Despite a rising risk profile, EIS investments provide fantastic growth opportunities for investors, especially where they have maxed out their pension and ISA limits.

The new restrictions on asset backing were a positive step from the adviser perspective, as EIS is now easier to advise on, and it is contained within one risk bucket.

In February 2019, there were 63 open EIS offers available in the market, so there is certainly ample choice. But what questions should you be asking as an adviser?

What are the fees?

Fees across EIS offers are not homogeneous, and this is a serious consideration to be aware of. Fees come in the form of annual management charges (AMC), initial fees, and performance fees to name just a few.

Of course, this is an area that requires significant research and due diligence, so higher fees are to be expected.

According to MICAP data, the average AMC for open EIS offers in February was 1.65%. The highest initial charge amounted to a significant 5%.

High fees can erode away returns, especially over the long term. This is worth considering as EIS investments are realistically long term investments. A five to 10 year time horizon should be expected, rather than the three year minimum holding period to be eligible for income tax relief.

Fees can also be levied on investee companies. This means that the underlying companies are receiving less of the funding they require to grow their business towards a profitable exit.  

Is the manager robust?

With the realistic time horizon of an EIS investment being so long, advisers should question how robust the manager is. Will the manager be around in 10 years to fulfill a long term venture capital investment?

EIS managers, in general, are rather small financial institutions in comparison with some of the large fund managers. It’s also worth considering that EIS investments do not qualify for FSCS protection.

Is the manager a generalist or a specialist?

Does the EIS manager have a sector focus, or is it a generalist? Some EIS managers will have a sector focus in technology or medical applications, for example. Specialists have the opportunity to garner a better network and knowledge of a chosen sector, whilst generalists have more scope to diversify.

After the 2017 Budget rule changes, many managers pivoted their offerings from an asset-backed focus to growth capital. It’s worth scrutinising whether these managers have adequate experience as a growth investor.

Is enough being done to mitigate tax risks?

Fundamentally, Advance Assurance is king. If it isn’t in place, don’t touch it.

How quickly a manager can deploy capital is another consideration. Investors will only receive income tax relief when the manager has deployed the capital and has issued an EIS3 form.

According to MICAP data, the most common time frame for deploying EIS capital is 12 months, but some EIS managers are deploying capital in 18 months or more.

Investment managers will be reliant on there being suitable deal-flow available, and this is not necessarily guaranteed.

There is certainly no shortage of opportunities, but managers will have to do their due diligence to find investments that have the best growth prospects for their clients.

How many exits has it had in the past 12 months?

Publicised exits are few and far between in the EIS marketplace, so it is key to ask managers what its exit track record is like. Advisers should also be mindful of what sort of exit has occurred. Was the exit involving a true growth company that would be in line with the current risk-to-capital rules?

There have been significant success stories in the EIS marketplace. In 2018 Par Equity achieved a 75x return for investors with its ICS Learn investment. Other notable EIS exits included Gear4Music and Buying Butler.

Good managers can pick more winners, but they can also accelerate an exit event through their guidance and network, such as a series A funding round.

However, there will also be failures, especially now that the focus is purely on growth capital since the 2017 Budget (and loss relief may be available on these). It’s prudent to expect around a third of EIS investee companies to fail. However, these failures should be offset by the success of the winners. Transparency over failures among EIS providers should be seen as a positive, as these are inevitable.

Most providers will assign a value to their current EIS portfolios. However, this value can be somewhat arbitrary if it is based on unrealised investments. Real value is only generated upon the exit of an investee company.