David Hall, Executive Chairman

Thought leadership

VCT investment rates set to surge through £1bn in the pandemic

Investments by Venture Capital Trusts (VCTs) into some of the UK’s smallest but fastest growing businesses look set to pass £1billion through the pandemic and, with these young businesses needing more support, it is likely the rate will increase further through the winter months and beyond.

VCTs are listed investment funds that raise their money only from private investors, almost exclusively based in the UK, and are focussed on investing in young UK domiciled companies, generally less than 10 years old. With YFM Equity Partners (YFM) having last year celebrated the 25th anniversary of  the listing of our managed VCT, British Smaller Companies VCT, which was followed by the launch of British Smaller Companies VCT2 five years later, our two trusts are today worth in excess of £275m and investing into dynamic, early stage businesses across the UK is at the core of what they do.

For the self-employed entrepreneurs running these businesses that are the engine of economic and employment growth, 2020 and 2021 have presented plenty of challenges as they try to plot a course through from survival to re-acceleration. During this period, UK VCTs have invested in over 200 businesses, adding them to their portfolios whilst at the same time investing a further £300 million into those they have already backed.

With well over £5bn invested, the demand for further funding as companies seek to scale looks set to rise to even greater levels in 2022. This demand criss-crosses the UK and covers a diverse number of activities. Examples of some of the businesses to receive investment from our VCT funds during the pandemic include Manchester-based product intelligence platform Vypr; film and TV visual effects company Outpost VFX in Bournemouth; and marketing automation platform Force24 in Leeds.

At the point of investment, the typical business backed by VCTs is 4-5 years old with 20-30 staff and sales of between £2m-£5m. The initial funding tends to support investment in people and products, often including expanding sales and marketing teams as the business seeks to grow its customer base in the UK and overseas.

Excluding any existential pandemic, the risks faced in scaling a small business in both their domestic and global markets are high. The businesses will need to expand their close core management team at pace, recruit new staff, develop whole new functions within the business, overhaul sales and marketing operations, review UK and overseas partners, and, whatever the service or product, it will no doubt be edited, changed, enhanced, all in response to the customer adoption. Given the seismic changes needed, many management teams find that having a supportive and experienced investment partner working alongside them as they undertake their growth journey is invaluable.

As businesses scale, they often return for further funding and VCTs are ideally placed to meet this rising demand of investment. The trusts have been around now for 25 years and can provide truly patient capital, investing multiple times over many years as businesses grow, develop and adapt their plans.

Whilst investment rates have been strong through the pandemic and look set to increase further into 2022, that’s only part of the story. YFM has seen a number of businesses that received funds a few years ago emerging from the VCT stable having achieved and delivered significant value gains. These companies have been characterised by high growth not just in value, but also in employment creation, as well as a high propensity to export. Just one notable example is North West-based Matillion which has grown revenues from $1m to in excess of $50m, expanded operations from an initial office in Knutsford, to Altrincham, Manchester, New York and Denver. They have also created over 380 high value jobs; in Manchester a Matillioner earns more than 3.5x the average wage for the area, with the total number of employees now over 400 in the last five years since its initial backing by YFM managed VCTs.

We had all hoped that by now the pandemic and its terrible impacts on lives would be behind us, but as we head into winter and with a new variant at large, that isn’t going to be the case. For the small businesses impacted in their own way by the fast-changing economic landscape, there are more challenges ahead. VCTs have a vital part to play in providing the support these businesses will require – not just to survive but also to push on through to capitalise on the growth opportunities and vision of their founders and management teams.

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