Insights on EIIS – Terry Devitt, Investment Director, gives his view on what makes a good EIIS Investment.
With the 2018 EIIS season about to get off the ground, we thought it might be timely to put some of our thoughts around EIIS out there with the aim of assisting those considering an investment. First it is worth saying that EIIS has been hugely successful in recent years in terms of funds raised and successful outcomes for investors. Possibly due to lessons learnt, EIIS has also surpassed its predecessor scheme (BES) in terms of the level of professionalism brought to bear by both the advisers and companies who have become involved. However, those considering an EIIS investment might be advised to take on board the following points.
Investments Offering a Capped Return
Many EIIS projects being offered to the market incorporate a maximum return to investors i.e. investors will receive a return up to a maximum of, say, 10% on top of their original investment. The point to remember here is that this is not investment but lending. What is actually happening here is that the EIIS company is getting access to some very cheap funding for which it does not have to offer any security. As far as the EIIS company is concerned, whats not to like? For the punter however, there is only downside. If the company happens to do spectacularly well, there is nothing in it for the investor (apart from a slightly warmer feeling in relation to the security of the investment) – the investor will still receive back the original investment plus 10% and no more irrespective of what the company is actually valued at. On the other hand, the investor is of course carrying the full investment risk as there is typically no specific security attaching to the investment. Generally, we would only favour capped return EIIS investments where there is strong asset backing provided, thereby reducing the risk to investors.
Funds vs. Single Companies
During the season, there is generally a choice between single companies and funds offering exposure to a number of companies. In making this choice, the investor should ask themselves what is the principal reason for making the investment. Is it (i) to get an exposure to an interesting investment with significant upside potential which just happens to offer the additional attraction of a tax break? Or is it (ii) to benefit from the tax relief available while at the same time gaining exposure to the prospect of an additional return at a manageable degree of risk. If it is the first, then the single company route might be appropriate although we would advise as much due diligence as possible as it is clearly the riskier option. For most punters, and certainly for those motivated by the tax break, the fund route is preferable, simply because of the reduced risk associated with the diversified portfolio.
So in summary, you should avoid the capped return offerings and choose a fund as your preferred route to market, all other things being equal.