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Speaker 1: So this week we're talking about venture capital trust or VCTs.
Speaker 1: A few of you've written in asking us about.
Speaker 2: VCTs, what do they do? How do I get them?
Speaker 1: So we thought it'd be a good time to bring
Speaker 1: in an external voice to talk to us about exactly
Speaker 1: what VCTs are and if it can offer some of
Speaker 1: you a more tax efficient investment option, then maybe pensions,
Speaker 1: particularly in light of the changes we saw in the
Speaker 1: autumn budget, which of course increased some of the tax
Speaker 1: penalties on pensions. So with me today Tony DAHLWOOD'SO Gresham House,
Speaker 1: Gresham House and a specialist alternative asset manager managing a
Speaker 1: variety of VCTs. Two barrels ME VCTs and two Mobius VCTs.
Speaker 1: Welcome Tony, Thank you so much for joining us today
Speaker 1: on what is a relatively complicated subject.
Speaker 3: Real pleasure to be here, Meren.
Speaker 1: Okay, I'm going to start with one of those big
Speaker 1: questions that people find of putting. But you're so expert
Speaker 1: that I know you're not going to find it off putting, Tony.
Speaker 2: What is a VCT?
Speaker 3: So VCT starts a venture capital trust. Venture capital trusts
Speaker 3: are listed vehicles which are tax efficient ways of investing
Speaker 3: in early stage growth companies, primarily private companies, small private companies.
Speaker 3: But there are some AIM VCTs as well that invest
Speaker 3: in AIM for those companies that are eligible to be vctable,
Speaker 3: so to speak.
Speaker 1: I'm interrupting you already because we are super basic here.
Speaker 2: What is it aim?
Speaker 3: AIM is the alternative investment market of the London Stock Exchange,
Speaker 3: typically early stage companies that are starting on their journey
Speaker 3: for growth.
Speaker 1: Okay, so an AIM company is a listed company, but
Speaker 1: not a fully listed company.
Speaker 3: Correct. It has certainly slightly different rules, but typically it's
Speaker 3: an easier way of getting listed and access for the
Speaker 3: public to buy and sell shares in that AIM listed company.
Speaker 3: As I say, the primarily most VCTs are made up
Speaker 3: of private companies, unlisted companies, small ones with growth ambitions.
Speaker 1: Okay, So what then, is the difference between a VCT
Speaker 1: and a private equity trust?
Speaker 3: So that many private equity trusts listed ones three eyes
Speaker 3: an example of that, and these are trusts that typically
Speaker 3: hold private companies in a listed structure. Three three eyes
Speaker 3: cases a London Stock Exchange the main list, and you
Speaker 3: can access buying those shares on the London Stock Exchange
Speaker 3: and you're getting exposure to the underlying companies like three I.
Speaker 3: The biggest exposure you'll have on three I is a
Speaker 3: Dutch supermarket business called Action. So you have many different
Speaker 3: private equity trusts that give you underlying private equity exposure
Speaker 3: through a listed vehicle.
Speaker 2: Okay, still it's the same idea.
Speaker 1: You've got private companies, unlitted companies wrapped up insider trust.
Speaker 3: Correct. And the difference between a VCT and they standard
Speaker 3: private equity trust like three I or Htree Capital Trust
Speaker 3: would be that the VCTs are tax efficients. The VCTs
Speaker 3: offer thirty percent income tax relief when you buy new shares,
Speaker 3: and they provide in some respects more more flexibility than
Speaker 3: some of the pension tax changes that are happening at
Speaker 3: the moment, So you have some tax relief by investing
Speaker 3: in the new shares to then support the UK's ecosystem
Speaker 3: of growth. Small companies.
Speaker 1: Okay, So tax release is offered by the government in
Speaker 1: order to encourage us to put our money into smaller
Speaker 1: companies to help them grow. Right, So let's talk about
Speaker 1: how that tax relief works. So I buy new shares
Speaker 1: in a new launch VCT, I put the money in,
Speaker 1: and I can then apply to get the tax I've
Speaker 1: already paid back the income tax I've already paid back.
Speaker 3: So you put one hundred pounds in to the new shares,
Speaker 3: you'd get the shares worth one hundred pounds, and then
Speaker 3: for your h MRC submission, you would then be able
Speaker 3: to indicate that you've bought one hundred pounds worth and
Speaker 3: you'll be able to claim back thirty pounds offset against
Speaker 3: whatever income tax liability you were had in totality for
Speaker 3: your own personal affairs, as.
Speaker 1: Long as I paid that much income tax over the
Speaker 1: year obviously, right, Okay, correct, And there is also a
Speaker 1: capital gains tax relief here as well.
Speaker 2: Right correct.
Speaker 3: So if and when you make money on the shares
Speaker 3: in due course, you must hold them for five years.
Speaker 3: It's an important point. So once you invested, you must
Speaker 3: hold them for five years. Once you held them and
Speaker 3: you make a capital game, there is that a zero
Speaker 3: capital gains tax on that? As well? As these investment
Speaker 3: VCTs do pay dividends, and you're also have income tax
Speaker 3: free dividends.
Speaker 1: Okay, So I don't pay capital gains on any gains
Speaker 1: and I don't pay any income tax on the dividends
Speaker 1: that I get.
Speaker 2: Correct, quite big benefits.
Speaker 1: Let's say that I have bought shares in one of
Speaker 1: your VCTs on launch. After five years, I want to
Speaker 1: sell them. Who do I sell them to? Who is
Speaker 1: going to buy the stuff? Without the tax relief?
Speaker 3: There is a liquid market to some degree, but as
Speaker 3: you say, sometimes that isn't there. The company themselves have
Speaker 3: a buyback mechanisms, so they often step into the market
Speaker 3: and buy from their balance sheet from realized gains from
Speaker 3: exited investments on their balance sheet, okay.
Speaker 1: Or perhaps do VCTs have a set life and that
Speaker 1: will wind it up after five years or ten years
Speaker 1: and you will get your money back.
Speaker 3: Some may do. Typically they are evergreen, which means they
Speaker 3: carry on until the boards decide in consultation with shareholders
Speaker 3: that something should change.
Speaker 2: Okay.
Speaker 1: So there could be situations where you buy into your
Speaker 1: VCT at the beginning, you get your income tax relief,
Speaker 1: and maybe you get your capital gains tax relief.
Speaker 2: You've had your tax free dividends, etc.
Speaker 1: All marvelous, but when you come to wanting to sell,
Speaker 1: you may end up doing that at a discount to
Speaker 1: the net as at value, which would make to a
Speaker 1: degree of set your tax benefits that is possible.
Speaker 3: You know, typically the buybacks, if you look at happen
Speaker 3: much closer to NAV than the average discount on investment trusts.
Speaker 3: You know, five percent maybe a number that I have
Speaker 3: in my head, but it's but you're right there that
Speaker 3: you don't always get your money back at NAV. So
Speaker 3: the important bit is one that the NAV has grown
Speaker 3: over that five ten year period that you hold the shares.
Speaker 3: And then two, what is the commitment by the board
Speaker 3: and the company to buy back shares or provide a
Speaker 3: secondary market in those shares to be brought by other people.
Speaker 1: Okay, And the other thing that we should talk about
Speaker 1: is the fee structure, because it tends to be that
Speaker 1: VCTs are very significantly more expensive than other types of
Speaker 1: listed investment vehicle. So a big listed investment trust that
Speaker 1: say invested in liquid UK equities or dividend paying equities
Speaker 1: or something like that would tend to have a total
Speaker 1: expense ratio of below one percent, but you would expect
Speaker 1: vct to have a total expense ratio much much higher
Speaker 1: than that.
Speaker 3: You're correct. There is the intensity and resourcing required to
Speaker 3: invest in private equity companies and small ones is much
Speaker 3: greater than buying and selling shares on the London Stock Exchange.
Speaker 3: As a result of that, the fees tend to be higher.
Speaker 3: Private equity fees as a whole tend to be higher.
Speaker 3: If you look at the unlisted market as well, you'll
Speaker 3: see them and they can range typically between one and
Speaker 3: a half and two and a half percent, and they
Speaker 3: will have some performance fees typically as.
Speaker 1: Well, so you'll get that management fee maybe two percent,
Speaker 1: possibly a performance feel on top of that. And there
Speaker 1: are other charges around the edge. I remember reading a
Speaker 1: while bag that a lot of VCTs will also charge
Speaker 1: the companies in which they invest a couple of percent
Speaker 1: a year for the input that they give to them,
Speaker 1: for example, and that's going to come back in the
Speaker 1: end as a charge on the end investor.
Speaker 3: Effectively, well, it's a charge to the company typically that
Speaker 3: the company underline company pays for could be board representation
Speaker 3: or value creation plans, or advisory work or strategic work,
Speaker 3: and that's charged typically to the company themselves.
Speaker 1: Yeah, but it's an expense, if an expense of the
Speaker 1: company's an expense to the investor in the company, right,
Speaker 1: So it all ends up in the same place.
Speaker 2: So there is but there is a degree of tolerance.
Speaker 1: Among investors too, higher fees to higher cost dignificounts, etc.
Speaker 1: Because you're getting such a great tax rebate along the
Speaker 1: way that It's not that fees are not quite the
Speaker 1: issue with the VCT as they are with other types
Speaker 1: of vehicle.
Speaker 3: I think fees are all always an issue for an investor,
Speaker 3: so they're always under a scrutiny. They's certainly not be
Speaker 3: dismissed by boar boards do their producer job and make
Speaker 3: sure that the manager is held to account for its fees.
Speaker 3: But the market price of the fees are pretty well transparent.
Speaker 3: Private equity fees are pretty transparent, and they're all in
Speaker 3: in that region.
Speaker 2: All right. So performance, how's it been?
Speaker 3: Well, it varies. I mean, it depends on the manager
Speaker 3: and it depends on the type of it. As sectors
Speaker 3: you're exposed to. Some the last few years may been
Speaker 3: affected by COVID. You know, small companies with stretched balance
Speaker 3: sheets that went through COVID in a tough time. So
Speaker 3: I'd say the last few years, some companies, some VCTs
Speaker 3: have done quite well, are m Mobius, VTTMI receptionally well
Speaker 3: and some of the others have probably had a tough time,
Speaker 3: but they're still doing what they say in the team.
Speaker 3: And I think it's really important to remember these are
Speaker 3: not short term investments. You must have a long term
Speaker 3: horizon when investing in them.
Speaker 2: What do you mean by long term?
Speaker 1: Is that five years, well, at least five years for
Speaker 1: a VCT.
Speaker 3: You can't get the tax benefits without that, But I
Speaker 3: would say much longer. And you but or trusts typically
Speaker 3: not trust but venture capital itself. You go for a
Speaker 3: very diverse, fied portfolio because of the high risks associated
Speaker 3: with the online companies, and you should look at it
Speaker 3: typically at ten to fifteen year horizon.
Speaker 1: Okay, I'm still I'm still wondering about how long a
Speaker 1: VCT lasts, and that, let's say after fifty I say
Speaker 1: fifteen years is the long term. Pretty much everyone who
Speaker 1: might have invested when that VCT was launched might want
Speaker 1: to be out by the end of fifteen years, So
Speaker 1: who are the investors after that? Who holds a VCT
Speaker 1: after fifteen years.
Speaker 3: Well, some people still retain them after fifteen years because
Speaker 3: they could be investing, you know, in their thirties and forties,
Speaker 3: and they can hold them well into pensions, so they
Speaker 3: can hold them for you know, twenty to thirty years.
Speaker 3: I mean, Baron's meeds been going since nineteen ninety five,
Speaker 3: so you've got something that's approached you thirty years and
Speaker 3: I think some people are still holding them from day one,
Speaker 3: So I think there is a range of investor. I
Speaker 3: think it's important this is this is an important point
Speaker 3: that people need to recognize that this is a benefit
Speaker 3: to both themselves from financial returns but also society in
Speaker 3: the UK for ecosystems of early growth companies that contribute
Speaker 3: to economic growth, and they are it's a very very
Speaker 3: important part of UK society.
Speaker 1: Because there is that funding gap for smaller companies in
Speaker 1: the UK.
Speaker 3: Yeah, because because over history of UK has been at
Speaker 3: the forefront of finance, provision, healthcare, innovation, and VCTs are
Speaker 3: there to catalyze some of that as well. And I
Speaker 3: think you know, with the work we're competing in a
Speaker 3: global marketplace. The US is now the default for technology
Speaker 3: and early stage related growth companies, and we are we've
Speaker 3: lost some of that market share and positioning. Yet we
Speaker 3: have some phenomenal academic institutions and platforms and hubs in
Speaker 3: the across the UK that have some very great specialisms
Speaker 3: and we really should be you know, catalyzing and supporting them.
Speaker 1: M okay, tell me about the types of companies that
Speaker 1: are in these said, the Moobius VCT had done very
Speaker 1: well recently.
Speaker 2: What kind of companies are in.
Speaker 3: That fundamentally early stage companies, but they're things that like
Speaker 3: so it is what I'm thinking of. An API platform
Speaker 3: developed by a team that design called Ozone API is
Speaker 3: developed by a team that designs open banking in the UK.
Speaker 3: It's a global platform, so it's selling to global customers.
Speaker 3: And these are for banking users. You know, when you
Speaker 3: look at your using your app in order for security
Speaker 3: of app and then to access your accounts and the
Speaker 3: various different services you want from your own bank. This
Speaker 3: is these are the types of things that are developed
Speaker 3: within within that product of that company. There's another one
Speaker 3: which is an Irish and UK based company called city Swift,
Speaker 3: which is a data platform that increases the performance of
Speaker 3: public transport networks, uses AI analytics and simulates and optimizes.
Speaker 3: So again, lots of these are technology related. They're at
Speaker 3: cutting edge of innovation, and they are you know, the
Speaker 3: future of how the world is evolving, rather than historically,
Speaker 3: you know, VCTs. Previously you could invest in a much
Speaker 3: more traditional old style businesses and you might be able
Speaker 3: to invest in asset backed business that have property like pubs.
Speaker 3: Those things are no longer able to be invested in
Speaker 3: within VCTs.
Speaker 1: Okay, So let's talk about most investors and their rappers
Speaker 1: in their journeys. So I think a lot of listeners
Speaker 1: to this podcast, they will have a pension, so they'll
Speaker 1: have things inside their pension rapper, they'll have things inside
Speaker 1: their ISA wrapper.
Speaker 2: Is this the next stage?
Speaker 1: So once you've pretty much maxed out your pension, it
Speaker 1: was a lot easier to do than it used to
Speaker 1: be maxed out your isold.
Speaker 2: Of course we're talking we had quite a lot of
Speaker 2: money there.
Speaker 1: That's up to sixty grand a year put ahead, right
Speaker 1: if you're using your maximum pension maximum iSER is a
Speaker 1: VCT The thing that you would come to next when
Speaker 1: you're looking for tax efficiency and you've filled your other rappers, it's.
Speaker 3: Definitely one that you would consider immediately. I mean, of course,
Speaker 3: there are other private vehicles where you can get LHT
Speaker 3: or a capital allowance, capital gains allowances, benefits, so there
Speaker 3: are other things where they are they're for more sophisticating investors,
Speaker 3: let's say, probably not the retail investor who's got who's
Speaker 3: just just about maxed out on their ices and their pensions.
Speaker 3: So I would definitely put them there as that next choice.
Speaker 3: But if you are further up the quantum scale or
Speaker 3: the sophistication or risk return scale, you can go into
Speaker 3: some direct private deals.
Speaker 1: Direct private deals. How would an ordinary investor do that?
Speaker 3: Well, there's ei s's that's one way of doing it.
Speaker 3: You can get similar type of tax rates on a
Speaker 3: director single deal, single projects.
Speaker 2: Yeah, Enterprise investment scheme.
Speaker 3: Correct, yes, And that's another way of you know, identifying
Speaker 3: a company that you have you think is good for
Speaker 3: whatever reason for both management, valuation, sector, and you can
Speaker 3: put money directly into that single company. Of course it
Speaker 3: is much more high risk return, but that is another
Speaker 3: option as well.
Speaker 2: And what are the tax benefits there? How does that work.
Speaker 3: So it's very similar. You get thirty percent back from
Speaker 3: investing and you have a capital gains benefits, you have
Speaker 3: to hold it for a certain period of time. There
Speaker 3: is also something called SCIS where you can get up
Speaker 3: to fifty percent back. I think that's the number fifty
Speaker 3: percent now still, and so that's for a smaller company
Speaker 3: at an earlier stage. So there are these other much
Speaker 3: higher risk opportunities where you can go as well to
Speaker 3: put into your portfolio.
Speaker 1: But by the time you get to that, you are
Speaker 1: really into the world of very high risks, aren't you
Speaker 1: with one individual small company?
Speaker 3: Yeah, I mean when you look at portfolio construction, a
Speaker 3: single company does have a specific risk. However, if you
Speaker 3: are you have an edge then you believe you're getting
Speaker 3: a good valuation, you believe in something that can be
Speaker 3: executed on, then you might have an edge that says
Speaker 3: it's not as higher risk as some people perceive.
Speaker 1: We tooked briefly Tony back of the beginning of this
Speaker 1: about the funding gap in the UK.
Speaker 2: Are we really behind the curve technologically?
Speaker 1: Did you think when you look at kirs Darma, was
Speaker 1: it yesterday the day before talking about I'm going to
Speaker 1: go change back. This last week's is going to be
Speaker 1: When you look at Kirs Darma last week talking about
Speaker 1: AI as the driver of growth in the UK, etc.
Speaker 2: Is this possible?
Speaker 1: Are we genuinely too far behind the curve on some
Speaker 1: of these things.
Speaker 3: This country has a culture historically of being innovative and
Speaker 3: entrepreneurial and if you put an ecosystem around that, then
Speaker 3: you will get good results. Therefore, people should be commended
Speaker 3: to make money and be a success, and they should
Speaker 3: be commended also if they take risk and they fail
Speaker 3: and they get back up on their feet and go again.
Speaker 3: And this is what entrepreneurism and startstup and growth companies
Speaker 3: are all about. We are behind the curve when it
Speaker 3: comes to some of that now. We used to be
Speaker 3: at the forefront, but now we are behind. If you
Speaker 3: look at the US, the money, the capital gravitates to
Speaker 3: the US. When people think about listing, they think about
Speaker 3: the US primarily and the London Stock Exchanges is in
Speaker 3: the secondary field. That is not a good place to be.
Speaker 3: Is not where we were when I started in the
Speaker 3: nineties in investing. So how do we change? That? Is
Speaker 3: a cultural change. VCTs are part of that, but venture
Speaker 3: capital and is part of that. But in general, investing
Speaker 3: and commending good managements to take risks and then to
Speaker 3: be rewarded financially and otherwise should be commended and applauded,
Speaker 3: not taxed. And that is an important point. The aim
Speaker 3: market I've mentioned earlier, the growth market has gone from
Speaker 3: about eighteen hundred companies fifteen years ago to about seven
Speaker 3: hundred to day. And people talk about that, but they
Speaker 3: don't then start addressing how do we solve that? And
Speaker 3: there's many components that solution, and one of them is
Speaker 3: the fact that it's the regulatory burdens, the transparency, the
Speaker 3: constraints on making money and being successful. All of those
Speaker 3: go to the best management team saying why do I
Speaker 3: need to be listed? If I have an option, I'll
Speaker 3: do the option.
Speaker 2: I'm going to put you in charge, Tony, completely in charge.
Speaker 2: You can do whatever you like.
Speaker 1: It's the one policy change focus on to try and fix.
Speaker 2: Part of that.
Speaker 3: It would be the regulatory burden around transparency on being
Speaker 3: listed and therefore capital access, getting the best management teams
Speaker 3: to run quoted and unquoted companies. Those things are if
Speaker 3: you've got the best management teams, the rest will.
Speaker 1: Flow is there anything we could do with the tax
Speaker 1: system to encourage companies to list or encourage companies to
Speaker 1: be more innovative. I mean, I always think it might
Speaker 1: be useful if say, when a company a company listed,
Speaker 1: it had a lower rate of corporation tax for five
Speaker 1: years or something like that.
Speaker 3: Well you can see the benefits of having from a
Speaker 3: societal point of view, in the Ireland lower corporation tax
Speaker 3: twelve percent or recently. And look what's happened to Ireland
Speaker 3: in the last ten years. It's phenomenal the amount of
Speaker 3: the money that's gravitated there, but importantly the skills the companies,
Speaker 3: the global companies that are now based there, They are
Speaker 3: sitting pretty now thinking about what to do with the
Speaker 3: surplus for society and island as a result. So you
Speaker 3: can see that trickle down effect. Is it works?
Speaker 1: Yeah, Let's say Rachel Reaves is listening. Eh, now you've
Speaker 1: got a new launch. I know you've got a new
Speaker 1: launch coming out with Baron's Mead. Right, You've got a
Speaker 1: share offer.
Speaker 3: Yes, so one of our brands, Baron's Meat, is coming
Speaker 3: out on new VCT offering in the next week or so.
Speaker 3: And you know they cap the amount that they raised
Speaker 3: typically between up to fifty million, So hopefully, like last time,
Speaker 3: we hit the cap. But we've you know, Gresham houses
Speaker 3: many of these offerings for people, and we've always got
Speaker 3: something on the go.
Speaker 2: Merry, I know you have.
Speaker 1: I know you have, and that's somewhere listeners for you
Speaker 1: to go and look if you have filled up every
Speaker 1: single other rapper and you're looking for something with some
Speaker 1: tax benefits and possibly rather more risk. Tony, is there
Speaker 1: anything that we haven't covered that we should cover?
Speaker 3: No? I think you know. Investing is a fundamental part
Speaker 3: of economic growth. Taking risk, making returns and applauding people
Speaker 3: for taking that risk is something which this country has
Speaker 3: been good in history, and we really need to continue
Speaker 3: to do that.
Speaker 2: Well.
Speaker 1: Well, hopefully we will get better at that over the
Speaker 1: next decade or so, possibly than not the next couple
Speaker 1: of years.
Speaker 2: Tony, thank you so much for being with us today.
Speaker 3: It's a real pleasure. Good to speak again.
Speaker 2: Thanks for listening to this week's meren Talk to Your Money.
Speaker 1: If you like our share a rate review and subscribe
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Speaker 2: Also, be sure to follow me and John on x
Speaker 2: or Twitter. I'm at marinasw and John is John Underscore Stepic.
Speaker 1: This episode was produced by Somersidi and Moses and sound
Speaker 1: designed by Blake. Maple's executive producer has been Brendan Francis Newnham.
Speaker 1: Questions and comments on this show and all our shows
Speaker 1: always welcome. Our show email is Meren Money at Bloomberg
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