There are several important investment criteria an investee company has to meet to be VCT qualifying. For example, it must be unquoted or AIM listed and there are restrictions on the value of its assets and number of staff.
There are also rules governing how the manager invests; at least 70 per cent of a VCT’s cash must be invested in qualifying companies within three years. The remaining 30 per cent can be invested in non-qualifying investments, such as cash, listed equities, debt and investment funds.
2. Playing by the rules
The rules the manager must adhere to in order to maintain a VCT’s qualifying status are becoming increasingly complicated, especially after rule changes last year. It is important to choose an experienced manager who understands the rules to the letter and manages the VCT accordingly.
The rule changes have had implications on which investee companies will qualify for VCT investment. This has focused and narrowed the potential investment universe, which may have implications for a manager’s deal flow.
It is important to be clear on a manager’s ability to deploy new monies into appropriate qualifying investments that fit the VCT’s mandate.
Looking at whether a VCT manager’s deal flow is appropriate to the level of fund raising they are seeking will be critical to ensure they are not overstretching themselves and putting themselves under pressure to invest the capital.
Because of the numerous rules which VCTs must adhere to, in order to qualify for tax breaks, it is important to choose an experienced manager with relevant expertise.
Choosing a VCT
There are four main types of VCT, so it is important to understand the differences. They all invest in smaller UK companies but the market splits them into Generalist VCTs, AIM VCTs, Specialist VCTs and Limited Life of Planned Exit VCTs.
Each of these will have their individual investment approach and risk and return profiles, so each will suit different investors according to their needs and their risk appetite.
The VCT list below details the different types and their features.
- Generalist VCTs - As the name suggests, they invest in a general portfolio of companies across the smaller and private equity universe, often across multiple sectors.
- Aim VCTs - Focus on companies listed on the AIM market. These are the only listed companies (daily priced) that “qualify” under VCT rules. AIM has been around since 1995 and is now a mature exchange, with more than +£90bn raised with c. 1,100 companies operating in +100 countries across 40 sectors.
- Specialist VCTs - Focus on companies in a specific sector, such as renewable energy, leisure, media or technology, where the manager believes they have an edge.
- Limited Life or Planned Exit VCTs - Similar to Generalist VCTs but tend to focus on lower risk, lower return companies with the main objectives of capital preservation and providing liquidity as soon as possible after the minimum five year holding period.
3. Matching investment objectives
It is important to consider the investor’s requirements and match their investment objective to the type of VCT selected – the manager’s strategy and the structure of the VCT must fit the investor’s requirements.
An experienced manager focussed on a specific sector often builds a high level of expertise that can translate into investment success.
Growth and Income
VCTs should be considered on their investment merits rather than simply a way of accessing tax reliefs. Given their focus on smaller, less liquid companies, VCTs will not be suitable for every client.
However, because they offer tax-free dividends, the majority of VCTs will focus on providing regular income alongside capital gains. As such, VCTs can complement an investor’s income portfolio.
