Following our Best EIS Fund award at Investment Week’s tax efficiency awards we were asked for thoughts on how the sector (EIS and VCT) at large is progressing. Original article here.
How do you think the tax-efficient sector as a whole has fared in the past 12 months?
2018 to 2019 was the first tax year post implementation of the much-documented ‘risk to capital’ rule changes to EIS and VCT investments.
This resulted in a changed risk profile for both EIS and VCT schemes, but it was the EIS industry that felt the bigger impact as the asset-backed, film finance focused funds, which are now not allowed, for example, were more prevalent in that side of the tax efficient market.
As a result, while the VCT industry has seen its second-largest fundraising year (its largest with 30% tax relief) of £730m, the EIS industry is down. Estimates for managed EIS flows suggest it has fallen from a similar size to the VCT market (£700m) to £400m in 2018 to 2019.
What developments have you seen in your area of the market over the past 12 months?
At a high level, it looks like a difficult 12 months for the EIS sector as a whole but all the capital now raised is being funnelled into growth businesses, which is a good thing, and this has resulted in the larger growth EIS fund managers raising more capital year-on-year.
For instance, Parkwalk is now the largest EIS fund manager (by funds raised in 2018 to 2019) as a result of the rule changes, our track record of delivering returns and deploying capital in a timely manner.
What do you think we should expect in terms of further government intervention/guidance in the tax-efficient space in the years ahead?
Thankfully (and hopefully) not a great deal – the new rules have been designed so that the capital is now invested where the government wants the funds to be directed, ie, in growth businesses.
However, we are expecting details on the approved EIS fund structure over the next couple of months and the EIS industry is hoping the new structure will encourage more investors into EIS.
Administration issues for EIS is one reason why investors and advisers prefer VCTs over EIS, and the EIS industry will hope the new approved fund will in part address that issue, especially given the structural imbalances in the VCT market that make it near impossible for new players to enter it.
In terms of investor education, what more do you think could be done to encourage greater awareness of tax-efficient products?
Outside of more general awareness raising marketing, as well as positioning VCT and EIS alongside pension products, there needs to be a clear explanation of the risk/return balance each presents as part of a broader investment portfolio. For instance, some advisers, post rule changes, are shying away from EIS to favour VCTs.
However, growth EIS investing does produce the returns, especially if you select the right manager.
Given HMRC’s CGT receipts hit a record £9.2bn in 2018 to 2019 (up from 7.8bn in 2017 to 2018) this will be an increasingly important part of EIS investment.
Moreover, timing is important, with most EIS funds deploying capital over a 12 to 18 month period, and the tax relief attaches when the investment is made into the companies not the funds.
That means, if you are looking to use EIS for CGT deferral purposes, this deployment lag needs to be factored into the three-year window to invest in EIS post realisation of the gain.
Who do you think are the names to watch in the sector in terms of personalities and companies?
Digitalisation and online portals will increase in importance for advisers and fund managers.
So, my names to watch out for are firms offering these services – Exact, Delio and Co-Investor spring to mind. In terms of EIS, Parkwalk should consolidate its position as the largest EIS fund manager.
And for VCTs it will be interesting to see how fundraising is impacted by the new deployment rules, which might limit the size of future fundraising for some, however, I expect Octopus will continue to dominate the market.
