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FIND INSIDE
INTRODUCTION
1
MARKET UPDATE
2
industry analysis
4
considerations for investment
3
MANAGERS IN FOCUS
5
WHAT'S ON THE HORIZON
6
FURTHER LEARNING
7
The latest news, updates and statistics on EIS
In partnership with:
coronavirus developments budget news what the managers say market composition biotech / pharma what's ahead
1. Introduction
Foreword Opening statement Update overview Key findings
Foreword Opening Statement Update Overview Key Findings
1. INTRODUCTION
Spring Budget Changes Bounceback Loan Extensions Brexit's Implications for EIS It is Time EIS Hit the Mainstream What the Managers Say
2. market update
Market Composition Market Size and Targets Update MICAP Market Snapshot
3. considerations for investment
Biotech/Pharma Deep Dive How Many Investments is Too Many? Fundraising Update The Cost to the Taxpayer
4. industry analysis
Arie Capital Blackfinch Deepbridge Guinness Asset Mgmt Jenson Funding Partners Oxford Capital Praetura Ventures Symvan Capital EIS Solutions Comparison
5. managers in focus
Coronavirus: Is the End in Sight? What the Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclaimer
7. further learning
2. MARKET UPDATE
3. CONSIDERATIONS FOR INVESTMENT
4. INDUSTRY ANALYSIS
5. MANAGERS IN FOCUS
6. WHAT'S ON THE HORIZON
7. FURTHER LEARNING
guy tolhurst
foreword
MENU
Foreword
INTRODUCTION / FOREWORD
I
t gives me great pleasure to introduce the first EIS Update of 2021, as we look optimistically to the gradual ending of the Covid related restrictions, and onto the (hoped for) economic recovery. In his budget at the start of March, Chancellor Rishi Sunak made clear that increasing investment levels into young, innovative companies with high growth potential will be key to the UKs recovery. Even if Sunak neglected to actually mention EIS’s by name, they will no doubt play a key role over the coming years. Offering investors a raft of generous tax perks to invest in small, high risk companies, EIS plays a key role in funneling capital to these younger SMEs that might otherwise wither and die for lack of funding. And with the chancellor now committed to improving investment levels, that should be a good sign that he won’t look to undermine what has been working in this field. While it might be a bit disappointing that the Chancellor didn’t take the opportunity to increase EIS incentives - which would no doubt drive up investment even more - the scheme is likely to benefit from income tax allowances and bands, pension lifetime investment allowance, CGT annual allowance and IHT thresholds all being frozen for the next five years. All these together mean people are going to be potentially paying increasing amounts of tax as inflation and GDP growth bite. With its generous tax allowances, EIS could be an ideal product for those who are willing to invest in UK plc in exchange for some mitigation of their own tax liabilities. Of course, EIS investments remain high risk and illiquid, and therefore won’t be for everyone. One thing Sunak made abundantly clear is that he doesn’t see a short term fix to paying for the Covid support measures. The allowances being frozen (termed stealth tax rises by some industry commentators) may well not be the end of the pain, and likewise there is always time for him to put money into initiatives he thinks will help generate growth. Therefore it is encouraging to see the EISA continue to push for improvements to EIS in the future. After all, EIS has been recognised repeatedly by various parts of the Government as a successful method of encouraging capital to flow into young companies that might otherwise struggle. With the Government looking to push this direction for the foreseeable future, now could be a great time to consider investing - it seems as likely as ever before that the Government is going to look to create a healthy environment for SMEs - the kind EIS investors will be investing in - in order to give them the best chance possible of success. Of course, all of this is only relevant if the various EIS managers have healthy deal flows, and are able to actually place your clients money in a company they are confident will provide a return. Thankfully the UK’s start up market remains buoyant, despite the recent Brexit and Covid related difficulties. And with Brexit now in the rear view mirror, and the end in sight for the Covid crisis, now might be the perfect time to consider adding one or two new EIS offers to your panel. We’re in a period of great change, and it is during these times that small, innovative companies have great potential for large gains. I hope you enjoy the Update.
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opening statement
INTRODUCTION / OPENING STATEMENT
S
o now we know for sure. 2020 was the worst year economically for 300 years as the UK economy shrank by 9.9%. And the grim reading doesn’t stop there. According to the Office for National Statistics, that contraction is more than twice as much as the previous largest annual fall on record and is one of the largest across all the major economies in the world. Not since 1709 has our economy fared so badly. And the cause of the 1709 downturn? Not disease but cold weather. The Great Frost of 1709 was so cold, there were reports of flocks of birds frozen mid-air and plunging to the ground, other stories told of corpses impossible to move because they were frozen into their bedsheets. The UK economy wouldn’t recover for 10 years. Our road to recovery should, fingers crossed, be easier. The Bank of England tells us the economy is like a “coiled spring” with businesses and households currently in stasis but ready to unleash pent up growth when the economy is reopened. So the prospects of a “roaring 20’s” might provide salvation. Certainly many of the small business owners and entrepreneurs that we talk to have found 2020 at best difficult and at worst catastrophic. Small businesses tend to be cashflow dependent and don’t always have large reserves of profit to call upon so any downturn in sales can have a significant effect. So far, we haven’t seen the number of insolvencies and bankruptcies that we might expect given the situation and there’s no doubt the Government’s interventions such as CBILS, Bounce Back Loans and Future Fund have propped up small businesses but as these measures start to get wound down, there’s no doubt these numbers will rise. What’s clear is that the pandemic has created winners and losers. Both at sector and firm level. At sector level, fairly obviously the hospitality, travel and leisure sectors have had a tough pandemic. Pubs shut, travel banned and social gathering limits has meant almost all firms in these sectors have been decimated. But could they be due a bounce back in 2021 and beyond? With us all desperate to holiday, meet and eat together again, are these the hot sectors to invest in now? The retail sector has created winners and losers more than most. The major online retailers and supermarkets have had a great pandemic. Smaller or high street stores with little online presence have struggled or in many cases closed doors. The other big sector winners have been those sectors which were already starting to see growth but which the pandemic has accelerated at lightning speed, predominantly in tech. Think Zoom, Hopin (first fundraising to Unicorn in 2 years) and Revolut. The question now is will these trends continue post pandemic or will these successes be shortlived? Another success story, for obvious reasons, has been medtech and biotech. The scramble for vaccines, testing kits, PPE, personalised health and diagnostic equipment has seen a wall of money reach a sector that has traditionally struggled to access funding given the traditionally longer timescales needed to start and scale such businesses. Again, short term reaction or sustainable, long term movement? Many sectors are therefore in flux, which presents investors with opportunities. We saw during the last crisis in 2008 that the crisis decimated the large, static, immobile blue chip companies whose focus was on maintaining their status quo rather than innovating and getting ahead of the curve, but helped smaller, more nimble operators, focused on disruption and technology, to flourish. One simple example is Uber. Granddad of the order by app concept and totally transformed an industry. But back in 2008, it was a struggling startup being turned down by every VC in America. Its early investors weren’t institutions but private investors. With sectors in flux and companies beginning to identify and capitalise on fast moving trends, it feels like now is another great investment opportunity. Clearly, the Uber example above is an exception rather than norm. For every Uber, there are 100 Betamaxes but it goes to show what is possible when investing at the earliest stages of a company’s growth journey. And it's the job of a good Venture Capital (VC) fund not just to second guess these trends but to work with companies when things go against them and to turn them around. The Government plays its part by facilitating the landscape and has indeed committed to making the UK the tech and entrepreneur centre of the world. But it’s private investors and fund managers who need to play a significant part and drive sectors and companies forward even quicker. This is where EIS and SEIS comes into play. In the past few years, the schemes have been focused on delivering funding to companies prioritising growth, innovation and tech and during the pandemic, EIS and SEIS funded companies and the investment managers who invest in them have proved the value of this strategy. They have proved not only nimble and adaptive but also genuinely inventive, profitable and increasingly important job creators. It's now the job of investee companies, and the VCs that support them, to ensure they continue to grow and are ready to take advantage of further opportunities when they present themselves either at a macro or micro level. There will always be winners and losers in early stage businesses. Both receive funding but only VC backed businesses get the mentorship, support and advice required to navigate through all types of economic conditions to create consistent winners. Within a VC portfolio right now is the opportunity to invest in the next Uber or Airbnb. Go find it!
- Mark Brownridge
With sectors in flux and companies beginning to identify and capitalise on fast moving trends, it feels like now is another great investment opportunity
mark brownridge
director general eisa
update overview
INTRODUCTION / UPDATE OVERVIEW
We couldn’t do this without the help and support of a number of third parties who have contributed to writing this update. Their contributions range from inputting into the scope, sharing data, giving us their insights on the market, providing copy, and peer reviewing drafts. So, a big thanks to: Andrew Aldridge, Jeffrey Faustin, Jonathan Prescott, Kealen Doyle, Mark Brownridge, Reuben Wilcock, Richard Roberts, Sarah Barber, Shane Gallwey, Stephen Margolis. Their input is invaluable, but needless to say any errors or omissions are down to us. We have relied upon MICAP for most of the data that we have based the report 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 report and supported us by helping to meet production. So, a big thanks to: Arie, Blackfinch, Deepbridge, Guinness, Jenson, Octopus Investments, Oxford Capital, Praetura and Symvan.
Business relief qualifying shares and share sales Business Relief allows investors who hold Business Relief qualifying shares to sell those shares. As long as they purchase replacement Business Relief qualifying shares within three years of the sale, the two year BR qualification clock is not reset. As the examples of Earthport, WYG and PTSG show, there are examples where it may be worth investors considering earning an immediate windfall, which can then be reinvested in other options a manager considers better long term value. However, investors should be aware of the risk that, should they pass away in between an investment being sold and any replacement shares being acquired within the three year window, they would not be able to claim Business Relief
acknowledgements and thanks
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INTRODUCTION / KEY FINDINGS
£45
lent to UK companies through bounce back loans by the end of January 21
billion
0.02%
the cost to UK taxpayers for EIS’s income tax reliefs in 2019/20
of UK GDP
1,957
publicly announced into non-listed UK companies (2020)
private equity investments
67
open offers
£19,627
into an EIS offer (as of February 2021)
avg min investment
1449
in the TRADE AND COOPERATION AGREEMENT BETWEEN THE EU and the UK
pages
15
either exited or partly exited from by EIS managers in 2020
of EIS offers (as of February 2021)
avg target return
273%
key findings
as of February 2021
biotech/pharma companies
2. Market update
spring budget changes Bounceback loan extensions brexit's implications for EIS It is time EIS hit the mainstream What the managers say
spring budget changes
MARKET UPDATE / spring budget changes
On March 3rd Chancellor Rishi Sunak set out his vision for a post pandemic world. And it was a vision EIS fits right into.
espite the hopes of several experts, the Chancellor neglected to increase either the level of tax relief EIS offers, the amount a company can receive or the amount an investor can invest. However, he also created an environment in which EIS investments are likely to become increasingly popular, due to a more burdensome tax regime. The most important of these changes are:
D
- MARCUS STUTTARD
quote
- Rishi Sunak
We need to do even more to encourage businesses to invest right now. Business investment creates jobs, lifts growth, spurs innovation and drives productivity.
billion fiscal support from the Gov
£407
Capital Gains Tax (CGT) Annual Exempt Amount will remain at its 2020/21 level until April 2026.
As assets grow in value, this will leave investors and entrepreneurs facing increasing CGT charges. With more and more people facing CGT liabilities, a product such as EIS, which allows investors to invest capital gains and defer the tax, may find a wider audience. In addition, EIS’s CGT free growth will become even more of an appealing prospect.
main changes
01
02
With wages still growing despite the current economic problems, people are going to see an increasing amount of their income taxed and taxed at a higher rate. Products such as EIS, which offer income tax relief can help ease the new burdon, while offering high potential returns.
Income tax Personal Allowance and the Higher Rate tax band will rise with CPI as planned from April 2021 and will remain at this level until April 2026
03
The Pensions Lifetime Allowance was meant to increase by CPI over this period. By freezing it at the current level, it could see high income individuals with newfound capital that needs investing. Although EIS’s high risk, low liquidity nature will make it an unsuitable pension replacement for many, some may fancy the opportunity to invest some of the excess capital into the tax efficient market and since Business Relief qualification accompanies most EIS qualifications, this would create a potentially IHT income tax and CGT-free environment. In these regards, it is not dissimilar to pension contributions.
Pensions Lifetime Allowance will remain at its 2020/21 level until April 2026.
04
Last year saw the first drop in IHT paid in a decade thanks to the impact of the residence nil-rate band. The nil-rate band and residence nil-rate band were meant to increase in line with inflation, which should have slowed down future increases in IHT levels, as had been seen over the previous decade. With these bands now frozen, an increasing number of estates are going to be drawn into paying IHT, and those already paying IHT will see the amount they pay increase. This will be compounded by the chancellor’s measures to bolster the housing market, with house price growth a major element in rising estate values. As EIS-eligible shares generally qualify for business relief after two years, EIS can be helpful in protecting estates from IHT.
Inheritance tax (IHT) nil-rate band and residence nil-rate band will remain at 2020/21 levels until April 2026.
A cumulative effect
The effects of these tax changes will gradually be felt over time. The chart below, looking at the effects of salary rising with inflation compared to the personal allowance is a good example. The gap between the two lines is the taxable amount. With the personal allowance frozen, the gap between the two is likely to grow. Likewise, with the freezing of the income tax higher rate tax band at £50,270 for five years, rising salaries are likely to push some into the higher rate, increasing their income tax liabilities.
personal allowance and salary inflation increases over time
personal allowance and capital gains allowance
Of course, this is just an example. Salaries won’t grow exactly in line with inflation - and inflation may be above or below 2%. But nevertheless, it demonstrates that over time, without incremental increases, the freezing of allowances renders them less valuable in real world terms. The same is true of the allowances for CGT, IHT and pensions. As EIS offers several substantial tax perks, this may help form part of a strategy for clients looking to mitigate what are in effect taxes rises, once inflation is taken into account.
An investment-led recovery
More than any individual policy, those interested in EIS will have taken heart from the overall message from the chancellor. Whereas the British Government sought to recover from the 2008 recession with a bout of austerity, the 2021 Government will instead look to targeted investment to drive growth out of the current financial hole. With such a message being trumpeted, it seems unlikely EIS will be targeted in the future for adverse changes, adding an element of confidence to tax planners. That said, many commentators will be able to point to the lack of EIS improvements as a gap in the chancellor's budget, if he truly wanted to increase investment. Some have suggested one reason the chancellor didn’t touch EIS was to avoid an international spat over state aid when the situation between the EU and UK remains fairly tense. If that’s the case, then potentially we could see some improvements in the future, once the EU-UK trade deal has had time to bed in. Nevertheless, Sunak did introduce a number of schemes which might impact companies that are EIS eligible. This includes changes to the Visa system to allow high-skilled migrants an easier route to working in the UK, and a Lifetime Skills Guarantee, to give the UK workforce access to the education and training they need to bring the expertise and innovation needed to fuel growth and recovery. These might be especially relevant to knowledge intensive companies, and the new approved EIS Knowledge Intensive Fund structure, which aim to give early stage companies with high levels of R&D greater support.
To help ensure the transition out of the Covid era, Sunak also introduced several new schemes to replace old business support schemes (such as the bounce back loans) which will all end by the end of March 2021. The new loans are:
"From 6 April 2021 the Recovery Loan Scheme will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million to give them confidence in continuing to provide finance to UK businesses. The scheme will be open to all businesses, including those who have already received support under the existing COVID-19 guaranteed loan schemes.”
recovery loans
These loans may well offer potential EIS eligible companies cheap funding that won’t require additional equity funding which could dilute existing shares. That said, these loans will need to be repaid, unlike equity funding. Also, just because these loans are guaranteed by the government, does not guarantee SMEs will be successful in obtaining them, and full details of the loans (such as who the approved lenders are) are yet to be released.
“ The government will provide ‘Restart Grants’ in England of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses, giving them the cash certainty they need to plan ahead and safely relaunch trading over the coming months.”
Although this will provide some EIS companies with a cash injection, it is unlikely to be enough to replace the amount of funding EIS can provide. Instead, it is likely to provide extra assistance to EIS funded companies that have been hard hit.
Restart grants
“Building on the government’s Future Fund, the government will commit £375 million to introduce Future Fund: Breakthrough, a new direct co-investment product to support the scale up of the most innovative, R&D-intensive businesses. The British Business Bank will take equity in funding rounds of over £20 million led by private investors to ensure these companies can access the capital they need to grow and bring prosperity to communities across the UK.”
Although full details of the Future Fund: Breakthrough are yet to be released, as a successor to the current Future Fund, it will likely not be EIS compatible. For a start, £20 million is over a company's annual EIS funding limit. However, assuming the same rules apply for the new version, companies which have previously received EIS funding may be able to receive Future Fund loans from new investments without affecting the tax status of previous EIS investors.
The Future Fund: Breakthrough:
Personal allowance (£)
Capital gains allowance (£)
Base £50k salary increasing by RPI
Overall, the OBR judges that the Budget’s investment package will boost business investment by around 10% at its peak in 2022-23. In this supercharged investment environment, it is hoped that more entrepreneurs will be encouraged to start the journey of bringing their ideas to market, or expanding their offering, helping provide EIS funds with a greater level of dealflow.
- Ian Warwick, Managing Partner, Deepbridge Capital
As the UK economy post-pandemic, we expect investors and financial advisers to utilise the Enterprise Investment Scheme (EIS) to support great growth-focused companies whilst allowing investors to benefit from the generous potential tax reliefs on offer.
8
Source: HMRC
Bounceback loans extensions
MARKET UPDATE / Bounceback loans extensions
he scheme, launched by the Government at the start of the Covid crisis, and extended until the end of March at the end of 2020, allows Companies to borrow up to between £2,000 or 25% of their revenue (up to £50,000), with generous repayment terms. The government will cover all interest payable for the first 12 months from when the original loan was drawn down, during which the borrower does not need to make any repayments. After this, borrowers originally had to make full repayments (including interest charged at 2.5%), however this has since been made substantially more flexible. Under the new system, introduced at the start of February, SME borrowers won’t have to make any repayments until 18 months after they first took out the loan. This is in addition to changes made in September, which allowed borrowers to extend the length of their loan from six years to ten, make interest-only payments for six months, with the option to use this up to three times throughout the loan, as well as pause repayments entirely for up to six months. For SMEs, the move gives them another 6 months before they have to start paying back any bounce back loans they took out to survive the crisis. These may well include SMEs that have received EIS or SEIS funding in the past, or intend to seek out EIS funding in the near future. The recent extension should help improve their cash flow, improving the investment case for SMEs in general. As of the end of January, £45 billion had been lent to over 1.4 million companies through bounce back loans. At the time of writing, the loans are available until the end of March 2021.
- Kealan Doyle, Director, Symvan Capital
Covid has accelerated long-term trends towards digitisation for enterprises' .
The UK Government has given companies greater flexibility in paying back any bounce back loans they have taken out.
T
Who can qualify for bounce back loans?
SMEs can apply for a loan if the business: • is based in the UK • was established before 1 March 2020 • has been adversely impacted by the coronavirus If it was classed as a business in difficulty on 31 December 2019, it will need to confirm that it is complying with additional state aid restrictions. In addition, companies that have claimed any other Government Covid support scheme (for example the Coronavirus Business Interruption Loan Scheme) cannot apply for a bounce back loan. They can, however, apply to transfer up to £50,000 of this loan or finance facility into a bounce back loan. They may well wish to do this, as the terms for bounce back loans are extremely generous.
The Government’s Bounce Back Loans (offering businesses between £2,000 and 25% of their turnover up to £50,000) have provided over 1 million companies (mainly SMEs) with vital support during the crisis, at extremely attractive rates. However with the UK now slowly moving out of the Covid crisis, questions are being raised about the affordability of some of these loans. Business funding marketplace Funding Xchange has said that, even with the repayment extension of up to 10 years, half of borrowers will struggle with repayments. Co-founder and CEO of Funding Xchange, Katrin Herrling commented, “Extending the repayment period from six years to ten years will have a positive impact on around one in five of the businesses. We still forecast that more than half of the businesses who have used the scheme may be unable to repay. Many are already distressed and the 46% of borrowers who had no prospect of being able to repay anyway will still not be able to repay.” This is both a risk and potential opportunity for EIS portfolios. The risk is if an SME which previously received EIS funding separately took out a bounce back loan and struggles to pay it back, this may hamper growth. The opportunity is related to deal flow. Some of these companies struggling with liquidity may look to raise additional funding via external investment. This could see new opportunities for EIS managers to invest in companies which might otherwise not be available to them. Of course, EIS discretionary investment managers consider the investment runway and future funding requirements of any potential investees in their due diligence process and all debt and income would be taken into account in any decision to invest or not.
A liquidity crunch?
SMEs have received bounce back loans
1m+
9
brexit's implications for eis
MARKET UPDATE / brexit's implications for eis
After 4 years, the end of 2020 finally saw the British Government and the EU sign a trade deal. At over 1400 pages, the agreement covers everything from Intellectual Property protections to fishing rights.
owever, not all areas were given equal coverage. The finance industry, despite being arguably the most important contributor to the UK’s GDP, received seemingly little attention. For EIS managers and investors, possibly the most important aspect of this is the deal itself. After 4 years of uncertainty and governmental sabre rattling, although many details are yet to be finalised, the deal provides concrete knowledge around what the UK’s future relationship with the EU will look like, and that it won’t include World Trade Organisation tariffs in order to trade.
H
UK business culture has long been infused with entrepreneurial spirit. EIS is about getting funding to firms rich in ideas and innovation that can help power the future UK economy.
One of the more contentious areas of negotiations was around the use of state-aid, and ensuring the UK and EU competed on what the EU calls a ‘level playing field’. EU state-aid rules restrict the amount of investment companies can raise through EIS to £5 million a year and £12 million over their lifetime (or £10 million a year and £20 million over the lifetime of knowledge-intensive companies.) A concern of the EU’s was that the UK would seek to loosen the regulatory environment and increase subsidies (potentially via tax incentives), in order to out compete the block. Therefore it wanted the UK tied to EU regulations in some way.
amount of state aid granted in 2018 (% of gpd)
Source: Institute for Government Analysis of European Comission, State Aid Scoreboard, 2019
- Reuben Wilcock, Head of Ventures, Blackfinch
State-aid and ‘the level playing field’
0.5
1.5
czech republic
denmark
croatia
germany
lithuania
malta
finland
estonia
latvia
bulgaria
sweden
slovenia
poland
france
belgium
romania
slovakia
cyprus
austria
portugal
united kingdom
netherlands
spain
italy
greece
luxembourg
ireland
hungary
For it’s part, the UK felt independence meant independence from EU rules. It also pointed out that the UK has historically spent a lot less on state aid than EU rules allowed. Historically most UK state aid has been directed towards environmental protection and energy saving and R&D. In the end, the deal lands somewhere between the two positions. The EU-UK trade deal takes a principles based approach to controlling subsidies. There are certain rules on top of this, for example prohibiting subsidies for restructuring an ailing or insolvent economic actor without it having prepared a credible restructuring plan, however beyond these the UK is free to design a system that meets these principles. If the UK or EU creates a subsidy which the other party feels could create a negative effect on trade or investment between the parties, it may then take remedial actions proportionate to remedy the negative effect. At the start of February, the Government revealed its initial subsidy plans to replace EU state aid rules as it launched a consultation on the matter. Although the consultation doesn’t mention EIS by name, it does include some hints as to the direction the Government is planning on taking, including:
The UK-EU Trade deal subsidy principles
With a view to ensuring that subsidies are not granted where they have or could have a material effect on trade or investment between the Parties, each Party shall have in place and maintain an effective system of subsidy control that ensures that the granting of a subsidy respects the following principles:
i
Subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”); Subsidies are proportionate and limited to what is necessary to achieve the objective; Subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided; Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy; Subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means Subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.
05
06
It is noticeable that the Government's draft principles are very similar to the UK-EU trade deal listed earlier which suggests the UK is not intending on pushing the boundaries with regards to state-aid, at least at the moment. Regardless, EIS and SEIS would meet the relevant principles, and should therefore not be under threat by the new regime. EIS and SEIS are targeted incentives to deliver investment to high risk companies that would otherwise struggle to raise finance, and they have been successful at doing so, something the Government has recognised in the past. Given that EIS and SEIS were allowed under old EU existing rules, it seems unlikely the EU would be able to successfully challenge the UK Government if it was to maintain the status quo. In particular, as the two economic blocs feel their way through the trade deal, it seems there are other bigger fish that will draw the ire of the EU (such as fishing rights, and recently the vaccine roll out). It is important to remember these reliefs are targeting SMEs, and moderate increases in investment would be unlikely to have a negative impact on trade. While it is too early to tell what Brexit fully means for EIS, it does appear to have created a more favourable regulatory environment for it, and one where the potential to relax some of the current restrictions exists.
Committing to increase UK investment into R&D to 2.4% of GDP by 2027 An independent body to oversee the new subsidy system across the UK facilitating strategic interventions on Government priorities, such as achieving net zero carbon Acting as a responsible trade partner Any future regime will only take effect when the legislation comes into force, and won’t apply retrospectively to subsidies awarded before
10
Jonathan Prescott
thought leadership
Communication in the industry: It is time EIS hit the mainstream
MARKET UPDATE / THOUGHT LEADERSHIP
t a time when businesses are focused on resilience and growth, more advisers are beginning to recognise the role venture capital and the Enterprise Investment Scheme (EIS) can play in portfolio construction and financial planning – particularly as a way of building a diversified portfolio. However, there is still a fear factor that surrounds EIS and this is holding people back from realising its potential. Yes, it has its risks, but as part of diversified portfolio it is a powerful investment solution that provides access to an interesting asset class along with the associated tax reliefs offered by EIS. So, why isn’t everyone taking advantage of the opportunity? Ultimately, fear is borne out of the unknown, and a lack of understanding of the space, sector and opportunity means EIS is yet to become mainstream. To overcome these challenges, we, as fund managers, need to share as much information about our investment process, strategy, objectives and results as possible – the good, the bad and the ugly. It is only with transparent and clear communication that financial planners and their clients will begin to understand more about what they’re investing in. Of course, no investment is risk-free and at times a decision to invest in the absence of clear and transparent information, even for highly qualified financial advisers, can be akin to walking a tightrope. You’re venturing into a high risk environment, with perceived risk all around and with what at times can feel like little support in place to mitigate the risk. However, it’s only when you begin to understand the safety measures that are put in place that you can feel comfortable to make a decision and acknowledge that it’s suddenly not quite as risky as first envisaged. Whilst this won’t encourage everyone to “walk the rope”, some invariably will and for good reason. This is exactly the same for venture capital and if we’re going to grow this market we need to educate people on those safety nets and the benefits of this asset class. And to do that we must begin to look at how we communicate. Open and honest communication is the key to building trust and confidence, and we know that when used in the right proportions, and for the right client, venture capital can reap excellent returns. The wrappers of EIS and VCT only make it more attractive, but without the knowledge and experience of what it entails, some will always be wary. We need to create trust by giving investors the keys to take a real look under the bonnet at the performance of their investments. In my experience, investor communications can be restricted to a brief valuation, which gives very little commentary on the business. There is no real assessment of how businesses are performing and often surpises are not too far away. We need to deliver consistent, frequent and detailed analysis of portfolio investments. Investors need to know how their investments are progressing with updates at key milestones, and ultimately we need to take the investor on a journey where they feel engaged. The various tax reliefs available to investors are well documented and are welcome when addressing many of the tax planning challenges faced by investors. However, the one relief that is often ignored is loss relief. As fund managers we naturally avoid the talk of losses within our portfolios, but if questioned one to one we would talk about the power of loss relief and its value as a relief that mitigates the risk of loss of capital. We’ll openly talk about our approach to mitigating risk for investors; for example through due diligence and portfolio diversification. So if you openly talk as a manager about the risk of early stage investing, the words “loss relief” should come as no surprise to an investor or their adviser. EIS then suddenly becomes more palatable as part of a diversified investment portfolio. But how do we stop someone being wary of this asset class? Perceived risk is having a significant impact on the uptake of EIS and it is only through widespread transparency – spreading the word widely among the industry on the importance of open and honest communication – that this will change.
We, as fund managers, need to share as much information about our investment process, strategy, objectives and results as possible – the good, the bad and the ugly.
business development director Praetura Ventures
praeturaventures.com 0161 641 9475 ventures@praetura.co.uk
contact
A
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t a time when businesses are focused on resilience and growth, more advisers are beginning to recognise the role venture capital and the Enterprise Investment Scheme (EIS) can play in portfolio construction and financial planning – particularly as a way of building a diversified portfolio. However, there is still a fear factor that surrounds EIS and this is holding people back from realising its potential. Yes, it has its risks, but as part of diversified portfolio it is a powerful investment solution that provides access to an interesting asset class along with the associated tax reliefs offered by EIS. So, why isn’t everyone taking advantage of the opportunity? Ultimately, fear is borne out of the unknown, and a lack of understanding of the space, sector and opportunity means EIS is yet to become mainstream. To overcome these challenges, we, as fund managers, need to share as much information about our investment process, strategy, objectives and results as possible – the good, the bad and the ugly. It is only with transparent and clear communication that financial planners and their clients will begin to understand more about what they’re investing in. Of course, no investment is risk-free and at times a decision to invest in the absence of clear and transparent information, even for highly qualified financial advisors, can be akin to walking a tightrope. You’re venturing into a high risk environment, with perceived risk all around and with what at times can feel like little support in place to mitigate the risk. However, it’s only when you begin to understand the safety measure that are put in place that you can feel comfortable to make a decision and acknowledge that it’s suddenly not as quite as risky as first envisaged. Whilst this won’t encourage everyone to “walk the rope”, some invariably will and for good reason. This is exactly the same for venture capital and if we’re going to grow this market we need to educate people on those safety nets and the benefits of this asset class. And to do that we must begin to look at how we communicate. Open and honest communication is the key to building trust and confidence, and we know that when used in the right proportions, and for the right client, venture capital can reap excellent returns. The wrappers of EIS and VCT only make it more attractive, but without the knowledge and experience of what it entails, some will always be wary. We need to create trust by giving investors the keys to take a real look under the bonnet at the performance of their investments. In my experience, investor communications can be restricted to a brief valuation, which gives very little commentary on the business. There is no real assessment of how businesses are performing and often surpises are not too far away. We need to deliver consistent, frequent and detailed analysis of portfolio investments. Investors need to know how their investments are progressing with updates at key milestones, and ultimately we need to take the investor on a journey where they feel engaged. The various tax reliefs available to invetsors are well documented and are welcome when addressing many of the tax planning challenges faced by investors. However, the one relief that is often ignored is loss relief. As fund managers we naturally avoid the talk of losses within our portfolios, but if questioned one to one we would talk about the power of loss relief and its value as a relief that mitigates the risk to loss of capital. We’ll openly talk about our approach to mitigating risk for investors; for example through due diligence andportfolio diversfcation. So if you openly talk as a manager about the risk of early stage investing, the words “loss relief” should come as no surprise to an investor or their advisor. EIS then suddenly becomes more palatable as part of a diversified investment portfolio. But how do we stop someone being wary of this asset class? Perceived risk is having a significant impact on the uptake of EIS and it is only through widespread transparency – spreading the word widely among the industry on the importance of open and honest communication – that this will change.
MARKET UPDATE / WHAT THE MANAGERS SAY
So how are the managers feeling about the EIS market and overall investment market conditions? Here's what they have to say.
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What do you think of the Brexit trade deal from an EIS perspective?
The Brexit trade deal is good news – it has both created certainty for an investment environment and also enables the UK Govt to support the EIS initiative without constraint of European State Aid restrictions. Hopefully, Brexit will also encourage start-ups to think more globally about their opportunities and the new trade deals will facilitate this.
Stephen Margolis
Chairman and Co-Founder Arie
what the managers say
How did your portfolio perform in 2020?
ARIE Tech EIS Fund is a small fund and the Companies that we have invested in previously have both started generating revenues and one of them is showing a 3x increase in value. On the VC side of the portfolio (not-EIS) we have had significant increases in value with 2 IPO’s currently in progress.
How has Covid affected your deal flow pipeline?
Being a small technology based EIS Fund focused on B2B; we have been fortunate that the investees have all found opportunity from the pandemic because they offered solutions to customers who had changed needs – so business has grown. Our pipeline has been constant, but we have been strict in sticking to our investment criteria as described above.
Reuben Wilcock
Head of Ventures Blackfinch
In general, the UK-EU trade deal brought with it some desperately needed clarity for UK businesses. In practice, we have not seen Brexit create a big impact in terms of the ambition of early-stage technology companies. Their ability to react quickly in the marketplace has placed them at an advantage over larger firms in this respect.
Our portfolio companies responded extremely well to the events of 2020. Faced with a crisis of unknown scale and duration, they continued to innovate, whether with creative cost reductions, flexibility in meeting customers’ changed needs, or even whole new products. It was a true test of entrepreneurial mettle, and it demonstrated that those start-ups with the ability to disrupt old practices and meet changing circumstances are best-positioned for long-term success.
The Blackfinch Ventures EIS portfolio invests in high-growth technology companies throughout the UK, many of which are well suited to changing working practices imposed by the pandemic. We’re focused on disruptive businesses, offering products that address real-world needs. We’ve continued to see a steady flow of companies that meet this criteria, and are seeking the type of investment and business development support that we offer. As a crisis often prompts new ideas and start-ups, we are also confident there will be no ‘Covid hangover’ in deal flow.
At times last year it was perceived that we were a long way from any trade deal, so having a trade deal should be seen as a positive. From an EIS perspective, we are still to see how state aid rules will be applied and impact EIS and SEIS over the longer term. The Government has previously suggested that they would be keen to increase the SEIS fundraising limit, so as a starting point it will be interesting to see whether that can be done in line with the new trade deal.
Ultimately, our investment criteria mean that our technology and life sciences companies are expected to be highly innovative and therefore we believe there should remain a genuine need for their research, development and/or products. Naturally, there has been an impact on investees and a minority of our portfolio have struggled to commercialise as planned. However, Deepbridge’s investment style of providing hands-on support to investee companies will stand us in good stead and has never been more important.
The UK is an innovative nation and that has not stopped during the global pandemic and our dealflow of quality investee opportunities remains strong. It is common for recessionary periods to see an increase in the number of start-ups, with agile growth-focused companies to be the life blood of economic recovery. With that in mind, we expect the deal flow pipeline to only gain in strength going forward.
Andrew Aldridge
Partner Deepbridge
EIS Companies have continued to prosper post-Brexit, and we do not anticipate this changing. The UK remains a hub of innovation where growth companies thrive, and initiatives such as the tech visa send a powerful message that the UK Government intends to continue to support our world class growth companies.
On an aggregate level, our portfolio is in good shape which is pleasing considering the disruption last year. A key feature of the Guinness EIS is sector diversification which we believed helped the portfolio navigate the uncertainty 2020. Several of our portfolio companies performed exceptionally well. The performance of online retailers has been particularly strong.
We continue to see a lot of exciting opportunities at realistic valuations and because of our generalist approach we believe we are ideally placed to capitalise on them. We also have a large portfolio of growth companies which provide us with some compelling follow-on investment opportunities.
Shane Gallwey
Fund Manager Guinness Asset Management
The majority of our portfolio have seen little impact and for those that it has had an effect on, they have been quick to adapt. Whilst there may be a short term impact we do believe that in the long term this will not provide any major challenges. Change may cause uncertainty but also provides significant opportunity.
Our portfolio performed well, despite some companies falling within the hospitality and travel sectors. The nature of early stage investing lends to inherently robust agile companies with the ability to pivot into adjacent markets or reduce overheads to ride out the pandemic. Any losses were largely due to other factors that may have been accelerated by the pandemic.
Our EIS fund invests in our existing portfolio of companies giving us a firm understanding of those companies that have already weathered the worst of the storm, we can therefore ascertain those that have proven their market and strategy. In terms of deal flow Covid has not had a significant effect.
Jeffrey Faustin
Partner & Chief Investment Officer Jenson Funding Partners
Early-stage companies are in a good position to capitalise from potential opportunities from Brexit but also young and nimble enough to adapt to the changing environment. We invest in companies that are already maximising on opportunities from the UK market and are well capitalised to overcome any challenges it may present.
While 2020 was undoubtably a challenging year, our portfolio held up very well. Founders showed remarkable resilience and agility, with a number of them well placed to capitalise on opportunities arising from the pandemic. In addition, we facilitated two deep tech exits within the first 6 months of the year. The acquisitions of Ultrasoc by Siemens and Latent Logic by Waymo.
Our deal flow pipeline continues to be strong, in addition to making a number of follow-on investments in 2020 we also made new investments, the latest into Bower Collective. Bower is a company that offers a range of home and personal care products, focused around sustainability and closed loop recycling, and is on a mission to eliminate plastic waste.
Richard Roberts
Director, Investor Relations Oxford Capital
Everyone has been mindful of the Brexit trade deal and its potential impact on the way we do business, but in reality the majority of our investments are focused solely on the UK market so there has been little impact so far. That said, the benefit of investing in early-stage businesses is that they’re often nimbler and adept at reacting to and managing change more quickly than larger corporates, so for many they still prove an attractive investment proposition regardless of the trade deal that has been negotiated.
We’re really proud of the performance of our portfolio in 2020 - we buckled down early to provide the hands-on support and guidance our portfolio needed, making sure we were monitoring cash runways on a monthly basis, helping founders apply for grants and supporting key strategic decisions. This ultimately resulted in our portfolio coming out of 2020 even stronger – revenues increased by 42% across the whole portfolio and more than half of the portfolio increased revenues by more than 80% during 2020
Somewhat surprisingly, the pandemic has had a positive impact on deal flow and we’ve gone from seeing around 100 businesses a month to more than 125, and these are spread across a variety of sectors. We’re also seeing deal flow from a number of different sources, including direct, through our network of venture partner investors and through our connections with the corporate finance community. I’d also say there’s a strong level of enquiries from businesses founded in the north – possibly a sign that the predicted boom in tech in north of England is coming to fruition.
Brexit is largely irrelevant to EIS technology investments but with two exceptions. The first is that the UK needs a supply of highly skilled immigrants to maintain its digital technology lead in Europe; let’s see if the government lives up to their stated obligations. The second change is to the impact of changing State Aid provisions, particularly with SEIS investment limits.
Very strong performance. A £100 investment in our EIS fund in April 2020 is now worth £125. The Covid pandemic has brought the ‘Future is Now’ trade for our portfolio, by accelerating long term digitisation trends for enterprises. Most of our companies initially had a tough time as enterprises suspended budgets for a few months, but this quickly reversed as the lockdown rapidly accelerated existing trends towards digitisation.
Our pipeline has been less impacted than our due diligence process. Getting to know management is arguably the key component of our DD, and we are always rigorous in this regard. The difficulty in meeting face-to-face with founders over the pandemic has changed the dynamic of this aspect considerably, despite having adapted to video calls.
Kealan Doyle
CEO & Co-founder Symvan Capital
3. Considerations for Investment
market composition Market size and targets update market snapshot
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market composition
CONSIDERATIONS FOR INVESTMENT / MARKET COMPOSITION
Minimum Investment
In this section we look at the average fees and charges EIS investors can expect to pay, as well as the typical minimum investment and levels of diversification they can expect. Unless otherwise stated, all data used in this section has been obtained from MICAP, and is correct as of 5 February.
average minimum investment
feb 2020
£18,182
£18,917
The average minimum investment continued to increase between Q4 2020 and Q1 2021. It now stands £1,500 higher than it’s rate at the same point in 2020, and has almost reached £20,000 - the number recorded in the second half of 2019. Half of the offers which opened between the start of 2020 and 5 February 2021 had minimum investments of at least £25,000. There could be a few reasons why the minimum investment is increasing. One could be the launch of Knowledge Intensive Funds (KIFs). Three of the 4 KIFs which launched in the period had above average minimum investments. As these offers are able to invest in slightly older, larger companies that may require more capital or time to reach profitability, potentially the managers of these offers may require a bit more capital to make the required investments. Another possibility is, with the risk to capital requirements now firmly understood by most managers, they are now confident in investing in slightly larger companies than when the condition was first brought in. As a result, minimum investments have also increased.
avg target number of investments
8.6
nov 2020
feb 2021
Founded in 2013, MICAP provides quality independent due diligence, research tools and panel support services on the tax-advantaged investment market. It is a sister company of Intelligent Partnership, and a part of the Indagate Group of companies.
How do we use MICAP?
initial charge 1.47% 2.18% 3.61%
to investor to investee total
average charges
amc 0.95% 0.87% 1.81%
Initial charge (IC) and Annual Management Charges (AMC)
An AMC of 1.81% was relatively flat compared to Q4 2020 (when the average was 1.80%), however the figure remains above the 1.7% average AMC of Q4 2019, and 1.3% of Q4 2018. In contrast, the average IC actually fell over the quarter, from 3.70% in Q4 2020, to 3.61% in Q1 2021. This fall came entirely from the average amount the investee company paid. The IC charged to the investor actually increased from 1.40% to 1.47% over that time. It is important to consider the fees and charges that offers have. Broadly speaking, if fees for the investor are too high, they can eat into the amount of capital that qualifies for the relief. If the fees for the investee company are too high, they could hamper growth potential, and eat into returns. If fees are too low, questions may be raised about the amount of due diligence a firm is reasonably able to conduct. A third type of fee some offers charge is an exit fee, once performance hits a certain threshold. For more specific examples, have a look at our Manager Comparison Table.
Diversification
Most offers are looking to invest in 10 companies, although there are lots of options that look to invest on either side of that. An average target of 8.6 companies is a notable jump from 7.6 in February 2020, but remains similar to the 8.5 recorded in November. While this suggests managers have found a sweet spot in managing costs and deal flow, and being sufficiently diversified, it is too early to say one way or another. It is worth noting that an outlier targeting 50 companies brings up the average. The next most diverse offer targets 20 companies - which is significantly above the average itself. The vast majority of funds target between 4 and 12 companies. Many investors will take comfort in the level of diversification provided by the majority of offers - and as these numbers continue to grow, the theory is investors will be better protected from downside. That said, EIS remains a high risk product, despite diversification, and investors will want to consider other forms of diversification - for example by sector or by geography. In many cases, where feasible, it might be worth considering investing with more than one EIS investment manager.
diversification
8.6 10 3 8 50
average mode min median max
- Ricky Margolis, Investment Manager, Arietech
While the EIS does not eliminate risk, it can provide an incentive to investors who are looking to get involved in startups in a much more appealing and manageable fashion".
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Avg. target no. of companies per portfolio
Market size and targets update
CONSIDERATIONS FOR INVESTMENT / market size and targets
iven the economic crisis that engulfed much of the country, it is probably not too surprising that the number of EIS launches plummeted over 2020. Between the start of January 2020 and 5 of February 2021, there were just 12 new EIS offer launches - less than half the number that launched in 2019. And while Q2 is traditionally a quiet period for new offer launches, Q2 2020 so no new launches at all in that period last year. This was during the first lockdown, so again, probably to be expected.
G
Data provided by MICAP (as of 5 Feb)
deep dive into fees and charges
Despite the ongoing economic troubles, the number of EIS offers open increased to above their pre-covid levels over Q1 2021, as managers prepared for the post-pandemic world.
With lockdown measures now set to be gradually eased over the coming months, it is likely that more offers will begin to open, as some managers may have held back and waited for greater economic certainty. As Q2 tends to be the quietest quarter, we may see this recovery occur over several months. Having said that, there are still plenty of choices for potential EIS investors and their advisers. Despite the slowdown in new launches, there has been a corresponding slowdown in offers closing, meaning that by February 2021, there were actually more open offers than during the same month in 2020.
Q1 2020
66
OCT 2020
60
2019
63
number of open offers
Many EIS offers are evergreen, and generally remain open for an indefinite amount of time, unless something unexpected occurs. In theory a pandemic and economic crash as we saw in 2020 could have caused some of these to close. As the number of offers increased (despite very few new offers launching), this suggests EIS investment managers thought there were still deals worth raising funds to deploy into. There may have also been cases where managers conducted second funding rounds of existing investees, where the manager felt these companies continued to offer untapped potential, but were in need of extra capital to get through the covid crisis.
Since these new rules were brought in, at least 4 KIFs have launched. Given the low general number of EIS offers launching, these will make up a high proportion of all new offers, and bodes well for the popularity of the structure. There is also a chance that KIFs might have benefited from the Covid crisis, which shone a light on a number of tech companies, boosting their popularity.
Target return creeps up
Continuing a long running trend, EIS offer target returns increased between Q4 2020 and Q1 2021. It is important to note these are target returns, not actual returns, and actual results could be lower. Still, the fact that targets have continued to rise despite the ongoing economic difficulties is a sign of confidence from managers. They will now have had almost a year to get used to ‘the new normal’, and will be basing their investment choices and targets with full knowledge of the present situation, and that the Covid related restrictions are likely to be gradually lifted over the remainder of 2021. It may also suggest some managers are confident there are companies that remain undervalued they can invest in. With the economic recovery yet to reach its full swing, there may be companies looking for investment that are primed for explosive growth that managers are confident they can find. EIS investments must be held for at least three years in order to qualify for the reliefs, but many are held for substantially longer. Investors can expect a typical timeframe of over 5 years for many investments. Therefore it is a longer term investment, and with these Covid restrictions temporary, many investments made today (or over the past year) will be held for many years after the Covid restrictions have passed. With the economy set to recover from the 2020 recession over the next few years, it would appear EIS investment managers are confident their investee companies will be able to take advantage of this.
average target return
sept 2019 feb 2020 oct 2020 feb 2021
227% 232% 244% 273%
One thing these stats do not tell us is the number of offers which are classified as Knowledge-Intensive EIS Funds. These were initially launched by the Government in April 2020, and offer investors a few additional benefits, in return for investing in a fund which invests in Knowledge Intensive Companies (KICs).
knowledge-intensive eis funds
number of eis launches per quarter
REFRESHER: what are KICs?
Knowledge Intensive EIS Funds (KIFs) offer investors the ability to claim the EIS tax reliefs for the year the fund closes, or to the previous tax year (assuming the investor had not used up the previous years EIS relief limits) In return, KIFs must fulfill the following criteria: • At least 50% of capital must be invested within 12 months of the fund closing date • At least 90% of capital must be invested within 24 months of the fund closing date • Within that 24 month period at least 80% of the fund’s capital must have been invested in the shares of companies that were knowledge-intensive at the time the shares were issued • The fund must invest in at least 4 companies, and no single company must receive more than 50% of the capital the fund invested.
knowledge intensive companies
market snapshot
considerations for investment / market snapshot
Leveraging its market overview position, MICAP is able to offer IFAs exclusive insight into the wider EIS market. As a sister company of MICAP, we are able to offer the following snapshot of data, which is updated in real time, and pulled from the MICAP website.
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4. Industry analysis
biotech/pharma - a healthy industry? how many investments is too many? fundraising update How much does eis cost the tax payer?
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Biotech/pharma - a healthy industry?
INDUSTRY ANALYSIS / Biotech/pharma - a healthy industry?
There is nothing like a global pandemic to help people to reassess their healthcare options. And for EIS investors, this might have helped create an opportunity to invest in an industry that is going through some historic disruptions.
W
hile technology in general might have hogged the headlines last year, there was a massive growth potential in any Covid-related drugs. Investing in biotech and pharma companies might still be worth consideration, and many companies in this sector posted strong returns. It should be noted that while many companies did extremely well, this wasn’t true for all companies in the sector. The FTSE All share Biotech and Pharma index saw an initial Covid boom, but has since returned to below pre-covid levels.
That said, levels remain higher than at any time pre-2019, although these figures will be dominated by larger company performance, as opposed to those receiving EIS investment. Nevertheless, it demonstrates that both challenges and opportunities remain in the sector. While there were three dedicated Pharmaceuticals & Biotechnology EIS offers at the start of February, many generalist and technology focussed EIS managers will invest in companies that would class themselves as biotech or pharma. In fact, of the approximate 40 companies which EIS managers either exited or partially exited from in 2020, 15 could be described as fitting in the biotech or pharma sector. This may have been higher than usual, due to Covid creating an environment where exiting these businesses was more favourable for EIS managers than typically would have been the case. Also, not all of the exits resulted in a profit.
FTSE All Share Pharmaceuticals & Biotechnology
Medical companies:
with an ageing population, the need for new, better medical technology is constantly increasing. This could include drug design, more accurate (or easily accessible) diagnosis tools, smartphone apps through to medical data usage, and prosthetics.
As the world's population grows, pressure on food production is becoming an increasing issue. Improving crop yields, genetically modifying plants, and improving animal husbandry through technology are just some examples of how biotech players are an important part of the food ecosystem.
agricultural companies:
Looking to the UK’s future in a post-Brexit world, there is now potential for the UK to become the global poster-child for life sciences, with great economic potential for the country".
- Andrew Meade, Life Sciences Lead, Accenture
Biologists play a front line role in cleaning up ecological disasters, as well as ensuring this planet retains as much biodiversity as possible.
enviromental companies:
As the recent global struggles to distribute vaccines in a timely manner have shown, there is always room to improve the manufacture and distribution of organic or medical equipment.
manufacturing companies:
Types of company clients might invest in
The UK has a healthy biotech/pharma sector. This was demonstrated by the role Oxford University staff and students played in developing a Covid Vaccine. Dealflow comes from several sectors, including the UK’s University market, which develops a large number of scientists every year. Often these graduates will have an idea or product, but will lack the experience or capital to take it to market and reach its full potential. EIS investments often help with both of these issues. Exits can come from IPO, however more often than not, exits occur with a sale to a large private equity firm or possibly a pharmaceutical giant, often pre-profit.
15,388.23
Source: investing.com
The KIC factor
One of the challenges when investing in biotech or pharma companies is the longer run up it takes to make these companies profitable. Many require expensive, long winded, medical trials in order to reach the market, and almost all require a disproportionate amount of R&D compared to a typical company. In addition, a lot of the investment is made upfront - in developing the product, and there is less certainty around the results of R&D compared to, for example, an online distribution channel. According to the UK BioIndustry Association, life science R&D typically requires 12-15 years and potentially $1 billion to develop an asset and build a global corporation. For EIS investors, who can only invest limited capital into young companies; and typically do so with a 5 year investment cycle in mind, this can create challenges. However these are not insurmountable. As noted, many EIS investments will be sold before the company is profitable. Many biotech and pharma companies will be knowledge-intensive companies (KIC). This means they can receive more EIS funding, be larger (by employee numbers) and older, and therefore more established. Investing in KICs allows managers to invest in slightly later stage companies, lowering risk. It also allows them to invest when more R&D has been done, giving the investment manager a greater sense of what the final product will look like, allowing them to make a more informed investment decision.
18
Index score
How many investments is too many?
INDUSTRY ANALYSIS / How many investments is too many?
his is one of the great strengths of investing in EIS through an investment manager - they will generally invest in around 8-10 companies, providing you with a level of diversification it can be hard to match as an individual investor. Research from technology provider Founder Catalyst, however, has found that the optimal number of companies to invest in is actually 25, notably higher than most managed EIS portfolios target. It found that investing in such a number would lead to a 2.77X return, or a 3.19X return when taking into account the 30% tax relief from EIS. For reference, according to MICAP data, EIS funds have an average target return of 273%. Although further diversification beyond 25 should lead to slightly greater returns, the research found dramatic diminishing returns beyond this point. As such, the increasingly small returns will require ever increasing work to identify and manage additional investments, which may see the small further gains eaten up by costs. In order to conduct this review, Founder Catalyst used data from the report The UK Business Angel Market 2020 by UK Business Angels and the British Business Bank, specifically, looking at the chart below:
As with the old adage, ‘don’t put all your eggs in one basket,’ standard investment orthodoxy says it is smart to diversify investments to protect against downsides.
potential returns after reliefs are taken into account
3.19x
- Jonathan Prescott, business development director, Praetura Ventures
EIS investments are not without their risks, but once you know what you’re dealing with they can help to diversify your portfolio and offer the potential for additional returns.
investment exit multiples 2018/19
2015/16
Source: The UK Business Angel Market 2020 by UK Business Angels and the British Business Bank
Founder Catalyst's analysis was made by assuming that the vast majority of Business Angel respondents were investing in EIS-eligible companies
“Most of our respondents did not experience an exit during the 2018/19 tax year (70%). Of those who reported an exit, 70% had at least one positive exit and 59% had at least one negative exit (eg a write off). Whilst only 28% of angels experienced an exit in 2018/19, two in five anticipated an exit in the next 12 months. There was considerable variation in the rate of return from exits in 2018/19. 44% of exits were reported as breaking even or losing money while 35% made positive returns with 3% (10 deals) being reported as returning more than 20x the investment. Unsurprisingly given the stage of investment, trade sales and business liquidation remain the main exit routes, accounting for 59% of exits. 10% of exits were secondary sales to equity investors such as another angel or a VC/private equity (‘PE’) house “
written off <1x investment 1x investment 2x investment 3-5x investment 6-10x investment 11-15x investment 16-20x investment 21+x investment prefer not to say don't know % of exits
30
0
20
From an investors point of view, it may be possible to achieve a portfolio of around 25 companies after 3 years while also maximising the tax efficiency and manager diversification by investing with a different EIS investment manager each year. Not only does this increase diversification of investments, but investing over several years means that the tax reliefs can be claimed over several years, which can give more flexibility to tax planners. But for each investment it will take an additional two years for all of the investments to reach the required minimum investment horizon to avoid HMRC clawbacks of the reliefs.
Building a diversified portfolio
When considering diversification, it is important to consider beyond just the number of companies invested in. Investing with different EIS investment managers will provide diversification in terms of investment choice policy, and potentially sector diversification, if you invest with managers whose portfolios target different sectors. In other words, investing with one pharma, one tech and one generalist EIS fund, will provide more diversification than one fund investing in 24 tech companies. For this reason, many managers recommend advisers work with an array of EIS investment managers to offer investors this option. Having said that, it is also important to remember that some EIS investees receive funding from more than one EIS investment manager. Consequently, there is some scope for duplication of investee companies from one EIS investment manager to another.
Achieving 25 investments
potentially optimum number of investments
There are a few key limitations to the Founder Catalyst study: one is it only looks at averages, and doesn’t take into account real world factors - such as the quality of the manager picking the investments. These figures also don’t take into account fees, which would lower the returns slightly. Additionally, this is just from a snapshot of investors from one year, so different years might produce different results. It is important to consider the time it takes to conduct sufficient due diligence on a potential investment, and the level of involvement a manager may undertake in companies after an investment has been made. Managers have to strike a balance between the need to diversify, with the need to conduct thorough research on all potential investments, and then providing support and advice to investees for the following years. With the vast majority of EIS investment managers targeting between 5 and 15 investments, clearly that is the sweet spot for most managers in this regard. It should also be noted that there have been similar studies in optimizing the number of investments in the past, which have seen different results. Back in 2015, for example, one EIS manager looked at the effect of diversification on portfolios, and found that a portfolio of 12 companies was the ideal balance between reducing risks and achieving the best return. Investing in over 12 saw limitations to the potential upside of the overall portfolio. Obviously these two studies were conducted using different methodologies and at different times, and came up with different results. However both agreed on the basic premise: diversification is an important part of investing in SMEs. EIS tax benefits can also help swing the balance more in favour of the investor and for EIS managed portfolios offer both the expertise to select only the investees that qualify for the tax relief and the diversification of multi-investee portfolios.
Differing opinions
50
40
Potentially optimum number of investments
Potential number of investments
placed with an eis manager, targeting 8 companies
£100,000
income tax relief claimed
year 1
£30,000
total companies invested in
year 2
24
year 3
Investments held for 3 years or more will start to exit, providing returns which could be retained or reinvested for additional income tax relief. Where returns are reinvested in new portfolio companies rather than follow-on investments for existing portfolio companies, the optimum number of 24 portfolio companies may be exceeded.
year 4 and beyond
19
fundraising update
INDUSTRY ANALYSIS / fundraising update
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his is important to consider, as deal flow and ability to exit are two key risks when investing in an EIS or SEIS portfolio. Without sufficient deal flow, money invested with an EIS investment manager may not be deployed in time to earn the tax incentives for that year, and cause tax planning issues, while struggles to exit may lead to investor capital being stuck in a company that has already realised it’s potential. Given the uncertainty that shrouded the UK economy for much of 2020, one would have expected the number of non-listed UK equity investment deals to have seen a dramatic fall. This was not the case, however. 1,957 deals were done over the year, just 20 less than in 2019, and more than any of the other prior nine years.
For this section, we have used Beauhurst data to analyse the level of deal flow within the UK, as well as how UK investors are generally exiting (either via IPO or acquisition). These figures include publicly announced equity investments secured by non-listed UK companies, and therefore will include deals that were not EIS or SEIS eligible, and will not include all EIS investments (for example from an AIM focused EIS investment manager). However they provide a useful snapshot into the overall equity market within which EIS operates.
The below graph does not include Future Fund investments. If it did, the total number of investments would reach 2,928, worth £11.8 billion. The Future Fund involves the Government matching third party investments with convertible loan notes. If these loans are not repaid, they are converted into equity at the next fundraise. Investments made with the Future Fund are not compatible with EIS or SEIS. That said, if a company had received EIS or SEIS funding in the past and conducted another round of fundraising involving the Future Fund, prior EIS/SEIS investors would not lose their tax benefits.
Source: Beauhurst, The Deal 2020
2011
516
2012
2013
2014
2015
2016
2017
2018
2020
775
1,447
1,614
1,610
1,863
1,882
1,042
1,977
number of deals and amount raised excluding future fund (2011-2020)
Number of deals
Amount raised (£)
£1.6b
£2.1b
£3.6b
£2.0b
£4.3b
£4.4b
£9.3b
£7.8b
£11.7b
£9.8b
private equity deals in the UK in 2020*
Looking at what types of investment were made, we can see that a large number of the investments made last year were into companies that were potentially within the SEIS and EIS remit. The largest amount of investment a company can receive via EIS is £5 million per year, except for Knowledge Intensive Companies, which can raise up to £10 million. Looking at the chart ‘Proportion of deals by investment brackets’, in 2020 over 80% of deals were for less than £5 million, and therefore potentially EIS qualifying. It should be added that just because these deals are for the amounts one would expect to see with EIS, that does not mean these are all EIS. There are other criteria a company needs to fulfill in order to qualify for EIS. For example, it can only have 250 employees (500 for a KIC), not have gross assets of more than £15 million and the structure of any investment for which EIS is to be claimed must meet the risk to capital condition. We must also consider that a proportion of the EIS investments made in 2020 will have been initiated before Covid hit the UK - EIS managers can take 12 months to actually deploy funds, and sometimes longer. That said, this chart suggests there remained a healthy level of deal flow throughout 2020, despite the ongoing economic issues throughout the year. One worry is that, since 2018, there has been a drop in the amount of funding at the seed stage, although recent data suggests that at the end of 2020 there was a partial uptick. Potentially these 2020 investors saw opportunities for explosive growth in these very early stage companies as a result of being in the right place at the right time thanks to Covid. Nevertheless, these figures make for encouraging reading. They suggest that even amidst the uncertainty, attractive deals have been available and a subset of these will have been those that are EIS qualifying. Potentially there will have been small companies with a more severe need of cash as a result of the crisis, either as a result of a loss of custom or to reposition themselves, while other companies might have sensed a once in a generation opportunity caused by the disruption, and looked to raise funds in order to take full advantage of the situation.
Proportion raised by type
proportion of deals by investment brackets
proportion of deals by round number
Beauhurst data for exits currently only covers up to H1 2020, but even so, looking at the data, it is apparent that most companies will end up exiting via an acquisition, as opposed to an IPO. The UK market has been an attractive market for acquisitions in recent years. Numerous high growth companies (often with early funding from SEIS and/or EIS) have attracted a strong market for private equity buyers, which have found themselves comparatively flush with capital as a result of wider economic trends, such as low interest rates. The healthy acquisition market is probably an easier sell to company founders than an IPO in many cases - which can be more risky, expensive and take longer than selling to a single buyer - assuming one exists. All this has combined to create a healthy environment for EIS investments to find an exit, although the available exit routes certainly took a hit in H1 2020. This does not mean, however, that all EIS investments have always found an exit, and some will exit at a loss. Some will fail completely, and others will end up holding investor capital, without a clear exit path. Using MICAPs exclusive EIS/SEIS tool to look at the performance of EIS funds from the 2015/16 tax year, it is apparent that the majority of investments are yet to exit. Having said that, despite the minimum holding period of three years for EIS eligibility, many EIS investments envisage a five years or longer investment horizon. This means they are likely to be in the early stages of their exit journey.
Exits
acquisitions and ipos by high growth companies in the uk (2011-h1 2020)
EIS exits: 2015/16 investments
Acquisition
IPO
H1 2020
25
22
101
191
275
386
406
502
486
169
26
£0-£449k
£500k-£1m
£1m-£2m
£2m-£5m
£5m-£10m
£10m-£50m
£50m+
25%
29%
33%
32%
41%
44%
53%
57%
72%
92%
Realised
Unrealised
Total investment
Source: MICAP
2020 saw the general trend of more and more companies repeat fundraising, while the number of companies raising for the first time continues to shrink. The number of first round investments actually peaked in 2014, and has been shrinking since, while the number of companies raising subsequent funds has continued to grow. Beauhurst suggests a couple of reasons for this trend. In the longer term, it suggests a maturing market, with companies looking to raise money longer into their lives. It also suggests, in the short term, the Covid crisis may have made investors move into more risk averse strategies, also pushing them to target slightly later stage companies. With less investors chasing the earlier stage market, potentially this could leave investors with the correct risk profile with a wide variety of investment choices, of companies with high growth potential but underserved in funding. Certainly these trends match HMRC’s EIS data. Here, the proportion of companies raising money via EIS for the first time peaked in the 2014-15 tax year, and has been declining ever since. In contrast, the number of companies raising funds through subsequent rounds has been growing constantly for the past decade, and overtook the number of companies raising for the first time in the 2016-17 tax year. In the case of EIS and SEIS, the situation is likely exacerbated by the risk-to-capital condition, which restricts EIS/SEIS investments to more risky investments - and therefore may be pushing investors towards more mature companies, albeit within a strict cohort of early stage companies.
Repeat fundraisers continue to grow
Source: Beauhurst, Exits in the UK, Oct 2020
*not including future fund investments
How much does eis cost the taxpayer?
INDUSTRY ANALYSIS / How much does eis cost the taxpayer
With the Government on the lookout for ways to lower the deficit, and reduce costs, it is likely it will be looking at some of the reliefs they offer, and considering the cost benefit ratio of these reliefs, to ascertain whether they are worth it, or can be cut down.
hankfully, from an EIS perspective, it appears the Scheme actually costs the taxpayer comparatively little, so far as reliefs go, despite making a vital contribution to the UK’s thriving startup and SME ecosystem.
Cost of EIS income tax relief
Although the cost of EIS income tax relief to the taxpayer has fluctuated over recent years, it has remained between £500 million and £600 million per tax year, representing less than 0.03% of the UK’s GDP. For the most recent tax year recorded, 2019/20, it cost just over 0.02% of UK GDP. Compared to other tax reliefs, this is a low number. As a point of comparison, the Private residence relief for Capital gains tax cost £24,900 million, or 1.1% UK GDP in the most recent tax year, while the registered pension scheme reliefs for income tax cost £21,600 million or 0.95% of GDP. In other words, if the Government does decide to prune some tax reliefs, there are bigger targets to look at, where bigger savings could be available. Some of these may affect EIS investments as an aside. For example, if the Government were to increase Capital Gains Tax, or introduce it on the sale of primary residences, this might push people with new or higher CGT liabilities to reinvest these capital gains in an EIS, to mitigate these new costs.
Source: HMRC, Estimated Cost of Tax Reliefs, Oct 2020
cost of business relief
It’s worth noting that EIS investments also qualify for Business Relief (BR) after the required two year holding period, which would represent an additional cost to the taxpayer. That said, BR in total only represents a slightly larger cost than the EIS income tax relief. It is hard to make year-on-year comparisons between BR and EIS, because the details of estates which are notified to HMRC using IHT returns can differ markedly from year to year. That said, BR generally presents a higher cost compared to EIS. The number of people claiming BR (which topped out at 3,330 in 2017/18, the most recent year recorded) is notably less than the number of people claiming EIS relief (which stood at 36,915 in the same year 3,330 people claimed BR). This suggested the vast majority of EIS investors do not end up claiming BR on their EIS investments - presumably because they exit them while still alive.
of GPD - cost of EIS income tax relief
We see SEIS & EIS as valuable tools in the growth of SMEs and the wider economy.”
- Sarah Barber, CEO, Jenson Funding Partners
Nominal Annual Cost (£m)
Cost as a share of GPD (%)
21
£600
2015-16
£500
£300
£200
£100
£400
2016-17
2017-18
2018-19
2019-20
£0
0.03%
0.01%
0.00%
£700
£800
£900
0.04%
5. Managers in Focus
arie capital blackfinch deepbridge guinness asset management jenson funding partners oxford capital praetura ventures symvan capital eis solutions comparison
managers in FOCUS / arie capital
manager video content
go to website
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ariecapitaleis.com 020 7087 3570 martin@arietech.co.uk
executive chairman
turn off light
Ricky Margolis
Investment Manager
managers in FOCUS / blackfinch
blackfinch.com 01452 717070 enquiries@blackfinch.com
Gordon Pugh
Executive Business Development Manager
video content
managers in FOCUS / deepbridge
deepbridgecapital.com 01244 746000 enquiries@deepbridgecapital.com
Ian Warwick
Managing Partner
managers in FOCUS / guinness asset management
guinnessfunds.com 020 7222 3475 eis@guinnessfunds.com
Will Clark
Business Development manager
Bridget Hallahane
portfolio director
27
jensonfundingpartners.com 020 7788 7539 invest@jensonfunding.com
Partner & Chief Investment Officer
managers in FOCUS / oxford capital
28
oxcp.com 01865 860 760 info@oxcp.com
head of investor relations
managers in FOCUS / symvan capital
29
symvancapital.com 020 3011 5095 info@symvancapital.com
kealan doyle
Co-Founder
Nicholas Nicolaides
managers IN FOCUS / EIS COMPARISON TABLE
ARIE Capital Third EIS Technology Fund 2016 £450m / £3.86m ARIE Capital offers investors a portfolio of named innovative technology companies. We have known the companies for some time and have helped them develop. They all have a proof of concept, a B2B approach, revenues, capable dedicated management and offer significant upside potential. We allow investors the flexibility to invest via the fund or to select the individual companies they wish to support. September 2020 4 named early-stage disruptive technology companies in sectors including Apps, Connectivity, Medical Devices, Telemedicine, IoT, Sensors, Connected Devices, Agritech and Biosciences 4-6 N/A £10,000,000 2x return on investment ignoring tax relief 4-5 years £10,000 There are no manager charges levied on the investor at the point of investment for advised subscriptions received by a financial adviser, resulting in up to 100% allocation of subscription. This ensures up to 100% tax efficiency for investors. ARIE Capital fees are borne by the investee companies. We charge 1.5% of the sum invested subject to a cap of £10,000 each year. These fees are charged to the companies and cover the running costs of the fund. Performance Fee of 20% of returns above £1.35 for every £1 invested calculated on an individual company basis.
offer name year founded aum (toT) / aum (EIS) description of offer launch date underlying assets target no. of holdings target annual return target fundraise investment objective investment horizon min investment initial fee amc other fees
Blackfinch Ventures EIS Portfolios 1992 £500m/ £16m The Blackfinch Ventures EIS Portfolios target high-growth opportunities, investing in innovative start-ups and early stage businesses. They bring access to EIS tax benefits, and prospects for significant returns. The team focuses on firms often offering smart technology, supporting them from development to exit. Blackfinch capital is invested alongside investor funds. 2018 13 early-stage disruptive technology companies in sectors including EdTech, Wearables, SaaS, AI and Consumer Electronics Multi-sector portfolio of ten or more investee firms N/A Evergreen Targeting 3x return on investments 4 to 7 years £10,000 3% portfolio establishment fee (after deduction of adviser fees) AMC equivalent to 2% of capital invested, applied for first four years only (max 8%), charged to portfolio companies. This means investors should receive tax relief on the entire amount invested into the companies and the fees charged to the companies, thereby adding significant value. Performance fee of up to a 20% share of returns exceeding £1.30 for every £1.00 invested (ignoring tax reliefs), calculated on an individual company basis. Blackfinch can also recover reasonable expenses and reserves the right to charge arrangement, monitoring, director and exit fees to each investee company.
Deepbridge Life Sciences EIS 2010 £170m/ £140m The Deepbridge Life Sciences EIS is an opportunity to participate in a portfolio of actively-managed growth focused life sciences companies, taking advantage of the potential tax benefits available under the Enterprise Investment Scheme. A diversified portfolio of actively managed growth focused companies seeking commercialisation funding, the Deepbridge EIS invests in life sciences companies that have robust intellectual property and are operating in a high growth market sector. 2017 Growth capital: globally-scalable life sciences innovations 4 to 10 N/A Evergreen 170p for every 100p invested 3-10 years £10,000 There are no manager charges levied on the investor at the point of investment for advised subscriptions received by a financial adviser, resulting in up to 100% allocation of subscription. This ensures up to 100% tax efficiency for investors. Deepbridge fees are borne by the Investee Companies and are disclosed in the Information Memorandum. There are no manager charges levied on the investor at the point of investment for advised subscriptions received by a financial adviser, resulting in up to 100% allocation of subscription. This ensures up to 100% tax efficiency for investors. Deepbridge fees are borne by the Investee Companies and are disclosed in the Information Memorandum. Performance fee: an incentive fee of 20% of cash returned, in excess of 120% of the funds invested. Please see the Information Memorandum for full details.
Guinness EIS 2003 £3b/£200m The Guinness EIS is focused on identifying and investing in growth companies across multiple sectors that require scale up capital. The service has invested over £85 million into more than 30 growth companies spanning 10 sectors. The fund is evergreen with quarterly tranche closes. 2016 Growth companies across a range of sectors 10 n/a £30m per annum The service target companies that can deliver at least a two times return over the four to five year investment period. The target portfolio return is a £1.25 per £1.00 invested, before any EIS tax reliefs. 4 to 5 years £20,000 2.2% to investee companies 2% to investee companies 0.2% - Annual administration fee (investee companies) 0.3% Custodian Sale Fee 20% Performance Fee once investors have had original net Subscription returned
Jenson EIS Fund 2020/21 2012 £17.7m / £3.5m The EIS Fund has a mandate to focus on long-term capital growth, deal flow is sourced from existing S/EIS portfolio companies where there is an existing founder relationship, selecting teams that have demonstrated execution of their business plan. The EIS Funds are used predominantly to support the continued commercialisation of the company. Jul-19 19 Early stage sector agnostic UK growth companies 5-10 investments per tranche. Investee companies will be selected on the basis of an overall target exit consideration for the Fund of 185p for every 100p invested gross of tax reliefs within four years to seven years. £5 million A diverse portfolio of Investments in a wide range of sectors and industries, which qualify for EIS Relief. • Capital deployment through existing portfolio of companies. • Strong targeted tax free cash returns of 185p for every 100 pence invested. 4-7 years £10,000 No initial fee to investors. For investee fees, see 'Other fees' No annual management charge Exit Performance Fee: Linked to the performance of investment in the Fund Jenson will be entitled to a performance fee if and when a realisation of an investment in an investee company is achieved and the hurdles set out below are met. Performance fees will accrue on a deal by deal basis where funds are distributed back to investors following a realisation. Where: a) aggregate distributions to the investor exceed the net cost of the investor’s subscription in the investee company in question by 20% an entitlement to a performance fee of 25% of further funds so returned will accrue to Jenson; and b) accrued performance fees will become payable once, and to the extent, the investor has received 120% of their ‘Net Subscription’ (Subscription less facilitation fees) to the Fund. Investment initial fee: When Jenson makes an investment in an investee company, Jenson will charge the investee company an initial investment fee of up to 6% of the amount invested. Ongoing Management fee of £350 per month charged to investee company.
Oxford Capital Growth EIS 1999 Total AUM - £124m The Oxford Capital Growth EIS offers investors the opportunity to invest in a portfolio of shares in early stage technology companies that have the potential to grow rapidly and provide exposure to sectors in which the UK is a world leader such as financial technologies and future of retail. 1/11/2011 Early stage UK technology companies 8-12 per annum 2x subscription (net of fees) during the life of the investment. N/A - Evergreen Growth - we aim to invest in businesses that are solving commercial, technical or scientific problems in innovative ways. The companies in our existing portfolio operate in a number of sectors such as software, consumer internet, digital media and healthcare. When selecting new investments, we look for companies that exhibit high-growth characteristics or potential. It will normally take between 12-18 months for an initial subscription to be fully invested into a portfolio of companies. We aim to exit most investments within 5-7 years. We may hold investments for longer if we consider that more value could be returned to investors by doing so. Similarly, investments may not be held for the three-year EIS-qualifying period if a suitable exit opportunity occurs sooner or if the company fails. We will not necessarily be able to influence the timing of exits to the advantage of our investors. £25,000 2.5% of the initial subscription An annual management fee of 2% of the net subscription is charged quarterly. If the value of the companies held in the portfolio decreases below the net subscription amount, we will decrease the annual management charge commensurately. However, the annual management charge does not increase if the value of the investments exceeds the net subscription. 2% annual management charge, 20% profit share – of returns above the amount invested (after the deduction of any adviser charges). Our Custodian, charges a quarterly administration fee of £12.50 and a dealing commission of 0.20% of the transaction value when shares are bought or sold within the portfolio. For additional charges, please see the Information Memorandum
Praetura EIS Growth Fund 2011 £250m / £84m 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, including MedTech, Energy, FinTech, Artificial Intelligence, HR and Retail. 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. Apr-20 Generalist manager investing in B2B, recurring fee model tech enabled businesses with a focus on Creative, Digital and Tech, Financial Professional Business Services, Energy and the Environment, Health and Life Sciences. 8-10 per tranche 16% IRR £20m p.a To offer investors a diversified portfolio of early-stage EIS qualifying businesses with the opportunity to produce a blended return of 2x over a 4-7 year period 4-7 years £25,000 1% 1.50% Performance Fee Dealing Fee on exit Annual Custody Fee
Symvan Technology EIS Fund 2013 £27.8m (Total) / £22.2m (EIS) Discretionary portfolio service investing in high growth technology companies across a variety of verticals and industries. Investees will have validated their concept and will be looking for growth capital, spanning from Seed to Series A financing. Oct 15 EIS qualifying growth technology companies N/A - Fund is evergreen. Invests in circa 10 companies each year. IRR of circa 20-25% N/A - Fund is evergreen £2.85 per £1 invested 5-7 years £20.000 0% to investor, 6% to investee company 0% to investor, 2% to investee company 20% performance fee charged to investor on realised returns above 100% hurdle No Hidden Fees charges to Investee Companies.
Octopus Ventures EIS Service 2000 £8.43m (OVEIS) A discretionary managed EIS service for experienced investors to back a portfolio of bright early-stage UK companies whilst also taking advantage of EIS tax reliefs. Each portfolio will have around 10-15 companies selected for their ambitious growth targets – each company typically aiming to return ten times the amount invested or more. 17-Nov-20 Early stage smaller tech-enabled companies in deep-tech, the future of health, the future of money, and consumer sectors. 10-15 companies per portfolio N/A Evergreen The Service targets tax-efficient capital growth for investors from a portfolio of 10-15 companies, each company targeting 10x return over it's investment horizon. 5-10 years £50,000 2% 2% (plus VAT) per annum, per company in the portfolio – deferred and contingent on sale proceeds exceeding the amount invested in each company. Performance fee: 20% (plus VAT) of the difference between sale proceeds and the amount invested when each company is sold.Dealing fee: 1% on the purchase and sale of shares within the portfolio.Adviser charging: We can facilitate an initial charge and ongoing charging for up to 5 years.
6. What's on the Horizon?
coronavirus: is the end in sight what the managers say
31
covid: is the end in sight
WHAT'S ON THE HORIZON / COvid: is the end in sight
For over a year now, Covid-19 has been dominating the headlines. From the initial market crash and first peak, to the second peak and ensuing second and third lockdowns, Covid has been a dominant market force.
he second wave, notably worse than the first wave, peaked for new cases in early January, and deaths peaked a few weeks later. Typically, we would be expecting a third wave later in 2021, however if enough of the UK population are vaccinated before this, herd immunity might be achieved, and this should be averted, or at least substantially reduced.
80,000
60,000
40,000
20,000
12 May
16 July
19 Sept
23 Nov
27 Jan
new cases of Covid in the UK
Source: Johns Hopkins University
As Covid numbers continue to decline, restrictions on the public will continue to ease, and the retail and hospitality sectors will gradually begin to swing back into action. While the end might be in sight for the current incarnation of the disease, some of its non-health related impacts might be with us for far longer. One is the perilous state of the UK Government’s finances. In 2020 the UK spent around £400 billion fighting Covid and keeping the country running during lockdown. The March budget saw the Government make some of its first moves to claw back some of this outlay, however the high level of debt is likely to remain a gray cloud on the chancellors mind for the foreseeable future. Future tax rises seem likely, but it’s currently impossible to know where the Government will be looking exactly. According to the International Monetary Fund (IMF), past pandemics have been followed by a decline in interest rates, something it views as likely to happen again this time. Of course, going into 2020, interest rates were already extremely low across much of the globe (and indeed negative in one or two places). If we are expecting to see rates lower further, there is a chance they could hit zero, or potentially negative rates (although the Bank of England has moved to squash such ideas). Regardless of if we see negative rates, it seems low interest rates are unlikely to be going anywhere. One of the effects of this is to reduce the incentive for saving - if you earn less interest than the rate of inflation, it means you will definitely see your real world worth reduced. Instead, investing might become a more attractive option. As we’ve been living in a low interest environment for a while, this is unlikely to have a dramatic effect on the appeal of EIS, unless rates do indeed become negative. However if these low rates are matched by further tax rises, this could see tax efficient investments such as EIS become a more attractive option. Prior recessions have also caused increased unemployment (which takes time to reduce to pre-recession levels), as well as falls in productivity and, inturn, returns on investment. One difference between the recession caused by Covid and prior recessions has been the furlough scheme, and the various other Government systems designed to see employment reduction minimised. As a result, the levels of unemployment in 2020 and the start of 2021 are nowhere near the levels they reached in the 2008 or 1980 recessions. This may mean we also do not see a similar drop in productivity and returns, although this remains to be seen when furlough eventually ends.
Changes to society
Some of the biggest changes we’ve seen as a result of Covid have been lifestyle related - working from home has become the norm for millions. This has led to an explosion of online solutions, while traditional brick and mortar options have struggled. While the end of Covid will see many return to the office, the world may not be the same as it was before the pandemic. Scores of high street shops and brands will simply no longer exist, while brands that succeeded during the pandemic will have permanently gained mind share, and possibly market share. A look at the number of technology focussed EIS offers, shows that EIS fund managers are in general extremely forward looking in this regard. As such, many will find themselves well placed as society looks to bounce back following more than a year of pent up demand.
7-day average
New cases
unemployment rate (age 16 and over)
Source: ONS
32
We are really positive about the outlook for EIS investing in 2021, last year proved that start-up companies have a huge amount of resilience, grit and determination to succeed. We’re seeing significant innovation in the sector and we’re looking forward to seeing what’s next.”
- Richard Roberts, Director, Investor Relations, Oxford Capital
what's on the horizon / WHAT THE MANAGERS SAY
33
What are some longer-term changes you think Covid will have brought about?
Covid caused the realisation that the state of markets and businesses can change very rapidly and provide opportunity to embrace new technologies. This has created both opportunity for EIS Funds to provide investors with an opportunity to create value for themselves and take advantage of the tax incentives (given the low interest rates) and be able to invest in some really interesting technology-based startups.
Have you seen any changes in investor behaviour as a result of Covid?
Economic and political stability are the most important factors when investing; as well as understanding risk/reward. Covid-19 impacted the whole world which resulted in investors investing carefully in the market. EIS investments are high risk and in the current climate we saw less money being invested. However, with the end of the tax year approaching we are seeing more investments.
How do you think ESG and EIS can complement each other?
During the Covid-19 market downturn, ESG stocks have continued to outperform the S&P 500 and MSCI Europe indices. However, being relatively new to the market, ESG companies are not seen as major players. By encouraging private investors to take a risk and invest in early-stage businesses, the EIS will help the development of ESG companies.
What are some longer term changes you think Covid will have brought about?
In many respects, the coronavirus has accelerated longer-term trends that were already becoming too big to ignore. Specifically, the rise of remote working will impact and reshape several industries. However, the unlisted investee firms which make up EIS portfolios are typically ahead of the curve on such changes and slightly more insulated from economic shifts. Being innovative and nimble by nature, they’ll keep adapting and evolving in this environment.
Some investors chose to stay on the sidelines during 2020, while others were very active, recognising the heightened long-term potential of innovative technology start-ups. In 2021, we are seeing an uptick in interest from planners and advisers, and it appears that a lot more clients are taking a look at early-stage businesses and thinking now is a great time to return to the market and support these exciting companies.
It is increasingly clear that not only is ESG an irresistible investment force, but also that it dovetails naturally with the kind of forward-thinking companies that qualify for EIS investment. Companies that show their commitment to ESG concerns are going to be the long-term agents of change that drive markets forward and deliver the best returns for investors.
Not necessarily EIS specific, but one thing that has been great is the overwhelmingly positive feedback from adviser about our webinar programmes. We can’t wait to see advisers and investors face-to-face again, but we will now always run webinars and have been delighted with the response. And for any entrepreneur, perhaps there will, and should, be an increased awareness of the importance of (relative) agility throughout their growth journey.
With twelve-months of news coverage seemingly entirely focused on testing, treatments and vaccinations, there is certainly increased interest in investing in the life sciences sector. What was once perhaps a sector that investors shied away from due to lack of understanding, now there is greater awareness and understanding. Of course, it is still a sector that requires investment via a manager which has a deep understanding of the peculiarities of the sector.
ESG and EIS can very much complement each other, but it isn’t about ‘doing ESG for the sake of it.’ Our company ethos has always been ESG-friendly, long before ESG was a thing. A few years ago, one of the leading ESG managers forewarned me that we would likely see a culture of managers ‘slapping an ESG logo on their products,’ as a sales trick and I fear that we are now starting to see that, so advisers and investors need to look beyond a label.
Covid has accelerated changes in working and living that would have otherwise have taken years. We see this in greater take up of remote working, online shopping and implementation of cloud-based business support services. We see portfolio companies such as Sachel (remote learning), Wolf & Badger (online shopping) and Push Technologies (increasing data transfer speeds) benefiting from these trends.
Strong inflows into the Guinness EIS suggest that investors continue to be eager to support growth companies. There is widespread recognition that these companies will be the real engine for expanding the economy in the coming years. Investors increasingly want to understand and engage with our portfolio companies. We have recently launched a new investor portal to facilitate this.
There is no alternative to ensuring ESG considerations are central to all investment processes. EIS companies are unencumbered by problematic legacy practices, and Guinness works with our portfolio companies to help them engrain best practice into the fabric of what they do.
The world has no doubt changed in the last year. Covid has seen the way we work change with less face to face interaction and more online communication available, which will bring about more flexibility in working patterns, an increase reach geographically and greater automation across more sectors
Investors were cautious at the beginning of the tax year, not only due to Covid but also with the uncertainty around Brexit. Although January was a bleak month in terms of Covid the tax deadline remained and we saw an uplift in interest for our SEIS fund and have now closed two tranches. Lockdown and limits on winter travel have impacted spending habits perhaps allowing more investable income.
There is growing appetite amongst the population for government, larger corporates and retailers to be mindful of the environment, social responsibility and good governance. It is beneficial for a growing company to start with these founding principles which in turn can complement EIS investing by attracting quality opportunities and like minded investors.
sarah barber
Partner & CEO Jenson Funding Partners
The pandemic has accelerated changes that were already in motion, and tech companies have shown the ability to adapt and take advantage of new market opportunities. Our investment strategy is positioned to take advantage of these changes. For example, one of the most seismic shifts is on the future of work, it’s unlikely anyone will go back to a 9-5 office existence and we’re all having to adapt to this change.
We have continued to see a strong appetite from investors seeking to support early-stage UK technology companies, in particular those that have capitalised from opportunities arising from the pandemic. One thing that has changed is how we interact with clients and their advisers, relying much more on digital engagement whilst retaining our high service standards.
We firmly believe that ESG considerations should be central to building an EIS portfolio. For many years we have committed to be active owners and investors, incorporating and promoting ESG issues in our policies and practices. We believe working towards these goals will improve our ability to deliver better outcomes for investors, as well as aligning our investment activities with the broader interests of society.
What are some longer term changes you think COVID-19 will have brought about?
For me, what the pandemic has done is merely accelerate a change we would have seen develop over the next 10 years anyway, and just condensed this into a 12-month period. There has not only been an acceleration in the adoption of new technologies, but in people’s behaviour and their values too – this has been particularly relevant for purchasing decisions and the importance of health and wellbeing. This makes many of our current investment opportunities even more exciting, particularly in the healthtech sector, and it’s a validation that the investment strategy we were on was the right one.
Have you seen any changes in investor behaviour as a result of COVID-19?
Definitely. It’s fair to say in the first half of 2020 investment was subdued and investor confidence had been knocked, but as we moved into Q3 and Q4 last year investor appetite began to bounce back and that wasn’t just something we saw in the venture capital space. We’re not yet back to pre-pandemic levels but there is certainly a huge amount of capital in the market that is waiting to be deployed – we became a nation of savers in 2020, and not necessarily by choice, and it’s only a matter of time until that capital tap is turned back on.
As an investment team we consciously think about the investments we’re making and our investors rightly want to know where their money is going. This means that we want to be making investments that are impactful and for the benefit of social good, as well as those that will make a return for our investors. Many of the businesses we’ve invested meet that criteria and are using tech for good – be that Patchwork, a rapidly growing healthtech start-up on a mission to solve the NHS staffing crisis, or Culture Shift, the technology business that has created a platform for people to confidentially and safely report workplace harassment.
We often talk about ‘creative destruction' and how crisis can lead to innovation: 2009 saw the birth of Whatsapp, Uber, and Slack. COVID will lead to similar opportunities, arguably less because of fundamental changes than the acceleration of existing trends, which we are seeing from our portfolio in areas such as HRtech, AR/VR, and Fintech
Have you seen any changes in investor behaviour as a result of COVID-19?020?
As with all times of crisis, most asset class valuations dropped like a stone in the February to April 2020 period. Investor demand for high-risk venture capital investments dropped even more sharply. Astute investors realised that the Covid crisis was very different than the 2008-09 crisis which is almost certainly why venture capital investments have quickly regained their attractiveness compared to the last crisis.
I would suspect that most EIS investments conform with the broad principles of ESG investing, and the technology focus of Symvan’s investments most certainly do. To use just one portfolio example, Sweetbridge EMEA has set 12 ESG goals for the creation of their DLT ecosystems including goals for sustainability, monitoring modern slavery, people-focussed legal agreements, and an awareness of disadvantaged employees and customers.
KEALAN DOYLE
learning objectives cpd and feedback about intelligent partnership disclaimer
7. Further learning
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learning objectives
further learning / learning objectives
HOW DID YOU DO?
Covered over the course of Section 2: Market Update
Understand how the budget could impact the popularity of EIS in the coming years
Covered over Section 2, Spring Budget changes
Evaluate the key fees and charges applied by EIS managers
Covered in Section 3: Considerations for Investment, using MICAP data
Explain the benefits of diversification, and be able to build a strategy around it
Covered Section 4, especially on the page ‘How many investments is too many?
Define some of the key events likely to impact EIS in the near future
Covered in Section 6: What’s on the Horizon
Benchmark products and providers in the market against one another
Covered in Section 5: Managers In Focus
Identify the main developments and news in the EIS market
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CPD and feedback
further learning / cpd and feedback
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.
R
eaders of the EIS Quarterly Update can claim up to two structured CPD hours towards their CII or PFS member CPD scheme for the time spent reading this Update (excluding breaks). The review process included an assessment of the technical accuracy and quality of the material against CPD Accreditation standards. Achieving the recognised industry standard afforded by these organisations for this Update, and our training, demonstrates our commitment to delivering only balanced, informative and high quality content to the financial services and investment community. In order to test your knowledge and obtain a CPD certificate readers will need to complete a short online test and provide feedback on the update. This includes 10 multiple choice questions to demonstrate learning and a feedback form to assist in the compilation and improvement of future reports. To claim your CPD please visit: intelligent-partnership.com/cpd
Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates. Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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Intelligent Partnership actively welcomes feedback, thoughts and comments to help shape the development of these Quarterly Industry Updates Greater participation, transparency and fuller disclosure from industry participants should help foster best practice and drive out poor practice. To give your feedback please email: publications@intelligent-partnership.com
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