Venture capital trusts reap more than £1bn from UK investors

Venture capital trusts have raised more than £1bn from UK retail investors for the second year in a row, as savers continued to march into early-stage companies.

About £1.08bn was raised by VCTs in 2022-23, according to the Association of Investment Companies, a trade group. This was down 5 per cent compared with a record-setting 2021-22, in which £1.13bn flowed into the tax-efficient investment vehicles.

The high inflows will be a welcome signal for cash-hungry early-stage companies, with businesses keen to raise funds at a time when higher borrowing costs have led to a retreat in the wider venture capital market.

“This VCT fundraising is close to record levels, which will be highly beneficial to the UK’s innovative small businesses,” said Richard Stone, AIC chief executive.

Investors receive 30 per cent upfront relief on newly issued shares, provided they hold them for at least five years. This appeals to those with a longer-term outlook, with the AIC reporting about 60 per cent of those invested in a VCT said they did so to save for retirement.

However, the asset class is expected to face headwinds this year, amid changes in pensions allowances, declining valuations and market uncertainty.

This month, the annual allowance on pension contributions went up from £40,000 to £60,000 and the cap of £1.073mn on lifetime contributions was abolished, offering investors the chance to build a bigger retirement pot.

Yet the wealthiest will still be hampered by the tapered annual allowance, under which the allowance gradually reduces by £1 for every £2 of adjusted income above £260,000. For the highest earners, their annual allowance will taper to as little as £10,000, up from £4,000 in the new tax year.

“VCTs have really come into their own for those who have been stuck with the £4,000 annual tapered allowance. Moving that to £10,000 still doesn’t really cut it,” said Rachel Efetha, a financial adviser at Anstee & Co.

Efetha said few clients approached her about VCTs but were offered them once they had exhausted their Isa and pension allowances. She remained cautious about investing in private companies and said the decision hinged on an investor’s risk appetite.

Market uncertainty in the wake of Silicon Valley Bank’s collapse is expected to shake investor appetite for the riskier early-stage companies funded by VCTs. But last year’s figures suggest the asset class remains attractive even amid volatile conditions: for example, Octopus Investment, which manages the outsized Titan VCT, raised a record £237mn last year.

VCT fund managers have held on to some cash as dry powder in anticipation of improved opportunities next year. About £700mn was invested by VCTs in the last calendar year, despite more than £1bn being raised in the same period.

The bulk of investments (£652mn) last year were in private companies, with about £48mn invested in Aim-quoted companies. This compared with £539mn and £133mn in the previous year, respectively.

Though funds typically use cash for dividends and share buybacks, a significant sum was held back for future investment. Analysts said this could act as a drag on returns, while valuations had fallen as market confidence dipped.

“Underlying companies and portfolios are generally performing well, according to fund managers,” said Brian Moretta, head of tax-enhanced services at consultancy Hardman & Co. “It’s the valuations which have come off and, if that’s the case, they may not come down that hard.”

Moretta said the economic prospects in the next 12 to 18 months were not positive and this might motivate fund managers to hold on to more cash should investors spurn VCTs in favour of safer shores.