Classified as high-risk, these early stage investments are best entered into with a long-term view and, as the shares are not publicly traded, it can be difficult to sell them and there is a risk of loss of some or all of your capital invested.
However, if handled correctly this speculative form of investment offers experienced investors the potential of high returns and substantial tax breaks. For anyone interested in the potential benefits of Private Equity these guidelines will help you with the basics.
Why invest in Private Equity?
1. Growth Prospects
The potential for high returns to investors is often greater at the early stages, before the company becomes quoted or listed on the stock market.
2. Tax Efficient
Investors can take advantage of significant tax breaks with investments that qualify for the Enterprise Investment Scheme (EIS) or get tax breaks through choosing fund managed Venture Capital Trusts (VCTs).
Clients holding liquid funds within their pensions can also invest a percentage of these in unquoted securities. Currently any gain arising from the sale of an investment is free of capital gains tax.
3. Flexibility
Similar to investment trusts, Venture Capital Trusts (VCT’s) are quoted or listed investment vehicles which allow investors to invest indirectly into a range of private companies which are not themselves listed or traded on a recognised exchange or market.
VCT’s aim to encourage investment in smaller unquoted companies by offering private investors certain tax incentives in return for a specified period of investment commitment. Currently these tax incentives include a tax break of 30% of income tax over a 5 year period. At present, there is an additionaltax relief for VCT’s called Disposal Relief which essentially means there is no chargeable capital gain on selling VCT investments, subject however to certain conditions being met. Currently these are as follows:
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You acquired the shares within the permitted maximum for the tax year in question
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The VCT was an approved VCT both when the shares were acquired and when they were sold
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You are aged over 18 when selling the shares
VCT’s can however, offer a flexible method of investing in private companies as they give investors access to such companies in a tax efficient manner, but with ability to realise their investment if necessary - something not always so easy with EIS investments.
What is EIS?*
The Enterprise Investment Scheme is a government introduced scheme intended to encourage investors to support growing businesses. It provides tax relief for investors who own shares in qualifying companies. There are, at present a number of advantages to investing in an EIS qualifying equity at present, including:
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Investors receive 20 per cent income tax relief
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The investment becomes inheritance tax free after two years
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The investment becomes free of capital gains tax after three years
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Investors are able to defer capital gains
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If the shares are disposed of at a loss, the loss can be set against capital gains or income in the year of disposal
What are the requirements for Private Equity?
Hoodless Brennan is committed to lowering the barriers, and offering clients access to the pre-IPO market. We are, of course, legally required to comply with relevant legislation including the Prospectus Directive and FSMA rules relating to financial promotions. This means that sometimes not all deals can be shown to clients.
Due to the high risk nature of Private Equity investments, only suitably qualified investors should consider investing in this market. In order to gain access to Private Equity investment opportunities, Hoodless Brennan requires that its clients:
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Should have an annual income of at least £100,000 or an investment portfolio of £250,000
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Demonstrate they have the knowledge and understanding to view Private Equity investment opportunities.
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Be self certified as a sophisticated investor or high net worth individual.
Please note: self certification is required before any information on specific Private Equity investment opportunities can be supplied to you. Click here to complete the form.
How does someone invest in private equity through Hoodless Brennan?
Funding is accomplished either through a Prospectus, Private Placing Memorandum (PPM) or verified presentation. All available information is passed to clients who can then discuss the proposed transaction with the department.
Once a client confirms that he wishes to proceed, a placing letter is produced that requires the client’s signature and registration details. Once all placing letters have been returned with payments, the details are then sent to the relevant company who will issue the share certificates which are then sent to the clients.
Is there a minimum deal size?
A £10,000 minimum is required for most deals.
What costs are involved in dealing in Private Equity?
All Private Equity deals through Hoodless Brennan are free of commissions.
As the companies are not listed what updates are available on their trading activities?
Hoodless Brennan insists that wherever possible, shareholders be updated by the companies every quarter, with a trading update. If any shareholders wish to contact these companies direct they can do so and Hoodless Brennan can provide a list of contacts on request. Private Equity is an investment option for experienced or professional investors which offers higher risk but with the potential of high returns and substantial tax breaks.
Sign up for our Opportunity Alert service and be the first to know about investment opportunities to suit your investment portfolio* or phone +44 (0)20 7510 8696.
*Risk Warning: Qualifying for EIS tax benefits is complicated and NOT as straightforward as it may first appear. An EIS qualifying company may lose its EIS qualifying relief as a result of the company’s activities, commercial necessity or management error. The consequence of losing EIS relief means that the tax benefits of investing in the EIS scheme will be lost.
Therefore there is no guarantee that the tax advantage promoted as part of any investment will remain in existence. Additionally, the levels and bases of taxation may change. HB will not be responsible for assessing your personal tax implications of investing in these companies or any recommendations that we may make to you and you should always take independent professional tax advice.
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