For example, with millennials planning to retire later in life, capital growth becomes more important than obtaining dividends instantly. As a result, investors should pay more attention to the VCT reinvestment schemes on offer in order to compound their returns.
Equally, making use of the ability to recycle between VCTs offers reduced equity risk and compounds returns providing an additional source of uplift. These considerations could be key to capitalising on the full potential of VCTs for long-term pension planning.
Additionally, any VCT investor must be aware of the risks associated with investing in early-stage companies. Investors need to hold shares for five years to capitalise on the tax relief, and should be mindful that investing in start-ups can carry risks with the potential for volatile share prices.
For this reason, investing in VCTs is best seen as a long-term investment that must be carefully considered. Selecting the right VCT strategy is often the key to mitigating these risks.
Investors should also always remember that many start-ups do fail – about 20 per cent will fail in their first year with this figure rising to 60 per cent within the first three years.
While there are a variety of reasons for these failures, research by CB Insights suggests the primary reason for failure in almost half of cases is the lack of market need.
Traditionally, venture capitalists have tended to focus on researching a broad cohort of companies with the aim of identifying businesses that are likely to be successful. This research then underpins investment choice with the hope, rather than the expectation, that the market will validate this investment.
However, start-ups in certain sectors can provide greater chances of success. For example, high-growth B2B businesses accounted for 77 per cent of all exits in 2019.
The growing UK tech sector presents a huge opportunity for investors
VCT funds that target pre-Series A B2B technology start-ups tend to give better valuation on entry and, therefore, better returns to shareholders.
A solution can be selecting VCT funds that work with larger corporates to identify the problems they are facing in order to allow the identification of start-ups that are offering a solution to these very real problems. This approach can be crucial to solving the all-important issue of market need and reducing the risks of investing in early-stage businesses.
If investors pay careful attention to the VCT strategy being employed, this form of alternative investment can offer significant benefits.
A huge opportunity
The growing UK tech sector presents a huge opportunity for investors to back high-quality, better-capitalised companies with lower valuations. And VCTs can enable investors to capitalise on this sector: out of the 100 companies on the fast track list of UK tech companies with the fastest growing sales over the past three years, VCTs have invested in 15.
