VCTs - a vital source of funding for UK PLC
Alex Macpherson - 19 June 2009
A certain wartime spirit has emerged in the investment world. Aside from the general tightening of purse strings, there's a realisation that everyone's actions, from business owners to investors, are connected, and that we must all work together towards economic recovery. This is especially applicable to investment in Venture Capital Trusts (VCTs). Beyond the tax benefits and potential for long-term returns that they offer investors, they're a vital source of funding for growing UK businesses. If you ask not what your VCT can do for you but what your VCT can do for your country, the answer is, a great deal. Right now, investors, VCT fund managers and the Government can achieve much by working to ensure that VCT funding is available for the UK companies of tomorrow.
VCTs, which were introduced by the UK Government to encourage investment into small and medium sized UK businesses, are a funding oasis for companies which are too big for angel investors, yet too small to attract corporate or institutional funders. These are the kind of businesses that require an equity injection of several million and, without VCTs, would have real trouble finding it.
With lending from both the public and private sectors having all but completely dried up, these companies need VCTs more than ever. The flipside of the economic crisis is that it has created a strong market for VCT investment, whether that's in companies that need early stage funding, are restructuring, or are more established. It's an exciting time for a VCT specialist like Octopus to be investing: we're seeing lots of opportunities to invest in interesting companies that have real growth potential, and use our own Investor Group, comprised of industry experts, to help us make the right investment decisions.
However, Government legislation is an issue as some policies have affected the scope of VCT investment. First, from 2007, the income tax relief offered to investors was cut from 40% to 30%, making for a disincentive to investment. Second, the eligibility criteria for qualifying investee companies has been tightened, with a new investment limit of £2 million and the requirement that companies should have no more than 50 staff.
This has shifted the focus on to early stage and smaller companies. VCT fund managers are now operating in areas where businesses are smaller. At Octopus, we're tending to back only what we consider to be the best new companies with strong teams and good growth prospects. While we're finding great opportunities for investors, legislatory constraints are affecting the growth of some businesses including smaller companies, who know that as they expand they will no longer qualify for VCT funding.
However, as policy-makers are unlikely to adjust VCT legislation, this reinforces the need for the equity/skills gap at this smaller end of the market to be filled. Smaller companies must work to ensure that they are operating at a peak in order to fulfil their potential. Major VCT investors like Octopus can help them achieve this as we are able to offer not only funding but continued support. Once we've invested, we remain in close contact with companies, helping to manage their development and working with the management teams to ensure they meet their business goals.
With cash ready to invest, VCTs can help to provide the financial stimulus that not only UK companies, but the UK economy needs. The Government is already putting money into the economy and is targeting UK businesses specifically. In fact, Octopus is also working directly with the Government to channel money into growing companies, as one of the managers of its Capital for Enterprise fund. By working together in these ways, we can aim for VCTs to have a positive impact on smaller companies and in doing so, aid recovery.
