The investment landscape for enterprise investment schemes (EIS) and venture capital trusts (VCT) is undergoing significant change.
This shift is being driven by HMRC eligibility rule changes, a broader government focus on activist industrial policy, and – most importantly – the maturing of the UK start-up investment scene.
There has been a shift in government policy towards promoting growth and knowledge-intensive businesses, which is in part linked to the post-Brexit vision of a UK powered by high-tech growth and export-focused business sectors.
This is no white elephant stuff. There is a renaissance in UK entrepreneurship, with a notable uptick in EIS investment opportunities across a range of sectors including software, biotech, robotics, waste-to-energy, and even film and the creative industries.
- The EIS and VCT investment landscape is undergoing a significant shift
- Some investible funds may exit the EIS and VCT industry
- There is a developed ecosystem in the UK around EIS investment opportunities
There is an increasing number of UK-grown mega-exit success stories in the knowledge-intensive space, such as artificial intelligence companies Deepmind and Magic Pony ($500m and $150m exits respectively).
There are many other smaller investment exits that may not have grabbed headlines but have provided solid investment returns to EIS investors.
This is noticed by high-net-worth clients of advisers, many of whom are business owners, serial entrepreneurs, or part of a new generation that is increasingly independent. Many are looking for high-growth investment opportunities, with the EIS or VCT tax benefits a very welcome element.
Will greater product diversity offset decline of capital-preservation products?
The industry is already starting to adjust, with advisers and wealth managers evaluating what changes they need to make to serve their clients’ interests better in this transformed environment. Clearly there will be a move away from many capital preservation schemes which are simply too risky now from a compliance perspective.
But how fast or drastic will investors’ reactions be? We may see conflicting trends. On the one hand, some investible funds may exit the EIS and VCT industry as capital-preservation products wind down, and there is apprehension about the higher risk levels of remaining products.
On the other hand, it may well be that the increasing diversity of different growth-focused products on the market provides sophisticated investors (and advisers looking to provide their clients with a deeper service) a sufficient set of diversification options to facilitate an increase in EIS and VCT allocations.
Given the multi-level changes seen in this environment advisers and wealth managers are now looking to evolve their strategies and approach to evaluating investment opportunities in the space. What are the options? Below are some initial observations:
- Diversification across multiple VCTs and EIS fund providers will be key to a balanced investment strategy by investors.
- Expanding panel size to include a greater number of technology specialist VCTs and EIS funds will give clients more choice and diversification options.
- Re-evaluating existing panel members is necessary to understand how the fund managers will re-skill to move from capital-preservation to growth-focused strategies. Running a biotech, or robotics, or internet of things focused fund is very different and requires a set of capabilities different to, for instance, running a property-backed EIS fund.
- Deeper due diligence in funds’ investment strategies, to understand how the different EIS funds fit investors’ needs and preferences and what the genuine differences are between different products.
- Greater use of online platforms – an improved digital tool can help advisers identify specialist EIS funds, allocate funds and monitor their performance. This in turn enables new and more diverse players to come to market and access a broader range of investors. It also makes it easier to administer a broader funds panel, to track performance over time and improve efficiency.
- Greater use of third-party research: The quality is improving, allowing more insight into EIS funds’ performance, strategy and teams, and enabling more objective comparison between funds.
- Deepening relationships with clients enables advisers and wealth managers to avoid commoditisation of their product. It is likely that we’ll see a more pro-active approach to client engagement. There are already many instances of clients doing their own research, and giving their IFAs a shortlist of EIS fund products that they like.
Does the VCT and EIS fund industry have the capacity to handle a more demanding and sophisticated IFA and wealth manager industry? There are reasons to be optimistic. A combination of factors has led to an increasingly developed ecosystem in the UK around EIS investment opportunities.