EIS investing has changed
Whilst Venture investing is inherently high risk, there are number of controls that can be implemented to mitigate the risks associated with investing in small companies.
Ventures investing offers the potential for attractive returns from the UK’s vibrant start-up scene. But start-up investing is risky. It’s vital to invest with the right controls in place to manage that risk.
Start-up companies have a higher tendency to fail than long established businesses. Recognising that start-ups are the grass roots of the economy, the government have now changed the focus of tax-efficient EIS investing to put greater emphasis on risk-based investing (as opposed to capital preservation and income). Many EIS providers have been forced to pivot their investment activities to comply with the new regulations.
Timing isn’t everything
Tax reliefs from EIS investments don’t kick in until clients’ funds have been invested in EIS qualifying companies, the shares have been issued to investors and an EIS3 certificate has been issued by HMRC. EIS portfolio managers need to be acutely aware of this of course, but investors should be wary that the need for timely deployment doesn’t trump risk-aware selection of investments.
Some funds offer full investment of your subscription in just a few months. The question is, is this advisable? To answer that question, you should think about the quality of the deals into which your client’s funds are being invested, as well as the quantity.
Choosing the right manager
In a world of risk-based EIS investing, the need for effective control of risk in start-up investing is paramount. Choosing an investment manager experienced in risk-based portfolio management is a key risk mitigator for your clients. This takes expertise, ongoing relationships with entrepreneurs, a positive profile among the innovators and a track record of collaborative interactions, adding value to those with the big ideas.
In this series we examine some of these simple but powerful means of reducing and controlling risk in early stage investing. Getting this right – combined with the substantial tax reliefs – can potentially deliver attractive returns whilst mitigating some of the risk to capital.
Find out more in our CPD-accredited Oxford Capital Guide to Ventures Investing