New data provided by the Association of Investment Companies confirms Proactive’s recent coverage of venture capital trusts (VCTs) pointing to a substantial, yet not disastrous, downturn in fundraising and deployment for the tax-advantaged market.
In the 2023 calendar year, VCTs invested £506 million in new and follow-on investments in small private and AIM-listed companies.
This was a 28% decrease from 2022 when VCTs invested £705 million in new and follow-on investments in private companies and AIM-listed companies.
However, the wider venture capital industry in the UK and Ireland fared worse, suffering a 46% decline in year-on-year deal activity, per the Pitchbook European Venture Report.
“Last year VCTs’ investment in private companies slowed due to challenging investment conditions,” said AIC chair Richard Stone, who noted that businesses had to adapt to higher interest rates and sluggish economic growth, which impacted valuations and deal times.
“However, VCT investment activity held up better than the broader venture capital industry,” Stone continued. “VCTs have many advantages for investors, including attractive tax benefits and good long-term performance, and their investee companies create jobs and social benefits for local communities across the UK.
“These advantages help to shore up capital raising in difficult economic conditions and give VCT managers confidence to continue investing in tough times, when other venture capital investors are pulling back.”
Ewan MacKinnon at Maven Capital Partners also sparked a cautiously optimistic tone: “The first half of 2023 was certainly sluggish in terms of quality new opportunities, in line with the trend across the market, due to uncertainty arising from the Budget turmoil in late 2022.
“However, in the second half of 2023 and early 2024, we’ve seen an encouraging increase in activity and opportunities as economic conditions have improved and deal flow has now largely recovered across our UK regional teams.”
Estimated fundraisings across the whole VCT space for the current tax year ending 5 April are between £600 million and £700 million, a hefty 35% to 45% year-on-year decline, bringing the sector back in line with pre-pandemic levels.
Will Fraser-Allen, managing director at Albion Capital Group, agreed that the market is naturally going to be smaller this year, but it’s not something to be “overly alarmist about”.
“We're sitting at a point where the market valuations are sensible,” said Fraser-Allen. “There’s value to be had, rather than at 16-times revenues when you’re valuing an awful lot of the future performance when you’re paying.”