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A venture to close equity gap

SOPHISTICATED investors prepared to accept greater risk now have the chance to include venture capital trusts as part of their portfolios, writes Alison Eadie.

Venture capital trusts, first announced in the November 1993 Budget, are a new form of tax-efficient investment. They are expected to be up and running by late summer, once the Finance Bill gains Royal Assent. As yet only two fund managers have committed themselves to launching VCTs, although several more have expressed interest.

The fine detail is still being thrashed out between the Inland Revenue and the British Venture Capital Association. But the broad parameters are known.

In his first Budget, Kenneth Clarke, the Chancellor, offered exemption from income tax on dividends and capital gains tax on the disposal of shares for VCTs. Since then, he has added two more tax breaks to VCTs. Income tax relief at 20 per cent is now allowed on up to £l00,000 subscribed per year in a VCT, provided the shares are held for five years.

Rollover relief from capital gains tax is also on offer, as long as the gain from the sale of any asset is reinvested in a VCT.

Mr Clarke's refusal to bow to the BVCA's lobbying and raise the investment limit per company above £1m means managers with higher overheads doubt they can run VCTs profitably. Murray Johnstone, in Glasgow, is one company that believes it can do so, however.

The firm says its regional infrastructure, with offices in Manchester, London and Birmingham, gives it the right cost base to make money out of VCTs. It plans to raise £30m for companies needing expansion finance, for a few earlier-stage projects and possibly for small management buy- outs - if rules permit. Iain Tulloch, investment director of Murray Johnstone, thinks the £1m ceiling is right.

The key is to tap into the regions for potential businesses and into the "business angel" network of investors prepared to back small new companies, both with finance and management input.

One aspiring businesswoman who has benefited from an injection of private capital is Sam de Teran, a designer. About 18 months ago she received help from the Milton Group, a privately run firm interested in backing the start-up of her design and wholesaling business.

Since then her business has continued to prosper. Ms de Teran said: "Things are going fine. My sportswear is now sold at Harrods and Harvey Nichols, Fenwick and House of Fraser. When the Milton Group first invested in me I was only designing swimwear. I have now expanded to include gym, tennis and ski wear."

Mr Tulloch hopes angels will use their Enterprise Investment Scheme tax relief to reinvest with Murray Johnstone and will give the benefit of their business experience to small and growing companies in the VCTs.

Murray Johnstone's four offices will have to find a total of 35 investments over three years, assuming an average investment of £600,000.

Rothschild Asset Management plans to raise £10m for a VCT specialising in food companies, which it claims are more easily understood by private investors than hi-tech companies. The average size of investment is expected to be £500,000 to £750,000.

There are still some doubts over VCTs. Some fund managers are concerned that pressure to invest quickly could harm fund performance. This is because VCT rules stipulate that 70 per cent of the money raised must be invested in unquoted companies within three years. 3i, Britain's largest venture capital provider, with a network of offices that makes it a natural for VCTs, has not yet thrown its hat into the ring.

Charles Richardson, director of corporate affairs, said 3i was very positive about VCTs but might use other fund managers' trusts as syndication partners rather than launch its own.