A Silver Wedding for VCTs: 25 years of innovation
Unquoted investment through venture capital trusts
The great Mae West once dismissed a former lover with the words: “His mother should have thrown him away and kept the stork..."
Well, some relationships work, others don't, but one that is showing healthy signs of long-term stability is the union of UK private investors with early stage, unquoted investment through venture capital trusts (VCTs).
And as marriages go, it has been remarkably productive. There are now 25 VCT fund managers with more than 1,000 staff, who between them have raised some £8.5bn from individual investors since VCTs were first launched by Ken Clarke in 1995.
More tangibly for the UK economy, though, companies backed by VCTs have created more than 27,000 jobs and created a whole new generation of entrepreneurs, many of whom themselves have gone on to become business angel investors.
Why VCT investing is more important than ever
Back in the Budget of November 1994, which was when it all started, then-Chancellor Ken Clarke spoke of funding "small, growing, technologically-advanced and innovative companies".
In the event, this was only partly true, with innovative, though not necessarily higher risk, business models playing perhaps a greater role than pure technology, although this in turn meant that VCTs were relatively resilient when weathering the 'dot-com' crash of 2000/01.
Patient Capital Review
Since then, the technology content of VCTs' portfolios has steadily risen. This has been partly driven by market developments, and in particular by the huge advances in digital processing that have made successful business models easier to predict and faster to react.
Part, though, has been driven by successive legislation, culminating in the Patient Capital Review of 2017.
This effectively resulted in risks being 'hard-wired' into the VCT rules, ensuring that investment in high-growth, technology-driven firms is the core focus of every VCT.
In the two and a half years since then, VCTs' record for pure technology investment has been strong, with more than £1bn invested in young and innovative businesses.
Over 180 companies have been backed, of which almost 40% were based outside London and the South East, employing some 6,900 staff.
In 2019, these businesses had just under £400m of sales, of which 32% were in exports and they spent £131m on research and development.
A great many of them, and maybe the majority, are digitally-based and operating in sectors that are driving innovation and changing the world as we know it. These are in areas such as artificial intelligence, machine learning, cyber security, digital healthcare and big data analytics. And as a result, quite a number of portfolios are proving surprisingly resilient to the current crisis.
