What Is a Venture Capital Trust (VCT)?
Let me explain what a Venture Capital Trust, or VCT, really is. It's an investment vehicle based in the United Kingdom, functioning as a closed-end fund. The UK government set this up back in the 1990s to channel money into local private businesses. If you're an individual investor, VCTs give you a tax-efficient way to get into venture capital through the capital markets. These trusts target investments in small, unlisted companies at their early stages, aiming for higher-than-average returns adjusted for risk. You'll find most VCTs listed on the London Stock Exchange (LSE).
Key Takeaways on VCTs
To break it down simply, a VCT is a UK investment vehicle launched by the British government in 1995. Shares in these trusts trade publicly and provide capital to small, emerging private British businesses. Companies need to meet specific criteria to qualify for this funding. You'll encounter different types, such as evergreen, limited-life, and AIM funds.
How Venture Capital Trusts (VCTs) Work
The British government rolled out several venture capital schemes in 1995, including the enterprise investment scheme, seed enterprise investment scheme, and the VCT scheme itself. These were all about boosting private sector growth and pulling in investments from individuals like you.
As a retail investor, you can buy shares in VCTs on major exchanges like the LSE. This lets you indirectly participate in the growth of smaller, private, up-and-coming businesses. Fund managers from investment firms oversee VCTs, pooling your money with others to distribute to these businesses for their expansion.
For a fund to qualify as a VCT, it has to meet certain standards. It must be listed on a major UK exchange. The companies receiving capital can't have more than 250 employees, and they must have less than £15 million in gross assets before the investment, rising to £16 million right after.
The government gives these trusts a break by exempting them from corporate taxes on capital gains from their investments. For you as an investor, there are tax perks too: 30% income tax relief on annual investments up to £200,000, provided you hold them for at least five years, and tax exemption on dividends from VCT investments. Note that you can't defer capital gains taxes through this.
Fast Fact on VCT Equivalents
While there's no direct equivalent to VCTs on US stock exchanges, they're comparable to business development companies. These invest in small- and mid-size companies, including those in distress.
Special Considerations for Investors
If you're looking to buy shares in VCTs, you can go directly through fund managers for new offerings or pick them up on the secondary market via UK public exchanges like the LSE.
Be prepared for higher fees than with other investments, since VCTs are complex and demand more management. Upfront fees might hit 5%, and annual management fees could be around 2%.
I have to stress the risks here: given the nature and size of the companies involved, investing in VCTs can lead to significant losses. You need to be aware of that before diving in.
Types of Venture Capital Trusts
VCTs invest in various companies across industries for set periods. Evergreen VCTs go on indefinitely, while limited-life VCTs are short-term, designed just to generate income for a few years.
You also have generalist VCTs that spread investments across multiple sectors for diversification, and specialist VCTs that zero in on one sector. If technology is your thing, you might opt for a specialist tech-focused VCT to align with your interests or expertise.
Finally, there's the AIM VCT, which targets companies that are already public or about to go public on the LSE's Alternative Investment Market (AIM).
Real-World Example of a Venture Capital Trust
Take the Octopus Titan Venture Capital Trust as an example—it's one of the largest in the UK. This fund invests in over 90 tech-enabled companies with strong growth potential in their development stages, covering sectors like Big Health, Bought by Many, Depop, and Wave Optic.
The firm targets dividends of about five pence per year, with possible extras if portfolio businesses sell at a high profit. For the year ending June 30, 2021, it delivered a 32.8% return to investors.
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