EIS 2018 report (web)

19 18 year to 216% this year. It suggests that managers are attracting investors with higher targeted returns, ,but it appears that some managers are having to achieve a lower percentage of those target returns to get their performance fees. OTHER FEES Initial deal fee, exit deal fee and annual admin charge are quoted by some managers - although they are generally negligible, if charged at all. However, some offers do apply initial deal fees as high as 3% to pay business brokers on a deal’s initiation, for example. It’s worth noting that although there may be high fees in one area, they may be offset by lower fees in another area. Note that some funds charge flat fees (not a % of NAV or subscription). Nevertheless, as negligible as these fees can be, there are fairly significant upward trends with the initial deal fee and the annual admin charge - from 0.16% to 0.25% (56% increase) and 0.16% to 0.22% (27% increase) respectively. SECTOR ANALYSIS DATA A DEEP DIVE INTO OPEN OFFERS There were a total of 65 open EIS offers at the end of 2017. The analysis is based on data supplied by the MICAP platform and is correct as of late December 2017. The analysis is intended to provide a whole of market overview of what is currently available in terms of key metrics data. INITIAL CHARGE The analysis of fees and charges for open offers shows that, typically, investees (rather than investors) pay a higher proportion of initial charges. The rationale for this is that a higher proportion of the initial investment qualifies for tax relief. The data shows that the average initial charge to investees is on the rise, while the average initial charge to investors has not changed. For investees, it is up to 2.19% from 1.88% last year. This is a 16% increase and this trend is worth noting as, although this cost may not be directly coming out of an investor’s pocket, it will impact the investee’s expenses and the amount of funding it actually receives. ANNUAL MANAGEMENT CHARGE Annual management charges (AMC) tend to be quite similar between charges to investor vs. investee - with the average AMC to the investor being marginally lower. Average AMC fees for both investors and investees are relatively low. However, max fees are significant, with the top figure of 2.5% for investors presenting a significant cost over an extended period. As with the initial fees, average investee AMC has increased (by 17%), while average investor AMC has remained stable. Again, this has driven up the overall average, this time by 10%. So, just because fees to investors look reasonable or stable, it’s important to be aware of investee fees as well. Although the mode (the amount most quoted) for both AMC charged to investor and investee is 0%, the mode for total AMC fees is 2%. This suggests that at least one party is picking up the AMC tab at all times. PERFORMANCE FEE As has been standard for some time, the median and mode for exit performance fees is 20%, with the average at a similar level. Where it is higher, the expectation should perhaps be that the manager is doing more, or more difficult work to justify the extra amount. PERFORMANCE HURDLE In general, in order to collect a performance fee, a manager must beat the hurdle rate that they set up. The average fee is sub 100% as some funds are not setting a performance hurdle. There are a number of low hurdle rates, which is reflected in the mode only being 100%. This is due to there still being a substantial proportion of capital preservation EIS funds present, and this is likely to change amidst a clamp down on these funds. It’s also worth noting that the average hurdle has dropped from last year (it was 110%) and the average target return has jumped from 173% last AVERAGE 95.55 MODE 100 MIN 0 MEDIAN 100 MAX 150 AVERAGE 19.38 MODE 20 MIN 0 MEDIAN 20 MAX 35 SECTOR Media and Entertainment accounts for the highest share of open offers by industry sector. There will be a sigh of relief in this area of the market as it had been anticipated that these funds would be targeted for exclusion from EIS in the Autumn budget. However, there is the possibility that some of these products, which use risk mitigators such as Film Tax Credits, Animation Tax Credits, TV Tax Credits or Theatre Tax Credits, and pre-sales distribution contracts, may need to close and re-open with adjusted structures after the new rules introduced by the budget are implemented in summer 2018. Technology is accounting for a growing share of EIS portfolios (up from 20% last year and surpassing General Enterprise), which is in line with the greater focus on knowledge intensive companies in the budget, and is set to increase in the coming years. “Most people in the tax efficient space charge an upfront fee and an ongoing fee, but then you have all these implicit fees which add up, and are often brushed over in the IM, and certainly in investor presentations” — KEALAN DOYLE, SYMVAN CAPITAL MEDIA & ENTERTAINMENT FOOD & DRINK TECHNOLOGY PHARMACEUTICAL / BIOTECH GENERAL ENTERPRISE SPORT & LEISURE INDUSTRY & INFRASTRUCTURE 33% 28% 23% 6% 5% 3% 2% OPEN OFFERS BY INVESTMENT SECTOR % AVERAGE 1.15% MODE 0% MIN 0% MEDIAN 0% MAX 5% AVERAGE 2.19% MODE 0% MIN 0% MEDIAN 2% MAX 7.5% TO INVESTOR TO INVESTEE TO INVESTOR TO INVESTEE AVERAGE 0.55% MODE 0% MIN 0% MEDIAN 0% MAX 2.5% AVERAGE 0.74% MODE 0% MIN 0% MEDIAN 0% MAX 2.25% Where that fee is as high as 7.5%, which is the maximumwe saw this year for open offers, depending on the level of the fundraise, this could total a significant amount. As a result, the returns quoted to investors may be more difficult to achieve, driving a potential need for more risk to be taken to achieve them. The range of initial charges varies widely - from 0% to 7.5%. The average initial charge is quite significant at 3.3%, a rise of 10% from last year’s overall average of 3%. TOTAL INITIAL CHARGE OF OPEN OFFERS % INITIAL CHARGE TOTAL AMC FEES OF OPEN OFFERS % ANNUAL MANAGEMENT CHARGE AVG MODE MIN MEDIAN MAX 0% 1% 2% 3% 4% 5% 6% 7% 8% AVG MODE MIN MEDIAN MAX 0% 0.5% 1% 1.5% 2% 2.5% 3% AVERAGE 0.25 MODE 0 MIN 0 MEDIAN 0 MAX 3 AVERAGE 0.22 MODE 0 MIN 0 MEDIAN 0 MAX 2 AVERAGE 0.08 MODE 0 MIN 0 MEDIAN 0 MAX 0.65 INITIAL DEAL FEE ANNUAL ADMIN CHARGE EXIT DEAL FEE