Venture Capital Trusts

Venture Capital Trusts
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Not all company shares are listed on the stock exchange, in fact in order to protect investors, listing requirements effectively bar recently established, smaller companies from having their shares traded on an exchange. However, it is frequently exactly these kinds of recently established companies that would benefit most from the access to capital that the stock exchanges can provide.

Venture Capital Trusts (or VCT’s) are investments companies, quoted on the stock exchange, which are set up with the specific aim of matching capital from private investors with recently established, growth-oriented smaller UK companies. The managers of a new venture capital trust have three years in which to choose companies to invest in and during this time monies raised from private investors will typically be invested in cash or bonds.

In order to encourage the entrepreneurial culture, successive governments have made sure that investors in venture capital trusts receive considerable tax advantages. In order to qualify as a venture capital trust, there are a number of conditions that the company must meet, dictating what it may invest in and the proportions in which it must be invested.

Although Venture Capital Trusts are quoted investments, just like any other security listed on an exchange, it is not always easy to buy and sell them in the market. As unquoted companies are difficult to value, the market price of a venture capital trust may not reflect the true value of it’s underlying investments in it’s portfolio. This also makes performance difficult to assess.

There are three broad types of venture capital trust - generalist, industry specialist and AIM quoted. An industry specialist venture capital trust tends to focus on technology or ecology companies with wind-farms a more common choice over the last few years. An AIM-quoted venture capital trust invests in smaller companies quoted on AIM, the junior partner to the main London Stock Exchange with significantly less strict entry requirements. Such companies will tend to be more secure than completely unquoted companies so as a result AIM-quoted venture capital trusts are considered to be somewhat less risky than others. Generalist venture capital trusts have specific mandate but will often seek out smaller companies that are already profitable and then structure their investment in such a way as to have both a direct equity and a fixed interest exposure.

Venture capital trusts are a high-risk investment as some start-up companies will ultimately fail. Although the various tax concessions are clearly attractive, they will do nothing to mitigate the underlying risk and private investors should always bear this in mind. It is also important that investors in venture capital trusts consider it as more of a long-term investment and to minimise the risk involved in investing in these, they should spread investment over various venture capital trusts.

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