BR report 2018

50 51 “BR is something that investors typically only benefit from when they die. It’s a bit like pensions – if you want the rules to incentivise people to make investments, then they need to have certainty that the rules are going to remain the same for a long time in order for it to form part of their risk/reward assessment at the outset.” — JESSICA FRANKS, OCTOPUS INVESTMENTS in each of those core areas, and a portfolio team that sits above those investment teams focused on pipeline, cashflow management and overall performance outlook. Because of the product mandate, we look for sectors of the UK economy which we think are under financed, and therefore can provide a long-term pipeline for us to invest, and are capable of delivering growth over the long term. LC: Our deal pipeline is strong. We invest in areas that clients have found appealing, and that we like ourselves – things like care homes, hotels, data centres, wedding venues, pubs, property development, assisted living – focusing on asset backed investments. In our energy fund, we are starting to invest in reserve power, battery storage - and to a lesser extent, solar and wind projects, which have traditionally been the mainstay of our portfolio. Care homes are something that we particularly like. We take them right through the development stages, and we work with operators in the upper end of the market, where we see increasing demand for these high- quality care homes. Knowledge intensive companies are something that we’ve been looking at. The question is, would there be demand for a BR fund that was akin to a growth outlook similar to our VCT, for instance? Many of the BR investors are relatively elderly and are typically less likely to want higher risk but potentially higher growth investments – the more ambitious/ higher risk investment is probably more desirable to a younger investor with a higher risk appetite. AFTER THE BUDGET, THE GOVERNMENT ISSUED ITS SUPPORT FOR GROWTH INVESTING IN THE AIM MARKET. HOW IMPORTANT DO YOU THINK AIM IS AS A BR OPTION? SH: AIM certainly has a place in the market. Our experience is that in the BR market, the vast majority of people are looking to preserve a legacy and pass on their wealth to their family, and their first port of call tends to be capital preservation focused investments such as the trading strategies underlying our Ingenious Estate Planning solution. That obviously does not apply to everyone – some people are looking for higher levels of growth – but overall it is about diversification. Most clients should look to be well-diversified and AIM would therefore have a place alongside trading companies. There are some concerns around AIM in relation to the fact that we are 10 years into a bull run, and some analysts have commented about a bubble developing around a group of BR qualifying stocks within AIM. Having diversification across AIM and trading companies would alleviate and limit the exposure to that level of risk. DB: AIM is a fantastic space, and it’s very different to when it first launched when it was just tiny fledgling companies. My concern with AIM is that it’s a long-term investment. The AIM market was up 30% in the last year but advisers have to warn their clients that it could just as easily go down 30% next year. Older clients need to think – will my children need this money immediately post death, or will they be sensible in the long term, inherit the shares, hold onto them and wait for the market to return? SM: Some companies are listed on AIM to access BR. If BR was not available to AIM listed companies, certain companies might not have listed on the AIM market. For example, I have been told that one AIM listed company was considering the sale of its business to an overseas buyer. The major shareholder was not aware of the benefits of listing on AIM from a BR perspective. The company subsequently discovered it could be listed on AIM and achieve a partial exit for the major shareholder whilst also qualifying for BR. As a result the business decided to list on AIM. Had the business been sold to the overseas acquirer, the future of its manufacturing in the UK might have become uncertain. Since the company listed on AIM, it has expanded its manufacturing in the UK and created many new jobs. I do not think there is a better advert for having BR available on AIM. SJ: It’s fundamentally a win/ win in that it presents an excellent growth opportunity “There are some concerns around AIM in relation to the fact that we are 10 years into a bull run, and some analysts have commented about a bubble developing around a group of BR qualifying stocks within AIM. Having diversification across AIM and non-AIM listed trading companies would alleviate and limit the exposure to that level of risk.” — SIMON HARRYMAN, INGENIOUS for more experienced investors who have the risk appetite and time horizon to bear the volatility. For AIM companies, clearly BR services provide much needed ongoing finance and growth support. In the past, a lot of investment has been placed in similar companies - the top 10 holdings might be quite similar across the different investment companies. But recently, we’ve been seeing more innovation and different strategies. Managers have been focused on different sizes of companies, different sectors and we have seen the growth in platform availability. That has really helped to diversify AIM so that more companies are starting to receive investment support, rather than being focused on a condensed handful. JF: It’s really valuable for investors to have a choice of qualifying investments so they can select one that best suits their objectives. We manage a similar amount of client money in BR qualifying AIM listed companies and unlisted companies – it really comes down to a client’s objectives, and sometimes those of their beneficiaries as well. We’ve focused on managing AIM portfolios for more than a decade and our specialist Smaller Companies team continue to see strong investment opportunities across the market. We look for companies with a strong business model that are capable of delivering growth for our investors and include sectors as diverse as biotech to construction. One very positive development has been the ability to hold AIM quoted shares in an ISA. Combined with BR, this has enabled older investors who are happy with the risks and rewards of AIM investing to retain their ISA wrapper and undertake estate planning at the same time. This has been one of the most successful initiatives the government has launched in recent years, benefitting both those retail investors who are happy to take additional risk with their ISA investments, and growing companies that are the lifeblood of the UK economy. Whilst overall numbers are difficult to come by, our investors alone have chosen to invest more than £700m of ISA money in AIM listed companies since the rules changed in 2013. Incentivising retail investors to invest in growing companies provides the companies themselves with an important source of patient capital. BR incentivises investors to plan to invest for the long term, which in turn has enabled us to support the growth of some of our portfolio companies for more than ten years. LC: We manage the Downing AIM Estate Planning Service, which is a straight BR fund, and our Downing AIM ISA, which is a BR fund with the addition of an ISA wrapper. We don’t have any particular bias, but it has to be said that the higher proportion of the business is going into our unquoted product, the Downing Estate Planning Service. We believe that’s because people perceive it as being less volatile than an AIM portfolio. It’s the steadier returns that are attractive to people. Around the middle of last year, we soft closed our AIM portfolios. Historically, our focus on AIM has been on the smaller cap end. If you move up the market cap side of AIM, we are seeing some very stretched P/Es, which we don’t like the look of. We didn’t want to move in that part of the market, so we soft closed our funds. However, we have just softly reopened both services as we felt opportunities were starting to become available. In reopening the funds, we put up the minimum subscription so that we have more control on the flows that come in and because undertaking consecutive small trades can move prices against you. WHAT ARE YOUR THOUGHTS ON THE REVIEW OF IHT BY THE OFFICE OF TAX SIMPLIFICATION AND WHAT IT MIGHT MEAN FOR IHT? DO YOU FORESEE ANY CHANGES FOR BR? WHAT DO YOU THINK WOULD BE THE WORST CASE SCENARIO? DB: There is a need to simplify IHT because clients haven’t got the faintest idea most of the time, and a lot of advisers have trouble with some of the complexity around Trusts, especially with such things as the 14 year rule! We would welcome any changes which would make IHT more straightforward. If it’s difficult to understand, investors are less likely to do anything. The beauty of BR is that it is simply an investment which allows clients access and control of their money. What I love is when I go and meet the clients with advisers, how many clients are delighted with the fact that they’re only going to get this tax relief if they’re willing to help the UK economy. “We would welcome any changes which would make IHT more straightforward. If it’s difficult to understand, investors are less likely to do anything. The beauty of BR is that it is simply an investment which allows clients access and control of their money.” — DOMINIQUE BUTTERS, BLACKFINCH JOHN SCHAFFER DOMINIQUE BUTTERS LAURENCE CALLCUT SIMON HARRYMAN SAM McARTHUR JESSICA FRANKS BELINDA THOMAS SAM JERMY