A Transparent New World For EIS

Kuber Ventures is trying to eradicate the legacy of secrecy surrounding venture capital and make EIS more transparent and accessible.

Dermot Campbell, Chief Executive of Kuber Ventures, wants advisers to understand the world of EIS, SEIS and Business Relief (BR). Since 2013, he has been trying to educate and provide access to alternative investments through the Kuber platform, dedicate to these funds - it currently offers advisers the choice of 25 funds.

It hasn’t been an easy job.

Campbell says EIS gained a bad reputation, being thrown in the same category as film investments that HM Revenue & Customs (HMRC) was not keen on. He said once HMRC clamped down on ‘dodgy film’ investments, tax advisers funnelled money into EIS.

Naturally, Campbell says some people will think EIS is ‘playing into that [tax avoidance] world’.

And some of the funds available were not doing the industry’s reputation any favours.

‘Some of these products had massively high margins and big sales forces selling them,’ says Campbell.

‘That bit of the industry did not want platforms [like Kuber].’

He says the transparency that a platform brings would have shone a spotlight on the funds charging too much and delivering too little, but times have changed and now there is a push towards greater transparency and there ‘are some great funds appearing’.

‘We are trying to drive good behaviour and transparency but some [fund providers] cannot help themselves,’ he says.

‘It came from their heritage...operating in a secretive world where they are not used to sharing their toys and handling a lot of intellectual property that they do not want to be looked at. They have this natural thing where they want to be secretive because they are dealing with cutting-edge, disruptive information, and they do have those processes in place that protect that intellectual property.’

Why Campbell understands that funds need to be somewhat secretive about the companies they invest in and the specifics of their operations, he believes there is one area that should not be secret: charges.

Campbell is clear about two things: firstly, EIS providers should make their charges clear, and secondly, it is not Kuber’s place to judge what fees should be.

‘Our job is not to say what is fair and what is reasonable with charges,’ he says, adding that pricing both too high and too low brings about their own issues.

‘If you’re charging just 2%, then you’ve probably got your pricing wrong and you need to have a look at the [provider’s] balance sheet. And if you’re charging 20% then there could be other issues - but it’s not our job to say that fund charges of 20% are right or wrong, just to say that this is what it is.’

The fund management industry has already been pushed towards clearer charing through the Financial Conduct Authority’s (FCA) asset management review that raised concerns that asset managers were calculating fund costs inconsistently and even inaccurately. In a move towards ‘value for money’ investing, the FCA has told fund managers to provide clarity on costs and fees and make it easier to compare fund charges.

This change hasn’t made it into the alternative investment world, and Campbell says there are some parts of the industry that feel the regulator’s clear call for clarity ‘does not really apply’ to EIS and similar investments.

However, ‘there is a growing number of funds’ that recognise the importance but there ‘is a long way to go’.

Part of the problem around EIS charges is that it is not as straightforward as a standard unit trust, as both investors and the investee company can pay fees.

Some funds charge investors a set annual management charge and performance fee, while others will charge the investee company, and just to add more confusion, sometimes it is a mixture of both.

‘Transparency’ is one of the things we are pushing for and it’s not very easy,’ says Campbell.

He adds that charging the investee company is good for investors are they receive tax relief on the charges but often the investor is charged because ‘you cannot charge the company because there was lots of competition for that investment and the company did not need to pay’.

Campbell says it is ‘not good’ if a fund starts to make investment calls based on charges.

‘If you are charging the investors because [the companies invested in] are long-standing companies that are probably going to exit quickly and lower risk, versus a tiny, early-stage companies the is prerevenue and more of a risk,’ he says.

‘If [a fund] is only going to invest in companies where the fee is paid by the investee company, then you are putting yourself in a different [risk] bucket.’

When a fund charges both the investor and investee company, it is due to the investee company not being profitable enough to afford the charges and ‘the investor has to make up the difference’.

‘Investors need funds to be properly reimbursed so they can continue to invest and exist,’ he says.

Charges have been a hurdle for Kuber and Campbell doesn’t deny it is a tough job dragging the EIS and SEIS market into the 21st century. One of the other barriers he is facing is that, despite the ubiquity of platform use in adviser businesses, the EIS world is ‘90% manual’, says Campbell.

He says advisers are still having to write out suitability letters and apply for EIS investments through the post.

‘The last challenge for us is the industry is completely manual,’ says Campbell.

However, it is a challenge that can be overcome and although Kuber is currently home to £60 million of assets invested via 25 funds, Campbell hopes to ‘get to a place where we are raising £100 million a year’.

He is pursuing a ‘tactical growth strategy’ of driving transparency that will encourage more people to invest, expanding Kuber’s potential client base.

‘Platforms are playing an important role in democratising EIS,’ he says. ‘We are bring those investments to the masses.’