(Alliance News) - Partner Ewan MacKinnon from Maven Capital Partners UK LLP spoke to Alliance News on Monday morning on the current economic climate, and the impact of the recent UK Autumn Budget on venture capital trusts such as Maven Income & Growth VCT PLC.
Maven Income & Growth VCT is a London-based investment firm operating across four venture capital trusts. Maven Capital Partners is a private equity and property manager headquartered in Glasgow, and a subsidiary of Mattioli Woods Ltd, the Leicester, England-based specialist wealth and asset management business.
In conversation about the impact of the UK government's Autumn budget, MacKinnon said: "The good news for VCTs is that it's positive, because the VCT and [enterprise investment scheme] sunset clause has been extended for another ten years."
The EIS and VCT sunset clause, which had been introduced as part of European Union state aid rules, provided tax incentives for private investors to invest in early-stage companies. If it hadn't been extended, the relief would only have been available to subscribers for shares issued before April 6, 2025. The schemes' sunset clause has now been amended to 2035.
MacKinnon continued: "Obviously, there was a little bit of uncertainty over the last couple of years as to what would happen vis-a-vis the sunset clause. We had a different government, they were sort of talking about extending it, but it wasn’t in their interest among other ongoing pressing issues. The Labour government certainly talked a good game when they were in opposition, but it wasn't until we actually got that ratified that we've now got visibility for another ten years. So, the budget's actually been good for our sector.
"Now, you look at other sectors and how that will impact VCTs, and I suppose the fact that capital gains tax has gone up - maybe not quite as high a rate that we thought it would, but it's still higher - that then makes VCT investing a little more desirable, as its free from capital gains tax. So, that might help the industry, albeit VCTs invest in early-stage risky assets, so there is a risk-reward and that's the reason the tax relief is there.
"What we found really impacted VCT investing was when the lifetime allowance came right down, and also when the annual allowance dropped. I think it dropped at one stage to between GBP40,000 and GBP50,000, and that did mean that people were capped and couldn't put money into their pension, so that did create a further demand."
Capital gains tax increased for basic and higher-rate taxpayers in the Autumn Budget, though these hikes excluded residential assets. The lower rate increased to 18% from 10%, while the higher rate increased to 24% from 20%.
When asked about the impact of the Autumn Budget on the London market in particular, MacKinnon explained: "The first thing to say for Maven is that we don't focus on the London market. That's one of the things that's quite unique about us, we've got a regional approach, and we've got offices throughout the UK. We like to invest in regions of the UK, so we're not a London-centric house. So, if London is quieter and impacted in any way, then hopefully other parts of the UK will be busier.
"AIM has been challenging for a couple of years, and the AIM market has been in a difficult situation. The budget has probably alleviated some concerns, because it's been maybe not quite as bad as people had envisaged, but I don't think it's going to kickstart the AIM market. So, I still see that the AIM market is going to be slow for a while, as there's nothing there that's going to stimulate demand. AIM, however, is a small part of what Maven does - we've got between 4% and 7% invested in AIM - as we are much more focused on private companies."
Looking at the wider international landscape, MacKinnon said: "If you rewind to 18 months ago, the UK was still going through a lot of change. We had a Conservative government, we'd had various prime ministers and chancellors, and there was a lot of uncertainty in the market. I think certainly from our point of view, we found the exit environment 12 to 18 months ago quite challenging. In particular, there were very few US buyers looking to acquire UK growth assets and, in particular, US private equity was not coming over to the UK.
"Fast forward to 2024, we now know who's in power, we know we have a Labour government, and the opposite has happened in the US, where three or four months ago, nobody knew who was going to come into power and what that meant for the economy. So, what we've actually found is that the uncertainty in the US has created good prospects for UK companies, because the UK is a stable place to do business. We've actually seen US private equity come back to the UK, and we actually sold two of our portfolio companies to US private equity in the last three months, which I don't think we would have done 12 to 18 months ago.
"In terms of sectors, obviously it's going to be a protectionist government [in the US], we know that. I would be worried if I was an exporter into the US from China and other places like that where Trump is talking about putting in huge tariffs. However, it doesn't impact the types of businesses that we're investing in - small high-growth businesses. If they are looking at entering the US, they're typically going and opening an office in the US and growing that way.
"I think one sector that might benefit [from Trump's election to the presidency] is the energy and energy services sector, where Trump has been quoted as stating 'drill, baby, drill'. So, I think the oil market will benefit from that, and what you might see is that in the UK, because they've been talking about the transition to Net Zero and stopping licenses, in the North Sea in particular, you might find the UK service companies will benefit from a buoyant US energy industry."
On his outlook for small-cap stocks in particular over the coming year, MacKinnon added: "I think, generally, I'm cautiously optimistic about small-cap stocks and the market in the UK in general. We're seeing the key economic indicators improving, albeit slowly, but we're seeing inflation coming down, interest rates are coming down, and that helps all businesses, no matter small or large.
"One thing we have to be cautious of is the increase in employer's national insurance, that will be a cost to companies, and that will be either passed on to consumers or absorbed with lower profitability. I think it's probably the former, so you're going to see that impact on inflation.
"But small-cap companies are quite quick to react, they're not built with anchors that take a long time to change course, they can adapt very quickly. So, I think just the stability, lower inflation and lower interest rates should be good for small UK caps, because we are all trying to re-ignite a growth economy."
Maven Income & Growth VCT launched a share offer to raise up to GBP40 million at the beginning of October, following its GBP25 million fundraising the year before. The trust said it has raised more than GBP300 million across the last fifteen years.
"We're certainly seeing more opportunities for small growth, and we've got a really good pipeline of opportunities, so we think we can invest more this year," MacKinnon said. "As I mentioned, we've had some good exits this year to US private equities, we've had some really good realisations, and we've got on the back of that with a lot of firepower to invest in small and medium-sized enterprises.
"There's still a gap, without a doubt, in the market, and that's where VCTs come into play. So, bigger private equity and bigger venture capitals are typically pushing up in terms of the types of companies they invest in, and there is a gap [in the market] in the small companies turning over less than GBP3 million or GBP4 million, but have a disruptive product or service and good IP, that are looking for funding.
"We see hundreds of these opportunities every year, and we're still seeing a really good pipeline of opportunities. So, I think VCTs really help these companies to scale and grow, and hopefully become bigger, better companies on the back of our funding."
Shares in Maven Income & Growth VCT were flat at 38.00 pence each in London on Monday afternoon.
By Emily Parsons, Alliance News reporter
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