Due to the unprecedented impact of covid-19, many established income strategies have been disrupted, meaning the hunt for yield has become even more challenging for investors, writes Belinda Thomas, head of sales and investor relations at Triple Point.
Last year, equity markets were sent into freefall in March 2020, and numerous long-standing FTSE-100 and FTSE-250 dividend payers either cut, suspended, or cancelled their dividends, significantly restraining returns in income investors’ portfolios.
Now, with equity markets possibly being overvalued and markets having potentially factored in a recovery that still hasn’t happened, investors are looking for different ways to diversify their portfolios.
With this in mind, looking outside public markets towards innovative private companies gives investors the possibility of not only diversifying but also supporting the early stage companies that will help drive the UK’s economic recovery.
Opportunities outside of equity markets
The companies that are going to succeed during and after the crisis will be the ones that best adapt to the challenges that emerge. Over the coming months, we expect there to be more opportunities to invest in high quality, better capitalised early-stage companies with lower valuations.
There is precedence for this. Times of great change create significant opportunities for entrepreneurs to innovate. We saw this during the 2007-2009 financial crisis, after which many new disruptors, such as Uber and Slack, went on to become unicorns. Others will be born in the next year as a result of innovative thinking and the adoption of new technologies.
The economic uncertainty fuelled by covid-19 and the volatility in equity markets is also leading to lower valuations in the venture fund market. After 2008, valuations declined 15-40% and we are seeing a similar trend today.
Reinforcing the case for private early-stage companies, the coronavirus crisis has lowered key costs for start-ups, such as for rent and marketing, as well as increasing business owner´s access to the skilled human talent they need to grow their businesses – again, most probably at a lower cost.
This means growth companies will be able to take advantage of weaker labour markets and instability to do much more with less and therefore grow much more quickly.
VCTs and the tax advantages they provide
Venture Capital Trusts (VCTs) are an attractive investment for a wide range of investors, especially with the upfront 30% income tax relief on new share issues, which is available on investments of up to £200,000 ($276,600, € 231,942) per tax year.
The income tax relief can be particularly beneficial for high net worth investors who are constrained by the limits on their pension contributions. Investing in a VCT can be especially attractive for an investor at various stages of the retirement planning process – and VCTs have particular value for any investors that are reaching retirement.
A key characteristic of a VCT is its ability to pay out tax-free dividends, offering investors in pension drawdown a crucial alternative income stream. Furthermore, VCTs are main market-listed funds and can be sold, with the additional benefit that if they have been held for five years then any profits on their disposal are free of CGT.
Future
In 2021, it is likely we will continue to see high levels of public spending as central banks and governments aim to reignite economic activity.
While immediate major tax rises seem to have been ruled out for the time being, the chancellor will need to look for funding of the £400bn forecast black hole in public finances, and so tax rises of some form are likely to be considered in the medium term.
However, investments such as VCTs, which boost investment into early-stage UK businesses, are less likely to be targeted by potential reforms.
Overall, VCTs offer investors a golden solution to manage their exposure to tax rises, while putting their money to work backing early-stage companies that play a strong role in accelerating the UK´s economic recovery.
This article has been written for International Adviser by Belinda Thomas, head of sales and investor relations at Triple Point.
