VCTs: how to invest in Britain’s most exciting companies

Professional investor Alex Davies of Wealth Club picks four of his favourite venture capital trusts that invest in small, innovative, fast-growing British businesses.

Venture capital trusts (VCTs) are delivering on their promise. They were introduced by the government in 1995 to support small, innovative, fast-growing businesses. Today, six VCT-backed firms have become “unicorns” (private companies worth more than $1bn). 

More are growing at a double- or triple-digit rate, often doubling or tripling sales year-on-year. Very few, if any, of the companies listed on the main stockmarket can match that. VCTs are becoming the UK’s growth asset class: £109m has been invested in VCTs this tax year, nearly seven times as much as at the same stage in 2020-2021. 

Generous tax relief with VCTs

The opportunity to back some of Britain’s most exciting companies is increasingly appealing to investors. So are the generous tax reliefs VCTs offer, especially now that the tax burden looks set to reach unprecedented levels owing to a combination of tax increases (on the dividend tax and national insurance) and heavier restrictions on available tax reliefs (the pension lifetime-allowance freeze). When you invest in a VCT, you receive up to 30% tax relief. All returns, typically paid through dividends, are also tax-free. You can invest up to £200,000 a year.

Hargreave Hale Aim VCT (LSE: HHV) stands out because – in addition to its emphasis on Aim-listed companies – it can also back unquoted companies. The VCT’s largest holding is a private company: recipe-box delivery service Gousto, which achieved unicorn status in November 2020. The manager is one of the most respected small-cap investors in Britain and the trust has delivered strong returns, nearly doubling investors’ money in the five years to June 2021.

Making profits from pasta

Pembroke VCT (LSE: PEMB) is a relatively young VCT that is coming of age. Launched in 2013, it has always focused on backing rising stars, particularly consumer brands with premium-pricing potential. This year it achieved its first two profitable exits – fresh-pasta delivery service Pasta Evangelists and cold-pressed juices and nut-based milks producer Plenish. 

Investors have already received 8p in dividends, with another 3p final dividend expected to be paid in November (new investors can qualify). The portfolio looks very promising, boasting a number of fast-growing companies that have fared well during the pandemic. 

The British Smaller VCTs – British Smaller VCT (LSE: BSV) and British Smaller VCT 2 (LSE: BSC) – were part of the first crop of VCTs launched 25 years ago. Their record shows strong performance and consistent dividend payments. They were once renowned for management-buyout deals, but since 2015 they have concentrated exclusively on growth capital investments. One of them, Matillion, a Manchester-based company that specialises in helping global businesses make sense of their data, became the UK’s latest VCT-backed unicorn in September 2021. Matillion, first backed in 2016, has since become the largest holding in both VCTs. 

Listed US peers such as Snowflake trade on substantially higher valuations. If Matillion maintains its current growth trajectory and seeks a stockmarket listing, investors could see a significant uplift to the value of the VCTs.

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