John Davis of Seneca Partners
Investors in tax-preferred products such as VCT and EIS will soon be evaluating options as January 31 reminds them of their tax plans. But is there an elephant in the room this year?
The coronavirus has had a dramatic impact on the economy, not only for small businesses struggling, but also for boulevard names and commercial tycoons every day. The prime minister has fought a relentless battle to distribute financial support to keep the business alive.
So how do investors adjust the events of the past year to determine strategies for finding profitable and rewarding investments?
The tax-friendly investment areas are located in the small business world, so it can be very difficult to sort out potential winners.
A sector-by-sector analysis is a good place to start when assessing where Covid-19 has had the most positive or negative impact, but this research needs to go further.
Investors need to ask themselves how these companies have survived the pandemic. Are they terminally damaged or do they show a good level of resilience?
And, importantly, do they have the attributes to thrive after a pandemic?
Realistic evaluation settings
Many tax incentive product providers emphasize how they have transformed their strategies in response to a pandemic. Perhaps a credible example of the path to future prosperity is the move towards artificial intelligence, digital support, and biotechnology companies.
However, investors need to be aware of the associated valuations. And that is the core of it.
Investors can’t enjoy the idea that the value of their investment goes down, but imagining that the companies they invest in and their supply chains are unaffected by Covid-19 makes them unacceptable for macroeconomic reality. ..
An honest and true evaluation of these businesses is important to fairly reflect the investor’s position. For this reason, we conducted a complete Covid-19 risk assessment in March for more than 50 companies in our portfolio.
This included marking down the carrying amount of holdings that could be adversely affected.
Importantly, these write-downs did not reflect where we finally wanted or expected at the time of exit.
But pretending that everything works is just kicking the can, and now, months later, the pandemic is still a very real problem.
We now have time to properly assess the impact and have justified an upward revision of the valuation for a significant number of holdings.
However, it is important that these are real businesses and the valuation is dynamic in nature.
When trying to establish a “true valuation”, for AIM-estimated investments, live pricing and regulatory news streams deal primarily with the issue.
However, tax incentives include many private companies that do not have such a mechanism, forcing investors to rely on the judgment of management and investment committees.
Therefore, investors need to pay very close attention to the manager’s ability to fairly value the underlying holdings.
A useful question when considering the array of tax-preferred products this year is that investors did not see a decline in the value of tax-preferred investments given the catastrophic economic consequences we are currently enduring. How realistic is it?
Recent anecdotal feedback from several IFAs has emphasized that product providers are strengthening their account of the inherent risks of investing in SMEs. This is the main reason why tax cuts exist.
This message is not controversial, but I hope it is not a signal that some providers will immediately drop bad news to investors after drying the gunpowder for months.
If that is the reality of the situation, tax incentives are a good component of the entire investment portfolio, and managers with demonstrable exit performance and investment process strength may continue to be offered after the pandemic. The fact that it is expensive is similar. recovery.
John Davies is Investment Director of Seneca Partners.
How do you solve problems like VCT and EIS coronavirus?
https://www.investmentweek.co.uk/opinion/4025397/taxing-issue-solve-coronavirus-vcts-eis How do you solve problems like VCT and EIS coronavirus?