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Venture capital trusts are delivering resilient growth in the current environment

“The added bonus for investors is portfolio diversification in alternative assets whilst actively supporting growing innovative UK businesses,” says Albion Capital managing partner Will Fraser-Allen

Albion Capital Group -
Collabortative software has seen a boom in the pandemic

A number of managers of venture capital trusts (VCT) have been investing in sectors that have been less affected by the current economic circumstances and indeed are being driven by trends that have accelerated by the crisis.

In doing so, VCTs have enabled private investors to access UK small companies in sectors continuing to demonstrate growth at a time when growth is so elusive, says Will Fraser-Allen, managing partner at Albion Capital Group, in a recent op-ed.

With the COVID-19 crisis having plunged markets into volatility, with many traditional assets, including equities and bonds, suffering as a result, Fraser-Allen said 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 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.”

He highlights two such sectors that have demonstrated this resilient growth: healthcare and B2B software, both of which 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, has continued to grow and secure licenses for its products which are used to treat seriously ill children.”

Another company that has been backed by the group’s VCTs is Healios, a digital platform which provides family-centric psychological care.

It is demonstrating growth from providing remote treatment, an existing healthcare trend that has continued this year and has accelerated as a result of coronavirus lockdowns.

Tapping into the same wider drivers that have seen the fortunes of Zoom and Slack transformed this year as households and organisations find new ways of connecting remotely, and companies ramp up IT infrastructure to enable their staff to work remotely, Albion’s stable of six VCTs has also backed innovative B2B software providers in the UK.

Fraser-Allen highlighted portfolio company Egress, an expert in data security, which have been able to sign up significant customers, such as the NHS, where large swathes of staff were sent home to work but still deal with sensitive data and information.

“Many businesses had gone some way down this route before the pandemic but there remains much to be done,” he says.

Overall, this has provided further evidence of VCTs enabling private investors to access UK small companies in sectors continuing to demonstrate growth at a time when growth is elusive.

“The added bonus for investors is greater portfolio diversification in alternative assets whilst actively supporting growing innovative UK businesses,” Fraser-Allen adds.

Accessing unquoted tech opportunities

Many VCT portfolios are designed to be “all-weather” to cope with an economic shock rather than a healthcare pandemic, the Albion managing partner says, 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.

To invest in smaller, tech-based companies in the UK, many investors use investment trusts, though Fraser-Allen points out that through VCTs investors can not only get access to early stage companies in a tax efficient and advantageous way, but they should also help rebuild the economy post-Covid.

“The recovery of the UK economy needs to be driven by growth oriented SMEs 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.”

Currently, investors can get 30% income tax relief on investments of up to £200,000 per tax year in newly issued VCT shares.

The tax relief is provided in the form of a tax credit against an investor’s overall income tax liability in a tax year, 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 wants to encourage the support of small growth companies, with the large tax break designed to compensate backers for the inherent riskiness of investing in potentially volatile small technology companies.

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