Recent figures suggest the amount raised by VCTs fell by more than 23% between 1 April 2018 and mid-February 2019, writes Andrew Wolfson, managing director of Pembroke VCT.
The decline, which follows almost record-breaking VCT fundraising in the previous tax year, could be put down to numerous factors.
Indeed, many are highlighting heightened risk aversion among retail investors in the face of Brexit as a reason for the slowdown.
Brexit may be a contributing factor, but it is likely the change also stemmed from a rule introduced last year that requires VCTs to deploy a certain amount of cash within a set period.
With the shift encouraging VCT managers to invest more of their capital into early-stage, higher-risk companies, we think the industry has been forced to ask itself whether it is fulfilling its original purpose.
Supporting UK growth
The UK Government first introduced VCTs in 1995 as a way of encouraging investors to inject patient capital into Britain's high-growth start-ups within a managed portfolio structure.
In exchange for taking on the added risk of investing in small firms, the products have given savers a chance to generate a greater return on their capital than that offered by a more traditional investment vehicle.
They also shield investors' money from dividend and capital gains tax and provide a 30% tax relief on subscriptions up to £200,000 when investments last for five years.
Small- and medium-sized enterprises (SMEs) comprise 60% of all British private sector employment and more than half of total private sector turnover.
According to the Association of Investment Companies, VCTs have historically raised around £7bn for investment into high-growth British businesses. With Brexit looming, it is critical this support continues.
British start-ups may be thriving, but the UK still lags the US when it comes to incubating young, innovative businesses.
In response, the Government has introduced several changes to the rules governing VCTs over recent years to ensure cash is flowing to the high-risk growth organisations that need it most.
The first significant development came in the 2012-13 tax year when the maximum number of people a VCT-eligible business could employ increased from 49 to 249.
Alongside this, the cap on the gross assets a start-up could hold before investment rose to £15m from £7m. Then, in 2015, the government ruled that, in most cases, only firms trading for fewer than seven years would be eligible for investment.
It also said companies should utilise VCT money for natural growth rather than practices such as acquisitions and management buyouts.
The most recent development came in 2017, when the Government ruled that, from 5 April 2018, VCT managers must deploy at least 30% of all new funds raised into holdings.
The deadline for meeting this requirement is within 12 months of the end of the accounting period in which the shares were issued.