At the end of last year IFA and GBI Magazine hosted a special EIS and SEIS focused webinar chaired by Martin Fox, Managing Director of Bulletin Marketing. We were joined by Jeffrey Faustin, Chief Investment Officer at Jenson Funding Partners, Dr Brian Moretta, Investment Analyst at Hardman & Co and Andrew Castell, Partner at Par Equity. It proved to be a highly informative in-depth discussion which saw our three leading industry experts give predictions, research-backed opinions on what lies ahead for the EIS and SEIS industry. We have provided an outline below and for those that may have missed the opportunity first time around, the recording of the webinar is still available on the GBI Magazine website.
Knowledge intensive funds
Following brief introductions to the industry expert members of the webinar panel the Chair, Martin Fox opened by discussing the relief felt in the sector on the pushing back of the ‘Sunset Clause’ as part of Kwasi Kwarteng initial mini budget, which was then kept by Chancellor Jeremy Hunt. This and the uplift on the level for SEIS are seen as important elements in growth of the economy in the future. Highlighting some of the more recent changes discussion moved onto knowledge intensive funds (KIs) and Martin asked Par Equity’s Andrew Castell to outline the launch of their new KI fund.
By way of background Andrew explained that the knowledge intensive funds are the revised version of the HMRC approved EIS funds that turned out not to be especially popular but the fund concept itself seems to be well received in the market. He added that it essentially allows access to the same range of EIS tax advantages as the unapproved funds but can deliver greater certainty as to the date at which shares in EIS qualifying companies are deemed to have been subscribed for.
They are particularly useful, he noted, for investors who have large tax planning requirements in terms of being able to carry back reliefs to deal with unusually large income or capital gains that they may be wishing to bear less tax on. The main risk associated with them is that of deployment but if a manager has a good track record of deployment, then it should be fine. The only minor drawback, one that investors don’t need to be concerned about, is that they don’t really seem to address what the patient capital review intended them to do, which is to focus investment on very deep tech, very longterm companies, which might be spending well over a decade to bring something to market. Andrew added ‘when we looked at this before launching our fund we discovered that 80% of our companies are already knowledge intensive so running another knowledge intensive fund for us involves virtually no change whatsoever to our investment thesis.’
Brian Moretta agreed and in developing the point commented that KIs although useful, were not necessarily game changing adding ‘most people who are doing these are essentially doing the same thing in a knowledge intensive wrapper. They haven’t really changed people’s behaviour.”
A not so perfect world
Discussion moved to the power for good that EIS and SEIS is and the value they bring to both companies and investors and in turn UK plc. Addressing the metaphorical elephant in the room Martin raised the social and political turmoil of the last 12 months and conversation turned to the uncertainty and nervousness that the situation in Ukraine had brought as well as the impact of inflation and recession in the UK. Andrew went on to discuss how exiting has become less prosperous in the current climate. He noted ‘we’ve clocked up about ten years of returning money to investors every year and we have managed by the skin of our teeth to achieve that this year as well. We’re seeing a lot less interest from the US. On one hand it is odd given the exchange rate recently but what I’m hearing from the bankers is that there is a great deal of nervousness surrounding the war in Ukraine, and that’s putting off the US.”
In the midst of war-torn Europe, unprecedented inflation, and an energy crisis, SEIS and EIS investors have clearly been somewhat affected. However, Jeffrey Faustin highlighted that the impact hasn’t been exclusively negative noting that ‘one of the things we’ve seen recently is a return to labour market for sections of skilled workers. A year ago, it was a struggle to find a good developer or good resources. We are now in a position where that is softening a bit so now our portfolio companies are getting a much better price for these types of resources.”
Research and white paper
Following on from the retrospective Martin moved the conversation to discuss Brian’s recent research paper ‘TES white paper: how much should clients invest in venture capital? The research covers the effect of adding venture capital to equity or bond portfolios for retail investors, the holistic asset allocation approach and the tax relief benefits affecting risk and return.
Brian discussed the benefits of EIS and SEIS as an asset allocation class in a time where other investments may suffer due to the different economic behaviours of early-stage companies. Explaining this further Brian added that “if you look at Barclays, Shell or Diageo, these are big companies that are established businesses. How they behave somewhat depends on what is going on in the wider economy. For most companies that venture capitalists are investing in, the wider economy is less relevant. What they are doing is trying to find the minimum viable product or they are trying to find that first customer. Those are hard in any circumstances, whether the economy is doing well or badly. That means that particularly for early-stage companies, the way they behave economically is different from what conventional quoted equities do.” To highlight this Brian explained that every wealth management portfolio should include a percentage of alternative assets given it is a diversifying asset class which helps in terms of portfolio construction. He added that if you run it through conventional allocation models, it shows that you should have a proportion of this asset class in your portfolio ‘unless you like the really, really low risk side. In terms of your default equity bond exposure, everyone knows 60/40 and probably more people do in 70/30 these days’. Brian calculated that in a 60/40 scenario somewhere around about low teens should be in terms of exposure to venture capital as an asset class.
Consumer duty
As might be expected given the roller coaster of economic fortunes this past year, the future of the EIS and SEIS industry was a central topic over the course of the webinar, and conversation moved on to the latest of these, the changes to Consumer Duty. Martin outlined the changes that the FCA were bringing to the financial sector and specifically the impact in terms of the EIS and SEIS industry before asking the panel for comment. Andrew commented that the costs of meeting the FCA’s expectations will involve a lot of investment in additional software to allow for the data collection and analysis needed to for example assess sustainability data received from portfolio companies who he noted are themselves even less well positioned to provide this kind of information. He added ‘sadly, the cost of all that is going to find its way, one way or another, to investors. As always, it is the investors that get to pick up the costs of broadly-drawn data harvesting initiatives.”
Barries to venture capital
Throughout the conversation EIS and SEIS investing was lauded for the upsides and exciting prospects that it can produce, this led to a discussion about why all advisers were not active in the sector. Exploring whether there were specific barriers to venture capital Jeffrey Faustin highlighted the workload that investing in EIS and SEIS brings about in terms of due diligence. He suggested that the work-to-reward ratio for such a small percentage of a portfolio may not be seen as a valuable use of time. He commented “At the risk of upsetting a few advisers on this call, I think part of the issue is that financial advisers, like any other financial professionals, will be relatively time poor. There is a high level of due diligence that needs to go into understanding this space, given the percentage of the asset allocation to their clients’ portfolio”. Whilst Jeffrey focused on the adviser’s point of view, Andrew discussed the client mentality and suggested that the inherent risk profile of this type of investment may of itself be a barrier. He added “There’s no getting away from the fact that this is a risky asset class, particularly risky in terms of the profound illiquidity of it. I suspect whether that does or doesn’t put off advisers, that will certainly put off some of their clients.”
Tax relief and loss relief
A recurring point throughout the webinar was the simple fact that EIS and SEIS offer some of the most generous tax benefits of any government backed scheme. Addressing advisers listeining in on the day Martin reiterated the value of these schemes within professional financial planning and diversified portfolios for clients given these are government backed schemes that offer very good returns.
Brian shared his thoughts on the the psychology of investing and highlighted how people are naturally risk averse, but the eligible tax relief and loss relief needs to be raised as a point to counteract doubts that people may have. Martin and then Brian discussed how the tax relief on the way into the investment helps mitigate any potential losses whilst the loss relief helps amend any losses that may come to fruition. Brian added “if a company fails and you’ve got EIS tax relief on it or SEIS tax relief on it, then you can get tax relief on the capital you lose. So, for your EIS and you’ve invested £10,000, you already had £3000 relief. Your capital risk is £7000, you have a 7000 loss you can offset against your income tax in the year that the losses realised.”
Exciting times ahead
A wide ranging discussion that touched on all of the key issues in the tax efficient sector at the moment, the webinar was brought to conclusion with some of the many success stories surrounding investments that the panel members had made in recent times. Addressing each of the panel Martin posed the question ‘What is one company that you invest in that you are excited about?’ Jeffrey discussed Jenson’s investment in a company called ‘Front M’ that has developed computing technology that increases the bandwidth of satellite communications. Meanwhile, Par Equity’s Andrew Castell highlighted a company they have in their portfolio that has created innovative software that detects harmful images and videos on a hard drive without the need of sending it to a tech lab. Both panellists went into great detail about the exciting developments happening at both these companies and the passion and drive to help start-ups was clear in the way they spoke.
