Seneca’s Business Development Director considers the challenges advisers and investors are likely to encounter.
September is traditionally the time when advisers start to contemplate their EIS activity, reviewing their provider panels and looking at what the market has to offer. So what does the landscape look like as the ‘new season’ gets underway?
First of all, those investors who still prefer to opt for the more conservative end of the market are likely to find that Asset Backed type offerings are becoming much harder to find outside of the usual Media investments. No doubt there will be a limited supply as the season progresses, but these tend to be fully subscribed very quickly when they do come to market and are probably more opportunistic rather than an option that advisers can plan a strategy around in advance.
Large amounts of investors’ capital will be reaching the end of its investment term in ‘renewables’, which of course is no longer a qualifying investment option. Advisers will be tasked with helping investors transition into a somewhat different risk profile, if asset backed investments are in short supply and they wish to continue to enjoy the benefits of EIS.
So is this the year when advisers and investors really do have to get their heads around Growth Capital, if they wish to take advantage of the potential tax benefits of EIS?
Much has been written about the inherent differences of investing in the EIS Growth Capital arena; it is a fundamentally distinct place. Deals at good value are much harder to find, take much longer to transact and require far more monitoring in the post-investment phase. These are not passive investments by any means and keeping these ‘real life’ businesses on track requires significant management time and dare I say, cost!
The sheer complexity of properly transacting such deals makes it the domain of experienced managers, who have the capability and understanding of working with these SMEs and trying to deliver the desired investment outcome for investors. It follows therefore that Managers are unlikely to be transacting investment deals in great volumes, not least because the due diligence and analysis required can often run to months rather than weeks.
The seven year rule is also a significant factor for all. For investors, it means that their money is being deployed in generally much younger companies where the risks are naturally heightened. For Managers, not only are they considering these risks but also the fact that not many companies at this stage in their life cycles warrant investment at much north of £1m-£1.5m. If we then track back to the length of the due diligence and investment process then it all points to quality of investments, as opposed to quantity.
No surprise then that most Managers are likely to have capacity constraints this year with many open offers likely to be restricted to £15m-£20m even amongst the larger players in the market. To complete ten or twelve Growth Cap investment deals in a twelve month period is no mean feat.
It also seems to be a trend that deployment of investors’ capital is taking longer, notably for reasons already outlined, so advisers and their clients will need to recognise this in their tax planning, especially where carry back is required.
Going forward, it wouldn’t be wide of the mark to expect a longer investment term either. Investors have to some extent become used to a diet of EIS investments where perhaps the exit point may have been a little more predictable. However, the exit of an earlier stage, more PE based investment is rather more complex generally and exits in year four are likely to expand to perhaps five or six years. This will allow time for the investment to deliver on its plan and then orchestrate one of potentially numerous exit options.
This is likely to result in a higher level of running cost for Managers and in due course perhaps for investors too. Simply passing these costs on to the investee companies is easier to do with companies which are struggling to access the capital they need, whereas the stronger investment cases are more likely to resist as their options are wider with a greater audience of potential funders at the table.
To put it all in context however, despite these changes to the EIS landscape, good Managers will continue to find good and investable businesses which will continue to handsomely reward their investors. There may have been a shift in the EIS market in recent years but beyond doubt, it remains one of the most compelling opportunities around when used appropriately.