Today’s post is about EIS funds. Are there any that will be useful to us in this tax year?
To date, I’ve made one single EIS investment – £10K into Syndicate Room’s Fund Twenty8 back in March 2017.
- I did use its forerunner – the Business Expansion Scheme or BES – extensively back in the 1980s, but the rules were a lot more lax at that time.
Though I understand the mechanics of the Enterprise Investment Scheme, and I appreciate the tax breaks, I don’t think that I have an edge in this area.
- I’m not confident that I can pick a winning company.
You are investing in a single small company, with typically no professional investors alongside you.
- The risk of failure is high.
Here’s a quick refresher:
- You can invest up to £1M per year in EIS, so the annual limit isn’t an issue, and there is no lifetime limit.
- Companies have to be small (fewer than 250 employees).
- You get 30% income tax relief, up to the amount of tax you are liable for that year.
- You need to hold the shares for three years to avoid having the tax reclaimed.
- It may take 12 to 15 months for your money to be invested, which can mean a delay of up to 18 months before the EIS-3 forms are issued to enable you to claim the tax reliefs.
- You can offset against the income tax for last year as well as the current year.
- Losses can be offset against capital gains.
- You also get 20% off CGT paid in the last three years, or in the next year.
- And after being held for 2 years, the shares are exempt from inheritance tax.
The high risk of EIS is why I prefer VCTs.
- They are more transparent, listed (and hence more liquid) and they invest (in general) in later stage firms than EIS.
Although it should be noted that EU rules – and the recent Patient Capital Review – have tightened up what VCTs can invest in, so they are more similar to EIS than they used to be.
- The same is true of EIS, since the boom area in recent times has been solar power generation, which was banned (along with all forms of power generation) in a recent budget.
Since my pension filled up, I’ve been using VCTs to offset income tax, investing just over £20K a year (before the 30% tax relief).
- I’m now into my third year of this.
And now my Other Half’s pension is full, and she will need to use VCT / EIS to offset tax.
But since the pension allowances (annual and lifetime) began to shrink, VCTs have become more popular.
- This year I need to invest more than £40K, and I’m worried that there won’t be enough VCT issues to go a round.
Which is where EIS funds come in.
- I get similar tax breaks to VCT and hope to get similar levels of diversification.
My benchmark is Fund Twenty8, which promised to invest the minimum 10K subscription into at least 28 firms.
- That’s an average of £357 per firm.
VCT minimums run from £3K to £6K, so VCTs would need to hold 9 to 18 firms to offer similar diversification.
- That sounds entirely reasonable, and I would expect VCTs to possibly hold a few more than that.
So we’re targeting the £250 to £350 per firm range.
2016 EIS funds
I first looked at EIS funds in late 2016.
The two that caught my eye were:
- Syndicate Room Fund Twenty8
- 28 companies for £10K minimum = £357 per company
- You are investing alongside “Business Angels, Venture Capitalists and other Institutional Investors”.
- These Lead Investors should help keep down the funding valuations of the companies invested in.
- The Fund invests 1 for 1 alongside Syndicate Room’s regular Platform Investors until an investee company reaches its minimum target amount (MTA).
- There was a 1% initial fee and an annual management fee of 1%.
- There was also a 20% performance fee above a return of 110%.
- The target return was a 20% IRR over 3 to 7 years.
- Startup Funding Club (SFC) Angel Fund
- 8 to 15 companies for £5K minimum = £435 per company
- The last Angel Fund invested in a lot more companies, but that is not the norm.
- The Angel fund has no initial or ongoing fees, just a 20% performance fee.
- Once again, you are investing alongside “our award-winning network of experienced angel investors”.
- Investors can choose between EIS and SEIS, or take a mix.
- SFC also have an Epicure SEIS Fund which “aims to provide investors with a diversified portfolio of companies across the food, drink and hospitality sectors” (£5K for 10 firms = £500 per firm).
The other “funds” I looked at were:
- This is really a crowdsourcing platform, where all of the offers are presented by a fund manager, acting as Lead Investor.
- You then get to invest alongside this fund manager – as with Syndicate Room, this should keep the investment valuations lower.
- It seemed that you need to manage the individual investments yourself, whereas I was looking for a managed service.
- Revisiting the site today, they seem to have diversified into yield investments (property and bonds).
- Funds are mentioned, but not in the context of EIS.
- You need to register as a sophisticated investor to find out more.
- I registered, and found an SEIS fund with a £10K minimum for at least five investments (£2K per firm) and an incentive-fee only.
- There was also a SITR fund (Social investment) with a £20K minimum, 3% initial fee and a target IRR of only 7.8% over six years.
- Foresight Williams
- Foresight teamed up with Williams Engineering (of Formula One fame) to launch a Technology EIS Fund.
- The minimum investment was £10K for at least 10 companies (= £1,000 per company).
- According to Wealth Club, the fund is still open.
- There’s a 5.5% upfront fee and 2.3% annual fee.
- Blackfinch were offering discretionary, managed EIS portfolios, with an emphasis on asset-backed companies.
- This seemed to mean Property companies and Crematoria.
- The minimum investment was £25K, there was a 2.2% annual fee and a 25% performance fee on returns over 105%.
- The Asset Focused EIS and later Media EIS portfolios have both closed, according to the Blackfinch website.
- Rockpool were offering an EIS Portfolio Service, but I couldn’t find out anything about it without registering.
- There’s more detail on their website today, but the focus is on funding for private companies and there’s no longer any reference to EIS.
I was surprised at the time how well the market was developing, and was particularly interested in the Syndicate Room offer, which I subsequently put money into.
- I am also planning to invest in the SFC Angel Fund during the current tax year.
We revisited EIS funds in March of this year, when Syndicate Room (SR) and SFC each launched a Growth fund targeting firms that had done well since their first round of funding.
- In theory they should be better prospects (though you might be buying in at a higher price).
- The SR fund was targeting at least six firms.
- The Fund would invest alongside Lead Investors who would set the investment terms (price etc).
- The target IRR was 20% (10.6% excluding tax relief).
- Growth Fund investors have no voting rights and no pre-emption rights (Fund Twenty8 has pre-emption rights, which protect early investors from later dilution).
- The minimum investment was £10K (£1,666 per firm).
- Fees were 1% initial, 1.5% annual, and a 20% performance fee above 100%.
- The SFC fund had a minimum investment of £25K – too high for me.
- There was a 2.5% initial fee, plus a 1.5% extra initial fee for non-advised clients – making the initial fee 4% in total.
- And an annual management charge of 2%.
- Plus a 20% performance fee once 100% has been returned.
- Over the six-year recommended holding period, fees total to 18.4%, more than 3% pa.
- So you would need decent returns to overcome that.
Both growth funds were significantly more expensive than the equivalent stage 1 funds.
- I don’t know if SR and SFC will be running these offers again in the current tax year.
Funds for 2018/19
Here are a few more funds I’ve come across this year:
- Ascension Ventures (AV)
- I heard about AV in June when they launched an EIS fund with Unicorn Ventures of India.
- This appears to be aimed at funding 6 to 8 UK startups targeting their products and services at the Indian market.
- The minimum subscription is £100K, so this is not aimed at retail investors.
- The AV website also list a Centaur EIS fund and an Ascend SEIS fund (which is not yet open for subscriptions).
- The Centaur EIS fund targets 8 investments per investor for a minimum investment of £25K (= £3,125 per firm).
- AV also run a Social Impact Fund, with details available only on request.
- Nexus EIS Scale-up fund
- This is another growth / second stage fund targeting 8 to 10 investments.
- You can’t find out about the minimum investment without registering as a Nigh Net Worth / Sophisticated investor.
- Deepbridge Innovation SEIS fund will invest in at least five tech growth firms.
- The minimum investment is £10K (= £2k per firm).
- Par Syndicate EIS
- This has a £20K minimum, which is right at my limit.
- This gets you exposure to six or seven companies (so around £3K per company).
- Investments are made alongside an Angel network.
- Jenson EIS / SEIS fund
- Minimum investment £10K.
- Exposure to at least 5 EIS firms (= £2k per firm) or 10 SEIS firms (= £1K per firm).
- Parkwalk Opportunities EIS
- This is a university spin-out fund with a minimum investment of £25K.
- Anglo Scientific EIS
- Tech firms, 4 to 8 investments for a £5K minimum (= £833 per firm).
The Wealth Club site lists another half-a-dozen similar EIS funds, with minimum investments from £10K to £25K.
As with two years ago, there’s a lot going on.
- But it’s not really targeted at me.
I’d like to see funds with a £5K minimum investment targeting 20 underlying firms, and they just don’t exist.
- SR and SFC still seem to be the only options at that level.
Everyone else is investing at least double the amount per firm, and often 6 or 9 times.
The alternative is to go down the DIY route, using EIS offers on crowdfunding websites.
- Ed Bowsher recently described his journey in MoneyWeek.
Ed uses Seedrs mostly, as Crowdcube valuations are more aggressive (though there have been some big winners there).
- Syndicate Room are the third big player, and as we’ve seen above, they offer a passive fund.
- On their platform, the minimum investment is £1K per firm.
Crowdcube and Seedrs have a £10 minimum, and Seedrs now has a secondary market.
- So that’s another option, which sounds fun but time-consuming, especially at scale.
I’m also a little put off by the paperwork involved in investing £100 in each of 50 companies.
I haven’t found what I’m looking for today.
- The SR and SFC funds are the only ones operating at the scale I like.
- And they will only provide around 20% of our VCT/EIS capacity each year going forward (assuming I invest in one of them each year).
So I’m still 80% reliant on VCT offers turning up every year.
- Let’s hope than the Patient Capital Review recommendations result in a streamlining of the EIS fund sector.
Until next time.
Article credit to: https://the7circles.uk/eis-funds-october-2018/