EIS 2018 report (web)

36 37 HOW TO ADOPT BEST PRACTICE EXTERNAL DRIVERS THREE WAYS EIS FUND MANAGERS CAN SUCCEED FACTORS TO CONSIDER STEPHEN GEDDES MANAGING DIRECTOR, MAINSPRING 1. MANAGERS NEED TO IMPROVE RECORD KEEPING Some providers run the infrastructure for EIS funds manually using Excel spreadsheets. The problem is these are not robust and they’re not secure. Because they’re so flexible, they can be expanded by lots of different people doing different things at different times resulting in multiple versions. You end up not quite sure what’s happened. These are the fundamental records of someone’s investment, and things do go wrong with spreadsheets. Simple things like rounding of numbers - if you’re performing complex investment calculations - can cause issues; you can get to the point where everyone’s numbers look fine, but they haven’t been rounded, so the total is different to the sum. The FCA requires the fund’s records to be reconciled down to the last penny, if you’re a single penny out then that’s a problem. Fund administrator Mainspring has been active for seven years, and provides custodian and administration operations for a number of EIS fund managers, including TIME Investments, MMC Ventures, Bestport, and Foresight. Another issue is that investor reports get produced using Excel merged into Word. What you need is a single, properly constructed and supported database that can be interrogated, and repeats what it does correctly every single time. We use a robust investment administration platform which we use across all the private equity funds that we look after. It’s called Investran, and it’s provided by a firm called FIS and is used by approximately 80% of private equity fund administrators globally. 2. HAVE A GREAT ONLINE PLATFORM, BUT DON’T FORGET OFFLINE INVESTORS Some fund managers are starting to use their own or third party online portals to do the AML checks and ‘on- board’ investors. Fund managers must make sure that the online experience for the investor is pain-free, because it’s something that can really annoy them. Another issue is that not all investors are ‘e-enabled’ so there are two constituents of investors a fund manager needs to cater for. Ones that are savvy in tech and happy to have their details online. Then there are those who are absolutely not online. They may not even have an email address, but have money and want to invest. You have to have an online and an offline process. Across our entire estate, 20-30% of our investors are not online or don’t trust it. We do have IHT investors, which is going to skew that data, but it’s still a surprisingly high percentage. If you rely only on an online process, you’re going to exclude interested investors. Although effective fundraising and slick on-boarding of investors is important, don’t lose sight of the operational challenges of actually making investments with these sorts of funds. When the day comes to sign documents and allocate the investment between investors and move money to the investee company, you don’t want your fund spread around too many providers; you want to have a specialist custodian who knows how these investments work and is set up to react on any given day. 3. GOOD COMMUNICATION IS PARAMOUNT Investor documents have to be absolutely crisp and clean. You need to give as much information in as clear a way as you can by not over complicating the Information Memorandum. Make sure that the right documents are there, but make it concise. Some of the IMs we see are 60- 70 pages long - does all of it get read? What it always comes down to is information about the underlying portfolio companies. When a fund manager is selling their wares, they’re absolutely upfront about telling youwhat they’re going to invest in and how they’re going to invest. Then it can go quiet. When the information on the portfolio companies comes back, it can be too thin. To get an investor interested in the portfolio you’re building, it’s vital that the fund manager communicates often and with sufficient detail. It’s not just about the valuation, because everyone knows that a valuation can be merely subjective. It’s the writing around what a company is doing, why is it exciting, and what you are doing to improve it - that’s the real challenge and differentiator. It doesn’t need bright colours and funky graphics, because in many ways that detracts. What it needs is pithy, to the point, well-written comment on what’s been going on. At the moment, it’s virtually impossible to mention EIS without referring to the substantial changes announced in the Autumn budget of 2017, which fill many of the pages in this report. One of these was intended to incentivise greater EIS investment in early stage UK Tech businesses, but statistics show that, in terms of actual investment into EIS, they haven’t been doing too badly to date; two particular sectors have dominated in recent times - data by Standard Industrial Classification (SIC) reveals that the ‘Professional, Scientific and Technical’ (including hi-tech firms), and ‘Information and Communication’ (including film, cinema and media) sectors had the highest levels of EIS investment, together accounting for £810m (43%) of investment in 2015-16. When using the Trade Classification system to drill down into the data, including selected companies from other industry groups involved in activities such as research and development, chemicals and computer consultancy, HMRC identified £460m of investment into ‘Hi Tech’ in 2015/16. This totalled almost a quarter of all EIS funds raised in that year and was an increase of £119m from the previous year and £168m from 2013/14 56 . While the recent budget once again revealed the authority of the government to change EIS as it requires, it also strongly confirmed, once again, that EIS is a tool which is fully government-backed. At a time when accountants are warning that HMRC is disputing more self-assessment forms and making more money from investigating people’s tax affairs than ever before, this is a comforting fact: Figures released at the end of 2017 revealed that, in 2016, HMRC raised £1.4 bn from personal tax investigations - a 64% increase on 2015’s figure of £856m, achieved in part through the increasing threat of court action 57 . HI-TECH COMPANIES EIS FUNDING (TCN) NUMBER OF HI-TECH COMPANIES FUNDED BY EIS (SIC) SOURCE: HMRC Under these circumstances, anyone looking for tax mitigation and keen to avoid disputed tax claims, would surely welcome the Advance Assurance stamp of approval that EIS offers. And, with the use of good managers monitoring investments during the EIS qualification period, most investors can be confident that there are no grey areas vulnerable to HMRC scrutiny. No wonder then, that Dan Rodwell, managing director of GrowthInvest, said: “Over the last two years we have seen increasing interest in EIS from financial advisers – those who are experienced in EIS and those wishing to integrate EIS products into their client offering for the first time” 58 . It’s also unsurprising that the statistics show that almost 33,000 investors claimed income tax relief through self assessment forms in the year to April 2016, a slight increase on the previous year. In addition, interest in EIS is expected to rise, despite managers being forced into higher-risk investments as a result of the new rules. This is the finding of an EISA survey, which reported that half of advisers surveyed who already advise on the scheme said interest among investors looked set to rise rather than fall, despite changes meaning managers must invest in more growth-oriented companies 59 . Crowdfunding has also become a significant driver to EIS investing, with HMRC stating “increasing use of crowdfunding platforms” is behind the increased interest in EIS investments. 60 The rise in smaller investment amounts is one of the indicators quoted, but the potential influence of crowdfunding was highlighted even further by research released at the end of 2017 by accountancy firm Cowgill Holloway; Its analysis found that ‘Crowdfunding’ was the UK’s most searched business funding term in 2017 and that it was significantly higher in their league table than the terms ‘business loan’ and ‘bank loan’. 61 To some extent, the rise and influence of crowdfunding has been blamed for making it easier for companies to raise money without clear ambition for, or likelihood of, success, knowing that EIS will give investors tax relief if they close down. Of course, this is something that EIS was never intended to encourage 62 , so the ongoing relationship of EIS and crowdfunding will be an interesting one to watch. Our data clearly suggests that there has been a period over the last year or so, during which both EIS managers and investors have been making the most out of capital preservation plays and, in many ways, who can blame them. And while it is clear that many things in EIS will change in the year ahead, the power of clear-cut tax reliefs is probably not one of them. 2013/14 2014/15 2015/16 250 300 350 400 450 500 200 150 100 50 0 £ MILLION 2013/14 2014/15 2015/16 1000 1200 1400 800 600 400 200 0