Ever wonder what some EIS fund Managers aren’t telling you? GBI Magazine spoke to James D’Mello from the SidebySide Partnership to find out.
Alex Sullivan, Managing Partner at Clifton Media Labs, spoke to James to dig into the nitty gritty of the Enterprise Investment Scheme to give you and your clients the inside edge.
James has over a decades’ financial services experience from a range of specialisms including banking, pensions & investments. Over his time working at one of the major platforms James oversaw some 5000 odd EIS transactions, giving him a very unique, behind the scenes insight into the EIS industry.
Today, James is Head of Business Development at SidebySide, where he joins a management team responsible for over £1.1bn in exits to date.
Performance fees are simply fees on performance, but managers charge them in different ways. Performance fees can be charged against the overall portfolio or against individual investee companies.
The first structure means a fund manager will charge a fee on your client’s investment, while the latter means a fee will be charged on the profits from each company as they exit.
These structures means a client can have two very different investment outcomes from the same investment journey.
Theoretically, when performance fees are charged against individual companies in an EIS portfolio of ten companies, where nine failed and one made a five times return, your client would be charged on that one exit.
A performance hurdle is a hurdle over which performance fess are charged – meaning, if a fund manager returns over a set percentage, through an exit, they will charge your client performance fess for it.
These fees can range from 20-35% and they can serve to align a fund managers interest with your client’s.
Performance hurdles are crucial for an investor to understand because they can be charged on modest returns, after inflation and other fees, leaving the client with overall negative returns on a long term investment.
It’s also important for advisers to know two things about performance hurdles. Firstly, if a fund’s performance hurdle is a net profitable return, make sure thats on 70% of the investment, not 100%. The 30% tax relief on investment usually isn’t factored into performances fees, but can be and can make a big difference to your client.
Secondly, there are a lot of funds that have performance hurdles and there are some that don’t, it is worth factoring that into your due diligence. Performance fees will have an effect on your client’s returns.
Fees will always be presented in different ways, but if you convert them into a percentage they can add up quickly.
Most fund managers will say they won’t charge your client fees directly, and a lot funds can charge fees to their investee companies. This means whatever a client invests into the fund 100% will be available for tax relief purposes, but is the company comes to sell it will still come off the client’s returns.
Co-Invester, along with the EIS Association published a report revealing thirty six different words managers used for fees and charges.
Fees can also be absent from a fund managers investment memorandum.
Another important questions for an adviser to ask is if the fund manager has an uncapped structure.
With all of these potential fees its important you ask the fund manager, and do your due diligence.
Internal vs External Valuations
Valuations are a key part of the EIS industry. There is a big difference between an internally given valuation and an externally given valuation.
Managers can work company valuations two ways. Some will only change a company’s valuation at the point of an external investment coming in or a third party revaluing the company through a typical audit process.
The other way is for Fund managers to internally value the companies themselves. Funds that don’t have highly qualified members in their team to do valuations, and still do them, can lead to difficulties for an adviser who has to manage their client’s expectations.
Is tax relief included in my client’s return?
Tax relief is a by-product of EIS and VCT’s if a manager deploys funds into a company under EIS then they qualify for tax relief.
Some managers include that tax relief in their returns forecast.
As with all the issues raised, the best way to find the answers is to ask your fund manager, or James D’Mello himself.
What is SidbySide
SidebySide specialises in investments into later-stage EIS businesses already producing over £1m of revenue, helping to mitigate the start-up risk prevalent in a lot of EIS investments.
During the conversation with GBI Magazine James was eager to highlight that SidebySide is on the right side of all the topics covered above and that he is happy to talk to advisers about it.
Email James at; [email protected]