VCT reforms to spur restructurings

Changes to the regulation of venture capital trusts, which are tax-advantageous UK publicly-traded vehicles allowing retail investors to access venture capital investments, are likely to spur more restructurings of venture capital funds.

The modifications will stop VCTs, which are often used by venture capital firms that are fundraising, from being able to conduct management buyouts and follow-on acquisitions. The changes will also lower the cap on total investment received under tax-advantaged venture capital schemes to £12 million ($19 million; €16 million) from the £15 million limit the government introduced in March, forcing private equity firms to move assets from VCTs into larger vehicles such as limited partnerships.

The main goal of these changes, which are due to take effect in the autumn, is to bring legislation in line with the European Union's rules regarding state aid. The reforms have been criticized by industry bodies such as the British Private Equity and Venture Capital Association, which has said the changes will dampen the funding and growth cycle of small- and medium-sized enterprises.

VCTs raised about £399 million during the UK tax year to April 5, 2015, a slight rise from about £392 million for the previous period, according to Tax Efficient Review, which provides analysis on tax efficient investments.

“The changes in legislation are going to catalyse VCT managers' thinking, but the more far-sighted firms have seen this problem coming and have been addressing it going back a number of years,” said Ian Simpson, founding director at Amala Partners.

In September, Amala helped close a restructuring deal involving London-based Core Capital Partners. The firm used some new capital from investors including Adams Street Partners, SL Capital Partners and Stepstone to buy out companies from VCTs it managed as well as from its first fund, and transferred those assets into a new fund, Core Capital II.

Simpson said that while the Core deal was not a direct result of changes to the legislation, he anticipates there will be more restructurings going forward as VCTs become more restrictive.

“The existing legislation was already quite a straitjacket for growth,” Simpson said. “Other VCT managers have seen the writing on the wall and managers will be thinking, actually with the new legislation we've got to do the same.”