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If Carlsberg did tax breaks…

By 27th March 2018 No Comments

As featured in Professional Adviser, Tom Hopkins of Kin Capital discusses how VCTs and EIS are helping to future-proof the next generation with innovative and bold early-stage investing

There are some outside our professional circle who seem to think VCTs and EISs have acquired something of a bad rap for being an over-generous tax break for the already over-invested middle class retiree. With the various ‘low-risk’ capital preservation schemes involving solar, crematoria, storage facilities and the rest being peddled around in the last few years it’s hardly surprising.

However, with Royal Assent rubber-stamping new rules governing these schemes, and thus a refocus on growth and development, ‘risk-to-capital’ being the new mantra – this view can now be held as a bit cynical. It should be noted investors and advisers were already waking up to the illusion of ‘low risk’ EIS and VCT funds and were seeking proper returns on their capital even before the rules change. Of course, in fairness to the cynics, no adviser in their right mind would put a client into and EIS or VCT unless they were experienced and had an already mature and diversified portfolio. That’s simple common sense. But the reality is these unique tax schemes encourage, now more than ever, the well-off to invest in the new, the explorational and the bleeding edge. As ever, if you pick the right funds, the returns justify the risk. It’s always worth reminding ourselves the Government underwrites a large part of the risk and provides tax free returns.

To find these investment led funds advisers and clients might have to look beyond their usual ‘go to’ funds and should be aware of fund managers changing their spots.

Mindset

The shift in mindset required to go from capital preservation to growth investing is a difficult one. Therefore investors should look beyond usual brands and focus on those fund managers that have always focused on growth investing. Now more than ever it is about deal-flow and deployment of capital. There are plenty of examples of VCTs sitting on lots of cash as they change investment strategy or EIS funds returning cash as they can’t find a way to invest in our brave new world.  So stick with those funds that have always taken the risk.

An example of one fund is Pembroke VCT, one of very few VCTs not impacted by the rule changes, managed by Oakley Capital with £1.3bn under management.

Tight fit

One of their latest deals included Heist – co-founded in 2015 by Toby Darbyshire, with the mission to create the perfect pair of tights. The company’s approach has been to use innovative technology and a fresh approach to design, working through 197 samples, to solve issues that plagued current designs. Namely, digging waistbands, itchy legs and poor product longevity. Since Pembroke VCT’s investment Heist has grown like-for-like sales of tights by 450%.

New generation

A recent investment of Parkwalk’s was into Yasa Motors which has developed a new generation of high power and high torque density electric motors to market. The company opened a new £15m production facility in February 2018 opened by business secretary Greg Clark. The Department for Business, Energy & Industrial Strategy said YASA was working with companies like Jaguar and Williams to give vehicles the “speed of a Bugatti Veyron but the emissions of a Toyota Prius”.

While these two investments are very different they are both leveraging technology and helping to build UK Plc and, especially in this ‘Brexit’ environment, that in itself is enough to attract some investors. After all, how many other paper investments can say they directly helped to make the UK, and the world, a better place?

Growth kicker

And what about returns? Given the current state of other asset classes (listed equities, bonds, property and so on) increasingly investors are looking at alternative assets to generate the required growth kicker in the portfolio. The latest BVCA performance survey shows venture capital performance increasing, catching up on other forms of private equity and on a near par with MBO returns. The five-year venture performance (to December 2016) shows a 12.2% IRR return. This increased performance reflects the growth of entrepreneurial culture in the UK.

Parkwalk EIS for the tax years outside the three-years EIS holding period are showing total returns of 1.88x to 2.65x capital invested. With Pembroke’s younger portfolio already showing total returns of 1.06x to 1.20x. And all the above returns are, of course, excluding the initial 30 per cent tax relief. So the return is there for those willing to take the risk.

See the full article in Professional Adviser, published 27th March 2018, here