The EIS market has continued to grow, with new products and providers entering the market, and new service providers for IFAs and investors. It seems that this growth is being driven by lower pension limits, greater awareness of the scheme and more advisers using tax advantaged investments to implement sophisticated planning strategies. The work that the biggest providers, the EISA and their membership are doing to reach out to advisers seems to be paying off.
However, the biggest driver of growth in new investment over the last few years has now been switched off: subsidised renewable energy investments no longer qualify for the EIS. In November 2015 this was extended to ‘peak power’ projects, which share similar investment characteristics in as they are cheap to install and maintain and have contracted revenues (ironically, they do not share the same green credentials as renewables as they usually burn fossil fuels). This must represent a speed bump for the industry, but doubt if it is more than that. The other drivers for new investment, such as pension changes and more sophisticated planning mentioned above will kick in, and it may turn out that many of the advisers and investors who were introduced to EIS investments by the mini-boom in renewables will continue to invest in EIS. Certainly, as they begin to exit those investments they may well feel comfortable leaving that money in the EIS sector, and recycling it for further income tax relief (and to maintain the IHT exemption).
Other changes to the legislation governing the EIS scheme have been made to ensure ongoing compliance with EU State Aid. The changes are not ideal and will signal the end of some capital preservation based business models (such as acquiring and renovating pubs) and will make investing in mid-sized companies harder than investing in early stage companies. This is a meaningful change for the industry, but nothing more than that. The EIS has always had a focus on early stage companies and, while there may be a period of adjustment and new administrative burdens for the EIS managers, the industry is more than able to adapt. However, for advisers assessing EIS investments and looking at performance track record, a track record based on investing in renewable energy or a strategy of acquiring businesses is less relevant now.
There is still a dearth of exits ( not in the planned exit products, but the growth funds), and the industry will need to demonstrate more successful exits to continue to build confidence in the product and attract those advisers and investors who have been observing from the sidelines and waiting to see more evidence that EIS works as a pure investment and not just as a tax planning exercise.
As more advisers and investors start to consider EIS, platform based solutions and research and due diligence tools such those provided by Kuber Ventures, Mercia Fund Management, Lawson Conner, Seed EIS Platform and MICAP are now viable propositions. They aim to make advisers’ lives easier by simplifying and speeding up the advisers’ business process. If they are successful, they will become another driver of growth in EIS investment.
SEIS, SITR and Crowdfunding are all exciting developments in the sector. SEIS has the most generous reliefs, but the small limits on the amounts that can be invested make it hard to cover the fixed costs of sourcing and putting together the deal flow required for a fund. However, in 2016 we should see the first exits from SEIS and we’ll be able to start to evidence how the scheme is working. We know anecdotally that successful SEIS businesses can secure subsequent EIS funding, and this would appear to be a route up the ‘funding escalator’ that managers will be able to construct for investees. SITR (Social Investment Tax Relief) looks very appealing and we can see how this could provide interesting and engaging investments for clients along with appealing tax reliefs. Crowdfunding has democratised access to the EIS reliefs and we think that as long as the investments are small and made with realistic (i.e low) expectations this is a good thing. It remains a peripheral issue for the EIS industry at the moment though.
Against this background, fundraising will continue to grow over the next few years and the industry will continue to rise in prominence. As investors successfully exit investments and recycle the money into new opportunities and a further round of reliefs, confidence will rise and more people will be persuaded of the benefits.