UK small caps in line for cash injection after record VCTs fundraisings

Fundraising for small cap companies via Venture Capital Trusts for the 2017/18 tax year was the second highest amount since the tax-efficient investment vehicles' inception more than two decades ago.

A total of £728m was raised in the tax year, the Association of Investment Companies confirmed on Tuesday, which was up 34% on the previous tax year and the highest amount ever raised at the current level of 30% upfront tax relief.

This was also the most raised since the record 2005/6 tax year, when an initial tax relief on investments of 40% saw £779m drummed up. The 2017/18 fundraising was significantly more than seen in recent years, with £542m raised in 2016/17, £457m in 2015/16 and £429m in 2014/15.

"VCT fundraising is vital to UK smaller companies, as they will benefit from the VCT investment and expertise they need to grow," said Ian Sayers, the AIC's chief executive.

The AIC calculated that VCT assets under management as of 5 April 2018 were £4.3bn, up 10% from £3.9bn a year before.

This year’s bumper fundraising was boosted by the November 2017 Budget, when Chancellor Philip Hammond revealed that the government’s Patient Capital Review had recognised VCTs as effective providers of 'patient capital'.

As government-approved tax shelters, VCT demand has been boosted by tighter restrictions elsewhere and by the Chancellor giving the seal of approval to their valuable tax incentives. VCT shareholders can qualify for upfront 30% income tax relief, regardless of the individual investor’s earnings, provided the tax paid is sufficient to cover the relief obtained.

Sayers said pension rule changes and VCTs’ strong long-term growth and income record had also been important.

"VCT-backed businesses deliver vital economic benefits, with jobs more than doubling after VCT investment. I am confident that VCTs will continue to be a vehicle delivering transformational change for some of the UK’s fastest growing businesses.”

Some of the changes to the VCT investment rules in the last Budget put new restrictions on how VCT fund managers can invest funds, designed to prevent managers investing in ‘capital preservation’ type businesses and focus on the amount of time VCTs have to invest their money, moving them up the risk scale somewhat.

This included a doubling of the annual investment limit to £10m for 'knowledge intensive' firms, being those that invest significantly in R&D and either create intellectual property or have a high percentage of the workforce with higher education degrees.

VCTs can invest in these knowledge-intensive companies up to ten years old rather than the usual seven years for other small and micro-cap companies.

Forcing fund managers to hurry up and invest rather than hold onto cash, from 6 April 2018, VCTs are required to invest at least 30% of new money raised in investee companies within 12 months, though this only will be relevant for the money raised this tax year rather than the bumper last year. From the start of the 2019/20 tax year, VCTs must hold at least 80% of the fund in investee companies, up from 70%.