BR report 2018

60 61 “The average Total Initial Charge was 1.71% for new 2017/18 BR offers.” “The most common Initial Deal Fee for 2017/18 offers was 0.35%, the maximum Initial Deal Fee was 2%.” PERFORMANCE HURDLE A performance hurdle is the minimum level of return an investment must deliver before the manager can charge a performance fee. However, not all performance hurdles are associated with an Annual Performance Fee: as there are eight historical offers that have quoted a hurdle, but only five of them have an Annual Performance Fee. This is because some managers try to further align interests by applying the hurdle rate to AMC, so the AMC is only payable if the investment return meets the hurdle. No 2017/18 offers apply an Annual Performance Hurdle. The Annual Performance Hurdles range from 0% to 10% for historical offers. Advisers should pay attention to offers with low performance hurdles to avoid paying too great a performance fee, unless the level of performance fee charged and the underlying investments can justify the hurdle. They should also bear in mind that any annual fees could add up to significant costs over the lifetime of an investment and that in general, they should be expecting managers to charge either an Annual Performance Fee or an AMC - not both. EXIT PERFORMANCE HURDLE Exit Performance Hurdles are a rarity when it comes to BR offers because of absence of Exit Performance Fees. There was one outlier amongst historical offers that applied an Exit Performance Hurdle of 121% - this is a single company BR product that focuses on operating BR sites in the UK, and has a target term of three to five years, a minimum investment term of three years, and a minimum target return of 7% per annum. 2% 4% 6% 8% 10% 12% 0% AVG MODE MIN MEDIAN MAX 2017/18 OFFERS HISTORICAL OFFERS Initial Deal Fee is applied to the purchase of the shares in a portfolio, and they are most commonly found among AIM- based BR investments. Similarly, an Exit Deal Fee is often applied when selling shares in a portfolio. However, our data shows that a higher proportion of managers quoted the Exit Deal Fee (51%) than the Initial Deal Fee (38%) - this may be to discourage investors from liquidating their holdings. DEALING FEES INITIAL DEAL FEE The most common Initial Deal Fee for 2017/18 offers was 0.35%, the maximum Initial Deal Fee was 2%, which could become very costly in a portfolio with any significant turnover of assets. When looking at historical offers, the mode is 0% as most offers don’t charge an Initial Deal Fee. EXIT DEAL FEE The average Exit Deal Fee is marginally higher than the historical average (0.67% as opposed to 0.54%). However, this is not necessarily indicative of these fees rising, as the one new offer that charges 2% will push up the average. The most commonly charged Exit Deal Fee of new offers has reduced by two thirds against the historical figure. ANNUAL PERFORMANCE HURDLE 0.54% 10% 0.5% 1% 1.5% 2% 2.5% 0% AVG MODE MIN MEDIAN MAX 2017/18 OFFERS HISTORICAL OFFERS 0.67% 0.36% 0.35% 0.35% 2% 2% 0.5% 1% 1.5% 2% 2.5% 0% AVG MODE MIN MEDIAN MAX 2017/18 OFFERS HISTORICAL OFFERS 0.67% 0.54% 0.35% 0.35% 1% 1% 2% 2% INITIAL CHARGE The average Total Initial Charge (amalgamating initial charges to investors and to investee companies), was 1.71% for new 2017/18 BR offers. When looking at historical offers, some did not charge an Initial Charge at all, whilst the maximum quoted was 7.5%. While the average AMC is going down, this year the average Initial Charge has jumped up since last year. This is likely to be due to all of this year’s offerings charging an Initial Fee as opposed to only 50% that did so last year. It is important for advisers to review the level of Initial Charge applied to investee companies in relation to that applied to investors. We noticed that there are several managers applying the Initial Charge on investee companies rather than the investor (although none of the new 2017/18 offers apply a charge to investee companies). By doing so, their products may seem cheaper to investors, but in reality, the potential amount of tax relief that can be claimed would still be lower. It would also raise the risk profile, as more risk would have to be taken to generate the target return for investors. ANNUAL 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 so that the Annual Performance Fee only becomes payable when the NAV increases above the hurdle. One benefit of performance fees is that they effectively align investors’ interests with those of managers, provided the manager specifies a reasonable hurdle rate. In addition, as with any other tax-efficient investments we cover, BR is a long term investment, so the performance fees cannot be viewed in isolation of other fees. The AMC tends to be higher for investments that do not charge a performance fee. However, the amount of BR offers that charge an Annual Performance Fee is relatively low. Only one of the 2017/18 BR offers applied this fee, and only seven historical offers have applied it. Historical Annual Performance Fees range from 0% to 30%, with an average of 2.08% reflecting the fact that most managers don’t charge this fee. The average decreased to 2.14% this year, in comparison to 3.75% last year. 1% 2% 3% 4% 5% 6% 7% 8% 0% AVG MODE MIN MEDIAN MAX 2017/18 OFFERS HISTORICAL OFFERS There is a clear contrast between BR and EIS investments when it comes to performance fees. A performance fee is almost a default charge in the EIS industry, while only a small number of BR managers charge a performance fee. PERFORMANCE FEES 2017/18 OFFERS HISTORICAL OFFERS 4% 8% 12% 16% 20% 24% 28% 32% 34% 36% 0% AVG MODE MIN MEDIAN MAX 2.14% 15% 30% 2.08%