A recently commissioned research survey by EISA in partnership with IFA Magazine and sponsored by Nova Growth Capital, reveals fascinating insights into how financial planners view Seed EIS says Martin Fox
Seed EIS was created by the government in 2012, to help encourage and support start-up businesses. The government offered the greatest tax reliefs available today to encourage investors, and to compensate for the risks involved. These include Income Tax relief of 50%, as well as Capital Gains Tax Relief and Loss Relief on any companies that fail.
And for companies that succeed, the rewards can be very large.
It is also true that in the 9 years since SEIS was launched, the product, and the way it is managed has significantly matured.
So why isn’t SEIS being used more by IFAs and financial planners.
The EISA survey
To find out the answers to this question EISA commissioned research with IFA Magazine, and teamed up with Nova Growth Capital, one of the leading Seed EIS Managers, to sponsor the survey.
The findings from the research have been invaluable. Some answers you would expect, but there were some surprises as well, and some important lessons to learn.
What was particularly encouraging was that of the advisers that had recommended SEIS to their clients, 77% would do so again, and the other 23% may do so. So none were completely turned off!
The research findings
The key question of course was what stopped advisers from using SEIS. One of the obvious answers was that it was deemed too risky. To some extent that is right. In every SEIS portfolio some companies are likely to fail, but the overall portfolio returns can be very exciting indeed, and the failures are largely compensated by the tax reliefs. What is clear is that many advisers are not aware of how the management of some SEIS portfolios have developed to provide unprecedented support for the investee companies.
Of course there were other reasons why some advisers didn’t use SEIS.
Some used the excuse that their PI Insurers didn’t like the product. We asked a leading PI broker for their views on this. We are pleased to say that their view is that PI should not be a barrier at all. There are other products that do cause a problem but not SEIS if it is used properly.
Others made the point that their compliance managers didn’t like SEIS – so we talked to some. On discussion, they generally agreed that if it was used properly, with the right clients that are aware of the risks, there doesn’t need to be a problem.
Interestingly, some advisers were honest enough to say that they have invested in it themselves, and were waiting to see how it performed for them, before offering it to clients!
What do you look for in a SEIS manager
It was in this part of the research that there were some very clear requirements from advisers. The key points were:
- The quality of the management team and their track record ( important for due diligence)
- Portfolio diversification
- Honesty about failures
- Working with the founders and not just deploying capital
And as one respondent put it – the same as for an EIS manager, deal selection, exceptional service, tax and legal knowledge and the ability to pick top tier entrepreneurs.
What do advisers need in the future?
53% of advisers that responded were honest enough to say that they didn’t know enough about EIS, and needed to know more.
57% wanted training and education and 35% requested a simple guide for their clients.
And 60% wanted more evidence of SEIS investing being profitable. A similar percentage asked for case studies on how SEIS was being used in practice.
The messages for the SEIS fund managers are clear, and we are sure that some will respond. With the commitment of the government to support young businesses in this post Covid world, the need for support for young businesses has never been greater. And nor have the investment and financial planning opportunities.
Thank you to Nova Growth Capital
We are very grateful to Nova Growth Capital for sponsoring this research.
They have produced a report on the full findings of this research, and if you would like a copy please request one here.
Martin Fox, Chairman of the EISA committee for the Research, Education and Marketing of EIS.