The positive impact of 30 per cent initial tax relief might be called into question if it is viewed over a 10-year period.
Further consideration
This provokes a further and crucial element for advisers and investors to consider. The majority of EIS information memoranda attract money based on the strength of investment teams, sector specialism, hands-on involvement with investees, and geographic spread and presence.
Most invest in private companies and two specialise in Aim-only EIS structures.
Invariably, the aforementioned memoranda will point their investors towards an exit, hopefully a profitable one via a trade sale or initial public offering of their investees.
Here is another issue for investors to consider. Several years ago investment time horizons were often pitched at four or five years, whereas risk to capital conditions in recent years have seen this stretch to five to seven years or more.
The reality of a trade sale or IPO when investing in an early-stage company within a five to seven-year period is dubious, with very few achieving such a milestone.
In addition to those invested in private companies, Aim-only EIS portfolios are also available.
These generally involve backing later-stage or more mature companies if only by virtue of being on the Aim. These companies also have access more readily to follow-on funding by virtue of their access to the public markets, meaning that out and out failures that result in a full loss of capital are rarer.
While daily market price volatility may appeal to some more than others, market liquidity should allow exits within a much shorter timeframe.
Valuations
The subject of valuations by those EIS managers running investments in private companies requires investor attention. If investment time horizons are indeed stretching out, then valuations and reporting of them assume greater significance.
Holding valuations “at cost” is often a default position, but is it really credible four or five years into an investment to suggest that nothing has got better or worse over that time period?
If the information memoranda are to hold good, then investors would normally expect positive developments that point to a trade sale or IPO.
If that is not evident, then investors ought to challenge the manager over the short and medium-term prospects.
Equally, for investments that are approaching their 10th anniversaries, it would be worth checking how close performance is to the original investment thesis and whether in reality they possess enough cash to see out their journeys.
Further fundraising rounds for investees is often part of the growth cycle for many businesses. This too can pose a dilemma for managers. Often the result of raising further capital will dilute existing shareholders, which is not always a great message.
