Clearly, the returns must justify the risk, and there is a risk the EIS investment fails and the investor is left with a crystallised CGT liability – albeit with loss relief available in the year of exit. But there are few instances where an adviser is able to deliver quite such a comprehensive list of benefits.
Choosing the right EIS
Under the Financial Conduct Authority’s consumer duty rules, advisers need to demonstrate whole-of-market research on high-risk investments. While there are a huge number of EISs out there, including a few offering income tax relief within this tax year and carryback to 2022-23, choosing which to invest with is more important than ever. There are a few key areas in which a potential investor should be looking for consistency:
- Deal flow and deployment: where is the EIS sourcing its deals from and what has been its long-term deployment record? Is the fund hitting its deployment target timeframes consistently?
- Investment strategy and stage: how long has the EIS been operating – and, importantly, has it had to change how it invests over this period, and if so, how long has it been operating under its current investment strategy? How long has the investment team been together and is there an investment committee ratifying investment decisions? What stage of investment companies is the fund investing in?
- Track record: does the EIS have a proven history of successful exits under its current investment strategy?
- Fees: what is the level of fees charged to the investor and to the investee companies? Are there any hidden fees?
Valuations
How EIS and VCT assets are valued is often a point of contention, with different managers using different valuation approaches and methodologies. Transparency is key, and knowing the liquidity risks when looking at the asset class for a client portfolio is essential.
The higher interest rate environment in 2023 has created difficulties for some company valuations, with slightly less-risky types of investments such as gilts making it hard for EISs and VCTs as growth stocks to compete. The flip side to this, however, is that market stress can often lead to opportune conditions to invest in venture capital – often we see a stronger pipeline of experienced founders who are in control of businesses after large tech companies strip back their staff.
The scale of the opportunity from investing in the UK’s advanced technologies has not gone unnoticed by venture capitalists, who have been increasingly focusing on disruptive companies.
Pitchbook data from 2023 showed that Quantum Computing start-ups, for example, secured nearly quadruple the level of funding in the UK last year compared with 2022. In the face of a challenging economic environment in 2023, young and innovative companies proved themselves capable of weathering turbulent times.
Game-changing
Crucially, the funds heading into KI EIS investments are to companies looking to solve major global issues such as food and water security, climate change and pervasive health challenges. EIS investing should be viewed not just in terms of financial rewards, but also the wider positive impact on society it can have, by investing in some of the brightest minds and world-changing research coming out of the UK’s university network.
