New Rules, New Era for EIS

The EIS industry has been through a transformative year that has impacted inflows but it doesn’t mean that adviser interest is waning, quite the opposite.

In the tax year 2016/17, a total of 3,470 companies raised a total of £1.7 billion through EIS, which are the most up-to-date figures HM Revenue & Customs (HMRC) has.

Unsurprisingly, the 2016/17 total was a drop on the previous year’s £1.9 billion raised by 2,260 companies, as the EIS industry battled a number of uncertainties.

Considering the changes that have happened in EIS and the clampdown on funds offering capital preservation rather than growth, the 2017/18 figures are likely to report a further tick down, according to Mark Brownridge, Director General of the EIS Association (EISA), speaking at a GB Investments Magazine round table.

‘I suspect [the numbers will] be down to about £1.4 billion,’ he said. ‘Significantly down from the year before, and the year before that.’

‘2016/17’s £1.8 billion was a high figure, so we’re regressing back to where we were before.’

There have been widespread concerns that funds will want to raise less money and find it harder to invest under the new rules governing EIS. Following the government’s Patient Capital Review that showed EIS was funnelling too much money into low-risk capital preservation business, HMRC used the subsequent Autumn Budget to move EIS back to their original purpose: investing in higher risk start-ups that benefit the UK economy.

This included an enhanced regime for ‘knowledgeintensive’ companies and investors, who can invest up to £2 million a year in EIS companies as long as £1 million of the total is in knowledgeintensive companies.

While the industry is slowly adapting to the changes, it is not surprising that inflows have dropped slightly given that some funds are tweaking their investment portfolios and others are concerned about whether they now have suitable companies to deploy money into.

Brownridge does not expect the slowdown in inflow to continue.

‘I think it’s a bit of a one-off, at least that’s what I’m hoping,’ he says. ‘It proves the point about why the government has stopped this type of [capital preservation] product, as it seems to be where the problem lies.

‘It shows that you can’t invest in a low-risk manner.’

Although the overall EIS inflow figure is likely to be lower, Fabian Bullen, Senior Partner at wealth management firm St James’s Place, says investors are still willing to place their money into taxefficient investments.

He says he would ‘be surprised if [the amount clients invest into EIS] is down’.

‘In my own client practice, the actual figures are slightly up compared to the previous year, as new clients are coming in,’ says Bullen.

The interest in EIS is often down to one simple thing: ‘People don’t like paying tax,’ says Bullen.

‘A number of people have breached their lifetime pension level, and they’re still relatively young. They’re keen to invest, to build up their pensions, and reduce tax liability. We’re still seeing opportunities in those areas,’ he says.

Tom Lindup, Director at EIS and SEIS provider Velocity Capital Advisors, says he is ‘seeing more advisers utilising EIS’.

‘I think if numbers are down, it’s not because there are fewer advisers doing it,’ he says. ‘Last year we grew over 30% so we’re not seeing that. I am seeing more and more new advisers who are interested in the space and are trying it for the first time.’

He adds that advisers ‘understand why the market has changed’ but ‘the biggest thing for them is that this is a government-backed scheme, which gives validity’.

Daniel Rodwell, Chief Executive of GrowthInvest, a platform which allows advisers to access alternative investments for their clients, says advisers are using multiple EIS in order to spread clients’ portfolio risk.

‘With regard to advisers that come to us right now, they’re using us and saying: ‘OK, I’ve got £200,000 and I want to invest into at least four different fund managers to spread the risk’. This means they are accessing a greater number of companies,’ he says.

HMRC’s review of the sector could be seen two ways; that it is unhappy with the way the sector is operating because it has clamped down on capital preservation funds, but that it is also relying on taxefficient investments to fuel the UK economy as it has increased its funding limits.

‘It’s a great benefit to the economy,’ says Bullen, who adds that he would like to see more reporting from the EIS industry on why it is good for the economy and provide up-to-date information about the economic benefits.

He says it would provide confidence to investors and show the government isn’t going to ‘back out of the scheme...as it’s good for the economy’.

Brownridge says his own interactions with HMRC in 2017, the year of the Patient Capital Review were positive and it was keen for the industry to provide growth.

‘They want to encourage the industries that are doing well,’ he says.

‘Particularly with Brexit coming, we’re going to need those industries to really take off: artificial intelligence, cybersecurity, technology. The more money we can get to those areas, the better.’

There is a lot of money flowing into technology, as funds search for the next great disruptor but there are more established areas of tax-efficient investing that have had a facelift: creative and media investment.

Many advisers will remember the bad old days of dodgy film funds, and the reputation they left behind has tainted the appeal for advisers, but they should take another look.

Dan Perkins, Managing Director, Great Point Investments, says: ‘The creative industries sector is a well established and significant contributor to the UK economy. Whilst it is true to say there were a number of film investment schemes marketed 15 to 20 years ago that have made the headlines for the wrong reasons, these are a world apart from the media investments now available not least because of the HMRC Advance Assurance process that all investments have to follow before receiving funding.’

Perkins says the new risk to capital conditions had the ‘naysayers saying “that’s probably it for media”’ but contrary to that he says we are seeing plenty of growth in our sector and it is encouraging to see new players entering the sector that have traditionally taken a more generalist approach, such as Calculus Capital.

‘The playing field has been levelled,’ says Perkins. ‘All EIS investment is now purely growth focussed, irrespective of sector. For investors and advisers, the main risk mitigation tool available now is diversification, meaning that spreading your EIS investment across manager and sector is the only sensible approach.’

He says Great Point is ‘starting to successfully get the message out that the creative industry is alive and well and open for business’.

Perkins adds that there has been a shift in the types of investments Great Point is making following the risk rules.

‘Ironically, it wasn’t necessarily the level of risk we were taking previously that was out of kilter with HMRC’s approach to EIS - more the project based nature of our investment strategy which focussed on the production of television shows. Going forward, our strategy is based on a pure equity-based approach, supporting entrepreneurs to grow their creative industry focussed businesses,’ he says.

‘HMRC have not removed the sector from EIS qualification, simply re-purposed it to ensure funds are supporting equity based growth. They have subsequently confirmed they remain supportive of our sector and as a team of highly experienced media professionals this shift has been a positive as it helps highlight that the creative industries can be just as lucrative in terms of returns as other sectors such as tech or life science. By introducing the risk to capital conditions in this way, hopefully the regulatory environment will now enjoy a sustained period of stability giving investors and advisers confidence as to what qualifies and what doesn’t.’

Velocity’s Lindup says his company does not do much investing into creative industries, but does have a focus on technology.

‘I suppose we are one of the luckier funds, in the sense that [the change to rules] hasn’t altered our investment structure at all,’ he says.

‘It was always pure equity, and it was always pure equity that was at risk. I suppose the other questions are; what do we see in terms of the calibre and number of businesses that we see to invest in; and secondly, what do we sense the appetite is amongst potential investors for investing in those businesses?’

The answer to the first question may be disappointing for investors as Lindup says there ‘are a lot businesses out there, but there’s a lot less very good ones’.

‘From an investor appetite side in terms of the education piece, what we’ve experienced is that there’s clearly a feeding through of understanding both from an advisor perspective and their clients, with the risk associated with EIS,’ he says.

‘I suppose we’re like any other fund: we invest to achieve growth and make money.’