New Principles for communicating Performance from EISA
- On November 16, 2022
- By Chris Gosling
EISA has recently published new principles for communicating EIS Fund performance, a move that we warmly welcome. We spoke to Martin Fox, who chairs the Research, Education and Marketing committee of EISA, which was the architect of these principles, to outline the thinking behind them.
He said ‘The EIS industry can appear very confusing to investors and advisers alike, with the use of jargon, and so many different ways of expressing things. It makes it unnecessarily difficult to compare one fund manager against another.
Just over a year ago we tackled transparency and clarity of fees and created some principles on how we would like to see these expressed, and now it was the turn of performance.
We created a working party to look at this, which included fund managers, a platform, and industry analyst, and a wealth manager, to ensure that we had input from all sectors of the market.
The guiding principle was that consistency is really important, as is the ability to compare like with like.
The starting point was to define what counts as an exit, and we felt that the existing definition used by IPEV provides a very good base: Realisation is the sale, redemption, or repayment of an Investment, in whole or in part; or the insolvency of an Investee Company, where no significant return to the Fund is envisaged.
This is a very good starting point as it immediately positions exits or realisations as including all investments, failures as well as successes.
As a working party we then built 10 principles, which can be seen below.
Importantly we have aimed to address all stages of the investment process, including valuations of portfolio companies, further investments at different stages, significant changes in the investment strategy, whether investments are meeting expectations and what figures are used on exits.
Our hope is that fund managers and advisers will take on board these principles, and that advisers will hold managers to account if they are not being followed. If we can make EIS more understandable for both advisers and their clients then it is an important step forward. ‘
Principles on communicating Investment Performance
- All exits, including failures, should be shown in compiling an IRR.
- Quoted returns and projections should exclude tax reliefs. If the manager wants to also include tax reliefs to show total returns, the figures should be clearly differentiated.
- For profitable exits, the actual pay out, net of performance fees should be the ones shown.
The manager should make clear whether or not this is the case.
- If there has been a change in investment strategy, performance figures should be shown pre and post the change.
- Company valuations should either be based on the price of the last investment, or on a valuation approach that meets IPEV guidelines. The fund manager should publish details of the valuation methodology they are using and the frequency of valuations, allowing for the different capital requirements of SEIS, EIS and scale up funds. If there has been no further funding or valuation for 2 years, then an explanation should be provided.
- The transparency of the number of failures, average length of holding and amounts should be shown.
- The frequency and consistency of exits should be shown, and how this is in line with the approach set out by the fund manager.
Visual timelines produced by some managers are helpful.
- Where investments into a company have been made at different times, on exit a range of returns should be shown, rather than just the best one at a particular point in time.
- Where annual management charges have been accrued by the Manager, and are still payable by the investor, fund by fund performance should be shown net of this cost.
- Managers are expected to communicate whether returns and valuations over time are in line with the initial marketing material.
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