– Written by Sam McArthur, Partner at Praetura Investments
The downturn in valuations of quoted and unquoted smaller businesses has been well documented. The FTSE Alternative Investment Market All-Share index was down close to 15% in the twelve months to March 2024. The downturn in specific sectors has been even more acute; for example, the index for Software-as-a-Service businesses, published by SaaS Capital, suggests that valuations now are around half the level they were in 2021. There has been a concurrent reduction in investment activity in UK technology-enabled companies, with Sifted reporting that the aggregate amount invested during 2023 will be less than half the level of 2021.
However, the depressed market also presents opportunities, and venture capital investors see exciting, innovative companies where founders’ valuation expectations have been reduced. Many of these target businesses are at an attractive stage of their development with established products but need capital to help take their product to the next level or a new market.
Venture Capital Trusts (VCTs) have not been immune from challenges in recent times. VCTs invest in early-stage, growth businesses, and recently, many VCTs have invested increasingly in technology-enabled companies. After 13 years of positive annual returns, 2022 and 2023 saw the average VCT lose money. The dip in valuations could present a good entry point for a would-be VCT investor.
Coming at a time when Chancellor Jeremy Hunt’s Autumn Statement included the extension of the VCT ‘sunset clause’, which underlined the government’s commitment to VCTs. The extension to 2035 demonstrates the government’s confidence in VCTs’ ability to provide capital to the UK’s innovative early-stage businesses and it adds an extra layer of certainty for investors.
The Chancellor made further overtures towards savers by announcing the intention to launch the new UK ISA in his Spring Budget. Whilst Jeremy Hunt proposed a consultation on how this new £5,000 annual allowance will work, VCTs can compete for their share of a saver’s annual allocation. The tax incentives offered by VCTs make a compelling case before considering the opportunity of investing in innovative growth businesses.
Despite the recent dip in VCT performance, data from the Association of Investment Companies shows that VCTs have performed better over the long term, with total returns of 22 per cent and 85 per cent over the past five and ten years, respectively.
For those who remain nervous about potential further problems in VCT portfolios, now might be the time to consider a newer VCT with no legacy issues to manage and able to build a new portfolio when valuations are lower. With only a few weeks remaining in the tax year for annual VCT allowances to be used, don’t leave it to the last minute, as capacity is limited.
