Venture Capital Trust (VCT)

What Is a Venture Capital Trust (VCT)?

The term venture capital trust (VCT) alludes to an investment vehicle that works in the United Kingdom. The VCT is a closed-end fund that was made by the U.K. government during the 1990s to assist with directing investment into neighborhood private businesses. These funds are tax-efficient and permit individual investors to access venture capital investments through capital markets. VCTs search out potential venture capital investments in small unlisted firms that are in their beginning phases to create higher-than-normal, risk-adjusted returns. VCTs are regularly listed on the London Stock Exchange (LSE).

How Venture Capital Trusts (VCTs) Work

The British government presented a series of venture capital schemes in 1995. These incorporate the enterprise investment scheme, seed enterprise investment scheme, and venture capital trust scheme. Every one of the three of these programs were intended to energize the country's private sector growth and create investment from individual investors.

Retail investors can purchase shares in venture capital trusts that are traded on major exchanges like the LSE. This permits investors to indirectly participate in the growth of smaller, private, anticipated businesses. VCTs fall under the domain of fund managers who work for investment firms. The money from investors is pooled together and distributed to these businesses to assist them with developing.

Certain criteria must be met for a fund to be classified as. VCT. A portion of the primary capabilities include:

• Listing on a major exchange in the U.K.
• Companies that receive capital through VCTs must utilize something like 250 individuals.
• Companies under the VCT must have under \u00a315 million in gross assets before the investment and \u00a316 right after the investment

The government absolves these trusts from corporate taxes on capital gains that emerge from their investments. They likewise furnish investors with certain tax benefits, including income tax relief for 30% for annual investments of up to \u00a3200,000 (for however long they are held for at least five years) and a tax exemption on income derived from VCT investment dividends. However, investors can't concede capital gains taxes.

In spite of the fact that there is no direct stock exchange equivalent to VCTs in the United States, they are like business development companies, which are corporations that invest in small-and mid-size companies, as well as distressed businesses.

Special Considerations

Investors who are interested in purchasing shares in VCTs can do so directly through fund managers in new offerings. Shares can likewise be purchased on the secondary market on public exchanges in the United Kingdom, like the LSE.

Fund managers typically charge fees that are higher than different investments. That is on the grounds that VCTs can be genuinely complex and frequently require more consideration. Upfront fees can be all around as high as 5% while the annual management fees can be in the neighborhood of 2%.

Investors ought to know about the risks implied with VCTs due to the nature and size of the companies in question. Investing in these funds might bring about critical losses.

Types of Venture Capital Trusts

VCTs invest in various types of companies across different industries for fixed periods of time. Evergreen VCTs invest endlessly while certain short-term venture capital trusts called limited-life VCTs are simply intended to bring income for a couple of years.

There are likewise generalist VCTs, which are trusts that diversify across numerous sectors and industries, and specialist VCTs, which center around one sector at a time.

Investors with a particular interest or foundation in technology can decide to hedge their wagers on a specialist technology-centered VCT. The last type of VCT is called an AIM venture capitalist trust. It centers around companies that are as of now public or are on the verge of becoming public on the LSE's Alternative Investment Market (AIM).

Genuine Example of Venture Capital Trust

The Octopus Titan Venture Capital Trust is one of the country's biggest VCTs. The fund is invested in excess of 90 tech-empowered companies with strong growth potential that are in the development stage, including:

• Big Health
• Bought by Many
• Depop
• Wave Optic

These companies include various sectors. The firm aims for dividends of around five pence each year. Extra dividends may likewise be allocated if businesses inside the portfolio are sold at a high profit. The fund returned 32.8% to investors in the year up to June 30, 2021.

Highlights

• The types of funds incorporate evergreen, limited life, and AIM funds.
• Companies must meet certain criteria to fit the bill for capital.
• The VCT scheme was laid out by the British government in 1995.
• Shares in VCTs are publicly-traded and give capital to small and emerging private British businesses.
• The term venture capital trust is an investment vehicle that works in the United Kingdom.