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Thought Leadership
As venture capital is a long term asset class, with a high
level of investment risk at an individual company level, it’s
for investors who understand that losses will happen within
their overall portfolio and that they may often have to wait
patiently for the good investments to come through. An
allocation to venture should be from money that the client
isn’t relying on in the short to medium term.
Even within the venture portfolio, diversification is key.
It’s wise to diversify over time as well as over sectors and
sub-sectors. Clients should therefore be able to commit
to investing most, if not all, years over a period of several
years. If things go well, exits should start coming through
within that horizon, providing the cashflow, if required, to
fund the next five years – and so on. If you consider that
doubling one’s money over five years pre-tax represents
an almost three-times multiple post-tax, it’s easy to
see how an ongoing investment programme can become
self-financing.
In considering suitability, therefore, it’s likely that the client
will have:
• a sophisticated grasp of business and investment;
a sophisticated grasp of
business and investment
• the appetite to assume risk; and
• a long term investment horizon.
Particularly, the client will need to be prepared for early
losses within the venture capital portfolio, often coming
through before the profits.
How are advisers using EIS investments?
Investors can choose from a variety of routes if they want
to access EIS investments. As well as funds, they may look
at single company EIS opportunities, whether on a rifleshot
basis, as part of a portfolio service, or through equity
crowdfunding sites.
However it’s done, the challenges of building a portfolio
one company at a time are not to be underestimated and
few advisers have the expertise or indeed time to advise
clients on the suitability of single company EIS investments.
As a result, advisers rightly tend to focus on EIS funds.
Advisers have been quick to appreciate the value of EIS
funds as a tax planning tool, but unfortunately this has too
often been reflected in a desire for structured products
with supposedly low levels of investment risk.
With a growing realisation in the market that EIS is
getting back to its roots as a measure specific to growth
companies, its effectiveness as a tax-planning tool remains,
but advisers are having to think a bit harder about portfolio
theory. Considered as a stand-alone investment, venture
capital is risky. Considered as part of a well-diversified
portfolio, venture capital investment in the form of
subscriptions to EIS funds has little or no effect on overall
risk and can materially enhance portfolio returns on a posttax
basis – even before the returns from the venture capital
investments are factored in.
the appetite to
assume risk
a long term
investment horizon
22 EIS Yearbook 2016/17