A quarter of investors are paying more in charges to the manager of their venture capital trust (VCT) than they receive in tax relief, it has been claimed, but this is not reflected in the key investor document (Kid).
Richard Hoskins, co-founder of Kin Capital, which provides fund raising and other services to companies in the VCT and enterprise investment sectors, made the claims to FTAdviser amid ongoing concerns about Kids, some of which regulators at the Financial Conduct Authority have now pledged to look into.
Mr Hoskins has previously branded Kids for venture capital trusts "dangerous" due the requirement to include a measure of risk, because in his view the documents do not properly reflect the risks of putting money into what can be a complex investment.
But he is also asking the regulator to intervene to ensure VCT providers are more transparent on fees.
Mr Hoskins said: “To put the cost issue in context, in 2017/18 at least a quarter of VCT investors were signing up to paying more in fees and charges over the minimum commitment of five years, than they are getting in income tax relief.
"Whilst eye watering, high charges are easy for some managers to justify in a bull market. But, bulls quickly turn to bears.
"And let's not forget the £1bn or more of un-invested cash in VCTs. High levels of cash and high running costs - not exactly the best recipe for success.
"Fees matter, particularly at this stage in the cycle when clients are effectively locking in for five years given the VCT minimum holding period.
"There needs to be more provider competition on fees in this part of the market - the VCT industry desperately needs new entrants - something the government identified in last autumn's Patient Capital Review."
According to Mr Hoskin, the vast majority of EIS and VCT funds charge portfolio companies arrangement, monitoring, and director fees.
While these are costs essentially paid by the shareholders of the investee companies, given the fund is a shareholder, the investors in that fund are paying at least a portion of these fees, in addition to the other fees above.
"Venture capital investing is hard work and it is not cheap to deploy capital," Mr Hoskin said, "so higher fees in this market are completely justified. But there is no justifiable reason why managers can’t be transparent about all the charges."
"Any manager that tries to hide behind the ‘We don't know what the costs are in advance, so we can't tell investors what they are’...should not be responsible for managing other people's money.”
Investors in VCTs receive a 30 per cent tax break, but the shares must be held for five years. Mr Hoskins said that when considered over the five year period, the extra fees are more than this tax break.
This means the returns achieved by investors will be only those delivered by the underlying investments.
Francis Klonowski, an adviser at the firm of Klonowski and Co in Leeds, said he has not typically invested in VCTs, as he feels the returns are poor, once the tax reliefs are excluded.