AIM Report 2019

Industry analysis / Other key investment metrics 60 61 Again, the recent glut of AIM VCT offers has had a marked impact on the level of diversification within this market, with a considerable increase on the average target number of investee companies in the new offers compared to historical offers. AIM VCTs typically hold a significantly higher number of investee companies in comparison to AIM BR services, as underlined by the much lower average for open offers, which are dominated by BR products. The fact that VCTs have a much lower minimum investment level than BR but a greater number of investees is likely down to the fact that a VCT investor is investing in the VCT itself and doesn’t hold any shares invested in by the VCT directly. We suggest that, because shares in a BR product have to be held directly by each investor in order to qualify for the relief, this would make it much more labour intensive and incur additional fees to invest in as many companies as a VCT does, in terms of transferring the shares to investors and tracking each individual parcel of shares for reporting purposes. Thus the administration involved for BR products reduces the number of companies they tend to invest in. The rise in AIM VCT offers since our last report has also impacted the historical average, which has risen from around 30 in September 2017 to over 50 by June 2019. While this does not mean that managers today are making these investment portfolios more diversified (instead it is a function of the type of product being launched), this increased diversification is obviously good news for investors looking for some insulation against the volatility of the AIM market. TARGET DIVIDEND Unlike target return, which is not commonly stated by AIM managers, just over a third (38%) of all offers quote a target dividend to be paid to investors. The majority of those that do quote a target dividend are VCT offers, while some BR offers also quote this. However, none of the EIS offers provide a target dividend, in line with EIS rules . The range of target dividends has narrowed from our last report, when figures for September 2017 showed offers of between 5% and 6%. That has tightened to between 5% and 5.5% in June 2019, and again we think this is due to the higher proportion of AIM VCTs in the market, which typically offer lower dividends than BR products. TARGET DIVIDEND OPEN HISTORICAL NEW AVG MIN MED MAX 6% 5% 4% 2% 3% 1% 0% CONCLUSIONS WHAT WE LEARNED FROM THE INDUSTRY ANALYSIS AIM-based tax efficient offers The market has grown significantly in recent years, most notably from 2013 to 2017. However, this expansion has somewhat tailed off, with only five new products launched between January 2018 and June 2019 - half the number launched in 2017 alone. There are a number of factors that are linked to this slowdown. To begin with, the changes that were made to EIS and VCT rules at the Autumn Budget in 2017 and came into force the following April may have given managers pause for thought on how they structure and position their products. Having said that, the four products that were launched after the rule changes came into force were all VCTs, demonstrating that AIM investments can qualify under the higher risk to capital requirements. Anecdotally, there have been suggestions that HMRC has been slower at giving advance approvals to EIS and VCT funds since the new rules have come into force, which could also account for a reduced number of offers coming onto the market. In terms of BR, uncertainty over potential changes to inheritance tax with the Office of Tax Simplification’s review may also have had an impact. Another factor that may be impacting the number of offers being launched is the volatility that the AIM market suffered during the final quarter of 2018. Although it has rebounded strongly since then, it may be that the volatility combined with the recent introduction of the new rules has led some managers to suspend their focus on this market for the time being. Furthermore, the unresolved Brexit position and continued negative market sentiment among small businesses could have deterred some from choosing to launch new products at this time. Nonetheless, there remain good opportunities for tax efficient AIM investments, with all 33 current open offers targeting some form of growth strategy. Furthermore, the fact that all but two currently open offers are for BR products - which are not bound by the same risk to capital rules as EIS and VCT - suggests that AIM can still offer a strong option for steady growth at less challenging risk levels. Fees and charges The fees and charges applied by managers for their tax efficient AIM products remain broadly in line with what we have seen in our previous reports. AMC is the most common type of charge quoted by AIM managers using tax efficient products, followed by initial charge and dealing charges. An annual performance fee is quoted by some AIM VCTs, while the exit performance fee is found exclusively among AIM EIS offers. Fewer managers appear to be applying initial charges, however where initial charges to investors are made, they have increased to an average of 3%, up from 1.5% in 2016/17. This suggests that advisers and investors should look closely where these fees are applied to ensure that the benefits are worth the increased costs of these charges. Other key investment metrics There is good news from the diversification figures, where the average number of investee companies for new offers is considerably above the number of historical offers. This is likely to be down to the rise in the number of VCT offers in this space over recent years. It should also give investors a level of comfort that they are investing in a wide range of underlying companies. Furthermore, the continued reduction in the average minimum subscription amount for new offers highlights the expanding nature of tax efficient AIM investments, as they become increasingly accessible to investors, rather than being the preserve of HNWs. “AIM remains a crucial part of the funding ecosystem for smaller companies. Long-term shareholders on AIM are able to support businesses with growth capital throughout the economic cycle.” — RICHARD POWER, HEAD OF QUOTED SMALLER COMPANIES, OCTOPUS INVESTMENTS