AIC classifications
| Sector | Investment policy is to invest in: |
| AIM | a range of qualifying companies listed, or about to be listed, on AIM or on any exchange where the securities are treated as unquoted. |
| Generalist | a range of qualifying investments in different sectors. |
| Specialist: Environmental |
environmental and alternative energy companies. |
| Specialist: Healthcare & Biotechnology |
healthcare and biotechnology companies. |
| Specialist: Media, Leisure & Events |
media, leisure and events companies. |
| Specialist: Technology |
technology companies. |
Source: AIC
VCTs are further divided between pre-qualifying and qualifying, based on the requirement for VCTs to invest 70 per cent of the money they raise in qualifying investments within three years. Whilst the sector classifications look at qualifying investments, VCTs can vary widely in terms of both their pre-qualifying and non-qualifying investment strategies.
Comparing the numbers of pre-qualifying and qualifying VCTs listed on the AIC website highlights the increase in specialist VCT offerings, and the decrease in AiM VCT offerings following the 2006 reduction in the maximum size of company qualifying for VCT investment.
Source: AIC
Source: AIC
Limited Life
Limited Life VCTs have risen in popularity, attracting approaching half the funds raised in the 2007/08 and 2008/09 tax years.
The AIC assigns a VCT to a sector and secondly identifies if it is Limited Life. Elsewhere, Limited Life is often treated as a ‘sector’ in its own right. Limited Life VCTs are designed to wind up and return funds to shareholders after a limited period of time, generally soon after the 5-year holding period for investors to retain their Income Tax relief. This means that investors realise their investment at net asset value compared to selling their shares in the secondary market or through a VCT manager buy-back scheme, which usually will be at a discount. The Limited Life investor can then re-invest in a new VCT to potentially receive Income Tax relief on the new investment (subject to future tax legislation).
Limited Life is a different proposition and usually demands a different investment strategy to conventional VCTs, which generally aim to provide a long-term stream of tax-free dividends. Whilst a conventional VCT manager can take a longer view than 5 years, the Limited Life Manager has to be focussed on being able to make exits at fair value on the required date.
Conclusion
VCT classifications can provide a useful first step in understanding a VCT’s investment strategy. However, they are no substitute for reading the prospectus as even VCTs in the same sector can be very diverse.
Philip Rhoden is a director at Clubfinance Ltd. The views expressed here are his own.