Morningstar members receive free entry to the London Investor Show when they use voucher code 'Morningstar'.
Holly Cook: For Morningstar, I'm Holly Cook and I'm here at the London Stock Exchange to talk to Nicola Horlick, who will shortly be giving a presentation at the London Investor Show on investing in private companies.
Nicola, thank you very much for joining me.
Cook: Now you are managing high-net-worth individuals' money, specifically looking at investing in private companies. What is it about private companies that you prefer as opposed to listed companies?
Horlick: Well, the thing about listed companies is that there are insider trading laws that mean you can't know what's going on, and if you do know you can't deal in the shares. I found it increasingly frustrating that I couldn’t really get down to the depths of what was really going on in the company.
I thought actually I don't want to do this anymore and I'd done it for a very long time, 25 years of investing money in the stock market for my clients, and I then decided that actually I wanted to focus on private companies, where you can know everything about the company.
Now, obviously, the thing you are giving up is liquidity, because if something is quoted on the stock market, in theory you can buy and sell it very easily; it's not always the case in fact, but I mean in theory you can. Whereas with unquoted companies clearly you can't easily get out of the shares, but I'm happy to give up that liquidity element in order to know more about the company. And I also find it much more enjoyable, because then I can get more involved with the company and actually help to guide the company. So, I'm beginning to go on boards of private companies now that we have invested our clients' money in and I find that very satisfying.
Cook: Would you classify this as a niche investment that's really only suitable for those high-net-worth individuals or is it also potentially of interest to an individual investor who perhaps has a smaller portfolio? I mean, we are always hearing – people are always looking for more interesting ways to invest their money, in particular, given the low interest rate environment at the moment.
Horlick: Anybody who has less than £100,000 outside their main residence shouldn't start investing in private companies, I don't think. So, I think it's important for people to be reasonably well-off in terms of the amount that they have and the amount that they are saving. And if they are reasonably well-off, there are mechanisms that have been provided for the government for them to invest in private companies.
So, this is something, for example, called the Enterprise Investments Scheme, where a company gets approval—it has to do a certain trade—so it can’t be a financing company, it can’t be a property company. But if it's a real trading business then an individual can invest in that and get 30% tax relief – income tax relief upfront. So, if you put £10,000 in, then net of the tax relief it’s cost you £7,000, and the other thing is that when you sell it, if you make a gain, say it doubles in value and you are selling it for £14,000, you don't pay any tax on that £7,000 even if you've already used up your capital gains allowance.
So, it's actually a very attractive way to invest and there are companies, in fact my company, Rockpool, provides a service, an EIS portfolio management service. Say, somebody could put £30,000 into that service and they would end up with £6,000 going into five companies, so they’ve then got diversification. And I think that's actually a very good adjunct to a quoted equity portfolio. I'm not saying you should only do that because that would be high risk, but if you had £100,000 and you wanted to put, say, £30,000 of it into EIS, that would be the way to do it.
I think because the stock market has performed so poorly over so many years now, people are beginning to look beyond it. And also interest rates are so low, so if you leave money on deposit, you are actually getting a negative return in real terms. If you invest in the stock market you've had no return for a prolonged period. So, actually, this is a good way to invest if you can find the right companies.
Cook: Well, thanks very much for joining me Nicola, and I look forward to your presentation at the LIS.
Horlick: Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
