A new era for VCTs?

Stuart Veale discusses the recent rule changes to VCTs and the outlook in this new environment.

Stuart Veale, Managing Partner, Beringea

View the Proven VCTs

Venture Capital Trusts, or VCTs, have been around for over 20 years.  In that time they have raised over £3 billion from private investors and have played a vital role in financing the growth of UK SMEs.  But the Finance Act of November 2015 introduced significant changes to the rules about which companies VCTs are allowed to invest in.  What is the outlook for VCTs in this new environment?

The main objective of the new rules is to focus VCTs on providing growth capital to relatively young businesses.  Finance for acquisitions is no longer allowed.  This means, in particular, that management buyouts (MBOs), which have previously accounted for a significant proportion of VCT investment, are no longer permissible.

But financing management buyouts is only one way for VCTs to invest.  Some VCTs, including the ProVen VCTs managed by Beringea, were already focusing exclusively on providing growth capital.  Their investment strategy is to find companies with the potential to grow rapidly, to significant scale, and provide them with the funding and management support they need to fulfil this potential.   As a result, the changes to the regulations are expected to have minimal impact on the ProVen VCTs.

Although some other VCTs may have to change their investment strategy to meet the new rules, VCT managers have proven their ability to adapt successfully to new regulation.  Furthermore, the UK has a strong entrepreneurial culture which should ensure that there will be no shortage of good investment opportunities which meet the new rules.

At present, Beringea is particularly interested in investing in the following areas:

Digital Media – Digital technologies and the internet have completely transformed the way content is created and distributed.  For example, video is proliferating at a phenomenal rate and companies which are involved in the creation, distribution or storage of video based content are prime targets for investment.

Software-as-a-service – With the wide availability of high-speed broadband, companies are finding that renting business software hosted in “the cloud” is much more flexible and cost-effective than having to commit to the purchase of software licences and servers.  SAAS companies are able to scale rapidly, and have predictable recurring revenue streams, both of which are attractive features to investors.

Disruptive online business models – Interactions between customers and service providers can be made much more efficient by online business models which automate processes, thereby significantly reducing transaction costs.

Branded consumer goods – increasing disposable income and individuals’ desire to make a statement through what they wear has created a huge demand for categories such as jewellery, watches and designer apparel.  Companies which design and retail products which successfully tap into this desire are able to achieve exceptional growth rates.

VCT funding drives growth by enabling businesses to invest in technology and new product development, sales and marketing resources and wider distribution.  The benefits of VCT investment go beyond simply money, however.  VCT managers play an active role in supporting the management of the companies they invest in, contributing to the development of strategy, building the senior management team, ensuring that there is excellent management information and ultimately in helping to deliver a successful exit for all shareholders.

In summary, while some VCTs may have to change their investment strategy to comply with the new rules, there should be no shortage of suitable investment opportunities.  VCTs will continue to play a valuable role in supporting UK SMEs, at the same time providing individual investors with tax-effective access to this dynamic sector of the UK economy.