A guest piece from Thomas Davies, Chief Investment Officer at Seedrs, who sets out the company’s stall.
Savvy investors have long appreciated the huge impact that tax can have on investment returns. These same investors have also driven the extraordinary growth of low-cost ETF and passive fund strategies. According to the FCA, average total fund charges have declined from 1.13% in 2011 to 0.91% in 2015, while assets invested in passive funds increased from 10.4% to 16.4%.
So it is ironic that accessing tax-efficient investments can be punishingly expensive. We at Seedrs think it’s time that individual investors are able to bypass the high fees associated with funds and access (S)EIS tax reliefs directly without spending a fortune on professional managers, many of whom are simply charging for access to this asset class.
Investors who use Seedrs only pay a fee on the profit they make and there are no annual management charges. For example, if an investor invested £10,000 through the Seedrs platform resulting in returns of £20,000, the investor would pay just £750 in fees to Seedrs, compared with up to £4,000 under a typical (S)EIS fund charging structure (see table). Building a portfolio of early stage equities on Seedrs offers sophisticated investors the visibility and flexibility to select their own portfolio rather than relying on a discretionary manager. In addition, with many tax efficient funds limited in capacity, many investors are searching for alternative solutions.
Tax rules changes add to appeal of this asset class
New tax rules limit how much higher-rate taxpayers can put into their pension, with some people limited to only £10,000 annually. More and more people are looking for alternative options outside of the standard pension schemes and ISAs.
Rather than putting excess savings into a standard equity investment that will attract capital gains tax (CGT) on any profits at 28%, investors are increasingly looking to government initiatives that encourage investment into small private businesses. EIS investments are not only exempted from CGT and inheritance tax once shares have been held for 3 years, but the investor will also receive 30% of their investment back in the form of income tax relief (which increases to 50% for seed investments in very early stage businesses).
Disrupting early stage equity
Traditionally the further away you get from large-cap share indices, the more expensive it is to invest. It is simple economies of scale. Micro-caps and emerging market funds come with higher charges. However these can often produce some of the highest returns.
Because of this most investment funds require significant minimum ticket sizes (usually at least £25,000 and often much, much more).
Seedrs facilitates smaller minimum investments, democratising equity investment in a simple online process, and as the world’s first regulated crowdfunding platform, has brought efficiency into a notoriously inefficient marketplace. The result is not only access to an asset class that was previously inaccessible to many, but also lower fees for investors who have already been investing in early stage equity using more traditional methods.
Low fees does not mean low due levels of due diligence
Seedrs takes investor protections very seriously. Indeed it has to, because their fees from investors derive from the profits that the investors make. No profit, no fees. This means that Seedrs is completely aligned with the interests of the investors that use the platform and ensures that they are afforded all of the investor protections required in order to maximise their chances of success.
Unlike some of the competitors, Seedrs has a full in-house nominee structure, meaning that we represent all of the investors as one group, negotiating a full set of legal documents with professional grade investor protections that a top VC would expect. This includes full pre-emption rights, contractual obligations to keep investors informed on the progress of the relevant companies, drag and tag rights and so on. Our long term success is reliant on the success of our investors, and without these protections, the investor’s chances of success are significantly reduced.
This is a pioneering business model that is transforming the industry; even the professionals working for institutions are getting on board. When employee benefits platform Perkbox raised £4.3 million on Seedrs in October 2016, legendary venture capital firm Draper Esprit co-invested alongside the crowd (on the same terms).
While the data shows that this is a high returning asset class, it is also a highly skewed one (a significant portion of the overall returns come from a few big successes). It is therefore vital to build a diverse portfolio, spreading your investment across a number of businesses raising funds on our platform. Through the simple and efficient way our platform operates, this can easily be done with a few clicks of a mouse, with Seedrs taking care of all of the paperwork before, during and after the investment has been made.
Investing in the equity of growth businesses is risky, and belongs in a balanced portfolio. These investments are for risk capital that you can afford to lose. But whether that is £10 or £100,000, we certainly don’t think you should lose any of it on unnecessary fees.
Thomas Davies, Chief Investment Officer at Seedrs