Enterprise Investment Scheme
Industry Update - February 2022
The latest news, updates and statistics on EIS
2. Market Update
3. Considerations for Investment
4. Industry Analysis
5. Managers in Focus
6. What's on the Horizon
7. Further Learning
In partnership with:
Accredited by:
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1. Introduction
02
Opening Statement Update Overview Key findings
Opening Statement Acknowledgements and thanks Key Findings
1. INTRODUCTION
Market Composition Targets
3. Considerations For Investment
EIS and portfolio diversification: a perfect match SEIS: a key to Britain’s post-Covid recovery Climate finance: the next frontier for venture capital Kuber’s liquidation has little effect
EIS amid rising interest rates Regional Angels backed by cash pot for EIS OTS: remove stumbling blocks from EIS A Return to the Roaring Twenties? Maximising early-stage businesses Why Hunt for Unicorns? A clever piece of year-end tax planning What the managers say?
2. market update
Blackfinch Mercia Oxford Capital Worth Capital Comparison Table
5. managers in focus
There’s a clarion call for a wealth tax: What EIS can do EIS and the renaissance of entrepreneurship What the managers say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
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
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Opening statement
Photography by Interview by
03
o, here we go again! Another mad rush to tax year ends for all of us. Good luck everyone! As I step back from my role at the Enterprise Investment Scheme Association (EISA) after 5 years as Director General, I thought it would be a useful time to reflect, as certainly plenty of water has passed under the EIS bridge since I began! It’s certainly been a rollercoaster, jumping straight into the deep end with the Patient Capital review being announced in 2016 and undertaken in 2017. The review’s overriding aim was to strengthen the UK further as a place for growing innovative firms to obtain the long-term ‘patient’ finance that they need to scale up. But a large microscope was also placed on the role of tax-advantaged investment within the early-stage funding ecosystem and in particular, capital preservation EIS funds. At the time, EISA worked tirelessly with HM Treasury to help them understand the funding environment. Indeed, the majority of our recommendations were taken up by the review and subsequent legislation, ultimately resulting in the Risk to Capital condition. The condition is a principles-based requirement that depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low-risk return for investors and ensures that a company in which the investment is made has objectives to grow and develop over the long term. However, we shouldn’t underestimate just how close the tax-advantaged schemes came to being withdrawn as part of the Patient Capital Review process and it’s a point to be mindful of for the future. In short, the risk to capital condition was a return to the original intention of EIS and enshrined the idea of the spirit of EIS into actual legislation. From now on, only companies with significant growth plans would receive funding and every £1 of an investor’s money would need to be at risk to help fund that growth. SEIS and EIS’s reaffirmed role was to fund the next generation of exciting, growth-orientated, tech-focused and early-stage UK businesses. With the Patient Capital Review concluded, wouldn’t it be nice to have a period of calm. Obviously not, as almost immediately came Brexit! As a scheme that relies upon EU State Aid for its continuance, EIS faced both a potential threat and opportunity from Brexit. We are in many ways still waiting to see how that plays out. Surely nothing could top all that. Think again! Along comes Covid in 2020! Covid has affected all of our lives, both personal and private, in many different ways. Companies have had to adapt to survive and flourish during Covid and many have been the first responders to the pandemic. With the guidance and support of their fund managers, entrepreneurs and innovators have transformed and pivoted their businesses to help. Beermakers and distilleries have shifted production to hand sanitizers. 3D printers have been used to create the valves used in ventilators. When we look back on the current health crisis, there’s no doubt that we’ll learn that it resulted in a number of innovations: new drugs and medical devices, improved healthcare processes, but also manufacturing and tech breakthroughs. This is why EIS and VCT investment is so important in providing smart, seed capital for these innovations. Fund managers play an important role in developing the founders and innovators in these businesses, many of whom have a great idea, product or concept but no experience or inkling as to how to market or commercialise these or steer them through bad times. That’s when the value of a VC really kicks in. It’s pleasing to note that studies tell us that only 13% of businesses with VC backing fail. Without VC backing, that number rises to 45%. What’s clear is that the pandemic has created winners and losers, both at sector and firm level. At sector level, obviously the hospitality, travel and leisure sectors have had a tough pandemic. Pubs shut, travel banned, social gathering off limits has meant almost all firms in these sectors have been decimated. But could they be due a bounce back in 2022? With us all desperate to holiday, meet and eat together again, are these the hot sectors to invest now? The retail sector has created more winners and losers more than most. The major online retailers and supermarkets have had a great pandemic. Smaller or high-street stores with little online presence have struggled or in many cases (Debenhams, Topshop) closed their doors permanently. The other big sector winners have been those sectors which were already starting to see growth but which the pandemic has accelerated at lightning speed, predominantly in tech. Think Zoom, Hopin (first fundraising to Unicorn in 2 years) and Revolut. The question now is: will these trends continue post-pandemic or will these successes be short-lived? What those companies who have thrived during Covid all have in common is that their innovations solve problems. Crises presents these companies with unique conditions that allow innovators to think and move more freely to create rapid, impactful change. Early-stage businesses are able to do this much better than older, more established businesses as they can take advantage of their smaller size, be more nimble and act quicker than blue chip businesses for whom change is anathema and who move at the pace of an oil tanker. History tells us that it was from previous crises that some of today’s big companies—e.g., Uber, Airbnb—were born as they took the opportunity presented to disrupt, displace and dominate. So as I step back, it feels like EIS is in a good place despite the pandemic. There’s lots of positivity in the industry; investors are investing; innovative, exciting companies are being built. I’m absolutely convinced the next wave of big companies to come out of the UK will be SEIS and/or EIS funded. We have already seen Revolut, Charlotte Tilbury, Cobra beer and Eve mattresses come through the EIS path and that’s just to mention well known product names. There are also a whole raft of life science and medtech businesses you would be less familiar with but who are equally successful, both financially and in improving the quality of our lives. Despite the appalling economic news surrounding us, I expect the end of the tax year to be another busy one. This only goes to highlight just how buoyant our industry currently is. My final thoughts are to thank you all for reading my ramblings over the years and to acknowledge Intelligent Partnership for giving me one more forum. I’m sure my successor, Christiana Stewart-Lockhart, will take up the EIS and SEIS mantle with great gusto.
S
- Name Surname
EISA worked tirelessly with HM Treasury to help them understand the funding environment.
Mark Brownridge
Director General of the Enterprise Investment Scheme Association (EISA)
Opening Statement Q&A with Richard Stone, AIC Update Overview Key Findings
eavers are brilliant. The channels and dams they make help reduce flooding, and the wetland habitats they create are home to otters, water shrews, fish, birds and dragonflies, along with countless other species. Unfortunately for beavers, however, they have other uses for humans. Their fur makes excellent hats, and their scent sacs can be used in perfume. As a result, the European beaver was hunted almost to extinction by the beginning of the twentieth century. It had already been absent from the UK for centuries. But things could be looking up. Various projects to reintroduce beavers to the UK are underway, from Knapdale in the Scottish Highlands to Braintree in Essex. The projects are experimental and are being closely monitored for the broader benefits that beavers could bring to the ecosystem, as well as their role in mitigating the impacts of climate change. It may seem a leap from beavers to VCTs, but the common theme is that small things can have a surprisingly large impact. The VCT industry is bigger than it has ever been before, but at £6.4 billion it’s still tiny in the context of closed-ended investment companies (2% of the sector), let alone the broader investment industry. Nevertheless, VCTs support a wide range of businesses across the UK – everything from nanotechnology to pet insurance. These companies create jobs, stimulating growth in local economies. And their products and services can have beneficial downstream effects. This year, for example, the ProVen VCTs have invested in Litta App, which makes rubbish clearance digitally accessible, more affordable and greener. Meanwhile, the Maven VCTs backed Snappy Shopper, which is helping local shops compete against supermarkets by launching delivery services. And just before the pandemic, the Puma VCTs invested in MyKindaFuture, which helps students and young people find jobs. All these companies have clear benefits for communities above and beyond their commercial potential. VCTs were also active in supporting smaller companies through Covid-19. Our recent report, Eager Beavers: Enhancing the UK’s commercial ecosystem found that they invested £695 million in the first half of 2020, including £219 million in follow-on investments. The latest batch of half-year reports suggest the pace of investment activity has not slowed – a good thing too, given the need to build back the economy. The companies VCTs back start small, but they can go places. Cazoo, a used-car website founded as recently as 2018 and backed by Octopus Titan VCT, recently floated on the New York Stock Exchange, valued at $8 billion. Parsley Box, which provides ready meals mostly for elderly customers, floated on AIM earlier this year, securing the Mobeus VCTs a fourfold return. Deals like these, as well as uplifts in valuation as the UK economy recovers from Covid-19, have led to the average VCT returning 22.7% in the year to date. Of course, not all VCT-backed companies succeed. But the VCT sector plays a vital role in the UK’s small business ecosystem. Investors in VCTs have enjoyed good returns as well as tax relief, but the feeling that their money is making a real difference to fledgling businesses and the broader economy could be equally satisfying.
opening statement
nick britton
This report and the research behind it would not have been possible without the help and support of a number of third parties who enthusiastically shared their time and expertise. These busy professionals went to great lengths to provide us with data, their insights on the market, and useful comments and suggestions while peer reviewing initial drafts. We thank Mark Brownridge, the outgoing director general of the EIS Association (EISA), who once again generously provided the opening statement for this update. We are grateful for his unfailing support over the years. We’d also like to show our gratitude to Nic Pillow and Gordon Pugh of Blackfinch; Harry Heartfield of Edition Capital; Dr Paul Mattick of Mercia; Alistair Marsden of Nova Growth Capital; Jess Franks of Octopus Investments; Mark Bower-Easton of Oxford Capital; Jonathan Prescott of Praetura Ventures; Mathew Cushen and Paul Soanes of Worth Capital. The expertise of one and all have improved this study in innumerable ways and their support as sponsors has made this update possible. Any errors and omission are our own. 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, Edition Capital, Merica, Nova Growth Capital, Octopus Investments, Oxford Capital, Praetura Ventures, and Worth Capital.
Acknowledgements and thanks
learning objectives for cpd accreditation
Identify the main developments and news in the EIS market Define EIS-relevant issues in the high inflation, high interest rate, and high tax era 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
✓ ✓ ✓ ✓ ✓ ✓
cpd
04
Find out more at Managers in focus
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After you have reviewed this publication and before we fulfill your CPD certification request, we will be requesting your feedback on it. Your collaboration will assist us to enhance the learning activity, and will inform improvements to future publications.
Contact us: lisa@intelligent-partnership.com Sponsorship Opportunities: chris@intelligent-partnership.com
EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
key findings
05
income needed to be considered HNWI by HMRC (make up the 6,200 wealthiest individuals in the UK)
£20 million or more
proportion of the entrepreneurs who expect to hire employees over the next five years
72%
number of companies that have received SEIS investment (£1.4bn raised) to date. HMRC
13,800
number of companies that have received EIS investment (£24bn raised) to date. HMRC
32,965
number of unicorns raised in UK in 2021 (bringing the total to 116)
29
average overall return targeted by open offers
264.24%
average share price return on growth capital in 2021 (AIC)
47.43%
77.8%
£
share of EIS investment in early-stage companies
This update has thrown up some interesting, sometimes alarming, sometimes revealing facts and figures. So we've selected a few to give you a flavour of the current context, some food for thought and some indicators of the fundamentals you should be aware of.
2021
06
EIS amid rising interest rates Regional angels backed by £150m cash pot for EIS OTS: government should remove stumbling blocks from EIS A Return to the Roaring Twenties? Maximising early-stage businesses as an asset class Why Hunt for Unicorns? A clever piece of year-end tax planning What the managers say?
EIS amid rising interest rates
It seems like the long stretch of ever-cheaper finance has finally come to an end; the UK has entered what could well be a new era of higher interest rates.
07
On 16 December 2021, the Bank of England (BoE) became the first major central bank to raise rates since the start of the pandemic. The bank’s Monetary Policy Committee voted by a majority of 8 - 1 to increase Bank Rate by 0.15 percentage points, to 0.25%. The interest rate hike was an attempt to tame the strongest inflation in more than a decade. The Consumer Price Index rose by 5.1% in the 12 months to November, up from 4.2% in October. This is more than double the central bank’s target of 2%, set by the government. As a result, the market is already gearing up for a tighter monetary policy to curb inflation. This is evident by the fact that yields have already started rising after many years of decline.
UK inflation rate
Source: tradingeconomics.com
Yields on 10-year UK government bonds
Source: Trading Economics
1998
8
7
6
5
4
3
2
0.938
2002
2006
2010
2014
2018
2022
The rate increase was the first in more than 3 years by the BoE, and came despite fears that the Omicron Covid-19 variant could slow the economy by causing people to spend less. Rising inflation has an insidious effect: input prices get higher, consumers can purchase fewer goods, revenues and profits decline, and the economy slows for a time until a measure of economic equilibrium is reached. Post-Covid, the UK economy is expected to be in growth mode and the BoE appears poised to lift rock-bottom interest rates to fight rising inflation. Already, financial advisers are divided on what to expect from ascending interest rates.
Jan 2021
Apr 2021
Jul 2021
Oct 2021
0
1
0.6
0.7
0.4
1.5
2.1
2.5
3.2
3.1
4.2
5.1
In a recent FTAdviser poll, advisers were split on the impact of rate increases on investors. “28% of respondents view higher rates as good for investors, while 24% voted that higher rates will make no difference,” wrote the magazine. In contrast to this, a total of 52% of advisers surveyed believed a rate hike would not be bad for investors, 48% of advisers “took the view that a rate rise would be harmful”.
Source: ftadviser.com
Advisers think rising interest rates will be bad for investors
Good
Bad
No difference
10
20
30
40
Percentage
Using EIS to strengthen your portfolio
What advisers think: Good or bad for investors?
Inflation presents a special challenge for investors: Rising prices eat into investment returns and erode the value of retirement savings. Therefore, the primary goal of investing at a time of inflation is to preserve your portfolio's buying power. The second reason is that you want to keep your nest egg growing. It can also lead you to diversify, which is always worth considering. Spreading the risk across a variety of holdings is a time-honoured method of portfolio construction that is as applicable to inflation-fighting strategies as it is to asset-growth strategies. With these goals in sight, investors may want to consider adapting their traditional portfolio mix with alternative strategies. The Enterprise Investment Scheme (EIS) is an alternative investment strategy that can be used as a hedge against mainstream decline in real returns and that has often delivered superior results for investors. Often in the past, diversification has meant a balanced portfolio of stocks and bonds, with the traditional 60% stock/40% bond portfolio being a classic model of the approach. Lately, however, stock and bond returns have more frequently moved in the same direction, sometimes seeming positively correlated. For example, in March and April of 2020 the value of the FTSE 100 dropped by 31%, yet fixed interest markets failed to deliver the positive returns investors expected. While it’s true that these expected correlations have only failed to materialise for relatively brief periods, the risk remains. Investing in EIS companies (which are mostly unquoted) could help to mitigate this risk. In short, the combination of potentially high returns, generous tax benefits, and possibly low correlation with the market makes EIS investment a valuable strategy for both risk-reduction and wealth creation in an era of rising inflation and interest rates.
Traditional thinking is that rising interest rates create headwinds for equities, but the reality is more nuanced. The impact of interest rate changes and inflation differs from one business to another. Historically, these businesses have performed well during periods of rising rates.
EIS and companies that benefit from rising rates
Past performance shows that during periods of rising interest rates, the healthcare and technology sectors experienced average gains that outperformed the market. EIS provides excellent opportunities to invest in technology and healthcare businesses. When they are knowledge-intensive companies or funds, the investor could benefit from the special treatment accorded these R&D-focused companies.
Technology and healthcare companies
By earning more on their cash reserves, cash-rich companies tend to benefit from rising rates. investors should look for companies with large percentages of book value in the form of cash. Depending on their funding runway, many EIS investee companies are relatively cash-rich businesses. These companies (many of them in the tech and healthcare sector) tend to hold on to greater amounts of profits as retained earnings to reinvest in growth opportunities, rather than paying them out in the form of dividends. Dividends from EIS-qualifying companies are taxable while capital gains are not.
Cash-rich companies
These companies are able to pass their rising product costs to customers. People still need housing, food, heating, cooling, education, and products for daily living, even during inflation. A study by the US-based Drucker Institute shows that, out of 11 industry sectors, consumer staples had the largest concentration of highly innovative companies. EIS remains the UK’s flagship scheme for investment in young innovative companies. Advisers can use some of these ideas when constructing a client’s portfolio to help them diversify. However, even as you emphasise sectors that are likely to benefit from inflation, the inflation tail should never wag the investment dog.
Consumer staples (non-cyclicals)
08
Regional Angels backed by £150m cash pot
Angel investors have been upbeat about EIS for a while, and now the government is backing them. In his Autumn budget, Chancellor of the Exchequer Rishi Sunak announced £150 million of funding for a regional UK angel investor programme.
The funding, part of the government’s Levelling Up plans for the UK, has been allocated to the British Business Bank (BBB) to give a boost to start-ups and smaller companies outside of London and the Southeast. The Regional Angels Programme aims to help reduce regional imbalances in access to early-stage equity finance for small businesses across the UK. The aim is to increase the availability, supply and awareness of angel and other early-stage equity investments across the country.
In its newly released Regions and Nations Tracker, a report that explores the geographic patterns seen in UK smaller business finance, the BBB notes a significant regional disparity in access to funding. “The largest four regions within the UK—London, the South East, the East of England, and the North West—host 55% of the business population but take in 86% of equity investment. These areas also outperform on private debt, attracting 69% of investment,” the state-owned economic development bank says in the report. The UK 2070 commission (an independent inquiry into city and regional inequalities in the UK) has found that the UK is one of the most regionally unbalanced countries in the industrialised world, and that the disparities will widen unless the government adopts a radical programme of investment.
Persistent investment gap
VCT managers will have the Prime Minister and his Chancellor to thank for their announcement of a tax hike on dividends payments.
Regions and Nations Tracker 2021
Investors Home Location
Under the auspices of the British Business Bank, the Regional Angels Programme seeks to increase the aggregate amount of early-stage equity capital that is available to smaller businesses with high growth potential across the UK. The goal is to raise the profile and professionalism of angel investment activity and to attract further third-party capital alongside business angels while generating a market rate of return. The way the programme works is as easy as one, two, three.
The angels are coming: seeking a higher profile
1. After extensive due diligence, BBI selects an investment partner who typically has an angel network and often an EIS fund. 2. If it decides to go ahead with funding, BBI sets up a managed account where it automatically contributes about 30% of each funding round that the partner is putting together. 3. From that point on, BBI doesn’t necessarily have to review each and every investment opportunity, having already done its due diligence on the partner.
The involvement of angel investors in EIS can provide tremendous benefits for the sector. Various studies have shown that startups that are backed by angel investors are more likely to have substantial growth, experience a greater rate of return, and remain in business for a longer period of time.
Angel investors are good at helping companies achieve their potential. Often entrepreneurs themselves, or professionals with extensive experience in the industry they chose to invest in, they know what it takes to start, build and exit innovative businesses. Typically, angel investors will bring the benefit of additional monitoring of investees and help with their business objectives and eventual exit paths. An angel-backed company usually finds it relatively easy to secure additional funding. This is because there will be a considerable amount of due diligence information and reporting history already available to potential funders.
Benefits of raising capital from angel investors
What angel investors bring to a company
What angel investors bring to a company:
Angel investors can provide skills and experience to enhance a company's likelihood of success. Therefore, the growing involvement of angel investors could potentially reduce the rate of EIS business failure, bring more credibility to EIS investment, and attract more funding to the sector, as more potential investors are encouraged by the improved outcomes to join in. The uptake of EIS has been traditionally skewed towards London and the South East. HMRC’s latest EIS statistics show that the proportion of the amount of investment in companies registered in London and the South East was 66% in 2019 to 2020, broadly in line with recent years. Nonetheless, there are hotspots of innovation, creativity and entrepreneurship right across Britain, and EIS is a vehicle that can funnel investment towards them. The government believes the Regional Angels Programme is a significant step in that direction. The funding “will help ensure some of our most promising young companies across the UK get access to the finance they need to support their growth journey,” said Suren Thiru, Head of Economics at the British Chambers of Commerce. “Ministers must continue to ensure that the programme has sufficient funding capacity to meet any future surge in demand.”
EIS is the big winner
15
25
35
34.4
38.4
22.2
21.4
8.5
7.3
6.9
10.0
5.5
4.7
4.3
3.7
3.3
2.9
2.4
4.9
1.8
0.9
2.2
1.4
1.2
6.3
0.5
Greater London
South East
South West
East of England
Scotland
West Midlands
Yorkshire and Humberside
North West
North East
East Midlands
Wales
Northen Ireland
Other
Percentage of angles
Survey (2019)(n=508)
EIS/SEIS 2018/2019 (a)
Lack of local inverstors leads to wasted economic potential
Uneven spread of equity finance
Rural business owners more pressed into injecting personal funds
The British Business Bank's commitment to address regional imbalances
45%
of businesses using external finance in 2021
of equity investment based in London, South East, East of England and North West, despite hosting just 55% of smaller businesses
86%
of equity investmentstakes the investor and the recipient business are within two hours of each other and 61% within one hour
82%
between investor and recipients in over 50% of equity stakes in 2020 despite increased remote working uner Covid-19
30 minutes
Investors favour short distance deals
of rural construction business owners used personal funds, compared to 27% of their urban counterparts
38%
of investment is in London, but it only hosts 19% of the UK's smaller businesses
62%
of investment in Yorkshire and the Humber, but it hosts 7% of the UK's smaller businesses
1.5%
of investors into businesses in East of England, South East, East Midlands, and South West are based in London
60%
of equity investors in London businesses are also based in London
90%
58%
Top 20 Local Authorities account for
of equity deals since 2011
of businesses supported by the Banks programmes are based outside of london
Invested into businesses outside of London in 2020/21 In total, the Bank's regional funds provided a
£357m
£943m
flow of finance into regional finance markets in 2020/21
In
Value beyond capital (mentorship, advice, management) Marketplace knowledge and strategies used in similar companies Credibility from being associated with the investor Easier follow-on financing
After extensive due diligence, BBI selects an investment partner who typically has an angel network and often an EIS fund.
If it decides to go ahead with funding, BBI sets up a managed account where it automatically contributes about 30% of each funding round that the partner is putting together
From that point on, BBI doesn’t necessarily have to review each and every investment opportunity, having already done its due diligence on the partner.
Regional EIS investment is helping to level the agenda by sourcing growth opportunities which exist in thriving regional towns and cities outside of London and the south east.
- Paul Mattick, Head of Sales & Private Investor Relations, Mercia
OTS: government should remove stumbling blocks from EIS
09
The government should take a fresh look at the rules guiding enterprise investment schemes, with a view to eliminating complicated and obstructive administration and procedures that are impeding their smooth and equitable operation. That is one of the recommendations of the Office of Tax Simplification (OTS) in its second report on simplifying capital gains tax (CGT), which focuses on Simplifying practical, technical and administrative issues. The first report Simplifying by design was published in November 2020 and considered the policy design and principles underpinning the tax. In this second report, published in May 2021, the OTS acknowledges that the scheme requires strict criteria to avoid misuse. But it also argues that the current rules are overly restrictive and liable to frustrate genuine applicants. On 30 November 2021, the OTS published a letter (which it received from the Financial Secretary to the Treasury on behalf of the Chancellor) in response to, among other things, its second report on Capital Gains Tax. The following graph shows the number of taxpayers liable to CGT by year of disposal between the tax years 1987 to 1988 and 2019 to 2020.
- Chancellor Rishi Sunak
Giving reassurance to the private investors who provide this much needed capital that the scheme will continue beyond the current sunset date of 2025 is critical.
The report pinpoints “a number of specific areas that regularly cause practical concern which, if addressed, could better enable the relief to achieve its policy objectives”. These include the short deadlines for issuing shares, the interaction with Business Asset Disposal Relief, the potential for abuse with low value investments, a cumbersome application process, and the link between eligibility for capital gains tax and income tax. The report—which suggests significant CGT reforms across a wide range of areas, including moving home, getting divorced, and running or investing in a business—makes specific EIS-relevant recommendations for improvement.
OTS: Areas of practical concern
On another front, English pub owners could raise a toast to the Chancellor for introducing a new draught relief, which will apply a lower rate of duty on draught beer and cider. “It will particularly benefit community pubs who do 75% of their trade on draught”, Rishi Sunak said, adding the measures, which are ‘not temporary,’ represent the ‘the biggest cut to cider duty since 1923,’ ‘the biggest cut to fruit ciders in a generation,’ and ‘the biggest cut to beer duty for 50 years’. The tax breaks are good news for VCTs that invest in pubs, and might help to boost VCT investment in this area.
A toast to the Chancellor?
UK to invest in late-stage innovation, doubling Innovate UK’s annual core budget
£1bn
Number of taxpayers liable to CGT
Source: HMRC
The OTS recommends a review of the rules for EIS, with a view to ensuring that procedural or administrative issues do not prevent their practical operation. The OTS suggests the following specific improvements:
OTS: Ways of improving enterprise investment schemes
The government should provide taxpayers with a measure of flexibility in relation to non-substantive technical issues which risk invalidating claims where the substance of the transaction meets the policy objective. A short period of grace should be allowed between a company receiving funds and issuing shares. Currently, shares in companies that qualify for enterprise investment schemes have to be issued when, or shortly after, any funds are received, which can be commercially unreasonable. Consideration should be given to aligning the treatment of revived deferred gains for EIS and revived SEIS reinvestment relief gains so that Business Asset Disposal Relief can be claimed on the latter as well as the former.
This last recommendation refers to a source of longstanding frustration among investors. Under the status quo, investors cannot get CGT relief if they are unable to claim an income tax relief. This means that an investor who has suffered an income loss, for example, and has a negative income for the year will also lose out on the CGT relief. It is an odd outcome for an individual to be denied CGT relief, the OTS notes, if they did not have a liability to pay income tax when they first made that investment. In its response, the government confirmed that it has accepted the OTS’ recommendation that HMRC should review its guidance in relation to EIS. The chancellor is also considering “whether to review the rules for EIS, with a view to ensuring that procedural or administrative issues do not prevent their practical operation.” Nevertheless, it is explicitly stated that this would be in the context of the income and CGT functions of the relief. This suggests that any broader contemplation of issues on which there has been recent conjecture, such as increasing the levels of the reliefs available, is not on the agenda.
Implementing these changes, the report says, could remove a range of anomalies that can currently frustrate the uptake of these schemes. The reform could facilitate more financial support for start-up and early-stage companies. Stressing the economic contribution of the schemes, the report reads: “There is evidence to suggest that tax incentives for venture capital investment generate a number of positive macroeconomic benefits and business investment will be all the more important as the economy recovers from the effects of Covid-19.” Britain’s early-stage companies will play a critical role in driving the post-Covid economic recovery, and the EIS provides equity financing to them when it’s most needed, while also offering investors attractive growth potential and considerable tax benefits. Small businesses account for three fifths of the employment and around half of turnover in the UK private sector. With the sector already facing a significant financing gap even before the outbreak of the deadly Covid-19 virus, the pandemic has only made the financial vulnerabilities an existential threat for many firms. The chart below shows the high number of small businesses that closed for good in 2021.
OTS: Business investment will be important for economy recovery
Business creations/closures
The eligibility criteria should be reviewed on an on-going basis to ensure they can reasonably be met in practice and do not unduly restrict companies’ commerciality. HMRC should improve the functionality of the forms and their guidance in consultation with professional bodies and adviser groups. The government should continue to monitor whether the reliefs are being used for investments that are not in keeping with their original intention. The government should explore whether CGT relief should still be accessible by the investor even when income tax relief has not been claimed.
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
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1998-89
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
Number (thousands)
50
100
150
200
250
300
Year of Disposal
Q1
Q2
Q3
Q4
2017
2019
2020
Creations
Closures
60K
70K
80K
90K
100K
110K
120K
130K
140K
- Harry Heartfield, Partner, edition capital
As we come to terms with Coronavirus and move past the most serious restrictions a clear opportunity presents itself to investors.
s the full ferocity of COVID rolled across the globe over the past 20 months, the hospitality and leisure sectors were often hit first and hit hardest. Restrictions, whilst now removed in the UK, forced the closure of venues and whole sectors for months on end. Many wondered, when the storm abated, what the world would look like. Would there be demand for people to socialize in large groups? Would city centres become ghost towns? Was this the end for the pub as we know it? Two schools of thought formed. The first was that people would become permanently scarred by the pandemic limiting their exposure to crowds by shunning hospitality and looking to move out of cities. They looked at the huge increases in working from home and house price rises in the countryside compared to the decreases in London and other cities as indicators of a desire to avoid other people and said that their case was closed. Cities and hospitality were doomed, and it was better to get out now. The second looked to the past for inspiration. The Spanish Flu has many echoes in COVID. It spread with alarming speed across the globe, and necessitated large numbers of restrictions on crowds, theatres, restaurants and bars. Public campaigns to wear masks and open windows to limit infection were widespread. Millions still sadly died. But the aftermath didn’t see the end of pubs, restaurants, theatres or the collapse of city centres. It saw the start of the roaring twenties – an era of unprecedented growth in entertainment and urbanization. People, after a period of enforced distance, decided to make the most of their rediscovered freedoms. Come the lifting of restrictions in the spring, the sector held its breath. Which worldview would be proven correct? The data gave a sharply clear signal. Hospitality and leisure, left to their own devices, were back. A recent Barclays report showed that revenues were on average 26% higher than 2019 figures. According to Barclays economic modelling, sector revenues from April to December 2021 are likely to be £15.4bn higher than 2019. This performance has been echoed by Edition’s leisure portfolio. All of our hospitality businesses are trading above pre pandemic revenues, with new venues opening and locations often fully booked weeks in advance. It hasn’t all been plain sailing for the sector though. The supply chain crisis and shortages of labour have increased costs significantly for operators and made the return to ‘normality’ more nuanced than the headline revenue growth might suggest. Good quality operators have needed to adapt and respond quickly to satisfy increased customer demand, but despite this there is significant positivity for the future from the sector with 94% of businesses confident of growth in 2022. The hollowing out of the city centres similarly seems unfounded. More businesses are expecting to increase their city centre locations than reduce them. This pattern is matched by Edition’s investment portfolio, where we are investing heavily in site openings across UK cities, taking advantage of enhanced landlord deals and the return of office workers. The rush to the countryside seems to have been fairly temporary, with home rental costs rising in London, with the average rent now 3.6% higher than in 2020, as people return to the city and the creature comforts that only a major urban area can offer. We are not out of the viral woods yet, however, as the developed world moves from pandemic to endemic COVID, we believe that consumers are likely to emulate their grandparents and great-grandparents in participating in activities that make us happy – spending time with each other and indulging our passions and interests together – and that means a boom for leisure. The philosopher George Santayana, in words pilfered later by Churchill, said that "Those who cannot remember the past are condemned to repeat it". Demand for experiences, leisure and hospitality remains undimmed. Investors who ignore the lessons from the past and decide to avoid the leisure sector are likely to feel they have missed out if history repeats itself and the 2020s see a boom in consumer demand for leisure. We, at Edition, are determined not to make that mistake.
A
Two schools of thought formed. The first was that people would become permanently scarred by the pandemic limiting their exposure to crowds by shunning hospitality and looking to move out of cities. The second looked to the past for inspiration.
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
Harry Heartfield
Partner Edition capital
thought leadership
A Return to the Roaring Twenties?
www.editioncapital.co.uk 020 3145 1851 enquiries@editioncapital.com
12
11
espite the effects of the pandemic at a macroeconomic level, tech enabled industries flourished during 2021. Specifically, the European tech sector has had a pivotal year, gaining international recognition and stealing some of the limelight from its American colleagues. The UK led much of Europe’s start up success after creating 70 unicorns in 2021 alone, which is more than triple the number created in 2020. In a record-breaking year, the UK tech sector also raised over £26bn in venture capital funding, leading to more new jobs and public listings than ever before. For both investors and advisers, the rise of this asset class poses both exciting prospects for potential returns and tax efficient investing via EIS schemes. But navigating this fast-paced environment can be challenging. How can advisers and investors choose fund managers who maximise early-stage businesses’ chances of success? Pre-investment value Investors should seek out fund managers with a thorough pre-investment due diligence process. A wide number of factors should be considered before deploying capital. Business model, market size, IP defensibility and management team experience are all strong indicators to help fund managers predict future success. Consider if fund managers use both internal expertise and external consultancy to get the best overview of a new investment opportunity. For example, Praetura has hired one of the largest and most senior investment teams in the industry, but also uses a number of hand-picked expert consultants to help evaluate each business. In addition to this, our 80+ venture partners have substantial commercial experience and are called on to validate new opportunities when they have specific knowledge or experience. A balance must be struck between diversifying portfolios through investing in businesses in different sectors and stages while only choosing early-stage companies with exceptional growth potential. For example, Praetura sees almost 200 new opportunities a month but only invests in a maximum of 15 new businesses each year – all of which will span several sectors. Post-investment value Support for early-stage businesses post investment is often overlooked by many fund managers. Whilst the potential returns are substantial, start-ups are risky by their nature and rarely follow a linear path to success. For Praetura, this is where we aim to add significant value. After feedback from founders, Praetura launched an Operational Partners Programme to better support our portfolio’s growth journey. The programme employs several individuals with noteworthy previous experience to work with, mentor and connect founders to new opportunities through their own network. Beyond the simple advice typically provided by a non-executive director, the Operational Partners take an active support role in the business. Having these individuals in place de-risks the businesses we back by reducing the chance of potential mistakes and improving decision making. What’s more, Operational Partners also increase the potential for growth by helping to develop and focus portfolio founders. The programme doesn’t create dependency and instead encourages portfolio founders to be self-sufficient by helping each founder overcome certain commercial challenges they may not have seen before. These include potential hurdles around globilisation and recruitment, as well as more day-to-day tasks. As an example Praetura portfolio founder, Gemma McCall, started Culture Shift, a revolutionary HR tech platform that helps universities and businesses improve workplace culture. She’s been working with Mark Slade, the founder and vice chairman of derivatives trading and education business OSTC, for around 10 months now. On her work with Mark, an Operational Partner at Praetura, Gemma said “Mark is such a rock for me. Mark’s had huge success in building, scaling and exiting businesses. But he’s also failed at a number of ventures. Both experiences have taught him a lot. He’s been there before, and he knows what it feels like. We speak regularly and we work through challenges I’m facing, founder to founder. That kind of contact is so important.” Following the success of our Operational Partners, Praetura is currently hiring three more partners to accelerate the support for our portfolio and maintain the desired partner to founder ratio. While the programme has helped mitigate risk and increase potential returns for investors, it has also helped generate new deal flow for the Praetura investment team. Positive word of mouth and public endorsement from current founders has created a founder-first brand for Praetura in the start-up community, leading to more founders submitting equity funding proposals to the team over other VCs. The Operational Partners programme is just one way fund managers can add value to their portfolio. However, regardless of the strategy they employ, all fund managers have a responsibility to investors and advisers to maximise the potential of their investments. As the market matures, Praetura has seen a rise in questions from investors around how portfolios are handled, scrutinising each manager’s individual practices. While tax benefits are essential to the EIS market and a powerful planning tool for advisers, what’s clear is there is growing appetite from advisers and investors alike around VC as an asset class.
D
How can advisers and investors choose fund managers who maximise early-stage businesses’ chances of success?
Jonathan Prescott
Director Praetura Ventures
Maximising early-stage businesses as an asset class
www.praeturaventures.com 07710 087 636 Jon.prescott@praetura.co.uk
e all know that startups are a high risk, high reward asset class. It's a cliche in Venture Capital that, from a portfolio of ten startups, nine will fail. This implies that the one "winner" needs to return the portfolio and provide the entire upside. So we hunt for "unicorns": startups that deliver eye-watering, headline-grabbing exits. According to data from First Round Review, startups only have a .00006% chance of achieving unicorn status. Hunting for them therefore can be a very high risk strategy that itself throws fuel onto the risk associated with Venture Capital. The headlines write themselves. But what do the nine companies that "fail" look like – are they actually failures? Often, a "fail" in this context means that the startup is not potential unicorn material. According to data from i5invest, 80% of EU exits are under €50M, and the average sits at €30M. What if you didn't need to chase the .00006% of startups that become unicorns? What if, instead, you could achieve returns by playing into the centre of the 80% of EU exits? This is where the Seed Enterprise Investment Scheme (SEIS) can step up for investors. SEIS investments are often made long before a company hits a £1M valuation. (Here at Nova, our typical pre-money valuation for an SEIS stage company is £300K.) Investing at this early stage – not through friends and family, but through a well managed, proactive, FCA authorised fund – provides an opportunity for potential outsized returns. All whilst typically only having to play where the vast majority of exits are happening. For example, if a company valued at £300K manages to exit at £30M, this would be a 100x return. You would only need that company to have an exit of £3M to provide a 10x return. These £300K companies aren't the headline-grabbing, £100M investments that most people are hunting for; rather, they're successful small businesses solving niche market failures, having positive impacts on entire communities and creating extraordinary wealth in the process. It's important to realise that, in terms of stability, a startup with a £300K valuation is an inherently riskier asset than one valued at £100M. Investors can mitigate this risk by investing into a UK managed SEIS fund, which supports and nurtures a portfolio of such companies, spreading the risk and helping them address the main areas of failure. (Here at Nova, our approach has reduced the assumed failure rate of 92% within three years, down to 25% within our portfolio of companies.) When you then consider the generous SEIS tax breaks that the UK government affords to UK taxpayers – potentially underwriting 86.5%* of each investment – this early stage asset class becomes compelling. As VC investment continues to break new records, some of us are asking if we want to play in the .00006% world of unicorns, or if the 80% of €30M exits is a better bet. Why hunt for unicorns?
W
Investors can mitigate this risk by investing into a UK managed SEIS fund, which supports and nurtures a portfolio of such companies.
Alistair Marsden
Director Nova Growth Capital
Why Hunt for Unicorns?
www.novagrowthcapital.co.uk 0151 317 4250 alistair@novagrowthcapital.co.uk
*based on higher rate taxpayers claiming full SEIS tax reliefs.
13
ess Franks, Head of Retail Investment Products at Octopus Investments, talks through a highly relevant planning scenario as we approach tax year-end. Chris wants to mitigate a prior year income tax bill Chris is self-employed and a high earner. However, his income can fluctuate from one year to the next meaning he often doesn’t know what his tax bill will be until his accountant has finished preparing his tax return. Tax year-end is nearing and Chris wonders if there is a way he could offset his income tax bill from the previous tax year, while also supporting his wider planning objectives. What his financial adviser suggests Chris meets with his adviser, Helena. She considers Chris’s needs, goals, and appetite for risk, before suggesting a potential investment. Helena explains that one of the benefits of investing in companies that qualify under the Enterprise Investment Scheme (EIS) is the ability to carry back income tax relief to the previous tax year. Typically, relief can be claimed in the year that money is invested into each individual EIS company, or the previous year. This can make offsetting income tax from the prior year difficult when investing in an EIS portfolio at the end of the tax year. However, Chris could invest in a Knowledge Intensive EIS fund. This would give him access to a diverse portfolio of early-stage companies with high growth potential while making it easier to carry back relief to the prior year. The relevant date for income tax relief when investing in a Knowledge Intensive fund is the date the fund closes, rather than the date each underlying investment is made. So Chris could invest at tax year-end once his income tax bill for the prior year is known, and still claim relief against this earlier tax year. His investment would provide him a single certificate which he could use to claim up to 30% income tax relief creating either a rebate or allowing him to offset tax yet to be paid. A powerful way for investors to target high growth For a company to qualify for EIS funding, it must be unquoted and in the early stages of its growth journey. Buying the shares of these kinds of companies can come with significant growth potential because they’re at the beginning of their growth curve. Of course, with this growth potential comes higher risk. To compensate for some of the risk of investing in early-stage businesses, EIS-qualifying investments allow investors to claim several tax reliefs. Crucially, losses are relievable (against income or capital gains tax) and growth is tax free. This is a powerful set of reliefs for a higher risk portfolio with high growth potential. Additionally, investors can benefit from upfront income tax relief on up to 30% of the amount invested, capital gains deferral and relief from inheritance tax. Clients must be comfortable with the risks 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 a long-term investment. The shares of unquoted companies can also fall or rise in value more sharply than shares in larger, more established companies. Several 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 change existing tax legislation. Tax treatment also depends on personal circumstances.
J
The relevant date for income tax relief when investing in a Knowledge Intensive fund is the date the fund closes, rather than the date each underlying investment is made
Jess Franks
Head of Retail Investment Products Octopus Investments
A clever piece of year-end tax planning
octopusinvestments.com 0800 316 2295 support@octopusinvestments.com
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: January 2022.CAM011772
What the managers say
14
Entrepreneurship has been on the rise during the Covid-19 pandemic, a trend that many predict will accelerate when economies shake off the Covid-induced constraints. How has this scenario impacted EIS deal flow?
EIS funding continues to be unevenly distributed across the regions of the UK, with London and the South East continuing to grab the lion’s share of investments. What do you hope to see (from both the government or the industry) in response to this persistent problem?
There are fantastic growth companies throughout the UK, and recent lockdowns have proved how feasible it is to invest remotely. Being based outside London means we instinctively look beyond the capital to the opportunities around the country as a whole. Ultimately, investors need to be better distributed across the regions if we want investment distributed more evenly.
Nic Pillow
Ventures Manager Blackfinch
So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to say.
Given the change in emphasis in some underlying investment sectors since Covid, has your EIS diversification strategy changed at all in the last year?
EIS investments are necessarily long-term, and as the pandemic proved there’s no way to predict the sectors subject to sudden shocks or uplifts in future years. As a newer offering, most of the investments in our Ventures EIS came after the first lockdown, in companies offering technologies targeting the post-pandemic future, but we nonetheless continue to ensure broad diversification across the portfolio.
Partner Edition Capital
jessica franks
It was exciting to see so many innovative businesses launched during the pandemic. When assessing a company, we look for evidence of ‘product-market fit’, which typically marks the cusp of a strong growth trajectory. New start-ups can take time to reach this point so we’ve only recently started seeing COVID-era businesses feeding through. It bodes well for future deal flow.
For Edition, we haven’t found the rise of entrepreneurship to have materially impacted EIS deal flow. Most of our deals are into later stage profitable businesses so this new wave hasn’t had a chance to mature yet and come onto our radar. We are already seeing some exciting new businesses that have come from the pandemic which are likely to investment ready in the next 12-24 months so we see this shift as a positive for the sector.
A quick change that would help address this would be to remove the 7-year rule for businesses in regions that have been underserved by EIS/VCT investment in the past. It would allow us to back businesses that fall foul of an arbitrary rule and help drive investment into these specific regions.
No – we remain focused on Leisure and Entertainment. The past year has proven that if allowed to open, people are more keen than ever to go experiences and events. As we move past the pandemic, we feel that consumer spending in these areas is likely to grow as a share of disposable income and we are preparing to ride this wave by making more investments in these sectors.
Our deal flow is strong. As one of the most established VCs in the UK we get ongoing introductions through our various networks and through our existing founders. We have also seen a marked increase in direct enquiries over the past couple of years which highlights that entrepreneurship in the UK is thriving. The more people who are willing to take that risk and follow their ideas, the better.
While some VCs will always focus on London and the South East, we have seen some amazing companies created right here in Oxford and across the UK. We don’t think it’s just an issue caused by EIS/VCs though – many entrepreneurs believe they need to be in London to secure funding and attract the best VCs. This is not the case and this perception needs to change going forwards.
Our investment strategy has remained broadly the same and we have seen growth and innovation in a number of our sectors. For example, the future of food - agritech has seen real innovation, particularly when it comes to AI. One of the biggest pain points in the agriculture industry has been labour costs, and we are seeing some exciting new technologies emerge to address these issues.
Mark Bower-Easton
Business Development Manager Oxford Capital
Being right at the start of both the founder and investor journey, at ideation stage, writing the first cheque, we often see trends a good 12 months before they hit the larger VC markets. Over the past 12-18 months we have definitely seen an increase in applications for support and investment from people that have maybe had a bit more time whilst on furlough to think and reflect about their own personal situation and those ideas that have been niggling in the back of their mind for many years.
S/EIS funding continues to be unevenly distributed across the regions of the UK, with London and the South East continuing to grab the lion’s share of investments. What do you hope to see (from both the government or the industry) in response to this persistent problem?
The new commitment from the chancellor to back the Regional Angel Investors Programme with a further £150m will indeed help attract further funding to the regions. However, as an industry and on a macro level we need to look at the UK as a single market in comparison to global leaders, strengthen our offering as a whole (which means diversifying) and stop being inward facing about micro market dynamics.
Given the change in emphasis in some underlying investment sectors since Covid, has your SEIS diversification strategy changed at all in the last year?
We have always been completely agnostic, led by the market and founders with great market fit. From the very start, 12 years ago, we have always had a sense of purpose about our investments. We continue to grow the number of under represented founders yr on yr. For example, our most up to date figures show that 27% of our investments have gone to female founders, far above the industry average. We champion the move to more conscious investing within the VC landscape, but we are glad to say we have not had to change our investment mandate to fit in.
Changes to work and lifestyle from the pandemic have created new opportunities for many entrepreneurs. This has increased our deal flow as more businesses are using tech and digital solutions to innovate around emerging new problems. More entrepreneurs wanting access to knowledge through communities of founders also means our founders are likely to introduce us to their network.
Some of our most exciting companies were found outside the capital. Scotland-based Orbex, for example, is building the first rocket launched from UK soil with a 3D-printed engine. We would like to see more awareness of EIS in areas where funding is unevenly distributed. Businesses outside London can be less aware of EIS funding. Education and access are important.
We are one of the largest Ventures teams in Europe and have built networks and opportunity pipelines across multiple areas, so we remain resilient with a naturally diversified deal flow. More specifically, since the pandemic, we spent less time looking at the travel sector but saw more opportunities in consumer companies that were adopting technology.
Matthew Cushen
Founding Partner Worth Capital
Careful when you say entrepreneurship – that is a very broad definition that includes gig workers, someone setting up a coffee shop or a small consultancy. We see little change in the number of venture capital appropriate businesses. Deal flow was, and is, still strong for both SEIS and EIS.
This is partly bias within our industry – unable to see beyond close networks of ‘people like them’. We encourage investors to interrogate the regional investment figures from funds they are interested in - along with female founder and non-white founders. These ‘diversity’ figures are a proxy for an investment manager’s ability to remove inherent, sub-conscious, unhelpful bias that indicate they are not making the most objective or profitable investment decisions.
We don’t take a sector approach. Early-stage investing is very different from mature markets where market share is hard won and growth is often predicated on sector growth. We look at tiny sub-sectors and whether there is fertile ground for nurturing a new business. And when the herd is chasing one way and driving up valuations, we can see value outside of the herd.
The Praetura Ventures investment team are now reviewing over £3bn worth of opportunities annually. It’s an incredibly exciting time for early-stage businesses and the potential to grow globally has only been accelerated by Covid-19. Whilst initial lockdowns posed a challenge, we expect deal flow to substantially increase in 2022.
Praetura ensures 60% of our portfolio is based in the North of England. This funding gap is a real opportunity for investors willing to look outside the capital. According to government research, companies outside of London are 50% less likely to secure equity funding. The British Business Investments’ recognise this with their Regional Angels Programme. In 2021, Praetura became the first Manchester-headquartered venture capital company on the programme.
Diversification has always been at the core of our investment strategy. Our strategy mitigates risk by combining a thorough pre-deal due diligence process with a variety of early-stage companies from across different sectors and stages. Covid has changed the types of businesses seeking equity funding, but it hasn’t broadly affected our approach to diversification.
The UK has always been a hotbed for start-ups, and the great resignation has happened following the pandemic as a result of people realising that they can work (from home) in a way that fits their work/life balance. However, I doubt that this will influence the amount of high quality deal flow that Mercia
Addressing the uneven distribution of start-up investment across the geographies is one of Mercia’s USPs, as we are deploying £100m in regional companies already, and we recognise there is potential to deploy £250m a year without changing our strategy. The lack of capital in the regions results in the pricing of investments being 50%-100% lower for a comparable company, and creates an economic opportunity for EIS investors who are brave enough to invest outside of London and the Southeast.
Not at all, as we were already participating in the sectors which have been affected by Covid, such as remote working software, delivery companies, diagnostic devices and healthcare more generally.
Dr Paul Mattick
Head of Sales and Investor Relation Capital Mercia Fund Management
what the managers say
Market Composition Fees and Charges
Market composition
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 23 December 2021.
16
Number of open offers continues to drop
In the course of our last two EIS Updates, the number of open EIS offers has continued to drop—from 67 in February 2021 to 58 in September. Now the number has further declined to 55. Despite the extraordinary resilience of the EIS sector in the face of the devastating pandemic, it’s hardly surprising that managers may have closed funds to take stock of current conditions, as we noted in our last analysis. Indeed, the fact that the sudden arrival of the Covid-19 pandemic did not completely choke off capital flow to the sector is itself an amazing vote of confidence by investors.
Open offers by investment sector
49.1%
45.3%
General Enterprise
Media & Entertainment
Technology
VCT investee companies
of VCT managers invest in a higher proportion of female-led businesses than five years ago
66.7%
11.1%
22.2%
A unicorn is a private company valued at $1 billion (£718 million) or more. Worldwide, the growth in the number of unicorns has paralleled the global funding increase for new ventures and tech startups. The term unicorn was introduced by venture capital investor, Aileen Lee, in 2013. The moniker was meant to reflect the particular attributes of a unicorn: something highly desirable, but very difficult to obtain.
Growth Capital was the top performing investment company sector in 2021, according to data from the Association of Investment Companies (AIC). Experts say this was mainly due to higher growth companies staying private for longer, a trend that favours EIS investment. The AIC figures, released in early December, showed the sector saw an average share price return of 47.43% for the year. Target returns for EIS have remained relatively unchanged since our last analysis in October, when they stood at 263%. The average target returns are currently a hair above that level at 264%. On the positive side, target returns are holding, marking an end to the slide (a 10% drop) we saw from February to September. This could be a confirmation of a trend noted in other sectors: institutional investors are more confident about growth prospects. The latest Natixis Investment Managers Survey finds that almost half of institutional investors expect economic growth to return to pre-Covid levels in 2022. The search for yield is bringing investors to alternatives, the study finds, as tactical allocation moves position portfolios for new market realities and higher volatility. This means that many are looking further afield for income, including 68% who say they are increasingly using alternative strategies over fixed income to generate yield. Rising inflation and a weaker Sterling will continue to weigh on bond performance in 2022. EIS, which promises high-growth potential and generous tax relief, could be the sort of investment to benefit from the tactical moves designed to avoid or compensate for poor bond performance. In our previous update, we mentioned an outlier that aims for a 1000% target return. This exceptional target has continued to boost the average from the most often quoted return of 200%.
Target returns
Max 1000%
Median 201%
Target Returns
OPEN OFFERS
Mode 200%
Min 130%
Average 264%
“[In 2021], the best-performing sectors are dominated by alternative assets such as unquoted companies and property, as well as specialist equity,” said Annabel Brodie-Smith, Communications Director at the AIC. “The best-performing sector, Growth Capital, is relatively new and invests in later stage venture capital. It has proved popular as higher growth companies stay private for longer.” For EIS, the underlying investment sectors haven’t changed much since our last update. General Enterprise merely bobbed up from 47.0% to 49.1%; Technology picked up from 44.0% to 45.3%. Pharmaceuticals & Biotechnology dipped from 4.0% to 3.8%. But Media & Entertainment dropped from 5.0% to 1.9%.
Investment sectors
The sector allocation reflects the growth areas of the economy that EIS can invest in; it also explains the high target returns mentioned earlier. General Enterprise offers greater diversification for investors and added flexibility for managers. The UK tech startup sector is the fastest-growing in Europe. Data show that three-quarters of the UK’s top 100 fastest-growing startups are tech businesses. Pharmaceuticals & Biotechnology presents enormous opportunities. It’s supported by long term demographic trends and fundamentals. Compared to other sectors, demand for healthcare is resilient and less impacted by economic swings. Alongside food, clothing and energy, Media & Entertainment is one of the few industries that pervades into the lives of practically every consumer on the planet- delivering content ranging from news to gaming, films, TV programmes and more.
Early-stage companies continue to dominate the investee roster. More than three quarters of the businesses are early stage, compared to only 11.1% for later stage companies. AIM-listed businesses also make up 11.1%. It’s worth noting, however, that both early stage and later stage are in the context of the EIS timeline. The EIS rules restrict investments into companies that have been trading for more than seven years (ten years for a knowledge-intensive company) unless specific conditions are met.
Investee company type
open offers by investment sector
AIM Listed
Later stage
Early stage
In our Q1 2021 EIS update, we wrote the following: “The average minimum investment continued to increase between Q4 2020 and Q1 2021. It now stands £1,500 higher than it was at the same point in 2020, and has almost reached £20,000 - the number recorded in the second half of 2019. Half of the offers which opened between the start of 2020 and 5 February 2021 had minimum investments of at least £25,000.” As can be seen from the table below, the current average minimum investment stands at £20,000, with the most frequently quoted minimum being £10,000.
Minimum investment
Max £100,000
Median £20,000
Minimum Subscriptions
Mode £10,000
Min £5,000
Average £20,000
This marked increase in affordability—whether prompted by the prevalence of early-stage companies (77.8%), requiring less funding, or by some pressure on managers to lower this barrier to entry—is likely to bring in more everyday retail investors. Minimum subscription rate is a major factor in EIS’s evolution towards mainstream investing.
Most offers are still looking to invest across 10 companies, a number that remained constant throughout 2021. The average target of investee companies has inched up to 8.9, from 8.6 companies in February 2021. It’s however a sizable increase from the 7.6 recorded in February 2020.
Diversification
Max 50
Median 8
TARGET NO. OF INVESTEE COMPANIES, OPEN OFFERS
Mode 10
Min 3
Average 8.9
While diversification brings obvious benefits, increasing the number of investee companies also brings additional costs (e.g., monitoring costs) and regulatory requirements (e.g., more paperwork) which managers have to consider. Each fund manager needs to weigh this additional burden against the benefits of risk reduction.
In our last update, we included a section about Approved EIS Knowledge-Intensive Funds (KIFs), noting that there was a healthy appetite for investing in these funds. KIFs continue to draw interest from both managers and investors. It doesn’t hurt that the new EIS structure benefits from reduced paperwork and administrative requirements, a great comfort to managers and investors alike. At the time of our last update, Autumn 2021, there were five KIFs, four of which were launched during the year. This was more than half of the eight approved EIS funds (the predecessor to KIFs) launched in the five years prior to the introduction of KIFs. But only three of the five KIFs were open. Now, the number of KIFs open, or due to open in the next few weeks, has risen to seven. The government amended the EIS approved fund rules in April 2020 to focus investment on knowledge-intensive companies. As the UK gropes its way out of the Covid-19 pandemic, one sure path to recovery is through research and development, or innovation. EIS knowledge-intensive funds sit at the heart of Britain’s innovation ecosystem, giving investors the opportunity to make a real difference while making a profit.
EIS Knowledge-Intensive Funds continue to draw interest
Pharmaceuticals & Biotechnology
78.8%
Institutional fund managers have been allocating to VC and PE for many years, EIS and other tax efficient solutions are now offering the retail market similar opportunities
- Jonathan Prescott, Director, Praetura Ventures
The open offers are targeting an average overall return of 264.24%. However, this hefty average is distorted by a single outlier targeting an eye-popping 1000%. The most frequently quoted yield is 200%, still a respectable payout ratio.
Target dividends
Max 1000.00%
Median 201.00%
Target Dividends
Mode 200.00%
Min 130.00%
Average 264.24%
Fees & Charges
17
Over the past year, the average total initial charge dropped from 3.61% in February 2020 to 3.35% in October. It has now crept up to 3.43%. The initial charge to investors has not moved from 1.23% since September, though that represents more than a 16% decline from 1.47% in February 2021. The initial charge to investee companies, which dropped to 2.12% in September from 2.18% in February, now stands at 2.31%. The average Annual Management Charge (AMC) hasn’t seen much change. The AMC to investors has hovered just below 1.0%. It ticked down from 0.96% in February to 0.95% in September. It is now 0.98%. The AMC to investee companies has also been hanging about the same level. From 0.84% in February to 0.87% in September, it is now 0.84%.
The VCT fundraising season got into full swing in September and was a time of several rounds of impressive fundraising. During the pandemic and at a time when the UK’s young companies have needed it most, the VCT sector has raised £685 million for investment in small, innovative UK businesses. Where reported, open VCT offers target an average £1,000,000 in fundraising, less than the historical average minimum fundraise of £2,400,000. Whatever the reason, lower fundraising targets bring in more investors. That is what happened last year, when a 7.5% drop from the previous year allowed the most popular offers to be filled well in advance of the end of the tax year. Overall, 13 of the year’s 22 offers (comprising 20 of the 30 individual VCTs raising funds) were fully subscribed before 5 April 2021. Much of the investment went to support healthcare, science and technology businesses which have helped in the battle against coronavirus, said the AIC. “It demonstrates that demand for VCTs and the benefits they bring investors remains high at an extremely difficult time,” said former AIC boss Ian Sayers.
Below is the number of offers that charge each fee.
Number of offers that charge each fee
Total initial charge
Total initial deal charge
Total AMC
Annual perf fee
Exit perf fee
Initial Charge to Investors Excluding Adviser Fee Initial Charge to Investee Company Total Initial Charge AMC Charged to Investor AMC Charged to Investee Company AMC Annual Per Fee Exit Per Fee Annual Per Hurdle Exit Per Hurdle Initial Deal Fee Exit Deal Fee Annual Admin Charge
1.23% 2.31% 3.43% 0.98% 0.84% 1.76% 0.00% 17.91% 0.29% 96.45% 0.36% 0.20% 0.10%
0.00% 0.00% 2.00% 0.00% 0.00% 2.00% 0.00% 20.00% 0.00% 100.00% 0.00% 0.00% 0.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
1.00% 2.00% 3.00% 1.00% 0.00% 2.00% 0.00% 20.00% 0.00% 105.00% 0.00% 0.00% 0.00%
10.00% 10.00% 10.00% 3.00% 3.00% 4.75% 0.00% 30.00% 6.00% 150.00% 4.00% 3.00% 1.00%
Avg
mode
median
maximum
minimum
Annual perf hurdle
Exit perf hurdle
Exit deal fee
Total annual admin fee
60
109%
34%
106%
0%
30%
102%
18
EIS and portfolio diversification: a perfect match
For the right clients, it’s a brilliant idea to add EIS investments into your portfolio to help it grow and protect it at the same time. The wide range of industries available to EIS investors is readymade for a well thought out diversification strategy.
19
Investment diversification is a crucial aspect of financial planning since it’s the primary tool for lowering your risk and maximising your return. Diversification is all about variety, the type offered by EIS investments across a variety of regions, sectors, and investment sizes. Through the EIS scheme, you can invest in technology, healthcare, engineering, manufacturing, and a host of other industries that are not specifically related to each other. The tax-advantaged scheme was designed to encourage private investors to take a risk and invest in early-stage UK businesses, meaning startups. Part of the allure of startups is that they are abundant in just about every sector. Any industry in the world can benefit from disruption and entrepreneurs are only too keen to make it happen. Backing startups can take you into an array of different sectors, thus bringing added diversity to your portfolio. If one of your investments suffers in an industry-wide downturn, investments in better performing sectors in your portfolio may offset any damage or risk. This matches what we see in real life. While some industries are having a tough time, others are thriving. Of course, there are no guarantees in life or in investment. So, diversification is not a guarantee against losses, but, done right, it can mitigate risks, reduce losses, and improve portfolio performance. To make the right investment decisions across asset classes, company types, markets, and sectors, two key dimensions must be taken into consideration: the investment’s intrinsic returns and its correlation with the other assets in the portfolio. What distinguishes EIS from traditional diversification strategies is that it provides a third dimension.
The EIS third dimension
The decision to invest in EIS should be based on the merits of the investment itself, not the tax benefits. The potential investment appreciation is one of the key dimensions of a sensible diversification approach, the high growth dimension. This, though, comes with another possible diversifier, high risk. In addition to this anticipated increase in the value of the investment and the put-your-eggs-in-several-baskets dimension, EIS provides another major advantage: generous tax incentives. The array of tax benefits that EIS offers investors is remarkable. They can get up to 30% income tax relief, either against this year’s tax bill, or last year’s via a carry back facility. They’ll be able to defer capital gains made elsewhere, by investing these in an EIS. They’ll incur no capital gains tax liability if the investment does well. And, provided the EIS is held for at least two years and at the time of death, the investor’s heirs will pay no inheritance tax on it. But what if the EIS investment does not work out? Even then, the loss-relief option will allow them to offset up to 61.5% of losses against their income or capital gains tax liabilities. In short, the prudent investor who comes to EIS seeking a means of diversifying their portfolio could easily walk away with a bagful of tax gains as well.
Risk compensation is a theory which suggests that people typically adjust their behaviour in response to perceived levels of risk, becoming more careful where they sense greater risk and less careful if they feel more protected.
What is risk compensation?
- aic
75% of advisers have changed their behaviour in some way as a result of Woodford.
Breaching the far-off world of startups
The fact is that traditional investment funds will not provide investors access to start-ups or university spinouts, causing portfolios to miss out on this lucrative turf of the EIS. Most EIS funds invest in five to eight of these startups, although there are some that invest in many more. These dynamic, early-stage companies are somewhat disconnected from the main markets and their turbulence. Their cash flow is not necessarily driven by revenue; because they’re generally unquoted, their value is largely uncorrelated with market movements. So, they can avoid much of the roller coaster experience in traditional asset prices. In short, EIS can provide an extra measure of diversification that is simply unavailable to mainstream investors. What’s more, since EIS funds are managed professionally by financial experts, the private investor is spared the burden of always watching and keeping track of their investments. So, for the busy business person or professional, or simply someone who does not have the inclination to constantly eyeball individual company performances, EIS funds can provide a rather passive way of investing. That’s not a bad way to secure the three key factors that investors hope to find in the best investment options: investment returns, tax efficiency, and diversification. It’s therefore no surprise that since the EIS scheme was launched in 1994, nearly 33,000 companies have received investment and around £24 billion of funds have been raised.
EIS can provide an extra measure of diversification that is simply unavailable to mainstream investors.
Early-stage businesses need support, experience and the wisdom born from battle-scars.
- Mathew Cushen,Founding Partner, Worth Capital
SEIS: a key to Britain’s post-Covid recovery
The UK currently punches well above its weight on the global innovation stage; the country’s entrepreneurial culture continues to expand; and experts are looking to small and medium sized businesses to turbocharge the country’s post-Covid recovery. Perhaps nowhere is this exploit more in evidence than at the London Stock Exchange (LSE) which saw a record number of IPOs in 2021. Over 120 inspiring companies chose to list on the London main market, raising £16.8 billion, the strongest year for IPO capital raising since 2007 and the highest number of IPOs since 2014. While 2020 was a year of resilience, 2021 was a year of opportunity, says the LSE. “The landscape changed and the markets were buoyant. We were at the heart of the action - helping our clients uncover new opportunities and growth.” As appealing as IPOs might be, a scheme like the SEIS potentially offers even more lucrative deals. By the time investors flock to an IPO deal, jacking up the price of the shares, they’d have already missed out on some of the fastest growth the company will ever see. These pre-IPO deals, in small, early-stage companies, are where you will find the true diamonds in the rough. Here, companies are often attractively priced, as big investors and institutions typically ignore them in favour of already established companies with proven returns. Should the company do well, those large investors then come running and push up the share price. The ability of SEIS to incentivise investors to fund these promising businesses is the reason why the scheme has been called a key to Britain's economic recovery from the Covid-19 pandemic. By offering tax relief benefits to private investors who invest in these businesses, SEIS helps to stimulate the growth of the economy and encourage entrepreneurship.
“Sitting on millions”
The UK economy is sitting on 'missing millions' as too many small businesses remain static, according to a new report by a group of leading business schools. The report, produced by Saïd Business School, Aston Business School, the University of Leeds, Manchester Metropolitan University Business School and UCL, found that the UK economy could receive a boost if its high growth small businesses can realise their full potential and catch up with their international counterparts. This and similar studies have found that one of the most important issues facing small and medium sized businesses is lack of capital. For businesses looking to take the next step, whether that means hiring new employees, upgrading office space or another financial investment, it is vital to ensure that there is adequate capital available. While small and medium sized enterprises are often able to take advantage of local custom, finding opportunities in the wider business world, especially online, often requires a significant amount of wisely invested capital. SEIS was designed to aid businesses in amassing sufficient funds to take carefully calculated risks to propel them on to further success.
There’s a start-up boom afoot in the UK and the Seed Enterprise Investment Scheme (SEIS) is right in the thick of it.
A scheme that transformed the landscape
Since its introduction, SEIS has reshaped the landscape of seed-stage funding, providing tax relief and convenience for many more individuals to turn themselves into early-stage investors. Designed as a child of the Enterprise Investment Scheme (EIS), it would provide even more attractive tax breaks than EIS: 50% versus 30% deductible from income tax. In addition, if investments were held for more than three years there would be no capital gains tax, inheritance tax relief and up to 50% Capital Gains Tax reinvestment relief. The target companies had to be unquoted, less than 24 months old, have gross assets of less than £200,000 and fewer than 25 employees. SEIS helps provide support to those startups and new ideas which otherwise would have gone to waste. It helps the growth of companies which have huge potential and revenue generating ability. Without such funding, many innovative products which we use in our lives might not have come into existence. Support for early-stage companies post-Covid and a strong start-up pipeline will be crucial to fuelling Britain’s post-Covid recovery. Hence, many have called for more proactive support from Government.
Plenty of room for growth
It has been persuasively argued that there are too few early-stage businesses seeking SEIS funding. There should be tens of thousands of companies taking advantage of SEIS every year, not less than 2,000 as it currently stands. And that shortfall, the argument goes, is down to how SEIS is restricted. A number of suggestions made for improvement have obvious merit. Increase the funding cap. The SEIS funding limit per company still stands at £150,000 – the same level it has been since its inception in 2012. However, the world has moved on and early funding rounds, even at the seed stage, are getting bigger all the time. As a result, many start-ups are having to turn their back on SEIS because their funding needs exceed the cap. Some have suggested doubling this cap, or at least raising it to £250,000. Increase the qualifying period. Critics claim the current age limit for SEIS for investee companies should be extended from two to three years. This could increase the number of companies that can claim SEIS, as many miss out due to the complexities of the approval process. Simplification of the rules. This would encourage greater uptake of the scheme.
Since the Seed Enterprise Investment Scheme (SEIS) was launched in 2012 to 2013, 13,800 companies have received investment and around 1.4 billion of funds have been raised. In 2019 to 2020, 2,090 companies raised a total of £170 million of funds under the SEIS scheme. This is a slight decrease from 2018 to 2019 when 2,125 companies raised £171 million. 1,620 of the companies were raising funds under the SEIS scheme for the first time in 2019 to 2020, representing £145 million of investment. In 2019 to 2020, companies recorded as from the Information and Communication sector accounted for £62 million (37% of all SEIS investment). Companies registered in London and the South East accounted for the largest proportion of investment, raising £106 million (63% of SEIS investment) in 2019 to 2020.
Key industry data:
Following the resounding success of the Enterprise Investment Scheme (EIS), a new venture capital scheme, SEIS, was introduced in 2012/13 as a complement. While EIS catered to medium-sized companies in their early growth phase, the new scheme was to help provide funding to smaller companies starting out. This difference is reflected in the maximum amount each scheme allows investors to put in, and the percentage tax break involved. SEIS investors can invest up to £100,000 each tax year and receive a 50% tax break in return. (The corresponding figures are £1 million and 30% for EIS). Under both schemes, there is no capital gains tax to pay on any gains after three years; and both attract potential inheritance tax (IHT) savings of 40p on the pound after two years. SEIS provides 50% on a maximum investment of £100,000, equals to £50,000. For EIS, it is 30% income tax relief on up to £2 million invested annually (as long as at least £1m is invested into KICs) to give a total of £600,000. The different targets of the schemes can also be seen in the qualifying criteria for companies. SEIS is available to businesses with fewer than 25 employees that have been trading for less than two years. (Compared to companies with fewer than 250 employees and having traded for less than 7 years for EIS–10 years for Knowledge Intensive Companies, KICs). Further, to qualify for SEIS, a company’s gross assets value can be no more than £200,000. (This amount is £15 million for EIS). Under SEIS, companies can raise a lifetime maximum of £150,000 in investment (versus £12 million for EIS, or £20 million for KICs). A company may qualify for funding under both schemes. Therefore, SEIS investment can be a natural starting point in the funding journey of early-stage companies, before follow-on EIS funding rounds. It’s also possible for an investor to invest in the same company and claim both SEIS and EIS relief, but the SEIS funds must be raised first. Ultimately, SEIS and EIS can work in tandem with a company, from the very beginning to the scale-up stage, each providing crucial support.
A junior EIS or a complement?
<1
200,000
1-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50+
45
Percent
Source: gov.uk
1979
1.0
2.0
3.0
3.5
4.0
4.5
1981
1983
1985
1986/87
1988/89
1990/91
1992/93
1994/95
1996/97
1998/99
2000/01
2002/03
2004/05
2006/07
2008/09
2010/11
2012/13
2014/15
2016/17
2018/19
2020/21
change of reporting year
UK registry
Total register
Effective register
4,408,528
England & Wales
237,124
70,474
Northern Ireland
UK total and effective register sizes from 1979 to 2021
The number of companies on the total register by region at the end of March 2021
Age profile of companies on the total UK register for 2021
Our aim has been to increase the understanding of SEIS by financial advisers and it's inclusion in their financial planning. When it is done well, SEIS can offer some very exciting returns, as well as supporting the growth and development of young businesses in the post-pandemic world.
- Alistair Marsden, Director, Nova Growth Capital
Climate finance: the next frontier for venture capital
The Enterprise Investment Scheme (EIS) stands to gain enormously from the multi trillion-dollar investment opportunity presented by combating climate change with technology.
21
The climate-change challenges require faster, bolder innovation in climate tech; and nimble, innovative startups are arguably our best bet to achieve this. Britain’s thriving startup ecosystem is well positioned to play a leading role in what might be called the climate change revolution. The COP26 climate summit in Glasgow issued stark warnings to the developed world to get serious about climate finance, and COP27 is already scheduled for November 2022 in Egypt. But it appears that the solution to the climate crisis is not going to come from rich governments shouldering the global burden on national balance sheets. The solution—and it will require a lot of money—is private business. "Public investment alone isn’t enough," admits Treasury chief Rishi Sunak. And UN climate envoy Mark Carney puts the amount needed at $100 trillion over the next three decades. "The money is here - but that money needs net zero-aligned projects and [then] there's a way to turn this into a very, very powerful virtuous circle - and that's the challenge," the former Bank of England governor told the summit. Carney's comments reflect a problem often cited by investors who, in the face of a myriad of climate-related risks, need to be sure that they are being accounted for in a transparent and preferably standardised way globally. He said the finance industry must find ways to raise private money to take the effort far beyond what states alone can do. In an announcement at the climate summit in Scotland, financial institutions accounting for around 40% of the world's capital committed to assuming a "fair share" of the effort to wean the world off fossil fuels. Banks, insurers and investors with $130 trillion at their disposal pledged to put combating climate change at the centre of their work, and gained support in the form of efforts to put green investing on a firmer footing.
Carney has led an effort to ensure that financial institutions account for and disclose the full climate risks of their lending or investments, forcing the wider economy to price in costs that until now have been largely concealed. These include not only the direct effects of extreme weather events, but also any loss of government subsidies for fossil fuels, or the health and environmental costs of greenhouse gas emissions. Meanwhile, the International Sustainability Standards Board (ISSB) is seeking to replace a patchwork of voluntary disclosure practices that have had mixed success, with "baseline" global standards that companies could use to tell investors about the impact of climate change on their business. The aim is to bear down on companies giving a flattering picture of their climate policies and business practices, designed to meet concerns of investors in what has become a multi trillion-dollar global market for environment, social and governance (ESG) targeted funds. "If you don't have basic information on a globally comparable basis, you increase the risk of greenwashing enormously," said Ashley Alder, chair of IOSCO, the global umbrella body for securities regulators.
Investors’ concerns: the search for common standards
Big corporations have been under pressure to take real action on emissions or risk the wrath of protesters and shareholders. Now, with climate change increasingly becoming a threat to local economies, there’s a growing acknowledgement that small businesses have an important role to play. This is both as carbon emitters (according to the British Business Bank’s ‘Smaller businesses and the transition to net zero’, SMEs are estimated to emit around half of UK business-driven greenhouse gas emissions) and innovators of carbon elimination. This trend is driven by a number of factors: increased visibility of climate change’s effects, a culture shift led by the current generation of young people, record-low prices for clean energy that are becoming competitive with fossil fuels, and increasingly favourable policy changes. A recent survey by the Federation of Small Businesses (FSB) highlights its members’ increasing engagement despite some major concerns. “In the face of many competing priorities, taking action on sustainability has been a ‘nice to do’ challenge for small businesses, who often find themselves cash-, resource- and most importantly time-poor,” said Martin McTague, Policy and Advocacy Chair of the FSB. Now, however, with increased levels of environmental awareness and the pressing need to reduce our impact on the environment before it’s too late, this is no longer a ‘nice to do’, but a ‘need to do’.
Small Businesses: working on climate change solutions
“Entrepreneurs – the instigators of innovation and transformation – are critical players in making the art of the impossible, possible,” wrote PwC in a recent report. They are a proven cohort for bringing novel technologies and disruptive approaches to industry, and in doing so inventing a new future. That is why start-ups play a crucial role in the supply of innovative climate solutions, providing enormous business, mitigation and adaptation opportunities. Financial markets, however, are failing to disburse the needed finance to early-stage climate-focused companies with great innovation potential. Therefore, the role played by venture capital funding schemes like the EIS is more important than ever.
Climate change and small businesses: Key Findings of the FSB
56% of small businesses believe our planet is facing a climate crisis. 28% of small businesses said it will be extremely difficult to transition to a net zero economy. 36% of small businesses have a plan to combat climate change, but only 30% have made changes to their business as a result of that plan. 69% of small businesses don’t know how to measure how much carbon emissions their business produces.
EIS investors back ambitious, early-stage companies to help them achieve long-term, sustainable growth. These young, promising companies are the UK’s most important engine room for driving change and innovation. Innovation (i.e., new ideas, devices, methods, and processes) is key to addressing the challenges of climate change. Because of this, the field of climate finance is a logical arena for entrepreneurs, startups, and their financial backers. EIS investments are critical in helping innovative startups to bridge the so-called “valley of death” between technical discovery and commercial application and deployment. The timescale for the hard tech, physical-science-based startups that tackle climate-related problems, would be too long and too risky for most investors to even consider without the ample tax incentives offered by a scheme like EIS. There’s a growing number of governments and external corporates looking to collaborate with innovative start-ups on climate change. Of course, the scale of the needed climate finance is enormous and requires collaboration between the public and private to deliver those sustainable solutions. Working together with the state and larger but slower-moving companies will be beneficial to startups, and therefore to investors and the economy. The partnerships will unlock big commercial opportunities. They will create new industries and high skilled jobs in areas such as clean energy generation and storage, green transport and carbon reduction technology. In 2018, according to the Local Government Association, there were 185,000 full-time workers in England's low-carbon and renewable energy economy. It estimates this could rise to over 1.18 million by 2050. A growing climate finance market could easily increase the size of the EIS sector and its impact, by supporting increased innovation investments as a mechanism to solve global climate challenges, as well as post-Covid economic recovery.
EIS and climate finance: a natural advantage
QUOTE HERE
- Nic Pillow, Ventures Manager, Blackfinch
Kuber’s liquidation has little effect
Kuber Ventures, the fund investment platform, went into liquidation in September 2021, causing many to wonder what the event could mean for the larger EIS space.
22
Kuber Ventures is a dedicated multi-manager platform focused exclusively on the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and Business Relief (BR). Founded in 2013, the platform provides an easy-to-use online system for financial advisers and investors considering tax-efficient investments and wanting to build portfolios of many companies within EIS and SEIS. Kuber gives access to a range of managers and portfolios. Explaining its philosophy, the company said: “We firmly believe that with so much choice, spreading the risk can be far more advantageous than being heavily weighted in any one single company.” On September 30th David Moss, the Executive Chairman of Kuber Ventures, announced Kuber’s liquidation: "As a result of factors including the challenging market conditions and the impact of the pandemic we have faced over the past 18 months, it has not been possible to continue trading despite the best efforts of the staff and management."
As reported in the IFA Magazine, these factors will limit the impact of the event:
Why the liquidation is no reason for concern
While there is not a universally agreed definition of what a centralised retirement proposition (CRP) is, the following might be a neat way to sum it up: a consistent approach to retirement advice that extends across an entire firm.
A major venture capital firm, K2VC, has acquired the assets of the company, including its platform technology, and taken over the operation. K2VC is now waiting for regulatory approval to begin accepting new investments and promoting funds. Kuber will continue to offer non-regulated services for existing customers, meaning that investors and advisers will continue to have access to those investments.
Kuber has two competitors in this area: CoInvestor and Growth Invest. Could these businesses also be at risk? Both of these companies are strong, according to the report: “Growth Invest have seen 80% growth this last year, while CoInvestor have recently pivoted, targeting banks and family offices, which is proving to be a positive strategy.” James Faulkner, Director of Vala Capital, K2VC’s sole investor, said: “We continue to believe in the underlying commercial value of the [Kuber] platform, while we felt it was important for us to do what is best for the market and minimise disruption at such a critical time of the year.” The tax efficient and alternative marketplace as a whole remains in good health, said Daniel Rodwell, Chief Executive of Growth Invest.
What about the other EIS platforms?
As a result of factors including the challenging market conditions and the impact of the pandemic we have faced over the past 18 months, it has not been possible to continue trading despite the best efforts of the staff and management.
- Richard Roberts, Director, Investor Relations, Oxford Capital
As we approach tax year end, we’re really excited about the potential opportunities for investors to capitalise on the growth of early-stage companies and the UK tech sector that is continuing to thrive.
23
Blackfinch Edition Capital Mercia Nova Growth Capital Octopus Oxford Capital Praetura Worth Capital Comparison Table
Manager video content
24
Gordon Pugh
Executive Business Development Manager
blackfinch.com 01452 717070 enquiries@blackfinch.com
video content
Head of Sales and Investor Relations
mercia-group.com 07415 663 141 enquiries@mercia.co.uk
26
Business Development Manager
oxcp.com 01865 860 760 info@oxcp.com
27
Founding Partner, Worth Capital
worthcapital.uk 020 3858 0847 info@worthcapital.uk
Mathew Cushen
28
Nova Growth Capital 2019 as at 19th Jan 2022: total AUM =£4,216,512 of which EIS=£1,033,148 total invested = £3,347,410 of which EIS = £962,994 Investing can be done differently. Nova affords investors access to tech enabled, growth-focused businesses at the earliest stage, all whilst aiming to reduce the risks associated with investing in startups through aggressively applied capital, providing 525 days of dedicated support in the first 9 months. We are not just investors, we are cofounders. N/A - Evergreen We have a portfolio of 27 tech startups and this grows at a target of 10 per year. 10+ Target returns of 4.13x after 6yrs. N/A evergreen To invest in growth focused tech startups across various sectors 6 years £10k No fees to investors. Fees taken from Investee 5% 2% 20% performance fee *only once on original investments that return over 150%. No other fees.
Oxford Capital Growth EIS 1999 Total AUM - £140m 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. January 2011 Early stage UK 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 2.5% of the initial subscription 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
Offer Name Year Founded AUM (In total) / AUM (EIS) Description of offer Launch Date Underlying assets Target no. of holdings Target annual return Target fundraise Investment objective Investment horizon Minimum investment Initial fee AMC Other fees
Worth Capital 2014 £7 million : SEIS £4.1 million and £2.9 million EIS The Start-Up Series SEIS & EIS Fund invests in the winners of the Start-Up Series, a UK-wide monthly competition promoted by smallbusiness.co.uk & growthbusiness.co.uk. The Fund invests in B2C or B2B companies with innovative products or services that can create habitual consumption and therefore a loved brand - in underserved or growth markets. 2016 Sector agnostic, early-stage B2B or B2C businesses 3-6 per tranche n/a Evergreen SEIS: 340% target return after 5 years (i.e. original investment plus 2.4 x investment), plus tax reliefs. EIS: 290% target return after 5 years (i.e. original investment plus 1.9 x investment), plus tax reliefs. Blended: 305% target return after 5 years. EIS - 3-5 years / SEIS 5-7 years £10,000 No initial charge on investor subscription, therefore allowing investors to claim tax relief on their full investment. On termination of Fund, 0.65% of holdings. AMC equivalent to 2% of funds invested, applied for first five years only, charged to investee companies. 6.9% initial funding fee & £12k p/a directorship fees, charged to investee companies.
P
Calculus VCT 2016 £26m Generalist The VCT provides exposure to a diversified portfolio of smaller, growing UK companies. Sept 2021 The offer will be used to invest in companies with growth potential across the fastest growing sectors in the UK. New Share Offer £10million with over allotment of £5million Target annual dividend 4.5% of NAV £5,000 3% for advised investors (currently 0% fee offer) 1.75% charged to the Calculus VCT 20% subject to a hurdle of 105p
Investment solutions comparison
Edition Capital 2016 £53m / £50m Edition Capital is a leisure and entertainment specialist that offers investors the opportunity to gain exposure to the sharp rebound of the leisure sector. Investors will be invested into 8-12 established EIS qualifying companies per portfolio over a 5-7 year investment horizon. Edition EIS targets returns of £2 per £1 invested April 2017 Leisure and Entertainment 8-12 15% £20m Edition is a leisure and entertainment specialist that invests into companies that have a proven business model that have the potential to roll out, generate high levels of growth and become the leading leaisure businesses of the future. Edition focuses on businesses that are profitable with strong management teams that have a track record of executing strategy. 5-7 years £10,000 2.5%, charged to investee companies after deployment 2% for 5 years, 1% thereafter 0.15% pa custodian fee, also charged to investee companies 20% performance fee - on all Fund proceeds in excess of £1.20 per £1 invested
Blackfinch Investments Limited 2013 £642.4m/£57.6m (of which £26.6m comes from the Ventures EIS Portfolios) - as at 04/01/2022 The Blackfinch Ventures EIS Portfolios invest in high-growth technology companies throughout the UK, which operate across industry sectors. We’re focused on disruptive businesses, offering products that address real-world needs. These firms have the potential to change the way we live and work, and are set to transform global markets. July 2018 Our Ventures EIS Portfolios have made 41 investments across 24 companies 10 No annual income, but target returns are 3-5x amount invested N/A Growth 4-7 years £10,000 3% 2% (charged upfront and only for the first four years) 20% performance fee, after a minimum return of 130%
Octopus Investments 2000 11.3bn / 0.3bn Octopus Ventures Knowledge Intensive EIS Fund 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. 2022 Unquoted EIS qualifying smaller companies 10-15 per investment round N/A £15m per investment round Capital growth 7-10 years (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
Praetura Ventures 2011 £410m 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. July 2005 Early-stage EIS-qualifying businesses with high growth potential, mostly in tech or life science sectors based in the North with b2b models. 8-10 per annum minimum 2x return pre tax relief on exit 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. 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
Mercia Fund Management 1982 originally £940m and £75m Mercia EIS Fund is one of the industry's leading EIS managers, as recognised by independent reviewers and large advisory firms. Mercia creates diverse portfolios of early-stage technology companies, mostly in Software and Healthcare. We invest primarily outside London and the Southeast, where we can find better-priced investment opportunities, and we have a strong track record of exits. January 2013 Equity 10 to 12 Aiming to triple invested capital in 5-7 years, including tax reliefs Over £15m per year Aiming to triple invested capital in 5-7 years, including tax reliefs Aiming to triple invested capital in 5-7 years, including tax reliefs £20,000 1.5% for adviser investors and existing clients 1.75% 0.25% custodian fee to the investor, and industry standard fees charged to portfolio companies.
Offer Name Year Founded AUM (In total) / AUM (EIS) Description of offer Launch Date Underlying assets Target no. of holdings Target annual return Target fundraise Investment objective Investment horizon Minimum investment Initial fEES AMC Other fees
Offer Name Year Founded AUM (In total) / AUM (EIS) Description of offer Launch Date Underlying assets Target no. of holdings Target annual return Target fundraiseR Investment objective Investment horizon Minimum investment Initial fEES AMC Other fees
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
There’s a clarion call for a wealth tax: What EIS can do EIS and the renaissance of entrepreneurship What the managers say?
There’s a clarion call for a wealth tax: What EIS can do
The Enterprise Investment Scheme (EIS) and other tax-efficient investment schemes have always been some of the best hopes for Britain’s high-net-worth individuals (HNWI) to lighten their tax burden.
Now with the government considering higher taxes on the rich to help pay for the massive Coronavirus relief bill, a tax-saving investment scheme like EIS has become a virtual life saver for affluent investors. High taxes could still be on the horizon despite no significant changes to income tax, CGT and IHT in the October budget. The rich are different, they say. That’s certainly the case when it comes to finance. High-net-worth (HNW) individuals face a different set of financial challenges and opportunities than most other Britons. Typically, their concerns are less about funding a lifestyle in retirement and more about how to protect and grow wealth and pass it on to the next generation.
The UK’s current fiscal troubles, and some of the more popular proposals for restocking the country’s pandemic-ravaged public coffers, might give some rich people the idea that their wealth is under attack. Forcing the affluent to pay higher taxes on their wealth – especially assets like property and stocks that can increase in value over time – now enjoys broad-based support with the general public. Wealthy investors, facing a large income tax bill and looking for growth opportunities, often find that the EIS allowance is one of the most generous.
The Wealth Tax Commission, a body made up of academics, policymakers and tax practitioners, said that the government should consider a tax on the wealthy if it decides to raise taxes to try to get back some of this outlay. This would be fairer than raising tax on incomes, or goods people buy, or by increasing national insurance contributions, the Wealth Tax Commission said. The suggested tax would include all assets such as main homes and pension pots, as well as business and financial wealth, but not debts such as mortgages. It would be paid by any UK resident, including 'non-domiciled' residents. The commission also proposed an alternative where a threshold of £4 million would be set per household, assuming it contained two people with £2 million each, taxed at a rate of 1% per year on wealth above that threshold. It said that a one-off wealth tax in this scenario would raise £80 billion over five years after admin costs.
A tax on the wealthy
Madsen Pirie, president of the Adam Smith Institute free market think tank, said the tax proposal amounts to "attempting petty theft by instalments, only the numbers they're proposing to rob from people's pockets are pretty substantial." "Your cash in the bank is not stacked in vaults gathering dust, it is invested," he said. "If we tax those investments we end up with less produced, less produced means lower wages and lost pensions, that means a worse life for all of us. "Money would move out of the country at a time we really need more of it flooding in to help us rebuild after the pandemic ends. A wealth tax would leave the country a poorer place and the fact it would be brought in over a five-year period reveals the true intention of it being a tax for all time," he added. The following table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,570.
“A wealth tax would leave the country poorer”
* You do not get a Personal Allowance on taxable income over £125,140. * Income tax bands are different if you live in Scotland.
In the run-up to the Autumn budget presentation in November 2021, a group of UK millionaires sent an open letter to the Chancellor of the Exchequer, urging him to introduce a wealth tax on the nation’s richest people to help pay for the recovery. We know where you can find the money, they wrote. “Tax wealth holders like us. We can afford to contribute more, and we want to invest in repairing and improving our shared services.” Meanwhile, a report from Warwick University and the London School of Economics said a one-off wealth tax on all individual assets above £500,000 and charged at 1% for five years would raise more than £260 billion for public finances. But Helen Miller, Head of the Tax Sector at the Institute for Fiscal Studies, thinks a wealth tax would be a bad idea:
An open letter to Rishi Sunak
Whatever the merit of the arguments for or against levying more tax on the affluent, one thing is beyond dispute: Tax-efficient investing is a crucial component of financial planning. With those on higher incomes in the UK facing high tax rates on both capital gains and dividend income, the difference between pre-tax and post-tax investment returns can be substantial. Without a carefully-planned tax-efficient investment strategy, high earners run the risk of facing formidable tax liabilities. Government data shows that Britain’s wealthy individuals pay billions of pounds in taxes each year. Fortunately, the EIS scheme enables higher-rate taxpayers in the UK to invest tax-efficiently and bring down their overall tax bills. It does this by providing tax-efficient investment opportunities in some of the most exciting up-and-coming businesses in the UK. Beyond just the tax reliefs, the popularity of the scheme comes from the possibility of high returns. EIS allows you to reap the benefits of getting in early. The low requirement for overhead capital combined with high upside potential characteristics of many high-growth startups can make for a winning combination. In addition to hefty potential returns from the newest and most exciting businesses, adding startups to your portfolio could bring more diversity and balance to it.
Beyond controversy: EIS can help
But EIS investments are best known for their tax benefits. You get an upfront 30% income tax relief on investments in qualifying companies up to £1 million per tax year. (£2 million where any amount over the basic £1 million limit is invested in qualifying ‘knowledge-intensive’ companies). Providing shares are held for a minimum of 3 years (from the date of issue or commencement of trading, whichever is the later), then no capital gains tax (CGT) is payable. There’s also a CGT deferral relief. This allows you to treat the gain as not arising until some date in the future – as long as you purchase EIS qualifying shares with the realised gain. Effectively, the gain can be deferred indefinitely, and will disappear completely if the EIS qualifying shares are still held upon death. (CGT is the only UK tax where the liability automatically dies with the investor). If you sell the EIS qualifying shares during your lifetime and do not reinvest into further EIS qualifying shares, the deferred capital gain will become payable. Your investment will also benefit from 100% relief from inheritance tax (IHT), provided the investment is held for two years and at the time of death. If your investment is unprofitable, you can claim loss relief against income or capital gains. You can claim loss relief either in the tax year when they realise the loss or the following tax year. Needless to say, this is in addition to other EIS tax reliefs. Ultimately, EIS should always be in the mix as one of the considerations in an estate and wealth planning strategy that ensures the wealth is efficiently passed on to family members.
A smorgasbord of tax reliefs
Number of HNWI of over US$1 million in the UK from 2013 to 2023, by wealth bracket
2013
2023*
400,000
600,000
800,000
number of individuals**
100,000
1+ million US dollars
30+ million US dollars
Up to £12,570 £12,571 to £50,270 £50,271 to £150,000 over £150,000
Band Personal Allowance Basic rate Higher rate Additional rate
Taxable income
0% 20% 40% 45%
Tax rate
- Jess Franks, head of retail Investment products, Octopus
Income Tax rates and bands
An EIS can be useful in tax planning where clients want exposure to early-stage investments.
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The Covid-19 pandemic has brought about a renaissance in UK entrepreneurship and the Enterprise Investment Scheme (EIS) is poised for a significant uptick in opportunities across a range of sectors.
Since the beginning of time, it's been entrepreneurs that drive the creation of innovation. True breakthroughs have been the result of an individual or small team who had an idea and the determination to see it through to fruition. The pandemic has provided many individuals with the motivation, opportunity, and time to pursue their entrepreneurial dreams. The surge in entrepreneurship has been variously attributed to laid off workers starting their own businesses; isolated people rethinking their path in life and embarking on bold new projects; or simply people dissatisfied with the status quo and imagining alternatives. At the same time new technologies, evolving customer demands, and societal shifts allow many inventive minds to spot unfulfilled needs and go in quest of new solutions. As for the EIS, it is now in the best position ever to profit from the huge potential created by this reawakening of the entrepreneurial spirit around the country. EIS is now in its late twenties, the time when self-confidence and direction are in full force, driving ideas and fueling development. In recent years, we’ve seen an increasingly developed ecosystem in the UK around EIS investment opportunities. This is no longer a space dominated by just a few major players. Rather, it is a rapidly maturing industry, with a growing number of professional investment managers and advisers, a strong ecosystem of tax advisers, regulatory consultants, custodians, experienced law firms, and so on.
EIS and the renaissance of entrepreneurship
Small businesses may have limited resources, but they make up for that through a range of advantages: being community- and locally-focused, closer relationships with customers and suppliers, swifter decision-making processes, less bureaucracy and greater flexibility. Early-stage businesses are increasingly aware that both investors and consumers show their support for companies with ethical and transparent business practices, including those with a positive environmental impact and sustainable operations. For example, managers of venture capital trusts (VCTs) are increasingly realising that allocating cash to socially responsible investments can boost investor outcomes. While ESG risks can vary greatly depending on the company, product, service, or market, early-stage investors can play an active role in educating startups about the risks.
ESG and the virtues of small businesses
Entrepreneurs are known for their agility, a trait that has been highlighted during the Covid-19 pandemic. A report by King’s Business School (of King’s College, London) found that almost half of UK entrepreneurs were able to capture new business opportunities during the lockdowns. They did so by developing new products and services (especially in the digital space); others reviewed business practices or repositioned their businesses entirely. Many entrepreneurs leveraged existing digital and online capabilities; others started to cater for the healthcare space (NHS/Covid related). The research concluded that, despite tremendous challenges, entrepreneurs now look to the future with confidence. Nearly half see their business surviving the crisis eventually and one in three expect their business to be even larger than it was pre-pandemic. More than 72% of the entrepreneurs surveyed expect to add employees to their business over the next five years. Past research indicates that such expectations are a good predictor of employment growth over time. Even though new businesses inevitably start small, they are catalysts for sustained economic growth and a critical engine of job creation. The Entrepreneurship Index, compiled by the CEOWORLD magazine, evaluates a total of 100 economies which collectively account for 95% of global gross domestic product. The overall ranking considers a wide range of factors to create an overall “best countries for entrepreneurship” index, including innovation, competitiveness, infrastructure, labour skills, access to capital, and openness for business.
Entrepreneurs: Thriving amid the challenges
Personal experience of ESG investing among financial advisers and DFMs
Source: AIC/Research in Finance. Percentages are % of respondents who agreed with each statement. Respondents could select only one statement
I would consider myself an early adopter of ESG investing and have been researching and discussing this area with clients for years now
28%
I have recently become more knowledgeable about ESG investing and how to make this part of the offering to clients
51%
49%
I have recently become interested in ESG investing and have started to research this area
8%
14%
DFMs
All respondents
Financial Advisers
I have not thought about ESG investing too much but am planning to start researching in the future
ESG investing is not of great interest to me
23%
48%
18%
2%
6%
5%
3%
4%
The EIS space is now a core part of the UK’s innovation financing system. EIS is designed to help entrepreneurs raise money to help grow their business. It does this by offering tax reliefs to individual investors who buy new shares in the company. To the investors, the scheme offers a chance to invest in the UK’s newest and most exciting entrepreneurial businesses. The reality is that most firms are born small, stay small, and innovate little. Relatively few firms achieve high growth and engage in innovation on the way to becoming large, successful businesses that contribute significantly to aggregate productivity and growth. Often, a key ingredient that propels entrepreneurial companies from infancy to full-grown success is the kind of support provided by a scheme like the EIS. As it begins to emerge from the economic ravages of the Covid-19 pandemic, the UK is in recovery mode, despite headwinds such as inflation, and the supply chain crisis is limiting economic growth. The EIS investment sectors vary in what a return to pre-pandemic levels requires. Energy and hospitality and leisure were hard hit by the massive and swift cessation of mobility and travel. Others, including manufacturing, also faced pain because of multiple supply chain disruptions. If parts aren’t readily available, entire production lines could come to a halt. Some sectors became stronger. The strain on the economy resulted in an uptick in companies and entrepreneurs pivoting to creating new product lines to meet demands, such as personal protective equipment (PPE), and other items. Many companies with an online presence were also forced to ramp up and accelerate investments in their e-commerce capabilities. These small businesses are a vital part of the UK economy: they drive growth, provide employment opportunities, and open new markets. Through investing in the most exciting and innovative among them, EIS offers a chance to contribute to the UK’s innovation, competitiveness, and economic growth. These entrepreneurial businesses provide the economy with a healthy supply of new skills and ideas, support future industrial and business expansion, and make the marketplace more dynamic. EIS investors aim to receive a high return on their investment. For this reason, they tend to favour businesses with opportunities to scale rapidly. In recent years, a few of those have grown to be unicorns—i.e., companies with a valuation of $1 billion or more.
EIS: financing innovation
In 2021, the UK crossed a new milestone. It is now home to 100 tech firms valued above $1 billion and is only the third country to cross this milestone, following the US and China. For context, the UK has more tech unicorns than Germany (42), France (22), and the Netherlands (18) combined. The number of tech unicorns in the UK grew exponentially: In 2017, there were just 44 unicorns. The 29 unicorns formed in 2021 represent more than 4x the seven for 2020. A number of unicorns have been backed by EIS funds, including: Bought by Many, Cazoo, Depop, Gousto, Graphcore, Wejo, and Zoopla. There is also an increasing number of UK-grown mega-exit success stories in EIS. The following are a few of the recent investment exits from EIS-backed funds: Symphonic Software, Pasta Evangelists, Gousto, Bloom & Wild, deltaDNA, OXGENE, and Mission Labs. There are many other smaller exits that may not have grabbed headlines but have provided solid investment returns to EIS investors.
UK is now the world’s third-biggest tech unicorn hub
Luring overseas founders: the Global Entrepreneur Programme
Cognisant of the central role of entrepreneurship in wealth creation, job creation, balanced regional development, and economic growth, the UK government is looking to increase the country’s entrepreneur population. The Global Entrepreneur Programme (GEP) is designed to encourage entrepreneurs from other countries to start or expand their business in the UK. It aims to help high-growth overseas companies to relocate to the UK. The scheme touts the many advantages of doing business in the UK, including a strong economy, political stability, a favourable regulatory environment, and tax incentives. GEP offers mentoring and business support to non-UK based founders to help them set up and scale their business from a UK global headquarters. Free movement with the EU ended on 31 December 2020 and new immigration arrangements have been put in place for EU citizens wishing to come to the UK, who are now treated the same as non-EU nationals. The UK has introduced a points-based immigration system which aims to attract people who can contribute to the UK’s economy. There’s now an immigration visa specifically designed to attract people from all across the world to come and set up their business enterprises within Great Britain. The entrepreneur’s visa, which has to compete with similar schemes in other countries, is very difficult to obtain and has not yet led to an influx of business founders. Success in innovation helped the United States and Japan become the world’s leading economies. China has borrowed a page from their playbook, and the UK is out to do the same. The key is entrepreneurship.
Rank
1 2 3 4 5 6 7 8 9 10
United States Germany United Kingdom Israel United Arab Emirates Poland Spain Sweden India France
42.88 41.05 35.8 34.25 31.01 29.75 29.01 28.16 25.47 25.34
2.19 1.94 1.43 6.1 3.07 1.13 5.01 2.42 2.03 4.4
2.58 1.81 1.56 6.65 2.61 1.38 5.4 3.48 2.11 5.68
45.73 49.24 49.37 16.4 32.6 49.52 19.95 41.36 49.16 22.73
38.74 55.27 64.25 15.05 38.27 72.57 18.51 28.72 47.46 17.6
Country
Score
Innovation
Competitiveness
Labour skills
Infrastructure
With so many innovative companies founded during the pandemic, there has never been a better time to invest in the future with EIS.
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Omicron, the new Covid variant, is a sober reminder that the pandemic continues to wreak havoc on the economy, with businesses struggling to raise early-stage investment. What role do you see EIS playing in both the recovery and the post-Covid era?
Investment in SMEs will play a crucial role in the UKs recovery post pandemic and the EIS has been phenomenal in fuelling the start-ups that power the UK’s economic growth. Young companies use EIS funding to create new jobs, increasing the economic value of these firms even further. We think the innovations brought to market by these dynamic businesses will help shape and enhance our lives in the years after COVID.
The Bank of England’s monetary policy chief has said inflation is likely to soar “comfortably” above 5% next spring when the energy regulator Ofgem raises a price cap affecting millions of households. What impact do you foresee for the EIS sector?
Inflation impacts many areas of society, and early-stage technology investing is no exception. At the portfolio level, we expect greater demand from investors for inflation-beating investments – instead of storing money in bank accounts – leading to increased asset values. This should positively impact the value of our portfolio companies, although the valuations we pay for new investments will likely increase.
What role do you see EIS playing in the journey to carbon neutrality?
Every company must play its part in tackling climate change, but established businesses are often hampered by legacy practices. As an environmental, social and governance (ESG) investor, we see agile start-ups as best-placed to lead the charge – provided they have the funding needed to scale. Some technologies will take time to mature, but EIS backing can help deliver the clean economy we desperately need.
Whilst an existing corporate behemoth might take time to switch to a more ESG-focused approach, early-stage companies can be much more agile. Investing in innovation will be what drives the step change towards a greener, cabron neutral planet, and EIS is the bedrock of developing this out for the UK economy. A number of our companies are working towards carbon neutral status, and we look forward to supporting them going forwards.
Far too much governmental support has been focused on pushing more debt into early-stage businesses. Banks, despite the CBILS schemes, have been unwilling to lend to young businesses who might not have a long track record. EIS is ideally positioned to help support and recapitalise these businesses and to allow them to expand, in a way that debt can’t.
The Bank of England’s monetary policy chief has said inflation is likely to soar “comfortably” above 5% next spring when the energy regulator Ofgem raises a price cap affecting millions of households. What impact do you foresee for the SEIS sector?
If inflation causes bank base rates to rise (which seems likely at this point), then debt becomes even less attractive for early-stage businesses. Lots of companies are likely to consider equity investment to play an even more crucial role in their development and that bodes well for EIS. Similarly, the rise in asset prices driven by inflation are likely to increased CGT tax liabilities which again will drive EIS investment levels (as VCT can’t help with these liabilities).
What role do you see S/EIS playing in the journey to carbon neutrality?
We have seen how consumer demand for ethical and carbon neutral products has begun to drive changes in company behaviour. EIS funds have one job – to maximise investment returns for their clients. If carbon neutral companies look set to outperform other businesses, EIS funds will respond by allocating more capital to these businesses. It is a virtuous circle for which we have to thank the consumers!
The speed at which the new variant has spread is obviously a concern to all. However, we don’t foresee it having a negative effect on EIS. We have been battling Covid since March 2020, and during this period some of our companies have thrived – changes in technology that would usually evolve over years have actually been sped up as a direct result of the pandemic which has benefited the growth of early stage companies.
Rising inflation will squeeze investor’s finances and affordability will be affected. It will also mean that investors may require them to take more risk in their portfolio construction in order to achieve a real return. Both the tax advantages which EIS offers, and the potential for large, unlimited returns, can help support this as part of a balanced portfolio approach.
Omicron, the new Covid variant, is a sober reminder that the pandemic continues to wreak havoc on the economy, with businesses struggling to raise early-stage investment. What role do you see SEIS playing in both the recovery and the post-Covid era?
SEIS is a critical stepping stone for many UK businesses. It is often the vehicle that allows a startup to raise its first equity round, helping them to go from an idea to where they have early signals needed by the wider VC market to make investment. Whilst the amount of equity investment grows year on year, this is largely going to later stage companies through growth rounds. Without SEIS, that dealflow runs the risk of drying up.
SEIS founders thrive off changes in markets, SEIS investors are often the opposite and retreat during market changes. Whilst I have no doubt that founders will continue to come up with industry defining businesses, it is the investor side that is where I would see the risk. Looking at interest rates in isolation though is probably too narrow and we need to look at the wider economic landscape. Will there be CGT changes, will sunset clauses come into play, will Brexit and the changes to state aid through Trade and Cooperation Agreement allow greater flexibility in the S/EIS schemes. The tech investment sector is growing with a lot of latent potential. I do not see interest rates in isolation having a negative or positive impact.
Coming from a clean energy background, this question is really close to my heart. The move has been ongoing for many years now, way before the S/EIS schemes were commissioned. I believe industry and capital will solve this problem as there will be money to be made. S/EIS will play a critical part, allowing UK based startups to get off the ground and give them a chance to make a positive impact, but we need to view this on a Macro level, with a truly joined up, international approach to finance and innovation. Act local, think global.
Head of Retail Investment Products, Octopus
Young companies are key to the UK economy. EIS funding gives early-stage companies the necessary funding to scale and offers investors that are comfortable with the risk some incentive to invest via tax benefits like loss relief and tax-free growth. As smaller companies continue to address the world’s biggest problems, EIS continues to be an important vehicle for enabling this.
Increases in inflation alongside sustained low interest rates might drive investors to seek growth through alternative forms of investment, providing they’re comfortable with the risk. EIS can be important to do this. EIS also invests in private companies not listed on the stock exchange, meaning they can be less affected by market fluctuations spurred on by macro shifts like inflation.
As smaller companies tend to be more agile than larger companies, they are more able to adopt policies and frameworks that support the journey to carbon neutrality. As most EIS companies are tech enabled they are also able to measure and assess their progress against these objectives, setting new standards for themselves and the wider industries in which they operate.
We expect that life will quickly return to normal as pandemic transitions to endemic. With some exceptions where pre-pandemic behaviour changes (such as fast delivery, working from home) have been accelerated and reached a tipping point. We’re wary of proposition born from pandemic behaviours – showing excellent revenues but unlikely to thrive as life returns to normal.
Being even more careful to understand target audiences. There are EIS backed businesses targeting a mainstream consumer that will struggle as household spending is conserved for essentials. However there are wealthy consumers coming out of the pandemic better off, having foregone holidays and many nights out. So we expect the premium discretionary market to be in good shape.
We cannot expect behaviour change (although important) to alone solve for carbon neutrality and other environmental and social challenges. The big strides will come from innovation in technology and in business models. With the big breakthroughs most likely coming from the fresh entrepreneurial thinking that SEIS and EIS investors are supporting.
Paul Soanes
Since its inception, EIS has funded 33,000 businesses with over £24bn worth of funding. As our economy continues to navigate Covid’s new challenges, SMEs are the lifeblood of the economy and remain the most dynamic players in the market. Our investments help our investors reach their financial goals but also play a hand in shaping our collective future. The whole Praetura team see this as both a privilege and a responsibility.
Rising inflation is likely to motivate potential investors to look for alternative tax efficient solutions to help them reach their financial goals. Financial advisers will be an essential facilitator to help these new investors navigate investment opportunities available to them, whilst having appropriate control around risk. EIS is just one part of the planning landscape.
Beyond returns and tax benefits, investors have never been more interested in what additional benefits their investments create. We’re seeing a lot of investors seek out EIS funds that bring them closer to the portfolio businesses and the good their doing, whether that’s in carbon neutrality or other social benefits.
The pandemic is something that we will need to learn to live with, and it has accelerated some of the technology adoptions. There is currently a massive amount of early-stage capital available for good companies, with US investors entering the market as well. The EIS and venture capital sectors are very buoyant at the moment, and if you can find good companies with reasonable entry prices, there are very good returns for investors available.
With high inflation, but rock bottom interest rates, investors have a real challenge, as they require a high growth rate to avoid see a progressive reduction of their wealth. However, there are no savings accounts which can get near inflation, so investors should consider higher risk/return investments, such as investing in small companies via EIS.
A subsector of the EIS industry is focused on sustainability, but carbon neutrality needs to be approach from an institutional scale, so although some interesting technologies may comes through EIS, the majority of the carbon neutrality initiatives will need to come from the government and very large institutional investors.
Jess Frank
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Learning objectives CPD and feedback About Intelligent Partnership Disclaimer
learning objectives
How did you do?
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Covered in section 2, Market Update
Identify the main developments and news in the EIS market
Evaluate the key fees and charges applied by EIS managers
Covered in sections 3, Fees and Charges
Outline the statistical trends in EIS investment and tax relief in recent years
Covered in section 6, What’s on the Horizon
Benchmark products and providers in the market against one another
Covered in section 5, Managers in Focus
Define some of the key events likely to impact EIS in the near future
Covered in section 4, Industry Analysis
Define EIS-relevant issues in the high inflation, high interest rate, and high tax era
Covered in section 2, Market Update and section 6, What's on the Horizon
CPD and feedback
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Readers 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 visit: intelligent-partnership.com/cpd
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About Intelligent Partnership
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Intelligent Partnership is the UK’s leading provider of insights and education in the tax advantaged and alternative investments space.
We provide a wide variety of ways to keep advisers and industry professionals up to date with the latest developments. Our content includes a range of engaging, accessible and CPD accredited resources as well as industry leading events:
Free, award winning series including EIS, VCT, BR and AIM Updates offering ongoing observations and intelligence, the latest thoughts and opinions of managers and providers and a comparison of open investment opportunities.
Regular updates
Unlocking the practical and regulatory aspects of various areas across the tax-advantaged and tax planning spaces including estate planning and business relief, our guides for advisers, lawyers and accountants are updated annually to provide handy, accessible and everyday resources.
Professional Guides
A deeper dive into individual providers giving their input on particular market issues and more detail on the strategies and offerings they have developed to address them.
PROVIDER SPOTLIGHTS
A weekly snapshot of the latest articles, commentary and market data for financial services professionals, in an easy-to-read briefing on Tax Efficient Investments.
WEEKLY INVESTMENT BRIEFINGS
Free events online and across the country, giving advisers the opportunity to build their knowledge of tax wrappers and less mainstream asset classes and ask questions. Providers present their investment opportunities on a like for like basis and online events include additional content from independent expert commentators.
SHOWCASES
Heading into their eighth year, the Growth Investor awards and the Growth Finance awards celebrate the role of the UK SME investment and finance communities in job and wealth creation.
AWARDS
Intelligent Partnership produces INTERGEN, an immersive experience that focuses on the wealth, tax and estate planning needs of different generations and aims to reshape the future of professional advice for every generation. For more information, contact:
CONFERENCES
Our CPD accredited e-learning programme is aimed at regulated advisers, wealth managers, paraplanners, accountants and solicitors that require a recognised level of knowledge & understanding in areas of Tax & Estate Planning.
ACCREDITATIONS
chris@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 February 2022 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.
