VCTs offer investors the opportunity to support the innovation desperately needed in the UK post pandemic and Brexit, and also benefit from the return potential of these small, growth businesses, says Will Fraser-Allen, managing partner, Albion Capital
Covid-19 is undoubtedly having a profound and lasting impact on our economy. Amid the stories of job losses and corporate administrations that have plagued the past year, there has been a bright spot for UK business: a raft of exciting young growth companies thriving despite dire external conditions.
These companies, often operating in high growth areas such as digital healthcare and technology, are the businesses that VCT managers have supported for years. They will be key to creating jobs and driving improved prosperity by accelerating the development of the digital economy and rapid adoption of digital healthcare. With the support of VCT investors, they can drive an innovation-led economic recovery in the UK.
An innovation-led recovery
Given their investment company structure, VCTs are a means of democratising access to participation in the growth of exceptional private companies for investors. They can do so at an entry point where investors can meaningfully benefit from the return potential of these truly innovative businesses and support the innovation desperately needed to solve the challenges facing us all.
The Venture Capital Trust Association, which represents ten of the largest VCT managers in the UK, has analysed every VCT investment made since the 2015 rule changes and found that VCTs have invested over £1.8bn in capital into over 580 individual companies. Of that amount, £1.2bn has been invested in new companies, with over £0.6bn invested through follow-on investments into over 230 companies supporting further growth and innovation.
Overall, VCTA members have made over 1,300 individual investments into companies over the last five years, with the latest VCTA annual return to May 2020 showing VCTA investment portfolio businesses delivering £14.2bn in revenues, generating £3.9bn in exports, investing £534m in R&D and employing over 77,000 people.
The contribution of these companies to UK job and wealth creation is indisputable, and paints a promising picture for the prospects of small growth businesses in 2021 and beyond.
Investor demand
Demand for attractive tax efficient investment options – including VCTs – remains strong, particularly in the current environment of low returns. There are signs the average age of investors into VCTs is falling, and the average age of those invested in our own portfolios has reduced from 63 to 57 over the past five years. Younger investors are interested not just in VCTs as a tax mitigation strategy, but in the positive contribution that underlying portfolio companies are making to the world around us.
Such investors want access to the companies that will change the future. They have seen the astonishing gains that early investors in the tech giants have made and want to be first to find the next Amazon or Netflix. Some of the most common reasons for VCT interest that we are now seeing include:
- Relevance: Investors are particularly interested in VCT portfolio companies where the problems that are being solved are relevant to their own lives, such as cyber security and healthtech. They feel that by getting access to these types of businesses they are not only investing their money for growth but also to improve the world
- Access: Investors are looking to access a wide range of the businesses of the future and the relative ease of investing in private companies through VCTs gives them wider access to unquoted growth businesses than other investment options
- Long-term track record: The ups and downs of markets are familiar to most investors and VCTs’ long-term, patient capital approach ensures investments are sold when appropriate, rather than on a predetermined timetable This is particularly appealing to investors optimise investment returns by not being forced to sell their winners prematurely
Finding future winners
The world has undergone an incredible transition over the past year with the pandemic necessitating a move to remote working and the unparalleled widespread adoption of cloud and digital solutions. Nowhere has the pace of digital transformation been more evident than in the meteoric success of B2B software.
Young, unlisted companies operating in areas of B2B software have demonstrated resilient growth throughout the pandemic because they have been able to deliver high returns on limited invested capital. Typically, they provide solutions to significant, previously unsolved problems and the most successful are able to build a ‘moat’ of differentiation that separates them from competitors.
These companies are able to lock in multi-year contracts with blue chip customers and often operate in ‘mission-critical’ areas of business offering services that cannot be switched off – for example, cybersecurity, remote working or banking services – even during a global health crisis and economic downturn.
These companies show the potential to be global category leaders in emerging disciplines, delivering solutions that are in high demand and rapidly transcend borders. Small and growing businesses account for a significant proportion of the wealth and jobs created in the economy, and we believe it is exactly these types of companies that are best positioned to drive the UK’s economic recovery after the pandemic.
