EIS 2018 report (web)

58 CONCLUSIONS WHAT OUR MARKET RESEARCH TELLS US THE INDUSTRY IS WELL- PREPARED FOR GROWTH CAPITAL The majority of the feedback - both from advisers and investment providers - is that the EIS industry has been gearing up for a shift towards pure growth capital, and the changes from the Autumn budget merely solidify this sentiment. This is encouraging, as it means that the new rules will not result in a paradigm shift for the industry. The principles-based approach has also been largely welcomed. Yes, there may be some grey areas, but the government has been clear on its ethos. The increase in the number of advisers choosing the scheme as a mechanism for growth is encouraging - as opposed to EIS merely functioning as a tax planning solution (although tax planning is still the primary reason for advisers recommending EIS). However, where there may be some challenges is where investment providers are still concentrated on capital preservation strategies. The process of pivoting in order to be compliant under the new rules could be so burdensome that some funds may have to close. It will be interesting to see if there is quite the breadth of open EIS offers available in the next tax year. There’s also a concern that investment providers who have no expertise in choosing growth capital firms may make ill- conceived investments in a rush to make their funds compliant. Investors should be on the lookout for anything that hints at a bubble, especially in sectors such as technology. THE SCHEME COULD BECOME A HNWI ONLY SOLUTION EIS is becoming a more challenging option for retail investors to opt for, and its set to become more challenging as the risk profile of EIS increases. 58% of advisers in our survey believe that EIS is only suitable for HNW or sophisticated investors. One challenge of limiting the pool of investors to HNWIs, is that it doesn’t do the scheme any favours from a political standpoint. Naysayers could argue that the scheme is giving tax breaks to the rich - even if the scheme is providing essential funding for growing companies that will be the lifeblood of the UK economy moving forward. On the other hand, our adviser survey suggests that advisers who are veteran users of the scheme do think that there is scope for use with retail investors - so it potentially takes a little time for advisers to build up enough confidence in EIS to recommend it to lower ticket clients. The reality is, over 30,000 people applied for EIS tax relief in 2015/16. According to Capgemini, there were over 568,000 HNWIs in the UK in 2016 63 - which leaves a huge captive market for the industry to target, even if retail investors are completely disregarded. INVESTMENT PROVIDERS ARE NOT STRUGGLING WITH DEMAND Although the scheme may predominantly be the preserve of HNWIs - there is clearly no lack of demand for EIS investments. This is interesting, as the majority of advisers are unlikely to recommend that a client allocates more than 10% of their investment portfolio to EIS. From our Industry Roundtable discussion, it became clear that some EIS funds were in fact struggling to supply capacity to the demand in the marketplace. Some providers would cap their fundraising in order to prevent any deployment issues. This is a healthy sign that the market is buoyant, and also indicates that investment providers are being prudent with the capital that they receive. INDUSTRY ANALYSIS