Round Up Spring 2019

Guest article

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John Schaffer Investment writer Intelligent Partnership

How many exits have they had in the past 12 months? Publicised exits are few and far between in the EIS marketplace, so it’s key to ask managers what their 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

Is enough being done to mitigate tax risks?

be somewhat arbitrary if it’s based on unrealised investments. Real value is only generated upon the exit of an investee company.

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 timeframe 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.

Is the manager a generalist or a specialist? Does the EIS manager have a sector focus, or is it a generalist? For example some EIS managers will have a sector focus in technology or medical applications. 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.

There’s 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.

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