What Is a Venture Capital Trust (VCT)?

A venture capital trust (VCT) is a publicly-listed, closed-end fund found in the United Kingdom. designed as a way for individual investors to gain access to venture capital investments via capital markets. Venture capital trusts operate by seeking 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 (LSE), which invests in companies that may not even be listed on the exchange itself.

Key Takeaways

  • A venture capital trust (VCT) is a publicly-listed, closed-end fund in the United Kingdom that allows individual investors to gain access to venture capital investments via capital markets.
  • VCTs encourage small business growth, provide potential high returns through high-growth private companies, and have multiple tax advantages as well.
  • There are a few different types of venture capital trusts, including AIM, generalist, and specialist VCTs, based on the industries its investments are in.

Understanding Venture Capital Trusts (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 and give them a minority stake in the startup, as well. Fund managers are focused on investing venture capital for income and capital gains, which are returned to shareholders in forms such as dividend yields.

Venture capital trusts are primarily found in the U.K. where they were first introduced in 1995 to support U.K. small business growth. They are comparable to business development companies in the U.S. as there is no direct stock exchange equivalent to VCTs in the United States. 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 £1 million per company per tax year.

Types of Venture Capital Trusts

Within the world of VCTs, there are many different types of VCTs that invest in different types of companies across industries, and for fixed periods of time. VCTs that are set up to invest indefinitely are referred to as evergreen VCTs, whereas certain short-term venture capital trusts called limited-life VCTs are only designed to bring income for a few years.

In addition, generalist VCTs are trusts that tend to diversify across multiple sectors and industries. In contract, specialist VCTs focus on one sector at a time. Investors who have a particular interest or background in technology, for example, can choose to hedge their bets on a specialist technology-focused VCT. The final type of VCT is called an AIM venture capitalist trust. It focuses on companies that are already public or are on the verge of becoming public on the LSE's Alternative Investment Market (AIM).

Real World Example of Venture Capital Trusts

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 £825 million in the VCT. It invests in over 75 early-stage companies with high-growth characteristics. In 2019, the VCT reported a 3.3% total return. Some current portfolio companies include myTomorrows, Elvie, and Secret Escapes, while in the past the fund has backed "some of the UK’s most successful entrepreneurs, including the founders of Zoopla Property Group and graze.com."