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AIC - Feeding the Fledgling Economy

Posted by Jason Rolf on 13/Oct/2016

UK smaller companies (SMEs) are the lifeblood of the UK economy providing the bulk of new jobs growth nationwide. After the shock of the banking crisis in 2008 funding from traditional sources dried up and even now remains constrained, putting pressure on these small firms to find support elsewhere.

Venture Capital Trusts (VCTs) are one of the options available and they provide a vital conduit for growth capital to these firms despite a recent tightening of the rules around the types and age of the companies receiving the funding. Indeed, 2015 saw investment levels approaching those of the prior year despite the regulatory and compliance onslaught, the third highest on record over more than 20 years the Government backed VCT scheme has been in operation.

This pooled capital enables retail investors to benefit from fund manager's expertise in choosing the best opportunities together with the diversification of having a combined portfolio of investments.

According to the recently published "Feeding the fledgling economy" by the AIC two-thirds of companies supported by VCT investments have people from the VCT managers placed on the boards. This not only ensures oversight of the investments but often includes business support, advice and an excellent network from which to draw.

The report also highlighted where the money was distributed in 2015:

Sectors receiving greatest support:

Business Services
Digital, creative and information services
Retail
Manufacturing.

Average initial investment: £2m (range £50,000 to £5m)

Average R&D spend per company: £1.19m

Average turnover increase: £2.9m (per £1m invested)

Number of new jobs reported in VCT-backed businesses: 20,000


2015 Exports

The AIC report also showed that 194 of the VCT companies reported exports with a value of £1.2bn (40% of total sales) with the top 5 exporting no less than 67% of their combined sales – a hugely valuable contribution to the UK economy and a clear beneficiary of the weakening Pound.

Does the tax relief pay for itself?

Small companies, especially those involved in new, innovative high-growth sectors tend to be risky and many do fail early in their lives. However, the UK Government encourages support by offering generous tax-reliefs to individuals looking to invest via VCT schemes (30% income tax relief, tax-free dividends and no tax on any capital gains). This makes HMRC the single biggest investor and so it is vital that the schemes deliver a return in terms of increased employment which ultimately turns into increased tax revenue through higher tax receipts (source:

Research from HMRC itself produced evidence that since investment 71% of VCT (and EIS) backed businesses had reported a higher headcount with an increase of 24 per company for investments within the last 5 years and 103 for investments over 5 years.

Whether or not the upcoming exit from Europe brings some relief from the most recent regulatory burdens, the VCT scheme continues to prove itself.


The following are example case studies on investments by Amati VCT & VCT2 VCT which appear in the AIC's report "Feeding the fledgling economy":

LoopUp plc

LoopUp floated on AIM on 24 August 2016. LoopUp is headquartered in London, with offices in the US, Hong Kong, and Barbados, employing 66 people currently. It is focussed solely on providing remote meeting facilities (i.e. conference calls with file sharing) in such a way as to eliminate the numerous common frustrations and time-wasting experiences that are often associated with them. The value of the product is attested by the fact that 1,850 enterprise customers have signed up. The company raised £8.5m at float, of which £5m came from VCTs and EIS investors amongst which were the Amati VCTs. The company had around £10m of debt before flotation, as is typical of venture capital style funding, and the non-qualifying money was used to pay some of this down, whilst the debt holder also converted £4m to equity at the flotation price, leaving the company well financed from the qualifying funds for its next phase of growth. The company was founded in 2003, and raised some EIS money in 2006 for the same business it now conducts, thereby qualifying for follow-on funding. The company could not have floated in this way without the VCT backing, as the non-VCT demand on its own would not have been enough.

Science in Sport (SiS)

The Amati VCTs invested in SiS in April 2014 and October 2015 as part of two VCT-qualifying fundraisings. The first of these raised £2.3m, and the second combined qualifying and non-qualifying investment to raise £8.9m.  SiS is an AIM-listed sports nutrition company that develops, manufactures and markets products for professional athletes and sports enthusiasts.  The core product ranges include energy powders, isotonic gels, energy bars, recovery powders and ready to consume whey protein products.  The capital raised from allowed SiS to accelerate its growth through development of its e-commerce and international sales channels, specificially in the US and Australia, the world's largest sports nutrition markets.  SiS products are manufactured at their own facility in Nelson, Lancashire, where the company works closely with the LGC anti-doping laboratory to develop a testing system which minimises the risk of product contamination.  It is this level of scrutiny that has led SiS to be the official sports nutrition partner for some of the world's leading athletes, such as professional cycling teams Team Sky and Team Wiggins, the GB Rowing Team and the New Zealand All-Blacks rugby team.  More recently SiS was appointed the official sports nutrition partner to Liverpool Football Club for the 2016/2017 season.


Sources:

HMRC "The use and impact of VCTs"

AIC "Feeding the fledgling economy"