The sector for Enterprise Investment Schemes in the UK is a relative drop in the ocean in terms of size, but the potential is large - if the conditions are right. And one development that could galvanize it is easier access, a platform provider says.

Wealth management clients in the UK may have heard of Enterprise Investment Schemes and discovered some of their tax advantages. But they will very soon discover that easy-to-find data on EIS managers, and the best performers, hasn’t been easy to track down. 

This frustrating situation, however, is starting to change, so industry figures say. As recounted in these pages over a year ago, the squeeze by recent governments on lifetime pension savings allowances, coupled with a thirst for returns in a low-interest rate world, means investments that promise robust returns with a nice tax angle are attractive. (There are important exemptions from income tax, capital gains and inheritance tax. See an article here.) Also, independent investment advisors adapting to a fee culture and moving from a commission-driven model must prove their added value to clients in terms of the kind of products they can get access to. And this is all good for the EIS market, argues Kuber Ventures, a platform for the EIS world. 

And Kuber argues that its platform, giving investors and advisors at-glance-views of the hottest EIS talent with details on fees, returns, managers and other issues, is part of what could prove to be a revolution in what is still a relatively small portion of the UK investments market.

“We identified a series of problems in the EIS and related market. It is difficult and complicated for individuals to invest in EIS’s…it requires a lot of advice and it is expensive for advisors to research them. The market is pretty opaque,” Piers Denne, sales director at Kuber, told this news service in a recent interview. “For all these reasons,” he continued,” “We are bringing some order to the market.”

Kuber’s managers say they are blazing a trail for making the EIS market more visible and easy to access and research; St James’s Place, the UK wealth management firm, is understood to be working on something similar. As “fintech” innovation in different fields accelerates, internet-driven portals shining lights into once-obscure investment areas are likely to spring up, and those with an early-mover advantage could make a killing. That, at least, is what Kuber is betting on.

The firm is expanding. Earlier in September, Tim Thornton, Matt Lenzie, and Kate Hopkin were appointed to newly-created roles to drive Kuber’s sales. Thornton is based in Leeds and looks after clients in the North of England and Scotland. Linzie’s focus is London and to the North East of the country. Hopkin joined to support business development managers. The firm is also unafraid to state its views on issues such as Brexit and the overall state of the UK investment market. Kuber also has a regular series of seminars and events designed to spread the EIS message.

“Many financial advisors have  ignored EIS’s in the past because they didn’t understand them,” Dermot Campbell, chief executive, said in the same interview. That situation, however, is changing, he said.

Capacity, liquidity
One issue that Kuber’s managers bang the table about is “capacity towards the end of the tax year”. By this it means the available amount of investible firms in which EIS holders can put money, given recent changes to rules about what qualifies as an EIS-eligible investment. For example, a recent legislative change by the UK, getting rid of the ability to hold renewable energy production within an EIS investment structure, means the market capacity of such investible opportunities has shrunk by an estimated £500 million for the year 2016/17, the firm has said. This is a significant drop, because in the past, the energy sector made up about a third of the total of £1.6 billion ($2.08 billion) that was invested into EIS. And many EIS’s are maturing - about £200 million - which means that there is not a lot of capacity for fresh investment, particularly towards the end of the tax year. In short, there is no time to wait, Kuber claims. “Advisors who don’t do their research now will end up scrambling to get some form of investment,” Denne said.

Given the relative size of the market, and the capacity issue, is there a worry about the relative lack of liquidity of EIS investments? Campbell demurs, saying that a typical EIS portfolio on Kuber will be made up of, say, around 30 investments, initiated at different time points. The investments will mature over a period of time, probably starting in the fourth year and carrying on until around the seventh year.  Although there is no liquidity with individual holdings, there should not be a liquidity crunch for EIS holders providing they have planned appropriately. And with pension schemes limited and losing their tax benefits - at least for those in the highest tax brackets - the EIS model deserves attention, Campbell said. 

Another plus for EIS, Campbell said, is the inheritance tax (IHT) aspect. “Although Pensions can be IHT-friendly, EIS’s offer significantly enhanced tax reliefs as well as qualifying for IHT exemption two years after investment,” he said. 

An area which is seeing some growth, albeit at a low level, is the secondary market for EIS investments. Exits from EIS tend to go in phases of the economic cycle, he said. “We are seeing some relatively strong EIS exits coming through now,” he said. 

The EIS sector is, as yet, still a relative minnow in the pond but if the kind of developments Kuber and others speak of continue, it could expand into a rather more substantial creature.