Quelling the skepticism

VCTs have taken a lot of flack recently in the UK, but fund managers are going on the offensive to prove that despite changes to the tax scheme, they are still a safe bet. Dave Keating reports.

Speaking to a roundtable of journalists in London this week, 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) set up by Beringea Limited, said he’s been feeling the heat from the recent media frenzy around private equity in the UK.

Stuart Veale

The public suspicion of the power of private equity in the UK and its ties to the Labour government has extended into other alternative investment vehicles as well, including VCTS. These closed-end collective investment schemes, introduced by the Conservative government in 1995, allow individuals to invest in more risky small expanding companies in exchange for tax breaks.

However, VCTs have had a mixed record. Many have had their fingers burned by inexperienced managers, and the funds have failed to deliver the large returns of buyout funds. Interest in the funds has dropped dramatically since Chancellor Gordon Brown cut the income tax rebate on VCT investments from 40 to 30 percent in the 2006 budget. The changes, which went 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 fleeing VCTs in droves. “This time last year CVT 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 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 rate was probably what had the biggest effect on the dropoff in 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, the public and politicians that VCTs are not the risky investment vehicle they’ve been made out to be.