Peter Steele, head of Client Relations at Seneca Partners sheds light on some key considerations for paraplanners as the new tax season comes into view.
Ahead of the upcoming season, attention will soon focus on which providers will form the basis of client recommendations in the run up to the April 2022 tax year end.
With dozens of providers to choose from each with their own slant on the market, the task is by no means an easy one. For many, it is made a little simpler by using the data and ratings of the reviewers. Clearly there is a mine of information from these sources but even then, comparing apples with apples is extremely difficult and most often the decision will come down to instinct.
Asking each firm which factors they consider to be the most important when pulling their panels together is likely to provoke a whole range of different answers, which in many ways highlights the difficulty of the task. We have tried to simplify things based on the many conversations we have had on the subject over many years.
What are clients looking for and matters most?
Without being tedious and despite their classification, tax advantaged products must be considered as investments and not purely tax led. The strategic uses for VCTs and EIS are considerably different but the assumption here is that clients will want their money to perform.
Much is made of deployment track record, size and experience of investment teams, sector specialisms and deal flow – all of which can easily absorb a raft of hours of research and not necessarily provide many clear conclusions. Most investors will quickly distil this and ask; what is the manager’s track record of successful exits, how much actual cash has been returned to investors, and over what time period? In reality, these questions are the most appropriate issues to consider.
Qualifying rule changes in recent years have enabled investment in companies at a much earlier stage. This increases the potential risks to investors as often these are early stage or start-up companies, with many not even at the point of revenue generation.
Therefore, the journey to an exit can easily become a seven-to-ten-year haul which may not be what most seasoned investors have been accustomed to. Equally, it takes a great deal of imagination so early in a company’s life cycle to predict how and when an exit might come.
Managers who can clearly demonstrate a record of profitable exits and the return of cash to investors are generally much sought after.
It goes a little deeper as those that can, will most likely have invested in later stage businesses where there is proof of concept and strong and growing revenues. Both are key exit considerations.
It is therefore worth trying to understand from the marketing collateral issued by providers, just what the anticipated exit route is envisaged to be. Often, trade sale and IPO are the markers put down, but both are exceptionally difficult to hang a hat on seven to ten years in advance when the business is early stage or pre-revenue. An awful lot needs to happen and go well for the business during that period for either of them to become realistic avenues. The old adage of ‘’easier to invest but much harder to exit’’ is relevant in this context.
There are generally no shortages of growth businesses to invest in which perhaps makes the deployment argument a moot one but investing at a sensible value will be decisive in the outcome at exit. Again, this speaks loudly to those managers who have a history of successful exits as that would usually imply that the investment thesis has been well managed from outset.
Most product managers have a decent understanding of the relationship advisers have with their clients. Realistic valuations of private companies have long been a bone of contention where sadly the easy option for some might be to hold a value rather than impart the news to investors that things might not be progressing as well as hoped. Beware of these situations.
This issue is much less the case where the business is already AIM quoted and where daily market pricing supports the business case most often. AIM quoted businesses also allow investors access to relevant information and announcements about their investments which is a real benefit to many.
Return of cash is most definitely king!
[Main image: nicole-avagliano-unsplash]