As we enter 2019, many clients will be reviewing their investment portfolios. They will be reflecting on the year just passed, and considering the opportunities in the year ahead.
2018 was a tough year for public markets. Both the FTSE 100 and S&P 500 closed 2018 significantly down over the year, reversing the steady growth we’ve enjoyed since 2009. The Chicago Board Options Exchange Volatility Index (VIX) spiked towards the end of 2018, reflecting high levels of investor uncertainty in current market conditions.
The public market performance in 2018 was set against a backdrop of generally slowing economic growth rates, particularly in the Eurozone and China, a budding trade war between the US and China and the slowing of monetary stimulus. Public stocks have benefited over the last decade from the generous monetary policies and low interest rates since the financial crisis. This has allowed them to borrow cheaply to fuel growth and strengthen their balance sheets, but now as interest rates are rising this may lead to more speculation about those companies’ potential for profit.
Venture capital’s performance as an asset class has been historically uncorrelated to public markets, with periods of poor performance in public markets often coinciding with strong periods of venture capital performance.
The venture capital model relies on outstanding entrepreneurs creating companies that can deliver returns to investors. Entrepreneurs are always finding new challenges to tackle and companies to build. There are plenty of examples of great companies founded in times of uncertainty. LinkedIn, Skype and Skyscanner were all founded in 2003, and Airbnb, Farfetch, WeWork and Uber were all founded in 2008-09. Building a successful start-up is a long and tough journey, but with the right product it’s possible to achieve rapid growth in even the most challenging of macro environments.
For clients considering adding venture capital to their portfolio, EIS investment opportunities offer investors a cost-effective way of accessing a diversified portfolio of earlier stage investment opportunities, whilst also providing a range of valuable tax reliefs.