Fund and Investee Company performance
Investee Companies and assets they own or operate may fail or fail to operate in line with predictions resulting in investments being realised for less than the initial investment or may not be realised at all. Investee companies may cease to qualify for EIS relief depending on the political landscape.
- Just as other UK enterprises, British precision engineering companies carry the normal commercial risks, including bad debts, challenging market place, change in raw material costs etc. However, there are also several technical risks associated with the industry such as: warranty claims (12 months is considered normal), many companies own expensive machinery critical to manufacturing which may break down causing delivery delays or expensive repairs.
- The customer base of Investee Companies may not be diversified, hence the loss of contracts could be challenging to absorb.
- The engineering sector depends on the capital expenditure of a number of key industries, including: military, aerospace, automotive, industrial etc. which in turn are closely linked to future growth expiations of the UK economy.
- The markets addressed by the Investee Companies constantly undergo rapid and significant change, resulting in technological developments that could render certain technologies, materials or products offered by the Investee Companies obsolete, uneconomical or uncompetitive.
- Investment in smaller, unquoted companies or engineering companies bought in a “distressed” sale may have very limited operating history, profits or cash flow, and proper information for determining their value or the risks to which they are exposed may not be available, therefore carrying a higher degree of risk.
- Changes in economic conditions such as: interest rates, rates of inflation, industry conditions, competition, political and diplomatic events and trends, tax laws and other factors can substantially and adversely affect equity investments in general and the Investee Companies’ projects in particular.
Risks relating to the performance of CIM and Key persons
The performance of the Fund is dependent on the ability of CIM to source suitable engineering businesses for growth investments by Investee Companies’ subsidiaries. Hence, the departure of a key partner, consultant or employee of CIM may impact the pipeline of possible engineering companies in which the fund can invest, as well as the smooth-running of the Trading Subsidiaries’ businesses already invested in.
The development of small companies depends on a small number of key people who have key personal relationships and business critical expertise. If such people decide not to remain with the Investee Companies during the period of investment there could be significant impact on the future development of the Investee Company.
Risks related to doing business internationally
The Trading Subsidiaries may provide services and products to customers in foreign countries. As a result, the repayment of Investee Companies’ loans are subject to certain risks inherent in international business many of which are beyond their control. These risks include changes in local regulatory requirements (including restrictions on content), changes in the laws and policies affecting trade, currencies, investment and taxes (including laws and policies relating to the repatriation of funds and to withholding taxes), differing degrees of protection for intellectual property, instability of foreign economies and governments, cultural barriers, wars and acts of terrorism or widespread health hazards. Any of these factors could have a material effect on the ability of the Trading Subsidiaries to repay loans.
Risks relating to the EIS
There are several circumstances in which an Investor could cease to qualify for any of the Tax Reliefs offered by the EIS. These circumstances may relate to an Investee Company ceasing to be an EIS qualifying company or the Investor failing or ceasing to qualify for EIS relief. Click here to see the criteria needed to be fulfilled by Investors and Investee Companies.
A failure to meet the qualifying requirements for the EIS could result in:
- Investors being required to repay the 30% income tax relief received on subscription for the shares in the Investee Companies
- A liability to tax on capital gains on disposal of the Investee Companies’ shares
- Any deferred capital gains crystallising.
It should also be noted that although provisional approval will be sought from HMRC that the Investee Companies should qualify under the EIS, there is not guarantee that the formal EIS clearance will be granted or that such clearance will not be subsequently withdrawn.