound up. was first introduced, increasing to a shares to VCTs after the five-year peak number of 131 in 2007–08. Since If this trend continues the market minimum holding period and re-invest 2010–11 the number of VCTs managing could eventually be dominated by in the same VCT at the same time. funds has been decreasing, dropping a few big players and could even The graph shows two peaks in the from 128 to 80 in five years. This again potentially be harmful to investors VCTs’ fundraising history, in 2000–01 shows that although the market is as providers will have more pricing and 2005–06 respectively. The first expanding, the number of suppliers is power. Investee companies may also peak coincides with the dot com declining, so the average size of each face stricter terms and conditions bubble, which collapsed in 2001. VCT is becoming higher. on their investment. We would like to see some new entrants into the The second peak was in 2004–05 The amount of funds raised was market, either from existing providers and in that year the rate of Income £458 million in the 2015–16 tax year or brand new market participants. Tax relief was doubled from 20% to according to the AIC, £23 million However, the dynamics of the market 40% so clearly the record amount of higher than the same statistics by mean there are barriers to new funds raised in that year was a result HMRC. HMRC explains the discrepancy entrants: investors inevitably prefer to of the generous Income Tax relief! with AIC industry figures as arising participate in a top-up of an existing In 2006–07 the amount raised fell due to differences in the methodology VCT with an established portfolio dramatically from £780 million in and assumptions used to compile and income stream as opposed to 2005–06, to £270 million as the tax the figures. In particular, AIC figures something new and unknown. relief was revised downward to 30%. exclude enhanced share buy-backs.

17 VCTs’ IMPACT VCTs AND THE ECONOMY

THE ROLE OF VCTs IN THE and the amount they need to realise and the number of SMEs that hold ECONOMY their ambitions for growth”. an optimistic outlook about venture capital is double those that hold a It’s worth taking some time to examine Although a significant funding gap pessimistic outlook. However, despite if VCTs are fulfilling their objective of still exists in the SME sector, there the rise this is still a very low number helping to finance smaller companies. have been some encouraging signs and suggests that businesses are and improvements. According to the either not as ambitious as they could ASSESSING THE FUNDING GAP Albion Growth Report 2016, which be, or are not aware of the benefits of FOR SMEs surveyed more than 500 businesses, raising money by selling equity. access to finance ranked 7th in terms Funding to the SME sector has broadly of importance compared to 4th two Therefore, with the funding gap improved over the last 8–9 years years ago. And for companies with still in existence and more business since the financial crisis, as there are more than five employees the ranking owners looking for alternatives, we more alternative ways to raise finance falls further to 13th. This shows SMEs think there is an important role for other than traditional bank loans, are less constrained by lack of finance VCTs to play, and the industry should but barriers to accessing finance and than they have been in the recent do more to raise awareness among lack of awareness of financial options past. entrepreneurs. are still undermining SMEs’ growth potential. That said, the overall picture doesn’t VCTs AND THE FUNDING tell the whole story as certain sectors Prime Minister Theresa May stated in ESCALATOR are still having trouble with access the her speech at the Confederation of to finance. Only 9% and 11% of British Industry that while the UK ranks Businesses go through a series of companies in the construction and third in the OECD for start-up support, it development stages as they grow and retail sectors successfully raised lags behind in 13th place for the number are often accompanied by different finance. of SMEs that manage to scale-up. types of funding at each stage. The Another healthy trend in the SME funding escalator model shows the According to the British Bankers’ sector is that the appetite for equity different sources of finance available Association, business applications for based investment has continued at different stages of the business loans and overdrafts are at their lowest to rise this year. The proportion of life cycle. The escalator is an inter- rate since 2014, which has resulted in SMEs willing to consider investment dependent system; any gaps in the a £1bn funding gap. David Cameron, specifically from a venture capital provision of particular types of finance the former Prime Minister, stated that or private equity investor has will have knock-on effects, restricting “there is a £1 billion gap between the increased from 11% to 13% this year the business from reaching the next total funding UK businesses receive stage of development.

GROSS LENDING TO SMEs IN THE UK (£ MILLION)

SME 3 PER MOV. AUG. (SME) 5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0 JUN 07 SEPT DEC MAR 08 JUN SEPT DEC MAR 09 JUN SEPT DEC MAR 10 JUN SEPT DEC MAR 11 JUN SEPT DEC MAR 12 JUN SEPT DEC MAR 13 JUN SEPT DEC MAR 14

SOURCE: THE BRITISH BUSINESS BANK 18 “During 2015 alone VCT-backed companies spent £181 million on research and development (R&D) and the average amount dedicated to R&D was £1.19 million per company.”

The chart shows that VCT investments STYLISED FUNDING ESCALATOR are made to companies that have established revenues but are yet BANK FINANCE to generate profits. In addition, (SOMETIMES UNDERPINNED BY EXISTING EQUITY FINANCE) VCT investments come after EIS investments and before private PUBLIC EQUITY GROWTH MARKETS equity, so investee companies with VCT investment generally have slightly PRIVATE EQUITY lower risks than those receiving funding through EIS and SEIS. GROWTH CAPITAL, GROWTH LOANS

The size of VCT investments can range STAGE COMPANY OF from £0.1m to £20m, reflecting the VENTURE CAPITAL (INCL. ECF, CATALYST FUND, UKIIF) broad range of companies VCTs can VCTs support as a result of changes in rules. From 6 April 2012, VCT qualifying CROWDFUNDING, BUSINESS ANGELS holdings were extended to companies with up to 250 full time equivalent £0.1m £0.5m £1m £5m £10m £20m £50m £100m employees and gross assets of up to AMOUNT OF FINANCE SOUGHT £15m before investment and £16m after investment. PROFITABLE BUSINESS WITH TANGIBLE ASSETS / RELIABLE REVENUE STREAMS PROFITABLE BUSINESS BUT WITH LOW TANGIBLE ASSETS OR WITH GROWTH ASPIRATIONS OUTSIDE What the diagram shows very CURRENT REVENUE STREAMS succinctly, though, is that VCTs play ESTABLISHED REVENUES, BUT PRE-PROFITS an important role as a step on the funding escalator for small business. PRE-REVENUE SOURCE: THE BRITISH BUSINESS BANK VCT-FUNDED COMPANIES services and information technology. interested in innovative companies. According to the October 2016 edition Recent research by HMRC found that In 2015, VCTs provided £225 million of the AIC’s “Feeding the Fledgling 75% of SMEs supported by venture of funds to 115 SMEs. 44 investment Economy” report, the top sectors capital schemes had undertaken some transactions (£113 million) were in supported by VCTs received £114 form of innovation as a result of their companies receiving VCT funding for million, invested into 50 companies. investment. During 2015 alone VCT- the first time, while 71 deals provided The top four sectors that received the backed companies spent £181 million further finance to companies that had greatest support were: on research and development (R&D) received VCT funding previously. Businesses services and the average amount dedicated to VCT managers are particularly R&D was £1.19 million per company. Digital, creative and information services VCT INVESTMENTS IN 2015 (RANKED BY SIZE) Retail FOLLOW-ON INVESTMENT (£m) INITIAL INVESTMENT (£m) Manufacturing. £5m In the sub-section above we have noted that the retail sector is one £4m of the sectors that struggle when it comes to raising traditional finance, £3m but it is one of the sectors that received the most support from VCTs. £2m Hence, we can see the importance of these alternative finance options. £1m Other sectors that received significant levels of investment in 2015 included £0 health and social care, financial SOURCE: AIC, FEEDING THE FLEDGLING ECONOMY, OCTOBER 2016

19 “Over 20,000 new jobs reported in VCT-backed businesses and HMRC’s research states that 71% of SMEs had grown employee numbers since VCT (or EIS) investment.”

This year marked a significant level of TOP SECTORS SPENDING ON R&D exporting activity from VCT-backed SMEs. In a survey conducted by the AIC, 194 companies reported exports with a total value of £1.2 billion, which represents 40% of their total sales. This further proves why SMEs are a key part of the UK economy and why it is important to enable them to realise their full potential. DIGITAL, CREATIVE INFORMATION HEALTH AND MANUFACTURING VCTs have also made a positive & INFORMATION AND TECHNOLOGY SOCIAL CARE contribution to job creation. Over SERVICES 20,000 new jobs reported in VCT- backed businesses and HMRC’s research state that 71% of SMEs had grown employee numbers since VCT (or EIS) investment. The average DISTRIBUTION OF JOBS CREATED number of increase in headcount is 60 among VCT-backed businesses. 26% of jobs created were in each of London and the North, making them LONDON 26% the top two regions by number of jobs created. The South East follows that NORTH 26% with 19% of total jobs created in the region. REST OF UK 23%

SCALE-UP COMPANIES SOUTH EAST 19%

The number of UK start-ups is now SCOTLAND 6% not only well above the European average, but is hot on the US’s heels, too. Estimates suggest an amazing figure of 600,000 new businesses launching each year for the past three years in the UK. But then there are the darker statistics: fewer than 3% of start-ups survive for a decade or SOURCE: AIC, FEEDING THE FLEDGLING ECONOMY, OCTOBER 2016 enjoy a single year of high growth. OECD data shows that Britain is The picture isn’t entirely negative: additional scale-ups could add £225 near the bottom of the table for the there are 22,470 companies that are billion to British GDP by 2034. percentage of businesses that grow achieving more than 20% average Close to a quarter of these firms find to more than 10 employees after annual growth in turnover over a it difficult to secure the funding they three years, and this is a problem. three-year period and with an annual need on acceptable terms, with 75% of Ignoring this issue could endanger the turnover between £1 million and £20 these firms saying this is a significant UK start-up revolution and hamper million. And whilst they make up less barrier to their growth, and four out UK productivity. The British Business than 1% of UK companies, they create of five of those businesses surveyed Bank’s assessment is that there one in every three new jobs. But by CEBR (Centre for Economic and remains a need to stimulate a greater statistics like these show how much Business Research) in 2015 weren’t volume of scale-up businesses and more high growth small businesses making use of facilities such as VCTs SME exporters to counteract the UK’s could contribute if we could fund and EIS. lagging productivity. them: it is estimated that just 1% of

20 “Strategic planning, industry insights and contacts are all crucial factors to a growing business and VCT managers can offer support in all of these areas.”

INVESTEE COMPANIES CASE STUDIES

# ANTECH

AnTech Limited is a specialist oil and gas engineering company that both manufactures products and provides services for directional coiled tube drilling.

In February 2016, Calculus Capital made a £2.35 million investment in AnTech to provide working capital for the anticipated growth in the services business.

# BLACKSTAR

Blackstar Amplification designs and manufactures innovative guitar amplifiers and associated products for the UK and international music instrument market. Based in Northampton, Blackstar has established a global brand on a catalogue of 50+ products, each of which has received industry acclaim.

Foresight VCT invested £2.5 million as of June 2015; the investment has significantly improved the company’s operating efficiency and margins.

# EVE SLEEP

Eve set out to create the most comfortable mattress in the world at a price that’s fair for everyone. The mattress combines a high-density foam base, a mid layer of high-resilience comfort memory foam and a memory foam top layer. They are so confident everyone will love their product they offer all customers a 100-night sleep trial. By selling only online and cutting out the traditional retail middle man, they are able to sell their mattress at a third of the price you would pay for a premium mattress on the high street.

The company received funding from Octopus Titan VCT in 2015 and another round of funding of £6.9 million from Octopus Ventures, DN Capital and Channel 4. Today EveSleep is selling in seven countries, employing over 50 employees and won the 2016 Growth Champion of the Year award at the Growth Investor Awards.

# THE GP SERVICE (GPS)

The GP Service (GPS) is an innovative platform that brings patients, doctors and pharmacies together. The platform allows patients to consult doctors via online assessment questionnaire or through their video chat function. All doctors on the platform are UK-based and registered. After the initial consultation, patients can then choose to collect their treatment from any Partner Pharmacy through the service.

The company is backed by Maven VCTs, which invested £2.5 million in May 2016. The fund will be used to stretch the company’s activities into more regions of the country and develop additional services.

# THIRD BRIDGE

Third Bridge provides private equity firms, hedge funds and strategy consultants with the information that they need to understand the value of their investment opportunities. The company was founded in 2007 in London and it now employs over 250 members of staff and has offices in North America, Europe and Asia.

The ProVen VCTs, managed by Beringea, invested £3 million in the company in 2012. The investment has enabled the company to expand overseas and strengthen its senior management team.

21 “Strategic planning, industry insights and contacts are all crucial factors to a growing business and VCT managers can offer support in all of these areas.”

HELP BEYOND INVESTMENT HELP ON PLANNING AN EXIT

To expand their business activities Exit is arguably the most important SCALE-UP COMPANIES (STATS) SMEs need much more than financial stage in an investment transaction support. Strategic planning, industry and many managers would examine insights and contacts are all crucial potential exit options even before 600,000 factors to a growing business and VCT investing in a company, so a good VCT NEW BUSINESSES managers can offer support in all of manager would have the network LAUNCHING EACH YEAR these areas. and experience required to ensure a FOR THE PAST THREE smooth transaction to the next buyer. Besides investment there are a YEARS IN THE UK number of ways that VCT managers Typically, a manager can exit from can support their investee companies an investment through the following to realise their potential. routes:

Senior management: VCT Initial Public Offering (IPO): 22,470 managers can help SMEs select Under an IPO the investee company COMPANIES THAT ARE the most suitable and competent lists on a stock exchange to allow its ACHIEVING MORE THAN management, which start-ups often shares to be bought and sold on the 20% AVERAGE ANNUAL struggle with and can overlook. open market and the share price will GROWTH IN TURNOVER be determined by buying and selling OVER A 3 YEAR PERIOD Operation: VCT managers are more activities on the marketplace. experienced at running businesses from various industries, they are Mergers & Acquisitions (M&A): able to enhance operating efficiency, M&A might give investors an optimise administration, and reduce opportunity to swap their holdings of 1 /3 unnecessary costs as well as provide one company for shares in another. NEW JOBS ARE CREATED legal and financial expertise. BY THOSE 22,470 Share Buyback: Under this form COMPANIES Business insights: SMEs are often of exit, the company would buy back focused too much on research and the company’s shares from investors development and it makes perfect at a fixed priced determined by the sense as they are challenging existing investors and the management. competitors. However, the danger is Trade Sale: A majority of that they can overlook the power of shareholders agree to sell their shares sales and marketing. VCT managers to another company. can solve this problem by encouraging investment in effective marketing Voluntary Liquidation Resolution: campaigns and pairing investees up Common with Limited Life VCTs, to with great marketing teams. enable them to distribute capital back to investors as soon as the minimum Network: This can be reaching out holding period is achieved. to new customer segments, experts in specialised fields or opening up connections to prepare for the next round of fund-raising.

22 2016/17 FUNDRAISING OUTLOOK OPEN OFFERS

2016/17 is likely to prove to be a mode target fund-raise (£8 million) targets quickly. As the demand is very slow year for fundraising: many is also significantly lower than the outstripping the supply in the VCT VCTs are still digesting cash raised in historical figure of £20 million. The market, investors must act quickly in previous years (VCTs raised over £450 median value remains unchanged order to avoid disappointment. million in 2014/15) and the new rules from last year at £20 million. “It is difficult for VCTs to justify further (discussed below) have shrunk the This is happening at a time when fundraising to shareholders given so pool of potential investments. demand is high due to lower limits on much cash on the balance sheet and The highest target fundraise is £30 pension saving, so we are witnessing limited proof to show they can employ million lower than last year’s highest a capacity crunch in the market. VCTs the funds they are already holding,” figure (£100 million) and this year’s that are raising are likely to hit their John Glencross, CEO of Calculus Capital.

VCTs RAISING MONEY (OPEN VCTs)*

MINIMUM TARGET TARGET VCT INVESTEE INVESTEE MANAGER SUBSCRIPTION FUNDRAISING DIVIDENDS TYPE COMPANIES COMPANY TYPE STRATEGY SECTOR

ALBION VCTS Albion Seed/Early/ Growth & General PROSPECTUS TOP £6,000 £24m 6% Generalist 60 Ventures Later Stage Income enterprise UP OFFERS (16/17)

AMATI VCT 1 & 2 TOP Amati Global AIM Growth & General £3,000 £8m 6% AIM 60 UP (16/17 & 17/18) Investors Listed Income enterprise

CALCULUS CAPITAL Calculus Later Growth & General VCT PLC (17/18) – £5,000 £8m 4.5% Generalist 20 Capital Stage Income enterprise D SHARE OFFER DOWNING VCT FOUR Early/Later Growth & General VCT PLC – GENERALIST Downing £5,000 £20m 4% Generalist 11 Stage Income enterprise SHARE CLASS DOWNING VCT FOUR Early/Later Growth & Pharmac. & VCT PLC – HEALTHCARE Downing £5,000 £10m 4% Specialist 11 Stage Income biotech. SHARE CLASS

FORESIGHT SOLAR & Foresight Not Project Growth & Industry & £3,000 £20m 5% Specialist INFRASTRUCTURE VCT Group specified Based Income Infrastructure

Foresight Not AIM Growth & General FORESIGHT VCT £3,000 £30m 5% Generalist Group specified Listed Income enterprise

HARGREAVE HAL Hargeave Later Growth & General AIM VCT 1&2 £5,000 £25m 5% AIM 80 Hale Stage Income enterprise (16/17 & 17/18)

OCTOPUS APOLLO Octopus Early/Later Growth & General £5,000 £20m 5% Generalist 25 VCT PLC Investments Stage Income enterprise

OCTOPUS TITAN VCT Octopus Early/Later Growth & General £3,000 £70m 5% Generalist 55 (16/17) Investments Stage Income enterprise

Oakley PEMBROKE VCT B Early/Later Growth & General Investment £3,000 £15m 3% Generalist 25 SHARE 2016/17 Stage Income enterprise Managers PROVEN GROWTH & Early/Later Growth & General INCOME VCT (16/17 Beringea £5,000 £30m 5% Generalist 30 Stage Income enterprise & 17/18)

TRIPLE POINT INCOME Project Growth & Industry & Triple Point £5,000 £15m 5% Specialist N/A VCT – E SHARES Based Income Infrastructure

* DEFINITIONS OF THE TERMS WE USE IN THE TABLE AND THROUGHOUT THIS SECTION CAN BE FOUND IN THE INDUSTRY ANALYSIS SECTION 23 “VCTs offer attractive tax breaks as well as access to a wide-ranging portfolio of growth focused investments across a variety of sectors.” – John Glencross, Calculus Capital

MARKET COMPOSITION OPEN OFFERS BY INVESTMENT SECTOR

At the time of writing there are 13 VCTs that are raising funds, all of which have a Growth & Income investment mandate. 77% of open VCTs do not have a sector bias and invest in General Enterprise; the sectors Industry & Infrastructure and 77% 8% 15% Pharmaceuticals & Biotechnology GENERAL PHARMA & INDUSTRY & represent 15% and 8%, respectively. ENTERPRISE BIOTECH. INFRASTR.

Compared to offers launched in the past, this year’s VCTs have more similarities than differences. There OPEN OFFERS BY VCT TYPE have been 11 launches in total since April 2016, all of which have Growth 60% & Income as their investment strategy. 50% AIM and Generalist VCTs contribute to 15% and 62% of open offers, 40% respectively. There are no Limited Life 30% VCTs available in the market at the time of writing. 23% of open offers are 20% Specialist VCTs. 10%

0% GENERALIST AIM SPECIALIST LIMITED LIFE

CHARGES AND FEES OPEN OFFERS BY INVESTMENT STRATEGY AVG MODE MIN MEDIAN MAX

INITIAL CHARGE TO INVESTOR 2.38% 3.00% 0.00% 2.50% 3.00%

INITIAL CHARGE TO INVESTEE 0.46% 0.00% 0.00% 0.00% 3.00%

TOTAL INITIAL CHARGE 2.85% 3.00% 0.00% 3.00% 5.00%

100% AMC CHARGED TO INVESTOR 1.96% 2.00% 1.50% 2.00% 2.50%

AMC CHARGED TO INVESTEE 0.08% 0.00% 0.00% 0.00% 0.50%

TOTAL AMC 2.03% 2.00% 1.50% 2.00% 3.00%

ANNUAL PERF FEE 10.00% 0.00% 0.00% 10.00% 20.00%

CAPITAL PRESERVATION EXIT PERF FEE 6.15% 0.00% 0.00% 0.00% 20.00%

ANNUAL PERF HURDLE 22.40% 3.00% 0.00% 3.00% 100.00% CAPITAL PRESERVATION & GROWTH EXIT PERF HURDLE 77.00% 100.00% 3.00% 100.00% 105.00%

CAPITAL PRESERVATION & INCOME INITIAL DEAL FEE 0.00% 0.00% 0.00% 0.00% 0.00%

GROWTH & INCOME EXIT DEAL FEE 0.00% 0.00% 0.00% 0.00% 0.00% ANNUAL ADMIN FEE 0.37% 0.00% 0.00% 0.00% 3.25%

24 “Compared to EIS investments, VCTs are more diversified.”

A target dividend is stated by all TRENDS IN NEW LAUNCHES currently open VCTs; the range is OCTOPUS WITHDRAWS FROM Important changes were made to VCTs between 3% and 6% with an average EIS TO FOCUS ON VCT in response to revised EU State Aid of 4.81%. The largest EIS manager, Octopus rules. In particular, the Government Investments, has withdrawn from The minimum subscriptions range imposed limits on the age of qualifying the EIS market and stopped raising from £3,000 to £6,000, much companies and introduced caps on further EIS funds. lower than the level of minimum total investment a company can subscription quoted in a typical receive from Venture Capital Schemes. At the time Octopus commented: EIS investment. It shows how VCT Arguably the most important change “The latest changes to the EIS and investment is not only suitable for is the restrictions on acquisition VCT legislation demonstrate the high net worth and sophisticated finance, even if the target company government’s focus on helping early investors. The average minimum is carrying on a qualifying trade. The stage UK companies, which our VCTs subscription is £4,308, so VCT final rule change effectively bans VCTs are well positioned to support. It investments can also be held by from financing management buyouts. feels like it’s the right time for us to retail investors whose needs and risk Many VCTs that followed a strategy of focus on growing our VCTs rather tolerance match what VCTs can offer. funding management buyouts are not than expanding our EIS products.” raising funds this year. There is a diverse range of sizes This is the biggest change in among VCT investments, as shown by The impact of changes in rules on response to the legislation we’ve the target fundraises. The smallest new launches is mirrored in our seen so far, and it’s interesting that FUNDS RAISED fundraising target is £8,000,000, data. The average target number of it has come from the biggest player which is approximately one tenth of investee companies has increased in the market. Other providers the largest but there is no correlation from 37 to 38 per VCT. Previously, the have responded to the changes by between a VCT’s target fundraise and least diversified VCT has only three launching more specialist EIS funds other characteristics. investments in its portfolio, while the focused on growth and investing Compared to EIS investments, VCTs figure is 11 for VCTs launched this tax in non-contentious assets, but are more diversified. We use the target year. However, readers should note this is the first time we’ve seen number of investee companies quoted that there are various reasons why a a deliberate tilt away from EIS by the manager as the measure for VCT would have a low target number towards VCT. of investees. diversification. The average number of Among VCTs launched in 2016 investee companies held by a VCT is 38, Octopus Titan VCT has the highest while the most diversified VCT aims to fund-raising target, which is more hold 80 companies in its portfolio. than double the second highest. It also has the lowest minimum subscription so we speculate Octopus VCTs will be a popular product in the market and become fully subscribed quickly.

OPEN VCTs INVESTMENT METRICS

AVERAGE MODE MIN MEDIAN MAX

TARGET DIVIDENDS 4.81% 5.00% 3.00% 5.00% 6.00%

MINIMUM SUBSCRIPTION £4,308 £5,000 £3,000 £5,000 £6,000

TARGET FUNDRAISE £22,692,308 £20,000,000 £8,000,000 £20,000,000 £70,000,000

DIVERSIFICATION 38 60 11 28 80

25 THE IMPACT OF POLICY CHANGES SUMMARY OF THE RULES AND RECENT CHANGES

The most recent changes to the rules RULES FOR VCT QUALIFYING COMPANIES governing the qualifying criteria for companies receiving VCT investment were made in two Budget statements PRE NOV 2015 TODAY in 2015. These changes were primarily made in order to ensure ongoing 7 Years unless total compliance with EU State Aid investment represents more than 50% of the company's rules. The rules, both pre and post turnover over the preceding the final 2015 Autumn Statement 5 years and the company is MAX. AGE No limit and subsequent Finance Act, are using the funds to enter a summarised below for reference. new product or geographic market, or it received The changes were introduced to previous risk finance within ensure that the tax-advantaged its first 7 years. schemes continue to support economic growth and provide value LIFETIME CAP* No limit £12m for money for UK taxpayers. However, it is not intuitive how these changes can serve these objectives. ANNUAL INVESTMENT LIMIT £5m £5m

The arbitrary seven-year age limit doesn’t seem to serve any logical EMPLOYEE LIMIT (FTE) Fewer than 250 Fewer than 250 purpose. It penalises firms with long R&D periods, or firms that have 10 Years unless total traded on a small scale for a number investment represents of years but then identified the more than 50% of the potential to grow. However, it is true company's turnover over the preceding 5 years that the special rules for knowledge MAX. AGE N/A and the company is using intensive companies, and exemptions the funds to enter a new from the age test, are provisions to try KNOWLEDGE product or geographic and mitigate the impact of the rules. INTENSIVE market, or it received COMPANIES previous risk finance within The cap on total investment penalises its first 10 years. firms where there is a need to raise very substantial amounts of working capital LIFETIME CAP N/A £20m to finance a long term development programme before investors see a profit, or where expensive tangible EMPLOYEE LIMIT N/A Fewer than 500 FTE assets need to be acquired in order to commence business. New rules to prevent EIS funds being used to acquire And the size of a company’s workforce USE OF VCT MONEY FOR existing businesses or part Allowed will be a reflection of the type of trade ACQUISITIONS OF BUSINESS of a business (including carried out by the business, not an intangible assets that have indication of its stage of development already been used in a trade). and how easy it can access finance.

Removing or amending these rules Requirement that all investments are made with could let more capital flow to where GROWTH AND DEVELOPMENT TEST No requirement the intention to grow and it is needed – plugging the equity gap develop a business. for SMEs for helping to create jobs. At the moment, the rules are putting a brake on economic growth.

26 “The rule changes have meant some head scratching in some quarters about deployment of funds.” – Andrew Wolfson, Pembroke VCT

POST BREXIT CHANGES? Ben Yearsley, Investment Director at to participate in the discussions of Wealth Club, says the move away from the European Council or in decisions Immediately after the new rules amending replacement capital rules concerning it. However, the UK will were announced The Association is partly down to the fact that most carry on taking part in other EU of Investment Companies (AIC), the of the VCT managers have “moved business as normal. British Venture Capital Association on” from the banning of MBOs last (BVCA), the Enterprise Investment Note that the two-year time frame for year, which had dominated the VCT Scheme Association (EISA) and the UK exit negotiations doesn’t include the industry. Business Angels Association (UKBAA) timeline to negotiate the framework all began a joint lobbying effort to try BREXIT: TIMING AND PROCESS agreement for future relations with and soften some of the changes. the EU. Once the UK exits, the time Article 50 of the Lisbon Treaty sets required to regularise commercial This effort is ongoing, and when the out the formal legal process for relations could be fairly elastic; the UK exits the EU (at the time of writing any member country to leave the Swiss signed their first framework the exact format that Brexit will take European Union. The process should agreement with the EU in 1972 and are is very unclear) then it is possible that take two years. To date, Article 50 has still negotiating to deal with particular there will be more scope to make never been used and because the issues as they go along and the Lords changes to how these tax advantaged likelihood of it being required was EU Committee has said trade deals Venture Capital Schemes are thought to be minimal, it’s a rather between the EU and non-EU states organised. However, in order to access vague, very basic five-point plan. take between four and nine years on the single market and operate freely average. as it has done since 1973, the UK may Theresa May stated at the still have to comply with EU rules on a Conservative Party conference of At the point of exit, it will then be up variety of issues, which could very well October 2016 that Article 50 will be to the Government to review and include State Aid. invoked no later than the end of March adjust any EU imposed legislation 2017. Assuming that is when Article 50 as it sees fit. Nevertheless, it will be AUTUMN STATEMENT is activated, two years from this date important to take into account how takes us out to March 2019: this, to any adjustments might affect the The outcome of this lobbying effort us, seems like the current best guess Government’s upcoming negotiations remains to be seen, but the 2016 for when we can expect the UK to to access the EU single market: much Autumn Statement did bring about formally withdraw from Europe. After of this type of legislation is designed to some clarification and technical this, there will be no way back unless keep the European playing field level, changes to the rules that govern there is unanimous consent from all so changes that tip the balance too follow on funding for VCTs, suggesting other member states. much in favour of the UK are unlikely that HMRC is listening and responding to be tolerated. to the industry. The Chancellor In the meantime, the Great Repeal Bill also announced that HM Treasury introduced by the Government will would lead a review into the barriers repeal the European Communities Act, preventing access to patient capital. so that, from the date the UK formally The announcement may potentially leaves the EU, EU law will no longer be open the door to reversing some applied to Britain. However the body of the more restrictive new rules of existing EU law will be converted governing EIS and VCTs. into British law. This is intended to “give businesses and workers However, the Chancellor has decided maximum certainty as we leave the not to go ahead with the introduction European Union.” And the consensus of increased flexibility for replacement view is that it’s virtually certain that capital within the VCT scheme. The there will be no legal changes to items Treasury said: “The government which touch on EU agreed legislation will not be introducing flexibility for until the actual exit. replacement capital within the tax- advantaged Venture Capital Schemes Once the UK formally notifies the EU at this time, and will review this over that it is withdrawing under Article the longer term.” 50, the country will lose its power

27 “It’s encouraging to see that those on the coal face of providing financing to smaller companies, are clearly indicating that the EU Referendum result is having no discernible negative impact on demand for development and expansion capital.” – Jason Hollands, Tilney Bestinvest

STEPS TO UK LEAVING THE EUROPEAN UNION IMPACT OF BREXIT? A survey of VCT groups by Tilney Bestinvest revealed that managers UK VOTES TO LEAVE THE EU see little if any impact on demand for financing from UK smaller companies as a result of the Brexit vote. The survey includes response from 17 VCT management groups. 44% of VCT UK NOTIFIES EU – INVOKING ARTICLE 50 groups surveyed claim they saw no OF THE TREATY ON EUROPEAN UNION UK impact on demand for VCT financing (NO LATER THAN THE END OF MARCH) from businesses, while 31% believe the Brexit vote will lead to an increase REMAINING 27 EU 27 COUNTRIES MEET TO in demand for VCT financing. DISCUSS WITHDRAWAL Jason Hollands, Managing Director of Tilney Bestinvest, commented: “It’s encouraging to see that those on the coal face of providing financing NEGOTIATIONS UK BEGIN BETWEEN to smaller companies, are clearly UK AND EU indicating that the EU Referendum result is having no discernible DRAFT DEAL PUT TO negative impact on demand for EU EUROPEAN COUNCIL development and expansion capital…” (27 LEADERS) Although there is no immediate NEEDS APPROVAL BY AT impact on VCTs following the Brexit 20 LEAST 20 COUNTRIES WITH vote, the industry in general (64%) is 65% OF POPULATION expecting to see a lower level of fundraising this year after having achieved RATIFICATION a record amount of £458 million in AT THE END OF 2 YEARS, NEGOTIATIONS EU BY EUROPEAN 2015/16. CAN BE EXTENDED FURTHER BUT ONLY IF PARLIAMENT ALL 27 COUNTRIES AGREE VCTs launched so far this year all have a Growth & Income strategy and in general they have lowered their fund raising targets, however we believe IF NO AGREEMENT TO EXTEND EU NEGOTIATIONS THEN THE EU TREATIES these trends are not a result of the UK CEASE TO APPLY TO THE UK vote but changes in rules announced last year.

INCREASES IN DIVIDEND TAX AND REDUCTIONS IN DIVIDEND TAX CREDITS UK LEAVES THE EUROPEAN UNION UK From 6 April 2016, the notional 10% tax credit on dividends was abolished. Instead, a £5,000 tax free dividend allowance has been introduced and dividends above this level are now being taxed at 7.5% (basic rate), 32.5% IF UK WANTS BACK IN, IT HAS TO (higher rate), and 38.1% (additional APPLY LIKE ANY OTHER COUNTRY ? rate). This could hit business owners hard when extracting funds from SOURCE: BBC their company, particularly those who

28 “It’s too soon to say what the impact of Brexit will be.” – Daniel Kiernan, Intelligent Partnership

have increased the amount of cash TAX RATES PRE AND POST APRIL 2016 held on their balance sheets to offset risks of a financial downturn. TAX RATE (PRE APRIL 2016) TAX RATE (POST APRIL 2016) After the £5,000 allowance, the new rates represent dividend tax rate BASIC RATE BAND 0% 7.5% increases from 0% to 7.5% for basic rate taxpayers, 25% to 32.5% for a HIGHER RATE BAND 25% 32.5% higher rate taxpayer and for additional rate taxpayers, from 30.56% to 38.1%. ADDITIONAL RATE BAND 30.56% 38.1% A possible solution? Business owners could consider investing some of the money extracted into a VCT to generate an income tax credit of 30% KEY POINTS together with investment growth to Social VCTs have been mooted, but the concept has not advanced in the last offset the dividend tax payable. 12 months

Of course for investors who are VCT managers see little impact on the demand for finance from UK smaller looking for tax free dividends, perhaps companies as a result of Brexit because they are now paying more Proposed changes to allow the use of replacement capital will not go ahead tax on their investment income than in the near future previously, VCTs are really the only option. The majority of open VCT offers target Growth and Income

SOCIAL VCTs

In Budget 2015, the Government announced details of the design of a new Social Venture Capital Trust (Social VCT) scheme. The scheme was designed to encourage investment in companies that invest in social organisations. It will be similar to the Venture Capital Trust Scheme for indirect investment in commercial companies. However, there has not been any timescale committed on the proposed scheme, with the Government advising that they “will legislate for Social VCTs in a future Finance Bill”.

29 VCT vs EIS COMPARING THE UK’S TWO LEADING VC SCHEMES

VCT VS EIS FUNDRAISING DIFFERENCE BETWEEN VCT AND EIS EIS VCT 2,000 VCT and EIS are similar in a

number of ways as they are both 1,500 tax advantaged investments designed to support UK small 1,000 businesses. However, there are some important differences AMOUNT RAISED (£M) 500 between the two that anyone who’s interested in tax efficient investments should know. First, £0 2011 1997 1998 1993 2013 1995 2015 1996 2012 1994 1999 2010 2014 2001 2007 2008 2003 2005 2002 2006 2000 2004 although both investments offer 2009 investors 30% Income Tax relief TAX YEAR SOURCE: INTELLIGENT PARTNERSHIP upfront, the minimum holding Between 1995 and 1997 VCTs had raised period for keeping the relief FUNDRAISING TOTALS TO DATE more funds than EIS, before the trend permanently is five years for VCTs, According to HMRC’s statistics EIS reversed in 1998. The amount of funds whereas it’s just three years for have raised almost £14.2 billion funds raised by VCTs exceeded EIS again in EIS. Second, dividend income for 24,620 companies since it was 2005 when the level of Income Tax relief from VCTs is not taxed whereas launched in 1993–94. In 2014–15, 3,265 went up to 40% for VCTs. Since 2006, income earned on EIS investments companies raised a total of £1,816 EIS funds have largely outpaced VCTs in is subject to income tax. Finally, million of funds under the EIS scheme. amount of funds raised. although VCTs’ minimum holding In contrast, the total amount of funds period is two years longer than VCTs offer the same level of Income raised by VCTs since its inception in EIS, investors can expect to find Tax relief as EIS and have lower 1995 is £6.4 billion and in the 2013–14 a greater degree of liquidity in minimum subscription levels in tax year 57 VCTs raised a total of £435 the VCT market, as there is a general, so why is the sector not million. The same amount of funds secondary market. attracting as much capital as its close was raised by 43 VCTs in the 2015–16 counterpart? tax year. We speculate that (to date) investors VCT vs EIS favour EIS investments for two main reasons:

VCT EIS a greater investment cap a wider range of tax reliefs. INCOME TAX RELIEF 30% 30% The maximum amount of investment an investor can make in a year in VCTs MINIMUM TERM 5 YEARS 3 YEARS is only one-fifth of that of EIS, so it is MAXIMUM ANNUAL £1M intuitive that the total amount of funds £200,000 INVESTMENT ELIGIBLE (PLUS £1M CARRY BACK) raised through VCTs is a fraction of that from EIS. DIVIDENDS TAX EXEMPT TAXED There are more tax reliefs offered by EIS than VCTs. In particular, loss relief CAPITAL GAINS TAX EXEMPT TAX EXEMPT is available to EIS investors so if EIS shares are disposed of at a loss, the CGT DEFERRAL NO YES loss can be set against other capital gains or against Income Tax in either LOSS RELIEF NO YES the year of disposal or the previous year. Furthermore, EIS investments 100% AFTER 2 YEAR HOLDING IHT RELIEF NO would qualify for 100% IHT relief via PERIOD BPR after a holding period of two years.

30 “For people looking for an alternative to pensions, the main benefit is that VCTs provide regular, tax free dividend income and typically the income yield offered by VCTs is 5%.”

VCT ADVANTAGES shares on the secondary market and “A VCT is a much larger shares often trade at a discount to However, in light of the changes made their NAV, the secondary market gives collection of EIS companies to pension allowances and dividend investors an opportunity to release than an EIS fund. As taxation it is worth highlighting some of their capital in case of emergency. the major advantages of VCTs over EIS. such, compared with an Furthermore, Limited Life VCTs, which EIS, it provides greater TAX FREE INCOME aim to wind up and return cash to their investors soon after the five- diversification, should be For people looking for an alternative year minimum holding period, is more liquid, is generally to pensions, the main benefit is that another form of liquidity that cannot VCTs provide regular, tax free dividend larger and is listed on the necessarily be found so easily in the income and typically the income EIS market these days. main stock exchange.” yield offered by VCTs is 5%. Since – Tony Mudd, St. James’s Place tax free income is the main feature DIVERSIFICATION associated with VCT investments, virtually all managers return cash VCTs’ underlying investments are back to investors, making them an generally more diversified than EIS. effective tool when income is your About 90% of VCTs don’t have a client’s primary investment objective. sector bias and invest in the General Furthermore, given the recent changes Enterprise sector, which consists in dividend taxation mentioned above, of companies producing general VCTs may become a solution for a products and services. In general VCTs broader range of investors. And bear also hold a greater number of investee in mind the point we made earlier companies than EIS. Our research – tax free compounding can be a reveals that the average target powerful driver of returns. number of investee companies among open VCTs is 44, while it’s 6 for open EIS. TRANSPARENCY In particular, AIM VCTs can hold as many as 80 companies in their portfolios. It’s VCTs are investment companies listed also worth noting that VCTs can invest on the London Stock Exchange so they in debt as well as equity, and can have are obliged to report regularly. It is up to 30% of their portfolio in non- much easier to assess a VCT’s historical qualifying investments (typically cash performance than an EIS. For example, and gilts). Of course these features are the AIC publishes monthly performance another source of diversification for data on VCTs including their current VCTs. prices, NAVs and total returns etc.

LIQUIDITY AVERAGE NO. OF INVESTEE COMPANIES HELD BY OPEN OFFERS The level of liquidity an investor can 45 get from the VCT market is higher. There are several ways to realise cash 40 from VCT investments. Many VCT 35 managers provide a buyback facility 30 to allow investors to sell their shares 25 back to the manager when liquidity is 20 needed.

NO. OF INVESTEE COMPANIES 15

In addition, there is a secondary 10 market for VCT shares where the price 5 is determined by supply and demand 0 in the marketplace. Although it can sometimes be difficult to sell VCT VCT EIS

31 REGULATIONS REGULATIONS AND VCTs

REGULATORY UPDATE released, with the third published more individuals to meet qualification in September 2016, focusing on the and experience requirements. Regulation of investments is in a bit everyday conduct of business rules Advisers who only deal with of a holding pattern at the moment: that firms must follow. It proposes: professional clients, and individuals we know that MiFID II (Markets in who provide information about Financial Instruments Directive) new requirements for full disclosure investments without going as far as implementation has already been of costs and charges providing advice, will find that they postponed until 3 January 2018 to take new guidance on the need to do more in order to be seen account of ‘the exceptional technical responsibilities of providers for as competent to undertake their role, implementation challenges faced by treating customers fairly and those not yet competent will need regulators and market participants.’ to be supervised. expanding existing suitability and On 8 December a delay to PRIIPs was appropriateness requirements. On the advisers’ side FAMR (the confirmed by the European Council. Financial Advice Market Review) was The rules will now come into effect The extension of telephone recording published in March 2016 and perhaps on 1 January 2018, and ahead of this, requirements will apply to all MiFID did not go as far as many were new guidance on the part of the rules firms and the FCA is considering expecting or hoping. Much of what it causing the controversy is expected to applying it to financial advisers recommended seemed to be further be published around February 2017. because, “based on information reviews and consultations, once again from the Financial Ombudsman putting the industry into a holding PRIIPS will require any investment Service the majority of complaints pattern. However, it did propose a structured as an Alternative about investments centre on the new definition of advice, which could Investment Fund to produce conversations that happened when clear up some of the ambiguity around a prescriptive, three page Key they are sold...We believe that the “restricted” and “independent” advice Information Document (KID). The taping regime is a valuable means of and perhaps open the door to some intention is to make more information gathering evidence in the context of form of simplified advice. transparent and available on a market abuse and related regulatory consistent basis so that investors breaches, and that these provisions Finally, the FCA also carried out can compare like with like, even are just as relevant to the activities of a thematic review of adviser due across different asset classes. One non-MiFID firms.” (CP16/29) diligence, published in February. possible positive is that this may have Director of life insurance and financial the effect of making tax-efficient The FCA is also proposing measures advice Linda Woodall said: “Research investments more mainstream. to essentially bring advisers and and due diligence is one of the three arrangers who choose to be exempt pillars of getting advice right”, which In the meantime, the UK retail from MiFID (article 3 firms) into the is why we have returned to this issue. investment industry has been regulatory regime of MiFID firms. It is Firms clearly want to get this right and digesting the FCA’s consultation required by Europe to apply “at least all firms, regardless of size or type, papers on the forthcoming regulations analagous rules” to article 3 firms can carry out good research and due and in particular what will be and as such much of the lighter touch diligence. “However, there are still designated “complex products”, regime for financial advisers and improvements firms need to make the rules around the disclosure corporate finance firms will disappear. and we’d encourage all firms to look of charges and the governance of Rules such as client classification and at our findings and ensure that they product distribution. In particular it is conflicts of interest will now apply are challenging themselves to ensure expected that product manufacturers equally. Additionally, a 4th MiFID II they’re delivering quality due diligence will need to clearly identify a potential consultation paper will be released for their clients.” target market and type of client whose by FCA in early 2017 and the potential needs, characteristics and objectives size of the issues to negotiate has The regulator found firms of all will be met by any new product. prompted trade bodies to advise sizes and type were able to assess The FCA has limited latitude in how those involved to ensure they give the nature of the investments they to apply MiFID II in the UK: most themselves plenty of time to prepare recommend and their risks and of the decisions have been taken for the 2018 implementation. benefits – the emphasis was very much that this is one of advisers’ at European level. So far three There will be a new knowledge and key responsibilities to their clients. consultation papers have been competence regime that requires

32 “Research and due diligence is one of the three pillars of getting advice right.” – Linda Woodall, FCA

We suspect that the majority of CONCLUSIONS: MARKET UPDATE advisers operating in the alternative KEY POINTS The evidence suggests that VCTs investment market will already have certainly address the funding gap MiFiD II and PRIIPS will now both very strong procedures in place to for UK SMEs, and play an important be implemented in January 2018 ensure that this happens. So, overall, role in the funding journey of smaller for once there has not been much VCTs are likely to raise less companies. They’ve been successful in change driven by the regulations in money in the 2016/17 tax year than raising and deploying funds (although the market over the last 12 months they have in the previous three they are overshadowed by EIS in this – however, there is a lot of potential years respect), and most have achieved change hanging over both alternative solid returns for their investors, even Despite raising less money than investment providers and advisers in without considering the tax relief. the EIS scheme, research from the the future. More investors and advisers are AIC suggests that VCTs are used Overall however, there is little here for considering VCTs than ever before, more widely by advisers VCTs – and advisers who recommend particularly in the light of lower limits Tax free income, more them – to worry about this tax year. on the amounts that can be saved in information on the underlying pensions. portfolio, greater levels of liquidity However, this year looks like there will and greater levels of diversification be a reduction in the amounts that are all possible benefits of VCTs VCTs raise. Having enjoyed several when compared to EIS qualifying good years of fundraising many investments. VCTs already have cash to invest. In addition, the new rule changes mean that there is a smaller pool of potential investments for VCTs to make. For these reasons, VCTs are raising less money (if they are raising at all) this year. Coupled with increased demand, this means we are witnessing a capacity crunch in the VCT market, and advisers and investors who are keen to purchase VCT shares this year will have to move fast.

Of the funds that are raising, they are all growth and income funds. The more conservative VCTs with capital preservations are constrained by the new rules.

It is also significant that there are fewer providers in the market. We’ve noted that it’s difficult for new entrants and while we don’t think this is a big issue at the moment, it is one that’s worth keeping an eye on. If these conditions continue – lower levels of competition coupled with more money chasing fewer investment options – we think the balance of power in the VCT market will tilt in favour of providers over investors.

33 ADVISING ON VCTs

34 CONSIDERATIONS FOR ADVISERS VCT CHARACTERISTICS

Because of their risk profile and tax outcomes are less uncertain, by investing However, most investors (and most benefits, VCTs are not going to be in asset rich opportunities where the providers) focus on the primary market suitable for everyone. Investing in assets can provide some degree of because of the Income Tax relief on offer. VCTs requires a relatively high level of capital protection, or by a combination of Unlike EIS investments, a secondary tolerance for risk and capacity for loss all three of these strategies. market exists for VCT investors who and it’s more suitable for investors VCTs can use gearing (borrowing want to liquidate their investment. who have maxed out their pension money to invest), and this can magnify The market also allows new investors and ISA limits. But due to their unique risks (as well as returns), although very to purchase shares in mature VCTs. features, VCTs can be used in a number few VCTs use much gearing. However, readers should note that of ways to suit various investment secondary market purchases count objectives. This section will take a LIQUIDITY towards the permitted annual look at the merits of investing in VCTs Although VCTs are listed investments, investment limit for Income Tax relief and issues and concerns that advisers liquidity can still be problematic. VCTs’ (even though secondary market would have when recommending VCT shares are not widely traded and they purchases do not qualify for this investments to their clients. often trade at a discount to their NAV. relief). This means an investor cannot VCT managers do offer share buyback RISK AND RETURN: A QUICK claim Income Tax relief on more than schemes to enable divestment, but REFRESHER £200,000 worth of VCT shares a year, these are usually at a discount to the including both newly issued shares and Investments into small and medium underlying asset value and are not secondary market purchases. sized enterprises are always going to guaranteed. They typically offer to BUYING AT A DISCOUNT be deemed high risk. It is important to buyback shares at a 5% discount. understand the risks associated with Very often, demand for VCT shares Some VCT funds are positioned as VCT qualifying investments in a general on the secondary market can be low ‘limited life’ or ‘planned exit’ and have sense, and we will examine those because investors prefer to subscribe an objective of winding up as soon after risks here. However, each individual to new issues to obtain the Income Tax the five-year minimum holding period VCT investment opportunity will have relief. Therefore VCT shares tend to trade as possible, however this is still subject its own unique risks and, therefore, at a discount to the NAV of the fund. to being able to successfully dispose each opportunity must be individually of the qualifying investments (without Purchases of shares on the secondary assessed. there being any arrangements in place market don’t qualify for the Income INVESTMENT RISKS to sell the assets from the outset). Tax relief, but are still free from Income Tax and Capital Gains Tax. The reasons for this include: TAX RISKS Therefore, an advantage of buying They can be more reliant upon a In order to qualify for the tax reliefs, VCTs VCT shares at discount is that when small number of customers must follow a number of rules. These (if) the shares start trading at a price rules govern the types of investment closer to the NAV you will get a better They can have less capital available that they make, how much cash they can return than the performance of the to withstand a downturn in their retain within the fund and how quickly underlying assets alone, and any fortunes they have to deploy any funds they raise. returns obtained will be tax free. They can take a long time to bring If the VCT were to breach any of these In addition to taking the advantage of new initiatives to fruition and become rules they may lose their approved buying at discount, another benefit profitable status and investors would run of using the secondary market is that They can have very limited or the risk of having their tax relief investors who want to acquire VCT no trading record and proven withdrawn and clawed back by HMRC. shares are not tied to the timing of VCT management history fund raisings. The secondary market is SECONDARY MARKET open any time, unlike new share issues, Where they are listed on AIM, they which tend to be seasonal and only last can experience significant share price It’s worth considering the potential of for a certain period of time. Advisers volatility. the secondary market for shares in can find information on secondary VCTs. A strategy of purchasing shares These risks can be offset, to some market opportunities on London Stock at a discount to NAV, locking in free extent, by skilful stock selection and Exchange’s website where the current tax income and hopefully tax free gains sufficient diversification, by identifying price, monthly trading volume and as the discount narrows, is tempting. project based opportunities where

35 “The purpose of buybacks is to offer exit opportunities to investors.”

number of trades are recorded and SECONDARY MARKET AND VCT PROVIDERS published. In addition, the website also provides historical price data The secondary market is also an effective way to achieve liquidity for VCT and archives new stories of listed investors and many VCT managers support the secondary market in order to VCTs. However, there are no services make the sector more appealing to investors. However, the merits of secondary offering detailed commentary on the market purchases are also underplayed by many VCT providers, who prefer to secondary VCT market and making emphasise the tax advantages of buying new shares (and of course secondary recommendations or providing market activity does little to directly help VCTs raise funds or charge fees). reviews (as far as we know). BUYBACK POLICY TARGET BUYBACK DISCOUNT OF OPEN VCT OFFERS

Most VCTs have a share buyback OPEN OFFERS TARGET BUYBACK DISCOUNT policy. The purpose of buybacks is to offer exit opportunities to investors. ALBION VENTURES ALBION VCTS PROSPECT US TOP UP OFFERS 5% It’s generally not easy to gauge the depth of the genuine secondary AMATI AMATI VCT 1 & 2 TOP UP (16/17 & 17/18) 5% market for VCT shares, but it is CALCULUS CAPITAL CALCULUS CAPITAL VCT PLC (17/18) – SHARE OFFER NO GREATER THAN 10% probably safe to say that it is limited, so the buyback policy is vital for the DOWNING DOWNING FOUR VCT PLC – GENERALIST SHARE CLASS 0% BUYBACK DISCOUNT functioning of the market. Buybacks take the form of either the VCT DOWNING DOWNING FOUR VCT PLC – HEALTHCARE SHARE CLASS 0% BUYBACK DISCOUNT operating as the buyer of last resort for a market maker, or by dealing with FORESIGHT FORESIGHT SOLAR & INFRASTRUCTURE VCT 10% investors directly. In fact, buybacks are probably the most common way to exit. FORESIGHT FORESIGHT VCT 10%

Buyback policy is also a way for HARGREAVE HALE HARGREAVE HALE AIM VCT 1 & 2 (16/17 & 17/18) 5% VCTs to manage discounts on their shares. Most investment trusts offer OCTOPUS OCTOPUS APOLLO VCT PLC 5% to buy shares back at an agreed level of discount, often 5%, giving OCTOPUS OCTOPUS TITAN VCT (16/17) UP TO 5% shareholders some protection if the discount is any deeper than that. PEMBROKE PEMBROKE VCT B SHARE (16/17) NO MORE THAN 5%

However, buybacks are not PROVEN PROVEN GROWTH & INCOME VCT (16/17 & 17/18) UP TO 5% guaranteed and if lots of investors rush to exit at the same time, the TRIPLE POINT TRIPLE POINT INCOME VCT – E SHARES 10% policy may be suspended.

STATISTICS ON SECONDARY MARKET

APR MAY JUN JUL AUG SEPT OCT NOV

AVG VALUE TRADED (£) 186,297.24 93,005.65 126,655.99 117,647.41 83,464.81 186,276.95 114,828.28 117,081.06

AVG VOLUME 266,897 14,4710 201,211 167,936 124,287 272,697 201,370 197,166

AVG TRADES 14 17 11 10 11 12 11 12

This table presents some statistics on the trading activity of VCTs on the secondary market from the beginning of the 2016 tax year to present. Clearly, the scale of the VCT secondary market is not comparable to that of mainstream assets. For example, the number of trades in a month is less than 20 on average for VCTs, whereas a company share can trade tens or hundreds of thousands times over a month. Therefore, advisers should note that there is a limitation on how many VCT shares can be bought or sold on the secondary market at one time, and more importantly how much liquidity can be archived from there.

36 CLIENT CASE STUDIES SOME FINANCIAL PLANNING IDEAS

TAX FREE GROWTH # INCOME TAX REDUCER # TAX FREE INCOME # (DISPOSAL RELIEF)

VCT investors are potentially able Dividends issued by VCTs are Disposals of VCT shares are not to claim a reduction in their Income exempt from Income Tax and subject to Capital Gains Tax. There Tax bill of 30% of the cost of the investors who receive exempt is no minimum holding period for VCT shares they have purchased, dividends do not have to show this relief, and it applies to both up to the permitted maximum of them on their tax returns. There subscriptions for newly issued £200,000 worth of shares in any tax is no minimum holding period for shares and purchases of shares in year. The reduction will be applied to this relief, and it applies to both the secondary market. However, the investor’s Income Tax bill in the subscriptions for newly issued disposal relief is subject to the same tax year as the shares were shares and purchases of shares in permitted maximum. issued. For example, a client who the secondary market. However, Assume a client purchases purchased £200,000 of VCT shares the exemption from income tax £50,000 of VCT shares and then would be entitled to claim up to the on dividends is subject to the sells them for £75,000 six years maximum £60,000 of Income Tax permitted maximum. later. Conventional shares would relief (£200,000 x 30%). A client with a £250,000 portfolio have attracted £5,000 CGT Some important points to note: of VCTs that yielded 7% would (ignoring any annual allowances), Firstly, an investor’s overall Income be entitled to £17,500 tax free but shares in VCTs are CGT Tax liability cannot be negative (i.e. income annually (provided that no exempt. it is not possible to claim relief on more than £200,000 of VCT shares However, losses made on tax that hasn’t been paid or isn’t due had been purchased in any single disposals of VCTs cannot be used to be paid). If the client in the example tax year). to offset gains made elsewhere above only paid £30,000 of Income when calculating an investor’s Tax, £30,000 of that potential relief total annual CGT liability. would be lost (£60,000 - £30,000). In this case the client could instead have invested £100,000 in VCT shares and reduced their Income Tax bill to zero. Secondly, the minimum holding period to retain the Income Tax relief is five years. If an investor was to dispose of their shares prior to the end of the five-year period, HMRC will clawback the Income Tax relief. HMRC will clawback Income Tax relief by raising a special assessment for the tax year in which the relief was obtained. Note: Transferring the shares to a spouse DEFINITIONS or civil partner within the five-year period would not trigger a clawback of Income Share price: The price you actually buy and sell at Tax relief, but transferring the shares to Net asset value of a share (NAV): The value of all the investment company’s any other third party would do so. There is assets, less any liabilities it has, divided by the number of shares. Share price no clawback if the disposal or transfer is a can deviate from the NAV as investment company shares are traded on a stock result of the investor’s death. market, so at any point in time share price is determined by the buying and To qualify for Income Tax relief the client selling activities on the market at that point. The difference between share price must subscribe, pay for and be issued brand new shares in a VCT. Secondary and NAV is known as a discount or premium purchases, either purchased on an Discount: Buying shares at a price less than the NAV exchange or arranged privately, do not qualify for Income Tax relief. Premium: Buying shares at a price more than the NAV

37 DUE DILIGENCE & SUITABILITY ISSUES TO CONSIDER

The FCA’s thematic review of February Specialist independent research and of the client’s tax position, including tax 2016 focused on due diligence and, as reviews are available to assist advisers. calculations showing the current position well as understanding the nature of the But advisers must not overly rely on and the forecast benefits after the tax investment and the risks and benefits, these resources. FCA rules stipulate reliefs are obtained. Information that the regulator stressed the importance advisers need to be confident that the tax reliefs can be withdrawn as well of assessing the provider to establish the underlying processes third party as an awareness from the client that it is whether it’s appropriate to entrust them researchers use are sufficiently strong possible to lose capital invested should with client assets. So instead of the and robust enough for compliant advice. also be provided in writing and be part of usual due diligence requirements (see Independent research should be used the suitability file. previous reports), this year we’ll look at as a tool that highlights potential areas For this reason, it should be some specific items to examine. of concern, allows advisers to make demonstrated that suitable investors meaningful comparisons and saves time. Examining the product provider doesn’t have surplus capital to maintain their The adviser is then left to come to their just mean considering its size and standard of living without the funds own conclusions about the product/ strength, the levels of assets under earmarked for VCT investment. This manager, and to undertake their own management and market share. Recent means a full record of the client’s existing additional research where they feel it adjustments to qualifying trades and assets to show what capital is available necessary. legislative shifts towards growth capital and the status of the client’s portfolio mean that past performance may be a The FCA rules on suitability reports, prior to the recommendation. And, less relevant measure of a manager’s recently reiterated in the Financial Advice because of the statutory holding period skill. If their experience is in a field Market Review report, require that they: to qualify for the tax reliefs, there should that has now been removed from be no requirement for income or access Specify the client’s demands and VCT eligibility, such as renewables or to their funds during the term of the needs; management buy outs, or if they have investment as well as an understanding turned to growth capital but have few Explain why the firm has concluded that even after the expiry of the five-year investment credentials in that area, that the recommended transaction is period, there may still be a substantial advisers need to know. suitable for the client having regard to element of illiquidity, or that the client the information provided by the client; will have to sell shares at a discount to Involvement with growth capital and the NAV. investments generally requires a close working relationship between the Explain any possible disadvantages of investee company and the VCT. The the transaction for the client. manager should positively influence and Since investment in SMEs and young oversee the development of the investee companies is considered high risk by and this should be part of the terms of the regulator and the FOS because of the deal – for example, the manager the potential for failure being higher might insist upon a seat on the board. than larger companies, VCT suitability The manager’s past experience is also reports must reflect this, no matter what likely to govern its access to deals and mitigations are in place. Good research the sectors in which it has consistent and due diligence held on file provide deal flow. Bearing in mind the predicted evidence of why the product has been supply and demand imbalances, recommended as the most suitable for advisers must be satisfied that managers the client. are in a position to quickly and sensibly For clients with an attitude to risk at deploy all of the funds they raise. Deals the lowest end of the spectrum, there made that are outside of the manager’s is little prospect of justification of a normal risk parameters or investment recommendation of VCT. However, some mandate should raise a red flag. Cash with lower attitudes to risk but also an drag, under diversification, overpaying identifiable need for tax mitigation may just to get a deal and higher risk profiles be deemed suitable provided the case are all possible consequences of is clearly made as part of the suitability unsatisfactory deal flow. assessment. This will include full details

38 TYPES OF VCT PROS AND CONS

Although all VCTs have the same structure and their investments are governed by the same rules, there are many different types of VCT with different objectives and different risk and return profiles. In this section we’ll look at four main types of VCT.

PROS CONS

GENERALIST VCTs: Predominantly investing • More influence on investee in unquoted companies • Lower liquidity (excluding companies on companies AIM) across a broad range of sectors.

AIM VCTs: • Greater liquidity Predominantly investing in • High diversification • Managers are not the companies issuing shares on dominant shareholder AIM (Alternative Investment • Publicly available information on Market). investee companies

SPECIALIST VCTs:

Predominantly investing • Specialist skills and • Can be less diversified in a specialist sector, for technical knowledge example technology or healthcare.

LIMITED LIFE VCTs (PLANNED EXIT): • Exit shortly after qualifying Predominantly investing holding period is over in lower risk assets with a • Potentially lower returns view to winding the VCT up • Liquidity from a different yield due to debt investment as soon after the minimum perspective holding period as possible to qualify for the Income Tax relief.

39 OVERCOMING THE PII OBJECTION PII OBJECTION IN FOCUS

When advisers start to recommend VCTs for the first time, they must CONCLUSIONS: ADVISING ON VCTs notify their current Professional According to our survey (see the following section) many advisers are using Indemnity Insurance (PII) providers VCTs. However, by their very nature, they are unlikely to be something advisers and make sure their cover is are recommending week in, week out for their clients. They are only used with appropriate. If they don’t include VCT the right clients, in the right circumstances: for investment and tax planning advice in their range of services an IFA purposes. cannot remain independent; there’s no exemption from the requirement This in itself presents advisers with a challenge: deemed as risky investments, for IFAs to consider all products advisers need to spend more time and take more care with VCTs, even though simply because they cannot obtain they, for most advisers, only represent a small portion of business. And as we cover. Higher premiums making mentioned earlier, demand for VCTs is likely to exceed supply this year, and cover unaffordable or the total lack of advisers need to move fast to invest in opportunities they favour. We think that suitable cover would leave an adviser means starting research into the market early, identifying suitable options and with two options: self-insurance or to completing due diligence, forming an investment panel or a shortlist and then become a restricted adviser. starting the conversation with suitable clients. This might seem like a lot of work for what will be a small amount of total assets under advice, but we think The FCA is aware of the current it is an area where advisers are able to demonstrate a lot of added value. problems which smaller firms experience in obtaining adequate PII at In short, advisers need to be clear in their minds about the value they can add an affordable price. According to some for their clients by investing in alternatives and saving tax, something clients insurers, this is because the potential are less likely to be able to do for themselves. total premiums in the market for PII for personal investment firms may be significantly less than the sector’s total annual redress liabilities. As a possible contributor to barriers to firms entering the advice market, as something which is harmful to competition and the robustness of firms, and something that leads to greater reliance on the FSCS, the FCA is considering whether to look further at the professional indemnity insurance (PII) market in relation to the suitability and availability of cover for smaller advice firms.

There are pros and cons to all VCTs:

The FCA has focused on adviser due diligence in 2016, and it is arguable that more due diligence is required for alternative investments such as VCTs

Many VCT managers offer a buyback service, typically at a 5% discount to NAV, providing an exit for investors

There is a secondary market in shares in VCTs, and there may be some benefits to making purchases on the secondary market. However, secondary market purchases do not qualify for Income Tax relief.

40 MARKET RESEARCH

41 ADVISER SURVEY VIEWS FROM ADVISERS AND KEY STAKEHOLDERS

We gather the thoughts and opinions of advisers here, and this year we had responses from 124 advisers. Note that there is some bias in these results as in many cases the advisers we reach out to are already involved in tax efficient investments.

DO YOU RECOMMEND VCTs TO YOUR WHAT ARE YOUR TOP 3 REASONS TO WHAT ARE YOUR TOP 3 CRITERIA CLIENTS? RECOMMEND VCTs? WHEN SELECTING A VCT INVESTMENT?

72% TAX PLANNING (NON IHT) 58% PROVIDER REPUTATION 2%

25% 48% INCOME 53% PERFORMANCE HISTORY

57% 30% GROWTH 49% TRANSPARENCY OF UNDERLYING ASSETS 16%

10% IHT PLANNING 38% THIRD PARTY REVIEWS

FREQUENTLY NEVER 8% EXPOSURE TO A SPECIFIC SECTOR 31% PREVIOUS EXPERIENCE WITH PROVIDER

SOMETIMES NO RESPONSE 3% POSITIVE SOCIAL IMPACT 10% INVESTMENT PROCESS

82% of advisers surveyed stated that they do recommend VCTs to their 2% OTHER 1% OTHER clients. This is significantly higher than last year’s finding of 67%. A quarter Advisers were asked to pick their top Similar to the results for other tax of them recommend VCTs frequently. three reasons for recommending efficient investments, provider 16% have never used the product for VCTs. (Note: advisers weren’t given the reputation is the most cited selection their clients, a reduction from last option to rank their choices). The most criterion, ticked by 58% of advisers year’s figure (23%). Overall, it seems common reason cited by advisers for surveyed, which is more than double clear from our survey results that recommending VCTs, unsurprisingly, last year’s figure. Performance history there is an increasing proportion of is Non-IHT Tax Planning. Generating is the second most cited criterion advisers using VCTs to achieve their tax-free dividend income is the second (53%). From the top two criteria clients’ investment and tax planning most common reason, which was selected we can conclude that quality objectives. stated by nearly half of all advisers of a provider is the most crucial factor surveyed. Only 30% of advisers cited for advisers when choosing a VCT. Growth as one of their top three Transparency of underlying investments reasons, but this is still higher than and third party reviews are other last year’s 20%. Other responses important criteria, cited by 49% and barely got a look in. 38% of advisers, respectively. Compared to last year’s results the proportion of advisers who stated previous experience with provider has increased to 31% from 21%, showing more advisers are relying on providers they have worked with, perhaps through other investment vehicles. Clearly, providers with a greater product range and market influence have an advantage.

42 “Seven in 10 advisers believe that VCTs can coexist alongside ISA and pension as they offer additional benefits, such as diversification and ability to achieve higher returns.”

WHAT ARE YOUR TOP 3 CONCERNS WHAT ARE YOUR PREFERRED SECTORS WHEN SELECTING A VCT INVESTMENT? WHEN SELECTING A VCT INVESTMENT? 50% 55% INVESTMENT RISK 40%

40% COMPLIANCE & DUE DILIGENCE 30%

20% 39% LACK OF LIQUIDITY 10%

35% EXIT RISK 0% SECTOR MEDIA & INDUSTRY & GENERAL FOOD & DRINK FINANCIAL AGNOSTIC ENTERTAINMENT INFRASTRUCTURE ENTERPRISE SERVICES 25% SUITABILITY

Most advisers are sector agnostic (39%), which may indicate that advisers 17% LACK OF TRANSPARENCY recognise providers’ ability to choose the right investments across sectors. 35% of advisers surveyed prefer investments in the General Enterprise sector, which covers products and services from various industries without bias (and therefore 9% HMRC CHALLENGE is pretty much the same as being sector agnostic).

Industry & Infrastructure is the most cited specialised sector by advisers. We can 7% NO TRACK RECORD speculate that advisers who are particularly concerned about investment risk would give higher preference to investments that can preserve capital and the 6% OTHER ‘asset-backed’ nature of investments in Industry & Infrastructure could suit their needs. 55% of advisers who favour Industry & Infrastructure also indicated that Investment Risk is one of their top three concerns.

Over half of advisers cited investment Readers will find in the next section that VCTs launched in 2016 seamlessly match risk as one of their top three concerns with advisers’ preference, with most of them investing in the General Enterprise with VCT investments. This figure is a sector, and the rest in Industry & Infrastructure and Renewable Energy. lot lower than last year’s 90%, perhaps showing there has been improvement in advisers’ understanding of the asset ARE VCT INVESTMENTS ONLY APPROPRIATE ONCE BOTH ISA AND PENSION class. Compliance & due diligence LIMITS HAVE BEEN MAXIMISED? (40%) and lack of liquidity (39%) are the second and third top concerns; both figures are higher than last year. This may be linked to the FCA’s 2016 thematic review, which highlighted its 30% concerns with adviser due diligence. YES Suitability (another issue on the FCA’s current agenda) is also a key concern. 70% NO

Only 17% of advisers surveyed felt uncomfortable with lack of transparency in the VCT market, despite the result for the previous question, where 49% of advisers Three in 10 advisers agree with the statement that VCT investments are only picked transparency of underlying appropriate once both ISA and pension limits have been maximised, while the investments as a selection criterion. majority believe that VCTs can coexist alongside ISAs and pensions as they offer additional benefits, such as diversification and ability to achieve higher returns.

43 “64% of advisers believe that they will be using more VCT investments for their clients’ financial planning in the next two years.”

DO YOU SEE YOUR USE OF VCTs WHAT ARE YOUR PREFERRED SECTORS ARE ONLY HNW/SOPHISTICATED INCREASING OR DECREASING OVER WHEN SELECTING A VCT INVESTMENT? CLIENTS SUITABLE FOR VCT THE NEXT TWO YEARS? INVESTMENTS? 80% 7% 60%

64% 40% 50% 43% INCREASING 20%

0% PRIVATE AIM NO PREFERENCE YES NO NO RESPONSE 29% STAY THE SAME Of those advisers who recommend This question continues to split VCT investments to their clients, advisers. Half of the advisers who 72% have no preference with regard recommend VCTs think that they are to investee company type. Private only suitable for HNW clients (slightly company VCTs are more popular lower than last year’s 56%). among advisers who expressed a 43% believe VCT investments can be preference. 7% suitable for ordinary retail investors DECREASING 11% of advisers prefer AIM VCTs and and, looking more deeply into the we noted that 75% of advisers in this data, one third of advisers in this group group highlighted lack of liquidity as recommend VCT investments frequently one of their top concerns. This may to their clients. In addition, over half see suggest that advisers who need a their use of VCTs increasing in the next greater level of liquidity are more two years. Hence, we can see that the 64% of advisers believe that they likely to consider AIM based VCTs. In asset class is gradually becoming more will be using more VCT investments contrast, among advisers who prefer recognised and more common among for their clients’ financial planning private company VCTs only 23% stated ordinary retail investors, although the in the next two years; the figure lack of liquidity as a concern. capacity crunch we are experiencing is double last year’s 33%, showing may put the brakes on this. the increasing popularity of VCT investments. Although 7% of advisers Interestingly, minimum subscription indicated that they would decrease levels are lower this year which their use of VCTs, this is lower than may show that VCT providers are last year’s finding of 9%. responding to this notion.

LOWER CHARGES MORE TRANSPARENCY EASIER TO RESEARCH AND FOLLOW In addition to the questions above, we have also asked advisers to provide general comments on the market. The 10 most frequently requested changes by CLARITY ON SALE OF ASSET advisers are listed on the right. CONSISTENT CONTENT FOR COMPARISON To be honest, none of these ideas strike us as unreasonable. We also think that EXIT TRACK RECORD a great deal of progress has been made on many of these issues over the last MORE PROVISION (MORE CAPACITY) few years. But there is still room for improvement. MORE DUE DILIGENCE INFORMATION MORE SECTORS FEWER SEASONAL OFFERS 44 ADVISER ROUNDTABLE

INSIGHTS FROM ADVISERS MODERATOR: DAN KIERNAN INTELLIGENT PARTNERSHIP

We held a roundtable discussion with a handful of experienced advisers and investment professionals who use VCTs, to get a more qualitative view of how advisers perceive the VCT market.

FIRSTLY, WHAT SORT OF discuss VCTs with clients contribution limits for top CLIENTS DO YOU USE VCTS that have not signed a rate taxpayers, we do not ATTENDEES WITH, AND WHAT SORT OF self-certified sophisticated see this is as a sufficient INVESTMENT OBJECTIVES ARE investor statement or a reason to allocate more to YOU TRYING TO ACHIEVE? high net worth investor VCTs and so our usage is WHAT’S THE PRIMARY DRIVER statement. In terms of the more or less unchanged. FOR USE OF VCTS, IS IT investment objectives or The nature of the underlying DIFFERENT FOR DIFFERENT the objectives for using investments in VCTs CLIENTS? VCT, it’s quite often for compared to what is typically CHRISTOPHER GREEN We are focused on our diversification, and as part of the case with pensions is sensible tax planning. very different. Furthermore, ST JAMES’S PLACE Private Bank customers who are typically High Net with a tightening of the rules HAS YOUR USE OF VCTS Worth individuals who have on qualifying companies to CHANGED OVER THE LAST maximised their pension encourage VCTs to deploy TWO TO THREE YEARS? contributions and therefore genuine growth capital, in ARE YOU USING MORE OR are looking for a tax-efficient our view it is more important LESS VCTS, OR ARE YOU alternative with strong than ever to consider USING VCTS FOR DIFFERENT allocation to VCT primarily investment performance. REASONS? WHAT HAS BEEN in the context of investment MATTHEW WOODBRIDGE THE DRIVING FORCE BEHIND We’re very similar. Most of objectives, rather than BARCLAYS WEALTH MANAGEMENT ANY CHANGE? our VCTs are for people that focussing too much on tax for one reason or another Yes. It’s going up reliefs. are either capped or have significantly year on year at just got lifetime allowance the moment. And as long as WHAT ARE THE BIGGEST RISKS problems. They’re people the Government continue WITH VCTS IN YOUR VIEW? who are retirement planning. to tinker with the rules on HOW MUCH DO THESE RISKS VCTs, with the tax relief pensions, given what I’ve CONCERN YOU, AND HOW DO and the tax free dividends, already said, I think yes it will YOU QUANTIFY AND EXPLAIN FAISAL SHEIKH THEM TO CLIENTS? DO YOU can give clients what I think continue to increase. MONMOUTH CAPITAL is an incredibly effective HAVE ANY STRATEGIES TO retirement plan – provided Yes, for us the big change, MITIGATE THE RISKS? obviously that they can probably the same as for Changes to the rules on accept the risk that comes everybody else, has been the tax relief is a risk. Not with VCTs. So that’s our main pension changes and the just in terms of potential group now. It has changed, lower limits on what can change to the rules, but it used to be people that be saved into pensions. So also in terms of how the were just tax planning, but we’re using VCTs more often DAN KIERNAN managers cope with any now, because of the £40,000 now. It’s also been down INTELLIGENT PARTNERSHIP changes, and how advisers and even in a lot of cases to increased awareness can assess the managers’ £10,000 contribution limit and adviser training as strategy if there is no on pensions, people are well though. We’ve put a meaningful track record. running out of the ability to significant amount of time They may have invested contribute to them so VCTs and effort into educating our on one basis, last year, but very nicely address that. advisers about VCTs, and now rules have changed they are now more confident and your money is deployed High net worth about recommending them. entrepreneurs are our into different strategies this typical client base anyway, While we acknowledge the year... and as a rule, we don’t reduction in annual pension

45 CHRISTOPHER MATTHEW FAISAL DAN GREEN WOODBRIDGE SHEIKH KIERNAN

Liquidity is another big companies we’re going into. the providers we use, they investing in. And to do risk; there is only limited And we aim to demonstrate have all taken very good proper research, because scope for buy backs, so the in really practical terms, in and reasonable steps to again, and this possibly question is what happens if both our documentation make sure that as far as is applies more to the EIS everybody tries to liquidate and in discussions when possible they’ve taken on world rather than the VCT in a downturn? These are we’re sitting with the board the new rules and world, we did get feelings some of the biggest risks we client, to make sure they kept the risk as low as is some providers were almost see and focus upon in the appreciate that this is a possible. just looking around at what VCT sector. risky investment in the the competition were doing I think in a way it’s a good true sense of the word. and then finding similar I think it’s really vital thing in as much as it’s But we do everything we start-up companies and with the VCTs that people obviously a risk loaded can to mitigate as much of throwing those the money understand that they are investment anyway, so the that risk as we can by our in the hope that it could be stepping away to a great message hasn’t changed. recommendation and with the same as something that extent from what they It’s kind of like talking to diversification at our end as happened a year ago. That would normally think of as a client about exactly the well. might be an unfair criticism conventional investment – a same thing but just with but that’s how we felt about bond or unit trust or ISA. I Liquidity mismatch. a new set of rules. We some of them. think it’s really critical they Although VCTs are listed, haven’t changed what we understand that they have there is no genuine liquid stress to clients, that this I don’t think that, certainly moved into a new arena. secondary market for most is a potentially volatile for the companies that we And I appreciate that some of them. Clients must investment. use on the VCT world, I don’t of the very big VCT funds, remain in control of how think that’s an issue. I think the likes of Octopus, they and when they realise these HOW MANY VCT MANAGERS they are doing good ongoing reduce risk and volatility investments and avoid DO YOU TYPICALLY WORK due diligence and they are by experience and size, being in the position of a WITH? WHAT ARE YOU having a proper relationship and also by their stock forced seller. LOOKING FOR IN A MANAGER, with the investee companies picking. But nonetheless AND WHAT DO YOU THINK which is why there’s been THEY COULD DO BETTER? it wouldn’t take much for HAS YOUR PERCEPTION an awful lot of successes. VCTs’ performance to start OF THE RISKS INVOLVED We work with a small And also I think maybe the CHANGED SINCE LAST YEAR’S disappointing people if they number of what we regard timescale of VCTs lends BUDGET WHICH INTRODUCED haven’t fully been made as high quality managers. itself to investment much TIGHTER RULES FOR VCTS, aware that this is not like a We’re not looking for just a better, because they’re WITH A RENEWED EMPHASIS managed fund. representative sample of not looking to turn a quick ON GROWTH COMPANIES AND the market; what we want profit. They’re able to say And that’s what does worry EARLIER STAGE INVESTING? well, look, we got a five or six me about the way that to do is to take a view on, for It has increased the year run on this as opposed some of them are being example, their investment relative attractiveness of to the EIS world which is sold. They’re being sold strategy, their track record, certain VCTs which happen well, we know we’re going to off the back of tax relief, size and experience of the to have exposure to an have people banging on the tax free dividends and tax team and then select those existing set of investments door after three years and free growth. Well it might who we think are the very which pre-date the rule one week, looking to get suddenly appear to be a best and who fit our needs. changes. They can therefore their money out. little bit unwise if the VCT I think certainly from the offer a slightly different involved suddenly tanks and point of view of the bigger So there’s nothing particular risk profile to those entirely the [investors] haven’t been providers we’re quite happy that I would want to change, caught by the new rules. put in a position of really with what they do, we like certainly for the companies understanding that they’ve Obviously when the new the way they approach we use. We don’t use moved into a sophisticated rules were first thrown at potential investment literally the whole of the investment area. us it was, oh dear, are we opportunities and we look market, because I think almost trying to kill this for them to really have there’s too many very small So we do try and make as sector off by legislation? But good ongoing contact with providers out there and much effort as possible actually again, talking to the companies that they’re we tend to try and stick to to really research the

46 “Talking to the providers we use, they have all taken very good and reasonable steps to make sure that as far as is possible they’ve taken on board the new rules and kept the risk as low as is possible.” – Christopher Green, St James’s Place

the bigger ones because, sent large complicated It can be hard to make I don’t foresee any whilst track records aren’t documents through the post comparisons. particular clouds on the everything, you can judge that are not user-friendly. horizon, I’m reasonably On explaining the risks, a lot by the successes I would also like to see positive. From the point of some managers are very and failures that they’ve better communication on view of the VCT world I think good – they might include had. Sometimes a pattern performance for investors. we’ve got some really good examples that show that emerges and you think managers out there. I think performance can be lumpy, well, maybe some of the HOW HAVE YOU FOUND there are… from talking where the investor may successes are built on pure THE ADMINISTRATION to them and seeing what not get a dividend for three luck whereas the failures OF VCT INVESTING? HAS they’re doing there’s plenty years and then get a large tend to represent the fact COORDINATING THE VARIOUS of good opportunities, FORMS TO CLAIM THE one in year four, so don’t that they’re not doing their they just need the people RELIEFS BEEN CHALLENGING? invest if your requirement job properly. So rather on board to make sure HAVE YOU ENCOUNTERED ANY is for annual income. Those than spend lots and lots of they find them and then ISSUES WITH THE TIMING? kinds of examples are great, time talking to them, we’d do the deals. So I’m really but some managers just move away from them and I think it is much better quite positive about the place a list of generic risks what we’re really looking and easier then EIS, but VCT market and have been in the back of the brochure, at is good, solid, strong there are still issues with for a couple of years now, which is not so helpful. investment strategies over timing and communication they’re really strong. I see it that medium to long term. as stated above. LOOKING AHEAD, WHAT as a serious move forward, particularly in the high net Key considerations It’s fine for us because CHANGES WOULD YOU LIKE worth world. for us include a long and we’re quite a specialised TO SEE IN THE VCT MARKET? consistent track record; business in the sense that DO YOU HAVE ANY CONCERNS The Government – via FOR THE FUTURE, AND HOW a history of executing we’re a wealth manager legislation – have forced DO YOU SEE YOUR OWN USE investment strategy as looking after entrepreneurs us all to look at other [tax OF VCT CHANGING OVER THE planned without too much that generally have a net efficient] avenues, and NEXT 12 MONTHS? deviation or pivoting – worth of over £3 million. actually what a lot of us so, we don’t like to see We have a relatively small I would like to see a have done is discover this managers who used to be number of clients that period of no more rule world that we used to dip doing one thing, say, early we look after on a very changes! A period of into now and then for the stage tech investing, and bespoke basis. stability would be very odd speculative investor, now they’re also doing other welcome. but we didn’t have it on sectors. There needs to be a OUR PREVIOUS MARKET top of our list. Whereas One issue that I do have is strong rationale for that. RESEARCH HAS INDICATED now, allowing for the client that it’s a difficult market THAT ACCURATELY understanding and being We need to see strong to break into. There are QUANTIFYING RISK, CHARGES able to take the risk, I think governance and adherence big barriers to entry, and it AND PERFORMANCE (BOTH we’ve got a big business to industry standards of PRIOR TO INVESTMENT AND prevents competition. opportunity in VCTs. disclosure. They need to ON AN ONGOING BASIS) I agree with Matthew have a commitment to HAS BEEN A CHALLENGE about rule changes. I THANK YOU FOR YOUR TIME proactive and clear client FOR ADVISERS. WHAT ARE should emphasise that we AND FOR SHARING YOUR communications. YOUR THOUGHTS ON THESE support the tenor of the THOUGHTS WITH US. ISSUES? In terms of what could changes both to VCT and be done better, I think Well, charges are EIS schemes, in terms of they could communicate difficult to understand, the attempting to direct more with investors better - for managers need to explain genuine growth capital into example around the timing what they are charging smaller companies, rather of share allotments, and for and why the charges than some of the rather information on mergers and are high relative to other contrived situations we have what they mean for clients. investments. And there seen in the past. However, a When there are proposed is also wide dispersion period of stability would be VCT mergers, clients are of charging structures. welcome.

47 INDUSTRY ROUNDTABLE

MARKET DISCUSSION MODERATOR: DAN KIERNAN INTELLIGENT PARTNERSHIP

We held a roundtable discussion with a handful of fund managers who run VCTs to get their views on the current and future state of play within VCTs. ATTENDEES

HOW HAVE THE LAST 12 engaged with Kin Capital, Twitter. The growth of our MONTHS BEEN FOR YOUR who were with us last year, portfolio companies has led FIRM? HAS BUSINESS BEEN to act as promoter. They to strong demand for follow GOOD? WHERE HAVE YOU are introducing us to a lot on funding from the 50 SEEN INFLOWS COMING more of the IFAs and we’re companies already in Titan SHANE ELLIOTT FROM, AND HAS THIS now doing conferences, – hence the big fundraising BERINGEA, FOR PROVEN VCTs CHANGED FROM PREVIOUS events and we’re getting out again this year. So all in all a YEARS AT ALL? there a little bit more rather very positive year! than relying on high net We have seen strong It’s been a very strong worth wealth managers. We investor inflows to our year for the Proven VCTs are getting involved more Calculus EIS and VCT funds; and Beringea. We have with the IFA market and in particular we have seen made six new investments, the more traditional VCT an increase into our VCT seven follow ons, and exited JOHN GLENCROSS investors, and we feel we’ve which we feel reflects seven businesses. The IRR CALCULUS CAPITAL got a very credible story to the changes in pension on equity investment exits tell those people. regulation and increase in was 46%, and 12.5% on appetite for tax efficient Well, it’s been a record venture debt exits. investing and specifically year for fundraising into Dealflow has been VCTs. We receive inflows our VCTs – we managed consistently up two times from direct investors as well to raise over 30% of the on last year, we believe in as advised investors and I VCT market in the 2015/16 KOSTAS MANOLIS large part due to stronger wouldn’t say the split has tax year. We continue to DOWNING PR and marketing efforts changed dramatically from see adviser interest in and an expanding team. previous years. VCTs grow, driven by a Approximately 40% of deals number of factors. Policy Portfolio company deal flow seen in 2016 came from changes around pensions continues to be consistent corporate finance, which is and buy-to-let have led to despite Brexit and other somewhat different from an increased appetite for factors. In 2016 we saw over the last few years, where we complementary retirement STUART LEWIS 500 deals come through the saw a stronger skew from planning options. This OCTOPUS INVESTMENTS door, totalling over £1.4bn in direct introductions and increased interest from value. So we’re very happy other VCs. with how things have gone advisers led to an industry The remaining 60% of over the last 12 months. record fundraise of £100 million into Octopus Titan dealflow comes from We’ve had a good year. It VCT. As a business, we are various sources, including is very difficult to get into big believers in the value of direct, other VCs and ANDREW WOLFSON the generalist VCT market financial advice and the mix portfolio companies. and we were the first new of our VCT inflows continues PEMBROKE VCT 2016 was a good year one in 10 years when we to reflect this. for new business for launched four years ago. Downing, with a number We now have the required I must also say that we saw of new initiatives being presence to raise significant very strong investment launched and excellent funds. performance over the last 12 months, including fund-raising into our Certainly the tailwinds at a number of high profile established products. DAN KIERNAN the moment are in our portfolio company exits Given the recent changes INTELLIGENT PARTNERSHIP favour in terms of demand to industry heavyweights in VCT/EIS investment and supply, and we’ve such as Microsoft and rules we decided to restrict

48 “Given we have been growth cap investors since inception, our investment strategy hasn’t really been impacted by the new rules.” – Shane Elliott, Beringea

fundraising in these businesses looking for In addition to the legislative and will meet the needs of areas to ensure a realistic funding, although this has changes, growing concerns different types of client and deployment programme in been limited and doesn’t that the next two decades client objectives. line with deal flow. Downing seem to have impacted could see significantly lower will only raise funds for our ability to put money to returns from traditional JOHN, HOW ABOUT which deal pipeline is work. More importantly, we investments thanks to low CALCULUS? evident, so we feel that have doubled the size of the interest rates, high levels Yes, like many other funds we’ve been sensible in that investment team in the last of inflation and currency we have had to deal with, area. Our inflows have been 18 months, including adding concerns mean that firstly the complexity of coming from Downing’s more junior resources to advisers and their clients new EIS/VCT rules, secondly established and widening allow the senior partners to are increasingly looking the slow HMRC response support base of IFAs. We close more deals. to ‘alternatives’, such as times and thirdly the poor feel we’ve been sensible, VCTs, to meet their clients’ We have made strong, quality of guidelines given and we’re positive about the planning needs. consistent returns by to inspectors in applying the outlook for the future. investing in growth We’ve continued to invest new rules. WHAT CHALLENGES HAVE businesses, which means in our fund management However, materially, we YOU BEEN RESPONDING slightly later stage than teams as well as other parts have not had to change TO AND WHAT CHANGES true venture, and we intend of the business to support our investment strategy in HAVE YOU MADE TO YOUR to stick to our knitting for this growth in VCT demand response to new regulation, BUSINESS? HOW DO YOU SEE the next 2–3 years. In fact and support our existing and if anything our focus on THE 2016/17 “FUNDRAISING fundraising for 2016/17 has customers. This year we’ve growth and development SEASON” GOING? HOW ARE been our strongest to date. launched the first ever aligns well with the rules. YOU POSITIONING YOURSELF monthly contribution VCT, Well, for us, we see it Our position as a growth FOR THE NEXT 2–3 YEARS? so investors can lock in their going well. We are one and development investor investment needs early Of course the primary of a handful of VCTs not also sits well with clients before capacity dries up, challenge has been impacted by the rule who want to invest within even if they don’t have the the changes to VCT/EIS changes which most the spirit of the rules – cash to invest immediately. investment rules as I investors understand – we i.e. targeting investment just mentioned. This has do not have to change Like last year, we expect into areas where the required a change of focus our investment strategy our VCTs to fill up before Government perceives there on the investment front which has generated good their scheduled close dates, to be a real funding gap. and the recruitment of performance to date. Since so we are worried about So, like the rest of the additional team members to launching in late November investors who may have left market, our deployment help drive this development. we’ve certainly seen a far the planning until the very rate was a little slower in the But interestingly, in that greater take up from IFAs end of the tax year and risk first half of 2016 due to the context, the 2016/17 who haven’t directed their missing out. new EIS/VCT rules bedding “fundraising season” clients towards us before, in, but our completed ANY CHALLENGES? looks very promising for so that looks very positive. pipeline of investments VCTs as the impact of We are confident of having One challenge is that was strong in the second ongoing restrictions to a successful fundraise this we see that a lot of half of 2016, with a growing pension funding have year. advisers easily confuse or number of opportunities driven investors to look I think the changes to VCT interchange VCT and EIS – and profitable realisations. at alternative tax-efficient so a lot of our focus is on legislation did unsettle the We feel positive for the products to help fill the adviser education. VCTs and advisory market initially, 2016/17 fundraising season gap. VCTs can fit well as a EIS are incredibly different but it seems demand has and have already made supplement to restricted in terms of structure, bounced back stronger significant progress with pension funding. investment, risk profile and than ever, driven by the our VCT target raise, and liquidity. It may be because Yes, following changes significant changes to we expect to reach capacity they’re grouped together in to the VCT rules, we have pensions and buy-to-let I before the final close date. had to turn down some mentioned earlier. the financial press, when in fact they are very different

49 SHANE JOHN KOSTAS STUART ANDREW DANIEL ELLIOT GLENCROSS MANOLIS LEWIS WOLFSON KIERNAN

For the foreseeable future, in our approach, we of Oakley Capital, has a BERINGEA AND PROVEN? we will be keeping our focus invest in a range of areas network with some of the Well, as I mentioned, on backing good quality including technology, UK’s leading businessmen dealflow is up two times on management teams behind healthcare, environmental so we have always had a last year. We are a generalist companies with proven, services, sports and leisure, lot of new entrepreneurs investor, but with a focus on successful products and hospitality, business and coming to us for advice three key areas: Business revenues. We target more support services. and for funding. That services and software; established businesses with means we’ve got a fantastic Our pipeline of deals that digital media; and the growth potential, across a pipeline. have progressed past consumer sector. Sectorally, diverse range of different agreed ‘Heads of Terms’ We remain focused on we see SAAS [Software sectors. We will continue stage is strong and the consumer brands, in as a Service] businesses to focus on achieving number of prospective the premium sector and media such as digital capital growth from our deals through the door is across health and fitness, video as interesting areas. investments, underpinned up versus the same period hospitality, media and Trend wise, many of the by thorough due diligence last year, substantiating technology and fashion businesses we are focusing and risk management that there are a plethora of and accessories. We tend on are taking advantage of processes. This growth good businesses out there to steer clear of pure digital more commercial aspects of will help to support the requiring funding. offerings. We like things that machine learning, artificial VCT target regular annual people can buy, can touch intelligence, and internet of dividend of 4.5% of NAV. In December, we finalised and feel, can get on a shelf things. investments in the at Waitrose or Tesco or from WHERE ARE YOU INVESTING? leisure, technology and a department store. And WHAT CHANGES HAVE YOU HOW STRONG IS YOUR DEAL environmental services MADE IN RESPONSE TO PIPELINE AND WHAT ARE we continue to see a large sectors, although we had LAST YEAR’S BUDGET AND THE MOST INTERESTING AND number of opportunities. been working on each of THE TIGHTENING UP OF EXCITING AREAS? these for some months. We tend not to back pre- THE RULES ON WHERE YOU revenue opportunities, so We are continuing to That’s an easy one for CAN INVEST? HAS THE RISK the onus is very much on invest in all the same us! The vast majority of PROFILE FOR VCTS CHANGED whether someone can go target sectors and the funds we raise this NOW? out there, create a product, types of transaction as year will be used for follow Well, over the past four develop it, set up a supply before the rule changes, on investments into the or five months, I’ve been chain, take it to market. We including asset-backed existing portfolio. That approached by four other then evaluate how big we deals. However, we have means that we are investing VCT players who are having think that market is and how increased our focus on in known companies that to change their investment much we can help them earlier-stage growth capital have already shown they strategy and are wanting reach more of it. opportunities. Our deal can use our VCT funds to to buy into our pipeline. I pipeline is as strong as it has expand and prosper. Because in the space think that pretty much says ever been, but to achieve that we operate, which This question really it all! Although some people this we have had to invest in is really companies who gets to the heart of why say ‘we are changing our more dedicated origination have around £1 million Pembroke are here, because strategy’… it’s not just a resources, including and of turnover, the banking we haven’t changed our statement that is required, the hiring of half a dozen sector is still shying away rationale at all – we were it’s a whole culture change additional investment from these companies, set up originally to fund the throughout the fund, after team members last year. and we can’t see anything pipeline of opportunities all how do you turn round Therefore, transacting in the near future that’s we had coming in through from an MBO [Management in the post rule-changes going to change that. So, Oakley Capital office, even Buy Out] style business, environment is still strong we’re providing funding for before we established a into one that is investing in but I expect it to be less growth, just as VCTs were VCT. Oakley Capital are a growth? efficient from a manager’s originally set up to do in Private Equity firm with over cost perspective. 1995. $1.5bn under management. They are very different

As we are sector diverse Peter Dubens, the founder SHANE, HOW ABOUT skillsets. Who do the

50 “Advisers and investors now regularly tell us that the greater limitations placed on pensions have encouraged them to consider other tax-efficient investments such as VCTs.” – John Glencross, Calculus Capital

founders want as their WHAT ABOUT OCTOPUS, Given we have been UK healthcare and medical investors? They want people STUART? growth cap investors since technology unquoted who are going to help them inception, our investment companies, which is a niche Our VCTs have been grow. You could argue the strategy hasn’t really been space that offer a lot of focused for some time risk profile has changed impacted by the new opportunity if you have the on investment strategies but VCTs are going back to rules. We have developed right expertise. that fall exactly where the what they were originally an internal VCT checklist Government wants the designed to do. that is completed as an OUR PREVIOUS MARKET investment to go. This means initial assessment for new RESEARCH HAS INDICATED So I think the changes on we aren’t having to change businesses to assure we THAT ACCURATELY the whole were for the strategies, recruit new teams, don’t spend time on things QUANTIFYING RISK, CHARGES good, but I can understand throw away track records etc. AND PERFORMANCE OF VCT that won’t qualify, and those that have concerns INVESTMENTS HAS BEEN A The one area we are being review again in detail before over deployment of funds. CHALLENGE FOR ADVISERS. cautious on now is the fund- closing any new deals to Having to deploy cash WHAT ARE YOUR THOUGHTS raising into our AiM VCTs. assure we are not in breach. without a strong pipeline ON THESE ISSUES? The ‘age of the company’ We don’t see our risk profile of opportunities could rule in particular is slightly changing significantly. It is always our aim to be increase the risk profile of reducing the proportion of as clear and transparent each investment. On a different note, AiM offerings that qualify as possible. We focus Downing has continued under the new constraints, on providing easy to WHY IS THAT? to expand its non VCT/EIS so we aren’t raising much understand documentation offering and we are quite Well, some of the funds new money while we wait and timely communications excited about the Downing that we have seen, that and see how the AiM market to enable IFAs and investors Crowd platform that we have looked at specific settles down. to make an informed launched last year, which investments that we were investment decision. We Our investment strategy has already completed early stage backers of, in my recently redesigned our is similarly unaffected – we around £20 million of senior view, are looking to overfund documentation after having have always been a growth secured debt transactions. these opportunities. They requested input from investor. However, the initial want to overfund it with As far as VCT funds are investors and advisers; the uncertainty surrounding clever structures – basically concerned, one could say response has been that the interpretation of the an interest-charging that the risk has increased if they are now even easier new rules did disrupt structure rather than a a manager does not react to to navigate and digest. Our the speed of receiving straight equity deal. That the rule changes. Downing investor relations team advanced assurance whilst could be funds trying to has hired more dedicated is always on hand to help the regulators digested the do more of what they used resource to capture a fair with any queries. And our changes. In addition, the to be doing, MBO style: a share of the smaller pool diversified approach to costs of tax and legal advice loan going out, getting it of qualifying transactions portfolio construction leads for deals have increased. off the funds books, into a and to choose and structure to reasonable consistency in But the risk profile of our company, and charging an deals at appropriate risk long term performance. VCT has not changed. interest rate on it. It is not levels. In addition to that, we I think the most growth investing the way I But I agree with Andrew, are quite excited by a new challenging aspect of look at growth investing. for the general market, the partnership we have formed monitoring VCTs is that tightening of the rules has with Bioscience Managers I do think it is something advisers have to explain to dramatically affected those which has underpinned advisers should look at; their clients that while they VCT providers that focused the recent launch of the what is the structure of the are quoted, the share price on MBOs or operated in Downing FOUR VCT plc deal, and is it going in as on the screen is irrelevant. the ‘limited life/capital Share Healthcare Class. equity or is it a convoluted The quoted market price preservation’ sector. These This fund will utilise the loan structure that is doesn’t take into account VCTs will have to recruit or expertise and strong masquerading as an equity the dividend yield, nor the retrain teams if they wish track record of Bioscience investment? tax relief claimed, amounts to invest in accordance with Managers to pick attractive which are unique to each the new rules. investment opportunities in

51 SHANE JOHN KOSTAS STUART ANDREW DANIEL ELLIOT GLENCROSS MANOLIS LEWIS WOLFSON KIERNAN

investor’s own situation. The companies – like Titan – willing and able to embrace (management fees and share price is an indicator would appear to be higher this different approach will admin costs) at 2% and that of what the shares would risk. But investing in Titan be in a position to advise is ALL we charge (i.e. no get if sold on the secondary gives you access to 50 their clients in an area that portfolio company fees are market and whilst there is a companies immediately, so is becoming of increasing paid). I have seen a number small secondary market for there’s your diversification, interest to them. of deals where there are VCTs, it’s very unusual as the and many of those were excessive non-exec director When it comes to charges, buyer of secondary shares early stage companies when fees, there are monitoring it is important that focus would not benefit from the investment started many fees, there are deal fees, is not simply on the upfront income tax relief. years ago but they are now there are transaction fees, Initial Charge and Annual Inevitably, this drives down well established, profitable there are arrangement Management Charges the price in the market. But companies. It is arguably fees… as these products can this doesn’t matter, because much more risky to invest in have multiple charging When doing an MBO deal, clients would normally a VCT that will now have to mechanisms that may give that might be relevant, utilise the buyback facility do early stage investing for different names to what is because the company can offered by the Board of the the first time, particularly effectively the same thing. generally afford it out of VCT. It’s very important for if the offer is a new share profits. Where investing in a advisers and investors to class where you won’t even A simple approach is to growth opportunity, where check the buyback policy of get access to the previous put all charges into one of the companies are generally the VCT and their history of investments. three buckets – irrespective going to be marginally or facilitating buybacks, before of what the charges are Yes, I agree with Stuart. not yet profitable, I see it as investing. called: So I would suggest Advisers have become the fund investors paying bucket one is all one off So, it’s the NAV investors accustomed to having daily the fund manager a higher charges – such as the Initial need to focus on, both price feeds and risk profiling fee. That’s the reality. Charge, Dealing Fees in in terms of assessing the tools for mainstream and out, Exit Charges and We don’t do that. Again, I performance of the VCT products such as OEICs. Arrangement Fees. Bucket think advisers should look but also the value the client Understandably they have two could be all the ongoing out for fees charged to should be able to get should looked to apply these same charges – the Annual portfolio companies, but the client wish to sell after criteria to products that Management Charge, sadly on the whole it’s not the initial five-year holding really do not fit into the Annual Administration very clear in the literature. period. same mould; but firstly they Charges and any Monitoring We see fees as being However, once the are not priced daily priced Fees. Finally, bucket three something that is very focus is on NAV, and the – although a secondary should be any fees related relevant, and we see our dividends paid, it is fairly market exists for VCT to performance and this value to investors in our easy to compare historical shares – and secondly they should also include deferred performance. Therefore, performance. I would are not analysed for risk AMC linked to return. our success should be suggest performance over by the main proprietary Advisers should also note based on our performance, five years is most relevant systems. And additionally, that charges to underlying not on hidden fees. because that is the required the wide differentiation businesses, while not direct holding period. of offers available also to the investor, ultimately WHAT CHANGES WOULD means that meaningful On costs, the costs of impact returns and so they YOU LIKE TO SEE IN THE VCT comparisons between them running the VCT aren’t need to be factored into the MARKET? DO YOU HAVE ANY are difficult to make. This difficult to determine. The equation. CONCERNS FOR THE FUTURE, has meant that considerable Prospectus will lay out the AND HOW DO YOU SEE weight has been put on On charges, we are very THINGS DEVELOPING OVER initial costs of the offer as the independent reviewers lucky to be part of a much THE NEXT 12 MONTHS? well as the ongoing costs. who have the resource and larger private equity fund But, yes, risks are much access to get under the manager, which helps us I would like to see better more difficult to assess. bonnet of these products. fund our ongoing costs. recognition of VCTs/EISs in Superficially, a VCT that This seems a sensible That means we can cap the role they play in filling invests in early stage approach and IFAs that are the total expense ratio the funding gap that exists

52 “VCTs can fit well as a supplement to restricted pension funding.”– Kostas Manolis, Downing

for small UK businesses, I would like to see more key source of venture and the demand for VCTs to providing much needed obligation on VCTs to repay growth capital. continue to outstrip supply finance. We regularly come capital on exits. At the in the next 12 months. However, our view is that a across small businesses that moment it is allowable to number of the changes are are early stage in nature and retain capital invested from MANY THANKS TO YOU ALL too restrictive and will end cannot raise finance as they realisations and continue FOR GIVING YOUR INPUT. up excluding strong, early are caught by the new rules to fundraise. My concern stage growth businesses, – for example, it’s a small, is that if funds have too and therefore we would like historic share transaction much money, it becomes to see some restrictions or a company that was over that much more difficult to eased, especially the ability seven years old and that invest the money prudently. to provide some level of was bought for a negligible It goes without saying cash out and the 7-year rule. sum but has contaminated that fees are calculated the group. We believe there as a proportion of NAV, My wish is for no more is some fine tuning required financially benefiting legislation changes. if we are to be able to help managers who retain Investors like certainty so a genuinely small businesses capital. few years without any major that deserve support. changes would be welcome. My concern is that the If alternatives were industry gets considered to In the medium term I would available, there would be no be higher risk because of like the Government to demand from business for the amount of money that’s re-open discussions on VCT and EIS funds, but this flowing around in it, instead Social VCTs; I think there is is very clearly not the case. of flowing back to investors. an appetite for that both from investors and worthy We would like to see the The other thing that I think causes. time it takes HMRC to I would like to see would review VCT clearance be an HMT change that I would like to see a more applications reduce as it would allow individuals to sensible interpretation of the currently causes significant decide how they’re going ‘growth and development’ delays to investment to deploy their tax-efficient rule by HMRC. I feel that processes. HMRC’s recent money split between EIS HMRC is currently going approach of requiring and VCT, rather than to beyond the legislation in finalised legal documents have it capped at £1 million its guidance to Inspectors together with the clearance and £200,000 respectively. and HMRC should apply application (as opposed I would like to see a tax- the new rules as Parliament to submitting a headline efficient amount of £1.2 intended. For example, structure at the start and million, and left up to the confirming that raising funds finalised documents later investors to decide how to, in part, cover expenditure in the process when they they’re going to deploy that. relating to commitments are ready) also creates already made such as Well, as the other guys delays and frustration for rent, or paying existing have said, in some respects, entrepreneurs raising funds. employees, is permissible the VCT changes are It will also be interesting to under HMRC’s interpretation positive for the industry see how the Government of funds being used for as more VCTs which have reacts following Brexit growth and development. historically focused on and whether the business- buyouts or fixed returns But overall, we see little friendly noises we are will be shifting to growth likelihood of change in the hearing translate into a capital over the next 12 next 12 months, either in relaxation of the rules to months, and entrepreneurs regard to legislation, or the help fuel economic growth. will again see VCTs as a general market. We expect

53 CONCLUSIONS MARKET RESEARCH: CONCLUSIONS

First, advisers’ use of VCT investments is growing and many KEY POINTS of them expect to see their use of VCTs increase in the near future. As Tax planning is the most commonly cited reason for recommending VCTs there are fewer VCTs raising funds 82% of advisers we surveyed reccomend VCTs, and the majority (39%) are in the market this year, the survey sector agnostic result makes the anticipated “supply crunch” a more probable trend. Three in ten advisers think that VCTs are only suitable once ISAs and pensions have been maximised Non-IHT tax planning is the top reason for advisers to use VCTs for 64% of advisers think that their use of VCTs will increase in the next two their clients, followed by income years and growth. We can conclude that Advisers are split on whether VCTs are ever suitable for ordinary retail advisers are using the scheme in a investors way that the investment is design for and are understanding the asset class better.

The quality of a provider is the main criterion for advisers when selecting VCT investments, as investment risk remains as the most cited concern. There is also a significant proportion of advisers that are concerned about compliance and due diligence issues.

Most advisers have no preference on investment sector and underlying investee company type. But advisers who are concerned about liquidity tend to invest clients’ money in AIM VCTs.

Seven in ten advisers believe that VCT investments can be used even before pension and ISA limits have been maximised, and 43% believe VCT investments are also suitable for some retail investors. These results demonstrate that the asset class is being more widely recognised in the retail investment market.

54 INDUSTRY ANALYSIS

55 TERMINOLOGY DEFINITION OF KEY TERMS

This section takes a look at the current market of Venture Capital Trusts. The analysis is based on data obtained from the MICAP platform and is correct as of November 2016.

Our intention here is to give advisers data on key investment metrics – such as costs, minimum subscriptions and target returns – so that they have a reference point when reviewing the market for VCT investments and can understand the levels of returns to expect and at what prices. We start by giving some clarification on the terminology we will use:

OFFER STATUS

OPEN OFFERS VCTs that are raising money at the time of writing

2016 OFFERS VCTs that launched in the 2016/17 tax year (after April 2016)

HISTORICAL OFFERS VCTs that launched in previous tax years (everything before April 2016)

INVESTMENT STRATEGY

CAPITAL PRESERVATION Investments exploiting an asset, either a physical asset or the rights to an intangible asset

CAPITAL PRESERVATION & GROWTH Investment into asset backed trading companies

Investments exploiting an asset typically with contractual income streams that will allow it to CAPITAL PRESERVATION & INCOME pay an income to investors

GROWTH Investment into trading companies for long term capital growth

GROWTH & INCOME Investment into trading companies for long term capital growth and income

INVESTMENT SECTOR

Generating energy, typically from renewable sources (including wind, solar and hydro), clean ENERGY GENERATION sources (including anaerobic digestion) or other sources (including diesel powered generators)

GENERAL ENTERPRISE Providing general products and services, or an investment with no sector bias

Operating in the diversified manufacturing, cars, heavy equipment, aerospace, roads and INDUSTRY & INFRASTRUCTURE business services areas

MEDIA & ENTERTAINMENT Making films, producing theatre productions, printers and disseminators of news etc.

RENEWABLE ENERGY Generating energy from renewable sources, including wind, solar, tidal and biomass

VCT TYPE

The most common type of VCT. Usually broad-based and invest in a range of unquoted GENERALIST companies in a wide variety of sectors and can be in various stages of development

This type of VCT invests in companies listed on the Alternative Investment Market (AIM), the AIM junior market to the London Stock Exchange

SPECIALIST Specialist VCTs have a sector bias and invest in one sector or industry

These VCTs typically aim to exit and distribute assets back to investors after 5 to 7 years and LIMITED LIFE are designed to bear lower risk and generate lower returns than other VCTs

56 TERMINOLOGY OVERALL MARKET CHANGES AND DEVELOPMENTS

The industry analysis begins with OPEN OFFERS looking at the composition of the NUMBER OF OFFERS OPEN OFFERS market for VCT opportunities. We will examine the market by grouping HISTORICAL 54 2 products by their investment strategy, investment sector and VCT type. 2016 OFFERS 11 11 We will show our readers developments and changes in the VCT market by comparing our statistics on MARKET COMPOSITION BY INVESTMENT SECTOR new launches to offers introduced to the market in the past. GENERAL ENTERPRISE There are 65 VCTs recorded in our H IS T O INDUSTRY & INFRASTRUCTURE register in total. 13 of those are open R I C to new investments while the other 52 A L PHARMACEUTICALS & BIOTECH. are closed. Eleven VCTs launched after 2016 OFFERS April 2016 and all of them are still raising ENERGY GENERATION money, so there are two open VCTs that MEDIA & ENTERTAINMENT launched prior to this tax year. RENEWABLE ENERGY MARKET COMPOSITION BY INVESTMENT SECTOR

82% of 2016 VCTs do not have a MARKET COMPOSITION BY INVESTMENT STRATEGY sector bias and invest in the General HISTORICAL 2016 OFFERS Enterprise sector, while the rest invest their funds in the Industry & 100% 100% Infrastructure and Pharmaceuticals & Biotechnology sectors. Historically, 80% 80% there has always been more VCTs investing in the General Enterprise 60% 60% sector. The chart shows over 90% of historical VCTs invested in the General 40% 40% Enterprise sector and Industry & Infrastructure only represented 3% of 20% 20% the market in the past. 0% 0% In the section above we saw that Industry & Infrastructure is advisers’ CAPITAL PRESERVATION CAPITAL PRESERVATION & INCOME second most preferred sector after General Enterprise, in line with what CAPITAL PRESERVATION & GROWTH GROWTH & INCOME the adviser survey suggests they prefer, and there are a fair number of Unlike EIS and BPR investments, which can follow a diverse range of investment VCTs in this sector that are still raising mandates, the Growth & Income investment strategy dominates the VCT funds. market. However, it is hardly a surprising observation given the recent rule changes designed to encourage VCT managers to invest in more risky growth The Renewable Energy and Energy opportunities, and the fact that VCT dividends are tax free. In addition, 78% of Generation sector each had 2% advisers surveyed said they recommend VCTs for either Growth or Income, so we market share before disappearing think it should be fairly simple for advisers to find VCTs that match their needs in from the market due to the ban this respect. on Venture Capital Schemes from investing in renewables. The other 2% More than a quarter of all historical VCTs have capital preservation as their of historical VCTs have invested in the primary or partial investment objective. There has only been one purely capital Media & Entertainment sector. preservation VCT ever launched in the market (and that was a Limited Life VCT).

57 “Our VCTs have been focussed for some time on investment strategies that fall exactly where the government wants the investment to go.” – Stuart Lewis, Octopus Investments

MARKET COMPOSITION BY VCT MARKET COMPOSITION BY VCT TYPE TYPE

The most common type of VCT is HISTORICAL OFFERS 2016 OFFERS Generalist. Two thirds of all VCTs are 100% 100% Generalist, investing in unquoted businesses with no sector preference. 80% 80% This again matches with advisers’ preference; as 39% of advisers 60% 60% surveyed are sector agnostic and 35% prefer General Enterprise. 40% 40%

At this point we’d like to remind our 20% 20% readers that a Generalist VCT is not equivalent to a VCT investing in the 0% 0% General Enterprise sector. Except Specialist VCTs, all other types of VCT can have General Enterprise as their GENERALIST AIM LIMITED LIFE SPECIALIST investment sector. In fact, all of the Limited Life VCTs and AIM VCTs in our register deploy their funds in the CHARGES General Enterprise sector.

Limited Life VCTs is the smallest AVG MODE MIN MEDIAN MAX segment of the market and there haven’t been any Limited Life VCTs 2016 HIST 2016 HIST 2016 HIST 2016 HIST 2016 HIST launched in 2016. The proportion of AIM VCTs has remained at 18% in INITIAL CHARGE TO INVESTOR 2.36% 2.69% 3% 3% 0% 0% 3% 2.75% 3% 5.5% 2016. In the previous section, 72% of advisers indicated that they have INITIAL CHARGE TO INVESTEE 0.55% 0.23% 0% 0% 0% 0% 0% 0% 3% 5% no preference on investee company type and among those who did state TOTAL INITIAL CHARGE 2.91% 2.86% 3% 3% 0% 0% 3% 3% 5% 7% a preference, private company is the majority. So there is again no divergence AMC CHARGED TO INVESTOR 1.97% 1.89% 2% 2% 1.5% 0% 2% 2% 2.5% 3.5% between demand and supply in terms of investee company type. AMC CHARGED TO INVESTEE 0.10% 0.04% 0% 0% 0% 0% 0% 0% 0.5% 2% We can also see that the proportion of

Specialist VCTs has doubled in 2016. TOTAL AMC 2.06% 1.89% 2% 2% 1.5% 0% 2% 2% 3% 4% CHARGES ANNUAL PERF FEE 12% 10.71% 20% 20% 0% 0% 20% 15% 20% 20% Initial Charge and Annual Management Charge are the most EXIT PERF FEE 5.45% 2.64% 0% 0% 0% 0% 0% 0% 20% 20% common fees charged by managers. Both fees can also be charged to ANNUAL PERF HURDLE 22.4% 42.25% 3% 100% 0% 3.5% 3% 6.5% 100% 100% investee companies, but for the sake of our analysis we will focus on the EXIT PERF HURDLE 69.3% 86.56% N/A 100% 30% 3% 100% 100% 105% 105% total (Initial charge to investor + Initial charge to investee). INITIAL DEAL FEE 0% 0.08% 0% 0% 0% 0% 0% 0% 0% 3%

The average Initial Charge for 2016 VCTs is 2.36% whereas it’s 2.86% EXIT DEAL FEE 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% for historical VCTs. In addition, the range for Initial Charge narrowed ANNUAL ADMIN CHARGE 0.37% 0.12% 0% 0% 0% 0% 0% 0% 0% 3.25%

58 “It’s great to see VCTs return to their original purpose: funding high growth companies to help secure the UK’s future.” – Andrew Wolfson, Pembroke VCT

significantly this year. Initial Charges TARGET DIVIDEND of historical VCTs range from 0% to 7% compared to 0% to 5% for 2016 VCTs. HISTORICAL OFFERS 2016 OFFERS

The average AMC increased in 2016 7% to 1.97% from 1.89%. Similar to the Initial Charge the range for AMC has 6% also narrowed from 0% to 4% to 1.5% 5% to 3%. Readers are reminded that AMC is charged regardless of manager 4% performance, so it can add up to a 3% considerable amount after several years. 2%

In comparison to EIS, the level of 1% Initial Charge and AMC stated by VCT 0% managers is higher, but it doesn’t necessarily mean that investing in AVG MODE MIN MEDIAN MAX VCTs is more expensive. The key difference in fee structures between The average level of target dividend increased slightly from 4.90% to 4.94% the two asset classes is that most EIS as there were historical VCTs that do not distribute income (those with target managers charge an Exit Performance dividend of 0%). 5% is the most common level of target dividend the industry Fee, which is less common among offers, quoted by almost 40% of the VCTs in our register. VCTs. Our data shows less than 10% of VCT managers charge an Exit MINIMUM SUBSCRIPTION Performance Fee. HISTORICAL OFFERS 2016 OFFERS In contrast, an Annual Performance Fee is more common with VCT £10,000 investments. 28 out of 54 (6 out of 11) historical (2016) VCTs stated an Annual £8,000 Performance Fee, with 20% being the mode. A few managers charge a 5% or £6,000 10% Annual Performance Fee.

Managers who charge an Annual £4,000 Performance Fee usually specify an Annual Performance Hurdle so £2,000 that the performance fee is only payable when the hurdle is met. £0 Therefore, it is important for advisers to investigate whether a hurdle has AVG MODE MIN MEDIAN MAX been appropriately set and whether a This year’s average minimum subscription is 4.4% lower than last year’s figure, performance fee is justified. which is what we have expected, as VCT managers are slashing their fund-raising targets, so it is natural to lower their minimum subscription levels at the same time. The mode is £5,000 regardless of investment strategy. Although the min increased to £3,000 from £2,000 in this tax year, the max dropped by £4,000 from £10,000 to £6,000.

While comparisons between EIS and VCT are interesting (and something our readers request), it is important to note that the range of charging structures, investment horizons and level of returns makes it difficult to make apples to apples comparisons.

59 “We cannot observe any significant imbalances between what advisers need and what providers offer.”

TARGET FUNDRAISE CONCLUSIONS: INDUSTRY HISTORICAL OFFERS 2016 OFFERS ANALYSIS

£100m It is clear that the rule changes on qualifying companies had an £80m impact on the VCT market, as shown in market composition, minimum £60m subscription and diversification. All new VCTs launched this year follow £40m the Growth & Income investment £20m strategy, and the levels of minimum subscriptions stated by new offers £10m are lower than they used to be. We expect these trends to continue £0 and to observe more clear shifts AVG MODE MIN MEDIAN MAX in these measures in the coming years. Surprisingly, the average target fundraise of 2016/17 VCTs is slightly higher than the Advisers’ preference has generally average of historical VCTs, contrary to our expectation of a lower value as a result of been met by providers in terms the recent changes. However, the table shows that this year’s max target fundraise of investee company type and is £30 million lower than last year’s £100 million. Some managers have merged their investment sector and we cannot VCTs in response to the changes which may explain why the average value didn’t fall observe any significant imbalances down. For example, Baronmead has merged four of its VCTs into two. between what advisers need and what providers offer – other than DIVERSIFICATION the anticipated mismatch between supply and demand overall. HISTORICAL OFFERS 2016 OFFERS The average Initial Charge and AMC 80 of VCTs are higher than EIS. VCT 70 managers generally don’t charge an Exit Performance Fee, but our data 60 reveals that an incentive fee on exit 50 is becoming popular among new 40 VCTs. Annual Performance Fees have been more common with VCT 30 managers. 20 However, as the fee structures can 10 vary so much between individual 0 offers and between the EIS and VCT sectors, making meaningful AVG MODE MIN MEDIAN MAX comparisons between the two can We also take a look at the level of diversification in the VCT market. We will use be tricky. target number of investee companies as a measure. The statistics are in line with our expectations, with VCTs launched in the 2016 tax year being more diversified than historical VCTs. The average number of investee companies increased from 37 to 38. Among historical VCTs the minimum diversification is merely three investee companies, while the least diversified 2016 VCT has 11 investments in its portfolio. Since VCT managers are forced to focus on growth investments they must at the same time expand the number of companies in their portfolios to mitigate the risk, which explains why the level of diversification is rising among new VCTs.

60 MANAGERS IN FOCUS

DISCLAIMER Some of the managers have included some performance information in the following pages. As always, past performance is not a reliable indicator of future performance.

This document is for professional advisers only, and it is not to be relied upon by retail investors. The value of an investment, and any income from it, can fall as well as rise, so investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on the portfolio companies maintaining their qualifying status. The shares of the smaller companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell. These products are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. Neither Intelligent Partnership nor the managers offer investment or tax advice. We recommend investors seek professional advice before deciding to invest.

61 BERINGEA BERINGEA PROVEN VCT

ABOUT BERINGEA OUR PROVEN VCT CASE STUDY: ProVen VCTs are managed by Beringea, The principal investment strategy THIRD BRIDGE an award winning, specialist venture of PGI VCT is to identify a number of and growth capital firm which manages small and medium sized UK private nearly £200 million of VCT assets. companies with the potential to grow Third Bridge Group is a provider rapidly and to provide them with the of primary research services to Beringea has over 25 years’ capital and management support professional investment firms and experience of managing investments they need to be able to take full their advisers, including hedge in unquoted companies and has advantage of this potential. In return funds, private equity and mutual managed the Company since it was for this capital, PGI VCT will take a fund managers and management launched in 2001. Beringea is part of shareholding in the company, allowing consultants. Third Bridge an international fund management it to benefit from future increases in Group helps its clients to make group which manages more than $500 the business’s value. important investment decisions by million of venture capital assets. connecting them to authoritative Rapidly growing SMEs make attractive The investment management team market intelligence provided by acquisition targets for larger comprises 12 executives, who have industry specialists. companies looking for ways to boost more than 85 years’ combined their own rate of growth. A sale to Third Bridge Group was founded experience of making equity and debt a larger business is, therefore, the in London in 2007 and then quickly investments in SMEs. most frequent means by which PGI expanded into international Once an investment has been made, VCT achieves profitable disposals of markets, opening a New York office Beringea uses the experience of its successful portfolio companies. Any in 2010, followed by offices in Hong investment management team to profit made on an investment will Kong, Beijing and Mumbai. The add as much value as possible to the then be available to be paid out to company grew rapidly from its investee company. It also monitors shareholders as a dividend in line with inception. all investments closely to ensure that the company’s dividend policy. PGI VCT invested £2.1 million in any problems are identified at an early Third Bridge Group in November stage, so that appropriate action can 2012, alongside ProVen VCT, to be taken swiftly if necessary. support further international expansion and the development of additional research products. PERFORMANCE OF PGI VCT OVER THE LAST FIVE YEARS The company recently moved into larger offices in both London and The Total Return performance of the Ordinary Shares over the last 5 years New York to accommodate its (to 31 May 2016) is shown in the chart below: growing workforce.

NAV PER SHARE CUMULATIVE DIVIDENDS PER SHARE

110

100

90 Pence 80

60 MAY 2011 MAY 2012 MAY 2013 MAY 2014 MAY 2015 MAY 2016

62 BERINGEA CALCULUS CAPITAL CALCULUS VCT OFFER

ABOUT CALCULUS CAPITAL OUR VCT OFFER CASE STUDY: Calculus Capital have been investing in We are pleased to be offering a top up small UK companies for over 17 years, to the Calculus VCT, which will target GENEDRIVE making us a trusted choice for VCT an annual dividend of 4.5% of NAV. The

investors. Having created the UK’s first Calculus VCT will invest alongside our EIS WEBSITE www.genedrive.com approved EIS Fund in 1999, Calculus Funds, providing access to larger deals into are pioneers of the tax efficient more established companies which are LATEST £2.5m investment space and we’ve been further along in their growth trajectory. INVESTMENT managing VCTs since 2005. At Calculus, we believe that investing DATE July 2016 We are known in the market for our in these more established companies strong performance, delivering regular means failure rates are lower and the Healthcare SECTOR dividends to our investors. We believe time to exit is shorter – enabling us to Equipment & Services our solid track record is down to our pay regular dividends. We are active robust due diligence processes and in a diverse range of sectors and Genedrive, previously called highly experienced investment team. target companies with the following Epistem, is a Manchester The core team has been together characteristics: based biotechnology company since inception, and we have brought Strong management teams commercialising its expertise in significant further talent on board adult stem cells in the area of Recurring revenues and a strong over the years. infectious diseases. Their ground balance sheet As a growth investor, we are focused breaking product Genedrive® is Profits or a clear path to profitability on providing capital to established a next-generation Point of Care businesses which are looking to grow Clear route to exit molecular diagnostic system and develop. We invest across a wide Can achieve our target IRR of 20%. providing a low cost, rapid and range of sectors; from technology to accurate diagnostics platform for The key objective for each of our healthcare, leisure and hospitality to the diagnosis of infectious diseases investments is capital growth, biotechnology. Put simply, we seek to such as Tuberculosis (TB) and alongside robust investment and back impressive management teams Hepatitis C. monitoring processes to manage behind proven businesses. risk. We are ‘hands on’ investors, Since our initial investment, the

AGRI-SCIENCES 2% and usually take a seat on the board, company’s headcount has increased ALTERNATIVE ENERGY 4% driving value creation and guiding our from 2 to 86 people, revenues have BIOTECHNOLOGY 2% companies through to a successful exit. grown to over £5 million, a new BUSINESS & PROFESSIONAL SERVICES 9% CEO has been appointed and a new CONTENT MANAGEMENT SOFTWARE 2% US laboratory has opened. The DIGITAL MARKETING SOFTWARE & SERVICES 2% SECTOR SPLIT: INVESTMENTS / EXITS company also recently launched DIVERSIFIED FINANCIALS 2% Genedrive® in the Indian market to ENERGY EQUIPMENT & SERVICES 5% test for TB and antibiotic resistance. HEALTHCARE EQUIPMENT & SERVICES 5% Genedrive gained further financial INTERNET 2% support from the US Department MANUFACTURING 2% of Defence and the Bill and Melinda MARKETING 2% Gates Foundation. More recently, MATERIALS 4% the company’s research and MEDIA 2% development team achieved CE OPERATIONS PERFORMANCE MANAGEMENT marking for the Hepatitis C test in SOFTWARE & SERVICES 2% anticipation of phase 1 launch in PHARMA SERVICES 9% the EU in 2017. PHARMACEUTICAL DRUG DEVELOPMENT 2% PLATFORM BPO 2% Genedrive is an investment in both RESTAURANT & FOOD SERVICES 7% the Calculus VCT and EIS Funds. SPECIALIST ENGINEERING 9% SPORTS, TRAVEL & LEISURE 5%

TECHNOLOGY HARDWARE 5% *Data as at November 2016, includes all TRADITIONAL ENERGY 9% investments and exits across Calculus VCT TRANSPORTATION 5% and EIS Funds 63 DOWNING DOWNING FOUR VCT

ABOUT DOWNING OUR VCT OFFER

The VCT is managed by Downing LLP. Our origins date back In December 2016, Downing FOUR launched two Offers for over 30 years and we are an experienced manager of VCTs, the new Generalist and Healthcare Share Classes, which are with over £200 million under management (of a total £700 seeking to raise up to £20 million and £10 million, respectively. million under management as at 30 November 2016). Since The Share Classes aim to build portfolios of investments to 1986, more than 35,000 investors have helped us raise over support the growth of small UK businesses and healthcare £1.7 billion that has been invested into UK businesses across companies while offering investors access to VCT tax reliefs. a range of sectors, including renewable energy, care homes, The Generalist Share Class aims to provide attractive data centres, children’s nurseries, early-stage technology returns to investors by investing in a portfolio of growth and satellite earth stations. companies, at different stages in the business life cycle. We know that a successful business needs a strong team The Healthcare Share Class aims to provide attractive behind it, so we look for management teams with the returns to investors by investing in a portfolio of healthcare appropriate skills with whom we can build a long-term companies. The focus will be on development and relationship. We take the time to get to know them, their expansion funding for innovative healthcare and biomedical business and their aspirations, and work alongside them businesses. Downing has appointed BioScience Managers to achieve success. Once invested, we offer support in a Pty Ltd as our healthcare investment adviser. variety of ways to help businesses grow and often have a In addition, we are pleased to offer a new monthly standing representative on investee companies’ boards to maintain order option, allowing investors to subscribe a regular oversight. amount in the VCT, in addition to the usual lump sum offer. As annual and lifetime pension limits continue to be restricted, VCTs may provide an attractive supplement to retirement income through tax-free dividend payments.

Our new VCT share classes have recently opened. Set out below are two example investments that illustrate the type of investments we will be seeking to make.

CASE STUDY 1: CASE STUDY 2: FIRSTCARE ADHERIUM

The example below for the Generalist Share Class was Our Healthcare Share Class’ investment adviser is an investment made by Downing ONE VCT in 2007. BioSciences Managers Pty Ltd and an example of one of their previous investments is set out below. Revenue generating pre-profit – FirstCare Adherium FirstCare is an absence management solutions company helping businesses track and reduce the Adherium Limited is a company seeking to tackle medical number of absences among their employees. They non-adherence (the failure to follow a prescribed maintain the UK’s largest database on absences medical plan). Through their smart personal medication covering c.180,000 employees and recording c.12 million monitoring system and products, Adherium helps absences. Since Downing’s investment, FirstCare patients manage and track their chronic respiratory has merged with their main competitor, reached conditions. Their SmartinhalersTM synchronise with the profitability and is now expected to expand globally. app and secure online database to provide reminders and information, improving medical adherence in children by (SOURCE: FIRSTCARE) 180%. Adherium was successfully listed on the Australian Securities Exchange in August 2015. They have conducted 22 clinical trials across six countries. The company has received US FDA 510(k) clearance and their CE Marking, allowing for greater international market access.

Please note that past performance is not a reliable indicator (SOURCE: BIOSCIENCES MANAGERS) of future performance.

64 OCTOPUS INVESTMENTS OCTOPUS TITAN VCT

ABOUT OCTOPUS INVESTMENTS Octopus Titan VCT is managed by the Ventures team at Octopus, who have CASE STUDY: The best companies and products a combined investment experience TAILS.COM make your life simpler, not harder. of 150 years, bringing together a wide Why should financial services be range of backgrounds. This VCT is any different? When Octopus was The UK dog food market is worth currently open for investment with a founded in 2000, we wanted to build £1.6 billion, online sales of pet share offer of up to £70 million, with an investment company that put its supplies are growing and a fifth the potential for a further £50 million. customers first, by solving real life of pet owners are already feeding issues. We also wanted to be fully The VCT currently targets a regular their dogs according to specific accountable, honest and upfront about annual dividend of 5p per share, with diets. Tails.com takes advantage how we managed investors’ money. the potential for additional special of these opportunities by tailoring dividends if portfolio companies deliveries of food with the ideal Today we manage more than £6 billion are sold for a significant profit. For nutrition and quantity for each dog. on behalf of tens of thousands of retail example, a 5p special dividend was investors, institutions and charities With easy-to-manage online paid in early 2016 following the sale (source: Octopus Investments, Dec ordering and free ongoing of portfolio company SwiftKey to 2016). And we’ve built market-leading deliveries, the company continues Microsoft and the sale of Vision Direct positions in tax-efficient investments to perform well, now feeding over to Essilor, the global market leader in and smaller company financing. 40,000 dogs and growing revenue contact lenses. by 5x in the 12 months to July 2016. Having launched our first VCT in 2002, Please note that the value of an today we are the UK’s largest provider Individual portfolio example is investment, and any income from of VCTs as well as investments that for illustrative purposes only and it, can fall as well as rise. Investors qualify for Business Property Relief should not be considered as a may not get back the full amount (source: Tax Efficient Review, 2016). We recommendation to invest. All invested. Tax treatment depends offer a range of VCTs to suit different information sourced from tails.com, on individual circumstances and objectives. These include: Octopus July 2016 (for latest prospectus). may change in the future. Tax reliefs Titan VCT, Octopus Apollo VCT and depend on the VCT maintaining its Issued by Octopus Investments Octopus AIM VCT and AIM VCT 2. qualifying status. VCT shares could Limited, which is authorised and regulated by the Financial Conduct OUR VCT OFFER fall or rise in value more significantly than shares listed on the London Authority. With over £300 million in assets under Stock Exchange. They may also be management, Octopus Titan VCT harder to sell. This advertisement is the largest Venture Capital Trust is not a prospectus and investors (VCT) in the UK (source: Association should only subscribe for shares on of Investment Companies, Dec 2016). the basis of information contained It targets high levels of capital growth in the prospectus, available at for its many investors. octopusinvestments.com.

TITAN VCT FIVE YEAR PERFORMANCE

YEAR TO 30 APRIL 2012 2013 2014 2015 2016

ANNUAL TOTAL RETURN 2.7% 33.8% 9.6% 11.4% 7.2%

ANNUAL DIVIDEND YIELD 1.9% 38.3% 5.6% 5.4% 9.2%

65 PEMBROKE VCT OAKLEY INVESTMENT MANAGERS

ABOUT OAKLEY INVESTMENT OUR PEMBROKE VCT MANAGERS CASE STUDY: Pembroke VCT offers investors a tax BLAZE The Pembroke VCT is managed by efficient way of participating in the Oakley Investment Managers LLP, success of high growth companies in part of the Oakley Capital group four key consumer markets: Health Founded in 2012 by Emily of companies; a privately owned & Fitness, Hospitality, Apparel & Brooke, Blaze designs products asset management business with Accessories and Media & Technology, which enhance bike safety. over $1.5 billion assets under addressing the core aims of the Their flagship product, the Blaze management. Founded in 2002, Government’s VCT programme. Laser Light, in addition to its Oakley Capital seeks to be a best-of- Investors gain immediate exposure consumer applications, is now breed entrepreneurially-driven UK to 19 companies in a well-diversified fitted to the entire fleet of 11,500 investment house comprising private portfolio with net assets exceeding Santander bikes in London. Now equity, venture capital, corporate £35m. Approximately 50% of in discussions with New York, Paris finance and fundraising. our investments are later stage and Sydney cycle schemes, Blaze and profitable, 50% are revenue- has successfully expanded its offer Pembroke VCT and its management generating but pre-profit. New to the global cycle hire market have maintained a strategy of investments are planned at the rate of to include advanced logging investing in growth businesses 3–5 per year. capabilities, enabling scheme since 2013, and through their operators to analyse usage and experience and the connections of The fund aims at steady growth predict maintenance needs. the wider Oakley group benefit from through a range of investee company a preferential view of investment maturities, alongside an annual Having increased its team size opportunities in Pembroke’s chosen dividend target of 3p per share. from 6 to 11, Blaze raised a further sectors. This means a healthy pipeline Investors in Pembroke have seen £4.5 million in summer 2016 from of promising companies with no total returns of 28% over three years, a private office at a significantly changes to our strategy required 2013 to 2016. Alongside balanced increased valuation, enabling it as a result of the November 2015 investment objectives, Pembroke to scale its design, marketing and regulatory changes. offers the lowest TER in the VCT sales activities. This has allowed industry, charging no fees to investee its current ‘Burner’ front and rear companies so subscribers’ funds are LED lights to be complemented by used purely to grow their investments. a variety of new products now in the pipeline for 2017 launch.

PORTFOLIO SECTOR ALLOCATION BY VALUE TOTAL SHAREHOLDER RETURNS

PEMBROKE ORDINARY SHARE PEMBROKE B SHARE 130 125 AUM 120 £35.4M 115 110 105 pence 100 95 HOSPITALITY 50% 90 APPAREL & ACCESSORIES 18% 85 80 MEDIA & TECHNOLOGY 21% SEP 2013 MAR 2014 SEP 2014 MAR 2015 SEP 2015 MAR 2016 SEP 2016

HEALTH & FITNESS 11% All figures as at 30 September 2016

66 PEMBROKE VCT VCT COMPARISON VCT INVESTMENT OPPORTUNITIES

PROVEN GROWTH & INCOME VCT PLC (PGI VCT) CALCULUS VCT

MANAGER Beringea LLP Calculus Capital

The offer is targeting returns which are greater Calculus VCT plc will invest in established unquoted than those available from investing in a portfolio companies across a diverse range of sectors. The of quoted companies, through the Company’s current raise of £4 million is for a Top Up Offer. established strategy of investing in a portfolio of The focus is both capital appreciation and income carefully selected small and medium sized private generation, with a target yield of 4.5% of NAV DESCRIPTION companies with the potential for rapid growth. per annum. Calculus Capital, the Venture Capital OF OFFER portfolio manager, was co-founded by John Glencross Investors in the Offer will be buying into ProVen and Susan McDonald and has been investing in UK VCT’s existing diversified portfolio of companies. The SMEs for over 17 years. funds raised will be used to enable the company to make further investments in companies which the manager believes have high growth potential.

YEAR FOUNDED 2001 1999

TYPE OF VCT Generalist Generalist

AUM (TOTAL/VCT) £170m/£71.8m in PGI VCT (as at 31/08/2016) £133m/£5.6m

LAUNCH DATE 21 Sep 2016 28 Nov 2016

INVESTMENT Growth & Income Growth & Income OBJECTIVE

TARGET £30m + up to £10m over allotment £4,000,000 FUNDRAISE

TYPE OF New Ordinary Share Offer Top Up FUNDRAISE

TARGET RETURN 5% target dividend yield 4.5% of NAV annual dividend / YIELD

5 YEAR CUMULATIVE Increase of 26% between 31 May 2011 and 31 May 2016 n/a RETURN

MIN INVESTMENT £5,000 £5,000

INITIAL FEE 3% advised, 5.5% execution only/non-advised 3% (advised/execution only) or 5% (direct)

AMC 2% of NAV 1.75%

PERFORMANCE 20% 20% FEE (IF APPLICABLE)

Annual running costs capped at 3.6% of net assets – OTHER FEES Cost cap of 3.4% of the gross amount raised expected to fall to 2.5%

67 VCT INVESTMENT OPPORTUNITIES

DOWNING OCTOPUS TITAN VCT PEMBROKE VCT B SHARE OFFER

MANAGER Downing LLP Octopus Investments Ltd Oakley Investment Managers

Two share class offers: Octopus Titan VCT is a generalist VCT and the largest in Pembroke is a capital growth-oriented VCT offer with a focus Europe. The portfolio features around 50 early-stage on post-revenue branded consumer and leisure investments. A Generalist Share Class with no sector bias. Qualifying companies operating in many different sectors, making Established in 2013, it invests across four key sectors: health investments will focus on revenue-generating growth it a great way for investors to get broad exposure to this and fitness, hospitality, apparel and accessories, and media and companies and opportunities that have tangible assets part of the UK economy. The new share offer aims to technology. With a maturing portfolio of growing brands, it offers in the business to secure the investment against in fund new investments as well as additional investments investors a mixture of growth and dividend yield along with the order to manage risk. Non-qualifying investments will DESCRIPTION into existing portfolio companies. lowest TER in the generalist VCT category. mainly comprise funds managed by Downing’s Public OF OFFER Equity team and cash deposits. Titan is targeting an annual regular dividend of at least 5p per share. In addition, the VCT will aim to pay The Healthcare Share Class aims to provide dividends when there are significant gains from the attractive returns to investors by investing in a realisation of portfolio holdings. portfolio of healthcare companies. The focus will be on development and expansion funding for innovative healthcare and biomedical businesses.

YEAR FOUNDED 1986 2000 2013

TYPE OF VCT Evergreen Generalist Generalist

AUM (TOTAL/VCT) £700m/Over £200m £6.1bn/£611m £1.3bn in wider Oakley group, £35m in VCT at 30 Sept 2016

LAUNCH DATE 08 Dec 2016 Titan launched in 2007, New Share Offer 23 August 2016 Ordinary shares: 2013 B shares: 2014

INVESTMENT Growth & Preservation Growth & Income Growth & Income OBJECTIVE

TARGET Generalist: £20m £70m with over allotment facility of a further £50m £25m FUNDRAISE Healthcare: £10m

TYPE OF New Share Issue New Share Issue New Share Issue FUNDRAISE

TARGET RETURN Target dividend of 3p/share (yield of 2.7%), Target dividends of at least 4% p.a. from year four onwards 5% annual dividend plus special dividends / YIELD total return target of 6-9% p.a.

5 YEAR CUMULATIVE 5 year returns n/a (launched in 2013) n/a Refer to brochure RETURN 3 year returns 27.8%

MIN INVESTMENT £5,000 p.a. or £500 p.m. £3,000 £3,000

INITIAL FEE 2% (Non-execution), 4% (Execution only) 3% (2% for existing VCT investors) 2% advised, 5% execution only

AMC 2% Generalist and 2.5% Healthcare 2% 2%

20% of all dividends paid if the total return exceeds PERFORMANCE the hurdle. The hurdle is £1.00 per share up to 31 Performance fee of a maximum of 20% on all 20% over hurdle of 3% p.a. FEE (IF APPLICABLE) March 2020, £1.03 per share at 31 March 2021 and will future gains above the current high water mark rise by 3p p.a. thereafter

Fees to investee companies not to exceed 1.5% of total None: no deal, director, company management OTHER FEES Refer to the Prospectus for full details amount invested by Octopus or governance charges

68 VCT INVESTMENT OPPORTUNITIES

PROVIDER DIRECTORY DOWNING OCTOPUS TITAN VCT PEMBROKE VCT B SHARE OFFER AMATI GLOBAL INVESTORS MANAGER Downing LLP Octopus Investments Ltd Oakley Investment Managers AMATI VCT Two share class offers: Octopus Titan VCT is a generalist VCT and the largest in Pembroke is a capital growth-oriented VCT offer with a focus Europe. The portfolio features around 50 early-stage on post-revenue branded consumer and leisure investments. A Generalist Share Class with no sector bias. Qualifying www.amatiglobal.com companies operating in many different sectors, making Established in 2013, it invests across four key sectors: health investments will focus on revenue-generating growth 0131 503 9100 it a great way for investors to get broad exposure to this and fitness, hospitality, apparel and accessories, and media and companies and opportunities that have tangible assets part of the UK economy. The new share offer aims to technology. With a maturing portfolio of growing brands, it offers [email protected] in the business to secure the investment against in fund new investments as well as additional investments investors a mixture of growth and dividend yield along with the order to manage risk. Non-qualifying investments will DESCRIPTION into existing portfolio companies. lowest TER in the generalist VCT category. mainly comprise funds managed by Downing’s Public OF OFFER Equity team and cash deposits. Titan is targeting an annual regular dividend of at BERINGEA least 5p per share. In addition, the VCT will aim to pay The Healthcare Share Class aims to provide dividends when there are significant gains from the PROVEN GROWTH & INCOME VCT attractive returns to investors by investing in a realisation of portfolio holdings. portfolio of healthcare companies. The focus will www.provenvcts.co.uk be on development and expansion funding for innovative healthcare and biomedical businesses. 020 7845 7820 [email protected] YEAR FOUNDED 1986 2000 2013

TYPE OF VCT Evergreen Generalist Generalist CALCULUS CAPITAL

AUM (TOTAL/VCT) £700m/Over £200m £6.1bn/£611m £1.3bn in wider Oakley group, £35m in VCT at 30 Sept 2016 CALCULUS VCT

www.calculuscapital.com LAUNCH DATE 08 Dec 2016 Titan launched in 2007, New Share Offer 23 August 2016 Ordinary shares: 2013 B shares: 2014 020 7493 4940

INVESTMENT [email protected] Growth & Preservation Growth & Income Growth & Income OBJECTIVE

TARGET Generalist: £20m DOWNING LLP £70m with over allotment facility of a further £50m £25m FUNDRAISE Healthcare: £10m DOWNING FOUR VCT TYPE OF New Share Issue New Share Issue New Share Issue www.downing.co.uk FUNDRAISE 020 7416 7780 TARGET RETURN Target dividend of 3p/share (yield of 2.7%), [email protected] Target dividends of at least 4% p.a. from year four onwards 5% annual dividend plus special dividends / YIELD total return target of 6-9% p.a.

5 YEAR CUMULATIVE 5 year returns n/a (launched in 2013) OCTOPUS INVESTMENTS n/a Refer to brochure RETURN 3 year returns 27.8% OCTOPUS TITAN VCT MIN INVESTMENT £5,000 p.a. or £500 p.m. £3,000 £3,000 www.octopusinvestments.com 0800 316 2067 INITIAL FEE 2% (Non-execution), 4% (Execution only) 3% (2% for existing VCT investors) 2% advised, 5% execution only [email protected] AMC 2% Generalist and 2.5% Healthcare 2% 2% PEMBROKE VCT 20% of all dividends paid if the total return exceeds PERFORMANCE the hurdle. The hurdle is £1.00 per share up to 31 Performance fee of a maximum of 20% on all 20% over hurdle of 3% p.a. FEE (IF APPLICABLE) March 2020, £1.03 per share at 31 March 2021 and will future gains above the current high water mark PEMBROKE VCT rise by 3p p.a. thereafter www.pembrokevct.com Fees to investee companies not to exceed 1.5% of total None: no deal, director, company management 020 7766 6900 OTHER FEES Refer to the Prospectus for full details amount invested by Octopus or governance charges [email protected]

69 FINAL CONCLUSIONS

70 REPORT CONCLUSIONS SUMMING UP AND LOOKING AHEAD

1 DEMAND FOR VCTs IS GROWING Our survey suggests that more advisers are using VCTs than previously. Anecdotal evidence based on conversations with advisers and the number of incoming enquiries Intelligent Partnership and MICAP receive also support this conclusion.

2 TAX, DIVERSIFICATION AND THE ABILITY TO ADD VALUE ARE THE REASONS WHY Follow up analysis confirms that the reasons for this are what most readers would expect: lower limits on the amounts that can be saved in pensions, an increase in wealthier clients with income tax bills they would like to reduce, adviser focus on tax planning as a way of adding value for clients post RDR and smaller company investment as a diversifier.

3 SUPPLY IS LIKELY TO BE LOWER THIS YEAR After several years of successful fund-raising, it seems that many VCTs are choosing not to go looking for new funds this year, especially now that the changes announced in the 2015 Budget have come into force. There is a smaller universe of potential investments for VCTs, and more conservative managers who supported management buy-out with their funds are having to rethink their strategy.

4 THEREFORE ADVISERS MUST BE READY TO INVEST Reduced supply means that advisers who do want to use VCTs for their clients this year will need to prepare in advance. Research and due diligence, panel selection and shortlisting should all be completed quickly, so that when VCTs do open, advisers can move fast. There’s a certain amount of this rhetoric every year from the industry as part of the annual marketing effort, but this time it is more pertinent than usual.

5 RULE CHANGES ARE REFLECTED IN THE DATA All of this year’s launches have been for VCTs that target Growth and Income. This has always been the most popular VCT sector, but so far this year there are no VCTs targeting Capital Preservation. The number of VCTs that charge exit performance fees is also ticking up (from a low base) and the number of underlying investments they target is also on the increase – perhaps a reflection of the focus on growth as managers seek more diversification to reduce risk.

LOOKING AHEAD

Although the EIS sector typically raises planning needs, but no appetite for EIS. demonstrates. They support growth, twice as much as the VCT sector, AIC research and development and help More money chasing fewer VCT fund- research suggests that more advisers to create jobs. They play an important raising efforts, coupled with high use VCTs than EIS. part in raising funds and have an barriers to entry for new managers, important place on UK SMEs’ “funding And even though this year is likely to could shift the balance of power in escalator”, often making investments be a thin year for VCT fundraising, we the market and place too much power of between £500,000 and £1 million, wonder if VCT fundraising will begin in the hands of the managers at the where many companies can struggle to catch up with EIS. The drivers we expense of consumers. We don’t to secure funding. Over 20,000 have discussed throughout the report see any evidence of this yet, but if new jobs have been created and on – pension changes and wealthier clients providers think they can get away with average £1.19 million has been spent looking to reduce their income tax bills charging more than costs could creep on R&D by VCT backed businesses. – remain in place. These are the same up. We’ll keep an eye on this in the 75% of companies supported by VCTs drivers for EIS, but EIS might be too risky future. It would be great to see more have undertaken some form of R&D for many investors. VCTs, with their listed offers from more providers in the as a result of their investment. These status and greater levels of transparency market next year. are compelling statistics and show the and liquidity (although we must not over VCTs have served the SME community value of the VCT scheme to the wider egg those benefits), might appeal to a well, as the evidence in the report UK economy. growing cohort of investors with tax

71 APPENDIX I USEFUL ORGANISATIONS & RESOURCES

The Association of Investment Companies London Stock Exchange (AIC) (LSE)

The AIC is the trade body for closed- Readers can find useful information ended investment companies. The on VCT shares from LSE’s website, organisation provides an online including bid and offer prices, platform which allows advisers to key fundamental ratios and an compare investment companies interactive chart facility that and review historical performance supports simple technical analysis. information.

WWW.THEAIC.CO.UK WWW.LONDONSTOCKEXCHANGE.COM

FE Trustnet Morningstar

FE specialises in the collection, Morningstar is a leading provider of validation and distribution of independent investment research. fund and equity prices, and The company provides data on factsheet information. In addition nearly 540,000 investment offerings, to key statistics, the company including VCTs. Its website offers provides a custom charting facility key statistics such as a VCT’s total which advisers can use to make assets and market capitalisation, as comparisons between VCTs and well as data on returns and dividend against a benchmark. payments.

WWW.TRUSTNET.COM WWW.MORNINGSTAR.CO.UK

MI Capital Research HM Revenue & Customs (MICAP) (HMRC)

MICAP is a provider of independent HMRC’s website provides statistics due diligence and research into the and information about VCTs, alternative investment market. As including official statistics on the well as being a research tool, the number of VCTs and amount of MICAP Fund-Finder enables investors investment raised. More importantly, to Search, Compare and Select readers can find HMRC’s internal investment opportunities suitable for manual on VCTs, which includes all their investment needs. the information on tax reliefs and qualifying criteria.

WWW.MICAP.COM WWW.GOV.UK

72 APPENDIX II POLICY CHANGES TIMETABLE

VCT POLICY CHANGES

2004-2005 2006-2007 2007-2008

FROM 6 APRIL 2004, THE MAXIMUM FROM 6 APRIL 2006, THE MAXIMUM FROM 6 APRIL 2007, VCT INVESTMENT QUALIFYING FOR GROSS ASSETS OF QUALIFYING QUALIFYING HOLDINGS WERE INCOME TAX RELIEF INCREASED HOLDINGS DECREASED TO £7 LIMITED TO COMPANIES WITH FROM £100,000 TO £200,000. MILLION BEFORE INVESTMENT TO FEWER THAN 50 FULL TIME CAPITAL GAINS DEFERRAL RELIEF £8 MILLION IMMEDIATELY AFTER EQUIVALENT EMPLOYEES AT THE IS NOT AVAILABLE. INVESTMENT. THE RATE OF INCOME TIME SHARES WERE ISSUED. FROM TAX RELIEF REDUCED TO 30%. THE 19 JULY 2007, COMPANIES MUST HOLDING PERIOD FOR SHARES HELD HAVE RAISED NO MORE THAN £2 BY VCTS INCREASED FROM THREE MILLION IN ANY 12 MONTH PERIOD TO FIVE YEARS. UNDER ANY OR ALL OF THE TAX- BASED VENTURE CAPITAL SCHEMES.

2009-2010 2011-2012 2012-2013

MONEY RAISED SHOULD BE WHOLLY THE REQUIREMENT THAT THE TRADE FROM 6 APRIL 2012, VCT QUALIFYING EMPLOYED WITHIN TWO YEARS BE CARRIED ON WHOLLY OR MAINLY HOLDINGS WERE EXTENDED TO OF THE ISSUE OF THE RELEVANT IN THE UK WAS REMOVED, AND COMPANIES WITH FEWER THAN HOLDING OR, IF THE ISSUE TAKES REPLACED WITH A REQUIREMENT 250 FULL TIME EQUIVALENT PLACE BEFORE COMMENCEMENT OF THAT THE ISSUING COMPANY HAVE EMPLOYEES AND GROSS ASSETS OF THE INTENDED TRADE, WITHIN TWO A PERMANENT ESTABLISHMENT NO MORE THAN £15 MILLION BEFORE YEARS OF COMMENCEMENT. IN THE UK. RESTRICTION THAT INVESTMENT AND £16 MILLION PREVENTED A VCT INVESTING MORE AFTER INVESTMENT. THE ANNUAL THAN £1 MILLION PER ANNUM IN INVESTMENT LIMIT FOR COMPANIES ANY SINGLE COMPANY REMOVED. WAS INCREASED TO £5 MILLION, AND THAT SUM MUST TAKE ACCOUNT OF EIS AND SEIS INVESTMENT.

2014-2015 2014-2015 2016-2017

FROM APRIL 2014 VCTS CAN NO FROM APRIL 2014 A MEASURE FROM 6 APRIL 2016, VENTURE LONGER RETURN SHARE CAPITAL TO WAS INTRODUCED TO PREVENT CAPITAL TRUSTS (VCTS) WILL NO INVESTORS WITHIN THREE YEARS INVESTORS REFRESHING INCOME TAX LONGER BE PERMITTED TO MAKE ANY OF THE END OF THE ACCOUNTING RELIEF ON INVESTMENT INTO VCTS NON-QUALIFYING INVESTMENTS PERIOD IN WHICH THE VCT ISSUED BY DISPOSING OF VCT SHARES AND WHICH ARE NOT ONE OF THE LIQUID THE SHARES. AT BUDGET 2014 REINVESTING THE PROCEEDS IN NEW INVESTMENTS. CHANGES WERE MADE THE GOVERNMENT ANNOUNCED SHARES. THE LEGISLATION ALLOWED IN 2015 ON QUALIFYING COMPANY THAT COMPANIES BENEFITING NEW INVESTMENT INTO VCTS TO CRITERIA TO ENSURE THAT THE VCT FROM RENEWABLES OBLIGATION STILL BE ELIGIBLE FOR INCOME TAX RELIEFS CONTINUED TO COMPLY CERTIFICATES (ROCS) AND/OR THE RELIEF. HOWEVER, INVESTMENTS WITH EU STATE AID. RENEWABLE HEAT INCENTIVE (RHI) THAT ARE: SCHEME WILL BE EXCLUDED FROM • CONDITIONAL ON A SHARE BUY VCTS. BUY-BACK, OR WHERE A SHARE BUY- BACK IS CONDITIONAL UPON THE INVESTMENT; OR

• MADE WITHIN A SIX MONTH PERIOD OF A SALE OF SHARES IN THE SAME VCT, WILL NOT QUALIFY FOR INCOME TAX RELIEF.

73 CPD AND FEEDBACK NEXT STEPS AFTER READING

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www.intelligent-partnership.com 74 DISCLAIMER PUBLICATION

Intelligent Partnership is not authorised No part of this publication may and regulated by the Financial Conduct be reproduced in whole or in part Authority and does not give advice, without the written permission information or promote itself to of Intelligent Partnership. individual retail investors. 75 “We know that advisers are increasingly interested in VCTs. It will be no surprise to any of our readers that our market research found that lower limits on the amounts that can be saved in pensions are starting to have an impact. Advisers looking for alternative tax efficient investments have naturally turned to VCTs.” – Guy Tolhurst, Managing Director, Intelligent Partnership

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