ENTERPRISE INVESTMENT SCHEME
Industry Update - October 2022
1. INTRODUCTION
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
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Industry Update - MAY 2022
02
Opening statement Acknowledgements and thanks Key findings
1. Introduction
Opening Statement Acknowledgements and Thanks Key Findings
MICAP Stats Analysis MICAP Market Snapshot
3. Considerations For Investment
Boosting economic confidence: UK to revamp insolvency framework HMRC loses court battle over EIS funding for films —What are the larger implications?
Mini-Budget 2022: Sunset Clause extended beyond 2025 HMRC deals with growing pressures on advance assurance What the managers say
2. market update
Blackfinch OnePlanet Oxford Capital Praetura Comparison table
5. managers in focus
Splendid symbiosis: EIS & sustainable investment VC Inquiry: EISA urges Select Committee to abolish Sunset Clause “Are tax reliefs good value for money?” MPs want to know 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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Photography by Interview by
03
ince the Enterprise Investment Scheme (EIS) was launched in the tax year ending 1994, it has been something of a shape-shifter. The tax-advantaged scheme has gone through various phases as the government frequently moves the goalposts to prevent misuse and keep the scheme focused on its intended purpose. EIS was designed to provide a targeted incentive for new equity investment in unquoted trading companies by outside individuals, to help overcome the problems faced by such companies in raising equity finance to grow. EIS funding requires that qualifying companies be in business for the longer term and that investors face a genuine risk of loss of capital. Since its introduction, every Chancellor up to 2015 has approved and widened the scheme. In 2011 and 2015 restrictions were introduced required to meet EU State Aid rules. There is now the ability to get rid of these. The Seed Enterprise Investment Scheme (SEIS), established for smaller scale investments, has attracted talent to the UK and enabled many small entrepreneurs to start their own business here. Areas where EIS terms have been extended include, in particular, the increase to 30% tax credit. Neither finance nor property companies can qualify for EIS; companies which are older than seven years will now qualify for EIS. EIS has been particularly important in supporting new high-tech businesses, virtually all of which have got going with EIS finance.It has surprised me that over time I have encountered MPs of all three Parties who did not know about the existence of EIS and how important it has been in growing the UK Venture Capital commitment. Over recent years the EU has imposed a series of requirements on EIS which have served to increase the underlying costs e.g., particularly lawyers’ bills, inappropriate for small business. While the EIS and its junior SEIS are essentially working well, small changes could enable them to work more effectively across the whole of the UK. The SEIS investment limit will usefully increase from £150,000 to £250,000. The EIS investment limit is £1m and £2m if investing in knowledge intensive companies. Both the EIS and the SEIS have imposed age limits on the companies that are able to seek investment through the scheme. These age limits serve little or no purpose and will be abolished. The financial health requirements brought in to meet EU State Aid obligations will be usefully abolished.
S
lord flight
member of the House of Lords And EISA Chairman
Since the introduction of EIS, every Chancellor up to 2015 has approved and widened the scheme.
opening statement
Shape-shifting to stay the course
To help support the net zero agenda the higher limits which apply to “knowledge intensive” companies should also apply to clean tech and green tech. Some Parties in the Treasury are critical towards what they describe as the tax cost of EIS of circa £550,000 p.a. This figure ignores the tax revenues generated from EIS investing. These comprise Income Tax on individuals’ pay; Corporation Tax; VAT on their purchases; National Insurance; Fuel Duty etc. When the taxation is paid by individuals working for EIS qualifying businesses – and after allowing for only half of such employment tax revenues to be “new”, the £550,00 initial tax costs are still more than paid for. EIS and SEIS are thus attractive fiscal measures costing the Treasury nothing on the one hand but providing an attractive fiscal incentive to invest in SMEs on the other. Another area requiring reform is the removal of complicated tax rules required by the EU when the UK was a member, where there is no longer the need for the UK to impose such EU requirements. They add to costs and unnecessary regulatory complexity. Some three years ago I was contacted by the French tax office who advised they wanted to talk to me about EIS. I assumed, wrongly, that there was something in the UK’s management of EIS to which they objected to. Rather, they had observed how successful EIS had been in the UK in stimulating SME investment and wanted to understand how EIS worked. Subsequently France installed a different but comparable tax incentive. The next general election is planned to take place on Thursday 2 May 2024, though a snap election could mean voters being asked to go to the polls sooner. Under whichever party, the UK government now faces two key economic questions. First, how do they stimulate the UK economy and protect jobs, and second, how do they plug the estimated £337 billion deficit caused by the pandemic. Any well-thought-out answers to these questions would only encourage funding into UK’s small companies. With over £27 billion raised via the EIS financing of 52,000 new businesses since 1995, the popular scheme remains the envy of Venture Capital investors around the world. EIS/SEIS qualifying businesses survived well during the Covid lockdown. They are likely to be seeking fresh capital over the coming year to finance expansion.
The Seed Enterprise Investment Scheme (SEIS), established for smaller scale investments, has attracted talent to the UK and enabled many small entrepreneurs to start their own business here.
020 7222 7559 020 7976 7059 flighth@parliament.uk
MICAP Statistical Analysis MICAP Market Snapshot
Mini-Budget 2022: Sunset Clause extended beyond 2025 HMRC deals with growing pressures on advance assurance Pivoting with passion: how resilient founders are the key to growth Why climate change is such an interesting investment space over the next 5 years Inflation Drain - tackling the inflation problem What EIS managers are going through and the realities of the current situation for their inflows and deal flows What the managers say
Blackfinch OnePlanet Capital Oxford Capital Praetura Comparison table
Splendid symbiosis: EIS & sustainable investment EISA continues advocacy amid mini-budget uncertainty “Are tax reliefs good value for money?” MPs want to know What the managers say
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
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 The Lord Flight, member of the House of Lords and chairman of the Enterprise Investment Scheme Association (EISA), who graciously provided the opening statement. We’re also grateful to Christiana Stewart-Lockhart, director general of the EIS Association (EISA), for her pre-budget piece on abolishing the Sunset Clause. We thank them both for taking the time out of their busy schedule. We’d also like to express our gratitude to Nic Pillow and Dr Reuben Wilcock of Blackfinch Investments; Matt Jellicoe of OnePlanet Capital; David Mott, Richard Roberts, and Sarah Wakefield of Oxford Capital; and Jonathan Prescott of Praetura. Our thanks also go to Dave Morrison, partner at Nyman Libson Paul, for his insightful thought leadership about EIS funding for films. 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, OnePlanetCapital, Oxford, and Praetura.
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Acknowledgements and thanks
Identify main developments and news in the EIS market Outline regulatory developments that could impact the EIS in the near future Benchmark products and providers in the market against one another Evaluate the key fees and charges applied by EIS managers Outline the statistical trends in EIS investment and tax relief in recent years Define some of the key events likely to impact EIS in the near future
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EDITORIAL Mohamed Dabo CREATIVE Gillian Livingstone SUB-EDITING Lisa Best & Mohamed Dabo RESEARCH Mohamed Dabo
MARKETING Chloe Fry Carlo Nassetti DISTRIBUTION Michelle Powell SALES Chris White
Key findings
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proportion of EIS companies that raised 31% of all investment (2020 to 2021)
74.3%
proportion of total UK businesses that are public corporations
1,560
increase in the number of SMEs over the past 22 years
60%
decrease in the number of small businesses in the UK from 2020 (5.9million) to 2021 (5.5 million)
6.6%
proportion of businesses finding it ‘much harder’ than normal to recruit new employees
63%
growth rate in the average cost of producing a single unit of a good or service over the past 12 months
8.8%
99.9%
£
share of SMEs of the UK’s business population (SMEs have 250 or fewer employees)
%
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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.
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- fred wilson, vc entrepreneur
The VC market remains largely out of reach of many ‘main street’ investors as the SEC limits these fund investments to qualified and accredited investors. That has never made sense to me and is yet another example of the ‘well meaning’ rules resulting in the wealthy getting wealthier and everyone else missing out.
Mini-Budget 2022: Sunset Clause extended beyond 2025
The Enterprise Investment Scheme (EIS)—along with Venture Capital Trusts (VCTs)—will be extended beyond 2025, chancellor of the exchequer Kwasi Kwarteng announced in his mini-budget on 23 September 2022. The government remains supportive of the EIS and VCT schemes and sees the value of extending them in the future, notes HM Treasury in a budget document. “This is fantastic news for the industry and shows this government’s commitment to supporting entrepreneurs,” wrote Christiana Stewart-Lockhart, director general of the Enterprise Investment Scheme Association (EISA), in an email. She said EISA, the official trade body for the Enterprise Investment Scheme, will be working closely with the government “regarding exactly how and when these changes will be rolled out.” The EISA has been actively seeking the removal of the so-called ‘sunset clause’. But former chancellor Rishi Sunak had not addressed the issue. The sunset clause, were it to be activated, would affect subscriptions for shares made after 5 April 2025 and would remove access to 30% income tax relief for both EIS and VCT investors. The confirmation that this will be avoided will give EIS (and VCT) investors a dose of confidence about continuing to invest. There is, however, continuing pressure to expand EIS further for the benefit of the UK’s high potential SMEs. But, it is perhaps understandable that nothing further was mentioned in this regard given the short time the government has been in power. The stated government focus is on unlocking "private investment across the whole of the UK" and making Britain the place for investment by creating the right conditions and removing barriers to the flow of private capital and enterprise. That will involve cutting red tape and freeing business to grow and invest, including by disapplying legacy EU red tape where appropriate. Since many of the changes made to EIS (and VCT) in their lifetimes, particularly those put in place since 2015 (such as the introduction of age limits and number of employees allowable to eligible investee companies) have been required by the EU, many will be expecting significant changes in the near future.
The Seed Enterprise Investment Scheme (SEIS) will also be subject to a significant revamp, aimed at ‘increasing the generosity and availability’ of that tax-advantaged scheme. “From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from 2 to 3 years. To support these increases, the annual investor limit will be doubled to £200,000. These changes will help over 2,000 companies a year that use the scheme to grow.” When it launched in 2012, the SEIS scheme allowed companies to raise a maximum of £150,000 and investors were able to invest up to £100,000 each year. This rather low maximum investment per company has prevented many managers from operating in the SEIS space. This is because the fees earned on a successful investment didn’t justify the administration and due diligence involved. The hope now is that the higher investment limits will encourage more managers and investors to enter the market. The increase to the annual investor limit will see the SEIS limit match the VCT annual limit on which the tax reliefs can be claimed. There is speculation that this starts to make a case for the VCT allowance to go up, given the much broader range of scale-ups that VCTs can reach and also given the much higher EIS limits that currently apply.
Luring more funding into the Seed Enterprise Investment Scheme
The package of measures, known as the Growth Plan, also aims to unlock billions of pounds of investment into scaling up the UK’s science and technology firms. This has potential implications for Knowledge Intensive Companies (KICs), which enjoy a favoured status under EIS. HMRC defines KICs essentially as companies that are carrying out research, development or innovation at the time that they are issuing shares, although the requirements are a bit more specific. The government’s plan puts forward two measures to ‘help our highest-potential, innovative businesses accelerate their growth while allowing UK savers to benefit from higher potential returns’:
Boosting knowledge intensive companies
Bringing forward draft regulations to reform the pensions regulatory charge cap, giving defined contribution pension schemes the clarity and flexibility to invest in the UK’s most innovative businesses and productive assets creating opportunities to deliver higher returns for savers. Introducing the Long-Term Investment for Technology & Science (LIFTS) competition, providing up to £500 million to support new funds designed to catalyse investment from pensions schemes and other investors into the UK’s pioneering science and technology businesses.
As we prepared to go to press, the Prime Minister sacked Kwasi Kwarteng and appointed Jeremy hunt to replace him as chancellor of th exchequer, in an attempt to reassure jittery financial markets and appease the conservative leadership. Liz Truss also said: “I have... decided to keep the increase in corporation tax that was planned by the previous government." This government's turnaround follows drops in the value of the pound, sign of a lack of confidence from investors in the UK market, and intense pressure from the Prime Minister's own party to reverse some of the budget announcements. The government had previously backtracked on scrapping the 45% tax bracket for highest-income earners, the plan's most symbolic and politically sensitive measure.
Government’s recognition of the importance of venture capital in the UK economy by extension of the sunset clause is hugely welcomed and solidifies the role EIS plays in driving returns for investors whilst supporting UK SMEs.
Jonathan Prescott, Director - Praetura Ventures
With this additional access to funding, it is pertinent to ask what impact it could have on the scale-up funding currently supplied by EIS (and VCT) and EIS (and VCT) dealflow? According to a recent report by European venture capital firm, Lakestar, investing £75 billion annually and scaling up 10,000 new growth businesses will triple GDP growth to 2-3% by 2040. That suggests that there should be plenty of deal flow to go around!
To support growth right across the country, we need to go further, with targeted action in local areas
Kwasi Kwarteng - Former Chancellor of the Exchequer
A ‘pivotal’ day in the budget roller coaster
17 October 2022 was a dramatic day in British politics which saw the new chancellor dismantle almost all of the platform the Prime Minister’s leadership victory had been built on. In an emergency statement ahead of the medium-term fiscal plan, chancellor Jeremy Hunt announced the reversal of the majority of Liz Truss' tax cuts, and hinted a new windfall tax was in his sights – a move the PM had previously said she would not countenance. "[A]t a time when markets are rightly demanding commitment to sustainable public finances, it is not right to borrow to fund this tax cut," he said. "We will reverse almost all the tax measures announced in the Growth Plan three weeks ago that have not started Parliamentary legislation."
Plans to cut the basic rate of income tax to 19% from April 2023 to be ditched. "I have decided that the basic rate of income tax will remain at 20% and it will do so indefinitely, until economic circumstances allow for it to be cut," the chancellor said. Corporation tax rise to remain Cut to dividend tax rates and payroll reforms to be reversed Cut to National Insurance to remain Health and Social Care Levy to be abolished Stamp Duty cut to go ahead New VAT-free shopping scheme for non-UK visitors to be scrapped Freeze on alcohol duty rates to be abandoned Energy Price Guarantee, biggest single expense in the Growth Plan, to remain unchanged until April 2023. Afterwards, a Treasury-led review will look into new ways to support energy bills.
Following is a brief summary of the changes "which are all designed to provide confidence and stability."
The combination of maintaining the corporation tax, restoring the top rate of income tax, and the news measures announced in the emergency statement will raise around £32 billion every year, the government said.
Backpedaling on the mini budget
With the government's turnaround, many of the measures that would have been helpful to SMEs have been rolled back. There was no mention of the sunset clause for VCTs, EIS and SEIS, leaving us to assume that Mr Kwarteng's intentions to extend it beyond 2025 still stand. It would also seem that changes to SEIS have specifically been left as per Kwarteng's announcements. In any event, the chaos of the last few weeks has been disastrous in a context wherein all businesses, including SMEs, have been crying out for certainty and confidence. Many will already have wasted time and money on preparing for changes that will now no longer go ahead, knowing that more announcements are still to come on 31 October. In some instances, this could have been the final straw for otherwise perfectly viable SMEs. We believe that those SMEs with the support of EIS managers, will be far better placed.
Market reaction was swift as Investors greeted the chancellor’s emergency fiscal statement. Immediately, the interest rate - or yield - on UK government bonds fell sharply, making government borrowing less expensive. The 10-year gilt yields fell 41 basis points to trade around 3.972%. The pound was up 2.3% to $1.1428 by 4:45 p.m. London time, extending gains after rising for much of the morning session. The FTSE 100 index began trading higher as market sentiment improved following the Chancellor’s emergency fiscal statement.
Did they forget SMEs?
Investors welcome the news
The following piece is all accurate at the date of publication. However, as we go to press, the min-budget is still a work in progress with new developments potentially in the offing. We can't rule out further announcements before the scheduled 31 October medium-term fiscal statement.
HMRC deals with growing pressures on advance assurance
The rising popularity of advance assurance has put the service under increasing pressure in recent years, as response times have been lengthening.
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Although HMRC has doubled its resources since 2011-12, the demand for the service has trebled over the same period. Companies securing an advance assurance from HMRC benefit from increased certainty that their investment will qualify for tax relief under the venture capital schemes, such as the Enterprise Investment Scheme (EIS). The advance assurance service is greatly valued because it gives potential investors a dual certainty: First, that the company itself is eligible for EIS investment; second, that they will be able to claim tax relief on their proposed investment, subject to meeting the specific conditions applying to an investor–and assuming nothing changes to impact its qualification status after advance assurance is given. The growing demand on the service is due to several factors, including the introduction of the SEIS in 2012, the adoption by customers of new rules in 2015, and the increasing popularity of the schemes. Other pressures on the service come from applications for investments which are outside the spirit of the scheme rules. In these cases, applications are often re-submitted several times, with small details changed in each application. As a result, HMRC issued guidance in May 2016 making it clear that it reserves the right to withhold an opinion if it chooses. However, there have been times when advance assurance demand has dropped - e.g., from December 2017 schemes have had to comply with the risk to capital conditions - which led to a drop in schemes being submitted to HMRC for advance assurance for a year or two. Eventually, companies and investors have become more comfortable with the impacts of the risk to capital conditions, including the structuring and mechanics of EIS. From early 2018, HMRC has declined to consider advance assurance applications without confirmation of who the likely investors are. These are important milestones marking changes to advance assurance. When advance assurance demand goes up, it is usually an indicator that the popularity of EIS has again jumped up. “Demand is increasing significantly, and if this trend continues it will have an impact on the service standards we can deliver,” notes HMRC in Tax-advantaged venture capital schemes – streamlining the advance assurance service. “Any delays can affect investment deals and the future funding of companies. We need to make sure our service is fit for purpose and capable of dealing with increasing volumes as the schemes continue to grow.”
number of EIS advance assurance applications received, approved and rejected, 2006-07 to 2021-22
Source: HMRC
Earlier this year, HMRC increased the response time to advance assurance requests from 30 working days to 45. The head HMRC inspector in the VCR team attributed the longer wait time to “the popularity of the schemes and the small team I have to deal with the work”. The agency has since hired additional staff to support the work. The heavy workload led to the introduction of checklists, as part of the rule changes relating to SEIS and EIS advance assurance applications in October 20219. The checklists, now a requirement for any application, are intended to save HMRC from having to plough through multiple documents just to determine whether or not an applicant meets the qualifying criteria. The agency’s goal is to process advance assurance applications in a more efficient manner and reduce the current response times. HMRC states in VCM60270 and VCM60170 that it will aim to respond to most applications within 15 working days. However, for complex cases, which take longer to determine, the target response time is within 40 working days.
Heavy workload and long waiting time
Number of SEIS advance assurance applications received, approved and rejected, 2012-13 to 2021-22
Rejected
Approved
Pending or not pursued
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
2019-20
2020-21
2021-22
4,000
3,000
2,000
1,000
0
3,500
2,500
1,500
500
i
HMRC’s advance assurance obligation
If HMRC provides an advance assurance, it is committed to honouring its decision, subject to the following conditions:
All relevant information having been disclosed by the company The company making no changes to the facts on which the advance assurance has been provided The legislation not having changed between the date the advance assurance is provided and the date of the investment.
The VCR team has taken a number of steps to improve the advance assurance service and response times have been improving since April 2016 as a result. The team recently increased its resources, as noted earlier, to deal with a backlog of the less complex cases. “We also aim to ensure that individual applications are seen by the same officer,” says the aforementioned report. “This saves time because different officers do not need to start from scratch to understand the details of the case.” The team believes that guidance published in May 2016 has helped to embed the new rules on EIS and VCTs and reduce uncertainty for companies and advisers. “We are updating this guidance to provide greater clarity and certainty about how the new rules work.” HMRC has introduced a new online service for companies to apply for an advance assurance and, later, to make a statutory compliance statement. The full service will deliver considerable benefits to both HMRC and customers by sharing data from the compliance statement with HMRC’s compliance systems and replacing the existing paper certification process with an electronic one. The online service helps companies applying for an advance assurance to supply all the right information at the same time, reducing delays in obtaining additional information and reducing requests for progress updates.
What HMRC is doing about it
The increased demand for advance assurance means that the VCR team needs to prioritise those cases where there is the greatest uncertainty, and to streamline the service itself. “We want to focus on cases of genuine uncertainty and reduce routine reliance upon our service. “There is a large community of specialist advisers providing support to companies seeking investment under the tax-advantaged venture capital schemes. It is likely that, until now, the advance assurance has merely duplicated their work and confirmed the view the adviser has already arrived at.” What's interesting here is that most Venture Capital Trust investments are now made without seeking advance assurance. This is HMRC’s preference as stated in Venture Capital Manual VCM60410: “In general, companies seeking an investment from a VCT should not need an advance assurance from HMRC. VCTs should be able to rely upon their professional advisers to determine if a prospective investment is qualifying or not.” Also, “Provided that the VCT has taken reasonable steps [like consulting a professional adviser] HMRC will not withdraw approval from the VCT if the investment subsequently turns out to be non-qualifying. HMRC will accept that the breach was outside the control of the VCT.” The team recommends that investors carry out their own due diligence in determining whether a prospective investment is suitable for their portfolio. “Many investors already take advice from an independent financial adviser when considering whether to invest through a fund and it is reasonable to expect an investor to engage an adviser when considering an investment, often of many thousands of pounds.” While this may be true, most companies and managers would still prefer to get it from HMRC rather than a legal firm, from the horse’s mouth, as it were.
Worth remembering
Earlier this year, HMRC increased the response time to advance assurance requests from 30 working days to 45.
increase in the number of advance assurance applications for EIS from 2020-21 to 2021-22
11%
Although HMRC has doubled its resources since 2011/12, the demand for the service has trebled over the same period.
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eldom has the phrase ‘necessity is the mother of invention’ been more apt than in the last two years. Heading up Ventures at Blackfinch has afforded me a unique perspective on how high-growth high-tech start-ups have evolved in the face of a global pandemic, war, and the looming threat of recession. Difficult times unlock grit and passion in those with ambition, and their shared vision can help pull the rest of us through. Founders are the beating heart of every start-up. A diverse set of individuals with one thing in common: an almost unwavering belief in themselves and their product. These visionaries navigate hundreds of challenges, some almost fatal, before raising venture capital. The art of constantly adapting to new environments is in their blood, and threats become opportunities to innovate their way out of the impossible. This ability to evolve is the single biggest success driver in early-stage tech companies. Whether it’s the product, team, sales process or vertical, facing a challenge head-on – and making proactive, calculated adjustments – really does set the winners apart. The courage to execute a major course correction is a rare trait, but we have seen a surprising quantity of this in our Blackfinch portfolio companies. Tended was making safety wearables for lone workers when the pandemic struck. Quickly spotting the opportunity for an impactful pivot, CEO Leo Scott-Smith re-targeted his team to develop one of the most accurate hardware-based social distancing products on the market. Following plenty of late nights and long hours, the design, development and manufacture of this complex solution was completed in just five months. It helped companies like Rolls Royce, Unilever and the BBC get back to work safely. Revenues grew 20x in the period. This adaptable mindset led Leo to form a relationship with Network Rail and HS2, pivoting Tended’s highly accurate social distancing product once more. Its social distancing technology could be used to sense when site workers were too close to dangerous machinery or an approaching train. So, a new product variant was born. Tended is now an approved solution in an industry where success is measured in lives saved. This is good for business too, with revenues set to soar and leaving Tended well-positioned for future acquisition. This ability to identify and pursue opportunities in adjacent markets, where a product takes on a new purpose to a different user, is where growth and scale becomes transformational. It’s an ability embedded within many high-growth leadership teams. Tended is not alone. It didn’t take long for Odore’s founders Armaan Mehta and Karan Gupta to realise big beauty brands were struggling to understand customer needs and build deeper connections with them. Odore pivoted to develop a customer data analytics and management platform that solves their problems. Today, Armaan and Karan count L’Oréal, Sephora and LVMH as clients. What does this mean for investors? Out of Europe’s top 1,000 high-growth start-ups, 319 are UK-based, whereas second-placed Germany has 149. EIS and VCT tax reliefs are behind this disproportionate success, as they leverage private capital to supercharge high potential companies. For investors, this doesn’t just mean 30% upfront tax relief and strong return potential – it also creates the feel-good factor from helping the UK’s brightest minds build a better future.
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
DR REUBEN WILCOCK
VENTURES DIRECTOR BLACKFINCH investments
thought leadership
Pivoting with passion: how resilient founders are and the key to growth
blackfinch.com 01452 717070 enquiries@blackfinch.com
- Name Surname
Founders are the beating heart of every start-up.
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Matthew Jellicoe
Oneplanet capital
From an investment perspective climate change represents a megatrend of sorts. I.e. changes that are required so substantially and so quickly that they will impact almost every aspect of society.
oxcp.com/ 01865 860 760 info@oxcp.com
R
Why climate change is such an interesting investment space over the next 5 years
eturns versus Impact The OnePlanetCapital flagship fund is an EIS fund that focuses on early-stage companies combating climate change. One of the key challenges in educating investors about the fund is to explain how the impact driven nature of the fund combines with the strong investment returns which are possible from the space we invest in. Investors tend to think of ‘impact’ in an altruistic sense – as something separate from investor returns. However, the climate change space in an area where you genuinely have both. Megatrends - the investment background of climate change From an investment perspective climate change represents a megatrend of sorts. I.e. changes that are required so substantially and so quickly that they will impact almost every aspect of society. Unsurprisingly this has been seen on a global scale in terms of investment, as of December 2021, there were 860 climate funds with collective assets under management of $408 billion worldwide. Global assets have doubled in one year, boosted by continued fund flows and an accelerated pace of product development. Over the year, flows into the European climate fund universe amounted to an all-time high of more than $108 billion, up 61% from the previous record in 2020. However, at a macro scale, these climate funds are what I would term passive in terms of climate change impact. In other words, they are composed of companies that are committed to net zero and emissions curbs at a general level. If investors are looking for companies that are providing solutions to climate change this is a harder task and likely one that suits venture capital funds as there is so much early-stage technology and service businesses coming into the space with the capacity for huge growth. Types of sectors experiencing hyper growth It is hard to generalise about the space in terms of what investors should look for as climate change is affecting almost every level of society and energy production – whether it is companies developing innovative solutions to mitigate the damage, such as carbon capture technologies and renewable energy markets to transport and new sustainable products and services. A couple of examples illustrate the kinds of growth that are available in the sector. In the UK for example EVs are predicted to have 50% markets share by 2030 – obviously largely driven by regulation. But the hypergrowth of a sector growing at 300% per annum impacts demand across the battery supply industry, the global charging infrastructure as well as the whole car industry generally. Likewise, the battery storage market in the USA is predicted to grow from a nascent industry to $426 billion over the next 10 years. Looking at carbon mitigation, one of our portfolio companies (Earthly.org) operate in the nature-based carbon offset market – Mckinsey recently reported on this market growing 15 x by 2030 up to $50bn in value) and 100 x by 2050. There are massive growth opportunities across the sector – however due to the relative immaturity of companies coming to market with genuine solutions for the climate change crisis the appropriate investor channel is likely venture capital funds with a focus on climate change.
www.oneplanet.capital info@oneplanet.capital
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n the current environment, we’re being flooded with headlines on inflation. The recent exceptional increase is forcing advisers, and their clients, to reconsider plans and assumptions will need to take into account the impact inflation will have on client’s cash flow modeling and investment returns required to achieve specific goals. Investments, after tax, would need to beat inflation to provide a real return. It’s a bit like running a bath without putting the plug in and that plug hole has got a lot bigger. Risk and reward So, let's get back to basics, real returns are investment returns, net of tax, over inflation. To use the above analogy, if water is going down the drain faster than the tap is flowing water in, then the bath is not filling up but emptying. On the basis that the plug hole is not going to get smaller any time soon, how can investors start to fill the bath? To achieve inflation beating returns investors will need to take some investment risk and ideally reduce tax risk as well. Many DFMs will target returns as CPI plus a margin, the margin depends on the attitude to risk an investor has. Whilst many long-term investors will have experienced the gains and losses of the stock market, these are largely paper losses and are only a loss if realised. Investing in a diversified portfolio and riding the waves will, in most cases, recover the losses. However with EIS, where the losses occur, this is realised, because the company is liquidated resulting in a 100% investment loss, before any gains are seen. However, an investment loss is not always a financial loss because loss relief can be claimed for UK income taxpayers based on the net investment. Combine the available downside protection and unlimited tax-free growth, a diverse EIS portfolio can complement an investors existing portfolio – in particular, those who are reaching or have reached their lifetime allowance limit on their pension. Tax relief and tax-free growth, combined with diversifying into an asset not correlated to the main market could prove to be an inflation proofing strategy. Tax risk Another risk which takes a big bite from investors returns is the impact of tax. Whether it is income tax, capital gains tax or inheritance tax, tax can reduce returns significantly. Investing tax efficiently using ISAs and pensions is the foundation for most advisers’ financial plans for clients but there are also other investments that can offer multiple tax benefits including EIS. EIS investments offer income tax relief, CGT deferral, tax free gains and business relief for inheritance tax purposes, as well as loss relief to protect downside loss. Whilst your investment is illiquid until exit (which is an unknown) this could be a significantly shorter time period than locking it into a pension. Whilst both pensions and EIS offer IHT efficiency and tax-free growth on the investment, pensions are taxed when benefits are taken. The most obvious difference is that EIS investments carry a much higher investment risk. There is potential for complete investment loss. The various tax reliefs however will offer an income taxpayer an element of downside protection of up to 38.5%, reducing the financial risk. Of course, the tax benefits of EIS are just one aspect of the inflation beating properties offered by such an investment. The investment returns have the potential to significantly beat inflation with no tax impact. Therefore, investors looking to beat inflation may want to consider the long term benefits of EIS. Multiply your tax relief Using EIS as part of a long term investment strategy may offer the opportunity for double (or more) income tax relief. The tax relief returned to investors who have invested, and funds deployed into EIS qualifying company shares can then be used for a pension contribution, thus obtaining income tax relief twice. Another option could be to roll over any exits from an EIS into a further EIS obtaining additional CGT deferral and income tax relief or as a pension contribution to obtain income tax relief. Similarly, if an EIS company fails and the investor is able to claim loss relief, this could also be reinvested obtaining further income tax relief. Combining strategies on longer term investments could lead to significant tax savings in addition to potential investment returns helping to combat the impact of inflation on an investors’ portfolio to beat the inflation drain.
Sarah Wakefield
Business Development Manager oxford capital
Inflation Drain - tackling the inflation problem
To achieve inflation beating returns investors will need to take some investment risk and ideally reduce tax risk as well.
12
he tax reliefs are obviously attractive, but have they been enough to keep inflows up for EIS managers in current conditions? What are deal pipelines like? Are SMEs waiting to expand while things are so uncertain, or do they just urgently need capital? Clearly the economic outlook has changed in the last six months far more than many expected. The only certainty for the next six months is that significant volatility will continue. Consequentially, financial advisers and retail investors inability to predict future financial outcomes has impacted confidence. Concerns surrounding the UK economy and media coverage of major world events are at the forefront of national conversation and are difficult to ignore. Fortunately, there are several ways that EIS investments are insulated from these challenges. Firstly, the majority of concerns centre around more short-term economic trends, but EIS investments are long-term holdings that tend to be able to withstand short-term economic fluctuations. Secondly, by their very nature, EIS investments support early-stage smaller businesses looking to grow. Due to their nimble size, ability to pivot quickly and low-cost base, SMEs can be more agile in the face of economic uncertainty. Research into previous recessions suggests that many SMEs drive greater innovation and new models during periods of economic hardship. For example, we saw a significant acceleration of many digital businesses during the covid pandemic, which in many ways acted as a catalyst for entrepreneurship. According to EY’s digital growth forum, the UK’s rate of technology adoption was so significantly increased during the pandemic that consumer behaviour was catapulted to levels predicted for 2025 by the year 2020. This presented real opportunities for those businesses who relied on our uptake in new technology, with a record number of unicorns produced during this time. In terms of deal flows, there has been no shortage of ambition. Application levels have continued to grow, with early-stage businesses still requiring capital to achieve their goals. The most noteworthy change in deal flow has been the drop in valuations, as mirrored by the SaaS index. Whilst this change in value has been a hot topic for debate in the media, by analysing the last 10 years of valuations we can see that the trend for increased valuations continues to grow at a predictable rate when last year’s anomalous result is discounted. This rise in valuation conversations has led founders to be more realistic and, in turn, this is creating more attractive propositions for investors. Combined with growing requirements for capital, EIS investors tend to also have a wider number of options to choose from. Inflows from investors have also remained consistent. We feel this is largely down to the fact that the underlying asset-class in EIS is non-correlated to other areas that are contracting, such as listed markets. In addition to this, HMRC have reported that there was a 50% increase in the number of people paying income tax at 40% or above in 2022 compared to 2019. This increase in high earners has generated demand for tax efficient investment opportunities, further benefiting the EIS market. EIS is one of the most successful long-standing tax vehicles to help investors drive returns by offering capital to fuel unrealised potential in exciting early-stage companies. According to EISA, since the scheme started, over £27.1bn has been invested into 52,585 companies over the last three decades. Proving resilient to multiple recessions and creating real economic impact, the confidence in the scheme was renewed by the recent removal of the sunset clause. Ultimately from Praetura’s perspective, we believe that these highly skilled founders will be able to navigate and manoeuvre in difficult periods. Their noteworthy talent, combined with our investment mandate and the tax incentives, allows us to state with confidence that EIS will continue to offer an attractive tool for advisers to help investos reach their own financial objectives.
T
Jonathan Prescott
Director Praetura Ventures
What EIS managers are going through and the realities of the current situation for their inflows and deal flows
Fortunately, there are several ways that EIS investments are insulated from these challenges.
praeturaventures.com +0161 641 9475 ventures@praetura.co.uk
What the managers say
13
Many EIS professionals claim that the industry ‘has now come of age’. Do you agree? What are the reasons for your answer?
Markets are going through a period of great volatility and anxiety. What is the state of the key EIS drivers in this climate of uncertainty?
The great benefit of EIS in turbulent times is that while company valuations may fall, tax reliefs do not. With providers such as Blackfinch, funds can be deployed – enabling eligible investors to claim 30% income tax relief – within the tax year. And there remain many companies with excellent long-term potential to invest in, often now at more attractive valuations.
DR nic pillow
Senior Ventures Manager Blackfinch Investments
So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to say.
We’re now most of the way through 2022. How has EIS been doing so far?
At Blackfinch we have seen no let-up in demand for EIS investing. In fact, inflows in the traditionally quiet period since the start of the tax year have been the highest we have ever seen. Most portfolio companies have also continued to deliver strong growth, and our first exit proved that excellent investment returns can still be realised.
Industry data shows that for the 2021/22 tax year over 800,000 companies were established, which is the highest number on record in a single year; and the UK recently passed a milestone of creating 100 “unicorns”, many of these taking early stage funding through EIS – so it has been a great success story for UK PLC.
Although the outlook for tech markets in the current environment is one of uncertainty, we view EIS as a long term investment. Short-term market fluctuations should have little impact on the outlook for our companies over the long term given the typical lifecycle of our investments is 2-10 years and we’re working with our companies to ensure they have long cash runways to withstand these market conditions.
From our perspective the EIS sector continues to flourish, and we’re encouraged by the resilience of the market. New opportunity deal flow remains strong - we have made one new investment approximately every six weeks since the start of the year; and we’re seeing continued strong performance and progress in our portfolio, following a 9x exit in March.
richard roberts
Director Oxford Capital
As one of the longest running government-backed tax incentive schemes for investment, the EIS scheme has benefited from the recent boom in the UK's tech start-ups landscape. This has led to a greater education of the asset class, increased awareness among the IFA community and a better understanding of how it can be used as a financial instrument. Financial advisers are engaging more as they start to recognise the value of the asset class. Likewise, the scheme has now matured and established itself as a critical contributor to the UK economy, with many of the county’s biggest commercial success stories having been through EIS on their funding journey.
Venture as an asset class coupled with tax relief creates a different risk dynamic from a capital point of view compared to much of the volatility seen by the market. Of course, economic hardship can affect small businesses, but generally EIS investments as an asset class are non-correlated to areas suffering some of the most adverse effects of the recent volatility, such as listed markets.
Whilst the flows have been strong thus far in 2022, recent economic uncertainty will undoubtedly have an impact. We expect flows into most asset classes to reduce over the next six months, but there is still a strong appetite for EIS as many advisers and investors see the potential opportunity.
jonathan prescott
In McKinsey’s 2021 report on Europe’s top 1,000 tech start-ups, 32% came from the UK while Germany was second with just 15%. The EIS industry has directly contributed to this success, attracting private capital into our most innovative companies, and in turn encouraging yet more to be founded. It has unquestionably established its role and value within the UK economy.
Investors claimed nearly 1.5bn in tax relief from EIS in 2019-20. This is no longer a niche sector but had become a main stay of the economy generating 20billion GBP of capital for the start-up sector. We think because EIS has been around for 26 years now investors have confidence in the lifecycle of venture capital and it is generally becoming more accepted. The crowdfunding platforms have also democratised EIS in recent years and it is perhaps seen as a more normalised investment channel to qualifying investors.
Market volatility will always affect the EIS market to an extent and we saw this during Covid and are seeing it again in recent months. Venture Capital is always a long-term investment and often investors focus on liquidity in such times. That being said the OnePlanetCapital Climate Change fund is driven by underlying factors which are largely unaffected by market volatility – ie government regulation around net zero, regulatory change in transport, customers moving towards sustainable businesses in general and unfortunately the climate crisis itself – which will only get worse.
Volumes are up significantly on last year however we are seeing some cases being deferred due to market conditions. However our view is the OnePlanetCapital Climate Change fund is a good hedge in terms of what is going on today. Clean tech is a mega-trend with very powerful drivers behind it. It Is one of the shaping factors of our time and nothing has changed here. Climate change doesn’t care about inflation or indeed war. The climate crisis has hit unprecedented levels and is here to say. There is massive momentum behind capital in this sector. To get on track for net zero, investment must triple to 2025, then double to 2030.
matt jellicoe
Co-founder and Investment Director OnePlanet Capital
26
MICAP statistical analysis
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 5 October 2022.
15
Much has happened since our last industry analysis in May. Boris Johnson has resigned as Prime Minister and leader of the Conservative Party, with Liz Truss being elected as his successor. After 70 years on the throne, marked by her Platinum Jubilee celebrations in June, Queen Elizabeth II died on 8 September at the age of 96. The Queen is succeeded by her son, King Charles III. Other significant events of the year have included Britain's response to the Russia-Ukraine conflict, a record-breaking 40°C heatwave during the summer, and a cost-of-living crisis marked by high inflation and rising energy bills. As we go to press, the world continues to react to the new Chancellor Kwasi Kwarteng’s recently released Mini Budget 2022, the biggest package of tax cuts in half a century. The Federation of Small Businesses (FSB) declared that the “Truss government is off to a flying start.” Martin McTague, National Chair of the FSB, said: “The Chancellor has delivered pro-small business measures . . . and has rightly recognised that removing taxes on jobs, investment and entrepreneurs is essential for our economy.” However, others—notably, the International Monetary Fund (IMF)—have expressed concerns about the government’s Growth Plan. The international organisation, which promotes global economic growth and financial stability, warned that the measures will 'likely increase inequality.' The IMF also recommended against fiscal policies not targeted towards specific groups, saying that the plans as they are will benefit the rich rather than those who really need help. Of particular interest to the tax-advantaged sector was the extension of the EIS, SEIS, and VCT schemes beyond 2025. “This is fantastic news for the industry and shows this Government’s commitment to supporting entrepreneurs,” said the Enterprise Investment Scheme Association (EISA). Meanwhile, investors continue to be supportive of EIS.
An eventful market context
46.9%
VCT investee companies
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 Annual Per Hurdle Exit Per Hurdle Initial Deal Fee Exit Deal Fee Annual Admin Charge
1.26% 2.10% 3.32% 1.0% 0.85% 1.81% 0 18.6% 0.22% 97.86% 0.31% 0.12% 0.10%
OCTOBER 2022
1.34% 2.07% 3.41% 0.94% 0.81% 1.74% 0 18.08% 0.21% 97.85% 0.36% 0.17% 0.10%
May 2022
-5.97% +1.45% -2.64% +6.38% +4.94% +4.02% 0 +2.88% +4.76% +0.01% -13.89% -29.41% 0%
% change
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.
8.2%
The most common target return is 200%. The target returns vary significantly from 1.4x to 10x money invested. Unlike VCTs, any EIS returns will be in the form of capital growth, rather than dividends. The managers will design an exit strategy that allows them to return capital and any tax-free growth to investors, although this is often after a performance fee is taken. This is generally around 20% of any gain made above 120%/100% of the investment amount, depending on the specific offer. What about inflation? In September, the Bank of England cut its forecast for the peak in inflation to just under 11% from more than 13%, following Prime Minister Liz Truss’ plan to cap energy prices, but warned that the policy could create longer-term price pressures. Even at the current rate of inflation, EIS investment could produce a very positive real return.
Target returns
Subscriptions to these EIS open offers can beas low as £5,000, well within reach of the average investor. The most frequently quoted amount is currently £10,000.
Minimum subscrition
The average total initial charge has been mostly on a downward trend for the past couple of years. It dropped from 3.61% in February 2020 to 3.35% in October of the same year. By December 2021, it had crept up a bit to 3.43%. Now, it has fallen back to 3.41%. Compared to last year, more fees have declined today than have gone up. We see the biggest drop (27.6%) in the average performance hurdle fee. The initial charge to investee companies has fallen by more than 10% to 2.07%. In previous analysis we noted that this fee has also been in decline for a while, perhaps a sign of improved bargaining position by investee companies. Interestingly, the decline in the initial charge to investee companies has not been mirrored by the initial charge to investors, excluding adviser fee, which has jumped 8.94%. Does this suggest that managers have largely compensated for the drop in fees to investees by pushing up the fees to investors? As can be seen from the following table, two other fees went up: the exit performance fee and the exit performance hurdle.
EIS open offers
There are currently 50 open EIS offers, five less than in our pre-Ukraine-war analysis in December 2021 when there were 55. Our May 2022 analysis recorded 54 offers. The decline in the number of open offers reflects the deterioration in the overall investment climate since our last analysis. In the interim, we have seen UK inflation hitting a 40-year high in July and the cost of living crisis becoming the worst in half a century. One positive news story against this dismal background is the extension of the sunset clause, which effectively allows tax reliefs for EIS, SEIS, and VCT to continue beyond 2025. "The government remains supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and sees the value of extending them in the future," the government noted in the budget document. The extension of the sunset clause is widely expected to boost investment into EIS and the sister schemes.
The open EIS offers invest mainly in General Enterprise, Technology, and Pharmaceuticals & Biotechnology. Each of these sectors is diverse and provides opportunities for growth in a market environment where investors are eager to diversify their portfolios and stay ahead of inflation.
Investment sectors
42.9%
The open offer investments are clustered mainly around early-stage companies. These infant businesses often struggle to raise equity finance, so EIS has established itself as a trusted and crucial source of equity funding for them. Well-suited for the long-term view of EIS investors, these companies offer, in parallel with the higher risk levels, the biggest potential returns to investors. Later-stage businesses are still within the limits applicable to EIS eligibility, but with the current rules limiting investment eligibility to companies that are less than seven years old (ten for knowledge-intensive companies) later-stage EIS investees are still relatively immature. However, they may have received previous rounds of EIS investing and have already passed some of the early milestones that are pointers to success. For this reason, their share price may be higher. This may be one of the reasons why the majority of EIS managers focus on early stage companies.
Investee companies
The current EIS open offers feature investment opportunities across the spectrum of seed, early, and later stages, the three MICAP stage categories. The tax-advantaged investments database, a sister company of Intelligent Partnership, uses the industry's nomenclature of VC investment stages. At the seed stage are companies at the age of a setup, with an idea for a product or service, perhaps engaging in R&D. The next stage of development is the early stage, where companies have posted revenue but are yet to become profitable or have only been profitable for less than two years. And companies in the later stage are those that have been profitable for two years or longer. These open offers target about nine investee businesses on average, with the most common number being 10 companies. This is double the five recorded during our previous two analyses, perhaps reflecting greater diversification by EIS funds in these uncertain times. These diversified portfolios of businesses from several different sectors serve to reduce the investments’ overall risk profile. The maximum number of investee companies is 50, although this is an outlier which is more akin to a VCT rather than an EIS offer. It makes sense that this is one of the EIS AIM offers. Generally AIM can take less time to source investees as there tends to be more information available about the companies (as a result of what they have to publish as a regulatory requirement and the presence of market analysts) and share acquisition and sale is a quicker process than where unlisted companies are involved.
Average charges
The initial charge to investors, excluding adviser fee, has dropped by almost 6% since our analysis in May. This reduction could be indicative of managers needing to work harder to attract investors in an unstable market. The deal fees have also plummeted. The initial deal fee has tumbled by nearly 14% as a further incentive for investors. By slashing the exit deal fee by 29.41%, managers are charging less for getting the opportunity over the finish line. Other fees have gone up, however. The average management fee has increased, by just over 4%; as have the AMC charged to investors (+6.38%) and the AMC charged to investee companies (4.94%). So, as is the norm, it remains important to review all fees to get a true understanding of fees for individual offers and how they compare to others in the market.
Market composition of open offers by investment sector
Max 50
Median 8
TARGET NO. OF INVESTEE COMPANIES, OPEN OFFERS
Mode 10
Min 4
Average 8.94
Average
40,000
80,000
120,000
Minimum subscription of open offers
100,000
60,000
20,000
Mode
Min
Median
Max
18,750
10,000
5,000
15,000
AIM Listed Asset-Backed Seed Stage Early Stage Early/Later Stage Seed/Early/Later Stage Later Stage Seed/Early Stage Total
2 0 3 19 0 0 2 0 26
Number
7.7% 0.0% 11.5% 73.8% 0.0% 0.0% 7.7% 0.0% 100.0%
Percentage
INVESTEE COMPANY TYPE COMPOSITION OF OPEN OFFERS
0.00%
400%
294.37%
200.00%
140.00%
250.00%
1000.00%
800%
12000%
1000%
600%
200%
General Enterprise Media & Entertainment Pharmaceuticals & Biotechnology Technology
NO.
Max 100000
Median 20000
OPEN OFFERS
Mode 10000
Min 5000
Average 19800
MINIMUM SUBSCRIPTION
Market snapshot
16
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.
Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider EIS market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
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Boosting economic confidence: UK to revamp insolvency framework HMRC loses court battle over EIS funding for films—What are the larger implications?
Boosting economic confidence: UK to revamp insolvency framework
With insolvencies on the rise, the UK government is scrambling to renovate the country’s ageing insolvency framework. But the EIS buffer is already in place
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The current framework dates to 1986 and has not kept pace with developments in the insolvency market. While it has been intermittently supplemented on an ad hoc basis over the years, there has been no wider revision of the regime. According to Lord Callanan, parliamentary undersecretary of State at the Department for Business, Energy and Industrial Strategy: “Despite close collaboration between regulators and the Insolvency Service, the current model has not achieved the levels of consistency, independence and transparency which were envisioned following the introduction of statutory objectives for regulators in the Small Business, Enterprise and Employment Act 2015.” The government has therefore set out ambitious proposals to modernise the existing regulatory framework by creating a single independent government regulator to sit within the Insolvency Service and introducing the regulation of firms that provide insolvency services. “The proposed reforms are bold and forward looking,” says Lord Callanan. They will represent a sea change in the way that regulation of the insolvency profession has been carried out for 35 years. The changes “will ensure that our regime provides confidence to all those who use its services and that it remains globally competitive.”
Insolvency rises after government withdraws Covid support
The Corporate Insolvency and Governance Act 2020 introduced various temporary measures to help protect companies affected by the lockdown restrictions during the pandemic. Most of these measures expired at the end of June and September 2021, except for restrictions on winding up companies, which were extended until 31 March 2022. “This remaining insolvency restriction will not be extended further, allowing the insolvency regime to return to its pre-pandemic operation,” the government said at the time. The tapering of the pandemic-support measures caused more companies to go bust. By January 2022, company insolvencies for England and Wales had jumped 11.2% to 14,048 from the previous year, though that was still below levels recorded before Covid-19 hit, according to data released by the Insolvency Service. Some 90% of insolvencies were creditors’ voluntary liquidations, or CVLs, the process by which directors of a company choose to place the business into liquidation to pay off debts. Those climbed by a third from 2020 to the highest annual number since the financial crisis in 2009.
The number of registered company insolvencies in June 2022 was higher than pre-pandemic levels, driven by a higher number of CVLs
Source: gov.uk
In June 2022, the number of registered company insolvencies was 1,691: • 40% higher than in the same month in the previous year (1,207 in June 2021), and • 15% higher than the number registered three years previously (pre-pandemic; 1,467 in June 2019). In June 2022 there were 1,456 Creditors’ Voluntary Liquidations (CVLs), 30% higher than in June 2021 and 44% higher than June 2019. Numbers for other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic, although there were 3.6 times as many compulsory liquidations in June 2022 as in June 2021, and the number of administrations was 2.3 times higher than a year ago.
The Insolvency Service said the increase “coincided with the phasing out of measures put in place to support businesses during the coronavirus pandemic.” Those government support measures included the furlough programme to bolster wages, which ended in September 2021. The number of CVLs in the third quarter reached the highest since records began in 1960. This follows warning signs last year that companies were saddled with debt burdens that they were unlikely ever to repay.
EIS provides a buffer against insolvency
Unfortunately, there is no denying that the vast majority of companies that are placed into an insolvency process (such as liquidation or administration) are companies which are in the first 3 years of their trading. Many companies under the Enterprise Investment Scheme (EIS) are found in this age bracket. A business must have been trading for less than 7 years when it first applies for EIS funding. The company’s intention must be to grow and develop as a company. So, for example, it must not be expecting to close after completing a project or series of projects. There will therefore be a plan that will enable the start-up to continue its business. All this implies that EIS companies must have measures in place to avoid insolvency, an unfortunate situation where debts or liabilities to creditors can no longer be settled at present or in the near future. Generally, you'd expect companies that attract EIS funding to have undergone due diligence investigations by the EIS investors and they do look for good management and resilience. In addition, the investors provide financial (and often business) support those companies are unlikely to have otherwise. None of these advantages, preclude EIS investees from bankruptcy - and many do fail, with the intention of investment managers being that those that succeed outstrip the losses from those that fail. The owners must structure the company and run the business in such a way as to minimise the risks of insolvency. A business can go broke because it has made a mis-investment, misjudged business risk, or made errors in price calculation. General market changes or an economic crisis, such as the one currently prevailing, can also drive a company into insolvency. EIS investment provides a good protection against insolvency. Becoming an EIS investee company means gaining access to funding, which by itself reduces the risk of insolvency. Individual investors who buy new shares in the company, are rewarded with generous tax reliefs. Moreover, they must hold the shares for at least 3 years (note that if an investor acquired EIS shares in a company which did not start to trade until a later date, the 3 years do not start until that later date). The investment being ‘locked in’ gives the EIS company extended use of the funds to finance its ambitious growth strategy and provide big potential returns to its investors. Under EIS, a company can raise up to £5 million each year, and a maximum of £12 million in its lifetime. This also includes amounts received from other venture capital schemes. The company must receive investment under a venture capital scheme within 7 years of its first commercial sale.
The financial health requirement
A company must not be in financial difficulty when applying for EIS or SEIS. While there is no definition of what constitutes financial difficulty, it’s a sure bet that a company that is facing serious financial concerns will not meet this requirement. This condition was meant to ensure that companies that apply for the schemes are in good financial standing, and that the investment they receive will be used mainly for growth and development. However, the financial health requirement has had its fair share of critics. As part of the evidence given to the Treasury Committee inquiry on the UK VC market, several people and organisations are calling for its abolition. Doing away with the requirement would give EIS an even greater reach, as EIS investment could reach those firms with good underlying ideas even when they have got some financial difficulties. It’s unclear what most investors think about this issue, and it'll be interesting to see how the Treasury Committee takes the suggestion when it publishes its recommendations. It will also be interesting to see how the government views the suggested changes to EIS rules given its support for EIS in the recent budget.
Looking ahead
The government is committed to ensuring that the UK’s insolvency regime retains and enhances its good reputation, Lord Callanan says. The goal is to ensure that people have the confidence to invest and do business in the UK, “secure in the knowledge that, where at all possible, businesses facing financial difficulty can be rescued and jobs saved.” But if rescue isn’t an option and financial failure is unavoidable, he adds, “it will be dealt with fairly and transparently.” The reform will be vital to encouraging new start-ups and growth in the economy, as well as providing reassurance to those in financial difficulty and their creditors.
quote
- name surname, job title, company name
2000
1500
1000
Jun 19
Oct 19
Aug 19
Dec 19
Feb 20
Apr 20
Aug 20
Jun 20
Oct 20
Dec 20
Feb 21
Apr 21
Jun 21
Aug 21
Oct 21
Dec 21
Feb 22
Apr 22
Jun 22
Start of first lockdown
Number of insolvencies
Total company insolvencies
Compulsory liquidations
Creditors' voluntary liquidations
Other insolvencies
England and Wales, June 219 to June 2022, Not seasonally adjusted
The government has set out ambitious proposals to modernise the existing regulatory framework.
It’s easy to get caught up with short-term economic concerns but EIS investments always require patience and many innovative high-growth technology businesses still retain excellent long-term potential.
Dr Nic Pillow, Senior Ventures Manager - Blackfinch Investments
19
H
dave morrison
partner Nyman Libson Paul
HMRC is losing key battles over EIS funding for films—What are the larger implications?
1
www.nlpca.co.uk 020 7433 2400
MRC has recently lost two cases concerning film companies and EIS at the First Tier Tax Tribunal, it also fully conceded one just before the start of the hearing. However, HMRC also won two other film/TV EIS cases, but lost many of the arguments, winning on technicalities. Outside of the film industry HMRC had a convincing win in a bloodstock business case. The impact should reach further than these industries because the courts’ responses to the ‘Risk to capital / Growth and Development’ issue is becoming clearer. What are the implications for all EIS in a broader context? The underlying technical issues here apply to any company seeking EIS investment and, at the core, are essentially about the need to demonstrate that the company has a long-term ambition to grow and develop. The problem is, gathering tangible evidence as proof of a future intention is particularly difficult, there’s no bloke at the local market selling crystal balls and tarot cards to prove the future, it is just subjective guesswork. Historically, HMRC have disliked people using single purpose EIS raises for short-term ventures, particularly when funding a single film production, hence the introduction of this nebulous legislation which, in practice, has historically left HMRC as ‘Judge and Jury’ as to whether a company meets this requirement. Cases reaching the Tax Tribunal are rare because there is no right of appeal against a refused EIS Advance Assurance Application, and without EIS Advance Assurance, investors won’t invest and the company never gets off the ground nor would it have the funds to go to the Tax Tribunal unless it manages to issue shares to investors, when there is a right of appeal. Taxman hit with the legal challenges Consequently, there have been very few cases at the Tax Tribunal in the past, but suddenly we have had several, mainly concerning the Film and TV industry. This is not a coincidence, HMRC has not allowed many Film and TV companies into the world of EIS since 2017. HMRC won one of the recent cases (CHF Pip! Plc) on only one point whilst actually losing most of the rest of the arguments. Similarly, it won in Coconut Animated Island Limited but on the grounds of so-called Disqualifying arrangements legislation rather than the Risk to capital rules, on which the Tribunal supported the company. The other two film cases were won by the individuals running the company actually appearing in court themselves without legal representation (Inferno Films Ltd and Cry Me A River Limited). Great news for the individual little guy in a David v Goliath sort of way! One further case was conceded by HMRC in the eleventh hour, just before the tribunal. In short, HMRC has been losing consistently on the Risk to Capital argument, albeit that HMRC is using other legislation to win the cases. Nevertheless, bucking the trend, HMRC did win in Valyrian Bloodstock Ltd v HMRC, where it wasn’t apparent that there were plans to replace the horses initially used at some future date, evidencing a long-term objective. It may be hard to prove that there is a plan to longevity, but if one never expresses such an intent it the outset, then there will be even more difficult to convince a judge. The key points in these cases are decided upon the facts, essentially someone’s opinion rather than technical interpretation of legislation or reliance on past precedents, judges can only opine upon what is put in front of them. The fact that the judges appear to have a feel for how the commercial world operates in real life is encouraging. Neither Tax Inspectors nor Judges are likely to have ever run a business themselves, hopefully HMRC will reflect upon these decisions and their approach going forward. What will HMRC do now? The fear is that HMRC may just hide behind the fact that First Tier Tax Tribunal decisions are not binding precedents and may just trot out that familiar line, that ‘each case depends upon its own individual facts’. However, the fact that HMRC conceded one case at the last minute, hopefully, suggests that it is taking these Tribunal decisions on board, which can only be good news for everyone. Despite this article appearing to be relatively industry specific, it is actuallygood news across the board. HMRC can now reflect upon some independent views from outside its own echo chamber and will hopefully be a little more cautious about rejecting future EIS Advance Assurance applications. Equally, it gives some insight to advisors as to how the courts may interpret other cases. These decisions are not going to change much overnight, and the legislation is still, in reality, not a practical solution to the problem it was designed to solve. Of course, nobody is suggesting that finding an alternative solution is easy but asking Tax Inspectors to make commercial judgements is a little unfair as that is not how they are trained nor would they be expected to have practical business experience. Bridging the cultural gap EIS is for small companies, HMRC is a huge bureaucratic institution, one should expect a culture gap here, it’s nobody’s fault, but these cases give HMRC an opportunity to diversify its thinking and approach. Single production film and TV companies raising EIS funds will still be a thing of the past, the industry understands that and accepts that, but this might start to help genuine hardworking, long-term production companies get off the ground. Britain needs entrepreneurs and is a world leader in screen production. However, most of the screen industry is funded by inward investment by overseas producers … time to start growing our own again with EIS!
The fear is that HMRC may just hide behind the fact that First Tier Tax Tribunal decisions are not binding precedents and may just trot out that familiar line, that ‘each case depends upon its own individual facts
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Blackfinch Investments Limited 2013 £699m / £36.4m (as at 25/08/22) 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 54 investments across 28 companies 10 No annual income, but target returns are 3-5x amount invested N/A Growth 4-7 years £10,000 3% 2% p.a. (only for the first four years) 20% performance fee, after a minimum return of 130%
manager Name Year Founded AUM (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 Inital Fee AMC Other Fees
EIS solutions comparison
Offer Name Year Founded AUM (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 Inital Fee AMC Other Fees
Oxford Capital 1999 £140m (Growth EIS) We aim to invest in early stage technology businesses that are solving commercial, technological or scientific problems in innovative ways. Companies in our portfolio operate in sectors such as software, consumer internet, digital media and healthcare. November 2011 Early stage UK technology companies 8 to 12 2-3x excluding tax reliefs during the lifetime of the investment 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 2.50% 2% For additional charges, please see the Information Memorandum
Praetura EIS Growth Fund 2011 £550m / £170m Praetura is an award-winning fund manager that has been investing into early-stage businesses since 2011. The Praetura EIS Growth Fund is an ‘Evergreen’ fund structure, with two soft closes each year. The Fund invests across a range of sectors, with a focus on tech and life sciences. Praetura expects to fully deploy capital within 6 months of each relevant close date, with investment into c. 8-10 promising young businesses. The aim is to provide investors with capital growth from businesses in the North of England and beyond. Praetura use their More Than Money approach to grow portfolio companies and generate returns for investors. 2019 Early-stage EIS-qualifying businesses with high growth potential, mostly in tech or life science sectors based in the North with b2b models. 8-10 per tranche minimum 2x return pre tax relief on exit Evergreen - up to £30m per annum Discretionary Portfolio Service which will provide a portfolio of investments of circa 8-10 unquoted companies with a focus on capital growth. 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
OnePlanetCapital 2020 £3m / £3m OnePlanetCapital is a climate change specalist venture capital investor. The Climate change EIS fund Invests into companies that reduce carbon, combat climate change and facilitate the economies transition to net zero. We beleive that this is the investment opportunity of a lifetime whilst also creating postive environmental impact. The fund is evergreen with two soft closes per year. The fund invests into our core subsectors we define as; energy, industy and consumer businesses. 2019 Early stage, high growth potential companies combating cliamte change 8 2.5x five year return NA To deliver target return of 2.5x to investors whilst having a postive environmental impact 4-7 years £10,000 0% 1% 20% performance fee, after minimum return of 120%. All other charges can be found in our Information Memorandum
When it comes to sustainable investing, the Covid-19 pandemic lit a fire underneath the stragglers.
The radical impact of the pandemic accelerated the need for a different approach to traditional investing, and EIS funds are perfectly placed to back the emerging businesses that can support the bigger ideas and concepts. As a result of the devastating impact Covid-19 has had on global economies in such a short space of time, many policymakers and investors are viewing the crisis as a wake-up call that has accelerated the need for a different approach to investing, as parallels have been drawn between the unforeseen risks of a pandemic and issues such as climate change. The interesting argument that pandemics and environmental risks are viewed as similar in terms of impact, is borne out by a JP Morgan survey of investors from 50 global institutions, representing a total of $12.9 trillion in assets under management (AUM). Some 71% of respondents said that it was ‘rather likely,’ ‘likely,’ or ‘very likely’ that the occurrence of a low probability / high impact risk, such as Covid-19, would increase awareness and actions globally to tackle high impact / high probability risks such as those related to climate change and biodiversity losses. As a result, something unexpected has happened: businesses are focusing on sustainable investing. Rather than retreat to traditional ‘safe’ investment vehicles in the face of the biggest recession since WWII, organisations are using the economic uncertainty as an opportunity to realign and shift their focus towards a different kind of policy, one that takes into account environment, social, and governance (ESG) factors. Once a niche market, ESG is increasingly tipping towards the mainstream.
Splendid symbiosis: EIS & sustainable investment
Knowledge-intensive companies (KICs) and ESG: the tech connection In order to support research and innovation, the UK government introduced knowledge-intensive companies (KICs) into the EIS legislation in 2017 and implemented in April 2018. This was to allow research-oriented companies to raise more EIS investment than other companies and over a longer period. HMRC defines Knowledge Intensive Companies (KICs) as companies that are carrying out research, development or innovation at the time that they are issuing shares. Being a knowledge-intensive company (KIC) for the purposes of EIS will give a company an array of additional benefits in terms of how much money it can raise. This is particularly useful when a company envisages that it will need to raise a lot of investment and will likely raise over the usual EIS limit, or over a longer time period – within 10 years of a company’s first commercial sale (compared to seven years for companies that aren’t KICs). KICs benefit from the correlation between ESG and technology A lot of innovative start-ups do qualify as KIC, and many of these companies benefit from the increased investor appetite for ESG, technology, and intangible assets. Intangible asset investment and intellectual property value have derived from our societal shift and dependence on technology. ESG initiatives run very close to our societal dependence on technology. As technological advancements increased, so did ESG advancements, even if ESG initiatives have been on a much slower course than technology. Societal behaviours and consumer sentiment on sustainability skyrocketed within the past few years. Governments across the world increased their investments and subsidies for “green” industries. In the UK, a £166.5 million cash injection will drive forward developments in critical technology needed for a green industrial revolution including carbon capture, greenhouse gas removal and hydrogen. The multi-million-pound investment, awarded to innovators, businesses, academics and heavy industry right across the UK, will accelerate the delivery of the critical game-changing technologies needed to further drive Britain’s climate change ambitions, while creating over 60,000 jobs across the UK. Many KICs are the recipients of this government largesse, with some providing EIS investors the opportunity to back technology growth companies that have a proven technology, robust intellectual property and are operating in a high growth market sector. Psychologically, investors deem that their investment in ESG companies provide attractive growth metrics and aid our environments and society collectively. This collaborative trend fundamentally drives the demand for sustainability.
EIS often favours investment in companies that offer solutions to some of the greater problems facing us over the coming years, such as climate change, food and water security, health, longevity and mobility.
ESG & EIS: mutually supportive
There’s a symbiotic relationship between ESG and the early-stage technologies funded by the Enterprise Investment Scheme (EIS). Sustainable investing is about investing in progress, and recognising that companies solving the world’s biggest challenges can be best positioned to grow. EIS often favours investment in companies that offer solutions to some of the greater problems facing us over the coming years, such as climate change, food and water security, health, longevity and mobility. ESG investors (and, increasingly, EIS investors) want to back companies that can prove they are beneficial to the local area, either through employment, redevelopment, or community outreach. This comes alongside what the firm is doing on climate change and carbon emissions which is, as ever, increasingly important. As ESG provides a broader perspective, it also provides a foundation for long-term strategy, aligning perfectly with patient capital, which is what EIS is all about. From a company's operational perspective, ESG enables growth opportunities and mitigates downside risk. It can also affect a company’s ability to raise both equity and debt finance. From an investor perspective, ESG influences company behaviour, a boon for EIS investors who seek to support companies that are purposeful. As providers of ‘risk capital’, EIS investors are aware that they may never get a return. How do these investors justify their investment? EIS investors buy into the diversification argument - that spreading their net wider will help them snare a couple of big fish, while the others die off. Like EIS, ESG combines financial and non-financial objectives, such as sustainability and financial growth. ESG investing is reshaping the way financial institutions are thinking about their portfolios. It should do the same for individual investors. Using the latest data management techniques, institutional investors define and chase at the same time financial and non-financial objectives, giving today’s companies an edge that has only recently become achievable. By mixing usual ratios with ESG metrics, one can create a portfolio management strategy which will take care of both objectives at the same time in a streamlined manner. Concretely, the new assets to be included in a portfolio will not only have to go through a strict market screening, but they will also have to fit properly within the existing portfolio. The screening of each security will be made so as to match the long-term performance objective of the investor, the amount of risk it can swallow, and its ESG standards. The same principle applies to EIS investment, which should complement existing assets already in the portfolio while carrying its own weight in terms of added diversification, growth potential and, of course, tax relief. It’s unclear how many EIS managers are currently applying this principle - but the number seems to be growing. This suggests an ESG integration investment approach and it certainly makes sense in that EIS is looking for not only good ideas but good businesses and any good business should be taking account of sustainability in its current operations and future development. The success of EIS investment into Knowledge-Intensive Companies (KICs) highlights the importance of EIS when it comes to backing the technology that will tackle many of the world’s challenges. Recent budgetary changes have focused approved funds on KIC investments. From April 2020, at least 80% of funds raised in an approved EIS fund structure must be invested in KICs. Hence the renaming of the structure as Approved Knowledge-Intensive EIS Funds.
The pandemic has had an impact on the UK in ways that we could never have predicted. It has created a new class of investors, one more concerned with the impact their capital is having and the difference it makes to their local area. The events of the past two and a half years have not only accelerated various trends but resulted in increased interest for the types of businesses that must be backed and built now, using patient capital. Moreover, amid the tide of economic and social changes sweeping across the UK, EIS remains an essential tool to accelerate the country’s SME landscape. While continuing to provide pivotal support to the backbone of the economy, EIS companies are poised to be sustainability leaders of the future. A number of consequential suggestions have been made to the Treasury Select Committee inquiry into the UK’s Venture Capital industry that is currently underway. One of these ideas for changing the rules is that the higher limits which now apply to Knowledge Intensive Companies companies should also apply to clean tech and green tech. Another proposition is that green energy generation should be allowed again as an EIS qualifying trade (all energy generating trades were banned from VCTs, EIS and SEIS in 2015). As always, EIS continues to evolve to adapt to the changing marketplace and to be a better performing tax-advantaged scheme.
of SMEs say customers will influence environmental sustainability actions to a “large extent” in 2022
50%
In the current environment, now is the time for early stage companies to sharpen their business models and ensure they have sufficient cash runway to ride the downturn.
David Mott, Founder Partner - Oxford Capital
Matthew Jellicoe - OnePlanetCapital
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Christiana Stewart-Lockhart
director, eiSA
EISA continues advocacy amid mini-budget uncertainty
The companies using EIS and SEIS span many different sectors, and the investments made through the schemes are crucial to job creation, innovation, and economic growth.
A
week is a long time in politics and the last few months have seen a significant amount of change. The various U-turns have created uncertainty for everyone in the UK and some clarity is desperately needed. Looking back to the start of the summer, EISA had been working to stress the importance of extending the EIS beyond the existing 2025 deadline set by the EU. Our efforts included submitting oral evidence to the Treasury Select Committee’s Inquiry into the Venture Capital Market in June, alongside the AIC, the BVCA and the VCTA. It was a productive session and we were able to communicate the importance of securing clarity around the Sunset Clause as soon as possible. We explained that, at a time of so much economic uncertainty, removing the sunset clause would provide some vital security for UK start-ups. Committee members were also very interested to hear how the EIS and SEIS were being used across the whole of the UK and what more could be done to support entrepreneurs outside the South East. The age limit requirements of start-ups using the SEIS were specifically discussed in relation to this. Parliamentary support It was reassuring to hear that the Treasury Select Committee was broadly supportive of the EIS and SEIS with one Member of Parliament, Kevin Hollinrake MP, declaring “I absolutely believe in SEIS and EIS.” The Committee Chair, Mel Stride MP, also explained that “Venture capital is a very important part of the economy. It is pleasing to have you confirm that it is still doing well. We want it to continue to do well in the future. It has been useful to look at all the different schemes, to dissect them a bit and to touch on areas like diversity and the regional impact of venture capital investment.” In September’s mini budget, the Government announced:
www.eisa.org.uk 020 8132 6199
“We want this country to be an entrepreneurial share owning democracy. The Enterprise Investment Scheme and Venture Capital Trusts, we will extend beyond 2025. The Seed Enterprise Investment Scheme and Company Share Option Plans, we will increase the limits to make them more generous. Crucial steps on the road to making this a nation of entrepreneurs.” - Former Chancellor Kwasi Kwarteng, 23rd September 2022
The Treasury went on to specify that “From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from 2 to 3 years. To support these increases, the annual investor limit will be doubled to £200,000. These changes will help over 2,000 companies a year that use the scheme to grow.” Whilst much of the mini budget has now been scrapped, the new Chancellor’s statement on 17th October 2022 suggested that they were still committed to the changes to the SEIS, with the official Treasury statement specifying that:
“The government’s reversal of the National Insurance increase and the Health and Social Care Levy, and the cuts to Stamp Duty Land Tax, will remain benefitting millions of people and businesses. The £1 million Annual Investment Allowance, the Seed Enterprise Investment Scheme and the Company Share Options Plan will also continue to further support business investment.” – HM Treasury, 17th October 2022
These changes will enable more companies from across the whole of the UK to use this crucial scheme to secure investment in order to drive innovation and economic growth, further supporting the levelling up agenda. This improvement to the age limits is particularly relevant for those entrepreneurs from outside the South East, who often seek equity investment at a later stage. The Government is also still committed to the statement made in the growth plan regarding the EIS and VCTs, that being that ‘the government remains supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and sees the value of extending them in the future.’ EIS & SEIS will play a vital role in UK’s economic recovery The EIS and SEIS are absolutely crucial to the UK’s thriving start-up scene. They have facilitated nearly £27 billion of investment into 52,000 British start-ups since their inception. These schemes help some of the country’s most promising start-ups secure much needed investment to grow, contributing both to employment and to the country’s economic wellbeing. The companies using EIS and SEIS span many different sectors, and the investments made through the schemes are crucial to job creation, innovation, and economic growth. Many founders genuinely do not think their companies would exist today without the schemes. EISA is committed to ensuring more entrepreneurs and investors are aware of the opportunities the schemes offer to those starting and investing in early stage businesses. Education is crucial and we have held a series of events to raise awareness of the schemes across the whole of the UK. It has been fantastic to meet so many entrepreneurs and key players from across the whole industry in Edinburgh, Belfast, Manchester and Bristol and we look forward to meeting many more at our events in Cardiff and Liverpool next month. Whilst there is still significant uncertainty surrounding the Government’s plans and, indeed, how long the current Prime Minister will be in power, there is no doubt that the SEIS and the EIS are crucial to entrepreneurs in the UK. With a greater focus on education and raising awareness of the schemes we can empower local champions for the SEIS and EIS to support entrepreneurs from across the whole of the UK. EISA’s full submission to the Treasury Select Committee’s Inquiry can be found here: https://committees.parliament.uk/writtenevidence/109009/pdf/.
The Treasury Committee has launched a new inquiry into tax reliefs and is seeking your views. More specifically, the lawmakers want to know whether the system of reliefs as a whole achieves benefits for the UK economy that justify their cost.
increase in the total number of EIS investors in 2020 to 2021
40%
The investigation will look at the many tax reliefs available to businesses as well as those available to individuals on their personal tax liabilities. Do the tax reliefs impact employment, investment and growth in the UK? Are the reliefs being used in the way they were intended? Do they cause problems to the tax system, such as through tax evasion or avoidance? The call to evidence was completed in September.
The most recent probe is the second parliamentary inquiry relevant to the Enterprise Investment Scheme (EIS) this year. As part of her evidence to the previous inquiry, the Treasury Select Committee Inquiry into the Venture Capital Market, Christiana Stewart-Lockhart, the director general of the EIS Association, said: “We believe that the SEIS and EIS can continue to play a major part in closing the funding gap that exists in the UK. The SEIS and EIS also play a huge role in developing world class UK businesses that help establish the UK as both the start-up hub, and tech hub, of Europe. “The money raised to date has played an important role in providing early-stage funding for a wide range of innovative, productive companies who, without SEIS and EIS, would not have been able to start their business. “In our view, fast developing, smaller, entrepreneurial businesses are more likely to be leading the UK in terms of diversity, opportunity and inclusion. We also believe that if the scope of the EIS were expanded, more could be done to provide scale up capital, to help entrepreneurs in all regions of the UK and to facilitate funding to assist with the levelling up agenda and in reaching net zero carbon targets.”
EIS: playing a major part in closing the funding gap
“Are tax reliefs good value for money?” MPs want to know
Proportion of investors and amount of investment, by size of investment (investment on which Income Tax relief was claimed), 2020-21
1,500 to 2,000 1,000 to 1,500 750 to 1000 500 to 750 450 to 500 400 to 450 350 to 400 300 to 350 250 to 300 200 to 250 150 to 200 100 to 150 75 to 100 50 to 75 25 to 50 15 to 20 10 to 15 5 to 10 2.5 to 5 1 to 2.5 0.5 to 1 up to 0.5
0%
5%
10%
15%
INVESTORS
AMOUNT INVESTED
AMOUNT OF INVESTMENT (THOUSANDS)
PROPORTION OF INVESTORS
PROPORTION OF AMOUNT INVESTED
We are also interested in any problems the tax reliefs may cause for the tax system, and the scope for reform.
Rt. Hon. Mel Stride MP - Chair of the Treasury Committee
The Confederation of British Industry (CBI) has warned that the UK economy faces stagnation next year and could easily fall into recession. How are you preparing for this alarming eventuality?
The Treasury Select Committee has launched an inquiry into the UK’s Venture Capital industry. What results do you hope to see from the probe?
While EIS is already a huge benefit to the UK’s start-up sector, it stops short of helping companies extend their growth and scale into truly global businesses. We hope to see recommendations for significant increases in EIS funding limits, and even to permit tax relief on shares bought from early EIS investors, subject to a minimum holding period.
The FCA's Policy Statement and final rules on its new ‘Consumer Duty’ (for financial services firms dealing with consumers) are due by the end of July. What does this mean for the way you engage with EIS investors?
We welcome the new Consumer Duty principle that promises to deliver greater clarity to EIS investors across the industry. At Blackfinch we are looking to further strengthen our client-centric approach, enhancing our online portal and personal communications, while continuing to streamline our overall customer experience and making it easier for clients to understand how their investments are performing.
We are working with our portfolio companies to ensure they are funded with a long cash runway and that management teams are strengthening their balance sheets where possible. However, on the flipside, we know from experience that a recessionary environment can be a breeding ground for entrepreneurial activity and many of the huge tech companies of today were borne out of economic crises.
It’s a welcome initiative, as we enter a post Covid world, and with the myriad of economic challenges on the horizon. While it was really encouraging that the Government recently announced an extension to the EIS sunset clause past 6 April 2025, there’s always more that can be done to ensure entrepreneurs receive the support and guidance they need to grow their businesses.
This is another welcome initiative from the FCA to continue to help improve market best practice. The principles state “that consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it”. A positive investor experience, regular transparent reporting and accessibility is at the heart of what we aim for at Oxford Capital, so little will change for us following this policy.
David mott
Founder Partner Oxford Capital
Our investment team have dedicated time to understanding how the economic impact may affect different sectors in different ways. Generally, we have been more considerate of macro risks and have stress tested financial models more rigorously. Praetura has also developed a custom internal portfolio management platform that helps us monitor company financial and cash runway on a real time basis. This means we can react quickly to changes as they arise.
We’d like to see continued support for the venture capital industry through additional support for EIS and VCT products. The removal of the sunset clause renewed confidence in the role EIS plays in the UK economy. One change that would benefit the industry is an increase of the amount of capital each business can attract over their lifetime.
Ultimately, this ruling will help managers ensure they’re engaging with the right audience in the right way. We will continue to engage with authorised advisers and sophisticated investors in accordance with the FCA’s guidance. Good compliant managers want improved regulation to help create a better managed marketplace to support the industry’s growth.
Recessions are always challenging but their advantage is in forcing customers to make changes. Innovative companies that deliver genuine value stand to benefit from such changes and can continue to win business. These are the types of businesses in which we invest. We are additionally supporting them in building resilience and strategies to handle the likely short-term pressures.
As EIS is a tax advantaged investment there is always an underlying investor base for EIS investments. So we are not overly concerned about recession. Of course it is not ideal, and will almost certainly affect inflows. However, OnePlanetCapital was founded during Covid, after all, we saw the Climate crisis as very much a long term mega trend that would resonate with investors for the next 20 years.
So far, I think we’ve seen great news in terms of SEIS limits being raised which I think shows the government understands the importance of SEIS and EIS. I would hope to see the scheme strengthened as I think it is the lifeblood of entrepreneurship to an extent – an incredible 30,0000 SMEs have been funded to date.
Learning objectives CPD and feedback About Intelligent Partnership Disclaimer
Learning objectives
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Covered in section 2, Market Update
Identify 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 4: Industry Analysis
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 6: What’s on the Horizon
Outline regulatory developments that could impact the EIS in the near future
How did you do?
CPD and feedback
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Intelligent Partnership has achieved accredited status from the CII and PFS. Members of these professional organisations represent the majority of the insurance, investment and financial services industry.
Readers of the EIS Industry 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
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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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IIntelligent 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
Regular updates
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:
disclaimer
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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 October 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 EIS-qualifying shares. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
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