Wealth managers may be shy about venture capital but the asset class is attractive particularly when it can be held in an advantageous tax structure as is the case in the UK, a practitioner in the sector argues.

Wealth managers may be shy about investing in venture
capital (see here) but the asset class is attractive particularly when it can
be held in an advantageous tax structure as is the case in the UK, a
practitioner in the sector argues.

Venture Capital Trusts, which are listed vehicles designed
to put money into fledgling businesses and which carry tax reliefs, have been
around since the mid-1990s and raised a total of £4.6 billion (around $7.34
billion) since that time. The performance numbers may not set the world alight
but with tax breaks, there is plenty of reason to hold VCTs, argues Patrick
Reeve, managing partner at Albion Ventures. The firm, with £230 million of
client money, has run these closed-ended trusts since 1996.

“As
an asset class venture capital hasn’t done that well for
many years, as opposed to private equity buyouts,” he said. “It is an interesting
area but not an easy one. With VCTs, the government recognised that this asset
class isn’t an easy one so it provides tax breaks to mitigate the risks,” he
told WealthBriefing recently.

Of
the £4.6 billion of funds raised via VCTs, only 8 per cent of investors have
lost more than half of their initial capital and when tax breaks are taken into
account, only one per cent lost more than half of their invested capital. On
the upside, 6 per cent of investors have increased
their money by more than 50 per cent before tax
breaks and 13 per cent have done so with full tax breaks taken into
account. There is a clear bias in favour of VCTs being a positive investment, Reeve
said.

Since
inception, Albion’s investments have, on average, repaid 1.6 times
the amount of investors’ initial capital, Reeve said. On the lower-risk funds,
he targets a return multiple of 1.5 times or more; on higher risk, the figure
goes up to 2 to three times or more.

Tax

With
these vehicles, there are income tax and capital gains tax exemptions. For
example, there is income tax relief' at the rate of 30 per cent of the amount
subscribed for shares issued in the tax year 2006-07 and onwards (source:
HMRC). No CGT is paid on disposal of shares.

VCTs
are a long-term play; such investments typically haven investment horizon of as
long as 10 years. “They are very good income generators; you can pay out
capital and revenue profits via tax free
dividends,” he said.

When
Reeve, a chartered accountant by training, started Albion,
the firm was then part of UK-listed bank and investment house Close Brothers
but it emerged in a management buyout four years ago, and renamed using the Albion name, he said. It has a
total of about 15,000 retail investors.

The
firm currently runs seven VCTs.

Banks don’t want to know

WealthBriefing was interested to know
what Reeve thinks of the complaints from politicians and some businesses that
firms, such as start-ups, are not getting any love from the banks. Reeve thinks
that in the UK’s
financial environment, complaining about banks’ wariness to lend to such firms
is to misunderstand the role of banks.

“Banks
are there to provide working capital and not core capital. The core business
capital comes from yourself, your family and friends and from investors such as
angels and venture capitalists. Once you ask a bank to
take risk they are not going to do it,” he said.

Albion
Ventures’ VCTs typically invest sums of £1 million to £10 million in a range of
growing firms, from technology-oriented companies to asset-based businesses
(such as hotels).