Advisers, and their clients, have more investment options than ever but this means there are also more pitfalls
The expansion of EIS options and the ways in which to invest in them mean that advisers have to be increasingly careful about their due diligence and avoiding any potential pitfalls, but the real key is education.
Robert Clark, Managing Director of independent financial advice firm Newstead Clark Financial Services in Birmingham, says that he is comfortable talking to clients about the options available to them through EIS investments.
Although he believes technology is increasingly easy to talk to clients about due to its ubiquitous nature, he says that as long as he has done his own due diligence on the sector or fund, he is happy to discuss complex themes with them.
However, he says “I’d want to do research for due diligence” to ensure all bases are covered.
Talon Golding, Co-Founder and Director of private equity firm Novo Ventures based in Birmingham, which describes itself as ‘venture builders’, says advisers should look at geographical metrics when assessing EIS opportunities alongside sector analysis as key locations can offer significant long term growth potential for young companies.
“However, it’s all down to the individual client,” he says. “What’s right for their risk profile and individual circumstances.”
Novo Ventures focuses on its home city of Birmingham, and Golding says “being local” enables them to truly support growth for their clients and advisers should consider that “proximity of portfolio companies is a key factor in determining how hands-on a fund manager is”.
“A regional strategy doesn’t mean you lose diversification, an EIS fund can invest across key sectors within a geographic area which they are experts within,” says Golding.
“With Birmingham, it’s going through a renaissance. There’s more opportunity here now than at any time since the industrial revolution. It’s an incredible place to grow a business and as such there is a significant pool of EIS opportunities for savvy investors to target. It’s the youngest major city in Europe – a key economic driver for long term growth and prosperity for a geographic region.”
He adds that Birmingham is home to the new UK headquarters of HSBC and there is “a lot of talent coming out of our universities and relocating here”.
“Students and professionals are seeing Birmingham as a place to live and stay, not as a pit-stop on their journey” says Golding. “For EIS investors, there is merit in looking at a city with a lot of growth and a regional strategy whereby you can have an impact on those companies.”
A regional strategy doesn’t mean you lose diversification, an EIS fund can invest across key sectors within a geographic area
The client journey
Whatever, geography or sector advisers choose for their clients’ EIS portfolios, Golding says: “The real work starts when the investment is made; you have to look after them, make sure they deliver on their objectives.”
Each individual investor will have a different “journey” depending on the types of companies they want to invest in, their tolerance for risk, and what they want to get out of their investment.
David Lovell, Operations Director at Growthinvest, a platform that provides access to tax efficient investments, says the company is unique in that it has “a mixture of underlying single companies”.
“The journey varies for the individual, but if we’re looking at investors, they often seem to be attracted by an initial investment proposition, but as we track their journey they look around, and find out about other opportunities,” he says.
In order to assist those clients in finding the right investments for them, Lovell says the platform is in the process of building up the education content on the site.
“We’re building up more video content,” he says. “We see some people who know what investment they want to make, but we definitely see people come on to familiarise themselves with the environment and use that as a basis for research.”
While Growthinvest does its own research on the investments on offer, Lovell stresses that it does not undertake in-depth research and both advisers and investors need to ensure they are educating themselves before investing.
“We will always do a certain amount of due diligence on the platform,” he says. “[But] we are not a research house, so we will have links to independent research reports where we’re able. We also know that people want to get a feel for the company or the fund manager.
“We’ll get interviews with the fund manager, their Twitter feeds, so [investors and advisers] can engage.”
He says there’s a variation in the market due to the volume of investments, and “one can do more in an online environment”.
Lovell believes that despite the shift online and the engagement, research, and education opportunities available through the digital world, sadly the investment industry has not kept pace in a practical sense.
“That’s what we firmly believe the market needs to improve on; the digitisation of investments and the customer journey in this space is very important,” he says.
“You might invest in high-tech companies and talk about blockchain, but you still need to do a wet signature on the form. There’s been quite a bit of good momentum led by the EIS association to address that.”
Digitisation of the investment process would go a long way to helping people invest, not just in tax-efficient investments, but more generally. However, there are somethings that need to happen to encourage investment in EIS.
Richard McCaughan, Chartered Financial Planner at Chartered Financial Solutions, a Leamington Spa-based financial advice firm, says “basic knowledge” and “research” would help both advisers and clients feel more comfortable.
Fellow independent financial adviser Clark says he has invested a few clients in EIS and “due diligence is important” as is diversification.
“Don’t put all your eggs in one basket,” he says. “They need to spread money about.”
For Clark, the move to digital signatures is less of a concern due to the age of his clients.
“The digital thing, while it’s important, older people are still more comfortable with writing a cheque out,” says Clark. “I don’t think digitisation is as important as explaining charges and managing expectations.”
Charges are always a sticking point within the fund management industry and EIS is no different. Lovell says EIS charging is not uniform.
“There is a lot of variation across the market,” he says. “It’s quite unclear, even to those within the industry, you have to look through and read the small print. There are different ways that charges are applied. Some are obvious.”
The key information documents that funds have to provide clients mean “there is a need for everyone to be as transparent as they possibly can be when they say what their charges are”, adds Lovell.
Andrew Aldridge, Head of Marketing at EIS provider Deepbridge Capital, says there is a “cost to raising funds” that has to be paid for.
“We charge a fee to the investee company, but we don’t charge the investor a fee,” he says. “The only fee charged to the investor is a potential performance fee on exit.”
Aldridge says he was “appalled at the lack of transparency” in fees a few years ago but believes the industry is changing for the better.
“Sometimes you didn’t know what managers were charging or who they were charging,” he says. “The industry has made strides over the last few years, and now the sector as a whole is much more transparent.
“We make it clear what we charge investee companies and the only fee we charge the investor is a potential performance fee on exit, which is ultimately how we make money. Our management charges to the investee companies keep the lights on, but to make money, it’s exit and performance fees which are aligned with the investors’ interest.
“We think that is the most transparent way of doing things.”
Tony Stott, Chief Executive of Midven, which invests in earlystage, technology and SME companies primarily based in the West Midlands, says his company “rolls up our annual fee so we charge on exit”.
All the providers currently have a number of investments in the pipeline, including a number in the technology space, which is a popular sector for EIS investment. Stott says he looks for companies with “recurring income”, which includes a number of software and services businesses “that sell on recurring income”.
“We have a business which is currently developing a flat antenna to go on top of moving vehicles, which is on the way to becoming a unicorn,” he says.
“We [also] have a company which is in the shared virtual reality (VR) space. Most people are aware of VR headsets, which you put on and you can walk through scenarios; the company we are involved with can take that content and put it in a dome, so people can stand in it and share that content. We’ve also signed a contract with Uber.”
He says Midven has “various companies” in the portfolio and although the company is not explicitly technology focused, “a lot of it is tech”.
“We’re focused on recurring income and early revenues. Companies that are doing something now, that’s been tested in the market,” he says.
Aldridge says Deepbridge Capital does not discriminate in the types of companies it invests in but they must all be “companies that are globally scalable” in order to maximise the growth opportunity within them.
“If someone came to us with a company that would work in the UK but not in other markets, we wouldn’t be interested,” he says.
“We’ve got a VR software company, we’ve got medical technology ie – cancer diagnostics, deep vein thrombosis treatment, real estate analysis software, a company that produces Omega3 from freshwater algae, companies that are looking at new drug delivery techniques – a whole array of technology and life science focused companies.”
When investing in companies, it is not just about throwing cash in their direction but broader support at board level and through connections, and in a global workplace those connections are more important than ever.
“What we look for is the ability to support [companies] with more than just cash,” says Aldridge. “[That means] commercial support, board expertise, opening doors. Our companies have distribution commercial deals in over 35 countries, with products being used in over 190 countries. A lot of early-stage business don’t necessarily know how to open international trade doors and therefore we need to be able to offer support and guidance. “That’s an example of how we add value.”.