For private investors this time of year is not just a time to celebrate the usual festivities – but also the start of the annual venture capital trust season.

Providers of VCTs are beginning to target wealthy clients. But after a lacklustre response from investors last year, they may not be in for an easy ride.

VCTs offer investors tax-efficient access to small and start-up businesses. This year, however, the potential investment pool is smaller than ever before, while many investors have reined in their appetite for risk following the difficulties in the credit markets.

So financial advisers expect fewer offerings from VCT providers. VCTs focused on Aim-listed companies could all but disappear as many of the companies these previously invested in are excluded under the new investment rules.

To qualify for inclusion in a VCT, companies can no longer have more than 50 full-time employees or a gross asset value above £7m. For the second year running, investors will receive 30 per cent upfront income tax relief, rather than the previous 40 per cent level.

Financial advisers believe these changes could keep new investors away. Also City bonuses, which typically fund a good slice of the VCT market, are expected to be significantly lower this year.

This year’s total VCT fund raising estimates range from £150m to slightly above last year’s £250m. In the 2005/2006 tax year, VCTs raised more than £700m

Priti Patel, tax shelter investment consultant at Allenbridge, says: “The Aim VCT market has shrunk considerably. Reducing the number of employees a qualifying company can have has had a crushing effect on the market.”

Without Aim VCTs, the choice for investors is generalist VCTs, which offer more diversified portfolios with longer-term horizons, or more specialist VCTs, which have set lifespans of typically five years.

Martin Churchill, editor of the Tax Efficient Review, says: “There is an increasing division in the market between investors wanting a short-term investment and longer-term holders.”

Given the recent credit problems, he says investors are likely to migrate towards the specialised fixed-life VCTs, which often offer some downside protection.

“People have become more risk averse so are more interested in this side of the investment proposition,” he says.

“Being able to minimise risk will make up for the fact that the tax break is not as big as it was.”

Patel says demand for limited life VCTs will also come from seasoned investors looking for something different. “We are seeing interest in specialist VCTs,” she says. “After 10 years of VCT investment, a lot of investors are wanting to diversify.”

Last year around half of the money raised went into limited life VCTs. With a spate of recent or forthcoming launches in this area, this year it could be even more. “The market has shifted very much in favour of people going for the tax break and not being too worried about making money,” says Churchill.

Ingenious and Edge Investment Management are fund raising for VCTs focused on the music and entertainment industries. Triple Point will launch a specialist VCT next week that will offer exposure to a hedge fund, and a mix of alternative companies.

Matthew Woodbridge, bond & VCT manager at Chelsea Financial Services, says: “These types of VCTs do have a bit of celebrity sparkle to them. But this should be the icing on the cake; investors have got to agree with the fundamentals.”

Providers of these types of VCTs say investors are attracted by the downside protection, as well as the dynamic investment areas.

Duncan Reid, commercial director of Ingenious, says: “Investors are not going in just for the tax break. They expect to make a return from a vibrant area.”

David Glick, director of Edge Investment Management, says more investors have been asking about the risks involved in the VCT as well as the returns.

Generalist VCTs are likely to pull in funds from investors who have used up their pensions allowances and are looking for further income tax relief. “If people have maxed out their pensions they will be looking at what else they can do,” says Mark Hutchinson at Epic, which offers a generalist VCT.

“There has been a big push into fixed-life VCTs that do little more than protect the tax break but we could see the re-emergence of the higher net worth investor looking more closely at underlying investments.”

Woodbridge says established VCTs, such as Northern 2 and Close Enterprise, have generated some good returns. “It is clear now who is doing a good job. There is quite a lot of value in top-ups,” he says.

Close Enterprise splits investment between more “boring” higher-yielding companies and younger, higher-growth businesses.

The VCT is hoping to raise £20m. Its underlying investments range from a portfolio of freehold pubs in Liverpool to a laboratory producing sensors for detecting heat from jet engines.