EIS Isn't Dead, it's Gone Back to it's Roots

Whenever there is significant change within a sector or industry, there will always be those who might consider it to be bad news for those active within it, particularly when that change fundamentally shifts the market and causes a significant number of players to adapt.

Also, when that change comes from the Government and where there are a large number of stakeholders whose operations do not match the requirements of those changes, then you might also think that this could signal the end for many of them. That has certainly been a potential view of the EIS sector since the launch of the Patient Capital Review and the subsequent Government-led changes that eventually became legislation last year.

However, while the EIS sector is undoubtedly changing and has moved away from its pre-Patient Capital Review self, our own view is that scepticism around EIS as a financial planning tool in this new environment has not just been “greatly exaggerated” but is very far from the truth.

THE ‘NEW’ EIS WORLD

First of all, I think it is important to acknowledge that there is some evidence to suggest that certain organisations are struggling with this ‘new’ EIS world – which ironically is a return to how the scheme was initially envisaged. The sector has recently made headlines in a number of ways which perhaps outline the difficulty some have had in developing an EIS proposition that might have worked a few years ago, but is not going to work now.

For instance, we’ve seen news around some providers withdrawing funds, others have apparently begun consulting on redundancies, while others have said they were not able to deploy EIS funds in the 2018/19 tax year. And, for those that might not keep a close eye on the sector, this might lead them to the conclusion that the entire EIS market is suffering. But, again, this is far from the truth and our opinion of these announcements is that they are specific anomalies and are not in any way a reflection of the industry as a whole.

Let’s, however, not be under any illusion that certain providers have needed to change, and it may well be that they have been unable to cope with a new set of rules which introduced the risk to capital condition on their funds, and that effectively removed any remaining ‘capital preservation/asset-backed’ EIS propositions.

For providers which exclusively operated in this part of the EIS market, then they have probably had to make a number of hard decisions. Could they truly move into the type of EIS investment sectors that Deepbridge has always specialised in, such as disruptive technologies and life sciences, for example? It’s one thing for providers to suggest they are acting in the spirit of the EIS rules, it’s another thing altogether to piece together a proposition which abides by the new rules and also offers a compelling investment opportunity. The recent troubles displayed by a number of providers appears to show that, for some, bridging that particular gap has been problematic.

VCTS VS EIS

There was also much conjecture around the funding levels under EIS and how perhaps VCTs may replace EIS as an adviser’s tax planning tool of choice. Much of this conjecture was that VCT fundraising in 2018 would surpass that of EIS, but the latest figures reveal that VCT inflows were down 5% for 2018/19, compared to 2017/18, whilst it is also anticipated that EIS fundraising for 2018 will be up on 2017, although not yet likely to reach the peak of 2016.

To our mind, that all of this is an understandable progression for a sector which has been dealing with a number of fundamental rule changes and which has seen a significant number of propositions either having to change their approach or leave the sector. The Patient Capital Review and the introduction of the risk to capital condition have shaken the market which meant some providers have to change in order to comply with the new rules.

However, consider this against those who do operate in growth-focused EIS investing, particularly in the ‘knowledge-intensive’ sectors such as technology and life sciences. Many of these managers continue to report year-on-year growth – Deepbridge’s own 2018/19 EIS funding raising was over 25% up yearon-year, so it’s not simply a case of saying that all managers are suffering, when clearly those of us that have always focused on growth-focused and highly innovative sectors are not.

A NEW BREED

There are many other positives to be aware of which should ensure stakeholders discard any pessimistic thoughts. For instance, we have seen a number of new entrants to the market in this new environment – they clearly see the opportunity that does exist, especially under the new rules, and I suspect as we see more of the ‘old guard’ retreat, we’ll see a new breed taking their place in greater numbers.

Then of course is the advice element in all of this, and how advisers are much more willing to look at EIS investments and how they fit into the tax-efficient investment needs of their clients. For instance, our own adviser ‘community’ has grown rapidly, and continues to do so, plus advisers are increasingly knowledgeable, and thereby more confident, in this sector and on the product options available for those who require tax-efficient opportunities – or indeed for those happy to take risk in order to target potential high-growth opportunities.

Advisers have not only benefited from increased education in this area but we find that national advisory firms, networks and support service providers have almost all embraced tax-efficient investments as an area of potential opportunities. The further good news is that the EIS market continues to innovate and the opportunities for advisers and investors to access early-stage, high growth-focused companies has never been so varied. After all, without quality investee companies to invest in, we would all be at something of a crossroads.

Overall, we can see that the EIS market has certainly matured in the last couple of years, advisers are embracing it and we expect to continue to see an upward trend in funds raised in the future.

The risk to capital rules were always going to take time to bed in, but now they have and, as a result, EIS funding is once again focused on supporting innovation and job creation in the UK. It is the great unmentionable but also, with the UK scheduled to leave the EU, EIS and SEIS have perhaps never been more important in funding UK plc. To that end, advisers need to work with those providers who are experienced in the growth-focused sectors, have the expertise, the deal flow, the resource and the understanding, and can importantly deploy funds expeditiously in order that clients can claim any potential tax reliefs at the earliest opportunity. Working with such providers will mean the EIS experience is a good one for all, and that rumours of the EIS’s demise continue to be proven to be “greatly exaggerated.”