Ben Yearsley: When banks can't help you grow, try the VCTs

The Analyst

I am departing from the norm this week to write about a higher risk investment with some excellent tax benefits, and one that is playing an increasingly important role in the UK economy.

Over the next decade the balance between public and private sectors will change. Public-sector employment will fall and the private sector will be called upon to take up the slack, so it was encouraging to note GlaxoSmithKline's recent announcement of 1,000 new jobs at its new R&D facility. Yet it is the smaller companies where many new jobs will have to come from and because they lack the resources of larger firms they often need help to expand. Unfortunately smaller companies tend to rely on banks for borrowing and they are reluctant to lend at present. So who can lend to small businesses if banks can't?

One source of funds is venture capital. Venture capital trusts (or VCTs) aren't suitable for everyone as they are higher risk, long-term investments, but they do come with some very generous tax advantages for investors subscribing for new shares (see below). VCTs invest in small and growing businesses with no more than 50 employees, providing finance for these companies to develop, or for management teams to buy a business from its present owner. This could be a halcyon period for VCTs as they have the pick of the opportunities, but it won't last forever as the banks will gradually return at some stage.

There will probably be in excess of 30 VCTs seeking funds in the coming months and, as with any investment, there are both good and bad. Their strategies vary significantly, so if you are contemplating VCTs please make sure you know what you are getting into. One that I will invest in is Elderstreet VCT, a fund with a bias to software companies. It is a traditional VCT, genuinely investing in small, developing companies, aiming to grow them over time. Elderstreet's founder, Michael Jackson, was chairman of the accountancy software firm Sage for many years, taking it from a small company to the FTSE 100. Clearly this doesn't happen with every investment, and some businesses inevitably fail along the way, but the winners should more than make up for the failures over the long term.

One common misconception about VCTs is the level of risk. Admittedly they are higher risk and should be held for 7-10 years or more, yet most VCT managers avoid "blue sky" start-up companies. Instead they look for established firms with proven business models that are looking to expand. Once an investment is made, nurtured, and helped to grow, the manager will look to sell it, probably after 3-5 years. Any profit is then generally repaid to investors as a tax-free dividend – another one of the tax breaks available. Over the last four or five years many VCTs have been consistent with dividend payments, and tax-free yields of 5-6 per cent are commonplace.

The Elderstreet VCT is small in size at only £18m, though it has investments in over 20 companies. As an investor in this year's fundraising, you can benefit from a 30 per cent upfront income tax relief (provided you have paid sufficient income tax), and because it is an existing fund you gain access to a mature portfolio, which should mean an earlier dividend stream from businesses that are sold plus income from loans to the underlying businesses. The fund features a number of software businesses but it also has a wide range of other companies including engineering firms, a vending machine operator and a packaging business. Common to all is Elderstreet's hands-on approach. The investment team typically take positions on the boards of the companies.

I have been saying for the past 18 months that it is a good time to invest in VCTs due to the absence of bank financing. The situation persists, so this year could again be a particularly good vintage for those prepared to invest for the long term, and Elderstreet VCT is certainly one to consider.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
PROMOTED VIDEO
Arts and Entertainment
Robert De Niro, Martin Scorsese and DiCaprio, at an awards show in 2010
filmsDe Niro, DiCaprio and Pitt to star
News
i100
News
In this photo illustration a school student eats a hamburger as part of his lunch which was brought from a fast food shop near his school, on October 5, 2005 in London, England. The British government has announced plans to remove junk food from school lunches. From September 2006, food that is high in fat, sugar or salt will be banned from meals and removed from vending machines in schools across England. The move comes in response to a campaign by celebrity TV chef Jamie Oliver to improve school meals.
science
Sport
England captain Wayne Rooney during training
FOOTBALLNew captain vows side will deliver against Norway for small crowd
Life and Style
Red or dead: An actor portrays Hungarian countess Elizabeth Báthory, rumoured to have bathed in blood to keep youthful
health
News
peopleJustin Bieber charged with assault and dangerous driving after crashing quad bike into a minivan
News
peopleHis band Survivor was due to resume touring this month
News
people'It can last and it's terrifying'
Life and Style
fashionModel of the moment shoots for first time with catwalk veteran
Sport
Radamel Falcao poses with his United shirt
FOOTBALLRadamel Falcao's journey from teenage debutant in Colombia to Manchester United's star signing
Life and Style
fashionAngelina Jolie's wedding dressed revealed
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Front-Office Developer (C#, .NET, Java,Artificial Intelligence)

    £30000 - £45000 per annum + benefits+bonus+package: Harrington Starr: Front-Of...

    C++ Quant Developer

    £700 per day: Harrington Starr: Quantitative Developer C++, Python, STL, R, PD...

    Java/Calypso Developer

    £700 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, J2EE, J...

    SQL Developer

    £500 per day: Harrington Starr: SQL Developer SQL, C#, Stored Procedures, MDX...

    Day In a Page

    Chief inspector of GPs: ‘Most doctors don’t really know what bad practice can be like for patients’

    Steve Field: ‘Most doctors don’t really know what bad practice can be like for patients’

    The man charged with inspecting doctors explains why he may not be welcome in every surgery
    Stolen youth: Younger blood can reverse many of the effects of ageing

    Stolen youth

    Younger blood can reverse many of the effects of ageing
    Bob Willoughby: Hollywood's first behind the scenes photographer

    Bob Willoughby: The reel deal

    He was the photographer who brought documentary photojournalism to Hollywood, changing the way film stars would be portrayed for ever
    Hollywood heavyweights produce world's most expensive corporate video - for Macau casino

    Hollywood heavyweights produce world's most expensive corporate video - for Macau casino

    Scorsese in the director's chair with De Niro, DiCaprio and Pitt to star
    Angelina Jolie's wedding dress: made by Versace, designed by her children

    Made by Versace, designed by her children

    Angelina Jolie's wedding dressed revealed
    Anyone for pulled chicken?

    Pulling chicks

    Pulled pork has gone from being a US barbecue secret to a regular on supermarket shelves. Now KFC is trying to tempt us with a chicken version
    9 best steam generator irons

    9 best steam generator irons

    To get through your ironing as swiftly as possible, invest in one of these efficient gadgets
    England v Norway: Wayne Rooney admits England must ‘put on a show’ to regain faith

    Rooney admits England must ‘put on a show’ to regain faith

    New captain vows side will deliver for small Wembley crowd
    ‘We knew he was something special:’ Radamel Falcao's journey from teenage debutant to Manchester United's star signing

    ‘We knew he was something special’

    Radamel Falcao's journey from teenage debutant to Manchester United's star signing
    'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

    'I’ll tell you what I would not serve - lamb and potatoes'

    US ambassador hits out at stodgy British food
    Radio Times female powerlist: A 'revolution' in TV gender roles

    A 'revolution' in TV gender roles

    Inside the Radio Times female powerlist
    Endgame: James Frey's literary treasure hunt

    James Frey's literary treasure hunt

    Riddling trilogy could net you $3m
    Fitbit: Because the tingle feels so good

    Fitbit: Because the tingle feels so good

    What David Sedaris learnt about the world from his fitness tracker
    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Saudis risk new Muslim division with proposal to move Mohamed’s tomb

    Second-holiest site in Islam attracts millions of pilgrims each year
    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York