Today I received my tax-free dividends from two of the Northern VCTs which I first invested in during 1995. They provide me with a good base level of income for living expenses although their overall portfolio performance has not been great. They only make sense after taking into account the associated tax reliefs.
The good news is that the European Commission has confirmed that the current tax reliefs can continue to apply until at least April 2035. There was some concern that a “sunset clause” would end the generous tax reliefs and make VCTs very unattractive. Many investors will have been holding back on investing in new fund raisings from VCTs until this issue was resolved.
VCTs do help to support smaller companies, currently way out of favour in public markets, and provide some extra diversity to our portfolios so I am happy to hold them. I tend not to bother “recycling” them to get the income tax relief associated with new VCT investments as the buy/sell spreads are high and the admin complexity is not worth the hassle.
See this press release from the AIC for more information: https://www.theaic.co.uk/aic/news/press-releases/aic-applauds-continuation-of-vcts
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
You can “follow” this blog by entering your email address in the box below. You will then receive an email alerting you to new posts as they are added.
I used to hold a lot of VCTs, but now hold none. I got tired of excessive fees – both upfront and ongoing, as well as not visible (arrangement fees, monitoring fees, sweet equity in portfolio companies) which took a significant portion of returns. Then there was the illiquidity and haircut if you wanted to sell. And don’t forget the incentive fees, which are at portfolio level (and in addition to the sweet equity in portfolio companies) – these are even reset periodically when return hurdles are not met. Overall returns without the tax break were mediocre, as a class they are poor.
They try to justify the fees by saying their investment universe is very restricted, but in the example of Albion, they had good, long term investments (eg schools) which they could have held indefinitely – yet chose to sell part of these to “broaden” the investment mandate. You can see for yourself the effect on the dividends.
Even without all that, I’m not convinced that they offer much to small, growing UK companies which isn’t already offered by PE more generally.
The groups which benefit most from their existence are the VCT managers and service providers.
All very good and appropriate comments. There is certainly a problem with excessive fees.