On June 6th, 12 delegates with varying backgrounds but a common interest in discussing EIS with their peers gathered in the magnificent Victorian atrium at Hambro Perks in Westminster.
The round table discussion was chaired by Richard Angus, Head of Business Development at Hardman & Co, the independent investment research firm, alongside Alex Sullivan, Managing Partner of IFA Magazine.
After a brief round table welcome and introductions Richard posed the first question of the discussion, asking after 25 successful years “where does the table think that the EIS market stands now?”
Andrew Aldridge, Partner and Head of Marketing at Deepbridge remarked that “the EIS market has never been in ruder health than it is now. It is now established and we recently saw the statistics from 2017/18, which was a record year for EIS fundraising. There is big money staying in EIS and the prospects are excellent.”
Do people get EIS?
But of course, there are still issues the EIS market needs to address and it was felt that as a slight step aside from standard investment, there is pressure from Prudential Regulation Authority (PRA) industries on ‘outside the box’ ideas. Everybody recognises that EIS is a complicated product, but it can be, and needs to be, simpler to communicate. Correctly, the regulatory stance is that it is a high-risk investment, but it needs to be more specific about high risk so advisers can explain it more clearly.
EIS is still seen as niche, but perhaps not as niche as it was. Some delegates felt the perception among IFAs is that the tax benefits tail is wagging the investment dog, and there aren’t a huge number of mainstream clients who are interested. As Nick Baker, IFA at Positive Solutions in Sussex put it:
“There is not enough information for us as advisers to be able to confidently say to a client ‘it starts here, this is what happens, and it ends here’, which is what most people like and can easily understand. Instead you have to say it might be 3, 5 or 7 years. I know it is a tax issue, but they are looking at it as an investment. If you can’t give a defined termination, standard investors will say, ‘Then I’m not interested – what else is there?’”
Where are the opportunities?
So, if EIS is outside the compass of the ordinary investor, where is the capital funding going to come from?
Richard Angus observed: “We have talked to the biggest wealth managers in the country and there is a concern that if the advisers aren’t informed on EIS some opportunities could get lost in translation – no adviser wants to give a bad sales pitch. We think the 55-65 year old bracket of current or ex-businesspeople, if made more aware, would be very interested in putting capital in this area.”
Aldridge agreed, saying: “In any walk of life there are the good and the not-so-good. Any adviser who has worked in this space and knows it well can have an eloquent conversation with clients.
“For many advisers, particularly if they have clients who are business owners, the CGT could be the initial trigger point for considering EIS, rather than income tax relief. If the client wishes to sell their business or property portfolio, they may say ‘What could I do about tax liability?’ The CGT is a huge lump sum – it can be the spur to advisers to investigate EIS. Clients who are selling their businesses are called to this market. They trigger the adviser interest.”
Roger Tull, IFA at Positive Solutions believes the secret is to “Anticipate the demand. I have clients who have property deals happening in a few years who know nothing about EIS now. I will start an education process now. If we know the clients well enough, we know if they are planning to exit the business or having a life change and that they could be brought into the market.”
Smoothing the path
Angus posed the question, “When you are marketing, is life getting easier? Are you understood by advisers or are there obstacles still to be overcome? I talk to people outside our industry about the nature of investing in entrepreneurs. It does work in the long term if you have diversified risk. If they don’t have access to capital it blows up. Is life easier than a year ago? Is knowledge seeping into the buy side?”
Nicholas Sharp, Head of Co-Investment Fund at Hambro Perks responded: “I have to be careful because we’re only a year old – but one thing is clear, there are a huge number of people who actively want to invest in early stage businesses. “The issue is finding investees, with the pitch that really resonates. We filter 2,000 or 3,000 opportunities each year. You can be on a distribution list and those brokers only pay if money ends up in the company.
They have no skin in the game. We do and crucially that shows our interests are aligned. Many businesses do fail and they want to know it will hurt you as well as the manager.
“What they want to know is that you will do the work and that you owe money in that. You will work alongside them and so raising capital is not a big challenge.”
Andrew Aldridge again: “It’s about ‘what is the appropriate investment?’ Several years ago, if appropriate meant EIS then off an adviser might go to the largest EIS provider in the market – box ticked job done. That was the status quo and perhaps consideration wasn’t given to the appropriateness of the manager or their investment style.
“That attitude has changed. There are a number of entrants in the market like our peers here today, all great guys, who understand the VC market and the intricacies of supporting early-stage companies, and that is good for the industry. It adds credibility to what people are investing in.”
At this point the chair called for a short break, which meant the Nespresso machine took a caning and Westminster’s mobile network came under severe pressure.
Afterwards the discussion ranged widely, taking in adviser and consumer education, fees, research resources, investor benefits and some investee experiences, which we will report in our next articles. GBI