Hassan provided seven questions advisers should ask their clients before investing in an EIS:
- Which type of EIS suits you? You could invest directly into a single company EIS, or through a portfolio managed by a respected and established provider. The second option spreads your risk and gives you the benefit of an experienced investor’s skills, but may cost you more in fees.
- If you want to invest directly with a single company, which type of business appeals to you? Companies operating in a broad range of industries use EIS to raise capital. Trade body EISA (the Enterprise Investment Scheme Association) publishes a list of open offers on its website, with investors able to access sectors from music publishing to hydropower, healthcare to technology. You should take into account your current exposure and try to diversify rather than doubling up on risk in sectors where you are already invested.
- Do you understand what a particular company does and what its headwinds are? What factors could impact the investment case for committing your cash.
- What competitive advantage, barriers to entry, or intellectual property does this company have which sets it apart from rivals in its marketplace? Does it have a management team which is experienced in its field? A company might have the most innovative products and services out there, but it counts for very little if the business as a whole is mis-managed.
- Do the suggested returns seem sensible? Can it demonstrate a strong pipeline of business? Sometimes companies may over-inflate their return on investment (ROI) projections to attract funding – would this investment opportunity still look compelling if the company’s costs were 50% higher and revenues 50% lower?
- What is the company’s exit strategy – how will it pay back investors at the end of the investment term? Does the management plan to buy back shares or float the business?
- How much volatility are you prepared to accept? The tax reliefs offered by EIS are meant to compensate you for their higher level of risk. Assess your risk appetite and look for a vehicle with more of a focus on capital preservation than aggressive growth if you are worried about potential losses.
“Another key factor to consider is the client’s investment time horizon – to qualify for all the tax reliefs on offer, you will usually need to lock your money away in an EIS for three years.
“After this time, it may be tough to find a buyer for your shares on the secondary market if you wish to sell,” said Hassan.
“You should also consider whether the client has exhausted other tax-efficient options, such as using your full ISA allowance and tax-free pension allowance.”
