The venture capital (VC) landscape has seen considerable upheaval recently with significant drops in fundraising and deal activity throughout Europe and beyond. However, venture capital trusts (VCTs) in the UK have demonstrated notable resilience amidst these challenges, maintaining performance and continuing to attract investor interest.
Performance amid broader struggles
The value of UK VC deals fell by 39% in 2023 compared with 2022, with deal values dropping from £18.4bn to £11.2bn (according to GlobalData). This decline is echoed across Europe, where VC deal value dropped significantly, particularly in sectors such as cleantech and software.
In stark contrast, VCTs have shown remarkable resilience in the UK. The industry’s £882m fundraising in 2023 represents the third highest on record, underscoring the enduring appeal of VCTs even in turbulent times. The sector’s ability to attract substantial investment has been bolstered by continued investor interest supported by government-sponsored tax relief, which provides a consistent incentive for investing in these funds.
This means that VCTs have continued to raise money and make investments just when founders, and their businesses, needed it most.
Consistent investment and deployment
Recent VCTA data also illustrates the robustness of VCTs in terms of investment deployment. In 2023 VCTs provided over £500m of patient capital to early-stage companies, significantly supporting the growth and innovation landscape in the UK. This level of investment not only facilitates the development of emerging enterprises but also highlights the role of VCTs as a crucial engine for economic growth and job creation.
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Diversification benefits and resilience
One of the key factors contributing to the resilience of VCTs is their inherent diversification. By investing in a broad array of early-stage companies across various sectors, VCTs mitigate the risks associated with individual venture business failures. This diversified investment approach spreads risk and can lead to more stable returns over time.
For example, while certain sectors like cleantech might experience downturns, other sectors such as healthcare or technology might perform better, balancing overall portfolio performance. This cross-sector diversification is a significant advantage, especially in volatile economic climates, as it reduces dependency on the success of any single sector or company.
Moreover, VCTs often provide extensive managerial support and strategic guidance to their portfolio companies, which can enhance their growth prospects and operational efficiencies. This hands-on approach not only boosts the performance of individual companies but also contributes to the overall stability and resilience of the VCT portfolio.
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The resilience of VCTs in the face of a broader venture capital downturn is a testament to their robust structure and the continued support from investors seeking both growth opportunities and tax efficiencies. While there are inherent risks associated with VCT investments, the benefits they offer in terms of supporting early-stage companies and contributing to economic growth are significant.
However, it is important to recognise that VCTs are not without their challenges and may not be suitable for every client. For instance, they typically come with higher risks and fees compared to traditional investment vehicles given their focus on early-stage companies. The relative illiquidity of VCT investments, a minimum five year investment period and the potential for volatility necessitate a thorough assessment of the investors’ risk tolerance and investment horizons.
Looking ahead
There are significant opportunities for the VCT scheme to further enhance its impact, providing additional benefits to investors and the broader economy.
Besides securing the remaining EU approval for the sunset clause extension, which we look forward to the new government securing, we would welcome the expansion of the scheme to include higher age and funding limits – indeed, the government has already acknowledged that the current limits of seven and 10 years for EIS and VCT support effectively discriminate against regional businesses. We would propose raising the age limit from seven to 10 years for VCT funding, and from 10 to 13 years for knowledge intensive businesses.
See more: Gresham House’s Baronsmead VCTs raise another £50m
Similarly, the annual and lifetime limits have remained static since 2015 despite rapidly rising inflation which has seen prices rise by over 30%, and have therefore have not kept pace with the investment needs of fast growth companies. We believe that annual limits should be increased to £6.5m (£15.5m for knowledge intensive companies) and lifetime limits should be increased to £16m (£27m for knowledge intensive companies), with a commitment to reviewing these levels every three years.”
By continuing to adapt and innovate, I expect that the VCTs’ crucial role in fostering entrepreneurship and driving economic development will continue to grow, providing substantial benefits to small businesses, the people they employ, the VCT investors and to the broader economy.
Chris Lewis is chair of the Venture Capital Trust Association (VCTA)
