Partner Insight: The sector will need time and a 'degree of adjustment' if it is to steer away from its reliance on buyouts and move towards growth investing over the long-term.
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Ahead of the long awaited results of the Patient Capital Review in October 2017, the VCT sector had expressed concern that ideas might be put forward to either limit or replace the associated tax benefits or otherwise further meddle with the terms of investment.
As it turned out in this case, the VCT sector needn't have worried. Much of what has been brought into effect by the Budget are ‘technical' changes which will have no impact on the investors. Additionally, the changes are mainly centred on the (somewhat controversial) focus on knowledge-intensive companies.
David Hall, managing director at YFM Equity Partners, which runs the British Smaller Companies VCT range, believes the effects of the rule changes are still working their way through the system. He comments that with a lot of VCTs largely investing in buyouts - maybe 85% buyouts and 15% growth capital; buyouts have been driving steady dividend returns for investors whereas the returns from growth assets have inevitably been more variable.
In moving to steer VCTs away from a reliance on buyouts, the government is more clearly pointing the funds in the direction of growth investing and the move has meant that for some managers (though by no means all) a degree of realignment and adjustment is now needed.
"We are in a transition period right now," he says. "The old-style buyouts still make up a substantial portion of the portfolios."
While the changes won't mean anything for the underlying companies, it might mean the VCTs hold on to some of those assets for a bit longer than they might have previously.
"It is important for advisors and investors to understand the investment strategy of the VCTs they are investing in, and the experience the manager has of making growth capital investments," says Stuart Veale, managing partner at Beringea, which runs the ProVen range of VCT fund. "For some investors, like ourselves, the rule changes have had minimal impact, as we have been investing exclusively in growth capital investments for many years."
John Glencross, chief executive and co-founder at Calculus Capital says that a clear indication from the manager of their track record can help clarify thoughts. "The important point is that investors are given a clear understanding about what investment strategy a VCT will pursue and what the team's experience is in being a growth investor," he says.
"The Calculus VCT has always followed a growth investment strategy because of our origins as an EIS investor. The Treasury has made it clear what type of investment it expects to see going forward. That message is gradually being disseminated."
Time is perhaps the most important factor right now for VCTs and the tax efficient sector overall. In this respect the Patient Capital Review was well-named; what the industry needs now is a settling down period which would allow all involved to take stock and adjust.
Click here to read the full article and access the most recent news impacting the sector in this month's Spotlight on Tax Efficient Investing eBook.
