BM Research

Last week a journalist from Growth Business called me about the fall in EIS investment in 2019/20. The full article is here, but my take is both fragmented and incomplete so I thought I’d just fill it out here.

While the data isn’t all in yet, it does look like less money has been invested into EIS funds in the last year. This should come as no surprise to anyone. The tax changes that the government introduced in 2017 have radically changed the shape of the market.

Prior to the enactment of the changes, there were (slightly simplistically) two types of products in the market: capital preservation and growth. Capital preservation products were a very large part of the market. The Patient Capital Review suggested that capacity of over £800m was available in these products. Given £1.8bn in total was raised in 2016/17, these were clearly a significant proportion of the market. And now they have gone.

Growth has done ok

So there is some evidence that growth products have done fine. VCTs had a near record year in 2018/19, raising £731m. While this is only £3m more than the previous year, they are subject to the same rules as EIS. It shows advisers and investors still have an appetite for growth investing.

The article highlighted some managers who raised significantly smaller amounts of money than the preceding year. It should be noted that these are new entrants to the growth EIS market. Advisers have expressed some scepticism about the switch of capital preservation managers to growth products. Managers need to bring a different skill set, and those that do not have a demonstrable track record will struggle. Established growth managers have done better: for example, Parkwalk had a record year.

My take is that while EIS investments as a whole have fallen in 2018/19, the growth market will have grown. Given this is the market the government is aiming the EIS relief at, this fall is not a bad thing. Those advisers and investors who invested in growth have continued to do so. However, they have stuck with the products that they know and some new entrants have struggled.

The next couple of years will see more evolution in the market. Subject to economic growth being ok, EIS fundraising should improve from the new, lower, base. Some new entrants will get further traction, but some of the established capital preservation names will fail to make the switch. The article didn’t mention others who didn’t adapt, such as Ingenious, who may return too. For an observer it will be interesting to watch!