The Investor’s Guide to Choosing the Right VCT

The Investor's Guide to Choosing the Right VCT

by David Tamplin on 8 Apr, 2014

You may have heard about how a venture capital trust can provide you with a steady income, grow your capital and provide you with impressive tax-related benefits. But you may not be aware that there is more than one type of VCT, and choosing the best one will depend on your circumstances and the benefits you most want out of it. Before you take the plunge and pour your hard-earned cash into VCT investments, a little research into exactly what is out there could deliver greater rewards in the long term.

What are the different types of VCT?

VCTs have expanded and developed greatly over the years, and they have become increasingly diverse in nature. However, the vast majority of VCTs can be classified as one of four main types.

Generalist VCTs: spread their investment portfolios across a wide range of sectors, and they put money into companies at different stages of their development.

Alternative investment market (AIM) VCTs: concentrate their investment efforts on niche and alternative industries that are either AIM listed or about to become so.

Specialist VCTs: tend to stick to one specific industry such as renewable energy, healthcare or technology. While this type of trust can be more risky, the rewards in terms of capital growth can be greater.

Limited life VCTs: will generally limit their investments to specific industries, but they will have a specific winding up date – usually between three and six years after the trust is started. These trusts invest in less risky start-ups and unlisted companies, but they are popular with investors who want to take advantage of HMRC’s tax rebate – which can be up to 30 percent of the initial investment sum.

Comparing different venture capital firms

If you are new to investing, or you want to limit the risk involved, a generalist trust is probably the best option. However, how do you know that a particular firm can be trusted? Well, you can check the firm’s history of delivering capital growth and healthy dividend payments. You can also perform a little research to check that the venture capital firm has relationships with a broad range of companies in several sectors.

The best venture capital managers will have a significant network of contacts, giving them access to the most current and accurate data possible. They can only make sound investment decisions if they have this information, so checking their background and track record should help you to make the right choice.

How do VCTs make their investment decisions

This will differ greatly, depending on the types of trust being offered and the sectors in which the start-ups operate. Managers will look for companies in the very early stages of development that have dynamic and driven entrepreneurs at the helm. In most cases, potential is the biggest asset, so investing at the early stages of a company’s life can deliver significant returns.

Some trust managers will test the waters with an initial, modest investment. If potential starts to translate to positive results, further investments may be made. This often means that dividend payments and capital growth can take a while, but they are usually worth waiting for.

Some venture capital firms will operate more than one trust, and give you the opportunity to spread risk by investing your capital across more than one scheme. You should ask exactly how your money will be invested before committing to anything, as different trust managers have very different strategies.

How to choose the right trust for your needs

You will need to have a clear idea of your priorities before choosing the venture capital trust that is right for you.

• Do you want the option of selling your shares in the trust quickly?
• How much risk are you willing to expose your capital to?
• Do you want a regular income from your investment?
• Is capital growth or tax relief your main priority?

You should speak at length with a trust manager or a financial advisor before committing to a particular provider in order to ensure that your main priorities are met. With careful planning and a long-term strategy, you can get the most out of VCTs – providing you with a more secure financial future.

About the Author

David Tamplin

David Tamplin has been writing for Uk Money Market for 3 years and is the current editor of the site. He has an insurance background and achieved his ACII professional insurance exams in 1993.