Venture Capital Investing: Why EIS Funds Can Outperform VCT Funds
Most HNW private client investors accept that over 80% of their investments should be invested in a classic asset allocation portfolio, consisting of a mix of stocks/bonds/cash and perhaps a smattering of alternative assets. However, these same investors equally acknowledge that the remaining 5%-to-20% of their portfolio can achieve higher returns in alternative assets such as venture capital, private equity, fine art funds etc.
The classic wealth management Discretionary Fund Management Product offering (DFM) tends to promise and often deliver average returns of circa 6% y-o-y over a 30-year period. Markets rise and markets fall but most would see this as a long-term investment target.
Yet investors should learn two things from this simple wealth management truism.
The first is that even relatively innocuous fees (i.e. 2% p.a.) function as the financial equivalent of carbon monoxide – silently killing investor returns. Symvan Capital research demonstrates that these seemingly benign annual fees reduce portfolio returns by 49.5% over that 30-year period – and that makes no account of the ravages of inflation on investment returns.
The second lesson is that true alpha is potentially generated by the remaining part of an investor’s portfolio; the part that invests in the off-piste riskier assets. If one accepts that DFM products are ‘much of a muchness’, it follows that an investor generates alpha through those riskier assets which should significantly lift overall returns.
The second lesson presents investors with two problems, the first being how to select the best manager(s) in the alternative asset space, and the second issue being the ‘wrapper’ which is particularly important for private client investors with tax obligations.
Symvan Capital’s CEO Kealan Doyle explores how early-stage VC investing addresses many of these issues, and why EIS technology investing is a must for the more sophisticated private clients in the UK.
Topics to be explored include why early-stage technology investing can provide the highest returns for investors, the pros and cons of investing in EIS funds rather than VCT funds, a primer on the tax breaks available from HMRC, the impact of fund fees on performance, and why EIS is crucial for IHT planning.
The world has changed considerably since the 1990s when private client investors could get access to hot tech companies at a relatively early stage. In fact, the Master Investor show that Symvan will be presenting at on Saturday used to be dominated by single stock companies (often AIM/LSE /TSE listed) offering a similar investor story, and we will be also exploring why VC funds offer a superior return to those alternatives.
Today private client investors rarely get to invest in tech companies such as Uber until much of the share price growth has occurred, and access to large VC and PE companies remains impossible. Fortunately, EIS investing allows access to the most exciting startups and scaleups in the UK and has the added advantage of the UK government underwriting over 60% of the risk for many investors!
Kealan Doyle will be presenting at the Master Investor Show on Saturday April 15that 12:50 PM on the Showcase Stage.
Published on Master Investor Magazine.