VCTs: deployment slows in challenging environment (updated)
See manager views on deal pipeline and significant investments in 2023.
In the 2023 calendar year venture capital trusts (VCTs) invested £531 million in new and follow-on investments in small private companies and companies on the Alternative Investment Market (AIM). This was a 25% decrease from 2022 when VCTs invested £706 million in new and follow-on investments in private companies and AIM companies.
The wider venture capital industry in the UK and Ireland in 2023 suffered a 46% decline in investment (deal activity) to €19.4 billion from €35.6 billion in 2022, according to the Pitchbook European Venture Report1.
The lion’s share of VCT investments in 2023, £479 million, was in 259 private companies, with a further £52 million in 24 AIM companies. In 2022 VCTs invested £658 million in 341 private companies and £48 million in 22 AIM companies.
Over the last three years (2021 to 2023), VCTs invested a total of £1.91 billion in private companies and AIM companies, providing vital support for these companies to achieve their growth ambitions.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “Last year VCTs’ investment in private companies slowed due to challenging investment conditions. It took time for businesses to adapt to higher interest rates and sluggish economic growth which impacted valuations and deal times. However, VCT investment activity held up better than the broader venture capital industry.
“VCTs have many advantages for investors, including attractive tax benefits and good long-term performance, and their investee companies create jobs and social benefits for local communities across the UK. These advantages help to shore up capital raising in difficult economic conditions and give VCT managers confidence to continue investing in tough times, when other venture capital investors are pulling back.”
“VCTs have many advantages for investors, including attractive tax benefits and good long-term performance, and their investee companies create jobs and social benefits for local communities across the UK.”
Richard Stone, Chief Executive of the Association of Investment Companies (AIC)
Managers’ views on pipeline for VCT investments
Chris Lewis, CFO and COO of Pembroke VCT, said: “We have seen an improvement in the quality of our investment pipeline during Q4 2023 and into Q1 2024. Pembroke's most recent investment, B2B software company Transreport (the UK’s fastest-growing accessibility technology company) is reflective of this. The software-as-a-service platform and app provides a comprehensive solution for booking and managing travel assistance for older and disabled individuals. The business secured a £10 million funding round together with Puma Private Equity to help expand its flagship passenger assistance technology.
“We have noticed that both new and follow-on investment rounds are taking longer to close. However, we are beginning to see confidence return as some economic indicators show signs of improvement. As long-term investors, we remain optimistic about the mid- to long-term potential of many excellent companies out there as we move further into 2024.”
Ewan MacKinnon, Partner, Maven Capital Partners, managers of the Maven VCTs, said: “The first half of 2023 was certainly sluggish in terms of quality new opportunities, in line with the trend across the market, due to uncertainty arising from the Budget turmoil in late 2022. However, in H2 2023 and early 2024 we’ve seen an encouraging increase in activity and opportunities as economic conditions have improved and deal flow has now largely recovered across our UK regional teams.”
Malcolm Ferguson, Fund Manager of Octopus Titan VCT, said: “While many funds have considerably slowed or stopped investment activity, Octopus has been investing actively. We are strong believers that periods of challenging economic activity can present some of the best times to be making investments, driven by improvements in talent availability and reduced competition. As a result, we may be in one of the most exciting periods in over a decade that sees the creation of the next generation of technology-enabled companies. We look forward to seeing those opportunities across 2024.”
Trevor Hope, CIO, VCTs at Gresham House, investment manager of the Baronsmead VCTs and investment adviser to the Mobeus VCTs, said: “While the macroeconomic environment has presented challenges in the last year, we have continued to deliver strong deal flow during this period and have completed eight investments with a total value of £22.4 million in the last quarter alone. We continue to see compelling opportunities for investors to support outstanding early-stage companies in their growth journey and currently have a significant pipeline across a wide range of sectors.”
David Hall, Partner and Executive Chairman of YFM Private Equity which manages the British Smaller Companies VCTs, said: “We’ve continued to see demand for equity capital increasing through the year with the pipeline at the end of 2023 extremely strong. Overall, the levels of equity investment since 2020 continue to run at significantly increased levels compared to the 2010s and that long-term trend looks set to be maintained.”
Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs, said: “Despite economic uncertainties, we have continued to support both new and existing innovative companies and have a healthy pipeline of new opportunities for 2024.”
Significant VCT investments in 2023
Below are some examples of VCT investments in companies completed in 2023, along with insights into their economic and social benefits.
Malcolm Ferguson, Fund Manager of Octopus Titan VCT, said: “We invested in HelloSelf in early 2023 where we led a £15 million funding round. HelloSelf is a digital, personalised psychological therapy and coaching platform focused on improving long-term clinically recognised and subjective mental health outcomes. However, we first met with founder and CEO Charlie Wells in March 2020, the week before the first Covid lockdown started.
“Charlie started the business in 2018 after he ripped the artery to his visual cortex and fell into a coma. Charlie underwent five brain surgeries and after this he had to learn to rebuild every aspect of his daily life. The neuro-recovery team that he worked with made him focus on one per cent gains and how to measure those gains. Learning from that experience, Charlie built HelloSelf to enable every single person to be the best version of themselves, by focusing on the one per cent, one day at a time. Charlie is a unique individual, and he and his leadership team are a key part of why we invested.
“We were delighted to be able to lead their most recent funding round, having watched the company deliver on all the things it had set out to do back in March 2020. We have joined the board of the company, where we work closely with Charlie and his team. It’s fairly typical for us to be communicating with our founders on a weekly basis or whenever needed. Our investment is helping the company to double down in the UK, its core market, as well as helping it explore international opportunities. The economic and social benefits of HelloSelf are important as it has the potential to alleviate pressure on emergency care and mental health services, both of which are increasingly strained.”
David Hall, Partner and Executive Chairman of YFM Private Equity which manages the British Smaller Companies VCTs, said: “We invested £6 million in DrDoctor in February 2023, alongside some of the early seed investors. DrDoctor is designed to do two things – firstly, make access to the health service for bookings, appointments and administration easier, faster and better and secondly, by making this more efficient it provides the opportunity to put more resource into frontline healthcare. We’ve helped develop the strategy by adding an experienced chair who has seen and been over many of the bumps in the road, and not unusually some additional senior resource in the finance team.
“The funding, as is so often the case, was to principally support further investment in the product and engineering teams. This is very typical at the stage we invest where customers typically expand and always find new things that they’d like to add. Our investments give the businesses the resource to do this quickly and in time we’d hope to expand the sales and support functions as the customer base grows. DrDoctor has a massive opportunity to grow and increase employment. The average investment for our VCTs is around seven years and growth of the economic benefits often accelerates towards the end of that period.”
Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs, said: “We invested £5 million in Camena Bioscience because of Camena’s gSynth technology which has potential to revolutionise DNA synthesis, offering unmatched speed and accuracy. Beyond funding, Mercia Ventures offers Camena comprehensive support, encompassing strategic advice, operational expertise and connections to industry partners and an extensive non-executive network. Mercia’s role includes mentoring by our growth partners in technology scaling, marketing and commercialisation. This integrated approach aims to boost Camena’s technological progress and market presence.
“Our support is accelerating Camena’s R&D, scaling its technology and shortening product development timelines. The company benefits from being part of the UK’s vibrant biotech ecosystem. It’s based in Cambridge and as part of this investment we worked with the founders to appoint an experienced female chair of the board. The development and commercialisation of its gSynth technology are expected to create high-skilled positions in the biotechnology sector, enhancing the local knowledge economy.”
Trevor Hope, CIO, VCTs at Gresham House, investment manager of the Baronsmead VCTs and investment adviser to the Mobeus VCTs, said: “We recently invested £8.5 million in Ozone API, an open finance API platform founded by the team that led the development of and authored the UK open banking standard. Open finance enables greater access to financial data for consumers and other financial institutions, and countries around the world are rapidly moving towards this approach.
“Ozone API has already built a customer base across Europe, the Middle East and North and South America and our investment will accelerate this global expansion. It will also support the growth of the company’s team, creating further high-skilled jobs in the UK’s booming fintech sector. Ozone API has many of the attributes we look for in early-stage businesses – it already has an industry recognised world-class product on the market and it is led by a founding team with a deep understanding of its sector.”
Ewan MacKinnon, Partner, Maven Capital Partners, managers of the Maven VCTs, said: “In September Maven VCTs invested £2 million into Laverock Therapeutics, a really interesting drug discovery business, as part of a £13.5 million funding round. Laverock is using the platform, which combines gene editing with gene silencing, to develop the most appropriate, adaptable solutions for advanced therapies. It’s being used for Type 1 diabetes and for treating solid tumours.
“A key factor that underpinned Maven’s investment decision was the quality of the management team, particularly David Venables (CEO) and John Brown (Chair). In 2015 Alexandra Lindsay, the investment director leading Maven’s investment into Laverock, led her former fund’s investment into Synpromics, David and John’s previous venture, which delivered excellent returns to investors. The strength of the investor syndicate provided Maven with additional comfort. This included Calculus Capital, Mercia and Eli Lilly, the world’s largest pharma company by market value, which undertook rigorous scientific due diligence on Laverock prior to investing.”
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Notes to editors
- Source: Pitchbook European Venture Report – 2023 Annual.
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 341 members and the industry has total assets of approximately £268 billion.
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