EIS 2018 report (web)

80 81 REPORT CONCLUSIONS CONCLUSIONS SUMMARY OF OUR FINDINGS WHAT A RISING RISK PROFILE MEANS The rising risk profile of EIS poses the question of how the investor base is being affected. The changes from the 2015 and 2017 budgets look to have notably reduced the circumstances in which many EIS investments might be suitable for retail investors. In fact, it appears that some sectors of the EIS manager industry are begrudgingly admitting that EIS is a high net worth individual (HNWI) investment. For them, the risk profile and average entry level are now moving out of the comfort zone for even wealthier retail investors. It is likely that it is these managers that are also moving towards the alternative investment fund model - which excludes retail investors. However, in 2016, 33,000 people applied for tax relief through EIS. At the same time, there were over half a million HNWIs residing in the UK in 2016 - suggesting that there is a large, untapped market with spare cash to invest in schemes offering secure tax reliefs for the coming years. ADVANCE ASSURANCE - IT’S STILL HERE! Amidst the backlog that HMRC is currently facing with Advance Assurance applications and its concerns about the substantial resources it has been eating up - it is encouraging to see that the government is still prepared to offer this service. Advance Assurance gives EIS the government’s stamp of approval, and despite the grey areas that the new conditions for application bring up, the pledge of a 15 day turnaround is a commitment that has never been made before. It promises to make EIS set-up time, investment and tax reclaim far more time-efficient going forward. THE AMOUNT OF OPEN FUNDS IS LIKELY TO SLIM DOWN Next year, it is likely that we will see a reduction in the amount of open EIS funds. The funds that currently have a focus on capital preservation strategies will have to pivot towards growth strategies, and some may choose not to offer an open fund for new investors. It’s worth noting that experience does not have the same weight as it once did in the EIS industry. Even if an investment manager has a long track record, it doesn’t mean that they will have experience with growth capital companies. In fact, some will be starting from square one. However, this in no way means that the sector is doomed. Many providers have always focused on growth capital, and others have been successfully pivoting since the changes that were implemented in the 2015 budget. In fact, the new environment is far more transparent for investors. The lack of a capital preservation option will lessen concerns of the scheme being withdrawn in the future. It will also clarify the focus on UK SMEs, high growth and the risks and rewards that come with it.