Small companies are better able to deal with Brexit blows and the industry remains confident of the opportunities on offer
Brexit has unsettled investment markets but ‘nimble’ companies that are backed by VCTs are well placed to weather the potential storm.
With political turmoil front and centre of UK investors’ minds, it is no wonder the many investors are holding back until the outcome of Brexit negotiations are known, and whether prime minister Theresa May can even negotiate a deal by 29 March 2019.
There has been some concerns that Brexit will make small companies hold off raising money as well as investors holding off investing. VCTs have raised a lot of money and there is a worry they will find it difficult to hunt out enough good quality companies in the timeframe they need to.
At our recent Round Table discussion on VCTs, John Glencross, Chief Executive of Calculus Capital, said that Brexit will bring some problems for smaller companies, particularly around staffing as leaving the EU will mean the end of free movement of people.
‘If you look at most of our science-based companies, 60% working in them aren’t UK nationals,’ he said.
‘So there are concerns about the companies having access to the skills and expertise post-Brexit. There’s another issue for life sciences with regards to the registration and approval of treatment and medicine which may create specific problems.
Glencross says he does not think ‘Brexit has ever really favoured the smaller growth companies’.
David Lovell, Operations Director at Growthinvest, a platform that provides access to tax efficient investments, says the concern for many investors ‘there wasn’t a particular fear about the success of the companies, the main fear was talent, or they weren’t worried at all’.
Despite his concerns about losing talent from the country, Glencross says he is not concerned that VCT managers will not be able to invest the cash they have raised within the time they need to and there are plenty of investment opportunities at present.
‘It’s a very fertile time,’ he says. ‘I’ve lived through many cycles…I think we’re seeing a lot of opportunities, a lot of entrepreneurs are comfortable about raising money.
‘We have an incredible generation coming through and we’re seeing opportunities.’
However, he does add that ‘it concerns me seeing the amount of money raised last year, combined with the fact that the government increased the amount that had to be invested to 80%’.
‘A lot of people tried to get in ahead of those rules,’ says Glencross. ‘I don’t think it’s healthy to just be raising money because you can. I think it will be interesting to see how well it’s applied by some VCTs.’
VCTs do not want to remain in cash for too long and managers will have to look at what raise targets are to judge what is realistic.
Madeleine Ingram, Head of Investor Relations and Marketing at Calculus Capital, says ‘it’s a discussion to see how much is sensible to put as a target to raise’ and ‘the concern is about the quality being there’.
Glencross says some ‘VCTs are offering a higher valuation to companies in order to put their money to work’.
‘Your in-price has a direct bearing on your out-price,’ he says.
He adds that some VCTs ‘have their work cut out to deliver the same level of returns to investors’.
There are concerns about finding investment opportunities and there are also worries about the potential to make realisations at the other end.
Glencross says Calculus Capital investments are ‘uncorrelated with stock markets’.
‘We’ve lived in unreal times; interest rates have been at negligible levels, but also a large amount of money has been pumped into western economies, that’s now being reversed.’
The US Federal Reserve is taking millions out of the system each month as part of its quantitative tightening and this is creating ‘bottlenecks in some economies’, says Glencross.
When it comes to Brexit, he says whether there is a deal or not, ‘we’ll start to see growth’.
‘If we see interest rates rising…and money is taken out of the system, that’s a more challenging environment for stock markets,’ he says.
‘You’ll see fewer companies going public and you might also see lower exit values than before.’
Glencross says the ‘value of entrepreneurs’ is starting to be recognised and ‘they’re growing in confidence to raise money’.
Ingram, is positive that the opportunities for VCTs and entrepreneurs will not be dampened by Brexit and ‘small companies are quite nimble and can handle change’.
Investors and VCT managers will be hoping there is not a dearth of investee companies after Brexit, especially as the allowable investments for tax-advantaged products has been curtailed, with extra emphasis placed on the need to put money into growth investments, rather than capital-preservation investments.
Glencross says it is more apparent that the Treasury is now ‘concerned about value for the taxpayers’ pound’ and justifying the tax reliefs afforded VCTs.
‘They are so intent on ensuring there can be no accusation that tax breaks are going to people without appropriate risk,’ he says. ‘They’re looking more closely at what VCTs are doing.’
Annabel Brodie-Smith, Communications Director at the Association of Investment Companies, says the VCT industry needs to ‘make it very clear all the economic and social benefits [the investments] are bringing to the economy because those investments are creating jobs, so that will benefit everyone’.
With productivity the watchword of many developed governments as their economies struggle to boost how productive their workforces are, VCTs are going to be even more important for the economy due to their focus on technology.
‘They’re talking about productivity and productivity improvements, it’s not surprising [the government is] trying to make sure that there’s adequate investments going into technology and science as you can scale those businesses without a proportionate increase in cost,’ says Glencross.
‘You can’t scale low-risk investments without a comparable increase in costs.’
He says given these factors it was obvious why the Treasury is keen to ‘tell VCT and EIS managers why they should be investing in growth opportunities where there’s capital at risk’.
The government has made it clear what it expects from tax-advantaged investments.
Lovell says the government has ‘put a sensible framework in place, the rules have been defined’.
‘The Patient Capital Review outcome has had clear backing for investment in early stage businesses in the UK and they’ve given a good stamp to the frameworks in the EIS world,’ he says. ‘It’s interesting they’re still saying they’ll keep their eye on it.’