EIS; A Genuine Growth Story

EIS; A Genuine Growth Story

Breaking records
According to figures from HMRC, over 24,500 companies* have received finance from venture capital sources (VCT, EIS and SEIS) since inception – raising over £14 billion*. Year on year growth in amounts raised under EIS shows no sign of abating and with pension rule changes taking effect in this new tax year, EIS is assuming mainstream importance in the planning process for both advisers and investors alike. Against this backdrop, 2016/17 tax year could see record amounts looking for an investment home.

It certainly seems the case that more people are finding that EIS has a part to play in their wider wealth management and estate planning needs.

However, what has become abundantly clear, as a result of recent legislative changes is that the inherent tax advantages which are available under EIS will not fit every risk appetite and suitability and appropriateness should never be compromised purely because of the tax breaks. The government are committed to ensuring that tax reliefs are used in a well targeted manner aimed at providing much needed capital to growing businesses who may otherwise struggle to access funding from more traditional sources. Within this definition therefore , it is no surprise that ‘renewables’ is no longer EIS qualifying which is historically where large swathes of cash were being invested on the basis that tax reliefs could be obtained for limited risk. Those days are over.

The EIS landscape has undergone significant change and it follows that the tax reliefs are being made available in recognition of the increased risks associated with investing in generally younger, growing companies. This presents a very different risk profile but one that can be very compelling in appropriate circumstances.

Focused on growth
In coming to terms with the fact that EIS cannot be viewed as a tax mitigation tool for high earners, the government looks to be committed for the foreseeable future, to providing tax incentives for investors who have the appetite to invest in British SMEs and who in the engine room of the economy can help to fuel growth and create employment thus achieving an all-round benefit for all UK taxpayers. Whilst that may disappoint some investors, there can be little argument with HMRC’s stance on this which is eminently fair and reasonable.

Changing landscape
So with renewables no longer in the equation, and the recently announced withdrawal of the largest EIS promoter from the market, what can we expect to happen?

Rule changes apart, operating a growth capital strategy is a wholly different beast to the more capital preservation type strategies and selecting a manager with the necessary skillsets and capability in a growth capital context will be a major issues for advisers to contemplate. Deploying tens and in some cases, hundreds of millions in growth cap situations simply won’t happen. The 7 year rule probably gives some indication of the size and scale of each investment opportunity with metrics dictating that most deals are likely to be sub £2m.That represents a very substantial number of deals for the market to absorb if the numbers heading towards EIS are to be believed .Seneca have been specialist operators in the SME market for many years and to complete the requisite number of deals, at the right values and get through the necessary levels of Due Diligence is not to be underestimated .This will undoubtedly catch out the lesser experienced operators in the market as will pressure to transact at over inflated valuations. It will be interesting to see in the coming years how exit track records shape up because when all is said and done, that is the only real success measure for investors. Investing now and obtaining the upfront tax reliefs might appear to be ‘job done’ in some quarters but if the underlying investments are poorly conceived then the unwanted and uncomfortable conversations between advisers and their clients will be inevitable 3 or 4 years down the line.

Hitting the wall
So on the one hand the attraction of EIS amidst all the other changes, could potentially see even higher demand this year , yet on the other we could be looking at a much smaller universe of good quality opportunities for the market to invest into. The key for advisers therefore will be to research their chosen providers very carefully and satisfy themselves that the Managers they choose have strong pedigree in a growth cap context. Historic strength in renewables will not automatically passport into growth cap capability, far from it .In this regard, a good quality, ongoing deal flow pipeline will also be an essential consideration.

Seneca’s house view, is that EIS is first and foremost, an investment led proposition. We feel there is merit in having an exposure to this asset class within a portfolio as a non- correlated investment. So each investment we make, has to pass the acid test of standing up on its own investment case. The tax benefits are secondary but at the same time very compelling if the underlying investment is doing its job. For this reason, hoovering up huge amounts of capital from investors and throwing it at sub -standard deals purely to attract the tax reliefs is a complete non -starter. Equally, our charging structure seeks to align with investors’ interests such that our remuneration derives from successful investment outcomes.

The recommendation to advisers is therefore to invest continuously throughout the year rather than waiting until Q1 because good quality deals may not always be easy to come by in a dash for the tax year end. To be fair, a growing number have recognised that investing now for example should see tax certificates coming through in time for January 31st in any event. So that in its own right is a driver for some investors.

We have a team of 70 working from 6 offices in the North West, Yorkshire and Midlands and we see over 500 opportunities each year and typically we will only transact in 20-30 which might give some indication of the deal selection process and the challenges of finding deals of appropriate quality and at the correct value .It is a point I can’t over emphasise and advisers need to be aware of the impact on the market this year.

Watching This Space
So in essence, this is likely to be a very interesting year as the market settles into the changes and it will be interesting for advisers to take a view of the market and assess how and where they plan to accommodate their clients. Indeed clients themselves may need to adjust to the changes as their journey from low risk capital preservation necessarily takes them up the curve to growth capital.

But whatever the outcomes are, there can be little doubt that when used appropriately, EIS is becoming an increasingly potent weapon in the armoury of an increasing number of adviser firms.

Ian Battersby, Business Development Director, Seneca Partners

*Source: HMRC Official Statistics (April 2016)

Article included in the July/August edition of EIS Magazine (Issue 9)

Seneca Partners Limited is authorised and regulated by the Financial Conduct Authority (reference 583361).

EIS investment may not be suitable for all potential Investors. Investments in unquoted companies generally carry a high degree of risk and may be of a long term and illiquid nature. The companies in which the Portfolio Service invests will often not be quoted on any regulated market and, accordingly, there will not be an established or ready market for any such shares and the Portfolio Manager may experience difficulty in realising them (for value or at all).

We recommend that Investors take independent advice before making an investment in the Seneca EIS Portfolio Service.

Important information

This information is of a general nature and does not constitute an offer to provide services.

Any opinions or conclusions attributable to Seneca Partners are based on the understanding of the available information at the time of publication. Such opinions or conclusions are subject to change without notice.

The value of investments and/or any income arising from them may fluctuate.

Past performance is not necessarily a guide to future performance.

Important notice

The products and services shown on this website place capital at risk. Investors may receive less in returns than they have invested. Investments may not allow for capital to be withdrawn on demand. If an investment provides tax relief then this relief is subject to change and is dependant on personal circumstances. Any reference to past performance or forecasted performance is not a reliable indicator of future performance.

Seneca Partners recommends that any investor seeks specialised financial and/or tax advice before investing. Seneca Partners does not provide advice and the information on this website, including but not limited to news, should not be construed as such.

Please confirm that you understand this warning and wish to proceed.

Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
    • Advertised rates of return aren’t guaranteed. This is not a savings account. If the business doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. In addition, if the tenant of the property being financed doesn’t pay the rent due as agreed or vacates the premises, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • This type of business could face cash-flow problems that delay payments to investors. It could also fail altogether and be unable to repay any of the money owed to you.
    • Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    • Even if you are able to sell your investment early, you may have to pay exit fees or additional charges.
    • The most likely way to get your money back is if the business is bought by another business or is wound
      up following the sale of the underlying property. These events are not common.
    • If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these. This investment aims to make quarterly repayments that comprise both a partial repayment of capital and interest, although this is not guaranteed. It could take over 14 years to receive back an amount equal to the amount you invested.
  4. This is a complex investment
    • This makes it difficult to predict how risky the investment is, but it will most likely be high.
    • You may wish to get financial advice before deciding to invest.
  5. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart

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Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If the business you invest in fails, you are likely to lose 100% of the money you invested.
    • Many of the loans ultimately financed by your investment are made to borrowers who can’t borrow money from traditional lenders such as banks. These borrowers have a higher risk of not paying back their loan.
    • Advertised rates of return aren’t guaranteed. If a borrower doesn’t pay back their loan as agreed, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • Some of the loans financed by your investment will last for several years. You may need to wait for your money to be returned even if the borrower repays on time.
    • Some Managers may give you the opportunity to sell your investment early through a ‘secondary market’, but there is no guarantee you will be able to find someone willing to buy.
    • Even if your agreement is advertised as affording early access to your money, you will only get your money early if someone else wants to buy your shares or the company in which you are invested has sufficient available capital to buy them from you. If no one wants to buy, it could
      take longer to get your money back.
    • If you are investing for growth, you should not expect to get your money back through dividends as the Service is not designed to pay dividends to investors seeking growth. If you are investing for income, it will take at least 25 years to get your money back purely through dividends.
  4. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).
  5. The value of your investment can be reduced
    • The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on the basis on which these new shares are issued.
    • If these new shares have additional rights that your shares don’t have, such as the right to receive a fixed dividend, this could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart

Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (“FCA”) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If a business you invest in fails, you are likely to lose 100% of the money you invested in that business. Most start-up businesses fail. Please see page 14 of the Information Memorandum for an overview of the types of businesses this fund invests in.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    • The most likely way to get your money back is if the business is bought by another business or your shares are sold on the Alternative Investment Market. The latter can only occur if there is a willing buyer.
    • If you are investing in a start-up or EIS qualifying business, you should not expect to get your money back through dividends. Such businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).
  5. The value of your investment can be reduced
    • The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    • These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart

Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (“FCA”) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If a business you invest in fails, you are likely to lose 100% of the money you invested in that business. Most start-up businesses fail. Please see page 14 of the Information Memorandum for an overview of the types of businesses this fund invests in.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    • For companies whose shares are not listed on any exchange (‘unquoted’ or ‘private’ companies), the most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    • For companies whose shares are listed on an exchange (such as the AQSE or AIM), the most likely way to get your money back is if the business is bought by another business or your shares are sold on that exchange. The latter can only occur if there is a willing buyer.
    • If you are investing in a start-up or EIS qualifying business, you should not expect to get your money back through dividends. Such businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).
  5. The value of your investment can be reduced
    • The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    • These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart