AIM Industry Report 2017/18

66 67 example, exit deal fee and admin fee, became less common. The proportion of offers with an exit deal fee dropped from 23% to 17% and there is no 2016/17 AIM offer that charges an admin fee. Offers that charge a performance based fee, either annual or on exit, normally quote a performance hurdle, so that the performance fee will only be payable by the investor when the hurdle rate is met by the fund’s performance. Now we are going to look at each fee individually, investigating how different fees are distributed and how they have changed from their historical values. ANNUAL MANAGEMENT CHARGE (AMC) AMC is charged by virtually all AIM- based investment offers. From the tables we can see that an AMC is quoted by 92% of the historical offers in our register and ranges from 0% to 2% with an average of 1.36%. Unlike other tax wrappers where AMC is sometimes calculated on the initial investment, all AIM offers use NAV to calculate the AMC, and the usage of NAV as the basis value means the AMC increases when the value of the underlying investment grows. The AMC is still the most popular type of fee quoted by managers in 2016/17. Only one of the 12 new 2016/17 AIM offers doesn’t charge an AMC. The range has narrowed, while the average has dropped to 1.23%. Unlike some other tax-efficient investments, AMC is charged to investors only. This is because AIM managers are generally less exposed to managing investee companies. HISTORICAL OFFERS AVERAGE MODE MIN MEDIAN MAX INITIAL CHARGE TO INVESTOR 1.17 0.00 0.00 1.00 3.50 INITIAL CHARGE TO INVESTEE COMPANY 0.08 0.00 0.00 0.00 3.00 TOTAL INITIAL CHARGE 1.19 0.00 0.00 1.00 6.00 INITIAL DEAL FEE TO INVESTOR 0.25 0.00 0.00 0.00 1.00 INITIAL DEAL FEE TO INVESTEE COMPANY 0.00 0.00 0.00 0.00 0.00 TOTAL INITIAL DEAL FEE 0.24 0.00 0.00 0.00 1.00 AMC CHARGED TO INVESTOR 1.39 1.50 0.00 1.50 2.00 AMC CHARGED TO INVESTEE COMPANY 0.00 0.00 0.00 0.00 0.00 TOTAL AMC 1.36 1.50 0.00 1.50 2.00 ANNUAL PERFORMANCE FEE 3.16 0.00 0.00 0.00 20.00 EXIT PERFORMANCE FEE 1.62 0.00 0.00 0.00 20.00 EXIT DEAL FEE 0.26 0.00 0.00 0.00 1.00 ANNUAL ADMIN FEE TO INVESTOR 0.02 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 0.02 0.00 0.00 0.00 0.50 2016/17 OFFERS AVERAGE MODE MIN MEDIAN MAX INITIAL CHARGE TO INVESTOR 1.50 0.00 0.00 1.50 3.50 INITIAL CHARGE TO INVESTEE COMPANY 0.00 0.00 0.00 0.00 0.00 TOTAL INITIAL CHARGE 1.50 0.00 0.00 1.50 3.50 INITIAL DEAL FEE TO INVESTOR 0.21 0.00 0.00 0.00 1.00 INITIAL DEAL FEE TO INVESTEE COMPANY 0.00 0.00 0.00 0.00 0.00 TOTAL INITIAL DEAL FEE 0.19 0.00 0.00 0.00 1.00 AMC CHARGED TO INVESTOR 1.23 1.50 0.00 1.38 1.75 AMC CHARGED TO INVESTEE COMPANY 0.00 0.00 0.00 0.00 0.00 TOTAL AMC 1.23 1.50 0.00 1.38 1.75 ANNUAL PERFORMANCE FEE 4.58 0.00 0.00 0.00 20.00 EXIT PERFORMANCE FEE 1.67 0.00 0.00 0.00 20.00 EXIT DEAL FEE 0.18 0.00 0.00 0.00 1.00 ANNUAL ADMIN FEE TO INVESTOR 0.00 0.00 0.00 0.00 0.00 ANNUAL ADMIN FEE TO INVESTEE COMPANY 0.00 0.00 0.00 0.00 0.00 TOTAL ANNUAL ADMIN FEE 0.00 0.00 0.00 0.00 0.00 “It’s not the Wild West: get your AIM right, the rewards can be bountiful; but AIM wrong, and you’ll shoot yourself in the foot.” — CITY.AM FEES AND CHARGES “AIM companies, many of which are UK-centric rather than importers or exporters, are less exposed to risks around Brexit-related currency movements and regulation changes.” — FINANCIAL TIMES INITIAL CHARGE Initial charge, the second most common fee, is quoted by 51% of historical offers. It displays a wider range than the AMC. Historically, the range was between 0% and 3.5% and remained unchanged in 2016/17. The average increased 0.33% to 1.50% from 1.17%. From the tables we can see that AIM managers do not charge fees on investee companies, which is a common practice among unquoted company managers. This is advantageous to investors as the amount of tax relief is only applied on the amount of investment less any fees. It also means that the fee structure is simpler for AIM offers and hence advisers should find it easier to compare the fees of AIM-based offers. The average initial charge of AIM offers is more comparable to that of the general BR market than to the averages observed in the VCT and EIS markets, which are significantly higher. This is logical as AIM managers don’t need to source deals to allocate investors’ money because all the potential investee companies are quoted on the LSE. PERFORMANCE FEES There are two forms of performance fee: the Annual Performance Fee and the Exit Performance Fee. The Annual Performance Fee is taken from an investment’s NAV on an annual basis depending on the performance of the investment over the preceding year. Managers usually specify an Annual Performance Hurdle with the Annual Performance Fee only payable when the NAV increases above the hurdle. Although performance fees are typically much higher than other fees, they are designed to align investors’ interests with those of managers, provided that the manager specifies a reasonable hurdle rate. As we are only looking at tax-efficient investments here, advisers should remember that they are long term investments and performance fees must be reviewed in conjunction with other types of fees. For instance, our previous research has shown that offers that do not charge a performance fee often quote a higher than average AMC. Similar to the general BR market, performance fees are relatively rare in the AIM space. Historically, 15% of AIM offers quoted an annual performance fee although the figure increased to 25% in 2016/17. Historical annual performance fees range from 0% to 20% with an average of 3.16% reflecting the fact that most offers don’t charge this fee. The average is higher in 2016/16 at 4.58%, and we believe this is because there are fewer offers in 2016/17 and thus fewer zeros in the average calculation. We noted that among those nine offers (historic and 2016/17) that quoted an annual performance fee, eight of them are VCTs and the remaining one is a BR offer. Exit performance fee is charged when an investment is liquidated. The fee is also percentage-based so the total amount payable depends on how much return the investment has delivered over the lifetime of the investment. Only 8% of AIM-based offers (historic and 2016/17) quoted an exit performance fee which means it is even less common than annual performance fee. Managers who do quote this fee charge 20%. In contrast to annual performance fee, which is mainly charged by VCT offers, exit performance fee is only quoted by AIM EIS offers. This mirrors the research findings that we highlighted in our EIS Industry Report. Since only a small proportion of offers quote a performance fee, either annual or on exit, advisers should pay attention to offer with these charges to see if the investment strategy and portfolio can justify the fees. PERFORMANCE HURDLES A performance hurdle is the minimum level of return an investment must deliver before the manager can charge a performance fee. Most managers state an annual performance hurdle of 6% (historic and 2016/17), so that the performance fee will only be payable when the manager delivers a 6% or higher level of return. It is important to think about whether an offer’s hurdle rate is reasonable in relation to its performance. More fees than are reasonable may be levied if the hurdle rate is too low, and high hurdle rates can incentivise managers to take unnecessary risks. DEALING FEES There are two types of dealing charge – initial deal fee and exit deal fee. Initial and exit dealing charges apply when shares are purchased and sold respectively. It is interesting to note that dealing charges are generally only charged by AIM BR offers. Dealing charges are generally lower than initial charge and AMC. In our register, 21% of historical offers quoted an initial dealing charge, and the charges ranged between 0% and 1%, averaging 0.25%. In 2016/17, the range remained the same while the average fell to 0.21% despite the proportion of offers with an initial dealing charge increasing to 25%.