From boom to bust, and from consolidation to overheating: this was probably not the kind of turbulence the UK Government had in mind when it introduced venture capital trusts (VCTs) in the 1995 Finance Act as a means of encouraging investment into the small and medium-sized enterprise (SME) sector.
But that is exactly what could happen following the introduction of new Government legislation designed to give flagging VCTs a helping hand.
Investment in publicly quoted VCT vehicles reached a peak of £450 million in 2000/01 amid a rush to capitalise on the dot-com boom. But with the performance of many VCTs plummeting at the same rate as the new economy that underpinned them, total investment fell to just £50 million in 2003/04 amid widespread investor disillusion.
This gave rise to the prospect of consolidation, fuelled further by new Government proposals currently under consideration and expected to be implemented shortly. If enacted, these proposals would allow for the first time the merger of existing trusts without removing the tax advantages enjoyed by the original investors in those trusts.
This could trigger a wave of consolidation. Among around 70 UK VCTs in total are a large number with net asset values of less than £10 million, where the costs of listing and having boards of directors combined with low management fees (typically stated at the outset as a percentage of net asset value) combine to make them uneconomic.
The only way to achieve viability is through tie-ups with other trusts to achieve greater critical mass – which is precisely what the new proposals would allow for.
At the same time as rescuing the weakest, the Government has sought to bolster the entire industry through new tax breaks that raised the rate of income tax relief for investors from 20 percent to 40 percent and allowed the distribution of tax-free dividends.
Mark Wignall, chief executive of VCT manager Matrix Private Equity Partners in London, says this could lead to some serious overheating. “People are talking about a tenfold increase in investment in VCTs from £50 million last year to £500 million this,” he says. “So far this tax year, £230 million of new VCT product has been made available to the market, suggesting the prediction could be accurate.”
Involuntary M&A prospects notwithstanding, VCTs seem once more back in vogue.