EIS Industry Report 2018/19

APRIL 2020 APRIL 2025 46 47 EXIT STRATEGY HOW MANAGERS DELIVER PERFORMANCE While the performance of listed companies can be ascertained through their current share price on the relevant market, the only time to reliably judge the performance of an unlisted EIS investment is on exit. Only 6% of the 17,000+ companies tracked by Beauhurst have exited to date (compared with 8% that have died). 46 To qualify for tax relief, EIS investments must be in unquoted companies - either small companies not listed on any recognised exchange, or listed only on AIM or NEX. Without a quoted share price to refer to, investors must rely on valuations through instances, such as further fundraising, or shareholder information provided by the investment managers. Crucially, HMRC prohibits “pre-arranged exits” for EIS qualifying shares - so it is important to consider the facts of each investment and make an appropriate judgement. AIM vs unlisted EIS Investment into shares in AIM or NEX listed companies allows for a clearly defined exit strategy via the sale of shares on the exchange (subject to the minimum holding period if tax reliefs are to be retained). The exit strategy for unlisted shares will be dependent on its own circumstances. It is important to note that any such exit strategy is not guaranteed and may take much longer than anticipated to realise. The majority of EIS offers are not focused on companies that are listed on an exchange. Approximately 30% of shares quoted on AIM are believed to qualify for EIS reliefs, but these shares only qualify for tax relief if they are subscribed to via a new share issue - i.e. buying them directly from the company issuing the shares. AIM shares can qualify for EIS either via an IPO, or subsequent placement of the shares. Shares bought and sold on a secondary market don’t qualify for EIS relief. Anticipate a long-term investment EIS investors will have to hold an investment for a minimum of three years to qualify for income tax relief. However, as discussed previously in our deep dive on tech offers, many offers will not achieve an exit immediately after the three-year qualifying period. Although the majority of open EIS offers (40.7%) target an exit after three years, nearly 28% of offers expect an exit in four years, and the same is true for offers that expect an exit within five years. However, these figures only stipulate a minimum investment term, and the reality is that the time to exit could be much longer. There have been very few publicised EIS exits over the past year, so it’s safe to assume that investors should expect between four and eight years for an EIS exit to materialise. Launch NOV 2016 APRIL 2017 APRIL 2019 Close 2nd anniversary deadline deployment Fund raising 2-year investment phase Unlimited phase for business exits and follow-on investments, but targeting exits after three years, unless offers received, otherwise, justify foregoing tax relief £ Co 1 Exit Co 1 Min 3 year hold for tax relief Exit Co 2 Exit Co 3 £ Co 2 £ Co 3 Cash returned to investors on successfull exits Investors can claim loss relief on any business failures Indicative Timeline Trade sale of the shares or assets of the investee company Management buy-out Sale of shares to other shareholders or through a buy- back by the investee company itself Sale of shares on an exchange (such as AIM) following an IPO Common methods of EIS exit MINIMUM TARGET INVESTMENT DURATION (OPEN EIS OFFERS) 22 15 15 1 1 0 3 years 4 years 5 years 6 years 7 years 8 years Considerations for Investment / Exit Strategy