How will demand for VCTs and EISs hold up in 2018/19?
Tax-efficient investment commentators predict demand for venture capital trusts (VCTs) will be "huge" this tax year but warn fundraising levels could be hit by a lack of available capacity and other pressures from new rules.
Fundraising for the 2017/18 tax year reached £728m, the second highest amount since VCTs were created, following the 2005/06 tax year when the sector raised £779m.
The "glut of large offerings" that provided more capacity than had historically been available was partly a response to fears surrounding the outcome of the Patient Capital Review during the Autumn Budget - although these proved unfounded - as well as investors increasingly looking for pension alternatives, according to Jack Rose, head of tax efficient products at LightTower Partners.
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However, he believes the figure for this tax year could be significantly lower.
"Although it is a little early to make any firm judgements, I would be surprised to see fundraising reach a similar level to that seen this year," he said.
"If this does indeed turn out to be the case it will not be for a lack of appetite from investors, but rather a lack of available capacity."
Reduced fundraising
As many vehicles raised substantial amounts in 2017/18, which now needs to be invested, it is unlikely managers will need to raise much this year, if anything at all.
Chris Hutchinson, director at Unicorn Asset Management and manager of the Unicorn AIM VCT, said: "While the fundraising figure is a positive sign the industry is healthy, there are risks of raising too much and so some VCTs will not want to grow.
"I am not convinced you can sensibly manage an AIM-focused VCT at £250m AUM because investing limits mean a manager could have hundreds of little holdings.
"They would struggle to contribute significantly to returns and could also become unwieldly in terms of managing. You need to know your companies well."
Furthermore, Rose noted barriers to entry for new vehicles are high, thanks to rules that dictate dividends are taken from underlying profits or income rather than capital.
He added: "That means a new VCT is unlikely to be in a position to pay dividends much before year four.
"Given this is one of the main attractions for a VCT, it makes it a lot less attractive against more established peers that can offer immediate access to any potential future dividends if the offer is a top-up of an existing share class."
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