Venture Capital Trusts were created 16 years ago on 6th April 1995 to create an attractive vehicle to encourage investment in small unlisted companies.
Many small and start up companies need investment to get going or to get on the next rung of the ladder. VCTs offer investors a tax efficient incentive to put their money in these firms in the form of dividend relief for income tax and disposal relief for capital gains.
And according to research by the Association of Investment Companies (AIC) the scheme seems to have worked.
The AIC reports that ‘…many VCTs have truly come of age when it comes to producing regular, reliable income for the good times and the bad’.
The Generalist VCT sector is yielding 6.4% and the VCT AIM sector is averaging 9%. The specialist technology sector is averaging 4.6%.
Dividends also held up during the worst of the recession with 93% of VCTs paying out in 2008 and 86% in 2009.
And now, in the first six months of the 2011/2012 tax year Â£73.9 million has been paid out in VCT ordinary share dividends as opposed to the Â£54.3 million of the same period last year.
AIC points to two strongest performers, the ‘British Smaller Companies VCT’, which has paid out a total dividend of 43.7p per share since its launch and ‘Proven VCT’, which has not only grown in share price by 186% in ten years but has also paid out 107.7 p per share since its launch.
Patrick Reeve, Managing Partner, Albion Ventures, and manager of several Albion-managed VCTs said: “Dividend generation has long been a feature of VCT strategy as it is a core tool in risk reduction – no matter what uncertainties are inherent in your portfolio of VCT investments, once a dividend has been paid no one can take it away again, and so an element of your return has been locked in.”
“Tax free income is clearly even more important now than ever, given the unusually high tax and low interest rates. VCTs, along with ISAs, are the only savings vehicles that can achieve this. And above this, investors like their dividend streams to be predictable and reliable, particularly if they’re using VCTs as ‘quasi pensions’”.
“VCT dividends are generated from two sources – revenue profits (for instance, from loan stock or dividend income from investee companies), and realised capital gains on the sale of an investment. The latter are more unpredictable, and so one method of ensuring a predictable dividend stream is to maximise the revenue profit generation ofÂ a VCT by having as much as possible in interest paying loan stock, while at the same time storing up realised capital profits and paying them out over time in a controlled manner to provide a stable level of dividends.”
Tim Levett, Chairman of NVM Private Equity Limited, Managers of the Northern range of VCTs, said: “Looking at the performance of the top Generalist VCTs over a ten year period, all funds have provided a steadily increasing regular dividend stream. Over the last five years, investors have been receiving regular dividends of at least 5p on a maximum investment net of tax relief of 80p, with capital value maintained and dividends received tax-free.”
David Thorp, Baronsmead VCTs, said: “It is the sale of successful investments in UK growth SME companies that generates the profits from which high and steady dividends can be paid.Â Many shareholders who invested in 1995 have stayed the course and dividends have been part of the glue over the longer term.Â Shareholders have told us that VCTs play an important part of their retirement planning.”
Stuart Veale, Managing Partner, Beringea Limited and Manager of Proven VCTs said: “The level of tax-free dividends being paid by VCTs is very attractive compared to the post-tax returns from many other investments.Â Furthermore, VCT shareholders are able to reinvest the income in additional VCT shares, thereby obtaining further tax relief.”
Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “AIC data on VCT dividends suggests that the sector is really delivering when it comes to producing a regular, reliable income for the good times and the bad.Â Of course there’s a broad spectrum of strategies and by their nature, VCTs are high risk and should be part of a balanced portfolio.Â There is lots of information on the AIC website – investors need to do their homework and, where necessary, seek independent financial advice.”
So maybe in these times of lower returns some people should be looking at higher risk to get the higher returns they are looking for.