The investments this adviser’s clients are always talking about

Sunny Sonpal is a financial adviser based in Milton Keynes and Managing Director at Collective Financial Planning.

The chances are his business bears similarities to your own. 

Sunny looks after a range of clients. They sit at different places along the wealth spectrum, not just the extremely wealthy. And he spends a lot of time figuring out how he can add as much value as possible for his clients. 

Sunny recently took the time to speak to Octopus about one area of investing he feels has helped his clients and business considerably.

“My clients are always talking about it,” says Sunny.

“It’s totally different. Some of these investments are in the high-tech world. What you have here is young, exciting companies and a lot of clients want to get involved in it.”

Getting in early

Sunny is talking about investments in early-stage companies. 

These are high risk investments, particularly because young companies will have a higher rate of failure than established companies. 

But when a client is suitable, they have an opportunity to access investments with huge growth potential and feel a strong sense of ownership in exciting businesses.

“Clients enjoy seeing companies grow from seed all the way to IPO,” says Sunny. “I first started investing in early-stage companies with my clients many years ago. One of the stories we all still talk about today is Zoopla, where the returns clients saw were fantastic.” 

When someone invests in a company at its initial public offering, there’s a good chance they’ve missed out on some of the most significant growth that company will ever see. 

Taking the risk of backing a business in the early stages of its growth means investors can maximise that growth opportunity.

So how could your clients get involved? 

How clients can invest in early-stage companies

One way clients can invest in early-stage companies is through the Enterprise Investment Scheme (EIS), a government backed incentive available only to smaller companies. With an EIS service, investors benefit from owning shares directly in a concentrated number of early-stage companies. This concentration means where a company succeeds, investors can really feel the impact of the growth. Equally, any losses will be felt more sharply. 

EIS investors can claim generous tax reliefs to compensate for some of the risk they’re taking by investing in small, young companies. These include 30% upfront income tax relief, tax-free growth, loss relief that can be claimed against income or gains, and the ability to defer capital gains. EIS shares also qualify from relief from inheritance tax. 

These reliefs combine to make an attractive high-risk portfolio where investors can get close to the companies they’re backing and feel engaged with their journey. 

Another way clients can access early-stage companies is through a Venture Capital Trust (VCT). VCTs invest in a large, diversified portfolio of smaller companies. Investors benefit from the VCT owning small stakes in a large number of companies across different sectors, and are able to claim up to 30% upfront income tax relief on their investment. Dividends and any growth are also tax free. 

Risks to bear in mind

It’s important to understand that the value of an EIS or VCT investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.

The shares of early-stage companies and VCT shares are by their nature high risk, their share price may be volatile and they may be hard to sell.

Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies and VCTs maintaining their qualifying status.

Why make early-stage investments a priority? 

It’s well-publicised that increasing numbers of investors are showing an inclination to invest in young, progressive businesses. In some cases, clients will seek these opportunities out with or without the support of their adviser.

This is certainly something Sunny has seen.

“My clients often ask, ‘What’s the next field? What should I be investing in?’”

So it’s important to Sunny to have this area of investing covered. EIS and VCT help him to do this. 

“Advising on early-stage investments has improved my business and the profile of my business,” he says. 

“First and foremost, it’s improved the knowledge base of my business. From there it’s led to talking to a lot of clients about these opportunities.”

“We’ve also gained many clients. Only recently, a new client approached me because they hadn’t been offered these opportunities in the past and felt they should have been.”

A thriving environment

Right now, the UK is a thriving environment for early-stage companies. It’s an area Octopus has significant expertise. Some recent examples of businesses Octopus has sold stakes in include Depop and WaveOptics – both delivering excellent outcomes for investors.

Depop, a second-hand fashion app, was bought by global e-commerce platform Etsy for $1.6 billion, while augmented reality innovator, Waveoptics, was snapped up by Snapchat for more than $500 million. 

Another example many of your clients will have heard of is Cazoo. Octopus was an early backer of the online used car retailer, which floated on the New York Stock Exchange earlier this year.

Both Cazoo and Depop are examples of unicorns (private companies which reach billion-dollar valuations) and are best-case outcomes for investors. 

Of course, not every company will achieve these kinds of returns or indeed succeed, and clients need to bear this in mind.

What is consistent though is that investments in early-stage companies provide capital to vibrant entrepreneurs looking to change industries, stimulate the economy and create jobs. 

Understandably many clients want to be a part of this, backing the next generation of pioneers and supporting the UK. Advisers are in a great position to advise them on the opportunity. 

Lean on expertise

It takes skill to invest in early-stage companies, as these businesses are more difficult to research and access. For these reasons, many clients choose to access smaller company investments through a specialist investment manager. This way, a client benefits from the manager’s expertise, track record and pipeline of investments.

Octopus has been making investments in early-stage companies for more than two decades. In that time we’ve invested over £2 billion, helping support early-stage companies to reach their full potential.

Gain the knowledge 

If Sunny’s experiences resonate with you and your business, we have an ideal next step where you can learn a little more about early-stage investing. 

You’ll be able to watch a short interview with Sunny, read about the four key reasons why advisers should recommend early-stage investments, and learn more about the tax-efficient investments we provide which offer access to these opportunities. 

Visit octopusinvestments.com/smaller_companies

VCTs and EIS investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: December 2021. CAM011630