Private equity investments could still find a place in self-invested personal pensions (Sipps) despite last month’s change in the rules to restrict their use.
This is the view of some private equity syndicates and a number of Sipp providers.
The Revenue had been planning to allow Sipps to invest in unquoted shares for the first time but in a last-minute change to the rules it decided to restrict it. The rules now state that indirect investments will incur a tax charge unless they are made through a real estate investment trust (Reit), a collective vehicle such as a property syndicate or a trading concern. Trading concerns only qualify for exemption if they are not controlled by the pension scheme or an associated person.
Andy Bell, managing director of AJ Bell, a Sipp provider, believes the “trading concern” exemption may have killed off all forms of unquoted share investment by Sipps. This is because if controlling shareholders cannot invest then they may be reluctant to allow minority shareholders to do so as this could hand undue influence over the company to the Sipp provider.
Private investor network, Hotbed, believes however that Sipp investors will still turn to unquoted companies as an alternative to traditional investments.
“It is not just people associated with small, unquoted companies that want to invest in them. Other people see the potential for high returns and will want to use the tax breaks of a pension to invest in this asset class,” says Gary Robins, chief executive of Hotbed.
He says that although private equity is complex, risky and harder to source than some other alternative assets, it is “the type of high net worth individuals who have Sipps who are often attracted to the asset class as they understand the risks and rewards involved”.
He argues that this is because private equity offers strong returns with some investments generating three times the initial investment in a short period of time. He gives the example of a company called Sarantel that Hotbed invested in October 2003 and listed on Aim in March 2005. Investors who were in it from the beginning saw a 126 per cent return on their investments.
“Private equity investments have the added advantage that income generated, for instance from yields and dividends, can also be put into the pot tax free,” says Robins. “Private equity has performed strongly over the last 10 years – better than some mainstream asset classes such as quoted equities.”
There are a number of ways to invest in private equity through a Sipp. There are exchanges such as JP Jenkins, the firm that set up and floated the Ofex market, which runs a website that allows you to buy unquoted stocks and Angelbourse.com provides a similar service. Alternatively, syndicates such as Hotbed pool your money with that of other investors to buy a range of private firms. Hotbed scours the market for promising companies that are seeking finance of up to £5m and then invites members to invest in units of £25,000.
For those who want a more diversified portfolio of unquoted companies, advisers recommend investment trusts that hold a portfolio of private company shares. It is usually easier to sell shares in investment trusts than a stake in the private company itself.
However, the rules on whether unquoted shares can be included in a Sipp are still a highly debatable area. Alliance Trust Savings says it believes they are eligible but Suffolk Life, which runs Sipps for Norwich Union, says it will not accept unquoted shares without further guidance from the Treasury.
So even if you want to put unquoted shares into your Sipp, not all providers will allow you to do it. “It is up to the providers to decide what you can put your money into and some will feel that unquoted companies are too risky for your portfolio,” says Hyman Wolanski, head of pensions at Alliance Trust Savings.
