Investment Strategies
How Venture Capital Eases Those Inflation Woes

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.