VCTs: market trends, opportunities and outlook
What is the investment outlook for the VCT sector, and how can VCTs continue to support ambitious UK companies?
It has been a challenging environment for venture capital trusts (VCTs), with the average VCT down 5% in 2023. However, over the longer term VCTs have performed better, with total returns of 22% and 85% over the last five and ten years respectively. These figures exclude the 30% upfront income tax relief which VCT investors enjoy if they hold their shares for at least five years (along with tax-free dividends and tax-exempt capital gains).
Over the past five years, the assets managed by VCTs have increased from £4.3 billion to £6.2 billion. In November, the Chancellor committed to extending the VCT scheme to 2035, enabling VCTs to continue their vital support of the UK’s small and ambitious businesses. As the economic impact of high inflation continues, this support remains crucial. But what is the investment outlook for the sector, and how can VCTs continue to support ambitious UK companies?
To discuss these issues and the outlook for VCTs, a media webinar was held today by the Association of Investment Companies (AIC) featuring Andrew Bloxam, Managing Director of Foresight Group which manages the Foresight Technology VCT, Ian McLennan, Partner of Triple Point which manages Triple Point Venture VCT, and Nic Pillow, Senior Ventures Manager of Blackfinch which manages Blackfinch Spring VCT.
Their comments were collated alongside views from Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs.
VCT fundraising in a challenging economic environment
Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs, said: “VCT fundraising is currently at a slower rate than in the 21/22 and 22/23 tax years, but these were record years and at £375m so far this is still a strong performance considering the economic environment.”
Andrew Bloxam, Managing Director of Foresight Group which manages the Foresight Technology VCT, said: “Despite the market headwinds, we have actually seen continued strong fundraising into Foresight VCTs. With the Foresight Technology VCT, our early-stage science and engineering technology strategy, we are seeing inflows up around 50% versus the same time last year. The Foresight Generalist VCTs have nearly sold out. Such positive fundraising might be an exception in the market this year.”
Nic Pillow, Senior Ventures Manager of Blackfinch which manages Blackfinch Spring VCT, said: “Economic turbulence has been pretty much a constant for the last few years, in fact ever since we launched just before the Covid pandemic. It’s important for VCT managers to understand how to work with whatever conditions they face and demonstrate they can adapt to find the best investment opportunities – not just to weather the storm but to thrive in the long term. This is ultimately what gives investors confidence and sustains inflows. We’re delighted that despite everything over the last year, our inflows are up a little on the previous year."
Economic and social benefits provided by VCTs
Andrew Bloxam, Managing Director of Foresight Group which manages the Foresight Technology VCT, said: “Since their launch in 1995, VCTs have raised over £11.5 billion. Most of that investment is now deployed into smaller and growing unquoted businesses based all over the UK; and such growing SMEs are a key driving force of job creation. Foresight Technology VCT invests into early-stage science and engineering companies commercialising breakthrough technologies, often tackling global problems with technical innovation and creating many new science and engineering jobs in the process.
“By way of an example, Foresight Technology VCT invested into Previsico, a company developing a sophisticated flood simulation and sensor platform to better manage and prepare against the seemingly increasing problem of flooding. Foresight’s investment has helped the company bring its solution to market and expand internationally – ultimately, helping society to avoid unnecessary flood damage.”
Ian McLennan, Partner of Triple Point which manages Triple Point Venture VCT, said: “VCTs have played a crucial role in supporting start-ups that drive innovation and contribute to economic growth over the past three decades, fostering job creation. At Triple Point, our focus is on early-stage, technology-driven companies in B2B sectors that offer solutions to challenges faced by more established businesses, thus further stimulating economic development and job creation.
“The Treasury Committee’s report over the summer of 2023 underlined the need for greater regional, ethnic, and gender diversity in the industry. We support enhanced diversity reporting, a practice essential across all investment sectors. 18% of our initial investments are in businesses with female founders or co-founders, and 28% of initial investments are outside London.”
Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs, said: “All of the VCTs in aggregate have invested in approximately 1,000 companies across the UK where the vast majority are unquoted growth technology businesses that are driving job creation and economic growth. At Mercia Ventures, where we manage the Northern VCTs, our strategy is to be a national investor and have offices throughout the UK. This results in 50% of our investments being in growth companies outside London and the South East. Examples include Pure Pet Food – a fast growing company based in Yorkshire and led by CEO Roz Cuschieri – and two fast growing life science companies are Manchester-based Gentronix and Newcastle-based Newcells.”
The trading environment for portfolio companies
Nic Pillow, Senior Ventures Manager of Blackfinch which manages Blackfinch Spring VCT, said: “Portfolio companies have certainly had to adapt to tighter customer budgets and longer sales cycles. However, we focus on businesses bringing innovation to their markets. In the current climate, the added value they deliver compared to incumbents is even more important for their customers and drives ongoing growth. Recent research by the alternative investment platform Wealth Club shows that we have the highest exposure to high-growth companies by annual revenue amongst VCTs, and that VCTs as a whole had almost double the proportion of high-growth companies compared to the UK main market.”
Ian McLennan, Partner of Triple Point which manages Triple Point Venture VCT, said: “In 2023, some of our portfolio companies faced a varied trading environment, largely due to higher interest rates. Those with sub-100% revenue growth rates found it tougher to raise funds at desired valuations, reflecting the impact of higher rates and weakened valuations from 2022. However, a positive shift has recently emerged, with more deal activity and stabilising valuations, suggesting an improvement as markets anticipate peaking interest rates and a brighter economic outlook.
“Additionally, the recruitment landscape has eased slightly compared to the highly competitive period of 2021-22. Ongoing layoffs in big tech have made it easier for our companies to attract talent, a pivotal factor contributing to their growth.”
Peter Dines, Managing Director of Mercia Ventures which manages the Northern VCTs, said: “There is no doubt that the current environment brings challenges to businesses. However, the leadership teams within our portfolio have continued to react well to the current challenges and the vast majority continue to grow. The wider follow-on funding environment has slowed significantly but these things are usually cyclical and I remain optimistic for the future.”
Which types of companies are you investing in now and why?
Ian McLennan, Partner of Triple Point which manages Triple Point Venture VCT, said: “The Triple Point Venture VCT specialises in investing in B2B software businesses at the ‘seed’ investment stage. These companies typically have their software deployed with early customers and generate annual revenues of £250,000 per annum. This strategy allows us to invest at attractive valuations while still being able to assess the product and gather feedback from corporate customers. We have a particular focus on companies that accumulate data through their base business, facilitating further analysis, moat-building, and potential AI-related services.
“Recently, we’ve been active in the healthcare sector, exemplified by our backing of Abtrace, a company whose software aids doctors in data-driven clinical decision-making. We've also invested in the environmental sector, supporting Modo, which provides performance management data for commercial-scale battery operators.”
Nic Pillow, Senior Ventures Manager of Blackfinch which manages Blackfinch Spring VCT, said: “With no shortage of innovative technology-enabled growth businesses, and valuations much lower than a couple of years ago, it’s an excellent time to be making investments. We focus on companies that are disrupting large markets and that have high growth potential over the longer term – ones that can build solid foundations in the current climate but have the potential to really take off as the economy picks up again. And after the turbulence of recent years, we continue to look for wide diversification across many sectors so that we are best placed to take advantage of whatever challenges the world may produce next.”
Andrew Bloxam, Managing Director of Foresight Group which manages the Foresight Technology VCT, said: “The Foresight Technology VCT is investing in early-stage science and engineering companies commercialising breakthrough technology (or "deep tech") – these are firms at the cutting edge of human understanding, often built on years of research at the top UK universities, and often aiming to solve some of the world’s critical problems.
“We look for the most scalable opportunities – built on technology that is defensible and unlocks ten times cheaper, faster or smaller solutions, by a team combining the right technical knowledge and commercial experience, with a clear plan to becoming a large sustainable and profitable company. With the right selection and support, this can mean building companies that have strategically valuable and acquirable technology from very early on, which can result in fewer companies failing compared to the typical digital technology portfolio.”
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