When advisers first start looking at business relief (BR) products, there is much to take in: the rules governing such products; the investment strategies being used; and what the investment risk is. It is easy to lose sight of the fact that, for non-AIM products, the investment is being made directly into a company or partnership, rather than a fund. It is, therefore, essential that governance is part of the diligence process.
In the investment trust/company industry, the concept of independent directors is not only well-known, but an argument that has long been settled. For the vast majority of investment trusts, the fund manager is a separate entity from the company that investors own shares in. The manager supplies services in return for a fee. The board has discretion as to how much the fee might be, or whether the manager should remain in that role. Once upon a time, investment trust boards consisted primarily of people connected to the manager, with all the potential for conflicts of interest that that brought. Over time, it was realised that this was bad practice, and it was deemed that a majority of the board should be independent of the manager.
Most non-AIM BR products have much in common with investment trusts. Most of the companies have no employees, with managers being paid a fee or having expenses covered for both fund management and company management.
What is surprising, then, is that more than half the products in our database invest into companies with no independent directors.
This would seem to be important ‒ in private companies, transparency is usually more limited than for quoted companies. From the research we have undertaken, more than a quarter of products invest in companies that publish abbreviated accounts, rather than full accounts. This is not restricted to the smaller companies: the smallest company publishes full accounts, while some of those with abbreviated accounts are among the larger in the sector. When information is limited, it is hard for investors to validate that companies are doing what they say they are.