The role of VCT finance

Fund managers have described VCTs as ‘coming of age’, but how do businesses benefit from accessing their finance?

Fund managers have described venture capital trusts (VCT) as ‘coming of age’ after a ‘vintage year’ in 2010, but what will a successful fundraising season this year mean for businesses seeking finance?

Last tax year (2009/10) the sector raised £340 million, the fifth most successful season since the creation of VCTs in 1995 and a substantial improvement from the previous year. According to research from the Association of Investment Companies (AIC), small and medium-sized enterprises (SMEs), which have faced difficulties in accessing finance are increasingly benefiting from cashed-up VCTs filling the ‘equity gap’.

The AIC collected data from 13 VCT managers, which between them made £1.3 billion of investments in 753 smaller UK companies since 2000. The research, titled ‘Closing the finance gap: VCT funding for SMEs’, finds the average investment in each business is £1.8 million. An amount, the report says, that sits squarely in the ‘funding gap’ for SMEs of £250,000 to £5 million identified in a government green paper last year.

Nearly three quarters (71 per cent) of the companies received between £250,000 and £5 million. In total, more than £900 million has been invested in the range, representing about 76 per cent of all funds invested. The research also finds VCTs provide capital in more than one round of financing, with 37 per cent of companies receiving at least one additional investment.

The report adds too that accessing VCT finance has extra benefits. ‘Where VCTs have provided funds it has traditionally been easier for VCT-backed businesses to access other sources of finance, including bank lending,’ it says.

Demand for VCT investment in the past five years has remained ‘strong’. The report finds that the peak of inquiries logged was in 2007, when 3,475 companies approached a VCT for funding, while the low point was the following year, 2008, when 2,554 came forward. Last year, 3,009 businesses asked about finance.

Despite the sustained interest, the AIC acknowledges that VCT finance is not ‘an easy option’ for businesses and only 1.5 per cent of approaches led to a deal.

‘Companies would not normally apply for VCT funding unless there was no alternative,’ it says. ‘The process of securing capital from a VCT is challenging. It invariably involves the company’s owners diluting their equity, which is often not their preferred option.’

However, manager of Baronsmead VCTs at ISIS, Andrew Garside, observes that many entrepreneurs and business managers, particularly in the younger demographic, are looking at VCTs because of the experience of the people who run them. Many want to know what advice or mentoring would be offered as part of the investment. He says VCT fund managers have had to change their strategy in dealing with growing companies to ensure that in those cases the objectives of both business owners and investors can be achieved.

‘There is a growing role of investors helping in [a business’s] development,’ Garside says. ‘They want a mentor. If you can’t do that, they are not really interested.’

Mark Wignall, chief executive of Matrix Private Equity Partners and manager of Income & Growth VCT, says VCTs are viewed as a ‘widely accepted’ solution to SME funding and he calls on the government to keep the tax reliefs offered by the scheme in place.

He comments, ‘There is much talk around relatively minor rule changes and relatively major potential tax simplification, but we think VCTs are now a well-established tool in the government’s kitbag to finance SMEs. With the scale of the continuing difficulties in bank finance for smaller companies, the government should recognise how VCTs are helping fill this gap and continue with its support.’

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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