In his Autumn Statement, the chancellor confirmed that the sunset clause for the Enterprise Investment Scheme and Venture Capital Trusts will be extended beyond 2025 to 2035.
This followed significant petitioning from those inside the EIS and VCT industries, including some strong arguments that VCTs were being forced to write down those portfolio companies that are reliant on continued equity funding, as without an extension to the sunset clause this funding might dry up.
This extension is a significant endorsement of the tax-advantaged investment market, which has grown significantly during the past 15 years.
However, despite the maturity of this market, we find that many advisers still underestimate its size.
And some advisers tend to recommend the same one or two fund managers that they have a good relationship with and simply supplement the client file with a third-party due diligence report on those products.
This approach can leave their advice, and their firm, exposed under the consumer duty – where demonstrating whole-of-market research on high-risk investments has become of paramount importance.
As we head into 2024 with the market at the size it is, plus the extension of the sunset clause confirmed by the government, advisers should be getting their arms around the sector.
While this can feel somewhat daunting, a key starting point is researching the fund manager.
In mainstream markets, fund managers typically buy listed securities issued by companies that they have no ongoing involvement with – a fund investing in US securities may have investments in Apple, Alphabet, Meta, Amazon and Microsoft, but the fund manager is unlikely to be attending their board meetings or introducing these companies to relevant people in their network.
This means that if the fund manager went bust, these securities could be readily sold for market value with relatively little client detriment. However, in the tax-advantaged market, the reverse is true.
EIS and VCT managers, however, will often play a key role in the development of their investee companies, and it is their value-add past the point of investment that can make the difference between a successful and unsuccessful manager (and when they are out competing with other fund managers for deal flow, a track record of guiding past investee companies towards big exit events can help them win the best quality companies).
In the unlisted business relief space, the role of the fund manager can be even more critical, as they are typically the firm responsible for directly managing the portfolio of assets that investors are buying into. If a tax-advantaged manager goes bust, the impact can be more profound.
Be mindful that bigger is not always better, and there are some excellent small fund managers out there. If your research leads you to recommend one of these smaller fund managers, the additional risks should be made clear to the client and, where possible, mitigated through diversification.
