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Industry Update | March 2023
Regulation 2023 – it’s more than just Consumer Duty
Enterprise investment scheme
How the rise of 'healthtech' is transforming our healthcare experience
EIS: the smart money goes north
Find the gems: the art of identifying and investing in resilient businesses
EIS: a key tool in the net zero journey despite renewables ban
EIS open offers jump by 24%
Bionic Arms for Ukrainian soldiers
Three need-to-knows about Knowledge-intensive companies
Analysis
Thought Leadership
EIS deal flow: building pipelines for funding success
Case Study
Going for growth with EIS
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Photography by Interview by
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We are proud to present our first industry report for 2023, which features a redesigned format that strips away the superfluous to focus on the essential for professionals in this field. In this issue, we find the gems that keep sparkling, with a veteran fund manager revealing how to identify and invest in resilient businesses. We've got some useful insights in 'Three need-to-knows about Knowledge-intensive companies' to enhance your understanding of these innovative businesses that can access additional tax relief benefits. Then we see why the smart money goes north and how astute investors are cashing in on the enormous investment potential of England’s diverse regional economy, with the north worth more than £340 billion - more than that of Austria and Norway. Of course, it’s vital to have a good deal flow in EIS and in 'Filling pipelines for funding success', a key member of an award-winning investment team tells the inside story. And one area where deals have certainly been flowing is healthcare, so we take a look at how the rise of 'healthtech' is transforming our healthcare experience, and why that makes it an attractive EIS investment. Despite the difficult economic conditions, Going for Growth with EIS illustrates that EIS presents numerous chances to invest in game-changing and pioneering enterprises. Another sector where you might not expect so much EIS activity is as a key tool in the net zero journey despite the ban on renewables investments. We find out there are plenty of opportunities for EIS investors to support companies working on innovative solutions for reducing greenhouse gas emissions and fulfilling their own ESG ambitions. No financial services publication would currently be complete without consideration of the Consumer Duty. We have an article giving pointers on what advisers and product providers need to consider as the implementation of anti-greenwashing and SDR/fund labels regulation approaches. We’ll also probe the most recent EIS data from the government, HMRC, and research platform, MICAP, and consider the case study of an EIS investment that has produced bionic arms for Ukrainian soldiers.
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
The EIS universe today
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This industry update of the Enterprise Investment Scheme (EIS)—the first in our new format—comes out as the UK tax environment is about to undergo major changes, making it necessary for investors to maximise their tax efficiency.
learning objectives
Identify the main developments and news in the EIS market Outline regulatory developments that could impact the EIS in the near future Evaluate the key fees and charges applied by EIS managers Describe some of the practical mechanisms used by EIS investment managers to deliver specific objectives to clients Define some of the key events likely to impect EIS in the near future Analyse some sectors and strategies that successful EIS managers are leveraging
Readers can claim up to 2 hours’ structured CPD. Click here to claim your CPD. By the end of the update readers will be able to:
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Learning objectives for CPD accreditation
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Streamlined and focused: Discover our enhanced format
The EIS universe today EIS: The smart money goes north Find the gems: The art of identifying and investing in resillient businesses Three need-to-knows about knowledge-intensive-companies EIS: A tool in the net zero journey, despite renewables ban How the rise of healthtech is transforming our healthcare experience Going for growth with EIS EIS open offers jump by 24% Regulation 2023: It's more than just Consumer Duty EIS dealflow: Building pipelines for funding success Bionic Arms for Ukrainian soldiers Continuing professional development About Intelligent Partnership
Covid changed context for BR
name surname
- Marcus stuttard
Very quickly, companies on AIM were able to access equity capital rapidly and at scale
he north of England's reputation for innovation goes back to the Industrial Revolution. In recent times, the nature of that innovation has changed from machinery and manufacturing to significant advancements across tech and life sciences. But one thing continues to be true – the north of England is a smart investment destination for investors. Five of the UK’s 10 largest cities and four of the world's top 100 universities give this part of the UK the drive and resources to generate innovation and growth. Its seven international gateway airports, flying direct to 254 destinations and 12 major foreign trading ports, also contribute to a diverse regional economy, worth more than £340 billion and greater than that of Austria and Norway.
- Van Hoang, Investment manager, Blackfinch Investments
The clearer market environment post-Brexit, as well as a tighter grip on the pandemic, creates an outlook conducive to increased listings on AIM.
Opening Statement Update Overview
1. INTRODUCTION
Market Composition Fees and Charges
3. Considerations For Investment
Are Hostile Takeovers A Danger To AIM? AIM In FCA’s Proposals
4. Industry Analysis
What Has The Market Been Doing? More AIM Positivity 2021 AIM Listing What's Driving the Market? The Autumn Budget 'AIM' for success, not perfection Focus Drives Pandemic Return Small is Beautiful Combatting Climate Change Health is Wealth What the Managers Say
2. market update
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stellar investment TIME investments Unicorn Comparison Table
5. managers in focus
More AIM-focused EIS Future Market Changes Considered What The Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
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BIDDER JURISDICTION (FIRM OFFERS)
One of the key benefits of investing in this area is the potential for geographic diversification. Most EIS portfolios are heavily focused on the London and south east regions; the latest HMRC statistics report that companies with a registered office in London and the South East receive 69% of EIS funding. For EIS investors, this can be very risky, as a local economic downturn in these areas can result in widespread losses within their portfolio. The north of England provides an opportunity for investors to spread their risk and mitigate potential losses through diversification. As a result, fund managers with a focus on the north, such as Praetura Ventures, can offer valuable differentiation to many current EIS offers. That value is evidenced by the fact that leading wealth managers, like Credit Suisse, include Praetura on their EIS panels.
role, Intelligent Partnership
Smaller stakes have little choice
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. But, on the other hand, in the vast majority of takeovers seen in the first half of 2021, there was a substantial bid premium where the share price increased during the offer period. The highest was an eye-watering 79%, although more commonly, it was in the lower, but still very pleasing 20% - 50% range.
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One of the key benefits of investing in this area is the potential for geographic diversification.
Geographic diversity, maximum potential
The data also underlines that far fewer investment managers are scouring the north of England for young companies that can be the future disruptors that EIS investors aim to unearth. This provides a strong indication that investors can expect clearer routes to quality deals with less competition. The lower demand for investment opportunities outside of London and the South East also means there is less competition for deal flow, making the best deals more readily available. As an aside, valuations tend to be more attractive in the north versus businesses in London, which only adds to the investment case. However, this does not mean that investment managers can reduce their due diligence, says Praetura, which continues to aim for top-quality deals, having reviewed £2.5 bn worth of deals last year and only invested in £30 million’s worth.
Maximise your returns with minimal competition
Another benefit of investing in the north of England is the potential to support social goals. Many investors are eager to make a positive impact in addition to their returns. Providing funding for small businesses and startups in areas with lower access to capital creates jobs and stimulates economic growth in these areas, helping to "level up" the economy and reduce regional disparities. Access to exciting, regional early-stage investment opportunities has not always been easily available to those in the north, but it is now a realistic possibility for investors and one that advisers can now combine with high growth potential and tax-planning goals. The latest EIS HMRC statistics show that only 7p of every £1 invested in the UK last year went to northern businesses, which highlights the need for more investment in this area. However, the north is producing more examples of successful businesses that are not just achieving exponential growth but doing so with EIS investment. As these case studies increase, so too will those statistics, proving what many in the region know already – the smart money goes north.
Invest locally, impact socially
praeturaventures.com jon.prescott@praetura.co.uk
Jonathan Prescott
Director, Praetura Ventures
The latest EIS HMRC statistics show that only 7p of every £1 invested in the UK last year went to northern businesses.
esgaccord.co.uk 07971 833316 lee@esgaccord.co.uk
Lee Coates OBE
Co-Director, ESG Accord
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2021 AIM LISTINGS
Resilient companies prioritise simplicity and aim to keep their operations and processes streamlined, which helps them scale effectively. On the other hand, complex systems and processes can hinder growth and cause problems.
Characteristics of resilient companies
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This tends to signal greater financial stability among a greater proportion of AIM companies.
It is worth noting that much of the strong performance of the overall AIM market in recent years can be attributed to a relatively small number of the larger companies.
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The ongoing market volatility highlights the importance of a strategic approach to portfolio management that prioritises resiliency while staying aligned with clients' long-term financial goals.
IS investment managers can help clients weather economic storms, by constructing portfolios that are equipped to withstand market fluctuations and uncertainty while staying on the path to growth. Guinness Ventures, for example, a leading EIS investment manager, has honed a set of robust criteria that target the investee companies best equipped to meet these objectives:
E
Simplicity scales, complexity doesn't
These companies understand the importance of being able to adapt rapidly to changing market conditions and customer needs. This allows them to stay ahead of the competition.
Speed is one of the greatest business strategies
They focus on generating profits rather than solely pursuing growth. This helps them sustain their business in the long term and withstand any economic downturns.
Profitability over growth
They invest in their top talent and provide opportunities for growth and development. This helps them retain their best employees and maintain a competitive edge.
Double down on top talent
Resilient businesses prioritise alignment among their employees, rather than solely seeking agreement. Alignment requires that you support the decision of the leader or the team, even if you don’t agree with it. This helps team members work together effectively and achieve common goals.
Alignment over agreement
They focus on delivering a clear and compelling value proposition to their customers. This helps them attract and retain customers and drive revenue growth. In essence, driving revenue growth and maximising efficiency positively impact stability, profitability, ultimately reducing costs and risk, even in uncertain times. One good example is the Guinness Ventures portfolio company, Cera Care, a provider of in-home care services, known for their ability to facilitate rapid discharge of patients from hospitals into more cost-effective home care environments, thereby halving hospital admissions and supporting the NHS.
Tighten up value proposition to drive sales
Guinness Ventures targets companies that not only survive difficult times, but actually thrive and succeed. Advisers looking to align with these objectives should be considering the following in their due diligence:
Going beyond survival to triumph
Does the investment team aim to invest in companies that are well-prepared and have a clear plan for navigating challenges and adapting to change? These are the companies that are most likely to succeed.
Being most prepared to win
Is investment targeted at companies that have a strong financial position and able to preserve cash even in tough times? Maintaining cash discipline is essential for financial stability and resilience.
It is easier to preserve cash when you are not running out
Does the investment team look for leaders who are able to take a realistic view of their business, quickly adapt to changing circumstances, and have the discipline to execute on their plans? These leaders are more likely to lead their companies to success.
Founders/CEOs who are realistic, able to adapt, and have discipline rather than regret
Is the investment team ready to take advantage of the likely benefits as large tech companies (Facebook, Amazon, Netflix, Google) consider hiring freezes and workforce reductions? This could be an opportunity for smaller, resilient companies to attract top talent.
Recruiting is about to get easier. Big technology companies have hiring freezes
Venture capital investors usually benefit from market disruption by investing in nimble companies that are better able to navigate change. Great opportunities can arise from difficult times, it just needs the right perspective.
guinnessgi.com/ventures eis@guinnessfunds.com
Shane Gallwey
Head of Ventures Guinness Ventures
These companies understand the importance of being able to adapt rapidly to changing market conditions and customer needs.
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MORE AIM POSITIVITY
hat structure gives advisers valuable certainty when it comes to tax-planning and claiming the reliefs on offer; it allows investments to be treated as if made in the year in which the fund closed, even if they were actually made in a later year - a great feature as tax year-end looms. Investors can also carry back some or all of their investments to apply the income tax relief in the year prior to that in which the fund closed.
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KI companies have been recognised by the government as those that take longer to mature, because of the learning, testing and approval timelines. They rely heavily on R&D and the creation of intellectual property or high levels of skilled employees is fundamental to their future business. Think deep tech, life sciences, health care and software... These companies are scarcer than other EIS-eligible companies, so it’s a good idea to engage specialist investment managers to track them down and ensure they meet the technical qualification criteria. Mercia Asset Management, for example, has invested in Axis Spine Technologies, which has developed more comfortable spinal implants for clients with back pain, spinal deformities and disc degeneration. Then there’s Acceleron, which has produced the world’s first serviceable battery pack with cells that can be removed and replaced to maximise energy efficiency.
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77
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Grants Internal retained cash or profit Investement or loans from owners or directors Loans from banks or other lenders, including recent government-backed COVID loans Friends and family investment or loans Equity investors
Per cent 0 10 20 30 40 50 60 70 80 90 100
Unlikely
Likely
*Totals may not add up to exactly 100% due to rounding
Propensity of SMEs to access financial support for net zero actions*
Propensity to access external loans for future net zero actions, by sector
Per cent 0 10 20 30 40
Transportation and Storage Agriculture/Primary Wholesale and Retail Manufacturing Other Services Accommodation and Food Service Activities Business Services Construction
Small businesses leading the charge to net zero
So deal flow, while far from unlimited, is and will continue to be available. Those EIS funds investing in KI companies certainly do not have to take on sub-standard deals because of a lack of candidates. Mercia’s KI fund closes 28 March, allowing any investments to qualify for income tax relief in 2022/23 or 2021/22, although it’s worth remembering that the EIS5 won’t be issued to investors to enable them to claim the reliefs until the fund has invested 90% of its capital. It is required to do this within 24 months of the close, although Mercia targets deployment within 12 months.
KI companies have been recognised by the government as those that take longer to mature, because of the learning, testing and approval timelines.
Top three reasons for smaller businesses to take net zero actions
Per cent 0 10 20 30 40 50 60
Makes financial sense It is part of our strategy or purpose to be a low-carbon business Other reason Other business benefits Responding to customer opportunities Keeping up with competitive trends Keeping up with regulatory or tax direction
Within the top three reasons
Most important reason
mercia.co.uk Paul.Mattick@mercia.co.uk
Dr Paul Mattick
Head of Sales and Private Investor Relations
Where can you find KI companies?
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2023 sees the sixth anniversary of the introduction of the ‘knowledge-intensive company’ (KI) categorisation for the UK’s venture capital schemes, including the Enterprise Investment Scheme (EIS.) In 2020, the existing HMRC-approved EIS fund rules were amended to focus investments on EIS knowledge-intensive companies.
So KI companies generally consist of expert teams creating new products and services that need significant research to get to market. This is where disruptors live, seeking solutions to current pressing issues that could revolutionise entire industries. And we are talking about investment in the early stages of those companies, often pre series A, making the growth potential extremely appealing. Yet, EIS-qualifying KI companies can be up to 10 years old and have less than 500 full time equivalent employees (three years older with twice as many employees than other companies that are eligible for EIS.) That means they can be well established and experienced. Given that the investment limit for individuals is raised from £1 million (non KI EIS-qualifying companies) to £2 million where any amount above £1 million is invested into KI companies, the additional tax reliefs on offer are potentially significant too. Of course, there are no guarantees, but that’s why, like other EIS managers, HMRC approved EIS KI fund managers diversify. Mercia targets 12 investee companies across sectors where breakthrough companies seek to transform their sectors or global health and life science.
Why do they offer exciting investment opportunities?
How many KI companies are there?
Data platform of over 45,000 of the UK’s fastest growing companies, Beauhurst, has calculated that there are currently over 2100 KI companies in the UK. This is not a huge investee market, but, consider this;
Over 750,000 companies are set up annually in the UK and data from Companies House reports that 46,474 new tech companies were created in Britain in 2022. Tech is just one of the sectors where KI qualifying companies are generally found. From April 2023, R&D tax credits available to SMEs will drop, leaving some looking for alternative funding sources.
Mercia’s KI fund closes 28 March, allowing any investments to qualify for income tax relief in 2022/23 or 2021/22
Mercia
Source: British Buisness Bank
Now, this might surprise you.
EIS: A tool in the net zero journey, despite renewables ban
Malcolm Ferguson, a fund manager at Octopus Ventures, explains: "We may be in the best period in over a decade to start, and therefore invest into, a new company.” “Some of the biggest household names were formed the last time we faced a challenging global economic environment, including Zoopla, a company we backed from an early stage.” “Although new challenges and headwinds exist in 2023, there are a number of very powerful tailwinds.” “As unemployment rises, we expect to see better availability of top talent. Scarcity of funding should reduce the level of competition around investing in the best businesses. And we’d expect incumbents to cut investment in innovation, creating windows of opportunity for new start-ups.” “All in all, we’re very excited about what the next few years have in store for the UK venture capital ecosystem. "
The value of an EIS and VCT investment can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on VCTs maintaining their qualifying status or portfolio companies maintaining their EIS-qualifying status. VCT shares or the shares of smaller companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
he Enterprise Investment Scheme (EIS) can continue to make a significant contribution towards achieving net zero emissions even with the current ban on renewables investment. This is because the transition to a low-carbon economy will require many new companies in new trades by 2030. There will be opportunities for new, small businesses to establish themselves as successful suppliers of essential services such as energy efficiency, carbon capture and storage, and sustainable transport, and gain a first-mover advantage. By investing in these companies through EIS, investors can not only support the transition to a low-carbon economy but also benefit from the tax reliefs provided by the scheme.
One of the most promising areas for investment in net zero is the development and deployment of clean energy technologies. There is also a growing demand for energy storage solutions, which can help integrate intermittent renewable energy sources into the grid. Investing in these technologies can provide a steady return on investment, as well as help to reduce greenhouse gas emissions and promote energy security. Another area for investment in net zero is energy efficiency. By improving the energy efficiency of buildings and industrial processes, businesses can reduce their energy consumption and costs, while also reducing their greenhouse gas emissions. This can include investing in energy-efficient lighting, heating and cooling systems, and building materials. Investing in circular economy business models is also a promising area for net zero investment. Circular economy models focus on reducing waste and promoting the reuse and recycling of resources, helping to conserve resources, reduce greenhouse gas emissions and create new business opportunities. Investing in research and development of new technologies, such as hydrogen fuel cells, carbon capture and storage and sustainable aviation fuels, is also an important aspect of net zero investment. These technologies have the potential to significantly reduce greenhouse gas emissions in key sectors such as transportation and industry. It is important to note that net zero investment is not only good for the environment but also for the economy. Net zero is not just about reducing emissions, it also presents opportunities for economic growth, job creation, cost savings and investments. It also helps to mitigate risks of climate change impacts that could have significant economic consequences.
There is a growing interest in sustainable investments, and more opportunities are becoming available for investors. Early-stage businesses are leading the way in sustainability and are becoming more important for the economy. However, these types of investments should be considered as part of a diverse portfolio, and it's important to be careful when choosing which companies to invest in. Investing in EIS can help support the growth of companies that focus on the environment. For example, a company that wants to reduce its carbon footprint may need the help of many smaller companies, and the EIS market is a good opportunity for investors who want to support these types of companies. Most EIS investors understand that they can support green technology through EIS. EIS-funded companies can contribute to the UK government's net zero strategy by developing and implementing innovative technologies and business models that help reduce greenhouse gas emissions and promote sustainable practices.
intelligent-partnership.com mohamed@intelligent-partnership.com
Mohamed Dabo
Senior Editor, Intelligent Partnership
Investing in EIS can help support the growth of companies that focus on the environment. For example, a company that wants to reduce its carbon footprint may need the help of many smaller companies.
he strain on the UK healthcare system has been a problem since long before the onset of the Covid-19 pandemic. Generational demographic trends, such as extended lifespans, have challenged the NHS and other healthcare infrastructure. To tackle this problem, we have seen a profound shift into technology-enabled clinical healthcare delivery. Digitally enabled healthcare aligns both physical and digital pathways and moves our experience of healthcare provision beyond the four walls of a hospital or GP practice. This sea change in approach is transforming people's lives. At the intersection of healthcare and technology, advances in 'healthtech' are driving down costs, while improving patient access and outcomes. Much of the innovation in this space has been driven by early-stage ventures, where technological progression is fuelling healthcare advances and breakthroughs. Investors in digital healthcare can now gain access to an increasingly broad church of innovation, ranging from data analytics and clinical decision support to artificial intelligence for remote patient monitoring. These technologies, including big data, the internet of things and machine learning, are key themes in the digital healthcare revolution and the advancement of national healthcare systems.
According to Link Group’s September 2021 AIM Dividend Monitor, AIM dividend payments are on the up. Ian Stokes, managing director of corporate markets EMEA at Link Group, said: "We are confident AIM’s dividends can regain their previous highs by some time in 2023, almost two years sooner than our expectation for the main market.” This was following the announcement of a £265 million jump in underlying dividends (which exclude one-off special dividends) paid by AIM firms in Q2 this year, a 56.6% increase in the three months to June. AIM payouts fell by over 40%, marginally less than the main market, between April 2020 and March 2021 when Covid-19 disrupted markets and businesses. This is despite what Stokes called the greater vulnerability of AIM companies to economic disruption than their multi-national counterparts as a result of lower levels of diversification and more limited access to funding. Consequently, “they must move quickly to preserve cash to ensure they can ride out a brewing storm”, Stokes said. Two thirds of AIM companies that normally pay dividends cut or cancelled these payments during the pandemic, a similar figure to the main market. AIM dividends also fell back to a level last seen in 2016, but the wider market investor payouts declined to 2011 levels. 2021 will see AIM’s payouts back to a level last reached in late 2018. The forecast for the second half of 2021 is for full-year 2021 payouts to rise 21.9% to £918 million. H2 dividends are expected to rise 24.2% to £519 million including special dividends. Stokes commented that, “Even though relatively few AIM companies habitually pay dividends, those that do tend to grow them faster than the main market.” This is amply demonstrated by Link’s expectation that a small contribution to the increasing dividend payments in 2021 will come from newcomers to the market.
Ensuring healthy adoption
Of course, dividend yield is now vulnerable to further erosion thanks to the recently announced increase to dividend tax. The 1.25% increase will apply from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain. But AIM is home to Venture Capital Trust (VCT) qualifying companies, although it is important to remember that not all AIM companies will meet the eligibility criteria. Those that do offer investors tax-free dividends, as well as 30% upfront income tax relief and tax-free gains on investments of up to £200,000 per year. There are already reports of investors surging into VCTs ahead of the implementation of the dividend tax rise and the expert VCT AIM stock pickers who already direct a large portion of the £700 million VCTs raise annually into AIM, could well be upping that figure very soon.
AIM's VCT-qualifying companies can escape dividend tax rise
According to EY, global IPO volumes rose 87% and proceeds rose 99% year-on-year in the third quarter of 2021. A key drviver was the rebound of the IPO markets in Europe, Middle East, India and Africa (EMEIA).
The seemingly exponential growth in Model/Managed Portfolio Services, as well as the ESG explosion.
There are already reports of investors surging into VCTs ahead of the implementation of the dividend tax rise
How the rise of 'healthtech' is transfarming our healthcare experience
Unfortunately, transforming our healthcare systems is not merely a case of simply implementing technology. Adoption is crucial. Previously, a catalyst was lacking for the mass adoption of an expansive form of digital healthcare. This catalyst came in the form of the pandemic, which shifted behaviours and supercharged innovation. The pandemic revealed the enormous pressure on healthcare systems and structural inefficiencies. The net outcome was a realisation that things needed to be done differently. Working from home and social distancing practices made old models of care, such as GP visits and certain types of in-patient hospital care visits, suddenly seem inefficient and prohibitively costly. The behavioural change swept away traditional ways of thinking about healthcare delivery. For example, the pandemic tailwind for adoption has supported the wider embrace of tech-led delivery models that harness technology to enable remote monitoring and testing. These delivery models can improve diagnosis and screening, as well as the timing of interventions, while boosting operational efficiency and lowering costs.
At the intersection of healthcare and technology, advances in 'healthtech' are driving down costs, while improving patient access and outcomes.
Bigger impact
The impact of technology will become more obvious as it is adopted and, arguably, the impact will be far more significant in the clinical environment than for therapeutics. Over the next decade, robust data will reveal the scale of change. We see the greatest impact in three ways: better access to clinical care; improved clinical outcomes for patients; and reduced costs. Ultimately, however, the best indicator of positive impact will be improved quality of life for patients. The pace of digital adoption in healthcare is driving more investors into the space. The healthtech revolution is just beginning, but we are already seeing how it can transform the healthcare experience.
The irony of the pandemic is that its legacy might not be how it diminished our healthcare systems, but how, ultimately, it made them more resilient. It has also deepened the investment case of digital care in the UK. For context, the UK is home to the largest number of digital health start-ups in Europe since 20101 . With a combination of early-stage venture capital and re-affirmed NHS goals towards a digital care future, we see the opportunity set widening further. There are still challenges, however. Adoption is accelerating but it won't happen overnight. For the next few decades, we will need to see doctors, nurses, and other healthcare professionals work in symphony with technology- this is the key to unlocking the power of cutting-edge digital solutions. This means developing clinical solutions that can be incorporated into existing workflows and achieving immediate practical impact. By leveraging technology in smarter ways, we can improve access to high-quality care - but also drive out costs and inefficiencies. Solutions need to be intuitive and seamlessly flow into existing practices. At an inception level, collaboration is vital. We need to create an ecosystem where private capital can engage with start-ups and early-stage companies to enable stakeholders, from software engineers to clinicians, to work in concert. This will then allow them to leverage the NHS and other healthcare systems to provide sustainable value-added solutions and deliver high-quality care.
Pandemic problem-solving
Scaling solutions
The scale of the challenge ahead requires early-stage innovation. This is happening. 2021 was considered a breakthrough year for healthtech and biotech, with a global record amount of venture capital investment to the tune of $79 billion. Healthcare also remains one of the least digitalised sectors, leaving plenty of room for growth. However, we must be able to scale solutions if we are to tackle significant challenges such as an ageing population. Our focus is on supporting tech-led companies further up the early-stage curve with established revenues. The themes of these innovative leaders range from robotics that prepare surgeons for the operating room to enhanced imaging technology -such as, real-time images from ultrasounds can be cleaned using algorithms that move imaging from 2D to 3D. This allows clinicians to get a more accurate picture and better plan for interventions. It also reduces surgery downtime and the need for CT scans or X-rays. By making the process more real-time, surgery times can be cut by 20-30%, which ultimately means more patients going through the operating theatre.
Downing Institutional Investments | Healthcare sales@downing.co.uk
Dr Nigel Pitchford
Partner & Co-Head, Healthcare Ventures
We need to create an ecosystem where private capital can engage with start-ups and early-stage companies to enable stakeholders, from software engineers to clinicians, to work in concert.
When the economic environment gets more challenging, you’d think there would be fewer opportunities to invest in game-changing, innovative companies, right? Now, this might surprise you. Some of best-known businesses backed by venture capital were formed in the doom and gloom of uncertain periods. There’s Zoopla, Uber, and Airbnb. They all flourished in the wake of the 2008 financial crisis. So, what’s going on? Periods of recession bring about difficult conditions for all businesses. Some will fail. Unemployment rises. These are well-documented effects of a slowing economy. What you might not realise is that for investors in early-stage businesses, these very same conditions can also create compelling conditions for entrepreneurs.
Seizing the moment
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octopusinvestments.com support@octopusinvestments.com
Jessica franks
Head of Investment Products Octopus
The current surge in the number of EIS offers can be seen as a sign of growing optimism over the UK’s economic growth outlook for 2023. This optimism is being fuelled mainly by evidence that inflation has peaked as energy costs ease.
The EIS universe today Consumer Duty: What it could mean for EIS investments EIS: The smart money goes north Find the gems: The art of identifying and investing in resillient businesses Three need-to-knows about knowledge-intensive-companies EIS: A tool in the net zero journey, despite renewables ban How the rise of healthtech is transforming our healthcare experience Going for growth with EIS EIS open offers jump by 24% Regulation 2023: It's more than just Consumer Duty EIS dealflow: Building pipelines for funding success Bionic Arms for Ukrainian soldiers Continuing professional development About Intelligent Partnership
A managed EIS portfolio can be an ideal structure for investors seeking high growth from early-stage companies. With an EIS, growth is tax free, which is a compelling tax benefit when investing in companies with high growth potential. Of course, not every EIS-qualifying company will experience significant growth. In fact, around 55% of early-stage companies fail within the first five years. So, the fact that loss relief can be claimed against income or capital gains tax for those companies that fail in an EIS portfolio, irrespective of the performance of the portfolio overall, is hugely valuable. These tax reliefs, combined with 30% upfront income tax relief provide a very attractive way to invest in early-stage companies.
Accessing venture capital through an Enterprise Investment Scheme (EIS)
By investing in a Knowledge Intensive EIS Fund, investors can claim income tax relief in the tax year the Fund closes or the prior tax year, instead of the date of capital deployment into underlying qualifying shares. This gives certainty to the timing of tax relief and can prove very valuable for tax planning purposes. With tax year-end approaching, a Knowledge Intensive EIS Fund is the final opportunity to carry back income tax relief to tax year 21/22. Octopus has launched its second Knowledge Intensive EIS Fund which gives investors the opportunity to invest in 15-25 early-stage businesses with high growth potential (each targeting 10x growth on initial investment). It is run by the same team behind Octopus Titan VCT, the UK’s largest VCT and benefits from the same pipeline of opportunities.
Getting the most out of tax year-end by investing in a Knowledge Intensive EIS Fund
Key risks to bear in mind
EIS and VCT investments are not suitable for everyone. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Regarding VCTs, this advertisement is not a prospectus. Investors should only subscribe for shares based on information in the prospectus and Key Information Document (KID), which can be obtained from octopusinvestments.com. For all other investments, investors should read the product brochure before deciding to invest, this can be found at octopusinvestments.com. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: February 2023. CAM012792.
A managed EIS portfolio can be an ideal structure for investors seeking high growth from early-stage companies.
By investing in a Knowledge Intensive EIS Fund, investors can claim income tax relief in the tax year the Fund closes or the prior tax year, instead of the date of capital deployment into underlying qualifying shares.
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1 Office for National Statistics, Survivals and growth by size, June 2020. 2 Association of Investment Companies, January 2022.
he Enterprise Investment Scheme (EIS) has a lot going for it in 2023. Starting from April, there may be a clamour from UK individuals looking for the tax reliefs offered by EIS in the face of slashed capital gains and dividend tax allowances. The government has said it will continue to support the enterprise investment scheme and venture capital trusts. This means that private investors can still save on taxes by investing in early-stage ventures. Tax-efficient investing is a good option for those who can wait for their investment to grow. In 2023, pension contributions will continue to be the primary method for lowering income tax liability, but for high earners who may be impacted by the tapered annual allowance for pensions contributions, EIS will also be viable option to consider in crafting a tax-efficient investment strategy. EIS remains a useful option in an inheritance tax mitigation plan as EIS shares become eligible for business relief after two years, and can also help defer a capital gains tax obligation. The tax incentives offered by HM Revenue & Customs through EIS are highly appealing. However, as we always say, it's important to remember that investment in the scheme should be based on their potential for strong returns and the merits of the investment, not just the tax benefits. For investors looking to invest in EIS, there is positive news from MICAP. The data suggests a bright outlook for the popular scheme, offering hope for investors aiming to take advantage of the UK’s most ambitious companies.
Number of open offers grows by a quarter
The bulk of the investment goes to the technology sector (46.7%) and to general enterprise (43.3%), a diverse investment area. Pharmaceuticals get 8.3% of the investment. These sectors would place high on most lists of ‘best investment sectors for 2023.’ While the tech sector will struggle from the impact of layoffs, UK tech will retain its position as one of the global leaders for creating and growing exciting startups which are driving innovation. In a new report, PwC researchers are bullish on Pharma in 2023, noting: “Leading pharmaceutical and life sciences companies can seize this moment to transform their businesses in bold ways.” General enterprise is the ideal hunting ground for EIS managers who prefer to cherry pick businesses they see as the most promising.
What sectors do the open offers invest in?
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 07 February 2023.
MICAP Data Analysis
intelligent-partnership.com lisa@intelligent-partnership.com
Lisa Best
Head of Financial Services Content Intelligent Partnership
The EIS context sparks optimism about 2023
The most common target return found among the open offers has also jumped to 300%, an increase of 50% from the 200% we saw in October, which could also be a sign of optimism among managers. The lofty target return provides an hedge amid inflation, which poses a “stealth” threat to investors because it chips away at real savings and investment returns. Historically, being invested in equities is really the only good way to stay ahead of inflation. While equities can be volatile, for the long run that has been a winning formula in the past. At 292.47%, the average target return of the open EIS offers could well outrun inflation and provide a significant positive real return for investors.
Target returns of open offers
The open offers invest in early-stage companies (82.9%), later stage companies (8.6%), and AIM-listed companies (8.6%). During the early stages of their development is when many small companies struggle most to secure finance through traditional avenues such as banks. EIS investment is crucial to plugging this significant funding gap that threatens to stifle their growth. Many EIS investors welcome the opportunity of stimulating the growth of the UK's innovative SME sector.
Investee companies
The majority of fees and charges have come down since a year ago. The Initial charge, though, has risen overall. This fits the trend among many product and service providers that are coping with rising wage demands and other costs in today’s high inflation rate environment. But AMC has remained stable and some of the smaller fees have dropped. Fees paid directly by investors have gone up and those by investee companies have gone down, reflecting the difficult times for SMEs. But it also means that less of an investor's capital is actually invested and therefore generating tax reliefs, while more is taken annually from their gains in AMC, eating into any growth. All the current open offers are focused on growth as their investment strategy, which positions these long-term investors ideally for an eventual economic recovery. Indeed, smaller companies are typically the first businesses to stage a comeback during recovery. And when that happens, growth stocks—the bread and butter of EIS—are likely to re-emerge as the biggest winners.
Fees and charges
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 Initial Deal Fee Exit Deal Fee
February 2023
February 2022
% Change
1.60% 2.14% 3.68% 1.03% 0.73% 1.74% 0 18.63% 0.28% 0.13%
1.23% 2.32% 3.43% 0.98% 0.84% 1.74% 0 17.91% 0.36% 0.20%
+30.08% -7.76% +7.29% +5.10% -13.10% N/A -4.02% -22.22% -35%
There are currently 62 open EIS offers, which represents a sizeable 24% increase from the 50 we recorded during our previous analysis back in October 2022. The current surge in the number of EIS offers can be seen as a sign of growing optimism over the UK’s economic growth outlook for 2023. This optimism is being fuelled mainly by evidence that inflation has peaked as energy costs ease. Lloyds Bank said confidence rose by five points to 22%, with firms’ expectations for their own prices moderating from the record high hit in December. This sense of cautious optimism in the market comes after a previous survey by the Confederation of British Industry showed that private-sector activity fell over the winter due to a cocktail of headwinds, including strikes, staff shortages and the cost-of-living crisis. Fears of a potential recession in the first half of 2023 remain, but business optimism is at a 6-month high, according to Lloyds; other confidence indicators—such as card spending data and investment intentions—have also begun to send positive signals. Much will now depend on what happens to inflation. But EIS investors seem poised to reap the benefits of a potential economic recovery.
12000.00% 1000.00% 800.00% 600.00% 400.00% 200.00% 0.00%
Average
Mode
Min
Median
Max
2.9x
3x
1.3x
2.5x
10x
Market composition of open offers by investment sector
46.7%
43.3%
8.3%
Technology
Pharmaceuticals & Biotechnology
Media & Entertainment
General Enterprise
8.6%
82.9%
AIM Listed
Early Stage
Later Stage
The data suggests a bright outlook for EIS, offering hope for investors aiming to take advantage of the UK’s most ambitious companies.
intelligent-partnership.com 079 3232 3388 mohamed@intelligent-partnership.com
Neil Blankstone
Investment Director, Blankstone signton
Building an AIM portfolio is about building for the long-term, with ‘time in the market’ as important as any other exchange.
he convergence of these rules impacts advisers and providers. It is vital that manufacturers and distributors understand how Consumer Duty, anti-greenwashing and SDR/fund labels impact on their respective businesses. Factors that need to be addressed over the next five months include:
contact
blankstoneSington.co.uk 0151 236 8200 Enquiries@BlankstoneSington.co.uk Micap offer
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31 July is the big day for Consumer Duty (CD). A month before this date, we are expecting the FCA’s less well-known anti-greenwashing rules. The anti-greenwashing rules are part of a broader set of new rules introducing the Sustainability Disclosure Requirements (SDR) and investment labels.
Inevitably, prompted by the FCA’s new labelling regime, as investors demand greater transparency and reporting, it will expose those fund managers whose ESG claims have been somewhat greater than their actions!
Get in touch
quote
closebrothersam.com/ifa 01606 810325 ifaclient@closebrothers.com Micap offer
Review marketing material and client communications; the anti-greenwashing rules will impose a very high requirement for firms to match their marketing and communications to what the product or service actually does. This complements CD. Consumer Duty requires marketing and communications to focus around client needs and understanding. The anti-greenwashing rule provides an underpin of trust in how companies describe their offerings.
"Inevitably, prompted by the FCA’s new labelling regime, as investors demand greater transparency and reporting, it will expose those fund managers whose ESG claims have been somewhat greater than their actions!" says the director of a sustainability-focused venture capital firm run by experienced entrepreneurs.
We have always sought a balance between optimising investor returns and investing in well run companies. We are now transitioning to include the environmental part of ESG. says the marketing manager at a fund designed to provide investors with a diversified portfolio of pre-seed technology companies.
Factors that need to be addressed over the next five months include:
All
Do you collect information on each client’s Investment Preferences and Objectives? Under CD you must show how you help clients make an informed choice, document their investment preferences and build this into the investment recommendation. Investment preferences can, according to the FCA, include a client looking to apply ESG or invest sustainably. If these areas are not part of your advice process, then the advice may not be compliant for Consumer Duty.
Advisers
"We ensure all our investments are sustainable and have positive environmental impact, and we are pleased that the rest of the investment community are following this trend" says another EIS manager.
Providers should be planning for the introduction of labels. This isn’t just deciding which label might be applicable to each fund (if at all), but what processes and procedures they will introduce to deal with the disclosure requirements. All funds will be required to provide 3 types of disclosure; Consumer facing, Institutional and Entity.
Providers
"We have always sought a balance between optimising investor returns and investing in well run companies. We are now transitioning to include the environmental part of ESG." says the marketing manager at a fund designed to provide investors with a diversified portfolio of pre-seed technology companies.
2023 will be a critical year for advisers and providers, adapting to Consumer Duty, anti-greenwashing and building new disclosure procedures. This is centred around increasing trust, helping customers make informed decisions, leading to good client outcomes. All firms need to act immediately.
Lee Coates OBE is co-Director of ESG Accord, a compliance and consultancy business specialising in supporting advisers develop processes around Investment Preferences and Objectives, ESG and Sustainability. www.esgaccord.co.uk
lee@esgaccord.co.uk
Director ESG Accord
esgaccord.co.uk
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EIS deal flow building pipelines for funding success
The number of subscribers for stocks and shares ISAs grew by 300,000 to just over 2.7 million from 2019 to 2020. While cash ISA subscribers went up by 1.8 million to 13 million.
Volume and quality are critical factors
Ongoing relationships contribute significantly to keeping the deal-flow pipeline full and as part of the Oxford tech cluster this ensures the team gets access to high quality deals from across the region, and across the UK. A plentiful deal flow is essential, as deployment timelines for investing our clients’ funds into underlying EIS-qualifying companies depend on the ongoing availability of well-researched deals that are ready to go across the year. The qualification clock for the tax reliefs does not start until this takes place. Without well-stocked deal pipelines, there is a danger of insufficient quantity and quality of deals to deliver timely investment returns. What’s more, while some investors may decide to keep their powder dry when conditions are less favourable, many are still looking to grow their wealth and have tax-planning that still needs to be done. It’s worth remembering that the investment horizon for EIS is generally between five to seven years. As a result, whenever the investment is made, it is likely to pass through several economic cycles, benefitting from good times to come. There's certainly no denying that current conditions have been damaging to some businesses, with reports that company insolvencies in December 2022 were 76% higher when compared to December 2019 (pre-pandemic) and 32% higher than in December 2021. But there is still an abundance of exciting EIS opportunities. While that’s no surprise to those with experience of this market: some sectors are more recession proof and can be part of the diversification strategy of an EIS manager. Long-term care and consumer staples are good examples of sectors where services remain in strong demand, whether or not economic conditions are optimal. Downturns can also be beneficial to small, young companies with the ability to pivot, take advantage of new opportunities and disrupt existing markets, aided by lower overheads which allow the creation of lower-cost products and services. Those challenges can lead to the availability of more talent, as larger companies shed jobs; and reduce competition, as risk aversion deters some companies from entering the market. After two decades in the EIS market, at Oxford Capital we’re excited about our current pipeline, with a strong deal flow of companies in lucrative sectors such as fin-tech, AI & machine learning, digital health and legaltech. We are targeting deployment in 3-5 companies ahead of this tax year end, which will equate to up to 35% of an investor’s subscription*.
*Deal completion subject to factors outside Oxford Capital's control.
Here at Oxford Capital we typically screen over 1,000 deals per year but back only a handful of these. We invest in 4-6 new companies annually, making the investment rate for our EIS offer just 0.5%. Our quality control process relies on robust filters and, as it progresses, extensive due diligence, including analysis of the prospective investee company's technology and IP, commercial traction and financials, quality of management team, competitive environment, risks, and growth potential.
A plentiful deal flow is essential, as deployment timelines for investing our clients’ funds into underlying EIS-qualifying companies depend on the ongoing availability of well-researched deals that are ready to go across the year.
Deal flow, the process by which EIS investment providers like ourselves identify and evaluate potential investment opportunities, is an essential component of building an investment strategy. It is this approach that can help to deliver consistent returns and the best outcomes for investors.
Our filtering process separates potential investee companies into two broad categories:
Those displaying early signs of growth, product market fit, track record of delivery/customers and strength of founder/management team.
High potential companies – those that have ground-breaking tech or intellectual property, breaking a large market with a world class technical team.
oxcp.com swakefield@oxcp.com
Sarah Wakefield
Business Development Manager, Oxford Capital
Long-term care and consumer staples are good examples of sectors where services remain in strong demand, whether or not economic conditions are optimal.
Manager Content
*Deal completion subject to factors outside Oxford Capital’s control
Case study: Open Bionics
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Investment detail
Open Bionics is an award-winning designer, manufacturer and supplier of custom-made bionic limbs.
Its flagship ‘Hero Arm’ has lights, feedback vibrations, and different functions that allow the user to grasp, pinch and hold, as well as do fun stuff like high-fives, fist bumps and give the thumbs up.
Open Bionics
Healthcare
The company is on a mission and it’s all in the name:
aiming to be affordable to all
'Open'
advanced engineering, giving children and adults a new superpower
'Bionics'
The Hero Arm has secured commercial licences from Disney, Marvel and Pixar to design arms for children with themes from Star Wars, Frozen and the Marvel Universe. The latest version is a Black Panther “Wakanda Forever” Hero Arm which is launching soon. The Hero Arm has already been supplied to two Ukrainian soldiers. This investment area lies at the heart of what drives Downing - investing in what matters.
Will Brooks, Investment Director for Downing Healthcare Ventures says:
It’s a fantastic initiative Open Bionics has embarked on. The team’s ethos has been clear to see since we first invested in 2017, so it comes as no surprise that they are supporting war veterans in this way. We look forward to continuing to support Open Bionics in both its impact initiatives and business growth.
Case study:
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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. 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 or for any expense or other loss alleged to have arisen in any way in connection with this publication.It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. 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 any of the investment options in 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 March 2023 which could change in the future. 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. 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.
Outline regulatory developments that could impact the EIS in the near future
Identify main developments and news in the EIS market
Describe some of the practical mechanisms used by EIS investment managers to deliver specific objectives to clients
Define some of the key events likely to impact EIS in the near future
Evaluate the key fees and charges applied by EIS managers
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Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC? Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC?
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Analyse some sectors and strategies that successful EIS managers are leveraging
See pages 3, 9 and 10
See page 10
See page 9
See pages 3, 4 and 6
See pages 3, 4, 6, 7, and 11
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