EIS 2018 report (web)

21 20 Advisers should note that the data here is the total target return to investors on the target exit date, net of all fees and charges, and ignoring any associated tax reliefs. Consideration should also be given to the risk involved and the likelihood of an exit - which is by no means guaranteed. INVESTMENT STRATEGY Growth strategies have, unsurprisingly, increased exponentially in 2017 - the growth test implemented from the 2015 budget will have pushed portfolios down this route. Growth strategies now account for over 78% of all EIS portfolios strategies. This is likely to move further towards 100% in the coming years, with capital preservation strategies no longer being eligible for tax relief under EIS. MICAP data for 2017 only refers to two strategies. Pure play Capital Preservation strategies have now disappeared from the market. MINIMUM SUBSCRIPTION The minimum subscription of open offers has kept in line with historical figures, with the most common entry level being £10,000. The highest minimum subscription at £100,000 is somewhat of an anomaly. MINIMUM FUNDRAISE The average minimum amount that a manager requires to proceed with their offer is over £3m. This is over £1m more than last year’s average figure. Although the mode of £2m is the same, the maximum value has nearly doubled. This could reflect growing confidence of EIS managers, despite the Patient Capital Review (or, an effort to make the most of the existing regulatory landscape before the introduction of new rules). TARGET RETURNS Average target returns have been pushed up from 173% in 2016 to 216.24% in 2017. This could be due to a greater focus on growth-based companies, and a move away from capital preservation strategies. The highest target return is 922% as opposed to 450% in 2016. INVESTMENT TYPE Alternative investment funds have increased their share of the market in 2017 vs 2016 figures. Alternative investment funds are a relatively new creation and were brought into being by the Alternative Investment Fund Managers Directive in 2013. In an EIS or SEIS context, AIFs have been called the most simple of funds to manage. Alternative investment funds cannot be marketed to the general public and authorised persons must carry out an “appropriateness test”. This test has a lower threshold than the suitability test. Once the appropriateness test is completed, the investment manager can proceed with investing the client’s money. Discretionary portfolio services (or MiFID portfolios), on the other hand, have more onerous requirements, but offer clients greater protection. Portfolio managers are obliged to carry out a suitability test on each investment they make. 15 “Fund management fees to investors are the carbon monoxide of the EIS/SEIS investment universe, quietly killing investor returns.” — KEALAN DOYLE, SYMVAN CAPITAL OPEN OFFERS BY STRATEGY Initial charges Average charges between Capital Preservation and Growth, and Growth portfolios are fairly similar. However, the most commonly charged (mode) initial fee is notably higher with Growth strategies, suggesting a premium is applicable for an undiluted growth focus. Annual Management Charge Much the same as initial charges, the average AMC is higher in Capital Preservation and Growth strategies, whilst the Mode is higher in Growth strategies. Mode AMCs for Growth strategies are higher vs 2016, when the average was 1.18%. This may be due to a greater number of investment providers pivoting towards this strategy, and passing those administration costs onto the investor. Exit Performance Fee The fees for the Capital Preservation and Growth strategy have risen this year by 6.6%, possibly as a result of portfolios pivoting away from pure play Capital Preservation strategies. However, it’s worth noting that the most common exit performance fee for the Capital Preservation and Growth strategy is 25%, which is the same as the exit performance fees for capital preservation in 2016. Target Returns The nature of pure Growth strategies naturally lends itself to higher average returns. Average target returns for Growth strategies have risen compared with 2016 data. Minimum Subscription The minimum subscription for Growth strategies is, on average, very substantial. With the most common minimum subscription being £25,000. In 2016, the mode for Capital Preservation and Growth, Growth and Super Growth was £10,000. With this increase in the most commonly quoted minimum subscription for EIS products with a Growth strategy, it does appear to push these investments further away from the reach of many retail investors. 78.46% 21.54% INVESTMENT STRATEGY (% OF OFFERS) CAPITAL PRESERVATION & GROWTH GROWTH ANTERNATIVE INVESTMENT FUND DISCRETIONARY PORTFOLIO SERVICE SINGLE COMPANY 0 20 60 40 40 44.62 15.38 OPEN OFFERS BY INVESTMENT TYPE % “Resistance to fees is a natural starting point for most people. My answer would be ensuring that investors and advisers understand exactly what they are being asked to pay for.” — IAN BATTERSBY, SENECA BREAKING DOWN THE MARKET BY INVESTMENT STRATEGY CAPITAL PRESERVATION AND GROWTH GROWTH “The exit performance fees for the Capital Preservation and Growth strategy have risen this year by 6.6%.” AVERAGE 216.24% MODE 120% MIN 110% MEDIAN 192.5% MAX 922% TARGET RETURNS AVG MODE MIN MEDIAN MAX 3.46 3.5 2 3.5 7 3.26 5 0 3 7.5 INITIAL CHARGES OF OPEN OFFERS BY INVESTMENT STRATEGY AVG MODE MIN MEDIAN MAX 1.46 1.5 0 1.5 2 1.24 2 0 1.5 2.55 AMC OF OPEN OFFERS BY INVESTMENT STRATEGY AVG MODE MIN MEDIAN MAX 20 25 0 22.5 30 19.22 20 0 20 35 EXIT PERFORMANCE FEE OF OPEN OFFERS BY INVESTMENT STRATEGY AVG MODE MIN MEDIAN MAX 120.56 120 110 120 130 234.56 300 110 200 922 TARGET RETURNS OF OPEN OFFERS BY INVESTMENT STRATEGY AVG MODE MIN MEDIAN MAX £14,286 £10k £10k £10k £25k £19,706 £25k £5k £2k £100k MINIMUM SUBSCRIPTION OF OPEN OFFERS BY INVESTMENT STRATEGY AVERAGE £18,538 MODE £10,000 MIN £5,00 MEDIAN £15,000 MAX £100,000 MINIMUM SUBSCRIPTION AVERAGE £3,194,839 MODE £2,000,000 MIN £150,000 MEDIAN £2,000,000 MAX £15,000,000 MINIMUM FUNDRAISE