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How advisers can use venture capital to target long-term above inflation growth

by | Aug 10, 2022

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Photo of Andrew Aldridge, Partner at Deepbridge Capital

By Andrew Aldridge, Partner at Deepbridge

As the UK reports inflation rates of nine to ten percent, deciding what advisers can be doing to help protect their clients’ wealth is the conundrum of the year.

We’ve seen the likes of gold, emerging equities and residential property mooted as possible inflation-proof opportunities to consider within portfolios, but perhaps the real consideration for targeting long-term above inflation growth is venture capital.

Venture capital investing is of course to be considered as high risk, but if introduced to well-diversified portfolios then it can be effective without overstretching the total portfolio’s risk level.  In the UK we also have a unique and world-leading incentive to consider VC investments, that being the Enterprise Investment Scheme (or EIS).

 
 

EIS was introduced back in the nineties with the intention of supporting early-stage companies to attract private funding.  It is now widely regarded as one of the leading tax incentive schemes in the world, with a PWC report for the EU rating EIS as the second best scheme in the world, ranked only behind it’s younger sibling the Seed Enterprise Investment Scheme (SEIS).

So, the question has to be why do so few advisers routinely use EIS propositions within their advice toolkit?  Deepbridge research suggests that only approximately one in five IFAs in the UK recommend EIS opportunities to their clients, with a myriad of reasons (potentially excuses, but let’s go with ‘reasons’) provided.

The first explanation most advisers provide is that they ‘don’t have the right clients.’ For some this is a genuine reason but for many this is based on the potentially false assumption that EIS investments are only for the mega rich.  We wouldn’t suggest that the average investor only invests in EIS funds, but as part of a well-diversified portfolio, EIS investing can be appropriate for many more clients than might be expected – with minimum subscription levels starting from just £10k.

 
 

The other often used rationale is that ‘EIS is too high risk.’  EIS investments by their very nature are unquoted early-stage stocks and therefore should rightly be considered as high risk.  However, this needn’t alter an individual’s overall portfolio risk level.  A White Paper published by Hardman & Co, ‘ ‘how much should clients invest in venture capital,’ outlines how venture capital can be added to portfolios without altering the overall risk, whilst providing a startling increase in performance. It should also be noted that EIS investments attract Share Loss Relief, which offers not-inconsiderable downside protection.  So, yes, such stocks should absolutely be considered with respect but within an appropriate portfolio, can add significant opportunity.

In reality, once you scratch the surface, a majority of advisers who don’t routinely consider EIS investments for their clients either don’t have the confidence to recommend such esoteric products or it doesn’t fit with their business model.  The confidence factor can be addressed via good quality training, with there being more training available than ever before – including Deepbridge’s award winning training series of course!  Whilst the business model restriction will be harder to adhere to once the FCA’s Consumer Duty initiative takes effect, with the FCA doubling down on consumer outcomes, will advisers be able to continue ignoring investment opportunities which can not only be useful tax planning tools but also potentially provide long-term growth?

The UK has a vibrant and envied start-up scene, with phenomenal intellectual property being produced from academia and entrepreneurs, to whom the provision of EIS funding is critical. With significant tax incentives and potentially inflation-busting growth on offer, it has never been more important for advisers and investors to be routinely considering Enterprise Investment Scheme opportunities.

 
 

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