Patient access

It is a quandary familiar to successive generations of policymakers. How do they persuade investors to support the companies of tomorrow with funding that enables start-up and scale-up businesses to fulfil their potential? The best of these companies may return investors’ money many times over, but the failure rate with this type of investment can be high and the pay-back is often slow.

The Chancellor said last week that he wants to encourage increased pension fund investment in “patient capital”. Philip Hammond’s Budget included plans for a consultation on how pension fund managers could be encouraged to set up pooled funds to make long-term investments in such assets.

That makes sense. But it’s also worth pointing out that the investment companies industry already provides a broad range of pooled funds offering investors exposure to patient capital assets. There is Neil Woodford’s Patient Capital Trust, of course, which was launched three years ago to make precisely the type of investment the Chancellor is talking about. But there is also an extensive range of venture capital trusts offering an attractive entry point to the sector.

VCTs are raising very large sums for growth businesses. In the 2017-18 tax year, these funds attracted £728m of investment, 34 per cent more than in 2016-17, and close to an all-time high for the sector.

Interestingly, the investor base for VCTs consists of people focused on retirement planning – in other words, investors who are directing their pension saving into patient capital assets just as the Chancellor hopes. This is because high earners find it increasingly difficult to save as much through private pension plans as they would like; the reduced annual allowance for those earning more than £150,000 a year limits their contributions so they seek alternative tax-efficient arrangements.

VCTs offer tax efficiency in spades, of course, with 30 per cent upfront tax relief on investments in new fund-raisings plus tax-free income and capital growth. With a maximum annual investment of £200,000 they therefore represent an attractive option for higher-earning pension savers who have maxed out their private pension contributions.

The rapid growth in the VCT sector in recent years has prompted some calls for the Treasury to reconsider the generosity of the tax reliefs it offers. The Chancellor has also made some tweaks to the VCT rules in an attempt to ensure the funds offer tax incentives in return for genuine risk-taking, rather than as a free lunch.

However, it would be very bad news if there were to be any wholesale reform of the sector. These funds are doing exactly what they’re meant to: research published by the AIC last year showed how VCT funding is squarely targeting businesses caught out by the funding gap that policymakers are so worried about; moreover, each £1m VCT investment has delivered an average gain of £2.2m in turnover, the AIC found, and companies with VCT backing employ more than 50,000 people.

None of which is to say the Chancellor is wrong to explore additional options for expanding the supply of patient capital. But in doing so, he should not overlook what is already available. And the longstanding concern of pension funds that this asset class is inappropriately risky for many of their savers is relevant here too; VCTs target a set of investors who typically already have a good range of more conventional assets and therefore have greater diversification in their portfolios.

For advisers and investors, meanwhile, this year’s VCT fund-raising season is beginning to get going. Pension tax relief suffered a reprieve in the Budget last week, despite suggestions it would be cut, but higher earners still face the same old problems. There is every reason to expect another good year of fund-raising by VCTs.