When a client invests in an EIS fund, the money is part of a pool of cash that gets spread across, say, 10 to 15 companies.
It usually takes 12-15 months to get the pool fully invested. Deployment delay can mean investors are waiting up to 18 months to receive their EIS 3 forms which are essential for investors when claiming tax reliefs.
What is worse, there is often very little transparency about when the money will be invested. This all makes matching the investments to the client's annual tax limits pretty tough.
There is also very little transparency regarding the underlying investee companies within EIS funds, including a lack of information on equity terms for the parties involved and a general absence of information covering the background of the companies the fund is actually backing.
But there is a new breed of portfolio service which allows each investor to set their own timescale, although there is a trade off against diversity.
For example, if time is really pressing, an investor might opt for a portfolio of just three to four companies. With reasonable visibility of the manager’s pipeline, this investor can be highly confident that their money will be fully invested in just a few months.
For another investor, getting a diverse portfolio may be more important than speed. So they might choose a diversity of 8 to 10, knowing that it could take up to a year to get fully invested.
The timing of investment can be particularly important for elderly clients looking to mitigate inheritance tax (IHT).
Knowing that the two year clock for IHT exemption has already started means less worry for the client and a better outlook for heirs. This makes the flexibility of an EIS portfolio service a compelling advantage for some advisers.
Transparency is obviously a very important factor when assessing private company investments whether the client is sophisticated investor or an investor looking at EIS investing for the first time.
Many EIS portfolios will offer investment mandates which include a full financial summary, a management team background as well as full equity terms for each individual company within a portfolio. Often, individual EIS funds will not provide this information.
Avoiding nasty surprises
Last year, at least one EIS fund manager surprised advisers by returning investors’ cash before it could be invested, forcing advisers to find new investment routes quickly to beat the tax year deadline.
Portfolio services enable advisers to follow step by step as their clients’ money is invested in underlying companies.
If the investment programme is not progressing as quickly as it should, they can react earlier and switch to another provider.
Starting early
