What advisers should know about EIS

If it is a low risk investment with tax breaks, then they may be a little late as the Government has been closing EIS to most low risk schemes.

If the client wants exposure to genuine, growing private companies as an asset class, where the downside risk is mitigated and the upside boosted by EIS tax reliefs, then there is a growing community of EIS managers providing such investment opportunities.

Having decided that this asset class is appropriate to the client’s risk appetite, ability to absorb loss of capital and willingness to hold illiquid assets for long periods of time, what should you be mindful of when choosing an EIS manager?

One of the most basic but critical things to consider before investing client money with an EIS manager is what is their investment strategy? Is it well thought out? Does the manager have a deep understanding of their chosen field or sector?

Ultimately using EIS should always be treated as an investment decision first. You should also look at the quality of the fund’s management team. Do they have the necessary experience and are they qualified to operate the fund?

Regardless of who pays those fees, these are going to affect client returns

Closely tied to the strategy and team is the fund’s track record, or more specifically, what has been the manager’s historic performance to date with their current strategy?

Next, how quickly is the manager deploying client monies? This is key for planning purposes. There are some EIS funds who can fully invest a client in days or weeks for almost immediate tax relief. However the majority of funds, especially those focused on a growth strategy, will usually take somewhere between nine and 18 months to fully invest a client’s subscription.

Deployment time will often reflect diversification in the investment too. There are different opinions on the optimum amount of individual underlying companies in an investor’s subscription.

However, it is worth bearing in mind that the fewer the companies within a client portfolio, the more concentrated the risk. There are issues associated with too large a portfolio of investments as well, not the least of which is the significant increase in administrative burden.

Fees are also an important consideration when choosing an EIS manager. There are differences across EIS managers as to how fees can be taken, either directly from the client or from the investee companies themselves. It is important to understand that regardless of who pays those fees, ultimately any fees are going to have an impact on client returns.

Finally how is the manager going to communicate with your client? What will the quality and regularity of those communications be? Any type of EIS is a long-term commitment and you want the comfort of knowing that you and your client will be kept informed of how the investments are progressing.

Depending on the interest level of the client, it is also worth finding out if the fund manager offers any opportunities for them to engage further in their investment, for example some fund managers run events or seminars where their investors can meet with investee companies directly.

Ultimately when advising on EIS, the most important thing to be mindful of is your client, and what type of manager, and investment, is right for them.

Anna Slemmings is head of sales and marketing at MMC Ventures