EIS 2018 report (web)

66 67 “There is now little difference in terms of average initial fee between Growth and Capital Preservation and Growth Offers.” TARGET RETURNS MINIMUM SUBSCRIPTION Average Growth target returns have dropped slightly, while mode returns for this strategy have gone up by a third to 300%, with close to half of those offers with a target return using this figure. There looks to be due to a minority of managers applying much lower rates which drag down the average. Again, as we would expect, because of the potentially higher risk profile of Growth offers in comparison to Growth and Capital Preservation offers, the mode and the average for minimum subscription is substantially higher for Growth. This raises the bar higher for participation and this bar is likely to rise further with more risk. AVG MODE MIN MEDIAN MAX AVG MODE MIN MEDIAN MAX HISTORICAL OFFERS GROWTH CAPITAL PRESERVATION CAPITAL PRESERVATION & GROWTH GROWTH & INCOME SUPER GROWTH £120,000 £80,000 £60,000 £40,000 £20,000 0% £100,000 2017/18 OFFERS £120,000 £80,000 £60,000 £40,000 £20,000 0% £100,000 GROWTH CAPITAL PRESERVATION & GROWTH HISTORICAL OFFERS CAPITAL PRESERVATION CAPITAL PRESERVATION & GROWTH GROWTH GROWTH & INCOME SUPER GROWTH 1800% 1200% 1000% 800% 600% 400% 200% 0% 1400% 1600% 2017/18 OFFERS 1200% 800% 600% 400% 200% 0% 1000% CAPITAL PRESERVATION & GROWTH GROWTH MINIMUM FUNDRAISE “There have certainly been some high and slightly questionable exit performance fees in the past in both Growth and Capital Preservation and Growth. For 2017/18 offers, there are no real surprises, with these fees staying around the 20% mark.” MARKET COMPOSITION The EIS market is now composed of just two strategies - Capital Preservation and Growth and Growth. While Growth’s domination of the market has increased, the recent rules changes suggest that, this time next year, we will only see new Growth offers. We also expect a shake-up in the underlying investment sectors with General Enterprise making a come-back from its current low level, and Technology to continue making more significant gains. The massive popularity of Media and Entertainment, with almost 50% of the market, could take a hit, depending on how much of its appeal is connected to glamour and how much is due to risk mitigators that may no longer be allowable within EIS. CHARGES There is a trend for increasing charges for EIS offers and the tendency that we identified last year for more charges to be paid by the investee, rather than the investor, has continued. This is particularly noticeable in the Initial Fees overall, although AMCs have remained largely unchanged. However, Exit Performance fees have also remained stable, but the underlying trend appears to be an increase for the standard fee from 20% to 25% in the near future. This would appear justifiable where Growth is becoming the most highly prized (and in fact, only) strategy, but Performance Hurdle rates most often quoted at just 100% don’t currently reflect a great deal of manager confidence in the growth they can achieve. TARGET RETURNS AND MINIMUM SUBSCRIPTIONS Having said that, Growth offers are driving higher target returns, at a third higher than the historical mode. Growth offers are also pushing up the average minimum subscription, consequently raising the bar for the type of investor who can afford to take the kind of risk that these offers currently need to take. Our assumption is that this will increase further as the new rules aimed at eliminating capital preservation strategies come into play. MARKET ANALYSIS CONCLUSIONS The average minimum fundraise figures are telling, with Capital Preservation and Growth offers introducing some very significant fundraises in 2017/18, with an average almost 5 times the historical figure. Growth offers, on the other hand, have remained quite steady. AVG MODE MIN MEDIAN MAX HISTORICAL OFFERS £14M £16M £6M £10M £2M £12M £4M £8M £0 CAPITAL PRESERVATION CAPITAL PRESERVATION & GROWTH GROWTH GROWTH & INCOME SUPER GROWTH 2017/18 OFFERS CAPITAL PRESERVATION & GROWTH GROWTH £14M £16M £6M £10M £2M £12M £4M £8M £0