We are only at the start of the ‘tax season’, but already we have a relatively clear picture of how things are shaping up for fundraising this year; at least for venture capital trusts (VCTs).
There is always speculation about who will open offers and how much they will raise, with early indications there will be in the region of £650m of available product this year, around £80m less than was raised last tax year.
The shortfall in capacity of VCTs will pose a problem for many investors. A number of popular VCTs have always filled very quickly – some within as little as 10 days – how quickly will they go now?
What is really interesting, however, is the contrast in supply and demand between the VCT and Enterprise Investment Scheme (EIS) sectors. There is no shortage in supply of open EIS offers or capacity within the products. There are probably double the number of EIS providers, compared with VCTs.
But, in stark contrast to VCTs, there is actually a reduction in demand for EIS from advisers. This is due to the perception of a dramatic increase in EIS risk-profile, an outcome of the shift towards ‘growth capital’ led by the Patient Capital Review.
Therefore, in the EIS space, investing in a provider with proven deal-flow quality and deployment capability is essential.
This year, more than ever, advisers and clients need to get ahead with their research and due diligence, as it is likely the best offers will fill well before the end of March.
So if you’re considering investing in a VCT or EIS what questions should you ask to spot a good manager?
1. What is your process for spotting potential?
EIS and VCTs are designed to encourage investment in SMEs and their tax benefits compensate for the increased risk associated with investing in smaller, less liquid companies. So a good investment manager needs lots of experience and specialist expertise to spot real potential for success in a small business.
There are lots of SMEs looking for funding, so it is vital to be able to sort the wheat from the chaff.
The manager will be following a robust, disciplined and proven investment process founded on relevant experience in the underlying asset class in question, whether that be the Alternative Investment Market Aim) or growth capital, for example.
Often this involves meeting the management team and getting under the bonnet of the business. So the investment team must be well resourced, as this company research can be very time consuming.
Many of the qualifying businesses are now less mature than in previous years due to the seven-year rule and therefore are potentially unable to justify significant initial investment because they are at an earlier stage in their development.