AIM Industry Report 2017/18

22 23 OPEN AIM OFFERS A SNAPSHOT AT SEPTEMBER 2017 INDUSTRY ANALYSIS This sub-section takes a detailed look at AIM-based tax efficient investment offers that were raising money at September 2017. Our register, taken from MICAP data, showed 31 open offers in total and they comprised Enterprise Investment Scheme (EIS), Business Relief (BR) and Venture Capital Trust (VCT) products and two different strategies and investment types. We will first examine the market composition and then move on to the distribution of some of the key investment metrics, fees and charges. MARKET COMPOSITION SNAPSHOT By product type AIM BR services dominate the market, comprising 87.1% of the open offers. There is an equal number of AIM EIS and AIM VCT products – with each representing 6.5% market share. In the Industry Analysis section, readers will see that there was a surge in the number of AIM VCTs in the 2016/17 tax year. Nevertheless, it is obvious that most AIM-based tax efficient products are designed to qualify for BR and mitigate IHT. In addition, VCTs tend to have a short fundraising span, whereas most BR services are evergreen. Since VCTs are a close-ended investment, advisers who wish to acquire shares in them should act quickly to avoid disappointment; rules changes to EIS and VCTs drove significant demand in VCTs last year, when we saw many VCT offerings which were fully subscribed before their proposed close dates. By strategy Clearly, there is not much variation in terms of the investment strategy offered by AIM products. Growth and Growth & Income are the only two OPEN OFFERS BY INVESTMENT TYPE strategies available to investors in September 2017. Capital preservation is not a standalone option with these products, revealing their general risk profile but also their growth potential. 58% of the market has the Growth strategy, aiming for long-term capital growth. On top of delivering long-term growth, the other 42% of the open offers also distribute dividends back to investors. To a certain extent, the strategies indicate that AIM shares may not be very suitable to highly risk-averse individuals who dislike volatility and want to keep their wealth as intact as possible. Instead, AIM shares can be more appealing to adventurous investors who are more experienced with investing and able to tolerate higher volatility. By investment type There are two investment types on offer: Alternative investment fund and discretionary portfolio service; the latter type outnumbers alternative investment funds by 9 to 1. The main difference between the two investment types is that for an alternative investment fund, the manager needs to complete an appropriateness test on the investor, whereas a suitability test must be completed by discretionary portfolio service managers. The appropriateness test, which is to check that the client has the necessary knowledge and experience to understand the risks involved with the investment, is less onerous than the suitability test. The suitability test is undertaken to verify that the investment meets the client’s investment objectives and the client is able to understand and bear the risks. Obviously, this involves identifying and understanding the client’s financial background and needs. It is perhaps then unsurprising that only 10% of all open offers use the alternative investment fund structure – all of the VCTs as well as a small minority of EIS services. Another point worth highlighting is that AIM- based offers do not specialise in any particular sector, and all of them state General Enterprise as their investment sector. CHARGES % OF OFFERS THAT CHARGE EACH FEE OPEN OFFERS BY PRODUCT TYPE BR EIS VCT OPEN OFFERS BY STRATEGY GROWTH GROWTH AND INCOME 87% 58% 42% 6.5% 6.5% FEES AND CHARGES 48% TOTAL INITIAL CHARGE 58% TOTAL INITIAL DEAL FEE 100% TOTAL AMC 3% ANNUAL PERFORMANCE FEE 3% ANNUAL PERFORMANCE HURDLE 3% EXIT PERFORMANCE FEE 3% EXIT PERFORMANCE HURDLE 52% EXIT DEAL FEE 10% TOTAL ANNUAL ADMIN FEE AVERAGE MODE MIN MEDIAN MAX Initial Charge to Investor 0.70% 0.00 0.00 0.00 3.00% Initial Charge to Investee Company 0.00 0.00 0.00 0.00 0.00 Total Initial Charge 0.70% 0.00 0.00 0.00 3.00% Initial Deal Fee to Investor 0.37% 0.00 0.00 0.08% 1.00% Initial Deal Fee to Investee Company 0.00 0.00 0.00 0.00 0.00 Total Initial Deal Fee 0.37% 0.00 0.00 0.08% 1.00% AMC Charged to Investor 1.34% 1.50% 0.80% 1.25% 2.00% AMC Charged to Investee Company 0.00 0.00 0.00 0.00 0.00 Total AMC 1.34% 1.50% 0.80% 1.25% 2.00% Annual Performance Fee 0.48% 0.00 0.00 0.00 15.00% Exit Performance Fee 0.67% 0.00 0.00 0.00 20.00% Exit Deal Fee 0.42% 0.00 0.00 0.03% 1.65% Annual Admin Fee to Investor 0.03% 0.00 0.00 0.00 0.50% Annual Admin Fee to Investee Company 0.00% 0.00 0.00 0.00 0.00 Total Annual Admin Fee 0.03% 0.00 0.00 0.00 0.50% “An annual fee is payable by all AIM companies. Annual fees are based on the market capitalisation of the issuer as at 30 November in the preceding year. Companies with a market capitalisation of up to £500 million will pay the minimum fee of £7,500.” — LONDON STOCK EXCHANGE 90% DISCRETIONARY PORTFOLIO SERVICES 10% ALTERNATIVE INVESTMENT FUNDS