The recent hit to the ‘Magnificent Seven’ tech stocks is a reminder of the need for diversified portfolios that are more resilient to shocks and also have the potential to generate counter-cyclical returns. As a result, alternative assets, such as venture capital trusts (VCTs), have increasingly come to the fore, says Ewan MacKinnon, Partner, Maven Capital Partners.
VCT investments, which are typically in early-stage companies and are less correlated with prevailing market conditions, have an excellent record of delivering consistently strong returns for investors. According to the British Venture Capital Association, some of the best-performing VCTs have seen annualised returns of more than 10% over the last ten years, compared with 6.5% for the FTSE 100 over the same period.[1]
Recent events in the UK are also causing investors, advisers, and tax planners to reconsider their investment approach. The Autumn Budget removed key tax exemptions and increased capital gains tax.[2] Combined with changes to pensions allowances, VCTs offer a compelling investment option– combining the potential for higher returns, and an alternative to traditional equities, with benefits such as income tax relief and tax-free dividends.
Getting in on the ground floor
VCTs are now an established part of the UK investment environment. In the Autumn Budget the Government extended the VCT sunset clause, and VCTs are set to continue to play an important role in the Government’s attempts to foster innovation and the growth of new sectors.
One of the main advantages of VCTs is that they expose investors to dynamic emerging companies offering significant potential for growth, which are otherwise difficult to access on public markets.
VCTs have financed a number of early-stage companies that have gone on to become household names and provided investors with strong returns – such as Gousto and Zoopla. Investment in early-stage companies entails a higher level of risk than with traditional asset classes – but with a seasoned investment manager which has the SME and sector expertise to identify these lesser-known opportunities, the potential returns to clients can be significant.
Maven’s VCTs, for example, have achieved 14 exits since 2021 from dynamic companies bringing cutting-edge products and services to market. Our exit from Quorum Cyber late last year achieved an overall 8.2x return, after initially exiting in 2022 and retaining an ongoing stake to participate in the company’s further growth. Another example is our 4.7x return on a partial exit from the RegTech company Novatus in September 2024, again including a retained equity stake in the business.
Backing British innovation
VCTs were introduced in 1995 as a way to stimulate the growth of innovative new British companies. Since 2016, for example, VCT investment has been responsible for creating over 106,000 jobs in the UK in emerging sectors such as cleantech, healthtech, and enterprise software.
The Labour Government is now making a concerted effort to drive growth by encouraging new sectors – for example by promoting a ‘British Silicon Valley’ of data centres, laboratories, and tech campuses in the Oxford-Cambridge Growth Corridor. New companies in these sectors are exactly the sorts of opportunities that VCTs target – early-stage, high-growth firms that are not listed on the public market – and VCTs will continue to play a critical role in the performance of ‘UK plc’.
Ideal addition to portfolios in 2025
VCTs are also a good way to improve the tax efficiency of financial planning strategies for clients. VCT investors can claim income tax relief of 30% on investments of up to £200,000 in new shares annually – an attractive proposition given that many investors are now facing increased tax burdens.[3] Unlike traditional assets, dividends from VCTs are also tax-free, something that’s particularly appealing to investors in the current high-tax environment.[4]
Furthermore, VCT performance tends to be less correlated with public markets, making them an important component of a diversified and resilient portfolio strategy.
The higher level of risk involved in VCT investment can be mitigated by the help of specialist investment managers which offer expertise in driving growth in high-potential younger companies, as well as the ability to construct large, diversified portfolios capable of generating long-term investment returns.
[1] https://www.bvca.co.uk/ ; https://curvo.eu/backtest/en/market-index/ftse-100?currency=eur
[2] https://kpmg.com/uk/en/home/budget.html
[3] https://www.morningstar.co.uk/uk/news/256704/autumn-budget-capital-gains-tax-changes-dominate.aspx
[4] UK economy edges closer to stagflation
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