What Is a Venture Capital Trust?
A venture capital trust (VCT) is a type of publicly listed closed-end fund found in the United Kingdom. A venture capital trust is designed as a way for individual investors to gain access to venture capital investments via the capital markets. Its mandate is to seek out potential venture capital investments in small unlisted firms to generate higher-than-average, risk-adjusted returns for its investors. Numerous venture capital trusts are listed on the London Stock Exchange.
Understanding Venture Capital Trust (VCT)
Venture capital trusts are a popular vehicle for investors seeking to invest in a diversified portfolio of venture capital investments. These portfolios give investors access to private market investments. Fund managers are focused on investing venture capital for income and capital gains, which are returned to shareholders.
Venture capital trusts are primarily found in the U.K. where they were introduced in 1995 to support U.K. small business growth. They are comparable to business development companies in the U.S. The shares of U.K venture capital trusts are uniquely structured to offer tax efficiencies. Shares can be bought directly from the fund manager in a new offering or actively traded on the secondary market with numerous listings on the London Stock Exchange. These shares offer the potential for high returns through investment in high-growth private companies. They also offer tax advantages, often relieving investors of many of the tax implications surrounding dividends and capital gains, or offering lower taxation rates.
Venture capital trusts are limited by some regulations that govern the percentage of fund allocations. Regulations require that 70% of investments must be allocated to qualifying investments within three years. Additionally, 30% of funds can be allocated to government securities, gilts or blue-chip shares. The trusts are also limited to 15% in a single holding and they can invest no more than GBP15 million per investment.
Investing in VCTs
Hargreaves Lansdown is one of the most active broker-dealers supporting the distribution of venture capital trusts. The firm advertises and offers new trust shares from leading managers across the industry. The Octopus Titan VCT provides one example of a venture capital trust offering. Octopus manages over GBP400 million in the VCT. It invests in approximately 50 portfolio companies with high-growth characteristics. In 2017, the VCT reported a 4.7% total return with a 5.2% annual dividend yield. Leading portfolio investments include Evi Technologies which was sold to Amazon, Rangespan sold to Google, and SwiftKey sold to Microsoft.