Time to venture into venture capital trusts

Professional investor Alex Davies, founder of high net worth investment service Wealth Club, picks his top venture capital trusts.

Each week, a professional investor tells us where he'd put his money. This week: Alex Davies, founder of high net worth investment service Wealth Club, picks his top VCTs.

The tax burden in Britain has reached a 49-year high. Higher earners have been hit the hardest: their share of the nation's tax bill has almost trebled since the 1970s. At the same time, investing tax-efficiently has become considerably harder over the past few years.

For instance, not only has there been a crackdown on the buy-to-let sector, with the relief on mortgage-interest payments reduced and stamp duty for second homes raised, but the pensions annual allowance has been cut too. Many fear tax relief for higher earners could be on the way out. So where can wealthier investors turn?

One of the last relatively straightforward and tax-efficient investments left is a venture capital trust (VCT). In exchange for the greater risks of investing in young innovative companies, VCT investors get 30% income-tax relief when they invest, along with tax-free returns in the form of dividends.

Owing to recent changes in the law, the types of companies VCTs can make new investments in are now typically younger and less established than previously. That said, if you invest today you get exposure to the whole portfolio of a typical VCT, which will often include more established companies that qualified under the old rules. They should help support dividend payments while the new riskier investments come to fruition. But future dividends could be lumpier than before.

A dependable VCT maven

One of the managers I would be most happy to put my money with is Bill Nixon, manager of the Maven VCTs. Consider VCTs 1 and 5 (LSE: MIG1 and LSE: MIG5). Maven historically specialised in management buyouts, which still represent as much as 66% of the current portfolios. It has also been one of the most active managers since the rule changes, with nine new investments in 2018 alone. As a result, investors get a good mix of new and old-style investments. These include companies servicing the oil and gas industry, a leading manufacturer of shower trays and a car seller. Since 2015 Maven has completed 11 profitable ventures, delivering returns of up to 7.1 times the cost of the stake.

A tentacle in every pie

The new VCT rules play to Octopus's strengths. The Octopus Titan VCT (LSE: OTV2) has concentrated solely on early-stage, high-growth businesses ever since its inception in 2000. It has a great record of spotting and nurturing rising stars and achieving high-profile exits. Zoopla, the first VCT-backed £1bn company; travel group Secret Escapes; Graze.com, which makes healthy snacks; and dog-food maker Tails.com all received funding from Octopus Titan. One of its most recent partial exits was realised at 80 times the lowest price at which they invested.

Two proven performers

Like Octopus, Proven has specialised in fast growers for many years so it should be well positioned to prosper under new rules. Over the last 20 years both the Proven and the Proven Growth and Income VCTs (LSE: PVN and LSE: PGOO) have generated great returns. Successful exits last year included luxury watch retailer Watchfinder, sold to Swiss luxury goods groupRichemontSA, providing a ninefold return, and Chargemaster, the UK's largest electrical car charging firm, reportedly sold to BP for £130m.

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