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enterprise investment scheme
quarterly Industry Update, October 2021
FIND INSIDE
INTRODUCTION
1
MARKET UPDATE
2
industry analysis
4
considerations for investment
3
MANAGERS IN FOCUS
5
WHAT'S ON THE HORIZON
6
FURTHER LEARNING
7
The latest news, updates and statistics on EIS
In partnership with:
EIS context VC funding surge what the managers say market composition HMRC STATISTICS what's ON THE HORIZON
quarterly Industry Update
A
1. Introduction
Foreword Opening statement Update overview Key findings
Foreword Opening Statement Update Overview Key Findings
1. INTRODUCTION
The EIS context Venture Capital Funding Surge Regulatory Update Investing in people: the 3 key things investors look for Knowledge Intensive funds' new approach to EIS Investing Targeting high growth and tax-efficiency Why Fund Managers Need To Add Value What the managers say
2. market update
Market Composition Fees and Charges Approved EIS Knowledge Intensive Funds Field for EIS Investment Widens MICAP Market Snapshot
3. considerations for investment
EIS HMRC Statistics SEIS and SITR Knowledge intensive companies
4. industry analysis
Blackfinch Deepbridge MMC Ventures Octopus Oxford Capital Praetura Ventures Comparison table
5. managers in focus
FCA focus on high risk assessment Future Fund: Breakthrough welcomes EIS involvement What the managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclaimer
7. further learning
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
guy tolhurst
foreword
MENU
Foreword
INTRODUCTION / FOREWORD
W
ith a growing focus on the importance of innovation and growth companies to lead the way out of the Covid-19 economic darkness, in this quarter’s update, we consider several recently published reports that recommend positive changes to EIS. It’s certainly heartening to see government-initiated, independent reviews making the case for EIS an even harder one to ignore. Those changes are aimed at making this important relief easier for both investors and investees to access at a time when SME funding has become even more critical. But that doesn’t mean it’s all doom and gloom for business. Far from it. Q2 saw big upward adjustments of UK GDP growth projections as the economy reopened. But that could be bad news for those looking for tax efficiency if they don’t take note of the huge and related drivers of pent up consumer demand, asset valuations and staff shortages. Throw in the frozen capital gains tax (CGT) and income tax annual allowances and it’s not surprising that the treasury is already seeing increases in these tax receipts. The funding surge in the wider venture capital market is indicative of the massive opportunity that currently exists in smaller, earlier stage companies, even without the substantial tax reliefs on offer through EIS. But it’s also worrying that UK inward investment in this sphere, while record-breaking, still falls so far behind other countries. In fact, this update features a look at one of the most recent steps the government has taken to drive the growth agenda - its open letter to the UK’s institutional investors, challenging them to ‘ignite an Investment Big Bang, by putting more UK capital behind the country’s entrepreneurial talent. Of course, the risk profile of smaller, younger companies can put off investors and certainly, many individuals will not be suitable for this type of investment. But Mr Johnson and Mr Sunak see plentiful positives where the right people and entities invest in the right way. All of this bodes very well for the future of EIS, the patient capital that it delivers to needy business pioneers and the explosive performance and tax incentives it can bring to investors. Our analysis of the statistics, insights into the key political, economic and regulatory developments of the last quarter and the viewpoints of some of the most highly-respected investment managers in the EIS market, are intended to keep you right up to date with the things you need to consider before deciding if EIS could work for any of your clients. I hope it’s helpful in shaping your thoughts on where EIS is right now and where it is going.
managing director, intelligent partnership
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EIS
The EIS context Venture Capital Funding Surge Regulatory Update Investing in people: the 3 key things investors look for Knowledge Intensive funds' new approach to EIS Investing Targeting high growth and tax-efficiency What the managers say
Blackfinch Deepbridge MMC Ventures Octopus Oxford Capital Comparison table
opening statement
INTRODUCTION / OPENING STATEMENT
s we head out of summer and into the autumn and with the Covid-19 threat seemingly(!) starting to recede, it's an interesting time to reflect on the last quarter. In usual times, summer tends to be a quieter period as the call of holidays takes people out of the office but this summer there has been noticeable activity in the equity funding markets some of which presents us with a slightly conflicting picture. Firstly, Beauhurst reports that a record £10.7 billion was invested during the half of 2021, more than double the amount raised during H1 2020, and an 84% increase on the previous record in H1 2019. Additionally, a record 1,296 deals were announced, marking an 11% rise since H2 2020, and a 24% rise from H1 2020. If we extrapolate this data out, then 2021 is on track to see more than £2.1 billion of capital deployed to private companies, firmly establishing the UK’s position as one of the best places to start and scale ambitious businesses. So, who is benefitting from these increases? Again, drawing from Beauhurst’s commentary, in the wake of the pandemic, the government recently pledged significant investment into the life sciences, in order to “make the UK the most attractive location in Europe to start and grow a life sciences business.” This includes a £200 million Life Sciences Investment Programme via British Patient Capital, so we expect to see both deal numbers and the amount invested in life sciences continue to climb higher in the near future. Still, it’s fintech and AI that continue to dominate the UK investment scene, securing 157 deals worth £3.28 billion and 128 deals worth £1.40 billion, respectively. A worrying longer term trend before Covid-19 was the decrease in funding experienced by companies raising for the first time (known as seed stage deals). Beauhurst research shows that initial seed-stage deals declined by 17% from 2,055 deals in 2018 to 1,715 deals in 2019. This was followed by a further 17% year-on-year decline from 2019 to 2020 when there were 1,427 deals. Why is this worrying? Because seed stage deals provide the pipeline of future, later, growth and unicorn bound companies. Any constriction in the number of companies receiving early stage funding inevitably leads to fewer potential unicorns further down the road at a time, post Covid-19, post Brexit, when the UK needs them more than ever. The good news is that Beauhurst has recently reported a bounce back for first time deals as VCs seem to be getting back to being comfortable with adding a little more risk to their portfolio with H1 2021 seeing more first-time raises in any half since H1 2014. The question now is, is this a one-off blip or a sustained alteration in the direction of travel? Only time will tell but it’s vital that seed stage companies have access to funding and this is why SEIS is so devilishly important in supplying equity funding to these companies. Not funding these companies kills them at birth so supporting and increasing the SEIS limits could be one way to breathe life into the sector and is a recommendation we are repeatedly making and will continue to make to government. With a budget due on 27 October, it’s a good time to get behind this important cause.
we expect to see both deal numbers and the amount invested in life sciences continue to climb higher in the near future
mark brownridge
director general eisa
update overview
INTRODUCTION / UPDATE OVERVIEW
e couldn’t do this without the help and support of a number of third parties who have contributed to writing this update. Their contributions range from inputting into the scope, sharing data, giving us their insights on the market, providing copy, and peer reviewing drafts. So, a big thanks to: Andrew Aldridge of Deepbridge, Dominique Butters and Reuben Wilcock of Blackfinch, Jessica Franks of Octopus, Nishil Patel and Anna Slemmings of MMC Ventures, Mark Bower-Easton, David Mott and Richard Roberts of Oxford Capital, Jonathan Prescott of Praetura Ventures and Tom Wilde of Shoosmiths. Their input is invaluable, but needless to say any errors or omissions are down to us. We have relied upon MICAP for most of the data that we have based the update upon. MICAP is part of the same group of companies as Intelligent Partnership. We also carried out our own extensive desk research and interviews to verify their data. The update is made possible by our sponsors, who have contributed copy to the update and supported us by helping to meet production costs. So, a big thanks to Blackfinch, Deepbridge, MMC Ventures, Octopus Investments, Oxford Capital and Praetura Ventures.
Business relief qualifying shares and share sales Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
acknowledgements and thanks
Find out more at MANAGERS IN FOCUS
Readers can claim up to 2 hours’ structured CPD (excluding breaks). By the end of the update readers will be able to: • Identify the main developments and news in the EIS market. • Outline regulatory developments that could be impactful to EIS in the near future. • Benchmark products and providers in the market against one another • Evaluate the key fees and charges applied by EIS managers • Outline the statistical trends in EIS investment and tax relief in recent years • Define some of the key events likely to impact EIS in the near future
learning objectives for cpd accreditation
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INTRODUCTION / KEY FINDINGS
3.35%
drops from 3.61% in February
300%
of approved EIS knowledge-intensive funds
385
in 2019/20. Twice the number of the previous year
24%
£340
to growth businesses by extending SEIS investment limit to £250,000 and changing EIS eligibility criteria to business size instead of age
million annual increase in funding
97%
(in 2019/20)
Rise in HMRC CGT receipts
3%
key findings
by companies using the EIS for the first time in 2019/20
proportion of UK fintech founders
77%
applications approved in 2020/21
have used tax-incentivised investment schemes including EIS and SEIS
proportion of EIS funding raised
proportion of advance assurance
most common target return
Average total initial charge
KICs raising funds
2. Market update
The EIS context VENTURE CAPITAL FUNDING SURGE REGULATORY UPDATE Investing in people: the 3 key things investors look for KNOWLEDGE INTENSIVE FUNDS' NEW APPROACH TO EIS INVESTING TARGETTING HIGH GROWTH AND TAX-efficiency Why Fund Managers Need To Add Value WHAT THE MANAGERS SAY
The EIS Context
MARKET UPDATE / the eis context
In a letter published on 4 August, entitled, ‘Igniting an Investment Big Bang: a challenge letter from the Prime Minister and Chancellor to the UK’s institutional investors,’ Mr Johnson and Mr Sunak urged British institutional investors and asset managers to place a greater focus on long-term positions in unlisted early-stage companies. The aim is to help drive the UK’s Covid-19 recovery by backing “ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.” The letter states that, “over eighty per cent of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only twenty percent of the UK’s assets.” It also refers to “better returns” and enabling investors to see their funds support an innovative, healthier future for their country. This appeal for greater funding in this area is a very strong indicator of the importance of EIS in post Covid-19 Britain. Many of the companies that contribute so greatly to economic growth are the SMEs that benefit from EIS growth capital investment. And the Patient Capital Review in 2017 along with the changes to the EIS rules that followed have ensured that funding is targeted at the firms with the highest growth potential. Given the current focus and crucial role SMEs play in the UK economy, there is certainly an argument to extend EIS in order to push up the available funding.
Government drives growth investment agenda
HMRC CGT RECEIPTS BY TAX YEAR OF DISPOSAL
8
Source: HMRC
Widening of CGT and income tax nets already taking effect
Data released by HMRC in August has confirmed ongoing increases in CGT liabilities. In the 2019/20 tax year, the total CGT liability was £9.9 billion for 265,000 CGT taxpayers. This liability was realised on £65.8 billion of gains. As in the previous year, the total CGT liability and gains increased (3%).
This is before any impact of the frozen annual capital gains allowance of £12,300 which will not change until April 2026 at the earliest. What’s more, the 265,000 CGT taxpayers is less than 1% of the number of people who pay income tax and who could find themselves with much increased income tax bills as a result of the chancellor’s decision to hold the income tax personal allowance and higher rate thresholds at the 2021/22 rates until April 2026 at the earliest. The 2019/20 CGT figures also revealed that over a quarter of CGT (28%) came from CGT disposals that qualified for Entrepreneurs’ Relief (ER). ER was claimed by 46,000 taxpayers on £28.9 billion of gains in the 2019 to 2020 tax year, resulting in a total tax charge of £2.8 billion. This is the highest amount of gains and tax since the introduction of the relief. Now renamed as Business Asset Disposal Relief (BADR), this grants a CGT relief for the disposal of shares, held for at least two years prior to a disposal, by an employee or office holder in the company, reducing the amount of CGT paid to 10%. However, whereas prior to 2020, relief could be claimed on up to £10 million of lifetime gains, from April 2020, this was adjusted to just £1 million. According to HMRC, in 2019/20, around 6000 individuals claimed BADR on gains above £1 million, reducing their CGT liability to 10% on gains totalling over £21.4 billion, or 75% of the total amount on which BADR was claimed.
GAINS ON WHICH BADR WAS CLAIMED (2019/20 TAX YEAR)
As for income tax receipts, they are also rising, with Income tax statistics released by HMRC in June reporting that, “income tax payers’ total income before tax grew from £533 billion in 1999/2000 to £1,120 billion in 2018/19 and is projected to reach £1,200 billion by 2021 to 2022.” There is also an upward trend in the numbers of those projected to be paying additional rate income tax in 2021/22 (up by over 40,000 or 1.4% since 2018/19). For higher rate income tax payers, a marginal decrease in their numbers is expected for the same period. This is “largely due to the 2019 to 2020 cash increase (meaning an above-indexation increase) in the Personal Allowance and basic rate limit, raising the higher rate threshold by £3,650 and resulting in fewer people having enough income to qualify for the higher rate of Income Tax.” But the subsequent freezing of this threshold is again expected to push up the number of higher rate income tax payers,”as a greater proportion of the population again become eligible for higher rate taxation.” This effect is likely to compound across the period of the frozen threshold. This all points to a growing number of cases where the benefits of EIS, either to claim the 30% upfront income tax relief, or the CGT deferral relief through reinvesting gains into EIS-qualifying shares (where the CGT liability is extinguished if the investor is holding the shares on death), could be substanital.
Since there are now very strong drivers for EIS for funding SMEs and for offsetting some of the tax consequences of Covid-19, while EIS investors continue to do their bit for the UK’s economic recovery, it’s not surprising that EIS is now viewed even more favourably by many investment professionals. That said, any investment in early stage companies comes with the potential for high risk and significant loss (although the availability of loss relief means that 100% loss can always be averted). Nevertheless, where appropriate, EIS can be a powerful planning tool that should not be ignored without full consideration. Talking to FT Adviser, Paul Dovey, director of private client sales at Radiant Financial Group, said, “As they are not appropriate for the majority of individuals, the benefits of the enterprise investment scheme and venture capital trust investments are often under-discussed by advisers with the clients that could benefit.” He went on, “last year, for example, these funds saw greater inflows than ever before, despite the backdrop of Covid. Clients may not be aware of these products or their personal suitability for EIS and VCT investments, so financial advisers should be proactively reaching out to discuss these where appropriate.” This sentiment is even more important in the context of the Office of Tax Simplification’s (OTS) recent second CGT review report. One of its findings is that, “many people have limited awareness or understanding of Capital Gains Tax.”
Calls for more proactive advisers where EIS is concerned
In July 2020, Rishi Sunak asked the Office of Tax Simplification (OTS) to carry out a review of capital gains tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. This work resulted in two reports; the first, ‘Capital gains tax: simplifying by design’ was published in November 2020 and the second, ‘Simplifying practical, technical and administrative issues’ in May 2021. It considers practical, technical and administrative issues, based on the present policy design principles of Capital Gains Tax. Two of the 14 recommendations specifically relate to Enterprise Investment Schemes and Seed Enterprise Investment Schemes:
OTS CGT review second report
The UK is responsible for one-third of the top 1,000 start-ups and scale-ups in Europe.
- Dr Reuben Wilcock, Head of Ventures, Blackfinch
Recommendation 10: The government should review the rules for enterprise investment schemes, with a view to ensuring that procedural or administrative issues do not prevent their practical operation. The aim of such a review would be to, “remove a range of anomalies that can currently frustrate the uptake of these schemes and so facilitate more financial support for start-up and early-stage companies.” There is acknowledgement of the benefits of EIS for both investors and investees: The OTS also recognises that some features of the rules relating to eligibility for EIS are overly limiting or cause practical problems for genuine applicants, the impact of which is, “to deter individuals and companies from using the schemes, potentially damaging take up and holding back investment from start-up companies.” As a result, the following improvements are suggested: In general, the OTS encourages flexibility when it comes to, “non-substantive technical issues which risk invalidating claims where the substance of the transaction meets the policy objectives of the relief.” Recommendation 14: HMRC should improve their guidance in eight specifically identified areas, including EIS. Application of any or all of the OTS’ EIS recommendations would be positive for both investors and investee companies and could stimulate more companies to apply for EIS status and for more individuals to invest in them. More positive recommendations for EIS These recommendations follow those made by Ron Kalifa’s government sponsored fintech report of February 2021. This independent review to identify priority areas to support the UK’s fintech sector recommended the expansion of EIS and SEIS. Kalifa found that, “97% of founders have used tax-incentivised investment schemes including EIS, Seed Enterprise Investment Scheme (“SEIS”) and VCT, 47% were concerned about their ability to qualify for such tax relief if their business models switched from being unregulated to regulated in the future.” The suggestion was therefore to, “expand the relief to regulated fintechs” to level the playing field for fintechs relative to other technology companies. Director General of the EISA, Mark Brownridge, commented, “By extending the investment limit for Seed investments from £150,000 to £250,000, and by changing the eligibility of access to the EIS scheme from the ‘age’ of the businesses to the ‘size’ of the business would, we believe, increase the funding available to growth businesses, particularly in the fintech area, by approximately £340 million, and encourage a material increase in the number of employees and skills building in UK fintechs. We stand ready to play our part in helping to deliver the report recommendations.”
Deadlines for issuing shares: Currently, shares in companies that qualify for enterprise investment schemes have to be issued when, or shortly after, any funds are received. If payment for the shares is even one day late, the whole investment is ineligible for tax relief. The OTS finds that, while it is important to ensure a direct link between a company raising funds and issuing new shares, requiring everything to happen on the very same day is commercially unreasonable. As a result, it suggests that a short period of grace between a company receiving funds and issuing the shares is allowed. Rules for EIS and SEIS for reinvestment relief and BADR: With EIS, if BADR was available on the original deferred gain, equivalent relief is still available if or when that deferred gain is brought back into charge. But under SEIS, a revived gain can no longer benefit from BADR, even if it would have originally qualified for that relief. Consequently, the OTS suggests aligning the treatment of revived deferred gains for the EIS and SEIS so that BADR can be claimed on both. Modern commercial practices: The OTS has been told that the requirements of enterprise investment schemes are so strict that many modern commercial practices can cause the schemes to fail. The OTS’ solution is for regular reviews on an on-going basis to ensure the requirements can be reasonably met in practice and do not unduly restrict the company’s commerciality. Application process: The current process for applying to HMRC for approval that the schemes criteria have been met - or for ‘advance assurance’ that the criteria are likely to be met - is cumbersome and can be onerous and expensive, particularly for SEIS applicants. To improve matters, HMRC should improve the functionality of the forms and their guidance in consultation with professional bodies and adviser groups. Link between income tax relief and CGT relief: One specific requirement of the enterprise investment schemes exemptions is that income tax relief must have been claimed and been given on all or part of the original investment. The suggestion is consideration of whether CGT relief should still be accessible by the investor even when Income Tax relief has not been claimed. This would smooth out an odd outcome for tax payers who have made income tax losses – which could be a particular issue in the current COVID-19 economic situation.
As, despite the risks, there is an opportunity for an investor to make a substantial capital gain on a successful investment, the Capital Gains Tax exemption is a key relief for many investors
The OTS understands that the benefits of enterprise investment schemes may be particularly important in the current economic climate, where new startup businesses should be encouraged and also where existing early-stage businesses recovering from the effects of COVID-19 will need new sources of funding.
SME STATISTICS
VENTURE CAPITAL FUNDING SURGE
MARKET UPDATE /VENTURE CAPITAL FUNDING SURGE
For starters, global funding to startups smashed new records, up 157% compared to Q2 2020 to reach $156 billion. Realising gains was also on the rise with the number of global exits (IPOs and M&As) increasing 109% year-on-year. Both statistics demonstrate the massive appetite for new innovation.
As a small cog in the much larger venture capital machine, the status of the venture capital market overall is interesting to consider as part of the backdrop for EIS. Looking at the Q2 2021 State of Venture report from CB Insights, there are certainly some massive positives in this area.
SMEs have received bounce back loans
1m+
9
Impressive Q2 21 figures
As mentioned earlier in section 2 of this update, the UK government is looking to ignite, “an investment big bang” by attracting more inward investment into UK ingenuity and enterprise. The figures for large-scale VC investment show just how far the UK has to go: The world leader is the US which in H1 2021 recorded $138.9 billion in investments. In the same period, Europe stood at $50.8 billion, of which the UK accounted for $14.3 billion, although its Q2 21 figure of $7.6 billion was a new quarterly funding record. In fact, the UK leads foreign investor participation in deals to US companies, with such investments totaling over a third of the overall VC investment into US firms for every quarter in the last 21 months. In EIS, of course, there is a mechanism for ensuring that the investment is made only into companies with a permanent establishment in the UK, to ensure that at least an element of their work is carried out at a fixed place of business in the UK. There is less of a gulf in the number of European exits, with the massive discrepancy in value attributed to the much higher average deal value in US VC.
Globally, sectors that have garnered huge interest of late include digital health, the VC funding for which more than doubled in Q2 2021 year-on-year with $14 billion of global funding. Cyber security received nearly $13 billion in H1 2021, almost 2.5x higher than the same period last year and AI investment hit nearly $31 billion, a new half-year record that outstripped the previous best by well over $10 billion. So, the potential of new technologies has been incredibly popular. UK VC fundraises also saw fintech and healthtech businesses attracting the largest deals in Q2 2021. KPMG reported that, “UK deals completed with biotech scaleups in Q2 21 were up 24% on the previous quarter.” There was also heightened interest in earlier-stage deals, with more businesses beginning to raise Series A and smaller rounds. If EIS is a microcosm of the larger VC universe, we can expect an explosion of demand for investments with high growth potential, which is just as the chancellor and prime minister would like it.
Fintech riding high
Global Venture Capital Exits Q2 2021
Source: CB Insights
This year has seen the UK pass a big milestone in venture capital investing, it is now home to 100 companies valued over £1bn. EIS has played an important role in driving this growth.
- Jessica Franks, Head of Retail Investment Products, Octopus Investments
VC Exits
UK VC fundraises
MARKET UPDATE / REGULATORY UPDATE
- MARCUS STUTTARD
Before the UK left the EU we were severely limited in what we could do to address the serious concerns identified.
- FCA, CP21/23: PRIIPs - Proposed scope rules and amendments to Regulatory Technical Standards, July 2021
10
FCA depreciation notification rule abolition moving forward
10%
REGULATORY UPDATE
Subsidy Control Bill and government consultation response Our last EIS Quarterly Update considered the development of the post-Brexit state aid regime which previously placed limitations on EIS funding with the intention of retaining a level playing field where government assistance to firms is concerned. This has now moved on with the Subsidy Control Bill introduced to parliament at the end of June. Business Secretary Kwasi Kwarteng said the government was using its "newfound freedoms" following Brexit to "empower public authorities across the UK to deliver financial support - without facing burdensome red tape". This will allow quicker and more flexible support to UK businesses that is good value for the British taxpayer while being awarded in a timely and effective way. Subsidies will only be accepted if they adhere to new UK-wide principles of delivering good value for taxpayers while being awarded in a timely manner, but official expectations are that the overall level of state aid will not increase significantly. That is despite the government’s announced intention to use the new system to, “enable key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution.” The new system will follow seven main, UK-wide principles, to be used by public authorities as criteria for evaluating possible subsidies. This includes the six principles set out in the consultation it ran earlier in the year (and listed in the Q1 EIS Quarterly Update), together with an additional principle aimed at "minimising any negative effects on competition or investment within the UK internal market. There will also be safeguards to ensure that devolved government departments and local authorities that will now have the power to approve grants and subsidies do not engage in bidding wars of support that could cause a relocation of businesses and jobs from one part of the UK to another. A new unit to issue advice on operating the new regime will be set up within the existing Competition and Markets Authority - but the CMA will have no powers to prohibit the granting of support. The UK will still, however, be subject to World Trade Organisation rules and any decisions made can be contested in law courts.
Streamlined subsidy approval process The new approval process will require subsidies to be considered by public authorities to undertake an assessment against the main principles to consider the benefits and potential distortive impacts of the subsidy. Authorities can choose to award individual subsidies or to create schemes via this route. Once a scheme has been created, subsidies within it can be awarded without any further assessment of compliance. The government is also creating a streamlined route for subsidies at low risk of distorting competition, trade and investment; that promote the government’s strategic objectives; and which it assesses to be compliant with the principles of the regime. This will be even simpler than the process of assessment against the principles as public authorities will only need to demonstrate that they meet the compliance criteria for the streamlined route. According to the Bill, a “streamlined subsidy scheme” means a subsidy scheme which— (a) is made by a Minister of the Crown, and (b) specifies it is made for the purposes of this Act as a streamlined subsidy Scheme. Streamlined subsidy schemes can only be made by the UK government and must be laid before Parliament after they have been made or modified. While there is currently no precedent for the schemes that will be granted streamlined subsidy status, the House of Commons Library July research briefing on the Subsidy Control Bill suggests that the, “approach of “streamlined subsidy schemes” could create safe harbours, or an equivalent to the approach of block exemptions, which is part of the EU state aid regime.” It continues, “the EU General Block exemption regulation includes simpler rules for regional aid, SMEs, research, development and innovation, training, certain broadband infrastructure, environmental measures, and others.” This suggests that EIS or SEIS schemes that have received advance approval after scrutiny from HMRC may well qualify for the streamlined subsidy approval process. If so, it would appear to be a simple rubber-stamping exercise. Without further information though, this is not certain and neither is the stage of the EIS or SEIS process that this would need to be inserted as an additional step in the current process; before or after commencement of investments? And, since it is not compulsory to apply for advance approval from HMRC, how would the system work if a company applied for subsidy approval from its local authority without advance approval? Tom Wilde, partner at legal firm Shoosmiths, told us, "Given that, as you mention, public authorities can choose to award individual subsidies or to create a scheme that satisfies the conditions, my hope is that the S/EIS scheme as a whole will be given approval with any necessary modifications being made to the scheme to allow this approval to be given. This would avoid the need for the individual approval of each grant of S/EIS relief to the investors of each company which is looking to raise funds, which would seem impractical and unworkable. Therefore it should not make a difference whether a company has received advance assurance or not, albeit that if the scheme is amended to fit within the new subsidy control framework, there may be an increase in advance assurance applications if the changes lead to more uncertainty." Wilde also expressed concerns over issues that might be caused by differences in the definition of what constitutes insolvency between the Bill and current HMRC practice. Companies facing insolvency are not eligible for EIS qualification, however, according to Wilde, "our experience is that HMRC have generally taken a pragmatic view to the existing ‘enterprise in difficulty’ test when looking at advance assurance applications - providing the company has a sensible, realistic plan to grow and develop, HMRC have usually taken the ‘enterprise in difficulty’ test as being met and based on current HMRC guidance I think this is a reasonable position to take." He went on, "However under the proposed Bill there are certain conditions that have to be met to be able to give subsidies to ailing or insolvent enterprises and it doesn’t appear that these can be met by S/EIS investments, e.g. the support has to be in the form of a loan or loan guarantee which are not EIS-eligible." In addition, "there does not appear to be the scope within the legislation for HMRC to apply the more pragmatic approach that they have applied to-date where a company has a credible plan to grow and develop. For example, it appears that one of the limbs of the definition is a very binary question of whether a company is in a net assets or a net liabilities position. It appears that any company in a net liabilities position (which as we know, is a very large number of companies that receive S/EIS funding) would not be eligible." The EU will likely watch the progress of the Bill with the intention of ensuring that British firms don't benefit from an unfair advantage. The new regime will come into effect in 2022 subject to parliamentary approval.
PRIIPs consultation underway Although not specifically mentioned in the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, EIS funds fall under the definition of venture capital investments, which would classify EIS funds as PRIIPs. One of the requirements placed on PRIIPs firms, the provision of a Key Information Document (KID) to potential investors, has been under fire for several years and now that the UK government is free to act unilaterally, it has moved quickly to make improvements.
HM Treasury has already outlined the three initial changes it intends to make to the UK PRIIPs regime and provisions designed to facilitate them and further amendments have already passed into law in the Finance Act 2021. This was followed in late July by the opening of an FCA consultation: CP21/23: PRIIPs - Proposed scope rules and amendments to Regulatory Technical Standards. One of the regulator’s proposals is to remove performance scenarios from KIDs because of the complexity for producing an obligatory, single performance calculation that works well to provide reasonable potential return scenarios for the wide range of products governed by PRIIPs. Instead, as an immediate remedy, PRIIPs manufacturers would be required to provide other types of information on performance. PRIIPs manufacturers would be required to describe, in narrative form:
The factors likely to affect future performance, including those most likely to determine the outcome of the investment and those which could have a material impact on its performance. The most relevant index, benchmark, or target, and how the PRIIP is likely to compare in terms of performance and volatility. An explanation of a favourable, negative, or worst scenario for how the investment performs.
Respondents are asked if they agree with this narrative proposal regarding performance in the KID and whether the FCA should specify the factors that the narrative should cover. In relation to inappropriate risk scores, the FCA proposes the introduction of a requirement for PRIIPs manufacturers to upgrade their product’s Summary Risk Indicator (SRI) score if they consider that the risk rating produced by the methodology is too low, with relevant reporting to the regulator to explain any increase.
FCA 10% depreciation notification rule abolition moving forward COBS 16A.4.3 outlines the requirement for investment portfolio managers to notify clients of any drop in value of their portfolio by 10% or more no later than the end of that business day. However, this rule has been roundly criticised by investment managers and advisers alike for being likely to drive bad outcomes by increasing panic among investors. As a result of volatility caused by Covid-19 and the consequent administrative burden this was placing on investment managers, the rule is currently suspended until the end of 2021, where investment managers have notified retail clients:
At least once of a portfolio value drop of at least 10%, That they may not receive another such notification in the current reporting period, Directed them to where they can view general updates on market conditions, and Reminded them of how to check their portfolio value.
But, a July 2021 memorandum to parliament saw its revocation by the government. Instead, investment managers will be allowed to agree what reporting is appropriate based on their specific circumstances with their professional and wholesale clients. For retail clients, a consultation has been promised.
Clarification on whether FSCS jurisdiction can apply to EIS The EISA’s regulatory committee has secured some important clarity regarding whether or not FSCS jurisdiction can apply to EIS funds given their structure. While the committee stresses that there may be circumstances that create an exception to this rule of thumb, after communications with the FSCS and FCA, it confirmed that it is possible for investors in EIS funds to make compensation claims on FSCS in the event of the failure of the FCA authorised firm managing that fund should the fund manager go into default. This is based on the following key assumptions: EIS Funds are Alternative Investment Funds (AIFs), and are not collective investment schemes, body corporates or a discrete portfolio management service Managers of EIS Funds (AIFMs) are authorised by the FCA, which makes them a relevant person The Managers of EIS Funds undertake the activity of managing an AIF from a location in the UK The location for EIS Funds is the UK, as they would be considered to be “otherwise domiciled” in the UK. The committee finds that, “Investment-related claims on FSCS need to pertain to protected investment business and they are set out in COMP 5.5.1R. The regulated activity of managing an AIF, when performed by an FCA authorised firm, is protected investment business because it is designated investment business.” For more details on the regulatory reasoning and why the structure of an EIS Fund does not mean that the FSCS does not apply, contact the EISA, but also remember that EISA, FSCS and FCA comments cannot be relied upon as legal advice and advisers and investors should seek their own advice.
The subsidy control regime - a flexible, principles-based approach for the UK
Source: Department for Business, Energy and Industrial Strategy, June 2021
Progress via the appropriate route
Public authority wants to grant a subsidy/scheme
KIF investment timeline
Does it meet the definition of a subsidy?
Is the subsidy/scheme in scope of the NI Protocol or the Multiannual Financial Framework?
Is it exempted under the subsidy control regime?
Is the subsidy/scheme prohibited ubder the subsidy control regime?
If it is subject to additional conditions, can these conditions be met?
Does the subsidy/scheme meet the criteria for a streamlined route?
Does the subsidy/scheme meet the criteria for a Subsidy of interest or a Subsidy of Particular interest
N
Talk to BEIS’s Subsidy Control Team: subsidycontrol@beis.gov.uk
Y
Do not award
Undertake an assessment of compliance against the principles. Subsidies of interest: public authorities can seek advice from the Subsidy Advice Unit (SAU) on how to improve the subsidy’s design. Subsidies of Particular interest: public authorities must seek advice from the (SAU) on how to improve the subsidy’s design. The SAU may produce a report on the subsidy. If so, there will b e a short “cooling off” period to allow for implementation of the SAU’s advice.
Undertake an assessment of compliance against the principles
BEIS’s Secretary of State can also ‘call in’ concerning subsidies, which are treated in the same way as Subsidies of Particular interest.
Award Subsidy
Upload required information to the transparency database
Consideration of the SAU advice
thought leadership
Investing in people: the three key things investors look for before deploying capital
MARKET UPDATE / THOUGHT LEADERSHIP
the key attributes that commonly set great entrepreneurs apart include resilience, drive, teamwork and an understanding of their own limitations.
www.deepbridgecapital.com 01244 746000 enquiries@deepbridgecapital.com
contact
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Andrew Aldridge
Partner and Head of Marketing Deepbridge
echnological advances and the fintech revolution are advancing the world of financial services and opening opportunities to investors like never before. However, investing at any level still requires a human judgement and is reliant on human behaviour. Large corporations being traded on the world’s stock markets are still run by human beings and their actions and experience can directly influence the Company’s performance and thereby investment portfolios internationally. At a very direct level, we should all remember the ‘human behaviour’ of Gerald Ratner and the effect that had on his company. More recently we have all witnessed Elon Musk’s social media chatter influence investor behaviour. On a more local and lower level, this importance of human behaviour is critically important for early-stage companies. The personality, experience and endeavour of entrepreneurs is one of the key attributes that venture capital investment managers look at when considering which of the highly innovative companies they see should be fortunate to receive their capital. At Deepbridge, we see thousands of Enterprise Investment Scheme qualifying investment opportunities each year. We screen companies based on stringent criteria, including the protectability of the Company’s intellectual property, the global market they are targeting, their revenues to date, and much more. However, it is the people behind the product or service which are ultimately the reason behind why we invest and for this there is no one-size-fits-all. In some instances, it may be the founders’ experience and track record of starting and exiting companies which is the ‘X factor,’ whereas in other scenarios, it may be the academic and sector knowledge the founders bring. However, the key attributes that commonly set great entrepreneurs apart include resilience, drive, teamwork and an understanding of their own limitations. Resilience is key Anybody who has ever run their own business will understand that things never go as planned. An entrepreneur may have the most articulate business plan, but there will be crosswinds and headwinds which delay and distract the business from this perceived trajectory. Having the resilience to continue to steer the business through these challenges and ensuring that the core objectives are met is how successful business leaders earn their stripes. It is also important that founders have the drive to grow a business and aim for an exit opportunity in line with investors’ goals. When raising venture capital, it is important the entrepreneurs realise that their goals need to be aligned and the business cannot drift. Your team is everything A key challenge for any Company that is seeking to grow is finding the right hires. A founder who shows the ability to work in and lead a team, is therefore critically important or you’ll find your capital being used up on hiring and firing and not progressing with long-term committed professionals. Know your strengths and weaknesses The final key point is that founders need to have the humility and self-awareness to understand their own weaknesses and where help is required. For example, academics may know the science and purpose of their life-changing discovery, but they may not have the commercial experience to build a business or the sales aptitude to take the product to market. Only by understanding their gaps can the founders then bring in the required team-members to expedite the growth of the Company. Understanding one’s own weaknesses is very much a strength. Conclusion At Deepbridge, we are extremely fortunate to work with great investee companies, with great management teams but it is far from luck. A fundamental part of what we do is identifying the right companies in which to invest and working with the great founders to ensure their Company has the right skills and structure to drive the business forward. So, whilst the world we live in is becoming increasingly tech focused, which is of course of particular importance to us as an EIS investor in tech innovations, there remains a need for empathy and the understanding of human behaviour and skills. You might be investing in a Technology Growth EIS or a Life Sciences EIS, but part of what you are investing in is human capital.
Jonathan Prescott
business development director Praetura Ventures
… the shares are deemed to have been issued on the date on which the fund closes, meaning easier tax planning for individuals.
mmc.vc 0207 938 2220 fundenquiries@mmc.vc
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Tim shaw
Partner, Blick Rothenberg
Easier tax planning and administration - Knowledge Intensive funds offer a new approach to EIS investing
Nishil Patel
Head of Business Development, MMC Ventures
lick Rothenberg, in partnership with MMC Ventures, reveal what exactly Knowledge Intensive Funds are and the potential tax benefits they can offer. The Enterprise Investment Scheme (EIS) relief has been with us now for over 25 years. In that time, it has become a well-trodden path for many companies to raise funding, and for investors to put their capital to use in a tax-efficient way; in the process unlocking potentially large investment gains too. What are Knowledge Intensive Funds? But while EIS and the associated tax reliefs are generally well-known, Knowledge Intensive (KI) funds are less so. KI funds first emerged as a concept in November 2016. It was prompted by the Patient Capital Review and part of measures to encourage more investment in growing, innovative companies, ‘unlocking £20bn of investment over the next ten years’ and to strengthen the UK’s position as the best place to start and scale a business in Europe. A consultation followed and, fast forward 3.5 years, and the ‘approved KI fund’ legislation was introduced with effect from 6 April 2020. An approved KI fund is an investment fund established, in HM Revenue & Custom’s (HMRC) opinion, for the purpose of investing in companies that are KI qualifying at the time the shares are issued. Certain conditions must be met for the investment made in the KI fund to qualify for EIS relief under this legislation, and include: There are several advantages for a company to qualify as knowledge intensive. A KI qualifying company can raise total EIS finance of £20 million over its lifetime and up to £10 million of EIS investment per year (vs £12 million and £5 million for a non-KI EIS qualifying company). The approved fund structure has several advantages for investors as well. Notably, the shares are deemed to have been issued on the date on which the fund closes, meaning easier tax planning for individuals. Secondly, the approved funds do not issue EIS3 certificates for each underlying investment, as many of their EIS fund peers do. Rather, the fund manager can apply for a single EIS5 certificate once 90% of the approved fund is invested, meaning a significant reduction in administrative burden for investors. And lastly. HMRC has increased the annual tax year investment limit to £2 million (vs £1 million for non-KI EIS) on which investors can claim income tax relief. Would you like to know more? If you have any questions about the above or how it may affect you, please contact the team at Blick Rothenberg. Or if you would like more information on investing in the MMC Knowledge Intensive EIS Fund, contact the MMC team.
the fund must have closed (so that no further investments will be accepted) 50% of the amount which the managers have subscribed for shares (as nominee of an individual) must be invested within 12 months of the closing of the fund 90% of the amounts which the managers have subscribed for shares (as nominee) must be invested within 24 months of the closing of the fund within that period at least 80% of the individual’s investment must be in shares in KI companies
blickrothenberg.com 020 7544 8983 tim.shaw@blickrothenberg.com
How clients can target high growth and become more tax-efficient
Those with an appropriate risk appetite and certain tax planning needs might want to consider the Enterprise Investment Scheme (EIS) as another way to invest tax-efficiently.
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Jessica Franks
Head of Retail Investment Products, Octopus Investments
H
igher net worth clients often exhaust their allowances when it comes to pension and ISA planning. Those with an appropriate risk appetite and certain tax planning needs might want to consider the Enterprise Investment Scheme (EIS) as another way to invest tax-efficiently. The background to EIS To compensate investors for some of the risk of investing in early-stage businesses, EIS-qualifying investments allow you to claim several tax reliefs. Investors can claim income tax relief equal to 30% of the value of their investment, provided they hold the shares for at least three years. Any growth in the value of EIS-qualifying shares is tax-free. Losses made on an EIS company can be offset against either their capital gains tax bill or their income tax bill, depending on which better suits their needs. And if an investor decides to reinvest the capital gain on the sale of another asset into an EIS-qualifying company, they can defer the gain until the EIS shares are sold. Long-term investments that diversify a portfolio For a company to qualify for EIS funding, it must be in the early stages of its growth journey and not listed on a main stock exchange. Buying the shares of these kinds of companies can bring significant growth potential and, bear in mind, significant risk to target that growth. In addition to growth potential, smaller companies can follow different investment cycles from other areas of the investment market. So EIS investments can help diversify an investor’s portfolio by providing exposure to companies that have the potential to be less correlated to wider markets. A key to a door that’s normally locked Investing in an EIS portfolio through a discretionary service run by a specialist fund manager brings access to a pipeline of investment opportunities you might be unable to find anywhere else. It also brings effective support to grow portfolio companies, and a team experienced in managing successful exits. The team that manages the Octopus Ventures EIS Service, for example, has spent more than a decade growing their standing in the venture capital space. Their scale and reputation, which encourages many entrepreneurs to directly approach the team, mean Octopus Ventures can have exceptional deal flow. That deal flow allows the team to be highly selective, choosing a few EIS opportunities from the thousands of companies seeking investment every year. And it means they see companies that many others won’t. High growth potential means high risk Investing in EIS companies is high risk. An investment could fall in value, potentially to nil, and investors may not get back the full amount invested. Shares in unquoted companies cannot easily be sold, as it may take time to find a buyer. When investing in an EIS portfolio, an exit is only possible when each individual company is sold. So a client’s investment should be considered illiquid and therefore a long-term investment. The shares of unquoted companies can also fall or rise in value much more sharply than shares in larger, more established companies. A number of EIS tax reliefs depend on companies maintaining their EIS-qualifying status for at least three years. It is possible that a company might cease to be EIS-qualifying and EIS reliefs previously granted would need to be paid back. HMRC could also change existing tax rules, and tax treatment depends on personal circumstances. Where to learn more To find out more about EIS, visit: https://octopusinvestments.com/our-products/enterprise-investment-scheme/ To learn about the Ventures EIS service offered by Octopus, sign up to our next webinar.
The Octopus Ventures EIS Service is not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: February 2021. CAM010767-2102.
octopusinvestments.com 0800 316 2067 support@octopusinvestments.com
More Than Money: Why Fund Managers Need To Add Value
The greatest thing we can do as fund managers is to create trust through open and transparent communication.
www.praeturaventures.com 0161 641 9475 ventures@praetura.co.uk
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Director Praetura Ventures
nterprise Investment Schemes (EIS) are moving into the mainstream. Post-pandemic scale-up success stories continue to hit the media as the economy shifts away from a survive to a thrive mentality. In specific sectors such as tech and life sciences, we consistently see an abundance of early-stage companies hit multi-million-pound valuations in a short space of time. Advisers and investors now understand how EIS schemes can be used as a tool for portfolio diversification. Likewise, it’s well known that EIS schemes can help both parties to access a unique asset class that often boasts substantial returns and benefits from associated tax relief. Despite the potential rewards, nearly all advisers are aware of the risks associated with venture capital. Which begs one question – as the market attracts more attention and becomes more sophisticated, how can advisers choose the best investments for their clients? In recent years, venture capital companies who can add value to their portfolio are rising to the top. By their nature, early-stage companies take shape over time and require input from many angles as they evolve. Even the most experienced founders will face unexpected commercial challenges. Whilst companies need to be self-sufficient, the support offered by active investors is becoming increasingly important to businesses having the best chance of success in an increasingly competitive landscape. Value can come in many forms. For example, Praetura Ventures appointed four industry heavyweights to help develop founders’ people, strategy and execution capabilities. These paid individuals act as one-to-one mentors, support founders through their networks and take active board roles. From winning new public sector contracts to dealing with unexpected media attention, our operational partners help founders grow their business but also mitigate potential business risks through their experience. In turn, this also mitigates potential risks for investors. Knowledge from those who’ve held pivotal positions at companies like Apple, The Co-operative Bank and the NHS help the Praetura founders with an established network and learnings from operating a brand at scale. Whilst leaders in SME scale-ups, such as Social Chain and OSTC, give insight into the hurdles and hacks in growing a business from a few too many. Beyond mentorship and consultancy, investors can add value by providing businesses with the tools they need to succeed. At Praetura Ventures, we’ve created a portfolio toolkit to support with day-to-day operational needs. The scheme includes training and discounts on business essentials to help save our portfolio time and money. An investor’s willingness to support also cannot be overlooked. From assistance in recruitment to procuring the right agencies, these examples of smaller day-to-day support can help bolster portfolio businesses. Due to their stage in the business lifecycle, early-stage founders search for equity funding for more than just money in the bank. Many founders of exceptional businesses want an investor who understands how to scale a business, build a team, mitigate risk and grow real value. Reviewing platforms and online start-up communities, such as Landscape, have already started answering questions for founders looking for critiques of different venture capital support. In turn, those providing the most value for founders are likely to source and secure better opportunities first. This value needs to be reciprocated back to the investors and advisers. Fund managers have a duty to be transparent and honest about their dealings with their portfolio companies. Updates on performance need to be regular and detailed to show changes in value. By doing so, the investment ecosystem will become more comfortable with the asset class and better understand its suitability for each individual investor’s goals. This continuous education is essential to further establish the EIS market. From the wider perspective, EIS is just one vehicle to give investors access to venture capital – an asset class that’s been generally underserved by the retail market. On the whole, accessing venture capital is still a major barrier for retail investors. However, large tech players will be looking to find a solution to this challenge. In the interim, fund managers should be providing advisers and investors with richer content and more tech-enabled solutions to cumulatively make this space more accessible. In conclusion, whilst tax incentives are critical, how an EIS fund manager cares for its portfolio businesses is an essential part of the puzzle. Beyond the potential returns and tax relief, EIS funding is evolving to become an open platform for advisers, investors and founders to make their own decisions.
MARKET UPDATE / WHAT THE MANAGERS SAY
So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to say.
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2021 has seen strong economic growth as we head closer and closer to post-Covid-19 reality. How has that impacted your EIS fund?
The pandemic accelerated digital transformation and technology adoption across all levels of society. What began as an urgent exercise in cashflow planning quickly evolved into the exploration of new opportunities, and a strong recovery from October onwards. One such example was portfolio company StaffCircle, whose HR Platform targets a remote workforce and is thriving as a result.
Dr Reuben Wilcock
Head of Ventures Blackfinch
what the managers say
The FCA has been busy with a number of consultations and policy papers setting out its thoughts and new rules in areas such as ESG, investment firms prudential regime and proposals on high risk investments and retail investors’ access to them. What negatives and positives do you see for EIS in the recent flurry of activity from the regulator?
With a strong ESG mandate across the whole Blackfinch Group, we expect to see increased demand resulting from any policy changes in this area. We continue to believe that the most effective way for investors to manage risk in high-growth EIS investments is to participate via an experienced fund manager that can deploy into a highly diversified portfolio.
Has the volatility we’ve seen over recent months settled to pre-Covid-19 levels for your investees?
Over recent months, we’ve seen a reduction in volatility due to the gradual easing of government restrictions. Indeed, since October, many of our portfolio companies have returned to predictable growth. We expect to see further stabilisation in the portfolio as 2021 progresses, with significant opportunities available for companies that have responded well to how the post-pandemic world has changed.
Reuben Wilcock
What do you think of the Brexit trade deal from an EIS perspective?
In general, the UK-EU trade deal brought with it some desperately needed clarity for UK businesses. In practice, we have not seen Brexit create a big impact in terms of the ambition of early-stage technology companies. Their ability to react quickly in the marketplace has placed them at an advantage over larger firms in this respect.
How did your portfolio perform in 2020?
Our portfolio companies responded extremely well to the events of 2020. Faced with a crisis of unknown scale and duration, they continued to innovate, whether with creative cost reductions, flexibility in meeting customers’ changed needs, or even whole new products. It was a true test of entrepreneurial mettle, and it demonstrated that those start-ups with the ability to disrupt old practices and meet changing circumstances are best-positioned for long-term success.
How has Covid affected your deal flow pipeline?
The Blackfinch Ventures EIS portfolio invests in high-growth technology companies throughout the UK, many of which are well suited to changing working practices imposed by the pandemic. We’re focused on disruptive businesses, offering products that address real-world needs. We’ve continued to see a steady flow of companies that meet this criteria, and are seeking the type of investment and business development support that we offer. As a crisis often prompts new ideas and start-ups, we are also confident there will be no ‘Covid hangover’ in deal flow.
At times last year it was perceived that we were a long way from any trade deal, so having a trade deal should be seen as a positive. From an EIS perspective, we are still to see how state aid rules will be applied and impact EIS and SEIS over the longer term. The Government has previously suggested that they would be keen to increase the SEIS fundraising limit, so as a starting point it will be interesting to see whether that can be done in line with the new trade deal.
Ultimately, our investment criteria mean that our technology and life sciences companies are expected to be highly innovative and therefore we believe there should remain a genuine need for their research, development and/or products. Naturally, there has been an impact on investees and a minority of our portfolio have struggled to commercialise as planned. However, Deepbridge’s investment style of providing hands-on support to investee companies will stand us in good stead and has never been more important.
The UK is an innovative nation and that has not stopped during the global pandemic and our dealflow of quality investee opportunities remains strong. It is common for recessionary periods to see an increase in the number of start-ups, with agile growth-focused companies to be the life blood of economic recovery. With that in mind, we expect the deal flow pipeline to only gain in strength going forward.
Partner Deepbridge
EIS Companies have continued to prosper post-Brexit, and we do not anticipate this changing. The UK remains a hub of innovation where growth companies thrive, and initiatives such as the tech visa send a powerful message that the UK Government intends to continue to support our world class growth companies.
On an aggregate level, our portfolio is in good shape which is pleasing considering the disruption last year. A key feature of the Guinness EIS is sector diversification which we believed helped the portfolio navigate the uncertainty 2020. Several of our portfolio companies performed exceptionally well. The performance of online retailers has been particularly strong.
We continue to see a lot of exciting opportunities at realistic valuations and because of our generalist approach we believe we are ideally placed to capitalise on them. We also have a large portfolio of growth companies which provide us with some compelling follow-on investment opportunities.
Shane Gallwey
Fund Manager Guinness Asset Management
The majority of our portfolio have seen little impact and for those that it has had an effect on, they have been quick to adapt. Whilst there may be a short term impact we do believe that in the long term this will not provide any major challenges. Change may cause uncertainty but also provides significant opportunity.
Our portfolio performed well, despite some companies falling within the hospitality and travel sectors. The nature of early stage investing lends to inherently robust agile companies with the ability to pivot into adjacent markets or reduce overheads to ride out the pandemic. Any losses were largely due to other factors that may have been accelerated by the pandemic.
Our EIS fund invests in our existing portfolio of companies giving us a firm understanding of those companies that have already weathered the worst of the storm, we can therefore ascertain those that have proven their market and strategy. In terms of deal flow Covid has not had a significant effect.
Jeffrey Faustin
Partner & Chief Investment Officer Jenson Funding Partners
Early-stage companies are in a good position to capitalise from potential opportunities from Brexit but also young and nimble enough to adapt to the changing environment. We invest in companies that are already maximising on opportunities from the UK market and are well capitalised to overcome any challenges it may present.
While 2020 was undoubtably a challenging year, our portfolio held up very well. Founders showed remarkable resilience and agility, with a number of them well placed to capitalise on opportunities arising from the pandemic. In addition, we facilitated two deep tech exits within the first 6 months of the year. The acquisitions of Ultrasoc by Siemens and Latent Logic by Waymo.
Our deal flow pipeline continues to be strong, in addition to making a number of follow-on investments in 2020 we also made new investments, the latest into Bower Collective. Bower is a company that offers a range of home and personal care products, focused around sustainability and closed loop recycling, and is on a mission to eliminate plastic waste.
Richard Roberts
Director, Investor Relations Oxford Capital
Everyone has been mindful of the Brexit trade deal and its potential impact on the way we do business, but in reality the majority of our investments are focused solely on the UK market so there has been little impact so far. That said, the benefit of investing in early-stage businesses is that they’re often nimbler and adept at reacting to and managing change more quickly than larger corporates, so for many they still prove an attractive investment proposition regardless of the trade deal that has been negotiated.
We’re really proud of the performance of our portfolio in 2020 - we buckled down early to provide the hands-on support and guidance our portfolio needed, making sure we were monitoring cash runways on a monthly basis, helping founders apply for grants and supporting key strategic decisions. This ultimately resulted in our portfolio coming out of 2020 even stronger – revenues increased by 42% across the whole portfolio and more than half of the portfolio increased revenues by more than 80% during 2020
Somewhat surprisingly, the pandemic has had a positive impact on deal flow and we’ve gone from seeing around 100 businesses a month to more than 125, and these are spread across a variety of sectors. We’re also seeing deal flow from a number of different sources, including direct, through our network of venture partner investors and through our connections with the corporate finance community. I’d also say there’s a strong level of enquiries from businesses founded in the north – possibly a sign that the predicted boom in tech in north of England is coming to fruition.
Brexit is largely irrelevant to EIS technology investments but with two exceptions. The first is that the UK needs a supply of highly skilled immigrants to maintain its digital technology lead in Europe; let’s see if the government lives up to their stated obligations. The second change is to the impact of changing State Aid provisions, particularly with SEIS investment limits.
Very strong performance. A £100 investment in our EIS fund in April 2020 is now worth £125. The Covid pandemic has brought the ‘Future is Now’ trade for our portfolio, by accelerating long term digitisation trends for enterprises. Most of our companies initially had a tough time as enterprises suspended budgets for a few months, but this quickly reversed as the lockdown rapidly accelerated existing trends towards digitisation.
Our pipeline has been less impacted than our due diligence process. Getting to know management is arguably the key component of our DD, and we are always rigorous in this regard. The difficulty in meeting face-to-face with founders over the pandemic has changed the dynamic of this aspect considerably, despite having adapted to video calls.
Kealan Doyle
CEO & Co-founder Symvan Capital
‘Post-Covid’ may be somewhat premature with ‘post-lockdown’ possibly more accurate. Economies reopening and the need for economic recovery is great for EIS in general as supporting early-stage technology and life sciences innovations, where Deepbridge specialises, are at the forefront of Government economic policy. Closer to home, we are seeing our portfolio companies accelerate their commercialisation and significant growth opportunities across both EIS portfolios.
As the EIS sector continues to grow, it is important and right that the regulator keeps up with progress - so long as that does not stifle the purpose of the Scheme, which is to encourage private investors to support early-stage growth businesses. The ESG review is particularly welcome as there has been considerable ‘green-washing,’ not just in the EIS sector, and it is important that ESG is more than just a badge on a brochure.
For some investee companies the pandemic offered significant opportunities, for a majority their plans were delayed and for a small minority the challenges were insurmountable, but that is the nature of early-stage investing and why EIS funds seek to have a diversified portfolio of companies. For the vast majority of investees, being able to get back in to their laboratories or to be able to travel and meet customers again has been the key ‘settling’ which has enabled them to continue on their growth trajectory once more.
Andrew Aldridge,
The EIS framework has existed for 26 years, over which time it has been incredibly successful at directing money from suitable private investors into UK smaller companies. We very clearly badge our EIS portfolios as high risk and set expectations around the investment timeframe and potential outcomes. The vast majority of our investors receive financial advice or are experienced investors, this ensures they are aware of the risks and confident that EIS investment is suitable for them.
While shares in EIS-qualifying companies could fall or rise in value more sharply than main-market listed shares, they are typically less correlated to market sentiment. Because Octopus Ventures EIS invests in unquoted companies, these companies are less likely to be affected by market sentiment because their shares aren’t traded on a main stock exchange.
Jessica franks,
During the pandemic we saw a huge shift to technology adoption, with five or ten years of progress occurring in months. This resulted in huge growth for our investee companies and an extremely buoyant fundraising landscape, as sophisticated investors sought access aware that in the UK, most of the action in the technology sector is happening away from the public markets.
ESG is an increasingly crucial topic for the regulator to get a handle on and issue guidance for. It is too easy for investors to be misled or subject to ‘greenwashing’. It’s something we take very seriously at MMC, which is one of the reasons we became a B Corp in 2020.
The uncertainty of the early pandemic hit the industry quite hard but, after that initial period, we have never seen a stronger fundraising climate. In the first half of 2021, many of our investee companies raised large funding rounds from European and US investors including Softbank, Tiger and Insight Partners, adding more than £90 million in value to the MMC portfolio.
Anna Slemmings
Partner, MMC Ventures
While the pandemic impacted a huge number of sectors, we have found that many early-stage companies were in a position to benefit from the pace of change brought on by COVID. Our fund has continued to perform strongly with an IRR of 24% over the last 5 years. In addition, we have delivered two deep tech exits in the last 18 months. Past performance is not a reliable indicator of future results.
We read the FCA’s DP 21/1 discussion paper with great interest. Improving risk warnings and clarification on EIS eligibility for the FSCS are huge positives for investors. However, other areas, such as evidenced verification of self-certification, and an additional layer of “positive friction” at the point of sale could present an unnecessarily high number of barriers to potential investors, which may reduce the amount of money going into the sector and underlying companies. We have taken up the FCAs offer to respond and look forward to the next phase of discussions.
While there has been volatility over the past year, a number of our companies have benefited from opportunities that have arisen from the pandemic and have flourished. For example, Moneybox, the savings and investing app grew customer numbers by 52% over the last year, and AUM has now surpassed £2bn. Significantly it has driven millennials to kick start their saving habits, the average age of its 600k customers is 32.
Many clients have experienced increased propensity to invest during the pandemic, while disruption has created opportunities and new markets for early-stage companies to address. Naturally, there’s been a huge amount of interest from investors in smaller company investing. Investors are recognising that, in an uncertain climate, smaller companies can be well placed to provide solutions to new problems or make the most of new opportunities. Investing in smaller companies carries a higher risk profile, but they can be flexible and adapt quickly to shocks, such as a global pandemic and they can be resilient in challenging times.
Praetura has seen a real rise in early-stage businesses seeking funding, many with refreshed global ambitions. Covid-19 acted as a catalyst for several growing trends in tech, and the market has responded well to recovery. The pandemic taught us to live in isolation and work remotely. In turn, this gave rise to many tech solutions that helped facilitate our lives. These platforms will continue to play a critical role in our ‘new normal’, presenting natural opportunities for investment in high growth, early-stage companies.
The FCA’s role is crucial to our industry. Their involvement ensures that financial professionals are equipped with the tools and information they need to make the right investment decisions. It’s the fund manager's responsibility to be as transparent and honest as possible but also to ensure they are suitable to an adviser’s strategic goals. The EIS is one of the longest running tax incentive investment schemes in the UK. Regulation will ensure fair and sustainable market conditions for advisers, investors and fund managers.
Praetura focuses mostly on business-to-business recurring revenue models. Due to this mandate and the types of businesses we back, our portfolio businesses haven’t faced an adverse amount of volatility compared to others.
Director, Praetura Ventures
3. Considerations for Investment
market composition FEES AND CHARGES APPROVED EIS KNOWLEDGE INTENSIVE FUNDS FIELD FOR EIS INVESTMENTS WIDENS market snapshot
15
market composition
CONSIDERATIONS FOR INVESTMENT / MARKET COMPOSITION
Number of open offers drops
For this section, we rely on MICAP data to help give you a snapshot of the size of the market, as well as the fees and charges you can expect to see from EIS offers. All data is accurate as of 12 September.
average minimum investment
feb 2020
£18,182
£18,917
£19,627
While Q2 is traditionally the quietest time for new launches, to date this calendar year, the number of new launches remains low in comparison to any other year since 2013, apart from 2020 when Covid-19 was at its height. Just nine new EIS funds have launched in 2021, of which five had already closed by our September review. It is likely, however, that these funds will reopen nearer to the end of the tax year.
nov 2020
feb 2021
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How do we use MICAP?
Target returns
Along with a contraction in the number of open offers comes a drop in average target returns with a 10% drop on the average seven months ago. Nevertheless, this is still significantly higher than the figure of two years ago and continues to suggest managers’ confidence in sound growth opportunities, perhaps tempered by a more competitive environment. Another consideration is risk and although somewhat counterintuitive in the high-risk investment arena of EIS, could the powerful drivers for some early stage companies actually be slightly lowering the risk premium? Interestingly, there has been an outlier for some time which quotes a 1000% target return, dragging up the average from the most often quoted target return of 200%.
The number of open EIS offers has dropped since our last analysis of the data in February 2021 when there were 67 open offers. Current figures show 58 open offers. This is surprising given the strong economic drivers and particularly in view of the clamour for early-stage technology companies that are highly prized within EIS. In Q1 2020, before the pandemic hit, there were 66 open EIS offers. Having said that, it is possible that some EIS managers have closed their funds to take stock of current conditions, in which Covid-19 is certainly not yet behind us and where prices for their usual targets may have been pushed up by current demand. That said, in our last update, we did predict a slow increase in EIS offers as the landscape to Covid-19 recovery becomes clearer.
AVERAGE TARGER RETURN
227% 232% 244% 273% 263%
SEPT 2019 FEB 2020 OCT 2020 FEB 2021 SEPT 2021
16
Founded in 2013, MICAP provides quality independent due diligence, research tools and panel support services on the tax-advantaged investment market. It is a sister company of Intelligent Partnership, and a part of the Indagate Group of companies. The data analysed here is using a snapshot from a particular date. We have live information directly from MICAP on our MICAP Snapshot page.
Underlying investment sectors
In September 2019 42% of open EIS offers focused on general enterprise, 41% on technology, 9% on media and entertainment, 5% on pharmaceuticals and biotech, and 3% on industry and infrastructure. To some extent, it may be surprising that there has not been a greater increase in the proportion of general enterprise and technology-focused offers as the former provides a wide scope to take advantage of any emerging sectors and the latter takes in the hottest sector of the moment. However, that simply suggests that EIS managers, who are paid to have an eye on the future success stories, were largely already in the sectors they needed to be in. On the other hand, there may be an expectation that pharmaceuticals and biotech would have grown substantially as a proportion of EIS offers. However, the reality might reflect the unpredictable and sometimes lengthy timelines and ongoing financing requirements that this area can require outside the high speed imperatives of Covid-19 vaccinations.
44.0%
Technology
UNDERLYING INVESTMENT SECTORS
47.0%
General enterprise
5.0%
media & entertainemnt
4.0%
PHARMACEUTICALS AND BIOTECH
FEES & CHARGES
CONSIDERATIONS FOR INVESTMENT / FEES & CHARGES
he average total initial charge of 3.35% is a drop from the February figure of 3.61%. The reduction is attributable to the initial charges levied on investors which have dropped, whereas investee companies are actually now paying more on average. That said, the 2.12% average is fairly significantly lower than the 2.6% charged to investee companies in September 2019. Although, not all managers fully disclose, or have a cap on initial fees charged to investee companies. For example, some charge additional directors fees if they hold a board seat.
deep dive into fees and charges
NOV 2020
FEB 2021
AVERAGE MINIMUM INVESTMENT
Annual Management Charges
There is only a marginal difference in the average AMCs now being charged versus those applied in February with the current total figure at 1.78%. This is close to the 1.7% applicable in September 2019, although since that time, there has been a reduction in the 1.2% that was charged to investee companies, with some rebalancing of the overall AMC so that investor fees have increased by around the same amount. Consequently, when taking both initial charges and AMCs together, investee companies are paying more as a one off, upfront cost and investors are paying more on an ongoing basis. This may be designed to allow investors to claim tax relief on more of their original capital and to make investing more attractive right now when there is still some uncertainty. A larger proportion of the ongoing costs being attributed to investors rather than investees may be intended to take a little bit of pressure off investee returns in the longer run, particularly with increases to corporation tax on their way in two years time.
average CHARGES
TO INVESTOR TO INVESTEE TOTAL
17
AMC
1.47% 2.18% 3.61%
0.95% 0.87% 1.81%
The average entry level to EIS offers has again shifted - this time downwards to £19,138 although this is still around £1,000 higher than it was in February 2020. The most common remains £10,000 (a £100,000 outlier skews the average) which is a relatively low access point for high risk investments and likely within reach of many retail investors. This is a reminder of why such investors, for whom £10,000 might make up all or the majority of their savings, should be fully aware of the potential hazards of EIS investing.
Minimum Subscription
FEB 2020
£19,138
SEP 2021
1.23% 2.12% 3.35%
INITIAL CHARGE
0.96% 0.84% 1.78%
Initial Charges
APPROVED EIS KNOWLEDGE-INTENSIVE FUNDS
CONSIDERATIONS FOR INVESTMENT / EIS KNOWLEDGE-INTENSIVE FUNDS
18
There are now five KIFs, four of which were launched in 2021, the most recent launch being in July. This is already more than half of the number of approved EIS funds (the predecessor to KIFs) launched in the five years prior to the introduction of KIFs (eight). This demonstrates the appetite for this new EIS structure. Currently, only three of the five KIFs are open. But, the two KIFs that are currently closed have already had two closings and, while most other EIS offers are evergreen, there is a higher likelihood of KIFs opening and closing more akin to Venture Capital Trusts. This is because KIFs are expected to meet specific timelines for deployment of capital. Like VCTs, more KIFs are therefore likely to reopen closer to the end of the tax year. In addition, the number of investment opportunities is arguably more restricted simply because of the nature of the qualification criteria for KICs. This includes the high percentage of operating costs that must be given over to R&D, the innovation condition which demands significant development of intellectual property within ten years or the skilled employee condition which requires at least 20% of employees to have a relevant masters or higher degree. With a record number of job vacancies and the Recruitment and Employment Confederation releasing statistics showing that between August 23 and 29 the deficit for programmers and software development professionals was approaching 70,000, demand for IT staff was outstripped only by requests for nursing staff and heavy goods vehicle drivers, meeting some of the criteria may not be straightforward. Target returns The average target returns across all five KIFs is 264%. But the most common target returns are 250% and 300%. This means that, in general, target returns for KIFs are 25% to 50% higher than offers in the overall EIS market. This obviously suggests greater opportunity, but also greater risk. Underlying investment sectors Two of the three currently open KIFs focus on technology with the third concentrating on pharmaceuticals and biotech. When it comes to the five KIFs launched to date, three are technology focused and two target pharmaceuticals and biotech investments. The question is whether KIFs could become a more natural home for pharmaceuticals and biotech in EIS than conventional EIS offers? There may be greater comfort levels of specialist investment managers in this area in KIFs as a mechanism for access to the kind of ongoing funding that companies in this sector can necessitate.
Appetite exists despite some challenges
hese funds, launched by the government in April 2020, offer investors some additional benefits, in return for investing in a fund which invests in knowledge Intensive Companies (KICs). In section 4, Industry analysis, we discuss HMRC’s statistics in relation to KICs raising EIS investment. But that is not to say that they will all be part of an approved knowledge-intensive EIS fund. Since they are in popular areas of innovation such as pharmaceuticals and biotech, there is no reason that the managers of standard EIS offers would not take an interest in some of them and advantage of the slightly looser rules in terms of age (up to ten years) and staffing levels (up to 499 full time equivalents) which allow for more mature and established investee companies. It is also worth remembering that, if advance assurance is sought by a company wishing to claim knowledge intensive status, it has to be knowledge intensive advance assurance as different tests apply in terms of the age of the company, number and type of employees, intellectual propery, R&D and amounts that can be invested.
Approved EIS Knowledge-intensive fund refresher
The investments made by EIS Approved EIS Knowledge-intensive funds (KIFs) are treated as if made in the year in which the fund closed, even if they were actually made in a later year. Investors may also elect to treat some or all of their investments as made in the year prior to that in which the fund closed. In return, KIFs must fulfill the following criteria: At least 50% of capital must be invested within 12 months of the fund closing date At least 90% of capital must be invested within 24 months of the fund closing date Within that 24 month period at least 80% of the fund’s capital must have been invested in the shares of companies that were knowledge-intensive at the time the shares were issued The fund must invest in at least 4 companies, and no single company must receive more than 50% of the capital the fund invested.
40%
60%
UNDERLYING INVESTMENT SECTORS KIFS
Fees and Charges
The average total initial charge for all five KIFs is 3.3%, with the majority of that charged to investee companies for whom the average initial charge is 2.13%. But not all KIF managers charge an initial charge to investors and not all charge one to investees, with the most commonly quoted total initial charge at 2%. 2% is also the most commonly charged total initial fee in the overall EIS market. When it comes to annual management charges (AMC), both the average and most common total AMC is 2%. This is higher than the average for the entire EIS market which sits at 1.78%. For KIF AMCs investors pay around three quarters at an average of 1.6% and investee companies are liable to an average of 0.5%. In terms of exit performance hurdles and exit performance hurdle fees, the modes are 100% and 20% respectively, which is perhaps a bit disappointing as it means that the managers only need to break even, with no actual growth required, to charge a 20% performance fee on exit. Nevertheless, this is reflective of the overall EIS market.
FIELD FOR EIS INVESTMENTS WIDENS
considerations for investment /Field widens for EIS
19
Confirmation has been provided of a new area for EIS investment - insurtech. HMRC’s list of non-qualifying trades for EIS includes insurance, but recently updated HMRC public guidance now states that Managing General Agent’s (MGAs), which include insurtechs, qualify for SEIS and EIS relief. This follows a campaign by Insurtech UK, the trade association for insurtech startups in the UK, which worked collaboratively with HMRC for over a year to clear the way for the reliefs to apply to companies with this business model. Accordingly, in March, Peppercorn, which had originally applied for advance assurance in July 2020, became the first insurtech company to receive EIS relief. HMRC’s initial reaction in October 2020, was that advance assurance could not be provided because insurance activities were excluded from the list of qualifying trades. The term ‘MGA’ refers to individuals or companies that manage the underwriting function for an insurer acting always as agent of the insurer and not that of the insured. Birketts has described MGAs as, “clearly now the third UK insurance market, and a genuine, cost effective way for insurers to access distribution and transact SME business efficiently. MGAs are leading the way by embracing new technologies, emerging capital, attracting good underwriting skills and experience, and identifying new distribution opportunities...most importantly access to niche and specialist markets without the need for insurers to set up their own distribution channels.” John Warburton, Insurtech UK’s chair of government and external affairs working group, told Insurance Times, “There had been several case studies of insurtech MGAs who had been rejected from SEIS/EIS eligibility because of an incorrect assumption by HMRC that because it was working within the insurance sector, it was an insurer that carried on insurance activity.”
He went on, “Insurance is an excluded activity from SEIS/EIS as per the legislation, but this only relates to insurers who bear financial risk on behalf of customers – something that an MGA does not do as an intermediary.” Peppercorn’s CEO, Nigel Lombard confirmed that his firm is neither a risk carrier, nor a legal entity effectively owned by an insurer. Instead, it is an MGA with delegated authority which would be regulated by the FCA. HMRC’s Venture Capital Schemes Manual still references insurance as an excluded activity at VCM3040 and continues to make the point that, “the other financial activities that are excluded are comparable with those listed - in particular...the bearing of the customer’s financial risk.” However, added text now clarifies that: “Intermediary businesses within the financial sector, such as mortgage advisors or brokers and managing general agents in the insurance sector for example, form part of the value chain in respect of the provision of finance or insurance products. However, as these businesses typically do not bear financial risk (they do not provide the capital for lending or underwriting) the services they are providing would not fall within the exclusion so long as they are commercially and economically independent of those parties that do.” The new text goes on to explain how the regulatory status of financial services businesses in the UK will often indicate whether the company can or does bear financial risk.
It’s an absolute no brainer for wealthy UK investors who have large tax bills, especially when you can benefit from all three reliefs and can shelter up to 98% in tax.
- Nishil Patel, Head of Business Development, MMC Ventures
market snapshot
Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider EIS market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
considerations for investment / market snapshot
20
4. Industry analysis
21
HMRC EIS Statistics
INDUSTRY ANALYSIS / HMRC EIS Statistics
In May 2021 HMRC published it’s latest analysis of EIS statistics looking at the 2019/20 tax year. They showed that, by the start of April 2020, EIS had raised around £24 billion of investment into just under 33,000 companies since its 1994 inception. The figure raised in 2019/20 was 2% (£38 million) higher than the previous year at £1,905 million, and the number of companies raising funds was just under 4% higher at 4215, reducing the average raise amount per company slightly to £452,000. This continues the recent upward trend in the amount raised that HMRC suggests could be attributed to “sustained historically low interest rates, increasing promotion and involvement of fund managers.”
Of course, the 2019/20 tax year almost entirely excludes the rise of Covid-19. However, it is interesting to note that strong and growing inflows into EIS were sustained over the seven previous years despite ongoing challenges to investors; 2012/13: Most trades attracting guaranteed feed in tariffs lost their EIS eligibility 2014/15: Companies benefitting from Department for Energy and Climate Change (DECC) subsidies became ineligible and new age and funding limits as well as a growth and development requirement were introduced 2016/17: All energy activities were excluded from EIS qualification 2018/19: The risk to capital condition was introduced, removing any capital preservation strategies and pushing up risk profiles This suggests that EIS investors are now very much used to pursuing the potentially high rewards in the context of shifting realities.
NUMBER OF COMPANIES RAISING FUNDS AND AMOUNTS RAISED, APRIL 1993 TO 2020
As VC investors, we work closely with our founders to navigate through the rough and the smooth –we place a lot of emphasis on building their mental resilience to support the growth of their companies.
- Richard Roberts, Director, Investor Relations, Oxford Capital
22
That said, 2019/20 saw a continuing drop in the number of companies raising EIS funding for the first time. HMRC reasons that this is a result of the restrictions applied in 2018 to remove low-risk and limited growth investment arrangements, including those that typically involved the creation of new companies raising funds for the first time, which would then be wound up after completion of the single project they were designed to facilitate. Nevertheless, there is also the consideration that a company that has already been the beneficiary of an EIS funding round and with which investors are very familiar might feel less risky than investment in a company in which no EIS investors have yet placed their faith. In 2019/20, only 24% of funding being raised was by companies using the EIS for the first time. While 2020 and 2021 have undoubtedly offered strong opportunities in new companies, particularly those focused on resolving a specific issue highlighted by Covid-19 such as pharmaceuticals or digital communications, it will be intriguing and important to UK PLC to find out how this tendency develops.
2019/20 saw increases in the number of companies seeking advance assurance and the number of advance assurance applications received by HMRC (3325, 6% up on the previous year, and 3440, 5% up on the previous year, respectively). This seems indicative of a market in which those looking to raise funds had become more comfortable with the risk-to-capital conditions introduced in 2018. But, the 2020/21figures are indicative of greater uncertainty, this time connected to Covid-19, with drops below the 2018/19 levels; 2965 companies sought advance assurance, an 11% drop on the previous year and HMRC received 3080 applications, a 10.5% reduction. In terms of approval rates, 78% of advance assurance applications received in 2019/20 were approved. In 2020/21 the figure was at 77%, so the quality of applications where eligibility is concerned, remained largely unchanged.
EIS advance assurance
In 2018/19, the first year in which investments of up to £2 million were allowed (provided at least £1 million is in knowledge intensive companies), 65 investors made investments of between £1 million and £2 million, contributing £95 million of investment. In 2019/20, the same number of investors provided £100 million of funding to KICs. That suggests an additional £50 million per year went into developing KICs than would previously have been possible. Interestingly, the number of KICs actually raising funds more than doubled in the two years in question: 185 KICs in 2018/19 and 385 in 2019/20. This suggests not only a growth in competition in this funding sector, but also that investors were increasing the number of KICs they backed, with smaller average investment amounts, thereby benefitting from added diversification. In its May 2021 statistics, HMRC stated that, “The combination of these increased limits and the focus on growth of the risk-to-capital measure is expected to result in more funds being raised through the EIS in future years in these innovative companies.“ Given the substantial drivers for KICs in the pharma and tech sectors through the pandemic and the more relaxed qualification rules for KICs, it certainly seems reasonable to expect ongoing increases to investment amounts, especially as Wealth-X’s 2021 World Ultra Wealth Report found that over 8,500 people in the UK have $30 million or more in net worth, including over 170 billionaires.
Knowledge intensive companies and approved EIS knowledge intensive funds
EIS showing resillience
In April 2020 EIS approved knowledge-intensive funds replaced the existing EIS approved funds. Like EIS approved funds, EIS approved knowledge-intensive funds are beneficial for investors as the administration is greatly reduced for them, with a single EIS5 form being issued once 90% of the funds have been invested, rather than multiple EIS3 certificates. They also focus on directing capital to knowledge intensive companies. More information about the EIS approved knowledge-intensive funds currently operating can be found in section 3 of this update - Considerations for investment.
SEIS and SITR
INDUSTRY ANALYSIS /SEIS and SITR
23
The maximum amount an individual can invest in a SEIS company is £100,000 per tax year. The maximum amount of investment that a qualifying company can receive is £150,000. With this in mind, the funding derived from SEIS is impressive with 13,800 individual companies receiving £1.4 billion of investment through the scheme since its 2012/13 launch. The official figures suggest that SEIS is taking a little longer than EIS to bounce back from the introduction of the risk-to-capital condition in 2018. 2,090 companies received £170 million investment through the SEIS in 2019/20, marginally lower than the 2018/19 amount. Since SEIS focuses investment on even younger and potentially riskier companies than EIS does, it is perhaps not especially surprising that this new growth and development requirement, which had never existed in any format previously in SEIS, has made investors think a little more before investing. That said, HMRC does point out that the 2019/20 figures are likely to be revised as more returns are received. The majority of companies receive investments of over £50,000 through the SEIS, with 63% of companies receiving investment of over £50,000 in 2019/20. The same applies to companies raising £100,000 - £150,000, which was virtually identical to the previous year. But that still leaves just under 800 companies looking to raise £50,000 or less, of which 135 were seeking just £10,000 or less. This points to the likely critical nature of these funding needs despite their size, when considering the time and work required to provide the necessary information to gain investment through SEIS.
HMRC Seed Enterprise Investment Scheme statistics
NUMBER OF COMPANIES RAISING FUNDS AND AMOUNTS RAISED, APRIL 2012 TO 2020
Launched in 2014 – with a sunset clause expiring this year, Social Investment Tax Relief (SITR) incentivises investors with tax reliefs to support the trading activity of community interest companies, community benefit societies and asset lock charities (which can be a company or a trust). Investors can buy shares or lend money. Investors pay no CGT on any gain on the social investment itself and can deduct 30% of the cost of their investment from their income tax liability, either for the tax year in which the investment is made or the previous tax year. SITR was extended for an additional two-years in the March 2021 budget. Many have been calling for reforms of the scheme because, although intended to provide increased working capital for charities and social enterprises, SITR has not been widely used. This is evidenced by the 2019/20 figures which report that just 30 social enterprises received £3.3 million investment through the scheme. This represents a drop of one third in the number of social enterprises and a 30% reduction in funding from the previous year when 45 social enterprises raised £4.7 million in total.
HMRC Social Investment Tax Relief statistics
NUMBER OF COMPANIES RAISING FUNDS AND AMOUNTS RAISED, APRIL 2014 TO 2020
The lack of take-up has been attributed to a number of factors including: Restrictions on employee numbers and qualifying trades which excluded activities such as asset leasing, lending, and operating nursing and residential care homes to comply with EU state aid requirements. A balance sheet asset cap, which led to the exclusion of many arts and culture organisations by taking into account the value of their significant collections and buildings. The sunset clause itself limiting the lifetime of the relief at the same time as interest in impact investing has been growing In its March 2021 summary of responses to the call for evidence issued in 2019, HM Treasury stated that the extension of SITR was intended to,”continue supporting investment to social enterprises in most need of growth capital.” It added, “The government continues to monitor the social investment market and assess the most appropriate form of support for the policy objectives that SITR was introduced to achieve.”
Knowledge intensive companies
INDUSTRY ANALYSIS / Knowledge intensive companies
24
In 2018/19, the first year in which investments of up to £2 million were allowed (provided at least £1 million is in knowledge intensive companies), 65 investors made investments of between £1 million and £2 million, contributing £95 million of investment. In 2019/20, the same number of investors provided £100 million of funding to KICs. That suggests an additional £50 million per year went into developing KICs than would previously have been possible. Interestingly, the number of KICs actually raising funds more than doubled in the two years in question: 185 KICs in 2018/19 and 385 in 2019/20. This suggests not only a growth in competition in this funding sector, but also that investors were increasing the number of KICs they backed, thereby benefitting from added diversification. In its May 2021 statistics, HMRC stated that, “The combination of these increased limits and the focus on growth of the risk-to-capital measure is expected to result in more funds being raised through the EIS in future years in these innovative companies.“ Given the substantial drivers for KICs in the pharma and tech sectors through the pandemic and the more relaxed qualification rules for KICs, it certainly seems reasonable to expect ongoing increases to investment amounts, especially as Wealth-X’s 2021 World Ultra Wealth Report found that over 8,500 people in the UK have $30 million or more in net worth, including over 170 billionaires. In April 2020 approved EIS knowledge-intensive funds replaced the existing approved EIS funds. Like approved EIS funds, approved EIS knowledge-intensive funds are beneficial for investors as the administration is greatly reduced for them, with a single EIS5 form being issued once 90% of the funds have been invested, rather than multiple EIS3 certificates. They also focus on directing capital to knowledge intensive companies.
The retail market is beginning to value venture capital as an asset class outside of tax reliefs, which is a positive shift in attitude.
- Jonathan Prescott, Director, Praetura Ventures
5. Managers in Focus
25
managers in FOCUS /blackfinch
manager video content
go to website
26
Blackfinch.com 01452 717070 enquiries@blackfinch.com
Head of Ventures
managers in FOCUS / blackfinch
video content
blackfinch.com 01452 717070 enquiries@blackfinch.com
managers in FOCUS / oxford capital
27
oxcp.com 01865 860 760 info@oxcp.com
MARK BOWER-EASTON
Business Development Manager
DAVID MOTT
Founder Partner
28
managers IN FOCUS / EIS COMPARISON TABLE
offer name year founded aum (toT) / aum (EIS) description of offer launch date underlying assets target no. of holdings target annual return target fundraise investment objective investment horizon min investment initial fee amc other fees
Deepbridge Capital LLP 2010 £205m/£161m The Deepbridge Technology Growth EIS is a technology-focused EIS proposition, which provides subscribers with an opportunity to participate in a portfolio of actively-managed growth-focused technology companies. The Deepbridge EIS invests in technology growth companies that have a proven technology, robust intellectual property and are operating in a high-growth market sector. 2013 IP-backed disruptive and globally scalable technology innovations 3-15 N/A Evergreen The investment objective of the Deepbridge Technology Growth EIS is to generate substantial tax-efficient mid-case capital growth of 160p for every 100p invested, over a 3-6 year period - although this can take longer. 3-6 years £10,000 There are no manager charges levied on the investor at the point of investment for advised subscriptions received by a financial adviser, resulting in up to 100% allocation of subscription. This ensures up to 100% tax efficiency for investors. Deepbridge fees are borne by the Investee Companies and are disclosed in the Information Memorandum. There are no manager charges levied on the investor at the point of investment for advised subscriptions received by a financial adviser, resulting in up to 100% allocation of subscription. This ensures up to 100% tax efficiency for investors. Deepbridge fees are borne by the Investee Companies and are disclosed in the Information Memorandum. "Please see the product Information Memorandum for detauils of all fees charged to the investor and investee companies. Performance fee: an incentive fee of 20% of cash returned, in excess of 120% of the funds invested. Please see the Information Memorandum for full details."
Blackfinch Ventures EIS Portfolios 2013 £563m/ £23m The Blackfinch Ventures EIS Portfolios target high-growth opportunities, investing in innovative start-ups and early stage businesses. They bring access to EIS tax benefits, and prospects for significant returns. The team focuses on firms often offering smart technology, supporting them from development to exit. Blackfinch capital is invested alongside investor funds. 2018 19 early-stage disruptive technology companies in sectors including EdTech, Wearables, SaaS, AI and Consumer Electronics. Multi-sector portfolio of ten or more investee firms. N/A Evergreen Targeting 3x return on investments 4 to 7 years £10,000 3% portfolio establishment fee (after deduction of adviser fees) AMC equivalent to 2% of capital invested, applied for first four years only (max 8%), charged to portfolio companies. This means investors should receive tax relief on the entire amount invested into the companies and the fees charged to the companies, thereby adding significant value. Performance fee of up to a 20% share of returns exceeding £1.30 for every £1.00 invested (ignoring tax reliefs), calculated on an individual company basis. Blackfinch can also recover reasonable expenses and reserves the right to charge arrangement, monitoring, director and exit fees to each investee company.
Octopus Investments 2000 10.7bn / 0.3bn Octopus Ventures EIS Service gives investors the opportunity to access pioneering businesses with high growth potential. Investors hold a portfolio of ten to fifteen early-stage companies selected by one of Europe’s largest venture capital firms. 2020 Unquoted EIS-qualifying smaller companies Around 10-15 companies N/A Evergreen – around £15m per quarter Capital growth 7-10 years per company (investments must be held for 3 years to qualify for tax relief) £25,000 2% 2% + VAT per annum (deferred and contingent) Dealing fee (for the purchase and sale of shares) 1% Performance fee 20% + VAT
Oxford Capital 1999 £125m (total) The Oxford Capital Growth EIS offers investors the opportunity to invest in a portfolio of shares in early stage technology companies that have the potential to grow rapidly and provide exposure to sectors in which the UK is a world leader such as financial technologies and future of retail. 1st November 2011 Early stage technology companies 8-12 per annum 2x subscription (net of fees) during the life of the investment. N/a - evergreen Growth - we aim to invest in businesses that are solving commercial, technical or scientific problems in innovative ways. The companies in our existing portfolio operate in a number of sectors such as software, consumer internet, digital media and healthcare. When selecting new investments, we look for companies that exhibit high-growth characteristics or potential. It will normally take between 12-18 months for an initial subscription to be fully invested into a portfolio of companies. We aim to exit most investments within 5-7 years. We may hold investments for longer if we consider that more value could be returned to investors by doing so. Similarly, investments may not be held for the three-year EIS-qualifying period if a suitable exit opportunity occurs sooner or if the company fails. We will not necessarily be able to influence the timing of exits to the advantage of our investors. £25,000 50% initial fee discount offer (reduced to 1.25%) - valid until 20.12.2021. An annual management fee of 2% of the net subscription is charged quarterly. If the value of the companies held in the portfolio decreases below the net subscription amount, we will decrease the annual management charge commensurately. However, the annual management charge does not increase if the value of the investments exceeds the net subscription. 2% annual management charge, 20% profit share – of returns above the amount invested (after the deduction of any adviser charges). Our Custodian, Mainspring Nominees Limited, charges a quarterly administration fee of £20.00, a purchase transaction fee of 0.20% of the cost of purchase made on your behalf; and a sale transaction fee of 0.30% on the value of the sale made on your behalf. For additional charges, please see the Information Memorandum
MMC Ventures 2000 c. £500m AUM, c. £250m EIS MMC Ventures is one of the most established managers in the tax-advantaged market. Through its EIS Funds, including its Knowledge Intensive Approved Fund, MMC invests in the technology companies transforming today’s industries, and has backed some of the UK’s most well-loved brands including Gousto, Interactive Investor and Bloom & Wild. N/A High-growth technology companies c. 10 15% excl. tax reliefs c. £50m across Standard and Approved EIS Funds 2-3x return excl. tax reliefs 5-8 years £25,000 2% 2.50% Custody fee of 0.15%, performance fee of 20%, charged on gains above 100% returned. Custody and annual management fees capped at five years. No fees charged to investee companies.
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offer name year founded aum (toT) / aum (EIS) description of offer launch date underlying assets target no. of holdings target annual returN target fundraise investment objective investment horizon min investment initial fee amc other fees
Praetura Ventures 2011 £300m Praetura is an award-winning fund manager that has been investing into early-stage businesses since 2011. The Praetura EIS Growth Fund is an ‘Evergreen’ fund structure, with two soft closes each year. The Fund invests across a range of sectors, with a focus on tech and life sciences. Praetura expects to fully deploy capital within 6 months of each relevant close date, with investment into c. 8-10 promising young businesses. The aim is to provide investors with capital growth from businesses in the North of England and beyond. Praetura use their More Than Money approach to grow portfolio companies and generate returns for investors. 2019 Early-stage EIS-qualifying businesses with high growth potential, mostly in tech or life science sectors based in the North with b2b models. 40 minimum 2x return pre tax relief. up to £30m per annum Discretionary Portfolio Service which will provide a portfolio of investments of circa 8-10 unquoted companies. The businesses will predominantly be tech or IP enabled and will all share particular characteristics. See attached IM. The target return is 2x over 4-7 year period. The Fund will predominantly invest into Northern businesses., circa 70%. 4-7 years £25,000 1% 1.50% Annual Custodian Fee - £85pa Custodian Dealing Charge – 0.35% (on exits only) Performance Fee – 20% of profits above a hurdle rate of 120% of the subscription amount
6. What's on the Horizon?
FCA FOCUS ON HIGH RISK INVESTMENTS Future Fund: Breakthrough welcomes EIS involvement what the managers say
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FCA FOCUS ON HIGH RISK INVESTMENTS
WHAT'S ON THE HORIZON /FCA FOCUS ON HIGH RISK INVESTMENTS
his year’s FCA’s Discussion Paper DP21/1, which closed for comments on 1 July, asked for feedback on,’ Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions.’ The regulator cited a slew of reasons for concern that the strict marketing restrictions already in place do not do enough to stop some consumers from investing in inappropriate high-risk investments which do not meet their needs. The main worries include the impact of low interest rates drawing more consumers towards riskier investments with higher returns, the growing choice of services and products, and a widespread increase in consumer vulnerability. According to the paper, there is recognition that, “higher-risk investments can have a place in a well‑functioning consumer investment market for those consumers who understand the risks and can absorb potential losses.” It goes on, “Even where it might make sense for someone to take more risk, consumers should be spreading their money across a diverse range of investments. This is to avoid a significant loss if a single investment, or type of investment, fails.” EIS investment portfolios are built with precisely this intention in mind. Where EIS is concerned, as with any high risk investments, it is imperative that the investor is sophisticated enough to understand the investment, tolerate its risks, not require liquidity for at least three years (and more likely five to 10 years) and have the capacity to withstand a substantial loss (although loss relief means total loss can be avoided). The tax benefits, therefore, should not be the only, or even primary consideration, but for individuals for whom EIS investment is suitable, there is likely to be a specific planning scenario involved.
27 Jan
7-day average
unemployment rate (age 16 and over)
Source: ONS
The Enterprise Investment Scheme should be at the heart of the Government’s economic recovery plans, to support early-stage growth companies, particularly in sectors such as technology and life sciences.
- Andrew Aldridge, Partner and Head of Marketing, DEEPBRIDGE
Each investment into an unlisted underlying company selected by the EIS manager to add to the investor’s portfolio is classed as a Non-Readily Realisable Security (NRRS) by the FCA, unless traded on the Alternative Investment Market (AIM). NRRS are, very broadly, unlisted and non‑exchange traded shares or bonds. The Discussion paper focuses on these, along with Readily Realisable Securities, Non Mainstream Pooled Investments and Speculative Illiquid Securities. AIM shares fall into the category of Readily Realisable Securities (RRS). They are liquid securities for which there is a reliable market and pricing. The FCA generally expects that, because they are traded on a venue providing liquidity and are subject to initial and ongoing transparency requirements, they are more likely to be appropriate for retail investors than an unlisted security. However, it points out that these securities still come with a risk that an investor could lose their money. Since, on 12 September, 54 of the 58 open EIS offers accepted investment from non-advised clients, most EIS managers are caught by the financial promotion rules when dealing with at least a portion of their potential investors. While mass marketing of EIS qualifying AIM listed shares is generally allowed, any direct offer financial promotions regarding unlisted EIS offers are already restricted. As a result, the recipient is required to be either a certified high‑net‑worth investor, a certified sophisticated investor, a self‑certified sophisticated investor or a certified ‘restricted’ investor (who has signed a declaration to say they have not in the last 12 months, and will not in the next 12 months, invest more than 10% of their net assets in these types of investments). Possible changes suggested by the FCA include steps such as cooling off periods or requiring SMS confirmations before investments are made. These additional client contacts are intended to ensure the client has fully considered their course of action. Other suggestions relate to improving risk warnings and requiring those offering the investments to check that the prospective investor meets the relevant self-certificattion requirements (high net worth or sophisticated), or to verify that restricted investors are not investing more than 10% of their net assets.
Where does EIS fit in the current rules?
Less formed ideas were discussed regarding speculative investments as an additional feature of investments that makes them generally inappropriate for retail investors’ needs, and indicating the need for a mass‑marketing ban. This has led some to express concerns about how this might impact investments to early stage businesses: Since “businesses with no track record could also be considered speculative,” SEIS and EIS, many of whose investee companies are pre-profit and have not yet launched their products, could find themselves in this category. According to the FCA, “Retail investors may not be best placed to assess the risks of the business establishing itself in its early days” although there is acknowledgement of, “the vital role start‑ups play in economic growth and [we] do not want to unnecessarily restrict their access to capital.” Changes here could see the more onerous Speculative Illiquid Securities (SIS) promotion rules applied. Under these rules firms are only allowed to send promotions to certified high net worth, certified sophisticated and self‑certified sophisticated investors on whom they have already done a preliminary suitability assessment. There are also requirements for specific and prominent disclosure, including a standardised risk warning, which clearly states that investors could lose all their money, these products are high risk (and riskier than a savings account), and (where relevant) ISA eligibility does not guarantee returns or protect investors from losses. While it is clearly important that EIS and SEIS investors are fully aware of the possible outcomes involved, the additional burdens of all of these potential new requirements could be problematic for funding levels. What’s more, they could increase administrative costs which weigh down on investors’ returns.
Future Fund: Breakthrough welcomes EIS involvement
INDUSTRY ANALYSIS /Breakthrough welcomes EIS involvement
2015/16
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nlike the government’s Future Fund, which closed for applications on 31 January 2021 and involved the government matching third party investments with loan notes converting into equity at the next fundraise if not repaid, Future Fund: Breakthrough is compatible with the Enterprise Investment Scheme. Announced at the March 2021 budget, Future Fund: Breakthrough was launched in July by the British Business Bank (BBB) which has £375 million of government funds with which to co-invest with certain private investors in high-growth, innovative firms. The aim is to support the scale up of the most inventive, R&D-intensive businesses operating in breakthrough technology sectors such as quantum computing, cleantech and life sciences. The criteria for the R&D intensive companies that qualify for investment are similar to those that apply to Knowledge Intensive Companies (KIC) in EIS and Venture Capital Trusts. Companies must have raised at least £5 million in previous funding rounds and be UK based (UK incorporated) with significant UK operations (meaning at least half of their overall employment base and research employees are based in the UK). Applications for funding must be made by lead investors, not companies. The lead investor does not have to be the largest investor in the round but is expected to contribute a significant amount to the investment round and meet the lead investor criteria. Investments will be made through British Patient Capital (“BPC”), the BBB’s commercial subsidiary. BPC will take equity in the funding round, with the minimum total investment round in which Future Fund: Breakthrough will participate, including its own capital, set at £30 million and the maximum it can invest set at 30%. This means that the minimum amount of private investment required for eligibility is £21 million.
Tax-advantaged investors such as Enterprise Investment Scheme investors or venture capital trusts will be able to invest as part of a syndicate, but cannot be a lead investor. This begs two questions: 1. Assuming the company being funded meets the qualification criteria for the Enterprise Investment Scheme, will the underlying investor be able to claim the relevant tax reliefs available through EIS or VCT? 2. If the answer is yes, how is this compatible with the rules for EIS which limits the amount of investment an EIS investee company can receive to a lifetime maximum of £20 million from venture capital schemes, bearing in mind the minimum investment round for Future Fund: Breakthrough is £30 million? Is it simply that Future Fund: Breakthrough funding will not be classed as venture capital scheme funding except for the portion made by EIS or VCT investment managers with their investors' funds? There is clearly still some clarification required, but on the face of it, the prospect of investing alongside a government agency while also accessing significant tax reliefs, sounds like an attractive one.
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Where do you see the biggest opportunities on the horizon for EIS investment?
Necessity is the mother of invention. Many companies have not just survived, but thrived, by demonstrating resilience and ingenuity. The winners have emerged as a result, and with new companies forming to address emerging opportunities, there’s no shortage of deal flow. Ecommerce, logistics, employee engagement and culture are just some of the hot areas we are closely monitoring right now.
What do you expect the future to hold for EIS as a tax relief?
EIS is a fundamental pillar of UK government plans to enhance the attractiveness of our start-up ecosystem. The focus will remain on high-growth, innovative and knowledge-intensive companies that balance risk exposure with the potential for high returns and help deliver a boost to the national economy. This will strengthen the UK’s already impressive lead in Europe for high-growth, high-tech companies.
Given the changes the government is already making to PRIIPs, what other changes would you like to see made in the realm of EIS, now that UK financial services are somewhat freed from EU regulation?
Investors should be further incentivised to support companies fundraising within the spirit of the high-risk, high-growth ethos of the EIS scheme. This could involve increasing the timespan in which a company would qualify for EIS investment, or extending carry-back opportunities. One welcome change in recent years has been the significant improvement in the turnaround time for EIS Advance Assurance applications.
We expect that our tech and life sciences companies will be at the forefront of economic recovery and growth in the UK. EIS has arguably never been a more important Government tool. Coupled with increasing investor awareness and interest, the future for EIS should be rosy.
The Enterprise Investment Scheme is one of the most tax-advantaged schemes in the world and we should never forget how fortunate we are to have such a tool in the UK. It is our understanding that the Government recognises the importance of the scheme, but it is up to the industry to ensure that the benefits are highlighted and the Scheme ringfenced for the future. Financial advisers and investors in the UK are the envy of their global contemporaries as they have access to tools such as EIS.
It is widely accepted that attempting to show performance scenarios for esoteric products, such as EIS funds, was impractical, counter-productive and potentially misleading, so the move away from this being a legal requirement under PRIIPS is welcome. The next steps, already acknowledged by Government, will be to assess how State Aid rules now affect EIS/SEIS and whether, for example, the maximum SEIS fundraising level of £150,000 can be increased to make this initiative more accessible.
Our investment thesis has always centred around technologies that are transforming industries. The areas of opportunity have evolved over time, and we are seeing a lot of activity in emerging technologies including artificial intelligence and blockchain. HMRC's recent changes to encourage support of these innovative businesses, including the introduction of Approved Funds for Knowledge Intensive companies, should encourage further investment too.
The case for EIS is stronger than ever in light of prospective tax changes in capital gains tax, and possibly even income tax changes. For the right investors, EIS will be an even more attractive proposition and EIS will continue to play its role in driving the UK's economic recovery by supporting innovative, early-stage companies.
EIS has been transformative for the UK’s startup ecosystem, attracting talent and capital far above any other European country. We now need to consolidate and build on that foundation. We’ll be keeping an eye on the sunset clause, which currently expires in 2025, but beyond that it’s time to stop tinkering and let the scheme do what it is intended to do.
The pace of change and adoption of digital health has accelerated rapidly in the last twelve months. This will undoubtedly continue. E-commerce is another area that’s booming, with some sectors experiencing a decade of growth in a few months. We’ve a healthy pipeline of potential investments. Some examples of recent exciting investments we have made on behalf of EIS investors are: •Comma - a software business handling accounting and banking for companies •Walking on Earth – a health and wellness platform for the workplace •XYZ Reality – a business in the augmented reality space, addressing the construction industry
The EIS framework has existed for over 25 years, over which time it has been incredibly successful at directing money from suitable private investors into UK smaller companies. EIS is seen as being a cornerstone in the UK’s success as a positive place for entrepreneurial growth. It will have an important role to play as the UK comes out of the pandemic and as part of the government’s levelling up agenda.
We think the current tax legislation works well for EIS and smaller company investing. It is a key supporting mechanism for smaller companies and is key to the UK’s success as a jurisdiction in which smaller companies can grow.
JESSICA FRANKS
We believe there is a huge opportunity to take advantage of technological advances in sectors where the UK is considered a world leader such as fintech, AI and machine learning. Given our existing exposure to these sectors, we are in a prime position to spot these opportunities, support our founders, and provide our investors with strong returns.
EIS has been a huge success story for consecutive governments, and it can’t be underestimated just how important a role it has had on the UK economy. Almost 33,000 companies have benefitted from EIS funding, raising over £24bn and we don’t see EIS disappearing anytime soon. It benefits the economy (now more important than ever in a post Covid world), entrepreneurs with great ideas, and investors looking to take advantage of early-stage investment opportunities.
At present we are comfortable with the current environment and structure of EIS, and don’t believe that any changes need to be made to the status quo. As we emerge from COVID, innovative new businesses and technologies will be a driver for the economy, and EIS is a fundamental part of helping these companies grow. We continue to monitor proposed regulatory changes and are feeding back to the FCA to contribute to the ongoing discussions.
Mark Bower-Easton
Business Development Manager, Oxford Capital
The EIS market still needs better education from fund managers and advisers. As investors look to diversify their portfolio and explore other asset classes, a growing awareness of how the scheme operates will increase both investment and returns on a macro level. In terms of where we’re seeing the best results, tech businesses continue to outperform other sectors, with a noticeable funding gap in businesses located outside of the Southeast.
Since the scheme was introduced in 1994, EIS has supported over 30,000 companies with over £20bn in funding. The EIS scheme is the lifeblood of many UK SMEs and will play an essential role in the landscape’s recovery over the coming year. As political opinion continues to pivot towards small business success, we don’t see any imminent changes to EIS tax relief in the future. Ultimately, we expect to see an increased use of venture capital as an asset class, as the market becomes more familiar with the dual benefits of tax relief and potential returns.
Whilst Praetura provide a KID document in a prescribed format, which helps stress test returns based on different outcomes, these only go so far. Further transparency across the market is required on fee structures so financial professionals can make the right choices. Clarity is key to make sure investors know how and what they will be charged in different scenarios.
learning objectives cpd and feedback about intelligent partnership disclaimer
7. Further learning
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learning objectives
further learning / learning objectives
HOW DID YOU DO?
Covered in section 2.
Outline regulatory developments that could be impactful to EIS in the near future.
Covered in sections 2, and 6.
Evaluate the key fees and charges applied by EIS managers
Covered in sections 4 and 5
Outline the statistical trends in EIS investment and tax relief in recent years.
Covered in sections 3 and 4.
Define some of the key events likely to impact EIS in the near future
Covered in section 6.
Benchmark products and providers in the market against one another
Covered in section 5.
Identify the main developments and news in the EIS market
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CPD and feedback
further learning / cpd and feedback
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eaders of the EIS Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to test your knowledge and obtain a CPD certificate readers will need to complete a short online test and provide feedback on the update. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at September 2021 which could change in the future. It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. This material is not intended to constitute legal or tax advice and we recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of shares in potentially Enterprise Investment Scheme qualifying companies. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
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