Venture Capital Trusts

jamesd

Better_Call_Saul wrote: »

I'm looking to diversify my portfolio at the start of next year and have recently been reading good things about VCT's. Does anybody on here have any experience of these?

No experience holding them yet but I've been looking at them and expect to start using them this year, replacing ISA with VCT for a few years.

In my situation I'm going to be shifting money from savings and investments inside and outside ISA into pension and VCT. I expect to continue to do this until I no longer have enough taxable income to make it worthwhile. A later phase of this will be using my basic rate income tax band to withdraw money from pension pots via VCT so I make a tax gain from moving the money from pension into ISA.

That usage is uncommon. VCTs are more often used by those who have used their whole annual pension allowance and the whole ISA allowance and still have more money that they want to invest with tax breaks.

Whatever your reason for using VCTs it's unlikely to be prudent to have more than 25% of investments in them, nor to have more than 5% or at most 10% in a single VCT.

jamesd

bowlhead99 wrote: »

The comment about 2-3 years was basically that the company may end up with a good investment that they exit in a short space of time, because the time is right to exit it or they have an offer too good to refuse. Therefore the company will be reporting an excellent exit multiple in a short space of time, or a great IRR.

That does happen but it appears that VCTs are tending to make some use of AIM investments to reduce this effect for at least some of the money that isn't in their primary target investment area. It's one reason why it's not a good idea to intend only the minimum five year holding needed to keep the 30% tax relief, the other being the returns coming from income and the often lower sale prices if you sell at that point instead of giving it more time.

Reaper

jamesd wrote: »

A later phase of this will be using my basic rate income tax band to withdraw money from pension pots via VCT so I make a tax gain from moving the money from pension into ISA.

That's an interesting and unusual strategy, I may consider a watered down version in the future. The downside is you may need to invest a larger proportion of your wealth in VCTs than I would feel comfortable with.

Whatever your reason for using VCTs it's unlikely to be prudent to have more than 25% of investments in them

I think I'd prefer a maximum of 10% in total and I am well short of that currently.

bowlhead99

It's one reason why it's not a good idea to intend only the minimum five year holding needed to keep the 30% tax relief, the other being the returns coming from income and the often lower sale prices if you sell at that point instead of giving it more time.

I concur!

Most stock market investments are not suitable for only a five year holding period as markets can move anywhere in that time, it might be less than one economic cycle.

Just because the government mandates that you hold for at least five years for the tax break, you shouldn't think of that as a target exit date. If you rush for the door on the anniversary of a funding round you will be doing it at the same time as other investors who are all cashing in their chips without regard for the quality of the portfolio and you may face a large bid-offer spread on the secondary market together with a discount to NAV. Really you should stay in and receive the full value of the dividends being paid out and get the real value from the mature portfolio rather than a firesale price.

As mentioned there are of course some which are touted as lower risk where the tax break is the main attraction. I'd prefer good fund management and long term sector exposure to be the main attraction of this type of investment, with the tax break an extremely welcome bonus but not the entire raison d' etre.

jamesd

bowlhead99 wrote: »

Most stock market investments are not suitable for only a five year holding period as markets can move anywhere in that time, it might be less than one economic cycle.

Indeed!

It happens that almost all of my own investing has been done in only one cycle. In early 2008 my investment value was under 20k with more than that in savings. It's now more like 16 times that, with lots of money added along the way and savings not much higher. It's been a great time to be investing but it's also one reason I'm interested in diversifying a fair bit out of conventional equity investments. I know there's a bust on the way, I just don't know when or how deep.

bowlhead99 wrote: »

As mentioned there are of course some which are touted as lower risk where the tax break is the main attraction. I'd prefer good fund management and long term sector exposure to be the main attraction of this type of investment, with the tax break an extremely welcome bonus but not the entire raison d'etre.

I'll happily have some of each but I'm not very keen on the early exit types that are really heavily oriented towards fixed and short end dates. I'll probably experiment with one of them but it's not going to be my core holding set. Partly because of the legislative risk, partly because of the cost in lower investment returns that they can deliver.