At a time when businesses are focused on resilience and growth against a challenging background, more advisers are recognising the role venture capital and the Enterprise Investment Scheme (EIS) can play in portfolio construction and financial planning.
The EIS industry has been around since 1995, and in the early days, EIS investors were typically individuals who made hay on a deal-by-deal basis. In more recent times, wealth managers have started to see the benefits of it as a tax planning vehicle, whilst also identifying its value as an alternative asset class.
Institutional fund managers and wealth managers are allocating funds to venture capital as a way of building a diversified portfolio and providing access to an asset class which can have potentially rewarding results for investors. Over the last six months it’s become increasingly evident that there is a need for investments to be aligned to the sectors which will fuel economic recovery post-Covid-19. EIS gives investors the ability to focus on supporting the sectors that will flourish in this new landscape, rather than continuing to invest in an existing portfolio which was constructed in a pre-Covid-19 world, where the future looked very different to what we’re now witnessing. One of EIS’ biggest draws is that it can give investors access to investments in fast-growth, start-up businesses. These firms are the engine room of the UK economy and will be crucial to Britain’s efforts to ‘build back better’ from the impact of Covid-19. Clearly, investments into early stage businesses come with additional risk, and this needs to be considered in light of each individual investor’s objectives and risk appetite.
But while EIS is growing in popularity, it hasn’t yet reached its full potential, and for many isn’t yet viewed as a mainstream planning tool. Open and honest communication is the key to building trust and confidence in the EIS industry. In a time of unparalleled challenges for businesses and the global economy, it has never been more important that the industry broadens its appeal and boosts its profile with a wider audience. It is vital that fund managers create trust through education and communication around key issues, including the diversification of businesses within an investment portfolio and fund deployment. Investors need to be handed the keys to take a real look under the bonnet at the performance of their investments.
In our experience, investor communications are typically restricted to a brief valuation, which gives very little commentary on the business. There is no real assessment of how businesses are performing relative to the plan, which can lead to surprises. Advisers have historically been disappointed with the detail they receive from EIS managers and this can create an environment where they struggle to understand what progress or otherwise is happening within the portfolio.
Fund managers must lead by example to deliver consistent, frequent and detailed analysis of portfolio investments to investors. Investors need to be informed about the progress of their investment with updates at key milestones. Crucially, it helps to show them how their investment can support a business through its growth strategy and deliver returns from the point of investment.
What fund managers must also be live to is that fact that there is an investor in the background with a financial plan. As managers, they have been entrusted to deliver part of the plan to the best of their ability, and it’s important that they stick to, and communicate their progress, with these objectives front of mind.
Innovative communication tools are another sure-fire way of boosting the image of EIS in the industry. We’ve designed our bespoke investor platform to directly address these issues and instil confidence in our investors and advisers. It is a comprehensive digital platform for investors to access detailed information about their investment, including information around valuation, EIS certificates and documentation.
We go above and beyond to update investors regularly on how the portfolio is progressing, with a flow of detailed and consistent information, including half-yearly portfolio updates and investor calls. We also provide ad-hoc updates in response to significant developments or events. This really came to the fore with our Covid-19 call to investors. Detail helps investors understand their investments better and creates trust with the fund manager.
Perceived risk is having a significant impact on the uptake of EIS. It is only through widespread transparency – spreading the word widely among the industry on the importance of open and honest communication, and transparency around fees – that this will change.
About Jonathan Prescott, Business Development Director at Praetura Ventures
Jonathan has almost 25 years’ experience within the financial services sector. Having spent over 15 years at AJ Bell as Business Development Manager forging links with advisers across the country. Jonathan subsequently spent over 4 years at Octopus Investments, as Area Sales Director for the North, Scotland and Northern Ireland where he was responsible for a team of Business Development Managers and for implementation of the group’s sales strategy across the region. Jonathan has a thorough understanding of VCT, EIS and BR.