What is a Venture Capital Trust (VCT)?

Venture Capital Trusts (VCTs) invest in early-stage, high-growth businesses across the UK, much like traditional venture capital funds. There are, however, a few key differences between traditional venture capital funds and VCTs. 

First, VCTs are publicly listed companies, meaning that an investor will acquire shares in a VCT, which is listed on the London Stock Exchange. This means that VCT investors access some of the benefits of investing in public companies, such as the potential to receive regular dividends and quarterly reporting. 

Unlike traditional venture capital funds that are typically structured to have a ten-year life, VCTs are evergreen vehicles with no specified end date. Instead, investors can sell their shares in the VCT – see more below for information on how this works. 

Second, investors in VCTs – provided that you are a UK taxpayer – receive a number of tax reliefs from the UK Government. In turn, the Government sets certain restrictions on the types of companies that VCTs can invest into, ensuring that they back innovative start-ups and scale-ups.

This model was first introduced by the UK Government in 1995 and it has played a vital role in strengthening the UK’s venture capital ecosystem. 

What are the benefits of investing in a VCT?

Investing in VCTs gives investors economic exposure to a diversified portfolio of carefully selected UK start-ups and access to a number of tax benefits. 

Provided certain criteria are met, anyone who invests in a VCT – or subscribes for shares, to use the technical language – will be able to take advantage of the several attractive tax benefits, including:

  • 30% income tax relief on your initial investment – which can be claimed immediately, but which will be forfeited if the investment is held for less than five years. 
  • Dividends paid by VCTs are tax-free. 
  • No capital gains tax if you choose to sell your VCT shares.

Tax relief is only available to UK taxpayers, on amounts invested up to a maximum of £200,000 per person, per tax year, and is restricted to the amount which reduces the investor’s income tax liability to nil.

While taking advantage of the above tax benefits, individuals are also supporting early-stage companies with high-growth potential, thereby aiding job creation and economic growth. Research by the Association of Investment Companies (AIC) shows that companies currently backed by the VCT scheme have created 27,000 jobs since the date of the first investment by a VCT.

How do VCTs work? 

VCTs are publicly listed companies that pool together money from retail investors and use them to invest in companies, and operate in a similar way to a standard investment trust.

VCTs are evergreen vehicles, without a specific timeline attached, so they raise and deploy funds continuously.

A VCT manager, like Beringea, which manages ProVen VCT and ProVen Growth and Income VCT (together the ProVen VCTs), will raise funds from investors, and then invest these pooled funds into carefully selected ‘qualifying’ companies.

Managers don’t just invest in any qualifying companies – in most VCTs, experienced teams spend a large portion of their time reviewing investment opportunities to find those with the greatest promise of outsized returns. 

Beringea, for example, has an investment team of 10 with backgrounds in banking, consulting & start-ups. The fund’s investment decisions are led by the highly experienced 4-person investment committee of partners including the Chief Investment Officer, with a combined experience in investing of over 100 years. 

To provide shareholders with the tax benefits of VCT investing, the funds have to be invested into companies that meet the restrictions placed on VCT investments by the UK Government. You can find more information on the criteria of the companies below.

When individuals invest in a VCT, they hold their shares in the fund and not in the underlying companies the VCT invests into. This means that investors immediately get exposure to all businesses that are already present in the VCT’s portfolio. 

Following the investment and allotment of shares, individuals will receive both a share certificate and a tax certificate. The tax certificate will be needed to claim income tax relief.

What are the types of VCTs?

There are three different types of VCTs – Generalist, AIM, and Specialist.

  • Generalist VCTs, such as the ProVen VCTs, are the most common ones. They invest in a range of sectors instead of focusing on a particular one, aiming to minimise risk through diversification.
  • AIM VCTs invest in shares issued by AIM (the London Stock Exchange’s market for small and medium size growth companies)-quoted companies. 
  • Specialist VCTs tend to focus on only one sector, such as consumer or SaaS.

As VCTs are companies listed on the London Stock Exchange, they must comply with a set of regulations regardless of their type. These regulations include:

  • Publishing their own annual report and accounts.
  • Having a minimum number of independent Directors to look after the interests of shareholders.
  • Holding general meetings for shareholders, including an annual general meeting (AGM).
  • Meeting standard corporate governance requirements.

What types of companies do VCTs invest in?

VCTs invest in small, entrepreneurial businesses in the UK, similar to those found on the Seedrs platform, which are not usually listed on the main market of the London Stock Exchange. The companies that VCTs invest into need to meet strict criteria, including:

  • They must be relatively small – typically with gross assets of no more than £15m and with fewer than 250 employees at the time of investment. 
  • They must be relatively young – usually less than seven years old. 
  • Their shares must not be quoted on a recognised stock exchange and they must not be controlled by another company. 

A few examples of VCT-backed companies that have grown to become household names include Zoopla, Graze, Virgin Wines, and Monica Vinader (which was part of the ProVen VCTs’ portfolio).

Highlights from the ProVen VCTs’ portfolio

Below are two examples of investments from the ProVen VCTs.

The ProVen VCTs were the first institutional investors in Monica Vinader – the leading jewellery brand that established the ‘affordable luxury’ category. From their investment in 2011, the jewellery brand grew to sell its products across more than 70 countries with a team of more than 350 people worldwide. Between 2016 and 2023, the business quadrupled sales to approximately £100m.

Blis is an advertising technology company that enables brands to understand their audiences without compromising personal data. The ProVen VCTs invested a total of £2.1m across 4 rounds of funding. Blis went on to secure £5.1m in funding from Beringea’s US funds to support its transatlantic growth. The ProVen VCTs exited their investment in 2022 as part of a significant round of funding by LDC, the private equity firm, delivering a 6.5x return. (Please note this is not representative of average returns and past performance of portfolio companies is not a guide to future performance.)

How can I invest in a VCT? 

Individuals can invest in a VCT by applying for shares during an open offer for subscription.

There are three different ways to apply during an offer for investment – through an execution-only broker, through a financial adviser, or directly to the VCT.

VCTs will typically only accept individual investments above £3,000 to £5,000, so for investors who do not already work with a financial adviser the most appropriate option will be through an execution-only broker that facilitates multiple individual investments through a nominee, like Seedrs. 

Retail investors can invest in VCTs via the Seedrs platform in a similar way to any other individual business on the platform. 

Potential investors will have to familiarise themselves with the offer by reading the prospectus document and the additional documents for the offer and apply.

When will I typically receive my dividends?

Dividend payments by VCTs vary with the investment performance of the fund and are dependent on the available reserves and cash resources. 

The payments may vary from year to year, but they are typically paid twice a year – the interim dividend is paid in July or August, and the final dividend is paid in December or January.  Please note that dividend payments are not guaranteed. 

How can investors sell VCT shares? 

VCT shares are listed on The London Stock Exchange and can be traded on that market. However, as the secondary market for VCT shares tends to be relatively illiquid, most VCTs – including the ProVen VCTs – have operated a buyback policy, whereby the VCT has purchased shares that have become available in the market, at a discount to the latest published net asset value (NAV). However, the share buyback arrangement may be withdrawn by the Company at any time, if the Directors deem this action to be appropriate.

Investors should be aware that if shares are sold within five years of the date of subscription, any initial tax relief claimed will have to be repaid.

Please note that tax relief on subscriptions for shares in a VCT is restricted where, within six months (before or after) that subscription, the investor had disposed of shares in the same VCT. 

What are the fees associated with investing in VCTs?

VCT fees are split into initial fees, paid by the investor when investing in the VCT, and ongoing charges, paid annually by the VCT funds. 

Initial Fees

Initial fees are deducted from the amount subscribed at the point of investment, and they tend to vary by an investor’s access point. Investing through a broker or adviser typically incurs less initial promoter’s fees than investing directly. The ProVen VCTs’ initial fees for their latest offer for subscription are as follows:

  • 3% promoter’s fee for Applications received through Financial Advisers and Execution Only Brokers, like Seedrs, less any discounts for early applications;  
  • 3.5% promoter’s fee for Applications received directly from Investors, less any discounts for early applications. VCTs will often pay Execution Only Brokers a commission for the capital they bring, typically of up to 2.5%, which is deducted from the amount subscribed by each investor. As part of the ProVen VCTs’ campaign on Seedrs’ platform, Seedrs will waive their initial commission of 2.5% for all investors. 

Investors through Seedrs will be liable to a 3% initial charge. 

Ongoing Charges

The Managers of the VCTs are entitled to charge the funds fees to cover the expenses of providing services to them and managing them.

The ProVen VCTs’ ongoing charges for their latest offer for subscription are as follows:

  • Annual management fee: 2% of net asset value per annum for each VCT;
  • Administration fees: £200,000 per annum for each VCT; and
  • Performance fee: 20% of increases in performance value when performance hurdles are met for each VCT.

Annual running costs are capped at 2.9% of net assets per annum for each VCT (note that this is inclusive of the annual management fee and administration fees outlined above but does not include performance gees).     

Annual running costs for the year ended 28 February 2023 were 2.4% of average net assets over the year for each VCT. No performance fees were payable for the year. If the average value of an investor’s holding was £10,000 over that year in each VCT, ongoing costs for that investor would have been approximately £240 per VCT (inclusive of the annual management fee, administration fee and other annual running costs).

What are the risks associated with investing in VCTs?

An investment into a VCT carries a significant risk and should be considered a long-term investment. 

Your capital is at risk, and you may not get back what you originally invest.

Any decision to invest in any VCT should be made on the basis of information contained in the VCTs’ relevant Prospectus and Key Information Document (KID). These are available on the campaign page. 

We consider the following risks, relating to the Offer, to be material for potential investors. However, the risks listed below do not comprise all of those relating to the offer and are not set out in order of priority.

  1. Your capital is at risk and you could lose money – The value of an investment, and any income from it, can fall as well as rise and you may not get back some or all of the amount you invested.
  2. Investments in smaller companies can be volatile – ProVen VCT and PGI VCT invest in smaller companies that are not listed on the main market of the London Stock Exchange. Investments in smaller companies can fall or rise in value much more sharply than shares in larger, more established companies.
  3. This is a long-term investment – Investors should be aware that if they sell their shares within five years of their subscription, they will be required to repay the 30% income tax relief obtained on the subscription for these shares.
  4. The past performance of ProVen VCT and PGI VCT are not a reliable indicator of future results. Nor should you rely on any forecasts made about future returns.
  5. The VCTs’ qualifying status could end – It is the intention to manage ProVen VCT and PGI VCT so that they qualify as VCTs, but there can be no guarantee that such status will be maintained. If they fail to meet the qualifying requirements it could result in adverse tax consequences for investors, including being required to repay the 30% income tax relief.
  6. Tax rules can change – The VCT tax benefits we’ve described in this blog post are correct at the time of going to print. However, rates of tax, tax benefits and tax allowances do change. In addition, the tax benefits available to you through this investment depend on your own personal circumstances.
  7. Your shares may be difficult to sell – There isn’t an active market for VCT shares in the way there is for most other listed companies’ shares. This means that if you decide to sell your VCT shares, it may take time to find a buyer, or you may have to accept a price lower than the NAV of the investment. The Proven VCTs operate a buyback policy but this is not guaranteed.
  8. Dividends are not guaranteed – There is no certainty as to the level of dividends that will be paid, if any.

What VCTs are available now?

We have made ProVen VCT (PVN) and ProVen Growth and Income  VCT (PGI), two of the UK’s largest and longest-standing trusts, available on the Seedrs platform.

Since the launch of PVN VCT in 2000 and PGI VCT in 2001, the ProVen VCTs have been behind many of the UK’s entrepreneurial success stories. From their investment in the Vinader sisters and their eponymous jewellery brand, Monica Vinader, which was sold at a blended 7.7x return to the ProVen VCTs, through to Chargemaster, one of the country’s leading electric vehicle charging networks that was acquired by BP in 2018, many successful businesses have been fuelled by the Proven VCTs’ investments.

As generalist VCTs – meaning that the funds back companies across emerging technologies such as fintech and software-as-a-service as well as established industries such as retail and healthcare – the ProVen funds have grown to more than £330m under management and a portfolio spanning 52 startups and scale-ups including:

  • DASH Water – the UK’s leading seltzer brand known for its innovative use of wonky fruit and veg to flavour its drinks.
  • Lucky Saint – one of the country’s most recognisable leading low-alcohol beer brands. 
  • MPB – one of the world’s best leading platforms for buying and selling pre-owned camera equipment, which raised £50m in its Series D in 2021.
  • CreativeX – an AI-enabled platform used by the likes of Google, Meta, Amazon and Nestlé to analyse the performance of visual marketing, which raised $25m in its Series B in 2022.