With the past year marking a record for VCT investment at £1.13 billion fundraised, it is clear that the alternative investment opportunity is becoming increasingly mainstream. As we approach the new fundraising season, this strength of demand is set to continue as investors increasingly prioritise vital tax relief and seek to support for the UK’s start-up sector.
Providing essential tax relief
This past tax year has seen VCT fundraising pass the £1 billion milestone for the first time , with a 65% increase on the amount fundraised from the year before. This strength of demand highlights how this once niche investment is becoming increasingly mainstream. Given the unprecedented financial and geopolitical pressures, this demand is only set to grow as investors seek to capitalise on vital tax relief.
With inflation expected to peak above 13% and investors facing economic challenges for the foreseeable future, tax relief is becoming a pressing priority. VCT investment remains one of the most efficient tax solutions as it allows investors to claim upfront tax relief worth 30% of the amount invested, up to an investment of £200,000, and earn tax-free dividends. With a recent survey showing that 71.7% of VCT investors were initially interested in this form of investment because of tax, the importance of this tax efficiency is clear.
Equally, restrictions on pensions in recent years have left savers with fewer and fewer options for pension and retirement planning. With clampdowns on tax exemptions for high earner’s pensions in 2021 affecting more than 1.6 million savers, tax efficient VCT investment has been able to offer a solution to demand for supplementary pension planning products. As inflation continues to climb, this tax relief could offer an essential income stream in the coming months.
Whilst it is clear that tax relief is a strong driver of continued demand for VCT investment, the opportunity to invest in the UK’s future is another key reason. VCT investment offers investors the opportunity to capitalise on innovation by providing start-ups access to capital at an early stage of their lifecycle. As the current economic challenges continue to develop, as in all times of great change, it is the businesses that prioritise innovation which are more likely to succeed.
Since their introduction over 20 years ago, VCTs have fuelled the success of many well-known companies in the UK, including Secret Escapes, Tails.com and Zoopla, with 75% of investment going into companies with annual sales of less than £3.6m and less than 49 employees, which are less than nine years old. When investors in VCTs were surveyed, some 94% said they believed that VCTs were strong backers of entrepreneurs and early-stage businesses.
Investment in growth companies through VCTs has also provided investors with strong benefits as it allows them to both support and capitalise on innovation. For example, research has shown that almost half of VCT investments are in businesses that have grown revenues by more than 25% year-on-year. By contrast, just 5.9% of companies on the UK main market have achieved this growth. Equally, over the 25 years that VCTs have been in existence their strong long-term performance has been reflected by the average VCT returning 155% over the last 10 years. As investment demand remains strong, it is this opportunity to both capitalise on and nurture innovation that drives VCTs’ popularity.
Mitigating the risks
As is the case when engaging with any form of investment in early-stage companies, there are risks that investors should ensure they are mitigating. For example, where some VCTs have seen share prices jump between 20-30% over five years, others have witnessed a drop. Clearly, a sensible strategy is key to mitigating the risks associated with investing in start-ups and ensuring investors are able to capitalise on the benefits of VCT investment.
Triple Point’s Venture Fund VCT adopts a challenge-led approach to help mitigate the risks of investing in start-ups. With 20% of start-ups failing within the first five years, Triple Point’s strategy helps mitigate this risk by establishing whether there is a strong market need for the product or service potential investee companies are providing.
Triple Point also adopts an approach that primarily invests in pre-Series A B2B technology businesses. With high-growth B2B technology businesses accounting for 77% of all exits in 2019, these businesses tend to offer better valuation on entry and better returns. Ensuring that investors are selecting the right strategy can help mitigate the risks associated with this form of investment, helping to ensure that investors are able to reap the robust rewards of VCT investment.