Investors looking to use enterprise investment trusts (EISs) and venture capital trusts (VCTs) as alternatives to pensions are being urged to diversify their holdings in order to mitigate downside risk.
Specialists in the EIS and VCT market have predicted the sector will experience growth as more investors seek alternative tax-efficient investments to traditional pensions, but also warn that they have their own set of risks.
Dermot Campbell, managing partner of Kuber Ventures, the EIS platform that launched in 2012, said because EISs are private equity investments, they have different characteristics from listed equities and have a greater risk of failure. However, he added that these risks can be reduced by choosing skilled managers and spreading the investment across several funds.
Mr Campbell said the decreased annual pension contribution limit, now at £40,000, means some investors might be looking for another tax incentivised scheme to complement their long-term savings needs.
“With EIS, there isn’t any limit to the fund size,” he said, adding that while they can be viewed as illiquid investments, the long-term nature of the investment should reduce those concerns.
Meanwhile, John Williams, partner at Kuber Ventures, said the risks associated to EIS need to be taken into account before an investment is made. “One of the risks is the liquidity of an EIS, but with a pension investment liquidity doesn’t matter because it is tied up,” he said, adding, “It’s a supplement, not an alternative to a pension.”
Managers of venture capital trusts (VCTs) have also been promoting their funds as alternatives in recent years, suggesting high net-worth investors will consider the tax relief as attractive as a pension scheme.
“From next year I can put £40,000 into a pension, the annual limit for which is going down and down,” said Eliot Kaye, director of Puma Investments, the VCT manager.
Kaye’s firm offers VCTs that have a mandate of capital preservation, which he says offers lower risk to investors. “What’s out there that gives me the tax break but the risk is mitigated?” he said. “There is a real appetite for the capital preservation VCTs.”
Kuber Ventures, launched as a platform providing access to six EIS managers: Rockpool, Guinness Asset Management, Old Burlington, Highgate, Future Capital Partners and Enterprise EIS.
It is in talks with Ascension Ventures, which launched the first seed EIS in May 2012, to join the platform.
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