VCT investors are getting younger

Venture capital trust (VCT) provider YFM Equity Partners recently canvassed 5,000 investors, of which 4,500 participated, on their attitudes to the VCT sector.

The survey reports the minimum investment made by an investor is between £10,000 to £20,000, while the youngest investor is 30 and the oldest is 95.

VCTs are similar to listed companies and investment trusts but with important tax benefits, with varying minimum or maximum investment amounts, costs and fees. There are four different types of VCTs; generalist, planned exit, alternative investment market (AIM) and specialists.

YFM managing director and fund manager David Hall [pictured] says: "The average investor age used to be 60 and this has fallen to mid 50s. What has changed is that in those years income tax relief went from 20% to 40% and now it is at 30% that changed the population of people that invested. There are more and more younger people with higher earnings investing. The tax break has gone from 20%, to 40% to 30% and [the holding period for shares held by VCTs] increased from five to three and back to five years."

Hall says investors want a constant dividend stream and are very passionate about investing or "putting back" into British businesses.

He adds: "The average amount investors put in YMF Equity VCTs is about £15,000. However, two things are also interesting. Firstly they would serially invest, so investors will invest with us year-on-year. They won't come to us each year. On average they would invest with us every three or five years. They will put in £15,000 one year and then another £15,000 after three years.

VCT investors "like to play the field"

Hall says: "We found they hold between five to ten VCTs. They [investors] like to spread the risk across the market space. They will pretty much be with Baronsmead VCT, Mobeus Equity Partners, Albion Ventures, ProVen VCT and Northern as well, and with different amounts."

He explains the average VCT investor likes to play the field.

VCTs play an important role in encouraging investment in small and medium enterprises. VCTs have been running since 1995 and were first launched to encourage investment in early stage companies by offering attractive tax breaks to investors.

YFM has a 30-year history of investing in small UK companies. The group invests up to £10 million of equity in UK businesses across all sectors and runs the generalist-type VCTs which hold a portfolio of companies in diversified sectors.

Hall says: "The generalist VCTs seek to invest in businesses that have strong market positions in their niche, have an innovative approach to their market and/or a competitive position that allows them to exploit a market advantage. This should mean that the returns and value creation are not dependant on a buoyant economy; but that in some cases it might provide a further boost".

Hall and his team manage the £42.9 million British Smaller Companies VCT, which was launched in 1996. Over one year, the VCT has returned 14% compared with an average of 7.5% for the VCT generalist sector as at 15 November.

The team also run another British Smaller Companies VCT 2. The top ten holdings include Bluebell Telecom Services, Deep Secure, Digital Healthcare, Displayplan Holdings, Harvey Jones, Immuno Biological Laboratories, Insider Technologies, Power Oasis, Seven Technologies and Waterfall Services.

Hall says: "The VCTs co-invest with each other and have a mix of investments in them which reflect the regional bias of what they do."

Both VCTs invest in a diverse portfolio of growth-orientated UK companies, with a focus on development capital and management buyout transactions. The VCTs are structured using debt and other yielding instruments alongside equity holdings.

YFM Equity Partners recently backed the management buyout of Basingstoke-headquartered manufacturer of cable assemblies company GTK. For the past four years the company achieved a 17% year-on-year increase in revenues with a turnover for 2013 of £9.4 million.

Hall highlights the group recently sold its equity stake in a medical communications business, Fishawack, in a secondary buyout backed by Growth Capital Partners. He says the £13 million deal provides an exit for YFM Equity and a circa two times return on its original investment.

Hall says: "Our experience derives from investing in small and medium-sized businesses since the late 1980s. On average we are invested in businesses for a period of seven years. In that time, 75% increase the number of employees and on average they can grow their employment base by almost five times. There are a number of reasons behind this expansion but these can include opening up in new geographic markets, expanding the product range and occasionally through acquisition."

Latest VCT statistics

The Association of Investment Companies (AIC) reports the VCT sector has total funds under management of £2.8 billion at 5 October 2013, the highest level since VCTs were established in 1995.

Martin Churchill, editor of the tax efficient review, predicts for the tax year 2013/14 an increase to about £350 million with Generalist VCTs taking the lion's share.

Churchill says: "The VCT market raised around £270 million of new money in tax year 2012/13. The VCT funds raised were split roughly 66% by Generalist VCTs, 5% from AIM-based VCTs and 27% from Planned Exit VCTs. This is a major shift towards Generalist compared to tax year 2011/12 when they both had a 50% share of the market."

He adds: "This change in my view is driven by a number of factors: good Generalist performance, a recognition that Planned Exit VCT 'dividends' in the early years are really mostly a return of capital, a narrowing of buyback discounts for Generalists, a worry about the Disqualifying Purpose Test and its application to Planned Exit offers and disappointment with some of the results of the first crop of VCTs that reached the end of their five-year minimum holding period."