EIS interview with Monmouth Capital
As we approach the end of the tax year, we were asked to participate in an industry round table discussion by Intelligent Partnership on the subject of Enterprise Investment Schemes (EIS).
The full report, which is a comprehensive and thoroughly-researched guide to EIS, can be accessed here:
Our answers go some way towards elucidating our approach to venture capital investment through the use of EIS, particularly in light of recent legislative changes.
Here is a transcript of the answers we gave to the questions posed during the round table discussion:
WHAT SORT OF CLIENTS ARE YOU USING EIS WITH, AND WHAT’S THE PRIMARY DRIVER FOR USING IT?
All of our clients have net wealth of at least £10m. In terms of EIS allocation, it’s typically below 5% of clients’ net wealth, so it’s really about helping them to access venture capital, which most of them are interested in. It may be because they’re entrepreneurs.
When they get liquidity from their business, they’ll often have an eye on putting money back into early stage businesses, so we can help them to access venture capital using competent and experienced managers with useful tax breaks. And generally speaking, it acts as a diversifier to other parts of their wealth.
HOW DO YOU COMMUNICATE AND QUALIFY THE RISKS OF EIS TO YOUR CLIENTS?
What we’re trying to communicate to clients is to think about EIS as a series of investments in individual small companies. Every single one of them could fail.
If you took every company in isolation, you could make a case for why it’s not going to work out and could fail. Which then would only leave the loss relief in the absolute worst case.
Even then, we warn clients that in extremes, government regulation can change. We try to bring to life what it would mean for this to go badly wrong, rather than just saying, “oh, it’s risky.”
WITH THE CHANGES IN THE BUDGET, HOW HAS YOUR APPROACH TO EIS CHANGED?
Our approach has not changed. We welcome the continued focus by the government on deploying genuine risk capital, that’s the way we’ve always viewed it and positioned it with our clients. A primary driver of doing this investing is the venture capital side of things, not - “let’s bank the tax relief as quickly as we can.”
ARE INVESTORS PREPARED TO TAKE ON THE RISK AND ILLIQUIDITY OF EIS, ESPECIALLY AFTER THE MOST RECENT BUDGET WITH THE CRACKDOWN ON CAPITAL PRESERVATION SCHEMES?
The main way we address those particular risks is always making sure they have more than enough capital to cover several years of their likely expenditure, so that whatever happens with these particular investments, their lifestyle is not affected.
Secondly, we pay close attention to the different strategies employed by different fund managers, including such things as the expected number of years to a typical exit from any fund. We also encourage our clients to repeat EIS and other venture capital investments every year to build up a ladder of cash flows.
HOW MANY EIS MANAGERS DO YOU WORK WITH, AND WHAT SPECIFICALLY DO YOU LOOK FOR IN A MANAGER?
We work with around a dozen managers, although we’ve done detailed research on over 25 and counting.
We look at many factors you’d expect, such as governance, custodial arrangements, quality of reporting and so on.
Some of the wider factors that help us understand the role that the fund could play in a client’s portfolio, are consistency of strategy and approach. We’re a bit wary of funds that have switched from one type of investing to another over the years. Maybe that’s unfair, but we want to see consistency.
We really like a core definition of the type of investment they make, whether that’s sector based or a question of size of company, or deal, or whether it’s based on valuation metrics or a combination of factors. We like them to be very clear about that, so we can decide how much to allocate, or how much to advise our clients to allocate to that particular strategy – then clients know what to expect.
It’s really helpful for us to know the likely number of years for a typical exit for that fund, so again, we try and introduce some diversification there so clients aren’t tied to a particular exit environment.