Venture Capital Trusts (VCTs) have shifted their annual fundraisings to the autumn, with many becoming oversubscribed before the year’s end. However, potential investors must tread carefully as rising interest rates and other economic factors pose risks to VCT investments.

1. Impact of Interest Rates: Higher interest rates have affected the valuations of both listed and unlisted growth companies, including those held by VCTs. Unlisted companies, valued based on multiples, have seen declines that outweigh their underlying growth due to a fall in publicly listed peers’ multiples.
2. Challenges in Valuation: Valuation of young businesses, often done through a price/sales multiple, has suffered due to rising interest rates. Despite operational success, small businesses’ valuations have declined as multiples fall faster than sales grow.
3. Opportunities Amidst Challenges: Despite economic challenges, certain sectors like business-to-business (B2B), data, and artificial intelligence have shown resilience. Companies with recurring revenue and essential software offerings have performed well, providing potential investment opportunities.
4. Potential Performers: Several VCTs have been identified as potential performers in the current climate. British Smaller Companies VCTs, Octopus Apollo VCT, Triple Point Venture VCT, and Pembroke VCT are among those focusing on areas with long-term structural tailwinds.
5. Assessing Risks and Benefits: Investors should be aware of the high-risk nature of VCTs, particularly during periods of economic uncertainty. Smaller companies are more vulnerable to funding challenges and cost inflation. However, patient investors holding VCT shares for at least five years can benefit from 30% income tax relief.
6. Time Horizon and Considerations: While shorter-term performance may be uncertain, VCTs are long-term investments, and innovative disruptors can thrive independent of GDP growth. Investors are compensated for higher risks with tax relief, but a realistic time horizon of seven to ten years is suggested to assess the full potential of VCTs.
7. Manager Selection and Diversification: Choosing VCTs with experienced managers, distinctive and repeatable processes, and broad-based portfolios is crucial. Diversifying across multiple VCTs can help mitigate risks and enhance the overall portfolio’s resilience.

Venture Capital Trust investments present both opportunities and challenges in the current economic landscape. As with any investment, thorough research, a clear understanding of risks, and a strategic approach to manager selection and portfolio diversification are essential for potential investors considering VCTs.

To secure exceptional talent for your private equity firm or portfolio company, please reach out to Raw Selection’s Managing Partner, Alex Rawlings, at Alex.Rawlings@Raw-Selection.com to discuss your requirements and how we can help you identify the best talent.