The author of this article makes the case for venture capital as a way to give some protection against inflation, and argues that UK-based Enterprise Investment Schemes (EIS) are entities that advisors should give more respect.

Inflation is one of the dominant, if not the most dominant theme of the investment world. The wealth management sector has had to wake up fast to the return of inflation touching the double digits not seen since the days of flared jeans, punk rock and British Leyland cars. Private market investing can, so its champions claim, provide shelter from the inflationary storm. Asset classes such as venture capital, private equity, credit and forms of real estate have been popular talking points in wealth management circles for several years, as their yields – compensating for illiquidity – attracted investors. Might these assets protect against inflation? Should investors perhaps have thought about this earlier? 

To address some of these points is Andrew Aldridge, partner at Deepbridge, a UK-based specialist investment house. The editors are pleased to share these views and invite responses. Jump into the conversation! The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com

As the UK reports inflation rates of nine to 10 per cent, deciding what advisors can do to help protect their clients’ wealth is the conundrum of the year. 

We’ve seen the likes of gold, emerging equities and residential property mooted as possible inflation-proof opportunities to consider within portfolios, but perhaps the real consideration for targeting long-term above-inflation growth is venture capital.

Venture capital investing is, of course, to be considered as high risk, but if introduced to well-diversified portfolios then it can be effective without overstretching the total portfolio’s risk level. In the UK we also have a unique and world-leading incentive to consider VC investments, that being the Enterprise Investment Scheme (or EIS).

[The] EIS was introduced back in the nineties with the intention of supporting early-stage companies to attract private funding. It is now widely regarded as one of the leading tax incentive schemes in the world, with a PricewaterhouseCoopers report for the European Union rating the EIS as the second best scheme in the world, ranked only behind it’s younger sibling the Seed Enterprise Investment Scheme (SEIS).

So, the question must be why do so few advisors routinely use EIS propositions within their advice toolkit? Deepbridge research suggests that only approximately one in five independent financial advisors in the UK recommend EIS opportunities to their clients, with a myriad of reasons (potentially excuses, but let’s go with “reasons”) provided.

The first explanation most advisors provide is that they “don’t have the right clients.” For some this is a genuine reason but for many this is based on the potentially false assumption that EIS investments are only for the mega-rich.  We wouldn’t suggest that the average investor only invests in EIS funds, but as part of a well-diversified portfolio, EIS investing can be appropriate for many more clients than might be expected – with minimum subscription levels starting from just £10,000 ($12,226).

The other often used rationale is that “EIS is too high risk.” EIS investments by their very nature are unquoted early-stage stocks and therefore should rightly be considered as high risk. However, this needn’t alter an individual’s overall portfolio risk level. A white paper published by Hardman & Co, How much should clients invest in venture capital?, outlines how venture capital can be added to portfolios without altering the overall risk, whilst providing a startling increase in performance. 

It should also be noted that EIS investments attract Share Loss Relief, which offers not-inconsiderable downside protection. So, yes, such stocks which should absolutely be considered with respect but within an appropriate portfolio, can add significant opportunity.

Once you scratch the surface, most advisors who don’t routinely consider EIS investments for their clients either don’t have the confidence to recommend such esoteric products or it doesn’t fit with their business model. The confidence factor can be addressed via good quality training, with there being more training available than ever before – including Deepbridge’s award winning training series of course!

While the business model restriction will be harder to follow when the Financial Conduct Authority’s Consumer Duty initiative takes effect, with the FCA doubling down on consumer outcomes, will advisors be able to continue ignoring investment opportunities which can not only be useful tax planning tools, but also potentially provide long-term growth?

The UK has a vibrant and envied startup scene, with phenomenal intellectual property being produced from academia and entrepreneurs, to whom the provision of EIS funding is critical. With significant tax incentives and potentially inflation-busting growth on offer, it has never been more important for advisors and investors to be routinely considering Enterprise Investment Scheme opportunities.