EIS May 2022

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What the managers say

So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to

The AIC has called on the Treasury to conduct a review of the current disclosure regime for UK retail investors. In the light of FCA’s amendments to the PRIIPs rules, what further changes would you like to see?

The FCA’s recent PRIIPs changes are welcome, for example in tightening risk scores in KIDs. However, there remains too much inconsistency. Why is a KID required for some EIS products and not for others? Similarly, the new narrative performance descriptions, while a great improvement on the old performance scenarios, may not deliver a clear like-for-like comparison of different EIS products.

The Subsidy Control Bill promises a new system for subsidies focused on key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution. What impact do you foresee for the EIS sector?

NIC PILLOW

EIS has served the UK extremely well over many years, helping establish twice as many high-growth companies here than in any EU country. The Subsidy Control Act now gives the government much greater flexibility in the subsidies it offers. We expect to see the core EIS scheme retained, if not extended, and potentially supplemented in target sectors or regions.

Ventures Manager
Blackfinch Investments

Income tax revenues are soaring. More people are brought into paying income tax, and others are brought into the higher rate band by the freeze on personal allowance and higher rate thresholds. How will all this affect EIS investment?

It is the freeze on the higher rate threshold that is particularly likely to drive more people to seek ways of reducing their income tax. EIS investments will be increasingly attractive given the high rate of relief available. Total EIS investment is therefore likely to increase, both in terms of the number of investors and the amounts invested.

The AIC has called on the Treasury to conduct a review of the current disclosure regime for UK retail investors. In the light of FCA’s amendments to the PRIIPs rules, what further changes would you like to see?

A level playing field across providers is welcomed. We are all for ensuring that only the correct type of investors gain access to venture capital, and that they are fully aware of all of the features of the investment they are getting in to.

The Subsidy Control Bill promises a new system for subsidies focused on key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution. What impact do you foresee for the EIS sector?

Any initiative that helps to boost the growth of early-stage companies and supports the sustainable agenda is positive for the EIS sector. In our own portfolio we place a huge emphasis on supporting our companies in developing their own ESG metrics and drive to be more sustainable and a number of them have achieved or are working towards B-Corp status.

MARK BOWER-EASTON

Business Development Manager
Oxford Capital

Income tax revenues are soaring. More people are brought into paying income tax, and others are brought into the higher rate band by the freeze on personal allowance and higher rate thresholds. How will all this affect EIS investment?

Investors can mitigate their income tax lability, assuming they have the correct level of risk appetite through several ways. The headline tax benefit of an EIS is 30% income tax relief, so for someone who invests £100,000, they will receive up to £30,000 of income tax relief, which they can offset against either the current, or previous tax year’s income tax liability. So, if investors find themselves paying more income tax due to the freeze on the personal allowance and higher rate thresholds, there will actually be more scope for EIS to help mitigate that liability.

The AIC has called on the Treasury to conduct a review of the current disclosure regime for UK retail investors. In the light of FCA’s amendments to the PRIIPs rules, what further changes would you like to see?

Overall, we’ve seen these amendments as a positive step. The FCA has actively listened to the market players and made changes accordingly – for example, with the introduction of the implementation period. However, this is only the first stage and the FCA has indicated that it plans to overhaul large parts of the disclosure regime for UK retail investors.

The Subsidy Control Bill promises a new system for subsidies focused on key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution. What impact do you foresee for the EIS sector?

JONATHAN PRESCOTT

As one of only a small number of North West focused VCs in EIS, we see the funding gap in the region as a unique opportunity for investors. We’ve played our role in the levelling up narrative and see this as pivotal for the UK economy’s overall performance. Likewise, investors are increasingly interested in the investee company’s effect on society. Ultimately, as the market matures, investors now hold the power in terms of their ability to vote with their feet and choose a fund manager who considers their own personal objectives and beliefs.

Director, Praetura Ventures

Income tax revenues are soaring. More people are brought into paying income tax, and others are brought into the higher rate band by the freeze on personal allowance and higher rate thresholds. How will all this affect EIS investment?

The investment landscape has seen a steep rise in consumer interest, fuelled by a number of factors including tech-enabled solutions and a focus on smarter financial wellbeing. As a VC fund manager, we’re completely focused on the quality of the underlying portfolio companies. However, EIS does offer unique access to an exciting asset class with very attractive tax benefits. EIS will continue to play a part in tax planning as a complementary solution to the other more mainstream solutions being used by financial planners.

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The UK economy has had a growth problem for a number of years, stemming in part from the lower level of capital investment by businesses.

Britain to ditch EU financial regulation for UK-specific ones

Votes, as they say, have consequences.

Investment and innovation make up the turf of the Enterprise Investment Scheme (EIS), which helps innovative companies with growth potential to attract investment. This means that government action and regulation in this area can hardly bypass EIS.

Many of the anticipated regulations are likely to impact the government-supported venture capital scheme, one way or another.

Take the Procurement Bill. Every year, the government purchases billions of pounds worth of goods and services from private businesses: everything from medicine to food to digital equipment and consulting services. By targeting small businesses, public sector procurement will invigorate these businesses, some of which may well be EIS backed.

The Genetic Technology Bill is another example. It could be a windfall for some knowledge intensive companies, those favoured businesses under EIS.

By stimulating local economies, the Levelling Up and Regeneration Bill can energise local businesses, thereby encouraging EIS investment in them. And the Trade Bill could open overseas markets to some EIS-backed businesses.

The legislative changes promise an extensive overhaul of the EU’s sweeping rules for markets.

So, the United Kingdom is uncoupling from the rules, regulations and institutions of the European Union to make its own laws, unhindered by duties to a supranational organisation. Whatever one’s sentiments about Brexit, it seems likely that the new regulations, tailor-made for Britain’s unique circumstances, and seeking to promote growth and innovation, will benefit EIS and its investors.

On 23 June 2016 the United Kingdom voted in a referendum to leave the European Union. Almost six years later, the government has announced plans to scrap EU financial services regulation and replace it with new rules which are "designed for the UK".

“[The] new legislation will strengthen the United Kingdom’s financial services industry, ensuring that it continues to act in the interest of all people and communities,” said Britain's throne Prince Charles, who delivered the Queen's Speech at the State Opening of Parliament for the first time on 10 May 2022.

The government’s priority, he said, is to grow and strengthen the economy and help ease the cost of living for families.

UK’s growth challenge and EIS’ opportunity

“My government’s priority is to grow and strengthen the economy…,” was the first line of the Queen’s speech.

The UK economy has had a growth problem for a number of years, stemming in part from the lower level of capital investment by businesses.

“This is a pervasive economy wide issue. It has been persistent for decades, and we must fix it to improve productivity, growth, and living standards. Indeed, we need the private sector to invest to level up this country,” Chancellor of the Exchequer Rishi Sunak said in a speech in February.

The government recognises that in order to accelerate growth, “the first [priority] is to encourage greater levels of capital investment by our businesses,” Sunak said.

“Our vision,” he went on, “is for the UK to be a global hub for innovation.”

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New bills relevant to EIS

Among the new legislations being considered, the following could have a direct or indirect bearing on EIS:

The Brexit Freedoms Bill

To enable laws inherited from the European Union to be more easily amended. Regulations on businesses will be repealed and reformed with the goal of “support[ing] economic growth.”

The Financial Services and Markets Bill:

to strengthen the UK’s financial services industry, “ensuring that it continues to act in the interest of all people and communities.”

The Draft Digital Markets, Competition and Consumer Bill

to promote competition, strengthen consumer rights, and protect households and businesses. Designed to create new competition rules for digital markets and the largest digital firms.

The Genetic Technology (Precision Breeding) Bill

to encourage agricultural and scientific innovation at home. This legislation will “unlock the potential of new technologies to promote sustainable and efficient farming and food production.”

Procurement Bill

designed to simplify public sector procurement in order to provide new opportunities for small businesses.

The Levelling Up and Regeneration Bill

to drive local growth, “empowering local leaders to regenerate their areas, and ensuring everyone can share in the UK’s success.” The planning system will be reformed to give residents more involvement in local development.

Data Reform Bill

to reform the UK’s data protection regime.

Trade (Australia and New Zealand) Bill

to enable the implementation of Britain’s first new free trade agreements since leaving the European Union.

Economic Crime and Corporate Transparency Bill

to further strengthen powers to tackle illicit finance, reduce economic crime and help businesses grow.

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THOUGHT LEADERSHIP

T

         he pandemic shook the UK economy.

Last year, the number of private sector businesses reduced by 6.5% – the worst contraction in decades. Despite this, new UK business openings have now outpaced global averages and remain consistent to pre-pandemic levels; these figures are also now expected to rise sharply. As we’ve seen in previous economic cycles, innovation and great entrepreneurship are often born out of unlikely periods of turbulent markets, structural change and challenging financial times.

A recent study by Tech Nation points towards Tech SMEs being a driving force in post-COVID recovery. Even in the height of the pandemic, 72% of UK tech businesses surveyed saw an increase in demand for their services throughout 2020. The UK also attracted the third highest level of tech investment globally, totalling £10.1bn.

“Pre-COVID-19, the tech sector was growing six times faster than the rest of the economy and it already employs almost three million people, representing an engine room of high-value, skilled and well-paid jobs, with salaries that are, on average, £10k higher than other sectors. Clearly, it is time to think about tech as core to UK employment, prosperity and productivity,” said Stephen Kelly, Chairman for Tech Nation.

Nevertheless, tech’s ability to fuel our economic recovery isn’t straightforward. Kelly has previously said that growth can only truly be harnessed if we offer our tech entrepreneurs support combined with the capital they need to scale.

As the government slowly moves towards its capital commitments, internationalisation ambitions and digital upskilling goals, some of this blended support can already be found in areas of the private sector throughout the UK. One example is Praetura’s operational partner programme, which takes industry heavyweights and matches them to our portfolio founders for consultancy and mentorship. Outside of Praetura, many investors are beginning to see the benefits of marrying capital deployment with operational expertise.

This shift has been reflected in the market for early-stage business investments as the asset class continues to evolve. EIS will undoubtedly play a critical role in the UK’s economic recovery. Since its inception in 1994, EIS legislation has helped over 33,000 companies raise a total of £24bn. Incentivised by tax benefits, this is one of the most successful government vehicles for connecting investors with entrepreneurs in a meaningful way. EIS has helped founders start and scale so many of the success stories we see today across the investment landscape.

But the industry is changing. As EIS shifts from one-off deals to more structured fund managers, investors are being offered more differentiated services than was available previously. But whilst EIS offers an attractive proposition for tax-efficient capital deployment, investors should demand more from fund managers in terms of mitigating risk and maximising returns by supporting the businesses they back. In turn, this can attract better deal flow from potential investees when venture capital companies cultivate a reputation for adding value beyond money in the bank.

As the market stabilises, we’re now seeing over £2bn raised a year by 2,500 companies. Whilst the risks of early-stage business investment are well-known, the likelihood of success drastically increases when investors understand the challenges entrepreneurs face and put steps in place to help them overcome them. SMEs are the lifeblood of the UK economy and EIS deployed in the right way will help pave the way on the road to recovery.

Startups: Key to UK’s economic recovery

JONATHAN PRESCOTT

DIRECTOR, PRAETURA VENTURES

As EIS shifts from one-off deals to more structured fund managers, investors are being offered more differentiated services than was available previously.

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praeturaventures.com
+0161 641 9475
ventures@praetura.co.uk

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