So the dust is settling in the aftermath of the Patient Capital Review and EIS season is in full swing. The future is all about Growth Companies.
It seems now to be generally accepted that EIS offers generous tax benefits for investments into qualifying growth companies. But what is the reality behind such a broad statement?
The ‘lag’ effect of the seven-year rule has started to have an impact on the Open Offers available in the market, with the age and maturity profile of potential EIS investee companies showing a tendency towards earlier stage companies and in some cases start-ups. The risk/reward equation which is driving HMRC’s approach to EIS qualification will be central to the investment decision faced by investors going forward.
EIS product providers appear to be finding opportunities in niche sectors such as tech, biotech, life sciences and general enterprise. Understanding the credentials of these providers in their specialist areas is important due diligence for advisers to consider and in some cases there is little in the way of consistent exit track record to work with. Undoubtedly, there are some genuinely exciting prospects across the sector spectrum but these are young businesses and investors should be aware of the investment risk and cognisant of both upside and downside variables.
It seems that the days of vast fundraising targets at EIS provider level are a thing of the past, largely because many of the qualifying businesses are now less mature than in previous years and therefore potentially unable to justify initial investment cheques much north of £1 million at this point in their development. The due diligence process alone ought to mean that transacting more than twenty deals per annum at provider level is a considerable challenge. This combination of factors is likely to reduce market capacity, which brings the crucial element of deal flow and deployment into sharp focus.
As much as EIS is about the investment case rather than being ‘purely for tax’, taking account of a client’s tax position is a pretty fundamental element in the planning and advice process. In that context, it is fairly essential that investors have a reasonable timeline on when and where their funds will be deployed. There appears to be growing concern amongst advisers and investors, exacerbated by the time being taken by HMRC to grant Advance Assurance, that subscriptions are still held in cash for well over a year and in some cases have even been returned to investors due to lack of deals. This can, of course, have dire consequences for investors and their cash flow positions.
So, along with appreciating the nature of growth investing from a risk perspective, it is critically important that advisers and investors also obtain comfort from providers over deal flow quality and deployment capability. Compelling reasons perhaps, as to why EIS investment should really be an all year round strategy?
Ian Battersby is Business Development Director at Seneca Partners Limited, managers of The Seneca EIS Portfolio Service.
Important Notice – EIS investments are inherently high risk and in undertaking an investment you are placing your capital at risk. You should seek independent advice before investing in EIS.