EIS 2018 report (web)

38 39 THE FEES DEBATE SHOULD FEES BE CHARGED TO THE INVESTOR OR INVESTEE COMPANY? WHAT ARE THE KEY BENEFITS OF CHARGING FEES TO THE INVESTOR? IB: At least investors know what the fees are if they are paying them, and investors are likely to ensure that such fees are kept to a reasonable level as opposed to sometimes opaque charging of investees. It follows that investors will then be more able to assess whether they are obtaining value for money. LC: The FCA was quite clear, post RDR, that charges that were paid by investors needed to be seen to be paid by investors. If you start burying them within the structures, are you really operating in the spirit of that requirement? We don’t think you are. People forget that the underlying companies are owned by the investors anyway. You should be transparent. No one should be trying to say that these products are low cost, because they aren’t. With all the due diligence and work that’s involved, you should be as transparent as you can be. There is also a pressure that you have to be wary of, that the advisers’ sales process tends to focus on two types of charge: the initial adviser fee and the ongoing adviser fee. Consequently, there’s a temptation for providers to remove those from WHAT ARE THE KEY BENEFITS OF CHARGING FEES TO THE INVESTEE COMPANY? AA: The reason we charge investee companies and not the investor is that, our founding partner was previously raising funds in New York before he returned back to the UK and set up Deepbridge. As he describes it, if he took a great deal to investors in New York and said, “I’ve got this great investment opportunity, but by the way, I’m going to charge you X% for the privilege”, they’d probably have thrown him off the top of the nearest skyscraper. From our perspective, we keep the lights switched on with the fees we charge investee companies, but that’s not how ultimately we will make money as a business, that will be through producing successful exits and receiving performance fees. But we do charge investee companies a fundraising fee - which we think is normal. We disclose to investors what we are charging the investee companies, but ultimately we want the investors to get 100% of shares allocated to them, and we want them to get 100% of tax relief on their investment. KD: 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. These ongoing fees can add up to another 3% per year. When you charge fees to the investor, the real scandal is that the fund manager often makes more off the investment than the investor. their product, because it makes the total sum of initial and ongoing fees look lower and they aren’t necessarily, you’ve simply moved the charges from one place to another and called them something different. Our view is there’s not enough transparency in the market at the moment, and it won’t take long for the FCA to have a look at it. It doesn’t matter where the charges are, you’ve just got to tell people what they are and be honest about it. WOULD YOU LIKE TO SEE FEES STANDARDISED TO MAKE IT EASIER FOR INVESTORS TO MAKE LIKE FOR LIKE COMPARISONS? IB: Standardisation is quite a difficult measure conceptually with growth capital investing. Not only is each investee a potentially unique situation, but also the due diligence processes and post investment control and monitoring will be quite variable between providers from one business to another. For example, taking board positions in investees and attending monthly board meetings, analysing monthly trading information etc., can absorb substantial time and cost versus investing via an IPO round. IS CHARGING FEES TO INVESTEE COMPANIES LESS TRANSPARENT THAN CHARGING FEES TO THE INVESTOR? LC: It depends on whether these are disclosed. If there is a 2% initial charge, you know perfectly well you’re paying 2%. If investors are told they are being charged 2% , but it will be put it into the underlying company because it’s more tax efficient to do that, investors still know they’re being charged 2%. If providers merely do that and don’t tell their investors, they don’t know what’s going on! Charging fees to investor Charging fees to investee “There’s not enough transparency in the market at the moment, and it won’t take long for the FCA to have a look at it. It doesn’t matter where the charges are, you’ve just got to tell people what they are and be honest about it.” — LAURENCE CALLCUT, DOWNING DO YOU SEE JUSTIFICATION FOR INCREASING EIS FEES AND WHY? IB: 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. Historically, some providers have felt able to charge flat fees when deploying industrial scale amounts of capital into single assets that required little ongoing management. Growth capital deals are wholly different and more complex through the due diligence, execution and post investment phases. Advisers and investors rightfully expect management of their money to be tightly controlled, often for periods of 5 or 6 years in an EIS context. These are real businesses which require time and resource. We defer annual management charges until investors get back at least their original investment amount so there is a minimum basis to what they are paying for. We have no plans to increase fees in the near future, but like anybody else we would expect to fully justify the reasons why if we did intend to do so. LC: It’s down to the fact that, when we could do, during the course of the year, £70mworth of renewables in EIS quite easily, naturally that means that you’ve got cost savings that come from the volume of business that you’re writing. If you’re having to structure relatively small EISs of £5 - 10m, then the set-up costs for that are not really materially different, but it’s not spread across as wide an investor base. That’s one of the factors contributing to rising costs. LAURENCE CALLCUT DOWNING ANDREW ALDRIDGE DEEPBRIDGE IAN BATTERSBY SENECA KEALAN DOYLE SYMVAN CAPITAL “At least investors know what the fees are if they are paying them, and investors are likely to ensure that such fees are kept to a reasonable level.” — IAN BATTERSBY, SENECA