If you’re interested in backing great businesses, it’s likely you’ve seen Dragons’ Den – where five experienced investors battle to invest with some of the UK’s most ambitious business leaders.
Making money is clearly important for the plucky entrepreneurs pitching their ideas to the Dragons. But profits aren’t all that matter when it comes to growing a young business.
It’s also about helping business founders achieve their vision. It’s one thing having a great idea or invention, but you’re likely to need someone with the right expertise and guidance to bring it to life.
This help comes in various forms.
It might be coming up with a way to reach a larger customer base or better distributing and marketing products. Perhaps there’s a need to expand your team with skilled workers. Or maybe the business needs investment or expertise in technology.
Either way, the idea is that a new investor can provide the right skills for a founder to achieve their goals, with the hope of making a profit along the way.
Venture capital trusts (VCTs) do a similar thing.
This article isn’t personal advice. If you’re unsure if VCTs are right for you, consider taking advice. VCT and tax rules can change, and their benefits depend on your circumstances.
What are VCTs and how do they work?
VCTs are a type of investment fund run by a manager.
They have some similarities with investment trusts but focus on high-risk early-stage unlisted companies, most of which aren’t normally available to the general public.
Here, younger companies seek funding and expertise from venture capital investors in return for a part of the business. The hope is the venture capitalist, after providing support, will eventually profitably exit and pay out some tax-free income to other investors in the VCT.
And by investing in a range of businesses, investors get exposure to more sources of potential success and limits the impact of any individual companies failing.
VCTs also help support the broader economy. Since being introduced almost 30 years ago, VCT investment has made its way into some of the UK’s most exciting businesses. They help to create jobs, reward innovation, and bolster the UK economy.
In fact, 106,000 people are employed because of VCTs. And they support local economies across the breadth of the country. While many large, established businesses are headquartered in London and the southeast, high-growth small businesses can be found throughout the UK. The innovation and employment opportunities contribute to boosting productivity throughout the country.
Remember though, while VCT investing can be exciting, VCTs often invest in companies at an early stage of development, which makes them higher risk. Therefore, they’re regarded as very long-term investments.
Given these businesses are so small, how exactly do VCT managers find them in the first place?
How do VCT’s find companies to invest in?
Firstly, they do plenty of essential networking. Attending conferences, for example, provides the chance to meet lots of small businesses, which means they might even get to know businesses and their founders far before they’re eligible for VCT investment. This can provide a constant pipeline of ideas.
Specialist advisers will also reach out and suggest interesting ideas to VCT managers, while entrepreneurs will contact them and pitch to them directly.
VCT managers have also been known to back the same business founder more than once – for instance, if they’ve had previous success and go on to set up another business.
The point is that investing in VCTs is about more than tax benefits. Supporting these businesses means backing some of the UK’s brightest entrepreneurs, boosting innovation and productivity, and contributing to the country’s economic growth.
VCTs are high-risk long-term investments though. It can be difficult to access money in the short term and they should only be considered for larger portfolios, held by experienced investors. We suggest if used, that they form a small part of a diversified portfolio. VCT investments, and any income they produce, can rise and fall in value, so you could get back less than you put in.
Investors should make their own assessment of their expertise and the suitability of a VCT for their circumstances. Those with any doubts should seek expert advice.
Interested in VCTs?
To encourage investment in higher-risk smaller companies, the government offers generous tax incentives including up to 30% income tax relief on new issues of VCTs if held for at least 5 years, as well as no tax on dividends and no tax on capital gains tax on any VCT shares held.
HL has a new service where you can invest in new VCT issues.
Why invest in VCTs with HL?
We make it easy
Apply online in minutes and hold your shares in an HL Fund and Share Account. No messing about with paper forms, cheques or share certificates.
Great discounts
We provide a discount on the initial charge so it’s cheaper than applying directly with the VCT provider.
No hidden commission
Unlike some other brokers HL doesn’t take any commission from the VCT provider. Just pay one £50 dealing charge when you apply and a further £50 dealing charge when you sell. Any commission paid by the VCT manager will be given back to you, so your money could go further than investing elsewhere.
You can invest with HL from a £10,000 lump sum up to the full VCT allowance of £200,000.