To explore the area of development capital we firstly need to look at the role in which a Venture Capital Trust plays…
So, what are VCTs?
Venture Capital Trusts (VCTs) are investment vehicles which pool funds from individual investors and invest them into small businesses. They are tax efficient for investors providing up front income tax relief, tax free dividends and no capital gain on exit.
In the 2015/16 tax year VCTs raised £457.5m, the third highest amount on record, (source: Association of Investment Companies) across over 100 different funds. In the past they have successfully been used to provide development capital as well as to fund management buyouts (MBOs) or acquisitions, with probably the lions share going to the latter.
So what has changed?
In November 2015 new rules were brought in as part of the 2015 Finance Bill which restricted what VCTs could invest in. It essentially eliminated the use of VCT funds where the cash was going back out of the company, either to shareholders to fund an MBO or to fund an acquisition. This leaves the only possible type of deal as development capital, and the impact is that there is an overhang of cash all looking for development capital opportunities.
What is Development Capital?
Development capital can be used to fund a whole range of things, as long as it is invested within the company e.g.:
- developing a new product
- developing new facility/ store/ location
- investing in marketing or sales to drive growth
- invest in people to expand in the UK or overseas.
These funds are not looking for very early stage companies, so businesses need to be established and profitable or at least with a clear path to profitability. But the only criteria is that the business must be less than 7 years old. And typically the funds look to invest £1m+ in each deal. Beyond that deal structures can be flexible and designed to suit the specific needs of the business.
What does that mean for SME’s?
If you are looking to invest for growth, there is money available in the market to do just that.
This post was produced by Stephen Reed from the Strategic Corporate Finance team. If you would like to find out more about how you could benefit from development capital then contact Stephen at [email protected].