The company sees an EIS as a natural progression of the venture capital technology funds it runs for institutional investors, Mercia Fund 1 and Mercia Fund 2. The EIS fund will invest across medical technologies, clean technologies, telecommunications, electronics and software technologies, data centre management and related areas. It will comprise five to nine technology firms that Mercia expects to be attractive to potential buyers within four to seven years. The firm thinks fewer than five holdings would increase risk through a lack of diversification while more than nine would dilute returns through over-diversification.
Mercia believes the technology sector has matured since the dotcom boom, when investments were made in expectation of flotations where valuations became inflated. It says the sector is now based on more modest long-term returns, which will be achieved when the firms are sold on, not through flotation.
The EIS has an unusual charging structure where investors have the choice of paying the annual management charge upfront or each year. Where the 1.8 per cent fee on an upfront basis is chosen, around 90 per cent of the initial investment goes into qualifying companies. If the 2 per cent a year option is chosen, 100 per cent of the initial amount is invested in qualifying companies.
Mercia says knowing exactly how much of their investment is going into qualifying companies provides clarity for tax-planning purposes, as investors do not get income tax relief on the amount of their investment
that goes towards fees.
The combination of high growth from technology and the EIS tax breaks will be attractive to some, particularly as an alternative to a pension for wealthy clients for whom pensions are no longer attractive. However, there are sector specific risks, such as bigger companies getting around intellectual property rights to compete directly with smaller firms or to avoid paying smaller firms for their innovation.