how venture capital trusts vcts work
the british government introduced a series of venture capital schemes in 1995 these include the enterprise investment scheme seed enterprise investment scheme and venture capital trust scheme all three of these programs were designed to encourage the nation s private sector growth and generate investment from individual investors 1retail investors can purchase shares in venture capital trusts that are traded on major exchanges like the lse this allows investors to take part in the growth of smaller private up and coming businesses indirectly vcts fall under the purview of fund managers who work for investment firms the money from investors is pooled together and distributed to these businesses to help them grow 21certain criteria must be met in order for a fund to be classified as vct some of the main qualifications include the government exempts these trusts from corporate taxes on capital gains that arise from their investments they also provide investors with certain tax benefits including income tax relief for 30 for annual investments of up to 200 000 as long as they are held for a minimum of five years and a tax exemption on income derived from vct investment dividends investors can t defer capital gains taxes though 3although there is no direct stock exchange equivalent to vcts in the united states they are similar to business development companies which are corporations that invest in small and mid size companies as well as distressed businesses special considerationsinvestors who are interested in purchasing shares in vcts can do so directly through fund managers in new offerings shares can also be purchased on the secondary market on public exchanges in the united kingdom such as the lse fund managers usually charge fees that are higher than other investments that s because vcts can be fairly complex and often require more attention upfront fees can be as high as 5 while the annual management fees can be in the neighborhood of 2 2investors should be aware of the risks involved with vcts because of the nature and size of the companies involved investing in these funds may result in significant losses types of venture capital trustsvcts invest in different types of companies across various industries for fixed periods of time evergreen vcts invest indefinitely whereas certain short term venture capital trusts called limited life vcts are only designed to bring income for a few years there are also generalist vcts which are trusts that diversify across multiple sectors and industries and specialist vcts which focus on one sector at a time 2investors with a particular interest or background in technology can choose to hedge their bets on a specialist technology focused vct the final type of vct is called an aim venture capitalist trust it focuses on companies that are already public or are on the verge of becoming public on the lse s alternative investment market aim 32real world example of venture capital trustthe octopus titan venture capital trust is one of the country s largest vcts the fund is invested in more than 90 tech enabled companies with strong growth potential that are in the development stage including these companies comprise a variety of sectors the firm aims for dividends of around five pence per year additional dividends may also be allocated if businesses within the portfolio are sold at a high profit the fund returned 32 8 to investors in the year up to june 30 2021 4