M AGAZINE
April 2021
SI DE BYSI DE
DEMYSTIFYING THE
COSTS OF EIS Ever wonder what some EIS fund Managers aren’t telling you? GBI Magazine’s Alex Sullivan spoke to James D’Mello, The SidebySide Partnership, to dig down into the nitty gritty of the Enterprise Investment Scheme and give you and your clients the inside edge on fees and charges PERFORMANCE FEES Performance fees are simply fees on performance, but managers charge them in different ways. Performance fees can be charged against the overall portfolio or against individual investee companies. The first structure means a fund manager will charge a fee on your client’s investment, while the latter means a fee will be charged on the profits from each company as they exit. These structures means a client can have two very different investment outcomes from the same investment journey. Theoretically, when performance fees are charged against individual companies in an EIS portfolio of ten companies, where nine failed and one made a five times return, your client would be charged on that one exit, despite making an overall loss. PERFORMANCE HURDLES A performance hurdle is a hurdle over which performance fees are charged. This means that if a fund manager returns over a set percentage through an exit, they will charge your client performance fees for it.
Performance hurdles are crucial for advisers and investors to understand because charges can apply on modest returns, after inflation and other fees, leaving the client with overall negative returns on a long term investment. It’s also important for advisers to know two things about performance hurdles. Firstly, if a fund’s performance hurdle is a net profitable return, make sure that's on 100% of the investment not 70%. The 30% tax relief on investment usually isn’t factored into performances fees, but can be and can make a big difference to your client. Secondly, there are a lot of funds that have performance hurdles and there are some that don’t. It is worth factoring that into your due diligence. Performance fees will have an effect on your client’s returns.
The 30% tax relief on investment usually isn’t factored into performances fees, but can be and can make a big difference to your client
These fees can range from 20-35% and they can serve to align a fund manager’s interest with your client’s.
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GB Investment Magazine
