EIS Industry Report 2018/19

25 24 EXIT PERFORMANCE FEE Exit performance fees are only applied when the underlying investment has been exited. In this respect, this is a fee that is gained by the managers through proven merit. Some managers will charge lower ongoing fees in exchange for higher performance fees. From an investors point of view, this may be a more favorable approach as the investment manager has to have its skin in the game. It is likely that the EIS market will become far more performance fee orientated in the coming years, as investments will no longer be focused on merely returning the investors, capital in a bid to chase the tax relief. MINIMUM SUBSCRIPTION Average minimum subscriptions have changed little from last year’s figures. However, the most common entry level is still £10,000, which makes EIS only really suitable for HNWI and sophisticated investors. In our last edition of the EIS report, we revealed that although EIS is only really suitable for this area of the market, there are over half a million HNWIs resident in the UK. This presents a very large captive market for EIS. SHIFT TO GROWTH HAS NARROWED AVAILABILITY (FOR NOW) EIS’s shift to pure growth capital has caused the market to narrow somewhat, with the exclusion of capital preservation offers. The dip in the number of offers available was to be expected. However, over the coming years, we expect more offers to enter back into the market as EIS managers who were previously focused on capital preservation, devise a strategy for pivoting. Of course, some providers have already pivoted their EIS offerings to a growth capital strategy. Others may take a little more time, especially if they have no experience of investing in the companies that qualify under the new rules. What is clear is that there is a substantial amount of capital looking for an ‘EIS-able’ 21 home. However, there is an argument that the EIS market may have peaked somewhat. It is unlikely that we will see the full gamut of offers that were available during the capital preservation era. HIGH GROWTH TARGETS ARE A POSITIVE STEP The high growth targets of EIS offers that are currently available in the market is a reflection of the commitment to growth capital that the government has required. As EIS has moved away from any hint of being a pure tax play, the potential for high growth will be expected by investors. However, advisers should consider that in some cases, SEIS may be a better option. If EIS offers present such high risk, then SEIS may present a similar risk profile, but with 50% income tax relief, as opposed to 30% income tax relief. What’s also worth considering is how the drive towards knowledge-intensive companies has increased incentives and flexibility for both investors and companies. It will be interesting to see how demand for this area of the market develops over the coming years. BEWARE OF HIGH ONGOING FEES Fees are of course, to be expected from investment managers. However, advisers should be aware of offers that charge high ongoing fees that have no correlation to performance. High ongoing fees can push up the risk profile of an EIS investment. It can also disincentivise investment managers from achieving growth. On the other hand, it is encouraging to see that most EIS offers are focusing on exit performance fees, which are, of course, based upon merit. We expect the EIS market to become more focused on performance fees in the coming years, as offers will no longer be aiming to merely return investors’ capital. Average Mode Median Minimum Maximum £18,055.56 £10,000 £15,000 £5,000 £100,000 Average Mode Median Minimum Maximum 19.31% 20% 20% 0% 30% 1. 2. 3. Market Update / Sector Analysis Market Update / Sector Analysis Sector Analysis Conclusions The most common minimum subscription for an EIS offer is £10,000