Yearsley sees VCT health

One question I often get asked, mainly by journalists, is whether there is any point to VCTs. Their death has been widely predicted and epitaphs have been written by all and sundry. However, I am pleased to say that rumours of their demise has been widely exaggerated and VCTs are actually in pretty rude health.

Inevitably famines follow feasts and the tax years of 2004/05 and 2005/06 were bountiful years for the VCT industry. Over £1.2 billion was invested by individuals keen to take advantage of the 40% tax break on offer. I think these two years clouded many views of VCTs as frankly the amounts raised were abnormally high, therefore when only £250 million was raised last year, this was seen as a bit of a failure. Well I have got news for you, I think the VCT industry should be pleased with £200 million a year and assuming the tax rules don’t change again, this is the figure they should be aiming for every year. At the end of the day there are only so many good deals to go around, and £200 million a year of new money should ensure that only the best get chosen.

I think that many people have problems with VCTs due to lack of performance. I don’t hide behind that fact that especially in the early years, performance was poor and mistakes were made. If you look at VCTs launched between 1995 and 2000 - with the exception of Close, Baronsmead and probably Foresight as well - performance hasn’t been sparkling. However since the turn of the millennium quality has definitely been improving with much more emphasis now on shareholder value and paying regular dividends.

Anyway, enough of the past, what of the future? This tax year will be tough for VCTs raising money. The volatility in the stock market, the credit crunch, rising taxes and rising mortgage costs are worrying investors and although they are buying certain risky investments (such as Russian funds) VCTs seem to have little appeal at the present time. This is a real shame as there are many decent quality managers seeking funds with a wide array of different offerings.

Among the many VCTs on offer this year I would like to highlight a couple for consideration.

Noble AIM VCT is managed by a very talented manager in the shape of Dr Paul Jourdan. Unusually this is a top up to an existing, fully invested AIM VCT, which means that you wont get the cash drag effect of a brand new one. It also means that most of the VCT will be invested under existing, less onerous rules.

Another one to look at is the “c” share issue of The Income & Growth VCT managed by Matrix Private Equity. This is a traditional generalist VCT from a well resourced, top performing manager who will just invest in unquoted companies.

A final one is Edge performance VCT. Edge is far from traditional. This is a limited life VCT that looks to wind up in five to six years. It is investing in the live event sector with a large amount of any investment underwritten by any entrepreneur they invest alongside.

The current backdrop perversely provides an interesting time to invest. With stock market jitters and banks unwilling to lend money, many small businesses that are either looking to expand or entrepreneurs looking to exit, will have very few options. VCTs will be one of those options. The lack of alternatives should mean that VCT managers have pricing power and will have access to some great deals.

As ever choosing carefully will be the key, but looking at top up offers could well prove beneficial. The risk of a brand new VCT this year is not much money being raised therefore having a small inefficient portfolio. Investing in top ups (or C shares) removes or reduces this risk.

To sum up, VCTs are alive and kicking with many top quality managers. Not much money will be raised this year, but those investors who are prepared to take the risk could be amply rewarded.

Ben Yearsley is head of VCT research at Hargreaves Lansdown. The opinions expressed are his own and do not necessarily reflect those of his company. No recommendations are implied by publication of this text.

11 January 2008