This limits the initial investment ticket size, which in turn puts pressure on managers’ deal flow.
One indication of whether the manager ‘has what it takes’ is by looking for a proven deal flow, with a track record of positive investment outcomes – where the underlying companies have achieved or exceeded market expectations.
That way you’ll know if they can spot a business that has the potential for success, even perhaps to become a future household name.
2. How do you follow the rules?
The rules the manager must adhere to in order to maintain qualifying status (for the tax breaks) are becoming increasingly complicated. It is important to choose an experienced manager who understands the rules to the letter and manages the portfolio accordingly.
The rule changes have had implications on which investee companies will qualify for investment. This has narrowed the potential investment universe, which may have an impact on a manager’s deal flow.
A manager must have the ability to deploy new monies into appropriate qualifying investments that fit the product’s individual investment mandate.
So check whether a manager’s deal flow is appropriate to the level of fundraising they are seeking.
Ensure they are not overstretching themselves and putting themselves under pressure to invest the capital, which may lead to poor investment decisions.
3. How do I know your VCT/EIS is right for me?
Each VCT and EIS will have its individual investment approach, risk and return profile, so will suit different investors according to their needs and their risk appetite.
It is important to consider the investor’s requirements and match their investment objective to the type of product selected. The manager’s strategy and the structure of their product must fit the investor’s requirements.
For example, VCTs are sometimes mistakenly considered as being solely focused on achieving returns through capital growth, but in reality many VCTs deliver regular income via tax-free dividend payments.
Finding a VCT with an income profile matched to your client’s requirements is crucial.
Investors considering a VCT as a supplementary pension planning tool may be better suited to a VCT with a track record of consistent dividend payments, especially the older investor.
Younger investors who are less reliant on regular income might prefer something that offers the opportunity of some special, but less consistent, dividends.
At the end of the day it’s up to the client and their requirements, but looking at a dividend track record of any VCT should help.
Consider the merits
Finally, an experienced manager focused on a specific sector often builds a high level of expertise that can translate into investment success.
