Sam McArthur, Partner at Praetura Investments, urges paraplanners to consider VCTs as an integral element of an investor’s portfolio and draws attention to a budding Northern ecosystem for the tax-efficient investment offers, as providing a unique proposition to those interested in the benefits of diversification.
The popularity of Venture Capital Trusts, or VCTs, is rising, as investors look to diversify their portfolios and small businesses seek new avenues for raising capital, particularly while they are still unquoted. The last three years have seen the three highest VCT fundraising totals on record, according to the Association of Investment Companies’ figures.[1]
For the uninitiated, VCTs are tax-efficient vehicles introduced by the government almost 30 years ago to encourage investment into the UK’s most exciting companies while still in their early stages.
A VCT is a listed company itself that pools investors’ funds so that they can be used to support early-stage companies’ growth. The UK’s standing as an entrepreneurial powerhouse can, in part, be attributed to the growing VCT sector.
Risks and rewards
The tax benefits of VCTs are a particular draw for investors, as they are entitled to claim a number of incentives on investments up to £200,000 each tax year. These include income tax relief, tax-free capital gains and tax-free dividends. So, aside from supporting high-growth small businesses as they innovate, investment in VCTs offers returns that are tax free, especially attractive in the wake of the CGT hike announced in the Autumn Budget.
In recent years there has also been an increasing awareness of the benefits of VCTs as a valuable tool in any adviser’s inventory, especially as the VCT market matures and investors target increased diversification.
VCTs offer advisers and paraplanners a useful route to diversify clients’ investments. However, many VCTs focus heavily on investing in businesses located in London and the South East, creating geographical concentration. A portfolio-first approach helps mitigate this by ensuring investments are spread across the UK, including often-overlooked regions like the North, reducing geographical risk and accessing broader growth opportunities. Geographically diversifying VCT investments naturally enhances overall portfolio diversification.
A different approach
As a Northern investment company, we know first-hand the opportunities that exist outside of London and the South East. Research from the British Business Bank last year revealed that venture capital distribution in the UK is highly skewed towards London, which captures 65% of all funding, while the North receives just 6%.
Analysts, including those from the British Business Bank’s 2023 Equity Tracker Report and KPMG’s 2024 Regional Investment Outlook, see the North as an emerging asset class. Its mix of lower competition, attractive valuations and innovative sectors like fintech and cleantech make it appealing for investment. And its most powerful cities, such as Manchester and Leeds, benefit from the strong talent produced by their local universities.
Yet, the unique position and lucrative offering of the North is often ignored. Unquoted companies based outside of London often have lower valuations compared to similar businesses that are located in the capital.
This represents an interesting opportunity for investors who can invest at potentially more attractive valuations into high-growth Northern companies. Investors are starting to catch onto these benefits, and fund managers are openly targeting these opportunities.
One such fund is the Praetura Growth VCT, which launched in April this year, and has invested £1.4m into five companies – four of which are outside the capital. It takes advantage of these specific strengths, aiming to provide investors exposure to exciting companies predominantly in the North of England.
As advisers and paraplanners encounter more clients who are looking to diversify their portfolios, it’s time for geographical difference to be considered as a marker for diverse portfolios. This geographical heterogeneity can reduce exposure to specific micro-economic downturns and it provides access to underrepresented growth opportunities.
The rising popularity of VCTs means that paraplanners should take diversification into account, or risk being left behind. Finding ways to mitigate tax rises while boosting potential returns is a key ambition for investors, making VCTs an interesting tool for financial advice firms. They can go one step further by thinking outside of the box – or at least the M25 – and uncover what the North has to offer.
[1] https://www.wealthclub.co.uk/articles/investment-news/vct-fundraising-2023-24/
