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Imagine enjoying generous tax incentives,
diversifying your portfolio, supporting
the British economy and having a share
in some of the most exciting companies
in the UK with the potential to earn
very high returns. All by investing in
a government backed scheme – not
some dubious structure that pushes the
limits of the rules but a well-established
arrangement that has been around in
one form or another for over 20 years.
Sound too good to be true? The proof
of the pudding is in the eating, but to
date it seems as though EIS investors are
enjoying these benefits. Smaller companies
can access a vital source of capital and
the treasury (it has been suggested)
is a net beneficiary from the tax these
expanding companies pay. It’s a rare
case of an incentive working exactly as
intended for the benefit of everyone.
A theme running throughout the report
is the popular view that this market can
only grow from here as investors respond
to the lower cap on pension allowances.
It certainly feels like the sector is gearing
up for more activity as new participants
enter the market place, new investment
opportunities are launched and new
marketing initiatives are finalised.
So why do people hesitate to invest? It
might be a reluctance to invest in a riskier
part of the economy. As the NESTA evidence
confirms, smaller companies are more likely
to fail and that alone might be enough to
put off some investors with lower levels
of wealth or little appetite for risk.
Yet we hope that the report has shown
just how these risks can be mitigated
against. We have seen how systematic
diversification improves the chances
of investing in a stellar performer, that
investing through EIS managers gives
access to specialist expertise and that
generous tax benefits tilt the risk/reward
balance back towards the investor.
What’s more, smaller companies don’t have
to be risky ones. The recent expansion
of the qualifying criteria means that very
well established, medium sized businesses
with large assets, strong cash flows and
long-standing customers, are also open
for investment via the EIS. The perception
that EIS is about funding start-ups or
very small companies is wrong – that is
now the role of the SEIS scheme. Advisers
who review the analysis in this report
will see that, although growth focused
investments still form the majority of
the opportunities available, there are
plenty of asset-backed or exit-focused
investments for the more risk averse.
Perhaps another reason people hesitate to
invest is the opaque nature of the market.
Performance information or precise details
about exactly what is being invested in,
and how portfolios are being run, can be
hard to come by. We talk about this in the
report, but in all honesty it is easy to get too
hung up on this point. By its very nature,
investing in smaller unquoted securities is
going to be a murkier activity than investing
in listed companies. It’s one of the reasons
why investing in smaller companies is more
difficult and requires more research and
expertise. It’s also one of the reasons why
the EIS scheme exists and why investors
are so well rewarded when things go well.
Having said that, something is clear from
the research we have done: any steps
the EIS industry can take to provide more
precise information about their investment
activity, and performance, will be well
received by advisers and investors.
REPORT CONCLUSIONS
So what does the future hold? As noted
above, everybody seems to agree that
the market is set for growth. The hope is
that this growth can be achieved without
attracting the kind of poor quality, “me
too”, opportunist investment products
that tarnished the UCIS market over the
last few years. The industry is also keen
to ensure that EIS investments continue
to place capital in productive, growing
companies and that rules are not abused
to simply shelter clients from tax risk-free.
The EISA and major industry players are
constantly on their guard against this, as
they know that a failure to play by the rules
could lead to government intervention.
Provided the EIS sector manages to
successfully navigate around these
obstacles, the next 12 to 24 months should
see increased levels of investment – and
not just from existing customers. We
believe that more advisers and investors
will engage with EIS and the industry is
starting to take steps to reach out and
welcome them. The outlook from here?
It’s very positive.
