James Ramsay, Head of Investment Product Management  | March 2025 

In this article, James discusses the advantages of investing in a new AIM VCT, including the benefits of fresh investee companies valued at current prices, and the expertise of specialist investment managers.  

2025 has been touted as the year of Venture Capital Trusts (VCTs) for a multitude of reasons. The attractions include the potential for boosting growth in a falling interest rate environment, pushing up returns with a well-supervised injection of risk, offering tax-free capital gains in the context of a reduced annual exempt amount and mandatory increases required of pension funds to diversify mainstream portfolios into growth capital. By 2027, they will also represent a route to reclaim income tax when withdrawing excess cash from pensions, as it becomes exposed to inheritance tax. New products and vehicles that can learn from the past, can be better designed to capture these future opportunities. 

A familiar format

Most advisers are familiar and comfortable with the listed security format of VCT shares, which provides regulatory scrutiny and a degree of liquidity. The same cannot always be said of the underlying investments VCTs select, which are generally unquoted, harder to value and less transparent in terms of publicly available information and governance.   

That is why some specialist VCT investment managers seek to leverage their expertise in stock picking on the Alternative Investment Market (AIM), one of the few stock markets where shares can qualify for VCT tax reliefs. The combination of attractive VCT reliefs on better understood, listed investee companies, makes for a compelling diversifier away from unquoted companies. Not only does AIM host great opportunities in the form of the smaller, younger companies that VCTs target, but it has traditionally garnered less attention from VCT managers, who have poured the vast majority of an oversupply of capital raised in recent record funding rounds into unlisted, private businesses over the last few years. This is well evidenced by over 12 new generalist VCTs being launched over the last decade, versus no new AIM VCTs¹. 

Deployment discussion 

The size of inflows into venture investments has proved problematic, as since 2017 VCTs have had to refine their underlying trades to comply with the new rules of the Risk to Capital condition. As a result, the market has become “tech-heavy” and dominated by generalists with similar strategies, generating growing competition for the same deals and added concentration risk. 

Of course, given the limited size of AIM, and the VCT rules that dictate strict deadlines of 12 months for at least 30% of funds raised to be deployed and three years for at least 80%, it appears that there may also be some VCT investment managers that raised more funds than they can deploy in a timely manner, and according to their mandated processes, targets and risk tolerances. Established AIM VCTs have had to branch out into unquoted investments as well as AIM listed ones. This would not have been an issue, had the AIM VCTs had the appropriate governance and support structures for the ordinarily more attention-intensive unquoted companies. This has often led to substantial underperformance. A new AIM VCT will not have these same supply constrictions, and one set up alongside an market-leading unquoted VCT team, will have fewer concerns about allocating to unquoted investments in the appropriate manner, through the appropriate processes, and only if needed. 

The benefits of a new AIM VCT 

George Clelland, Investment Product Manager at Puma Investments, has suggested that, “Being forced to invest for the primary purposes of meeting timelines, rather than to take advantage of strong drivers of growth and/or income, is far from ideal. Some AIM VCT managers have likely found themselves in that position after large fundraisings since 2020, as evidenced by generally poor performance.” However, it’s not a headache for Puma’s new AIM VCT, which launched last year.  

This is the type of legacy issue clients need to consider, when thinking about investment in long-standing VCTs. In addition, a new AIM VCT does not carry any baggage. The majority of established VCTs’ investments will have been made prior to the venture market’s readjustment in 2022, and the investment case for many of them, and the prices paid, have not stood up to the current climate; a new VCT cannot have that problem. Since there will likely be some investors who feel more secure with a portfolio starting in cash now, and not having to risk paying elevated NAV costs for existing underwhelming companies, a new AIM VCT could be appealing. 

Another advantage is that, as they become established, AIM VCTs can realise holdings gradually, perhaps selling portions of a holding when it has done well – rather than having to sell all of it as often necessary with an unquoted holding. This means they can continue to hold companies which are doing well and might start to pay dividends. It offers risk mitigation tools around concentration risk, a risk prevalent in the historically highest-performing VCTs. Buy low and sell high. 

Diversification in a high risk space is often sought by advisers – and is an excellent way for them to add value to their clients for their fees. Advisers should be considering a blend of generalist and AIM VCTs, as well as pre- and post-2022 VCTs. So it’s well worth contemplating whether a new AIM VCT is a good investment fit for any of your clients. 

For investment professionals only.

Sources

¹ London Stock Exchange