Tax-efficient international exposure can be be found beyond the FTSE 100.
In the wake of Brexit we have seen many fund managers extolling the virtue of a portfolio heavily dominated by FTSE 100 companies. The argument in their favour is that many of these are global businesses that generate much of their earnings from overseas.
It may surprise investors just how globalised in their thinking many of the UK’s most exciting and enterprising new companies are. Examples from EIS and VCT fund manager Calculus Capital include Weedingtech, Essentia Analytics and ActiveOps.
- Weedingtech – Weedingtech is the world leader in herbicide-free, non-toxic weed control. Its proprietary Foamstream technology uses a combination of heat and chemical-free foam to kill weeds and moss. Its technology is already being used in Munich, Porto, Barcelona, Florence, Toronto, Seattle and New York to name a few.
- Essentia Analytics – Essentia Analytics is a fintech company that applies sophisticated machine learning and algorithms to analyse a portfolio manager’s investment decisions to expose their behavioural biases and help them to make smarter decisions. It is a great idea and one that is relevant across the world. Essentia Analytics already has offices in London and New York and sells its service across Europe and the US. Our investment of £2.5m was to help them develop their international sales.
- ActiveOps – ActiveOps is a cloud-based workforce optimisation software company that helps companies manage the tricky challenge of having the right number of workers in the right place at the right time. It already has customers in more than 35 countries. Again, our investment was to help the business grow its international footprint further.
It stands to reason that the most promising British entrepreneurs should have global aspirations for their products and services. And the nature of modern communications means it is easier and cheaper than ever to operate and market an offering across international borders.
The companies mentioned all appear in Calculus’ EIS and VCT portfolios. They benefit from generous tax advantages. Governments of all political colours have blessed and even extended these tax benefits because they recognise that the capital that flows from private investors to these firms can give them the fuel they need to take off, domestically and internationally.
For many of those who are reaching the limit of the pension lifetime allowance, or who have used up their annual pension contribution and ISA allowances, VCTs and EISs are an attractive alternative. VCTs are particularly popular for those looking for the potential for growth and income in and approaching retirement. In the past two financial years they have attracted nearly £1.5bn of investment.
VCT investors can claim upfront income tax relief of 30% on up to £200,000 of investments each year (providing they hold the VCT for at least five years). There is no Income Tax on dividend income and you are not liable to Capital Gains Tax when you sell your shares.
Of course, these are higher risk companies in the earlier stages of their growth trajectory (at Calculus we tend to invest in companies that have already established some infrastructure and credibility). So your investments in VCTs should be part of a balanced portfolio.
Choose your manager well and your VCT can offer you instant access to a diverse and exciting range of UK companies, many of which are designed from the outset to succeed globally.
The story does not end there. As they build their infrastructure and marketing networks across oceans and borders, our businesses are attracting the interest of competitors and prospective partners. The international market for British businesses is growing. The weak sterling that has benefited the FTSE 100 multi-nationals is also helping our smaller ones. It is helping them trade competitively overseas, and it is making them attractive acquisitions.
We recently sold Synpromics – a company whose technology is vital to the development of many modern gene therapies – to an American business. We delivered a handsome return for investors and passed the baton on to a big gene therapeutics business with deep pockets and big ambitions. The set up in the UK will remain and is likely to grow further.
In short, do not assume that only multi-nationals have an international reach. Our best young businesses are going global from an early stage, which is good for them and good for investors.
Madeleine Ingram is a Director of Calculus Capital.
Calculus Capital is offering zero initial fee access to its latest VCT until 29 November 2019. The VCT is targeting 4.5% of NAV a year in tax-free dividends.
Printed in What Investment, Issue 440 November 2019.