BR report 2018

24 25 “BR investors are increasingly focused on the liquidity of their underlying investments and how they could exit an investment if a significant percentage of investors want to exit the same BR qualifying investment at the same time.” — SAM MCARTHUR, CHIEF OPERATING OFFICER, PUMA INVESTMENTS “The AMC is by far the most common fee charged by BR managers. 88.7% of open offers charge an AMC to the investor.” BY INVESTMENT SECTOR General Enterprise is the largest investment sector at 66.1%, growing from a 63% share in 2017. The substantial proportion of General Enterprise is largely due to the growth in AIM based offers over the past few years, with all open AIM based offers focusing on General Enterprise. Financial Services accounts for a notable chunk of the market, with many providers focusing on lending for property development projects. These funds have an annual target return ranging between 2% and 6.5%. It’s worth noting that where Financial Services is mentioned, this does not refer to companies where the business is wholly or mainly dealing in securities, stocks or shares, or in making and holding investments – as relief for these companies would not be available under BR. Here, companies are mainly focused on lending activities, predominantly making loans to creditworthy borrowers. Industry & Infrastructure accounts for 11.3% of the market, and is the third largest sector in BR. Businesses in this sector are usually rich in tangible assets which make them a popular area for BR fund managers and investors. Advisers and investors should be aware that charges can be made to either the investor or the investee company (or both). Charging fees to the investee company does not necessarily mean a better deal from the investor’s perspective. Fees levied on the investee company will put an added strain on the underlying company, and advisers should make this patently clear to clients. Compared with other tax advantaged investments we cover in our Industry Reports (EIS and VCTs), performance fees are less common with BR products. While there is a large proportion of Growth BR available in the market, the levels of returns targeted are not comparable to EIS and VCTs, so it’s logical that performance fees are less favoured by BR managers. CHARGES TOTAL INITIAL CHARGE TOTAL INITIAL DEAL FEE TOTAL AMC ANNUAL PERF. FEE EXIT PERF. FEE ANNUAL PERF. HURDLE EXIT PERF. HURDLE EXIT DEAL FEE TOTAL ANNUAL ADMIN FEE 66% 40% 97% 8% 5% 13% 5% 55% 34% NUMBER OF OFFERS THAT CHANGE EACH FEE ENERGY GENERATION 6.5% 14.5% 66.1% 11.3% 1.6% FINANCIAL SERVICES GENERAL ENTERPRISE MEDIA & ENTERTAINMENT INDUSTRY & INFRASTRUCTURE INITIAL CHARGES 43 BR providers charge an initial charge to the investor, accounting for over 69% of offers. Only 3 BR offers charge a fee to the investee company, the rest don’t have an initial charge. ANNUAL MANAGEMENT CHARGE (AMC) The AMC is by far the most common fee charged by BR managers. 88.7% of open offers charge an AMC to the investor, and 25.8% of offers charge an AMC to the investee company. 9.7% of BR providers charge an AMC to both the investor and investee company. 97% of open offers charge some form of AMC – this is down marginally from 98% last year. The most common AMC charged to investors is 1%, with the maximum at 2%. This is almost identical to last year’s picture. The average AMC charge to investee companies is notably lower than the charge to investors at 0.38%. However, six out of the 16 companies that do charge an investee company AMC also charge an AMC to the investor, thus offsetting the lower charge. The total AMC ranges from 0% to 3.5%. The most common charge of 1.5% remains the same as 2017, although the average has reduced slightly from 1.42%. Although the AMC is generally lower than the Initial Charge, it’s worth noting that the AMC is charged every year, regardless of the manager’s performance. Given that BR is a long-term investment, this can add up to a substantial amount over time. The mode (most frequent value) for initial charges for both investors and investee companies is 0%. The max charge of 7.5% is levied on an investee company. The initial charge is normally deducted from an investor’s subscriptions and not invested. It is normally quoted as a percentage so that the larger the initial subscription, the larger the initial charge (and the larger the amount that does not qualify for BR). The average total initial charge has dropped by over 10% this year, from 1.53% in 2017. AVERAGE 1.13% MODE 0% MIN 0% MEDIAN 1% MAX 3.50% AVERAGE 0.23% MODE 0% MIN 0% MEDIAN 0% MAX 7% TO INVESTEE TO INVESTOR AVERAGE 1% MODE 1% MIN 0% MEDIAN 1% MAX 2% AVERAGE 0.38% MODE 0% MIN 0% MEDIAN 0% MAX 2% TO INVESTEE TO INVESTOR TOTAL INITIAL CHARGE OF OPEN OFFERS % AVG MODE MIN MEDIAN MAX 0% 1% 2% 3% 4% 5% 6% 7% 8% AVG MODE MIN MEDIAN MAX 0% 1% 2% 3% 4% 5% 6% 7% 8% TOTAL AMC OF OPEN OFFERS % 1.34% 0% 0% 1.38% 7.5% 1.35% 1.50% 1.25% 3.50% 0%