What Is a Venture Capital Trust (VCT)?
The term venture capital trust (VCT) refers to an investment vehicle that operates in the United Kingdom. The VCT is a closed-end fund that was created by the U.K. government in the 1990s to help direct investment into local private businesses. These funds are tax-efficient and allow individual investors to access venture capital investments via capital markets. VCTs seek out potential venture capital investments in small unlisted firms that are in their early stages to generate higher-than-average, risk-adjusted returns. VCTs are commonly listed on the London Stock Exchange (LSE).
Key Takeaways
- The term venture capital trust is an investment vehicle that operates in the United Kingdom.
- The VCT scheme was established by the British government in 1995.
- Shares in VCTs are publicly-traded and provide capital to small and emerging private British businesses.
- Companies must meet certain criteria in order to qualify for capital.
- The types of funds include evergreen, limited life, and AIM funds.
How Venture Capital Trusts (VCTs) Work
The British government introduced a series of venture capital schemes in 1995. These include the enterprise investment scheme, seed enterprise investment scheme, and venture capital trust scheme. All three of these programs were designed to encourage the nation’s private sector growth and generate investment from individual investors.
Retail investors can purchase shares in venture capital trusts that are traded on major exchanges like the LSE. This allows investors to take part in the growth of smaller, private, up-and-coming businesses indirectly. VCTs fall under the purview of fund managers who work for investment firms. The money from investors is pooled together and distributed to these businesses to help them grow.
Certain criteria must be met in order for a fund to be classified as. VCT. Some of the main qualifications include:
- Listing on a major exchange in the U.K.
- Companies that receive capital through VCTs must employ no more than 250 individuals.
- Companies under the VCT must have less than £15 million in gross assets before the investment and £16 right after the investment
The government exempts these trusts from corporate taxes on capital gains that arise from their investments. They also provide investors with certain tax benefits, including income tax relief for 30% for annual investments of up to £200,000 (as long as they are held for a minimum of five years) and a tax exemption on income derived from VCT investment dividends. Investors can’t defer capital gains taxes, though.
Although there is no direct stock exchange equivalent to VCTs in the United States, they are similar to business development companieswhich are corporations that invest in small- and mid-size companies, as well as distressed businesses.
Special Considerations
Investors who are interested in purchasing shares in VCTs can do so directly through fund managers in new offerings. Shares can also be purchased on the secondary market on public exchanges in the United Kingdom, such as the LSE.
Fund managers usually charge fees that are higher than other investments. That’s because VCTs can be fairly complex and often require more attention. Upfront fees can be as high as 5% while the annual management fees can be in the neighborhood of 2%.
Investors should be aware of the risks involved with VCTs because of the nature and size of the companies involved. Investing in these funds may result in significant losses.
Types of Venture Capital Trusts
VCTs invest in different types of companies across various industries for fixed periods of time. Evergreen VCTs invest indefinitely whereas certain short-term venture capital trusts called limited-life VCTs are only designed to bring income for a few years.
There are also generalist VCTs, which are trusts that diversify across multiple sectors and industries, and specialist VCTs, which focus on one sector at a time.
Investors with a particular interest or background in technology can choose to hedge their bets on a specialist technology-focused VCT. The final type of VCT is called an AIM venture capitalist trust. It focuses on companies that are already public or are on the verge of becoming public on the LSE’s Alternative Investment Market (AIM).
Real-World Example of Venture Capital Trust
The Octopus Titan Venture Capital Trust is one of the country’s largest VCTs. The fund is invested in more than 90 tech-enabled companies with strong growth potential that are in the development stage, including:
- Big Health
- Bought by Many
- Depop
- Wave Optic
These companies comprise a variety of sectors. The firm aims for dividends of around five pence per year. Additional dividends may also be allocated if businesses within the portfolio are sold at a high profit. The fund returned 32.8% to investors in the year up to June 30, 2021.