Of course, if things are going well and funds are able to be raised at a value that is higher than earlier rounds, then so much the better.
Although managers rarely waste the opportunity to announce an uplift in company values, so therein lies a material conflict when the same manager is leading multiple funding rounds.
It is usual for investor reports to show the value of an individual’s investment holding. Less common is the appearance of the value of the company as a whole. But this is relevant in the context of an upcoming exit for investors.
While on the face of it a private company valued in the tens of millions is very encouraging, trade sales at that level are not regular occurrences.
Certainly, in the current climate, buyers are in much shorter supply and brokers are expecting the IPO market to be subdued for the remainder of 2023 at least.
The Aim- quoted EIS companies have at least overcome this hurdle by already having a listing and a technical exit route.
Fees
The issue of fees charged by managers is another area of focus for independent reviewers. It is a complex area and comparing like for like is tough.
With private companies, there might be an arrangement fee at the point of investment, plus ongoing monitoring fees to cover working with investee companies, attending board meetings, etc.
These fees can be substantial but may also give rise to conflicts of interest in terms of the alignment between manager and investor in respect of exits and realisations. They do have the potential to reward managers for continuing to back businesses that are not (and may never be) sellable in order to enhance their own P&L over an extended investment period.
What might seem a collection of similar fee structures, can in fact be quite nuanced in reality.
So where does this land us?
The presence of 30 per cent initial tax relief and CGT-free realisations are just two very attractive elements of EIS not commonly found elsewhere in the investment universe.
In the appropriate circumstances, these will appeal to investors. On the downside, it is apparent that there are many factors that advisers and their clients need clarity on before being able to make an informed choice.
Risk to capital conditions introduced in recent years have resulted in managers broadly investing at a much earlier stage in a company’s life cycle, which heightens the risk of failure.
