Caroline Flagg, Deputy Managing Director at PXN Investments, believes advisers should look beyond the tax benefits of Venture Capital Trusts and pay closer attention to portfolio construction, manager access to opportunities and regional diversification.
Venture Capital Trusts (VCTs) are often discussed in the context of tax planning, but for investment committees the more important question is whether the underlying portfolio is capable of generating attractive long-term returns.
That was one of the key messages from PXN Investments following the announcement of a proposed special dividend for shareholders in the PXN Growth VCT, supported by the profitable exits of Street Group and AccessPay.
The exits generated investment multiples of 4.4x and 1.24x respectively and have enabled the manager to propose a special dividend less than three years after launch.
For advisers and paraplanners, however, the wider lesson may be around due diligence.
Commenting on the announcement, Caroline Flagg said: “Tax relief matters, but the underlying investments must be the focus when selecting a VCT.”
She also highlighted the concentration that can exist within some VCT portfolios. While investors may hold several VCTs, they can still end up with exposure to businesses operating in similar regions and ecosystems.
PXN says around 64% of its identifiable UK portfolio companies are based outside London and the South East, reflecting its focus on businesses across Northern England and Scotland.
According to Flagg: “The North and Scotland are producing exceptional growth businesses, and our early exits demonstrate the potential of that opportunity. Investors risk missing out if their portfolios keep backing the same postcode.”
For investment committees, the announcement raises a broader consideration around diversification within private company investing.
While sector exposure is often scrutinised, geographic concentration is discussed less frequently despite potentially influencing both opportunity sets and portfolio outcomes.
As a result, when reviewing VCT holdings, committees may wish to consider not only tax benefits and historic performance, but also how a manager sources opportunities, accesses deal flow and diversifies exposure across the UK growth company market.
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