Last month I was delighted to be invited by GB Investments to take part in a round table on Enterprise Investment Schemes (EIS). It was a timely opportunity to sit down with colleagues in the industry to take stock of what EIS and Seed Enterprise Investment Schemes (SEIS) can offer clients and advisers.
I’ll give a flavour of the range of views on offer at the round table and add my thoughts from a First Wealth perspective but, first, some background on the schemes. The EIS was introduced in 1994 as a way of encouraging investment in small unquoted companies by offering tax relief of 30% on income tax. It’s designed to help smaller, higher-risk trading companies to raise finance by offering a range of tax reliefs (inheritance and capital gains tax also) to investors who purchase new shares in those companies. The SEIS, launched in 2012 to drive investment in start-ups, offers tax breaks of 50% on income tax and similar capital gains tax relief to the EIS. Almost £14.2 billion of funds have been raised by the EIS since its launch in 1993/94, according to EISA. The most recent figures report that 3,265 companies raised a total of £1.8 billion in 2014/2015, increasing from £1.5 billion raised by 2,840 companies the previous year.
Tax Relief vs Investment Opportunity
While in the early days investors might have been attracted to EIS and SEIS primarily for the tax relief benefits, there are advisers who believe that they now also stand up as attractive investment opportunities in their own right. At the round table, some went as far as to say that the tax relief options can distort the picture. Mark Brownridge, Director General of the Enterprise Investment Scheme Association (EISA), said: ‘The tax reliefs don’t help EIS sometimes… investments are powering through now. Five or 10 years ago, the investment story wasn’t so good.’
This point was picked up by Anna Sofat, Founder and Managing Director of London-based advice firm Addidi, who felt that a more nuanced take on EIS was now more appropriate, beyond the polarised argument of tax relief at one end of the spectrum and high-risk investing on the other: ‘You appeal to the greed with tax relief, within that the sensibility in the middle is lost. At the other end is fear [of the investments]. You really want the middle bit: a sensible, reasoned case for investing.’
To make a reasoned case, you need a solid research base and plenty of reliable information about the EIS opportunities. It can be a challenge for advisers to access the information necessary to make a case for alternative investments but Daniel Rodwell, Managing Director of GrowthInvest, a platform which allows advisers to access alternative investments for their clients, says that the situation is improving: ‘In terms of accessing and comparing different offers in the space, we’re trying to use technology to give advisers a level playing field… we have highly skilled people...enabling advisers to access all of those and view the multitude of independent reports out there.’ Mark Brownridge of EISA believes that structuring that information in a way that makes it easier for advisers to compare and contrast is the standard the sector should aim to achieve.
When dealing with higher-risk investing in unquoted companies the importance of due diligence cannot be over-estimated. Investors will need to be reassured that there are robust processes in place so advisers will be stringent in seeking this from providers. For me, it’s vitally important to look closely at the track record of the providers, to understand where the risks may lie and how those risks are being mitigated. Daniel Rodwell explained that the Growthinvest platform is working to meet advisers’ needs for a thorough assessment of investments for clients, adding that the goal is to “provide an independent perspective, provide an appropriate amount of information around the credit, the quality of people for the category they’re in and educate advisers on the tools.”
While completing a thorough due diligence process is vital, it can also be time-consuming. Anna Sofat, of financial advisers Addidi, recommends that less experienced advisers might want to use a third-party platform to do the due diligence on their behalf: “If you look at platforms, they come out with due diligence frameworks. These are all the things you should be asking, and here is what’s out there; there are reports. Have a framework to see what you should be ticking off.’
There’s been a culture shift since the financial crisis resulting in a change in the way that clients view their relationship with their investments. Often, they’re not solely seeking a financial return. As Lucius Cary, Founder and Managing Director of Oxford Technologies, explained, they’re buying into a company on an emotional or personal level, investing in something they feel a connection with or in which they have some non-financial stake. It’s also true that the proliferation of information available has empowered clients and investors to make more informed decisions about where their money is invested. The ‘Dragons Den culture’ has fostered a climate of entrepreneurialism where clients are much more engaged with their portfolios while the rise of peer-to-peer lending has made this direct and early-stage investing more commonplace.
It’s a key responsibility for advisers to ensure clients understand the disadvantages as well as the advantages of early stage investing and are comfortable with the higher-risk nature of investments like EIS and SEIS. If clients are committed to investing in start-ups or young companies they can choose to self-certify as a high-net-worth or sophisticated investor, but there are dangers that this can lead to a grey area over who takes ultimate responsibility for the investment. It’s similar to when an adviser recommends an alternative investment platform or crowdfunding platform to a client – are they acting independently or on my advice? As an adviser, it matters to me where the client’s money ends up and I need to be able to give clear guidance on an investment. Abdicating responsibility or grey areas over ownership of the decision risk confusing the relationship between adviser and client, could prove problematic in building trust and can trigger regulatory concerns.
Seed Enterprise Investment Schemes – EIS’ Little Brother
The Seed Enterprise Investment Scheme (SEIS) was introduced by the Government in 2012, in a bid to "stimulate entrepreneurship and kick start the economy." It allows clients to invest up to £100,000 into a number of companies over the tax year, during which they receive 50% tax relief. The SEIS might have been slow to take off as there was some scepticism over how long a 50% tax relief rate would last but the longer it remains the more comfortable investors will become. As investors start to see the SEIS companies producing returns there will be an exponential leap in growth and interest. With the amount of money in technology, it’s potentially a boom period in the next five years.
On that basis, it’s all the more important that advisers understand what position dealing in SEIS investments puts them in with the regulators. For example, if an adviser is building a portfolio for a client they know that if one investment fails, the regulator is likely to look at that in isolation. So, as soon as advisers move away from regulated products and into alternative investments like SEIS companies they are vulnerable. Anna Sofat says that ‘on the whole, the regulator forces the advisory industry down the more cautious, safer route…The risk [for the adviser business] is so high if something goes wrong.’ An additional consequence for advisers to be aware of is that some PI insurers won’t insure those who are advising on unregulated investments.
A Good Investment Opportunity?
In summary, there are many pros and cons to EIS and SEIS investments. As both schemes mature clients and advisers are beginning to see them as attractive investment opportunities, not just generous tax breaks. However, early investing is not for everyone and even when the client is fully comfortable and informed of the higher risks they are taking there can be many qualifications to bear in mind for both adviser and client. There are certainly plenty of opportunities out there, so it’s vital that advisers have access to all the information available and a system in place to make sure they can compare opportunities accurately and effectively on behalf of their clients.
If alternative investments like this are to become more mainstream they will also need a more nuanced regulatory framework which understands and supports advisers while still protecting clients. While the climate, and investors themselves, might have become more receptive to the concept of direct investing and embracing alternative investment opportunities, my role as an adviser remains the same – to provide the clear guidance and the best advice to help clients meet their goals and achieve their ideal financial lifestyle.
If you’d like any help or advice with structuring your investment portfolio, please get in touch.
Read more about the EIS Round Table event on page 28 of GB Investment Magazine.