The VCTs aim to be among the first to invest in Europe following the recent changes that allow VCTs to invest outside the UK. The VCTs will invest in unquoted UK and European firms that are involved in renewable energy projects with long-term guaranteed Government subsidies. The focus will be on more established firms and projects rather than riskier opportunities at the developmental stage.
The VCTs will diversify across energy sources including solar, wind and hydro power. They will focus on lower-risk investment opportunities that can provide investors with tax-free income and the ability to preserve capital. It will initially invest in a non-qualifying portfolio of deposits, institutional money market funds and short-term fixed income securities, then at least 75 per cent in suitable unquoted companies. Up to 25 per cent will remain in the non-qualifying investments.
Hazel Capital points out that alternative energy sources are being promoted by UK and European governments because increasing demand for energy is putting pressure on the dwindling supply of fossil fuels There are legally binding targets for all of EU member states to produce a minimum of 20 per cent of their energy requirements from renewable sources by 2020. There is also a target for the UK to reduce dependency on oil and coal-fired power stations by over a third by 2015.
UK and European governments have introduced financial incentives designed to benefit renewable energy generators and encourage private equity investment. These government-backed incentives and the legislation that underpins growth in the alternative energy sector could provide plenty of strong investment opportunities for VCT investors.
Some advisers may feel that the tiered performance fee, which is 20 per cent of annual dividends of 5 to 10 per cent a year and 30 per cent of annual dividends above 10 per cent, is a bit steep. However, no performance fee will apply until the net asset value is more than 100p a share and annual dividends of at least 5 per cent a year are being paid.