There has recently been speculation about be a “capacity crunch” in enterprise investment schemes, with demand exceeding supply.
Could it be that there will be fewer EIS offers around this year? If so, what’s going on?
The first thing to take into account is the rule changes to EIS which came into force this year; managers that used to rely on renewable energy projects or investing in later stage companies, are no longer able to do so.
So at the lower risk end of the EIS spectrum, there is potential for shortages of those types of deals.
But even the most popular, if also more risky, earlier stage deals may be under pressure; the new limit on the amount that an EIS company can raise from state aid sources has encouraged people to perhaps invest earlier, to ensure that investment takes place before all of the available headroom is used up.
The introduction of lower pension allowances has created a need for alternative tax-efficient ways to invest.And growth capital opportunities, are typically smaller deals and are harder to source (reducing market capacity by £350m by some estimates).
The changes also led to the withdrawal of the market leader, Octopus Investments, from fundraising for this year. It decided instead to focus on early stage companies through its VCTs.
The new rules have pushed up the risk profile of EIS. As a result, many investors exiting renewables investments (the £200m of funding allegedly coming back to market) are possibly too risk averse for the current crop of EIS. They might choose to put their money elsewhere.
No wonder many are predicting that there will be less EIS money raised in 2016/17 than last year (the first reversal since 2010/11). Yet, there are also new demand drivers; the introduction of lower pension allowances has created a need for alternative tax-efficient ways to invest. Awareness among advisers and investors is growing too.
EIS has also become more useful for tax planning, benefiting from changes to CGT, entrepreneurs relief and dividend tax.
And the scheme is even more attractive amid the government crackdown on tax avoidance, as a legitimate tax planning tool.
Other drivers continue to encourage EIS investing, with rising asset prices producing CGT liabilities, ageing client banks starting to require IHT planning and wealthier clients prepared to take on more risk with a portion of their portfolio.
So, as some EIS managers warn investors to be ready to invest sooner rather than later to avoid missing out, while others are quite satisfied with their own deal flows, this is a difficult market to call.
But two things are certain: the rules changes are having an impact and EIS has been successfully adapting to rules changes for more than 20 years.
Lisa Best is research manager for Intelligent Partnership.
