With Prime Minister Boris Johnson’s move to prorogue Parliament the latest in an increasingly tense relationship between the various parts of Government, and with sterling and stock markets facing increasingly uncertain times, patient capital investments may be worth considering as an investment option.
The economic and political climate can make it tough to know where to invest capital, as it is hard to know which way the wind will blow next.
One area that at least provides some protection against these shocks is patient capital. Those which receive taxable benefits requiring minimum holding periods, such as the Enterprise Investment Scheme (EIS) and business relief (BR) may see an uptick in interest as investors look for ways to store and grow capital during the uncertainty.
Despite the vote for Brexit happening over three years ago, the political and economic uncertainty it has resulted in shows no signs of dissipating, even though the UK is set to leave by the end of October.
Until this date, and probably beyond it, uncertainty looks certain to continue. For products like EIS and BR, however, investments are made with a view to lasting several years – at least two years in the case of BR and three years as a minimum for EIS. In reality investments tend to last longer than the minimum, especially in BR, where they need to be held until death in order to qualify for inheritance tax relief.
The longer-term nature of these investments ought to smooth out some of these short-term shocks of the present climate.
Similarly, while this uncertainty could lead to stock market volatility, EIS and BR investments are, to an extent, insulated from this. In order to qualify for the reliefs, neither will involve FTSE shares. Instead they will at most be involved in AIM listed companies or unlisted entities.
While investing in unlisted or AIM listed companies remains risky, unlisted shares are totally uncorrelated to the performance of the stock market, and therefore have an additional level of protection in case panic hits the stock market and contagion takes effect. AIM shares, meanwhile, may be volatile in the short term but have posted impressive medium to long term performances in the past.
In fact, the minimum holding periods required to qualify for the tax reliefs offered by EIS and BR work as lock in periods with a dual purpose; not only do they prevent investors from withdrawing at the first sign of a decent return, but also at the first sign of trouble. And that’s what patient capital is supposed to do.To some extent, this can also protect the investor from their own, short term, knee-jerk reactions.
In these uncertain times, this can also be hugely beneficial for UK business, helping them to retain the capital they need to navigate choppy economic waters.
None of this is to say the risk which existed before has gone away. EIS investments will still be risky due to the size and age of the businesses requiring it. Exit risk will still exist regardless of what happens with Brexit.
As the British economy lurches towards the Brexit date, there are no 100% safe bets in investments. EIS and BR still remain risky propositions and investors should speak to financial advisors before making a substantial investment. That said, the current uncertainty may well make their longer term benefits more attractive to prospective investors.