The Covid-19 crisis has plunged markets into volatility and many traditional assets, including equities and bonds, have suffered as a result. 
In this environment, investors are increasingly seeking safety in alternative assets offering uncorrelated returns that are more sheltered from falling markets. The Covid-19 impact we are currently witnessing is mostly sector-specific and, consequently, investors are looking to access those sectors that are least affected. Many industries have had an incredibly tough time during the pandemic, such as those operating in leisure, tourism, hospitality, travel and airlines.
However, a number of venture capital trust (VCT) managers have identified those sectors which have been affected to a much lesser extent by the current economic circumstances. In most instances, these have little or no direct exposure to the consumer and benefit from broader trends which have been accelerated by the crisis.
Sector-specific opportunities
Two such sectors that have demonstrated what Albion describes as resilient growth – companies that were growing and have continued to grow irrespective of the pandemic – are healthcare and B2B software. These companies have shown resilience in the face of a pandemic as well as during these tough economic times.
Healthcare companies may well have demonstrated growth without a pandemic; companies such as Proveca which re-engineers medicines, have continued to grow and secure licenses for its products which are used to treat seriously ill children. Similarly, Healios, a digital platform which provides family-centric psychological care, is demonstrating growth providing remote treatment, an existing healthcare trend that has continued this year and has indeed accelerated as a result of the current circumstances.
We have also seen resilient growth in one of our core focus sectors, B2B software, again as a result of Covid-19, where you are seeing enterprises ramping up their IT infrastructure to facilitate their workers to work remotely. Many businesses had gone some way down this route before the pandemic but there remains much to be done. Companies such as Egress, experts in data security, have been able to sign up significant customers, such as the NHS, where large swathes of staff were sent home to work, yet continue to deal with sensitive data and information.
Other sectors that have flourished during the pandemic include collaboration technology, with the fortunes of the likes of Zoom and Slack rising exponentially as people increasingly work from home and online gaming (for the same reason).
VCTs have enabled private investors to access UK small companies in sectors continuing to demonstrate growth at a time when growth is so elusive. The added bonus for investors is greater portfolio diversification in alternative assets whilst actively supporting growing innovative UK businesses.
Accessing unquoted tech opportunities
Certain VCT portfolios are designed to be all-weather to cope with an economic shock rather than a healthcare pandemic, but the focus on core growth sectors has enabled these portfolios to maintain momentum. If you look at the broader stock markets, consumer-facing has had a dreadful time this year; it is the likes of the US giant ‘tech’ stocks (such as Facebook, Microsoft, Zoom), software and healthcare companies that have had extraordinarily strong performance seeing their share prices rise. VCTs provide a way for private investors to access the next potential generation of these types of companies in the UK market; there are a lot of tech companies here to back and investors can get exposure to these emerging opportunities.
There are other ways to invest in smaller, tech-based companies in the UK, such as investment trusts. However, through VCTs you can not only get access to early-stage companies in a tax-efficient and advantageous way, but they will also help rebuild the economy post-Covid.
The recovery of the UK economy needs to be driven by growth-oriented SMEs (small- and medium-sized enterprises) and by investing in VCTs, investors can gain access to sectors that have demonstrated resilient growth during Covid-19 and will continue to grow after the pandemic. This way, investors can share in the recovery of the UK’s economy. Many industry sectors are going to look very different in the ‘new normal’ and we need to focus on those sectors that are going to enjoy significant growth. The clients of financial advisers investing in VCTs will be proud of their role in the UK’s technology-driven resurgence.
Tax-efficient incentives
VCTs offer investors exposure to young and dynamic businesses that are often not beholden to the wider fortunes of the UK economy but instead are capitalising on their own specialist niches and growth prospects. Investing in VCTs carries welcome tax relief to encourage investment in these smaller, higher-risk companies. By pooling investors’ money, VCTs allow a spread of risk over a number of small and medium-sized companies.
Currently, the income tax relief on newly issued VCTs is 30 per cent on investments of up to £200,000 per tax year. The relief is provided as a tax credit against an individual’s total tax liability, but they must hold shares in a VCT for at least five years to keep the income tax relief.
Investors in VCTs receive an attractive tax break because the government is leveraging private money through this successful investment scheme – with £619m being raised in the 2019/20 tax year – which it deems a good way of supporting the existing UK business infrastructure. However, potential VCT investors should not forget that the tax break also compensates them for the inherent riskiness of investing in potentially volatile small technology companies. Finally, if a call were to be made to the government, it would be that when the UK finally leaves the EU, it would be beneficial if a modest adjustment were made to the rules to allow VCTs to invest in portfolio companies for longer, in line with the conclusion of the Patient Capital Review, rather than facing the risk of selling these companies early, potentially to new foreign owners. In this way, UK investors would be able to share and continue to be a part of the rebuilding of the British economy.
Will Fraser-Allen is managing partner at Albion Capital. The views expressed above are his own and should not be taken as investment advice.