The EIS qualification clock doesn’t start until funds have been invested in EIS qualifying companies, the shares have been issued to investors and an EIS3 certificate has been issued by HMRC. And it’s that EIS3 certificate that allows investors to claim their tax reliefs.
The key to timely tax reliefs is timely deployment. It’s an aspect that EIS fund managers are acutely aware of. But the best managers are also committed to making the best investment decisions for their investors. And in this market, that can take time, typically up to 18 months.
We are less than six months from the end of the 2018/19 tax year, and many advisers are looking to invest into an EIS portfolio with full deployment in this tax year. Perhaps you are one of them. Looking at the current offers in the market, this is possible in a small number of funds. But the question is, is it advisable?
To answer that question, you should think about the quality of the deals into which your clients’ funds are being invested, as well as the quantity.
Uncovering the best deals for growth EIS investing 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. At Oxford Capital, skills and relationships provide a healthy flow of 2,000 – 3,000 potential investment deals to review each year. This means we are seeing more than 70% of industry deals in our target sectors (Crunchbase).
This process is critical because the more deals we see, the higher our chances of seeing the deals with the most potential to succeed. It is the frontline of the methods employed to mitigate the risks of investing in small, young companies.
For the deals that stand out, the next crucial stage is bespoke due diligence. For us at Oxford Capital this involves nine separate stages, from several initial meetings with the founders, internal and external research and due diligence, internal pitch and multi-layered assessment for approval by an investment committee.
Another consideration is the number of companies in which a clients’ subscription is invested. Diversification is another key risk mitigator in early stage investing. In this context, being rapidly invested into three, four or five companies doesn’t give the same protection as being invested into twelve or fifteen. Fifteen is the number of companies Oxford Capital targets in our EIS portfolios.
All of this can be time-consuming, but it is essential to deliver the greatest chance of success to our investors. We have refined the process down to a full deployment period of 14 – 16 months and have just completed investment into three new companies, with a further four to six deals expected by the end of the tax year. This full pipeline of opportunities that are well-advanced in the selection process means that our deployment period is projected to drop further, perhaps to 12 – 14 months.*
Recently there has been discussion in the EIS industry about some EIS managers struggling to deploy investors’ cash. This is a concern that you need to consider, particularly in the context of the recent changes to EIS rules. Some managers whose experience lies primarily in capital preservation EIS strategies have been forced to pivot their activities into growth areas that are new for them.
Not only does this raise questions about their expertise, it also calls into question their deal flow. Even if they have been able hire in the expertise to properly review opportunities with a view to uncovering the diamonds in the rough that growth EIS managers target, do they have the breadth of networks and contacts to get in front of the best entrepreneurs? There is a risk that their investment choices are restricted to just a fraction of the possible market.
While fast deployment can be helpful from a tax perspective, there is a balance to be struck between tax planning needs and the best investment decisions. At the same time, very slow deployment should ring alarm bells. So, it’s worth looking at the options from all angles.
Oxford Capital’s comprehensive coverage of new start ups in our target industries means client subscriptions into the Oxford Capital Growth EIS are currently generally invested in a portfolio of 15 companies in around 14 – 16 months. Controlling risk is our primary concern.
*The exact timing of these investments is not guaranteed and may be subject to change. The proportion of an investors’ subscription allocated to each investment will vary depending on the date the investor’s subscription is received.