Bloomberg Audio Studios, podcasts, radio news. Welcome to Meron Talks Your Money, the personal finance edion of Meron talks Money. In these bonus podcasts, we talk about the best strategudes we're making the most of your money. Meren, suset Web. So this week we're talking about venture capital trust or VCTs. A few of you've written in asking us about.
VCTs, what do they do? How do I get them?
So we thought it'd be a good time to bring in an external voice to talk to us about exactly what VCTs are and if it can offer some of you a more tax efficient investment option, then maybe pensions, particularly in light of the changes we saw in the autumn budget, which of course increased some of the tax penalties on pensions. So with me today Tony DAHLWOOD'SO Gresham House, Gresham House and a specialist alternative asset manager managing a
variety of VCTs. Two barrels ME VCTs and two Mobius VCTs. Welcome Tony, Thank you so much for joining us today on what is a relatively complicated subject.
Real pleasure to be here, Meren.
Okay, I'm going to start with one of those big questions that people find of putting. But you're so expert that I know you're not going to find it off putting, Tony.
What is a VCT?
So VCT starts a venture capital trust. Venture capital trusts are listed vehicles which are tax efficient ways of investing in early stage growth companies, primarily private companies, small private companies. But there are some AIM VCTs as well that invest in AIM for those companies that are eligible to be vctable, so to speak.
I'm interrupting you already because we are super basic here.
What is it aim?
AIM is the alternative investment market of the London Stock Exchange, typically early stage companies that are starting on their journey for growth.
Okay, so an AIM company is a listed company, but not a fully listed company.
Correct. It has certainly slightly different rules, but typically it's an easier way of getting listed and access for the public to buy and sell shares in that AIM listed company. As I say, the primarily most VCTs are made up of private companies, unlisted companies, small ones with growth ambitions.
Okay, So what then, is the difference between a VCT and a private equity trust?
So that many private equity trusts listed ones three eyes an example of that, and these are trusts that typically hold private companies in a listed structure. Three three eyes cases a London Stock Exchange the main list, and you can access buying those shares on the London Stock Exchange and you're getting exposure to the underlying companies like three I. The biggest exposure you'll have on three I is a
Dutch supermarket business called Action. So you have many different private equity trusts that give you underlying private equity exposure through a listed vehicle.
Okay, still it's the same idea.
You've got private companies, unlitted companies wrapped up insider trust.
Correct. And the difference between a VCT and they standard private equity trust like three I or Htree Capital Trust would be that the VCTs are tax efficients. The VCTs offer thirty percent income tax relief when you buy new shares, and they provide in some respects more more flexibility than some of the pension tax changes that are happening at the moment, So you have some tax relief by investing in the new shares to then support the UK's ecosystem of growth. Small companies.
Okay, So tax release is offered by the government in order to encourage us to put our money into smaller companies to help them grow. Right, So let's talk about how that tax relief works. So I buy new shares in a new launch VCT, I put the money in, and I can then apply to get the tax I've already paid back the income tax I've already paid back.
So you put one hundred pounds in to the new shares, you'd get the shares worth one hundred pounds, and then for your h MRC submission, you would then be able to indicate that you've bought one hundred pounds worth and you'll be able to claim back thirty pounds offset against whatever income tax liability you were had in totality for your own personal affairs, as.
Long as I paid that much income tax over the year obviously, right, Okay, correct, And there is also a capital gains tax relief here as well.
Right correct.
So if and when you make money on the shares in due course, you must hold them for five years. It's an important point. So once you invested, you must hold them for five years. Once you held them and you make a capital game, there is that a zero capital gains tax on that? As well? As these investment VCTs do pay dividends, and you're also have income tax free dividends.
Okay, So I don't pay capital gains on any gains and I don't pay any income tax on the dividends that I get.
Correct, quite big benefits.
Let's say that I have bought shares in one of your VCTs on launch. After five years, I want to sell them. Who do I sell them to? Who is going to buy the stuff? Without the tax relief?
There is a liquid market to some degree, but as you say, sometimes that isn't there. The company themselves have a buyback mechanisms, so they often step into the market and buy from their balance sheet from realized gains from exited investments on their balance sheet, okay.
Or perhaps do VCTs have a set life and that will wind it up after five years or ten years and you will get your money back.
Some may do. Typically they are evergreen, which means they carry on until the boards decide in consultation with shareholders that something should change.
Okay.
So there could be situations where you buy into your VCT at the beginning, you get your income tax relief, and maybe you get your capital gains tax relief.
You've had your tax free dividends, etc.
All marvelous, but when you come to wanting to sell, you may end up doing that at a discount to the net as at value, which would make to a degree of set your tax benefits that is possible.
You know, typically the buybacks, if you look at happen much closer to NAV than the average discount on investment trusts. You know, five percent maybe a number that I have in my head, but it's but you're right there that you don't always get your money back at NAV. So the important bit is one that the NAV has grown over that five ten year period that you hold the shares.
And then two, what is the commitment by the board and the company to buy back shares or provide a secondary market in those shares to be brought by other people.
Okay, And the other thing that we should talk about is the fee structure, because it tends to be that VCTs are very significantly more expensive than other types of listed investment vehicle. So a big listed investment trust that say invested in liquid UK equities or dividend paying equities or something like that would tend to have a total expense ratio of below one percent, but you would expect vct to have a total expense ratio much much higher than that.
You're correct. There is the intensity and resourcing required to invest in private equity companies and small ones is much greater than buying and selling shares on the London Stock Exchange. As a result of that, the fees tend to be higher. Private equity fees as a whole tend to be higher. If you look at the unlisted market as well, you'll see them and they can range typically between one and a half and two and a half percent, and they will have some performance fees typically as.
Well, so you'll get that management fee maybe two percent, possibly a performance feel on top of that. And there are other charges around the edge. I remember reading a while bag that a lot of VCTs will also charge the companies in which they invest a couple of percent a year for the input that they give to them, for example, and that's going to come back in the end as a charge on the end investor.
Effectively, well, it's a charge to the company typically that the company underline company pays for could be board representation or value creation plans, or advisory work or strategic work, and that's charged typically to the company themselves.
Yeah, but it's an expense, if an expense of the company's an expense to the investor in the company, right, So it all ends up in the same place.
So there is but there is a degree of tolerance.
Among investors too, higher fees to higher cost dignificounts, etc. Because you're getting such a great tax rebate along the way that It's not that fees are not quite the issue with the VCT as they are with other types of vehicle.
I think fees are all always an issue for an investor, so they're always under a scrutiny. They's certainly not be dismissed by boar boards do their producer job and make sure that the manager is held to account for its fees. But the market price of the fees are pretty well transparent. Private equity fees are pretty transparent, and they're all in in that region.
All right. So performance, how's it been?
Well, it varies. I mean, it depends on the manager and it depends on the type of it. As sectors you're exposed to. Some the last few years may been affected by COVID. You know, small companies with stretched balance sheets that went through COVID in a tough time. So I'd say the last few years, some companies, some VCTs have done quite well, are m Mobius, VTTMI receptionally well and some of the others have probably had a tough time, but they're still doing what they say in the team.
And I think it's really important to remember these are not short term investments. You must have a long term horizon when investing in them.
What do you mean by long term?
Is that five years, well, at least five years for a VCT.
You can't get the tax benefits without that, But I would say much longer. And you but or trusts typically not trust but venture capital itself. You go for a very diverse, fied portfolio because of the high risks associated with the online companies, and you should look at it typically at ten to fifteen year horizon.
Okay, I'm still I'm still wondering about how long a VCT lasts, and that, let's say after fifty I say fifteen years is the long term. Pretty much everyone who might have invested when that VCT was launched might want to be out by the end of fifteen years, So who are the investors after that? Who holds a VCT after fifteen years.
Well, some people still retain them after fifteen years because they could be investing, you know, in their thirties and forties, and they can hold them well into pensions, so they can hold them for you know, twenty to thirty years. I mean, Baron's meeds been going since nineteen ninety five, so you've got something that's approached you thirty years and I think some people are still holding them from day one,
So I think there is a range of investor. I think it's important this is this is an important point that people need to recognize that this is a benefit to both themselves from financial returns but also society in the UK for ecosystems of early growth companies that contribute to economic growth, and they are it's a very very important part of UK society.
Because there is that funding gap for smaller companies in the UK.
Yeah, because because over history of UK has been at the forefront of finance, provision, healthcare, innovation, and VCTs are there to catalyze some of that as well. And I think you know, with the work we're competing in a global marketplace. The US is now the default for technology and early stage related growth companies, and we are we've
lost some of that market share and positioning. Yet we have some phenomenal academic institutions and platforms and hubs in the across the UK that have some very great specialisms and we really should be you know, catalyzing and supporting them.
M okay, tell me about the types of companies that are in these said, the Moobius VCT had done very well recently.
What kind of companies are in.
That fundamentally early stage companies, but they're things that like so it is what I'm thinking of. An API platform developed by a team that design called Ozone API is developed by a team that designs open banking in the UK. It's a global platform, so it's selling to global customers. And these are for banking users. You know, when you look at your using your app in order for security of app and then to access your accounts and the
various different services you want from your own bank. This is these are the types of things that are developed within within that product of that company. There's another one which is an Irish and UK based company called city Swift, which is a data platform that increases the performance of public transport networks, uses AI analytics and simulates and optimizes.
So again, lots of these are technology related. They're at cutting edge of innovation, and they are you know, the future of how the world is evolving, rather than historically, you know, VCTs. Previously you could invest in a much more traditional old style businesses and you might be able to invest in asset backed business that have property like pubs. Those things are no longer able to be invested in within VCTs.
Okay, So let's talk about most investors and their rappers in their journeys. So I think a lot of listeners to this podcast, they will have a pension, so they'll have things inside their pension rapper, they'll have things inside their ISA wrapper.
Is this the next stage?
So once you've pretty much maxed out your pension, it was a lot easier to do than it used to be maxed out your isold.
Of course we're talking we had quite a lot of money there.
That's up to sixty grand a year put ahead, right if you're using your maximum pension maximum iSER is a VCT The thing that you would come to next when you're looking for tax efficiency and you've filled your other rappers, it's.
Definitely one that you would consider immediately. I mean, of course, there are other private vehicles where you can get LHT or a capital allowance, capital gains allowances, benefits, so there are other things where they are they're for more sophisticating investors, let's say, probably not the retail investor who's got who's just just about maxed out on their ices and their pensions. So I would definitely put them there as that next choice.
But if you are further up the quantum scale or the sophistication or risk return scale, you can go into some direct private deals.
Direct private deals. How would an ordinary investor do that?
Well, there's ei s's that's one way of doing it. You can get similar type of tax rates on a director single deal, single projects.
Yeah, Enterprise investment scheme.
Correct, yes, And that's another way of you know, identifying a company that you have you think is good for whatever reason for both management, valuation, sector, and you can put money directly into that single company. Of course it is much more high risk return, but that is another option as well.
And what are the tax benefits there? How does that work.
So it's very similar. You get thirty percent back from investing and you have a capital gains benefits, you have to hold it for a certain period of time. There is also something called SCIS where you can get up to fifty percent back. I think that's the number fifty percent now still, and so that's for a smaller company at an earlier stage. So there are these other much higher risk opportunities where you can go as well to put into your portfolio.
But by the time you get to that, you are really into the world of very high risks, aren't you with one individual small company?
Yeah, I mean when you look at portfolio construction, a single company does have a specific risk. However, if you are you have an edge then you believe you're getting a good valuation, you believe in something that can be executed on, then you might have an edge that says it's not as higher risk as some people perceive.
We tooked briefly Tony back of the beginning of this about the funding gap in the UK.
Are we really behind the curve technologically?
Did you think when you look at kirs Darma, was it yesterday the day before talking about I'm going to go change back. This last week's is going to be When you look at Kirs Darma last week talking about AI as the driver of growth in the UK, etc.
Is this possible?
Are we genuinely too far behind the curve on some of these things.
This country has a culture historically of being innovative and entrepreneurial and if you put an ecosystem around that, then you will get good results. Therefore, people should be commended to make money and be a success, and they should be commended also if they take risk and they fail and they get back up on their feet and go again. And this is what entrepreneurism and startstup and growth companies are all about. We are behind the curve when it comes to some of that now. We used to be
at the forefront, but now we are behind. If you look at the US, the money, the capital gravitates to the US. When people think about listing, they think about the US primarily and the London Stock Exchanges is in the secondary field. That is not a good place to be. Is not where we were when I started in the nineties in investing. So how do we change? That? Is a cultural change. VCTs are part of that, but venture
capital and is part of that. But in general, investing and commending good managements to take risks and then to be rewarded financially and otherwise should be commended and applauded, not taxed. And that is an important point. The aim market I've mentioned earlier, the growth market has gone from about eighteen hundred companies fifteen years ago to about seven hundred to day. And people talk about that, but they
don't then start addressing how do we solve that? And there's many components that solution, and one of them is the fact that it's the regulatory burdens, the transparency, the constraints on making money and being successful. All of those go to the best management team saying why do I need to be listed? If I have an option, I'll do the option.
I'm going to put you in charge, Tony, completely in charge. You can do whatever you like.
It's the one policy change focus on to try and fix.
Part of that.
It would be the regulatory burden around transparency on being listed and therefore capital access, getting the best management teams to run quoted and unquoted companies. Those things are if you've got the best management teams, the rest will.
Flow is there anything we could do with the tax system to encourage companies to list or encourage companies to be more innovative. I mean, I always think it might be useful if say, when a company a company listed, it had a lower rate of corporation tax for five years or something like that.
Well you can see the benefits of having from a societal point of view, in the Ireland lower corporation tax twelve percent or recently. And look what's happened to Ireland in the last ten years. It's phenomenal the amount of the money that's gravitated there, but importantly the skills the companies, the global companies that are now based there, They are sitting pretty now thinking about what to do with the surplus for society and island as a result. So you
can see that trickle down effect. Is it works?
Yeah, Let's say Rachel Reaves is listening. Eh, now you've got a new launch. I know you've got a new launch coming out with Baron's Mead. Right, You've got a share offer.
Yes, so one of our brands, Baron's Meat, is coming out on new VCT offering in the next week or so. And you know they cap the amount that they raised typically between up to fifty million, So hopefully, like last time, we hit the cap. But we've you know, Gresham houses many of these offerings for people, and we've always got something on the go.
Merry, I know you have.
I know you have, and that's somewhere listeners for you to go and look if you have filled up every single other rapper and you're looking for something with some tax benefits and possibly rather more risk. Tony, is there anything that we haven't covered that we should cover?
No? I think you know. Investing is a fundamental part of economic growth. Taking risk, making returns and applauding people for taking that risk is something which this country has been good in history, and we really need to continue to do that.
Well.
Well, hopefully we will get better at that over the next decade or so, possibly than not the next couple of years.
Tony, thank you so much for being with us today.
It's a real pleasure. Good to speak again.
Thanks for listening to this week's meren Talk to Your Money.
If you like our share a rate review and subscribe wherever you listen to podcasts.
Also, be sure to follow me and John on x or Twitter. I'm at marinasw and John is John Underscore Stepic.
This episode was produced by Somersidi and Moses and sound designed by Blake. Maple's executive producer has been Brendan Francis Newnham. Questions and comments on this show and all our shows always welcome. Our show email is Meren Money at Bloomberg dot net