Talking VCTs with Nick Britton of The AIC

Speaker A: This is a podcast produced for EIS Platforms Ltd. Trading as growth Invest. It is not intended to be a financial promotion of any sort and is intended for financial professionals only. Any comments made or opinions expressed in this podcast should not be construed as investment advice or a financial promotion. Startups and early stage businesses are high risk investments and you are unlikely to be protected if something goes wrong. Don't invest unless you're prepared to lose all your money.

Speaker B: Hello and welcome back to a new series of the Alternative Thinking Podcast with me, Melissa Griffiths and me, Steve Dobson. This is the podcast that takes a deeper dive into the alternative marketplace and explores topical issues. As we have come to the end of another busy tax season, we're delighted to have Nick Britton from the association of Investment Companies AIC joining us today. Hello, Nick.

Speaker C: Hi, Melissa. Hi, Steve.

Speaker B: So, um, for those who might not be aware, the AIC is a trade body for the close ended investment company sector which incorporates investment trusts and venture capital trusts. Nick, we normally like to start with a bit of a bio of yourself and your role at aic. If you could give us that, please.

Speaker C: Sure. I'll try not to go on too long, but I'm research director at the aic, which encompasses quite a lot of different things. My, uh, background is as a financial and business journalist, but at the aic, I'm responsible for our, uh, research projects, also for our trading and education program for financial advisors and a few other things too.

Speaker B: Okay, perfect. So we're going to focus today on VCTS. Um, last season, 25, 26, um, the VCT fundraise was the third biggest on record. Um, what do you think were the main drivers for that?

Speaker C: It was 918 million. It was 3% higher than the previous year and yes, as you correctly say, the third highest on record. Um, I think one of the drivers for that was certainly the change to income tax relief where it was cut from 30 to 20%, which I know we're going to talk about. Some people had said this was going to give a massive boost to VCT fundraising because people were going to rush in and get that 30% rate while it lasted. Ultimately, it doesn't look like that quite happened, but certainly, um, I think if you look at how the fundraising progressed over the tax year, it did speed up.

Speaker B: Yes, I've talked to the note on that.

Speaker C: Yes, absolutely. It sped up a bit and we finished up a little bit ahead of the previous year, whereas perhaps without that we would have been around the same.

Speaker D: Yeah, certainly when we looked earlier in the Season it looked like it was tracking below the previous tax year. And um, I think with the changes from the autumn budget obviously that propelled and we saw managers come out with either increased offer sizes or a supplementary offer um, to raise more funds.

Speaker C: So yeah, Northern vcts increased the size of their offer. Quite a few VCT managers uh, filled their offers Albion British mauling companies, um, some strong fundraisings from established managers with track records, um, which to be fair you see every, every year. But I think you know, in terms of what's driving the total. Yeah, that budget had a little bit

Speaker D: of impact there I guess the likes of, was it the Gresham House, the old Mobius VCTs normally do the two year cycle they'd raised the previous year weren't expected to come out 25, 26. But potentially on the back of the news they came out and did a significant raise and filled that fairly quickly too.

Speaker C: Yeah, absolutely.

Speaker B: And I mean just touching on that, it's interesting because one thing I've noticed over the years is that VCTs, um, they used to sort of, there'd be a few that came out sort of September time and then it sort of built and built but actually now I do feel they come out a lot earlier anyway which um, probably would be interesting how that moves to next season.

Speaker C: They come out earlier sometimes they fill a lot earlier. Yeah, um, you know sometimes within days or weeks. Which really does mean you need to keep an eye on this market. I mean it used to be, you know, thinking back 10 years ago, a kind of end of March job for some advisors. But nowadays, yeah, if you want to get the best choice of offers you need to be monitoring them this throughout the year really.

Speaker B: Yes. And start early summer's early start planning as well.

Speaker D: Yes, I guess advisors, you know, you've got to be talking about this and planning for the full tax year. Um, obviously not just for the vcts. Yeah, from, from the start of the season, as soon as you finish the tax year, start looking at what's going to be happening because the vcts is only one aspect of that and if that's going to start earlier in the year then yeah, it's key for advisors to get in front of their clients at an early stage.

Speaker C: Quite right, yeah.

Speaker D: So we talked about the last tax year. You alluded to the changes on the income tax relief which obviously is the hot potato here in terms of what's impacted. Certainly been a big driver of the previous changes. So you want to talk about the change itself and the other changes actually came in which were positive in terms of the investment rules around the company sizes, um, and how much companies can raise through these schemes.

Speaker C: Sure. I mean the government very much took with one hand and gave with the other, didn't they? Because they actually gave VCT something that we'd been asking for for a long time, which was this long overdue increase in the investment limits. So they doubled the amounts that VCTs can invest in individual companies over a year. And over their lifetime they increased what's called the gross assets test, which sounds technical, basically the size of company that the vcts can invest in. Now those changes, I say they were overdue because they hadn't moved for over a decade and obviously inflation has been eating them away over that time. So effectively they've been pushed into smaller and smaller companies, which was never the intention. So. So those changes were good. They were overdue. Unfortunately, though I was going to say

Speaker B: as well, isn't it one of the big things is to try and fill this gap for the scale up sort of. And that's where they wanted to get the VCT is really in that sort of scale up area to be able to take.

Speaker C: Absolutely. I mean we need to be back in startups, but we need to be back in scale ups as well because. And VCTs were finding, you know, they were hitting a wall where they couldn't put any further money into successful companies and that wasn't the way that it was supposed to work. So that's a good change. Unfortunately, the cuts in upfront income tax relief from 30% to 20% very much wasn't. And it came completely out of the blue. I mean, nobody, we didn't expect it, nobody I've spoken to in the industry expected it. And uh, we uh, are of the same view as everybody else that it is going to hit fundraising very, very hard indeed. I mean, the last time it happened, um, fundraising dropped by two thirds back in 2006 when they cut it from 40% to 30%. Um, so, you know, unfortunately we get something very similar. And the trouble with that is that of course that affects, um, funding for exactly the kind of businesses the government wants to support. And if you think about the combined effect of these changes, so the cut in income tax relief and the increase, um, the very welcome increase in size, then it's going to be more money going to the later stage and perhaps some of the earlier stage ones that also need funding are just not going to get it. Yeah. Which is really unintentional. Yeah, it's counterintuitive for it For a government that wants to back growth.

Speaker B: Yes. I mean some people think that that will push people towards the sort of EIS funds potentially as they'll, they'll get some of the lower amounts.

Speaker C: Yeah, we don't agree, we don't agree that ES is going to come and fill this gap. Um, mainly because EIS investors and VCT investors are not interchangeable.

Speaker B: No.

Speaker C: Then they're not the same group of people. EIS demands generally higher net worth, more sophistication. Quite often EIS investors are investing into companies they know. They're investing much more, it's much more illiquid. Um, so, yeah, we don't think is going to fill that gap and I think eis, um, is not my specialist area but I mean they've had their own, um, issues with fundraising as well. So we will see what happens. Unfortunately, what we think is going to happen is a lot less money for the kind of companies that VCT schemes are designed to support.

Speaker B: Yeah. Which, I mean, that was my question. You do think it's all going to become a bit of a negative and therefore I guess that leads us on to what are you going to do as a trade body to try and sort of make changes with this.

Speaker C: So, uh, we have been lobbying, so before this even was implemented, we were lobbying for it not to be implemented, for the decision to be reversed. You know, we'll continue to lobby for this to be reversed. Um, because, you know, the government's own analysis of the venture capital scheme suggests that the tax relief was set at the right level, at 30%. I've actually got here, um, HMRC's evaluation from 2022, not that long ago, of the venture capital schemes and I'm going to quote from it, um, the incentives appear to be set at the right levels. They say if they were to reduce the number of investors that make qualifying investments would likely decrease. The potential for fewer investors was much more associated with a change to income tax relief rather than CGT or loss release. So there's HMRC itself saying the incentives are at the right levels and if you, if you change the income tax relief, you're going to get a lot fewer investors.

Speaker D: And that was four years ago that was quoted from which.

Speaker C: Yeah.

Speaker D: To then do what they've done to the income tax relief. It seems again counterintuitive to what you're trying to achieve in this space for, you know, and if we look at, I guess, you know, the UK as a whole is a, I think is a risk averse nation. We have a lot of people that are happy to put money into bank accounts and sit on cash. And we know that's not necessarily a great investment. Um, and there's a big scheme now to push people into investment and, um, I can't remember the name. It's a squirrel, isn't it?

Speaker C: Savvy squirrel.

Speaker D: Um, you know, we're trying to get people to invest. This just goes against it, doesn't it? I mean, um, I know VCTs aren't for everyone. It's a risky asset anyway, but you really try. It's just this invest, you know, it's not attractive or less attractive for people now, and it's not the right messaging from the government. That's consistent with trying to get people to invest in the space.

Speaker C: Yeah. Or for entrepreneurs, you know, you know, looking to start a business and raise funds.

Speaker B: Yeah, yeah, well, and also, I mean, just going back, I mean, we know that when they last cut them from the 40 to 20%, I think there was a drop of 70 to 80%. I mean, that's a huge fool, isn't it? Um, then obviously it got changed again, moved back. Um, but I mean, it does seem like the 30% was a real sweet spot. And it seems a bit unusual to sort of go against that now, doesn't it?

Speaker C: But, I mean, obviously you've got to view it in context of other tax reliefs that are available, um, you know, the continuing restrictions, uh, to what higher earners could put into pensions, which has obviously been a massive driver for VCT fundraising and driving it higher over recent years. And, you know, they're. That hasn't got any more liberal, you know, that people are still very restricted. So that's going to continue to probably push money into these, uh, schemes, albeit at a lower level of tax relief. You've also got the increase to dividend tax, which has just come in as of the 6th of April. Um, so you've got to view this in context of maybe a kind of harsher tax environment overall. But all the same, I mean, having spoken to advisors, I think a lot of people who are comfortable with VCTs, who are sort of experienced with VCTs, will continue to invest in them at 20% tax relief. I think a lot who might have come into the space will now think twice about it, and that is a shame.

Speaker D: And then I guess, thinking, you know, we've alluded to thoughts on what may happen in the coming tax year, the 26, 27 tax year, and we've commented on 20 years ago when we saw this, uh, drop in the initial Income tax relief again. It was quite different then though, wasn't it? And you're not as convinced we'll see such a big drop off potentially as we saw back then when it was like 2/3 of float fell off.

Speaker C: Not necessarily. I mean, obviously I wouldn't want to be drawn into predicting we're going to quit fundraising, which is always a tricky game. I mean, one reason that maybe for a little bit of optimism it won't be quite as much is if you think back to I think the tax year 0506, which I think was when you last had 40% relief, um, it was a very big year for fundraising. It was 780 odd million. And one of the drivers for that was the fact that people knew that tax relief cut was coming. So there was a massive boost compared to the previous year. And therefore, you know, uh, currently We've

Speaker D: seen the 3% increase, haven't we, from year to year. So we haven't had the big boost on this last year.

Speaker C: So we haven't had that big boost and maybe we won't get such a drop. On the other hand, I mean again, looking at the figures we've seen, which, I mean we're talking about a few weeks, right? It's way too early to make any comments on this, but nevertheless, I'm going to make a comment on it. But it is down. It is quite a lot down.

Speaker D: Yes.

Speaker C: So, uh, early signs are that it is going to be and you know, we, we are pretty convinced that it's going to be very, very sharply down and I think VCT managers are too,

Speaker B: which leads us onto as well. I mean obviously VCT is listed. One of the things we see with the platform is that people like the fact there's liquidity there and after five years of holding we see a lot of people looking to sell into buybacks. We're actually now coming up to it's the fifth anniversary of the largest VCT fundraise of 2122, which was 1.134. So all these VCTs are now hitting their five year holding periods and um, uh, we're expecting to see quite a bit of movement in the buyback market. Thoughts on that, um, and what potential impact that might have as well?

Speaker C: Yeah, I mean the way that a lot of advisors have managed VT's in the past is to sort of recycle money. Right. So after the five years have elapsed that you need to hold VCT shares in order to get to retain the upfront tax relief, you know, is to Essentially sell those shares using VCT manager's buyback scheme and then reinvest them in another VCT.

Speaker B: I mean you used to get 30% but you'd still get 20% now.

Speaker D: Yeah.

Speaker C: And get tax relief again, it would be at 20% now, as you say, um, it has to be in a, we should make clear it has to be in a different vct. It can't be in the same vct. Um, but you know, you can still do that. And as you say, Melissa, the fact that um, five years ago there was such a big year for fundraising, something 22, 23, um, over a billion, as you said, um, what that means is quite a lot of people could be wanting to sell back those shares. Um, and potentially that does create quite a lot of demand for buybacks. Now, V to T, buybacks are never guaranteed. We should be quite clear they're at the board's discretion. Um, but most if not all VCTs have buyback schemes where they buy back shares to 5 or 10% discount. In the past we have seen those schemes work pretty well in that they've been able to meet people's demand to sell back their shares. Um, that's not guaranteed. You should be very clear about that. If there's too much demand for buybacks and the VCS don't have enough cash to actually buy back the shares, then potentially those buyback requests could be queued until the next opportunity. So VCTs, when I've always said they shouldn't be viewed as necessarily liquid, um, or even semi liquid investments, they are long term investments and five years is a minimum holding period, it's not necessarily a target holding period, it could be longer.

Speaker D: It's gonna be interesting, I think with that and uh, I guess of that fundraise that happened in the 2122 Titan was a big part of that and they're obviously not operating a buyback at the moment. So it probably lessens what potentially is going to come to market. We're probably still looking at about 800 million that could be available that people are eligible to do the buybacks on. And I think what we're seeing in the private market space at the moment, on the back of the private credit where a lot of these buybacks are being gated, there's a question, will we see something like this in the VCT market, um, which again following the blow to the income tax relief could be uh, a negative, um, for people looking at VCTs, because as much as we know they are semi liquid, they're not liquid. Vehicles, they are long term patient capital that people should be looking to invest into these um, structures. So they should be looked at it that way and treated that way. But I think because in a prospectus it will say we do a buyback at the discretion of the board, people still expect it and I think they look for the ability to be able to trade out of one and go into another one. That's a good thing we see as a platform is that the money tends to get recycled within the tax space.

Speaker C: And it's worked in the past, hasn't it? Has worked in the past, which can give you some confidence. But it's not a guarantee.

Speaker D: It's not guarantee.

Speaker C: People should be aware of that.

Speaker B: No, and I think it's in the past they were used as an alternative to a pension fund when people had sort of reached their limits and they could do, do it, recycle, sell back in. And then also, you know, you had strong dividends coming out. I mean I guess this is all up to, up for debate now as if it is going to move.

Speaker C: Look, I think, I think they're still supplement to a pension, they're not a substitute for a pension, but they can sit alongside a pension as long term investments. As you say, chucking out those dividends. We should be very clear lest we should be too kind of doom and gloom. I don't want to be too gloomy. Um, those tax free dividends are still there.

Speaker D: And um, to your point about the dividend tax now and um, the change

Speaker C: of limits worth even more relatively speaking. So your whole package of tax relief is that upfront tax relief, tax exempt capital gains, but the tax free dividends

Speaker B: and I guess uh, with you know we often talk on the podcast about um, IPOs and what's happening generally in the, in the public markets and you know I think IPOs are picking up. There's hopefully um, that might see um, some exit strategies for vct. So you know this could all be positive as well going forward as they sort of merge more with the rest of the economy and what's happening?

Speaker C: Well yeah, I mean these things are cyclical, aren't they? Yes, I know we've been through quite a painful point of the cycle. Let's face it, the pandemic 21, 22 valuations were very high. Um, and when valuations are high, people are investing at those high valuations. And then valuations came off a cliff and this is painful but hopefully we're nearer the bottom now than the top.

Speaker A: Yes.

Speaker C: And you know we're In a position for recovery. Again, VCs are a long term vehicle. Maybe now is not a bad time to actually be putting money in. If VCTs have less money to invest, um, because of lower fundraising, then they're going to be quite selective in how they. Even more selective in how they invest that money.

Speaker D: So actually uh, better choices hopefully made by the managers in terms of the companies, the calibre of the companies they're investing into.

Speaker B: Which does lead us on to.

Speaker D: Yeah, I was going to bring up, I feel like I'm the doom monger here, coming up with all the negatives but I am trying to be positive about the vcts. As a, a VCT investor myself. Um, we've mentioned before Titan, um, Octopus, Titan and obviously um, we talked about dividends and people again, the buyback, the dividends, Titan doing neither of those at the moment. We've had a big impact on the nav over the last probably four or five years. Um, Titan was the biggest vct. It was probably the most widely held on the street. It was on most panels. So there's a lot of pain being felt um, in the marketplace I guess, because of Titan. Do you see a contagion effect from there? Is it isolated with Titan? Um, and obviously the impact that has on future fundraising as well. What's your view on.

Speaker C: Yeah, look, I think when you get poor performance is of course going to affect people's appetite to invest. Um, and that is unfortunate, um, in terms of whether there is contagion. I think again it comes back to how well people know the VCT space and how well people understand the differences between the managers and also the VCTs within a manager's stable. So for example, last year we saw Octopus, Apollo VCT put in a strong fundraiser, raise about 80, 80 million, I think.

Speaker A: Ah.

Speaker C: So people are obviously differentiating between the two different strategies there. The more early stage strategy of Titan, slightly later stage strategy of Apollo. But yes, I mean for somebody who doesn't know the market very well, the average performance figures are hugely affected by Titan, as you said, by some way the biggest vct. Um, and that will um, impact um, appetite for the sector. I mean, I think when, if you look at when um, fundraising was at

Speaker B: its height, I was going to say it was about 25 to 30% of the market.

Speaker C: M share. It was, it was quarter of the market, a quarter of the assets. Um, and um, you know, a lot of that good fundraising was driven by sort of good performance and when you get poorer performance, you know, you get the opposite.

Speaker D: Exactly.

Speaker B: Final Question for you, Nick. Um, thoughts on vcts then. Do you still think they're a good investment? Um, and um, with all the changes that are happening, particularly this changing tax relief.

Speaker C: Yeah, I mean, I think that is a very pertinent question. And people are going to look at that change to tax relief and it obviously affects your calculations about risk and reward because it's going to, it reduces your post tax returns. There's no two ways about that. If you've cut the upfront income tax relief from 30 to 20%. The only thing I would say is you've got to look at that in context with the other changes which the increase to investment limits. Now, as I said, I don't think it's particularly good news for early, uh, stage companies, for startups. Okay. That's one aspect. Putting that to one side, if we think about the investors in these things, the advisors who are your listeners, actually, that increase in the investment limits and in the size of companies that VCTs can invest in could be a little bit of a risk mitigator.

Speaker B: Yes. A bit more security.

Speaker D: Yeah.

Speaker C: And I don't overemphasize that because of course we always have to say VCT is a high risk and we're only talking about moving from tiny, tiny, tiny companies to slightly less tiny companies, but still it gives vcts the flexibility to back some successes and to go into companies that perhaps a bit more established in terms of their sales and profits. Put that together with a lower fundraising, you know, perhaps, you know, a higher bar for investments to make the cut for VCT investments. And you know, if you look at all that in the round, then, yes, I think vcts could still be a very attractive investment and you've got to look around at what else is there in the market in terms of tax relief, in terms of pension relief, uh, being restricted and so on. So look, VCTs have got a 30 year um, track record investing in, extended

Speaker B: recently, weren't they, with the sunset clause, which I think you were, were influential in as well.

Speaker C: We had the extension. They're on a firm legal footing, um, for until 2035, I think. Yeah. So, um, they, they have in that 30 years, you know, built up real experience in investing in early, um, stage companies in the uk. And I think, you know, you can look at their track records, you can look at the manager's track records and you can see how they've performed in various different scenarios. Um, always remembering, of course, the rules have changed over that time, but you have very experienced teams here and I think People can make their own judgments about whether this is something that could be, you know, part of a diversified portfolio, uh, for a client. But as ever, think about what's, what's in the wrapper. Don't just think of it as a tax planning tool. Think about what, what are you underlying. What are you investing in?

Speaker B: Yeah.

Speaker C: What's the underlying strategy?

Speaker D: And that's, that's the cool part, isn't it? Because it's, it's, it's, it is startup companies that help in UK PLC grow. Yeah. So that's the crux of it, is what you're invested too. It's. Yeah, it's always the question we always get is the tail that wags the dog. Is it the tax piece or is it the actual investment? I think it's key that people realize that, you know, you should understand what that investment is you're going into. And as you're saying, because they can be more selective, potentially it de. Risks it a little bit because the following on the better companies and you know, being really selective of the companies they do invest into.

Speaker C: You can invest in established portfolios of companies, you know, early stage, fast growing companies, as you say, based in the uk, contributing to the economy and jobs in the uk, where your investment has a real impact on these companies and

Speaker B: you're diversifying rather than going off and doing it yourself, you know, you're actually diversifying with experience, you know, manager.

Speaker D: Absolutely.

Speaker B: Which I think, you know, at a level which, um, yeah, you feel comfortable at. I'm going to ask something. How confident or with the lobbying that's going on, what is the, you know, obviously success with the, um, sunset clause, do you think, you know, what will be the driving factors to potentially mean that they might change their thoughts on this? The 20%.

Speaker C: Yeah, I mean, it's, it's a very good question. And I think lobbying is sometimes very unpredictable business. I mean, we had this morning the results of lobbying we've done on the pension schemes bill. Investments, trusts are going to be included. You know, we hadn't expected that to come, that news to come out last night. That's, that's absolutely brilliant news. But, um, if you'd asked me, you know, 24 hours before would not have been that optimistic.

Speaker B: Oh, wow.

Speaker C: Um, I'm going to have to say with this one, you know, we are all, um, lobbying like mad to get this reversed, you know, is really, really important to do that. We think, unfortunately, there's going to be some supportive evidence for us in terms of much lower fundraising. This tax year.

Speaker A: Right.

Speaker C: Realistically, I think the government will have to see that before they contemplate changes

Speaker D: back to quote, from 2022.

Speaker C: Yes, well, absolutely, yeah. I mean, and it's not the only time they've looked at this scheme multiple times, they've always come to this conclusion. The tax reliefs are set at the right levels to get people to invest. And we'll find out, won't we?

Speaker D: Yes, we'll find out. Proof will be in the pudding when we see this tax year. The raise. Yeah, and I hope I'm wrong.

Speaker B: Sweet spot.

Speaker C: I hope I'm wrong of 30%. I hope they raise a billion with 20% tax relief. That would be absolutely brilliant for companies. Uh, but we don't unfortunately think they will. And I think the government might have to see that before they. And also if government's thinking that EIS is going to fill the gap, they might have to again, see the proof in the pudding that, uh.

Speaker D: Whether that happens, that's an interesting question. I think we've obviously talked about that, but is money going to go to eis? But it's a different investment. And I think, again, we touched on the fact that when you go into a vct, you're fully vested into an established portfolio, you know what you're going into. Whereas EIS is quite a different structure in that you're giving the discretion to the manager to pick those companies. You don't know what you're going into at the outset. You probably know the sectors that that that fund manager majors in. But the beauty with the VCT is you can see exactly that portfolio that you're going into and, you know, bigging up the AIC as well. You go onto the AIC website, there's some great information there. We talked about, you know, performance wise, you can look at the performance of all these VCTs on the website. You can see the costs, you can see everything on there. So there's a huge amount more information for investors that are interested in VCTs.

Speaker C: Absolutely. As, I mean, they're public companies, they follow disclosure, transparency rules. I mean, you can. There's a lot of information out there for people that want to research, uh, the market.

Speaker B: Well, Nick, it's been a pleasure having you on. Um, and, uh, yeah, it'll be interesting to see what's going to happen with this.

Speaker D: I think we should, um, do this again in a year's time and let's hope we're optimistic.

Speaker B: Still, your lobbing's worked.

Speaker D: We've had that billion pound raise.

Speaker B: Yeah.

Speaker C: Yes. Let's hope so well. It's been great to be on. Thank you very much for inviting me.

Speaker D: Thank you for your time.

Speaker B: And as we go into our new season, watch out for our new miniseries we're launching called I IHT Thinking with Puma Foresight and Downing. Uh, yes, exciting stuff, Steve.

Speaker D: Yeah, a lot of changes in the IHT market. Um, similar to what we just talked about with vcts, but a lot to unpick with IHT that I think will be very useful and educational for the advisor audience.

Speaker B: Perfect. We look forward to seeing you all soon. Thank you. To hear more, tune in to either YouTube on video or all good podcast channels.

Speaker A: This is a podcast produced for EIS Platforms Ltd. Trading as growth Invest. It is not intended to be a financial promotion of any sort and is intended for financial professionals only. Any comments made or opinions expressed in this podcast should not be construed as investment advice or a financial promotion. Startups and early stage businesses are, uh, high risk investments and you are unlikely to be protected if something goes wrong. Don't invest unless you're prepared to lose all your money.