What Are Venture Capital Trusts?
Entrepreneurs often need cash to grow their businesses. Sometimes, however, the amounts of money needed are too high to interest angel investors and not high enough to attract corporate venture capital. If so, venture capital trusts (VCTs) can be the answer.
Young CompaniesVenture capital trusts began in the 1990s. In return for tax relief, VCT investors offer risk capital to small and medium-sized (SME) UK businesses. The amounts of capital fall within £750,000 and £2 million.
This means that VCTs are often ideal sources of funding for young companies. These are businesses where entrepreneurs have taken them as far they can but cannot expand without a cash injection.
The Basic RulesThere are several rules relating to venture capital trusts and the entrepreneurs who apply to them for funding.
- Venture capital trusts must not invest more than 15% of their assets in one company. The entrepreneur must conduct his or her business wholly or mainly in the UK. From 2010, however, EU legislation changes this rule: entrepreneurs can apply for VCT funding as long as they have a UK permanent base.The entrepreneur who receives VCT money must use it for a qualifying trade. These are trades other than the ones listed below.
Non-Qualifying TradesEntrepreneurs who work in one of the following sectors don’t qualify for venture capital trust money: accountancy; banking; commodities; farming; forestry; hotel management; insurance; land deals; leasing; nursing homes; property; securities and shares.
Other CriteriaVCTs cannot invest in qualifying companies that have more than 50 staff. They must also invest 70% of their available funds within the first three years of trading.
Qualifying companies cannot receive more than £2 million from venture capital trusts. They must also have fewer than £7 million in gross assets before a VCT investment and fewer than £8 million of gross assets after the investment has run its course.
Four TypesThere four types of VCT investment: AIM, generalist, specialist and hybrid.
AIM venture capital trusts put money into companies listed, or which may soon have listed status, on the Alternative Investment Market (AIM). The Alternative Investment Market is part of the London Stock Exchange. Its listings are relatively small companies that offer shares for sale in a system that’s more informal than the main Stock Exchange.
Generalist VCTs are interested in non-AIM companies. They give money for company growth and management buyouts. They may even consider business start-ups.
Specialist VCTs build up expertise in areas such as the media. They prefer to limit their investments to these specialised industry sectors.
Hybrid venture capital trusts have a more flexible approach to investment. They consider applications for funding from all qualifying companies.