EIS 2018 report (web)

48 49 WILL ANY OF YOUR CLIENTS BE TAKING ADVANTAGE OF THE HIGHER INVESTMENT HEADROOM AVAILABLE ON KNOWLEDGE INTENSIVE COMPANIES? FS: We have three or four clients who could take advantage of it, but I think only one or two will end up using a decent amount of it. SJ: Not for our clients. Our clients simply don’t put that amount in at any one time. Some of the big accountancy firms, or perhaps the IFAs who’ve got really ultra high worth clients could take advantage, but that’s not our client bank. Our clients are investing 25, 50, 75 thousand pounds at any one time. Some of them might go up to half a million. DH: It’s not going to make much difference at all. The bulk of our clients don’t like knowledge-intensive companies anyway. They like to invest their money in very tangible businesses and they want to invest into things they can touch and feel, to some extent. Or they want to be able to understand the company they’re investing in. A lot of knowledge intensives don’t allow them to do that. HOW HAS YOUR USE OF EIS CHANGED OVER THE PAST TWO TO THREE YEARS? JC: It’s probably increased a little. I think there’s possibly more awareness of inheritance tax liabilities. Especially from the next generation. Most of these drivers come from the next generation of people who are going to receive the inheritance. AT: I’ve seen a much bigger interest since the impact of the changes in pension contributions. With the lifetime allowances being ratcheted down, clients have withdrawn significant pension assets to fund their children with a property purchase - because kids aren’t going to be earning enough money, either in salary or in savings to be able to buy their first homes. The knock-on effect of what high net worth clients can put into pension schemes has made them become more aware of alternatives, because they got used to getting that income tax credit as part for their tax exempt process. Clients were saying - “I can’t do a pension anymore, or the contribution is so small it’s almost meaningless. So what else can I do?” HOW MANY EIS MANAGERS DO YOU WORK WITH, AND WHAT SPECIFICALLY DO YOU LOOK FOR IN A MANAGER? JC: Actively, about half a dozen different managers. We do like to see somebody who’s been doing these sorts of investments for a long time, rather than the new kids on the block. FS: We work with around a dozen managers, although we’ve done detailed research on over 25 and counting. We look at many factors you’d expect, such as governance, custodial arrangements, quality of reporting and so on. Some of the wider factors that help us understand the role that the fund could play in a client’s portfolio, are consistency of strategy and approach. We’re a bit wary of funds that have switched from one type of investing to another over the years. Maybe that’s unfair, but we want to see consistency. We really like a core definition of the type of investment they make, whether that’s sector- based or a question of size of company, or deal, or whether it’s based on valuation metrics or a combination of factors. We like them to be very clear about that, so we can decide how much to allocate, or how much to advise our clients to allocate to that particular strategy - then clients know what to expect. It’s really helpful for us to know the likely number of years for a typical exit for that fund, so again, we try and introduce some diversification there so clients aren’t tied to a particular exit environment. HOW HAVE THE LAST 12 MONTHS BEEN FOR YOU AND HOW HAVE YOU REACTED TO THE CHANGES IN THE MARKET? DB: 2017 was an excellent year for Blackfinch. We’ve doubled the amount of new business inflows on 2016. With our two EIS portfolios; our Construction Companies EIS reached capacity with demand still high and our Media EIS companies also raised beyond our expectations. We actually carried on raising money throughout the year because we’ve got Advance Assurance on another two investee companies as well - one a gastropub, one a short-haul shipping company. IB: There was little change for us. Largely we are growth capital providers and have been for a number of years so in many ways it was what we wanted to hear. There had been lots of noise that potentially, the EIS market was going to change quite dramatically. In the end, it didn’t do that. The commitment was very much towards our type of growth businesses and making sure that they had access to the capital that they require in order to grow. LC: Within the industry, there was considerable speculation surrounding the eventual outcome of the Patient Capital Review. Of course, there were doomsayers who predicted that there would be changes to the tax relief basis of EIS and asset-backed trades would be banned. Indeed, some people even put those forward as suggestions. Fortunately, those views didn’t prevail and the outcome of the budget was quite sensible - a principles-based test and an enhancement to the funding limits for knowledge- intensive companies. This refocuses toward the intended target businesses. We have restructured our investment team to better reflect upcoming opportunities. Previously, we had a ventures team which focussed on early-stage technology companies. We also had a growth capital team as a separate division within the investment team. These teams have now merged so we can support these companies beyond early stage funding. MB: The changes in the market highlight that there is a constant need to educate advisers on how these specific asset classes, with this tax efficient wrapper, can be a valuable aspect of their advice proposition, and this is a key focus for Ingenious in the year ahead. There is an ever increasing number of advisers using EIS, while at the same time there is a proliferation of new EIS funds in the market to choose from. It is therefore extremely important that advisers are made aware that although there is a number of services which have the EIS moniker, they may vary substantially in terms of risk profile, investment style and quality. Advisers should take the time to understand the sector specialisms, track record and scale of the EIS manager, while the manager should place equal importance on providing education tools to advisers so they clearly understand the benefits and challenges of this type of investment. AA: The last 12 months for us have been positive. We’re still a growing company, so we expect year-on-year growth as we are going through our growth curve. INDUSTRY ROUNDTABLE INSIGHTS FROM EIS MANAGERS ATTENDEES MODERATOR: JOHN SCHAFFER INTELLIGENT PARTNERSHIP JOHN SCHAFFER STEPHEN JONES FAISAL SHEIKH DENNIS HALL JOHN CORNELIUS ANDREW TUSTIN JOHN SCHAFFER INTELLIGENT PARTNERSHIP DOMINIQUE BUTTERS (DB) BLACKFINCH ANDREW ALDRIDGE (AA) DEEPBRIDGE CAPITAL LAURENCE CALLCUT (LC) DOWNING MATTHEW BUGDEN (MB) INGENIOUS IAN BATTERSBY (IB) SENECA PARTNERS KEALAN DOYLE (KD) SYMVAN CAPITAL SARAH BARBER (SB) JENSON FUNDING PARTNERS “All these companies that were chasing solar panels, etc., if they start coming into chasing early stage technology, it could be problematic for us. The reason is it’ll be dumb money chasing returns, and that always results in an asset bubble.” — KEALAN DOYLE, SYMVAN CAPITAL