VCT Giant Navigates AI Risk and Tax Shifts Amid Portfolio Volatility

LONDON, UK – June 11, 2026 – Northern 2 VCT PLC, a venture capital trust managed by Mercia Fund Management, has revealed a year of strategic resilience against a backdrop of significant market turbulence and shifting UK government policy. In its annual report for the year ended 31 March 2026, the trust reported a decrease in its net asset value (NAV) per share to 54.6 pence from 58.3 pence, yet maintained its commitment to shareholders by declaring a consistent total dividend of 3.0 pence per share.

The results paint a picture of a venture capital landscape fraught with both high-stakes risk and high-growth opportunity. While geopolitical and economic headwinds, particularly in the final quarter, contributed to a negative total return of (0.6) pence per share, the firm successfully deployed £15.9 million into new and existing technology companies and demonstrated robust investor confidence by closing an oversubscribed £20 million share offer.

High-Growth Wins and High-Stakes Losses

A deeper dive into the portfolio reveals the stark duality of venture capital investing. The highlight of the year was the successful Initial Public Offering (IPO) of The Beauty Tech Group on the London Stock Exchange. Northern 2 VCT realised 30% of its holding in the at-home beauty device leader, generating £2.3 million in cash and a 5.8x return on its original investment. The IPO, which valued the company at £300 million, marks a significant validation for the UK tech scene.

Several other portfolio companies posted strong growth, buffering the portfolio against wider market pressures. Pet wellness brand Pure Pet Food saw its valuation increase by £1.2 million, while healthcare platform Semble and cybersecurity firm Risk Ledger grew by £1.0 million and £0.9 million, respectively. Risk Ledger has been on a significant growth trajectory, recently expanding into the US market and being named one of the fastest-growing cyber companies in the 2026 Tussell Tech200.

However, the report also acknowledged the inherent risks of backing early-stage ventures. The trust recorded significant write-downs, most notably Newcells Biotech, a pharmaceutical services provider that entered administration, resulting in a £1.9 million reduction in value. Other disposals, including identity verification provider Northrow and marketing service Adludio, were also realised at a loss, underscoring the challenging environment for some tech sectors.

A New Era of Risk and Regulation

The report signals a pivotal moment for the VCT sector, as the firm grapples with new external pressures. In a significant move, the Board has elevated "Artificial intelligence ('AI') and advanced technology risk" to a principal risk. The report notes this is driven by "investor concerns over the impact of AI on software company valuations" and the competitive disadvantages for companies that fail to adopt AI-enabled capabilities. This formal recognition highlights the double-edged sword of AI, which presents both immense opportunity and systemic risk to technology-focused portfolios.

This new technological uncertainty is compounded by major legislative changes. The UK government has reduced the income tax relief on new VCT subscriptions from 30% to 20%, a move the Board believes "runs counter to the Government’s stated commitment to supporting early-stage UK businesses" and may create a "more challenging fundraising environment." While some analysts predict this could significantly curb capital flows into the sector, Northern 2 VCT has proactively responded by extending its 2025/26 share offer to raise an additional £10 million, which was fully subscribed.

Conversely, the government has widened the pool of potential investments by doubling the annual investment limits for qualifying companies to £10 million and £20 million for knowledge-intensive firms. This allows VCTs to deploy more capital into scaling businesses, though the ability to leverage this flexibility will depend heavily on their success in attracting investor funds under the new, less generous tax regime.

Fueling the Next Wave of UK Innovation

Despite the headwinds, Northern 2 VCT remains an active and crucial investor in the UK's innovation ecosystem. The firm invested £7.0 million across four new ventures during the year. These additions showcase a continued focus on cutting-edge technology, including a £2.2 million investment in Astral Neutronics, a developer of compact fusion reactors for industrial use, and a £2.4 million stake in Thanks Ben, an employee benefits orchestration platform.

With a strong cash position of £39.3 million at year-end, the trust is well-capitalized to continue its mission. "Despite the ongoing geopolitical and economic uncertainties, our commitment to providing patient capital to support innovative early-stage businesses across the UK remains unchanged," stated Chair Thomas Chambers in the report.

The manager, Mercia Fund Management, expressed confidence in the portfolio's long-term prospects, noting that the underlying environment for early-stage technology remains encouraging, particularly in AI, deep tech, and health tech. The fund plans to continue its disciplined approach, focusing on high-quality companies with clear paths to profitability while actively managing its existing holdings toward future successful exits.