VCTs slash fundraising levels

Investors face missing out on lucrative tax breaks as popular venture capital trusts cut yearly fundraising levels, warn wealth managers.

The largest VCTs — listed funds which invest in early-stage businesses — have slashed their annual fundraising levels, disappointing investors when demand is at a high.

A clutch of large VCTs will now raise less money than in previous tax years, reversing a steady upward trajectory in fundraising from 2005.

Baronsmead Venture Trust and Baronsmead Second Venture Trust, two of the most popular generalist VCTs, said in results for the year ending September 2016 they were “unlikely” to raise new funds in the final half of the year.

Northern, which manages three VCT funds, has not carried out a “significant” fundraising since the year ending April 2014, said Matthew Woodbridge, director of wealth and investment management at Barclays. Another prominent fund — Maven Income and Growth 6 — raised £10m in the past tax year but will raise just £6m in this one.

Jason Hollands, managing director at Tilney Bestinvest, said there was an ongoing “supply crunch” around the funds, which offer investors 30 per cent income tax relief as long as the shares are held for five years.

Mr Hollands said the funds had “plenty of cash to invest” and had acquired it at a faster pace than they could make investments.

VCTs enjoyed one of their strongest years for fundraising in the tax year ending April 2015, attracting more than £457m from investors and bringing the total funds under management to £3.6bn.

However, rule changes which came into effect last November have meant the pool of companies eligible for VCT investment has shrunk.

According to the new rules, companies older than seven years were ruled ineligible for VCT investment unless they can be classified as “knowledge intensive”, management buyouts and renewable energy schemes were banned, and a lifetime limit of £12m investment was imposed.

Alongside these, the previous rules said qualifying companies must have gross assets of no more than £15m, fewer than 250 employees, and be unlisted on Aim.

VCTs must invest at least 70 per cent of their cash in qualifying investments within three years, meaning funds are careful not to raise more cash than they can invest.

“The rules that came in have slowed the rate of investments and managers are not getting through the cash pile as quickly as they would,” said Mr Woodbridge of Barclays.

The ban on management buyouts was one of the key drivers of the shrinking VCT investment, he added. “[Management buyouts] tended to be larger deals, but the VCTs are now investing in smaller and younger companies.”

Mobeus Equity Partners, whose VCTs previously invested in management buyouts, has already announced it will not raise money at all this year.

John Glencross, chief executive officer of Calculus Capital, said the rule changes had forced VCTs to “re-engineer their teams and change their investment strategy to now focus on growth investments.”

“It is difficult for VCTs to justify further fundraising to shareholders given so much cash on the balance sheet and limited proof to show they can employ the funds they are already holding,” he added.

Ben Yearsley, a wealth manager at Wealth Club, described the rule changes as “fairly draconian”.

“What it means is that the old school generalist VCTs like Northern, Baronsmead and Mobeus — who used to raise £40m a year — will now only look to come out for a fraction of that,” he said, adding: “Basically, if you want a VCT, you need to act quickly.”