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2019 Predictions For Alternative Investments

  • By Jason Stockwell

Andrew Aldridge, Head of Marketing at Deepbridge Capital, looks into his crystal ball to see what 2019 has in store for EIS, SEIS, and VCTs.

Being asked for predictions for 2019 is somewhat of a poisoned chalice and given the high-profile uncertainties at home and abroad it may be foolhardy to categorically state that ‘X is likely to happen’.

It should be caveated that political and economic certainty are both, by their very nature, myths but perhaps we can all agree that 2019 has more foreseen uncertainty than most years – at the time of writing, everything Brexit-related is up in the air, the US government is closed, a US and China trade war continues to loom large and Apple has issued its first revenue warning in years.

So, against this backdrop what predictions can possibly be made? I’m certainly not going to make any predictions about who the UK Prime Minister will be by the end of the year, nor will I attempt to make any assumptions around the UK leaving the EU.

With all that in mind perhaps any look at the future for 2019 must begin and end rather closer to home. We all know that different political parties look at the financial services market in different ways, and therefore when looking ahead we must try to adopt an ‘all things being equal’ approach, even if this is a highly unsatisfactory one and means we may have to talk in generalities.

More Investor Uncertainty?

So, what of financial services in general? Advisers are likely to have seen how the uncertainty of our economic and political future has developed into ongoing investor uncertainty. It seems logical to acknowledge that for many this means keeping one’s powder dry, however, let’s also be completely aware of the fact that Brexit does not change the fact we are just a few months away from the end of the tax year or that individuals will continue to want to utilise tax-efficient investments before that particular deadline. Indeed, tax-efficient investments, by their very nature of being unquoted, and therefore largely uncorrelated assets, may be particularly appealing to those appropriate investors who are staying away from the main markets but who wish to see their cash being active.

If we acknowledge that some decisions are way beyond the control of either investment managers or advisers, what are we to make of the tax-efficient investment sector? Needless to say, we are positive about how 2019 might unfold in that regard and believe both advisers and investors will continue to become increasingly aware of the importance of taxefficient investments, especially how they might fit as part of a balanced portfolio. This is a continuing theme from recent years as advisers seek to find alternative tax-efficient homes for investors.

Whatever you might think of the current government, it’s fair to say it – and especially Chancellor Philip Hammond – has been supportive of the EIS, SEIS, and VCT sectors. There appears to be a strong and growing consensus that EIS and SEIS are vitally important for both job creation and economic growth in the UK, and that entrepreneurs and start-ups in particular should have access to a wide and varied array of potential funders who secure their money via such investors.

Significant Shift

We have seen a shift in our sector since the Chancellor announced a return to how EIS was originally envisaged – investment in higher-risk businesses rather than simply focusing on capital preservation. 2019 will also see more meat placed on the bones of the government’s ‘knowledge-intensive’ EIS approved fund structure, as providers consider their options and opportunities, and we get a sense of how this will be delivered to investors.

Some of the core issues with the EIS/SEIS sector are also unlikely to go away anytime soon. A number of providers have struggled to deploy funds expeditiously and within the same tax year, leaving problems for those advisers who recommended such schemes and clients in terms of accessing their tax reliefs. A number of providers have recently had to dramatically change tack in order to meet the changed risk to capital requirements, and we are also seeing newly-formed/refocused teams, who do not have experience in certain sectors, struggling to find the necessary deal flow.

Due to this, the messaging around EIS and SEIS investment stays the same, even in a time of potentially great upheaval. Advisers and investors should continue to focus on those managers that have always been growth-focused and can demonstrate they have the necessary specialism, skills, experience and quality, in their chosen sectors – and importantly have the opportunities available in order to ensure expeditious deployment of capital. For example, our team has spent years operating in the technology and life sciences sectors, and this experience tends to be appreciated by those looking for managers who know what they’re doing and want to ensure that funds are deployed quickly, thereby allowing their investors to claim their tax reliefs.

UK: A Home For Tech

Interestingly, no matter what happens when it comes to the UK leaving the EU, we believe this country will continue to be seen as a great home for technology and life sciences start-ups and scale-ups. The UK has a rich history in these sectors, and we as an investment manager work particularly with universities and science parks to help support those firms who are established here. When speaking with entrepreneurs and venture capitalists overseas, it is particularly interesting to note that globally the UK is still seen as one of the best places for tech start-ups to be based as there is funding available – this reputation is unlikely to be tarnished by Brexit, certainly not in the short term at least.

Overall, while 2019 does look politically uncertain and the results of such uncertainty are never going to be overly positive, we believe the EIS/SEIS market is in a great position for the next 12 months and beyond. We have growth-focused businesses here that need investment and who want to create jobs, exports and deliver further innovation.

However, there are still ongoing issues for some managers to overcome, particularly as those who were previously focused on ‘capital preservation’ propositions adapt to the new world. We do not wish to see unnecessary deployment delays and sector inexperience damaging the reputation of the EIS as a whole.

2019 can deliver great opportunities for advisers and investors – as always, it depends on the client circumstances and appropriate advice – but let’s not kid ourselves that we know what is coming next, after all I’m pretty sure our politicians don’t know either.

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