Speaking to a roundtable of journalists in London last month, Stuart Veale said he felt a little uneasy about the timing of his appearance. Veale, who manages the Proven Growth and Income Venture Capital Trust (VCT) launched by investment bank Beringea, said he'd been feeling the heat from the recent media frenzy around private equity in the UK.
They may operate at the other end of the scale from buyout funds, but VCTs have also been viewed with some suspicion by the public, and have received some unflattering media coverage of late. The closed-end collective investment schemes, introduced by the Conservative government in 1995, allow individuals to invest in small, expanding companies in exchange for tax breaks.
VCTs have enjoyed a mixed record. Many investors have had their fingers burned by inexperienced managers, as a result of which returns have in many cases disappointed. In addition, interest in the funds has dropped dramatically since UK chancellor Gordon Brown cut the income tax rebate on VCT investments from 40 to 30 percent in the 2006 budget. The changes, which came into effect last March, also increased the holding time necessary to receive the tax benefit from three years to five years.
According to Jon Davey, VCT analyst at Bestinvest, investors are backing away from VCTs again. “This time last year VCT monies raised over the tax year were already above £300 million – the same figure this year is just £70 million,” he said. “We wouldn't be surprised if VCTs struggle to raise £150 million by the end of the tax year, a paltry amount versus last year's £750 million.”
Numbers like this prompted the Association of Investment Companies, which represents the investment trust industry, to host a roundtable discussion for VCT managers to explain why the vehicles are still a good deal for investors. Veale argued that investment may have trailed off because many of those who wanted to take advantage of the scheme have already done so. He also said that claims made about the risk of VCTs have been greatly exaggerated.
“Many of the risks of investing in smaller companies can be significantly reduced by the techniques employed by experienced VCT managers,” he said. “These include rigorous pre-investment investigation, the construction of balanced investment portfolios and active involvement in the management of companies.”
Veale did acknowledge, however, that dropping the tax rebate had probably had the biggest effect on demand. Both he and fellow VCT manager Philip Cammerman of British Smaller Companies VCT said the key will be for organizations like AIC to convince the media, public and politicians that VCTs are not the risky investment vehicle they've been portrayed as.
Annabel Brodie-Smith of AIC says that the group, which claims to represent 80 percent of the VCT market by value, is pursuing a number of strategies to encourage investment in the vehicles. Aside from organizing meetings between VCT managers and journalists, the group is also looking at other ways to foster more transparency.
“We've got a working party looking at how we can divide the VCT sector into sub-sectors, so that it's easier for investors to compare like for like with other areas,” she says. “We're also doing a training course on VCTs for advisors of private client brokers.”
Whatever reasons there may be for giving VCTs a wide berth, the industry is determined to ensure that a lack of information is not one of them.