Investors should not be satisfied with a tiny 'sprinkling' of returns on top of fees, a venture capital fund manager has said.
Dr Ilian Iliev, managing director of VCT and enterprise investment scheme (EIS) specialist EcoMachines Ventures, said too many retail investors were focused on traditional, often passive, funds that did not produce the kind of returns they could get from venture capital trusts and enterprise investment schemes.
He said: "[VCT and EIS] are are amazing tools available to investors in the UK. The reason they were set up was to stimulate investment in innovative British companies.
"Investors should be demanding more of their IFAs in terms of the advice they are getting in this space.
"For example, if we look at experienced investors using EIS as an investment tool, they typically expect a 6 per cent to 10 per cent return over a diversified portfolio.
"But private investors seem happy to just get their money back with a little sprinkling on the top. Investors should be expecting more."
Given the risks inherent in start-up companies, Mr Iliev said: "It is not, and should not be gambling. It should be a strategic decision by the investors and adviser about how to go about investing.
"It can be tough for IFAs, as with the changes in EIS rules, advisers may have been thrust into becoming micro fund-of-fund managers or curators. But from an investor's perspective, a carefully built and curated portfolio of EIS investments can provide them a diversified portfolio."
He said this should help with diversifying the risk and helping to maximise returns.
In terms of the longevity of the investment horizon, he reminded investors that the time horizon is usually between five and seven years, although there are opportunities to exit early, and stressed that people should be patient with this sort of patient capital.
He commented: "If investors are asking advisers to put their money into EIS, they need to be asking advisers what are the strategies after the three-year initial holding period."
Mr Iliev also said EcoMachines Ventures was not overly concerned about Brexit. While calling it a "mixed picture", because there will be less access to European venture capital money, he was also positive about the government backing for small-cap companies.
Overall, he said he was also positive about the future for start-ups in Britain, because the UK was seeing so many excellent centres of expertise and entrepreneurship, such as in the digital infrastructure, fintech, health tech and medical tech sectors.
Yet he added: "It is important however to differentiate between the noise and to pick the winners."
Over the next few months, he said EcoMachines Ventures is going to scale up its Evergreen EIS fund.
Find out more
To find out more about EIS and VCT investment, read FTAdviser's Guide to EIS and the Guide to VCT Investment, which both qualify for an indicative 60 minutes' worth of CPD.
simoney.kyriakou@ft.com
