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Industry Update | Sept 2023
Enterprise investment scheme
Market update with Christiana Stewart-Lockhart
How venture capital via tax efficient investments can lead to good client outcomes under Consumer Duty
The nuanced landscape of exiting portfolio investments
Thought leadership
Analysis
EIS - Looking beyond tax reliefs
Can the FCA be right?
Powering regional growth: the Cambridge Cluster
More than money: considerations when selecting an investment manager
Riding the waves for start-up valuations
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Photography by Interview by
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It certainly hasn’t been a quiet time for the EIS market with lots happening behind the scenes this summer and since our last update to readers.
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
The EIS universe today
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For most of the financial planning community, waving goodbye to the summer holidays and welcoming in the autumn months can signal a pivotal time for those anticipating their busiest months ahead. Discussion of tax-planning opportunities may indeed be ramping up and this edition of the Enterprise Investment Scheme (EIS) industry update takes a look at some of the key market updates happening across the landscape to help inform those conversations with clients.
learning objectives
Identify main developments and news in the EIS market Outline regulatory developments that could impact the EIS in the near future Describe some of the practical mechanisms used by EIS investment managers to deliver specific objectives to clients Define some of the key events likely to impact EIS in the near future Analyse some sectors and strategies that successful EIS managers are leveraging
Readers can claim up to 2 hours’ structured CPD. Click here to claim your CPD. By the end of the update readers will be able to:
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Learning objectives for CPD accreditation
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A busy summer of updates sparking the EIS conversation
In this issue, Market update with Christiana Stewart-Lockhart, takes a deeper dive into what’s been happening in the landscape and how the scheme is absolutely vital for driving economic growth in the regions outside of London and the South-East. In How venture capital via tax efficient investments can lead to good client outcomes under Consumer Duty, one manager shares a useful on-demand webinar demonstrating how financial planners can ready themselves for Consumer Duty with tax-efficient investments. Did you know that Cambridge is home to one of the world’s most successful life sciences and biotech hubs? One prominent manager in the space explores how crucial the region is as an entrepreneurial ecosystem in Powering regional growth: the Cambridge Cluster. The nuanced landscape of exiting portfolio investments takes a closer look at the truth behind what it really takes to realise a successful EIS investment and deliver a meaningful return to investors. Can the FCA be right? examines the broader context of client discussions surrounding ESG investments and what the FCA has to say about it. One manager probes the shift of conversation surrounding investment into EIS and how it’s now an important pillar of the UK’s VC landscape in EIS - Looking beyond tax reliefs. Clients considering investing in a portfolio of EIS-qualifying companies are often daunted by the overwhelming abundance of managers in the market. More than money: considerations when selecting an investment manager investigates the not-so-obvious factors that investors should look out for when making decisions. Finally, Riding the waves for start-up valuations makes a strong case for why a difficult fundraising landscape can provide growth opportunities for investors.
Latest HMRC figures demonstrated record levels of investment through the scheme in the 2021-22 tax year. In July, there were renewed calls from Parliament to announce an extension to EIS as soon as possible beyond the April 2025 sunset clause. The Chancellor Jeremy Hunt unveiled the Mansion House Reforms and how these plans could help unlock later-stage capital to fuel young British enterprise.
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This industry update of the Enterprise Investment Scheme (EIS) comes at a pivotal time as we enter into the 2023/24 tax year. The changes that were announced in the Spring Budget are now in full effect and it couldn’t be a more pertinent time for investors to think about maximising their tax-planning opportunities for the year ahead.
The EIS Universe today Market update with Christiana Stewart-Lockhart, Director General, EIS Association How venture capital via tax efficient investments can lead to good client outcomes under Consumer Duty Powering regional growth: the Cambridge Cluster The nuanced landscape of exiting portfolio investments Can the FCA be right? EIS - Looking beyond tax reliefs More than money: considerations when selecting an investment manager Riding the waves for start-up valuations Continuing Professional Development About Intelligent Partnership
Opening Statement Update Overview
1. INTRODUCTION
Market Composition Fees and Charges
3. Considerations For Investment
Are Hostile Takeovers A Danger To AIM? AIM In FCA’s Proposals
4. Industry Analysis
What Has The Market Been Doing? More AIM Positivity 2021 AIM Listing What's Driving the Market? The Autumn Budget 'AIM' for success, not perfection Focus Drives Pandemic Return Small is Beautiful Combatting Climate Change Health is Wealth What the Managers Say
2. market update
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stellar investment TIME investments Unicorn Comparison Table
5. managers in focus
More AIM-focused EIS Future Market Changes Considered What The Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
03
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The Enterprise Investment Scheme (EIS) and the Seed scheme (SEIS) have long been a vital cornerstone of the UK's efforts to foster entrepreneurship, innovation, and economic growth.
The EIS Universe today Spring Budget 2023: SMEs receive tax-friendly policies and investment incentives Unlocking EIS opportunities all year-round: don’t wait until tax-year end Breaking the glass ceiling: the rise of female entrepreneurship Why EIS is compelling right now MICAP statistical analysis: EIS open offers Welcoming the new tax year: maximising tax-efficient investments Consumer Duty: Considering ESG/Sustainability in EIS Continuing Professional Development About Intelligent Partnership
By Christiana Stewart-Lockhart, Director General, EIS Association (EISA)
EISA is hosting 10 free Ready Steady Grow! events for entrepreneurs, advisers and investors in cities across the whole of the UK this Autumn. These events will bring attendees together for a CPD qualifying technical session with expert speakers and panel discussions on topical subjects, providing up-to-the-minute insights into investment trends and entrepreneurial success stories.
hese government initiatives encourage private investment in high-risk start-ups by providing significant tax incentives. £30 billion has been invested into more than 53,000 start-ups since these schemes were created and they have emerged as vital catalysts for economic growth and innovation across the UK. The latest HMRC figures show that investment in SEIS and EIS growth companies has reached an all-time high, with total investment last year amounting to more than £2.5 billion. The total EIS investment in 2021-22 was £2.3 billion, a significant increase of 39% compared to the previous year. SEIS investments also saw impressive growth, with total investments reaching £205 million, a 16% increase compared to the previous year. Historically, venture capital investment has been disproportionately allocated to start-ups in London and the surrounding areas. The Treasury Select Committee’s recent Inquiry into Venture Capital found that “high-potential firms in other UK regions and nations struggle for access to capital” and, according to the latest HMRC statistics, 64% of start-ups benefitting from the EIS are based in London and the South-East.
There is an opportunity for the schemes to be used by more founders across the whole of the UK and a key focus for EISA has been to raise awareness of the SEIS and EIS in the regions and devolved nations. Start-ups outside of the South-East often seek their first investment at a slightly later stage and this was also highlighted in the Treasury Select Committee report. The April 2023 extensions to the SEIS, specifically the increased age limit on investee companies, should therefore allow more founders across the whole of the UK to benefit from investment through the scheme. The last 10 years has seen a significant increase in EIS and SEIS Fund Managers based outside of the South-East, alongside a growing number of angel groups across the UK. Edinburgh and Manchester are regularly highlighted as cities with thriving entrepreneurial ecosystems but there are other signs of success too and the winner of the Best EIS Investee Company at this year’s EISA Awards was a spin out from Queen’s University Belfast working on improving cancer diagnosis at an earlier stage. Whilst these positive signs should be welcomed, there are still many founders and potential investors who have never heard of the EIS and aren’t aware of the opportunities it could offer them. Education around the schemes is crucial and there is tremendous willing within both the industry and government to improve things in this area. EISA is hosting 10 free Ready Steady Grow! events for entrepreneurs, advisers and investors in cities across the whole of the UK this Autumn. These events will bring attendees together for a CPD qualifying technical session with expert speakers and panel discussions on topical subjects, providing up-to-the-minute insights into investment trends and entrepreneurial success stories. A networking reception will follow, where participants will have the opportunity to connect with industry experts, investors, and entrepreneurs, fostering valuable connections and unlocking new investment channels. We’re also working to connect MPs with entrepreneurs and investors within their constituencies. Alongside the work of the British Business Bank, there are significant efforts within the industry to increase investment in the regions and we are already seeing some marked improvements in the data. Whilst most of the investment is still in London and the Southeast, the latest data from HMRC showed substantial growth in investment in the regions and devolved nations. The South West saw the greatest change with investment through the SEIS and EIS increasing by an impressive 87% compared to the previous year. Scotland and the West Midlands also saw significant additional investment through SEIS and EIS with increases of 61% and 54% respectively. Whilst challenges remain, the groundwork is being laid to further accelerate investment in the regions and devolved nations. The EIS and SEIS stand as powerful tools for driving economic growth, innovation, and job creation across the UK and their capacity to unlock investment will undoubtedly remain a key driving force for the economy.
www.eisa.org.uk christiana@eisa.org.uk
Christiana Stewart-Lockhart
Director General, EIS Association (EISA)
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Business Development Manager, EIS Association (EISA)
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uch of the conversation surrounding venture capital centres on tax reliefs and the tax planning outcomes they might deliver. But it’s important not to lose sight of the investment case behind having exposure to venture capital. On 31 July Consumer Duty came into full force, placing utmost importance on achieving good customer outcomes. Advice firms can take this opportunity to review how venture capital might benefit suitable clients.
Dr Matthew Connell, Director, Policy and Public Affairs, at the Personal Finance Society (PFS) says, “Implicit in any financial planning is a commitment to get the best possible returns for clients within their liquidity needs, risk appetite, and objectives.” John Higginbottom, Head of Regulatory Propositions at Bankhall adds, “For the right client, tax efficient investments can help in achieving several goals, including capital growth.” Dr Brian Moretta, Head of Tax-Enhanced Research at Hardman & Co, is an expert in venture capital and author of the report Does Consumer Duty oblige you to add venture capital to client portfolios? He adds, “Consumer Duty requires advisers to deliver the best outcome for their client,” says Brian. “So I believe you need to consider venture capital, even if you eventually discount it, as it can lead to a better outcome.” “Our research shows that when you add diversified exposure to early-stage companies to a portfolio, through EIS or VCTs, this can increase expected returns. This is even the case when setting aside the impact of any tax reliefs.” “Critically, with appropriate rebalancing, you can add venture capital to portfolios to target improved returns while managing the level of portfolio risk,” explains Brian.
Linda Preston-Todd of Bankhall says, “The key is that a target market gives quite a wide base to consider, but there may be situations where a client enters that target market after being considered an outlier.” Matt, Brian, Linda and John advocate for considering venture capital for all clients, before discounting those clients who are unsuitable. “This will be driven by the client circumstances,” explains John. “As well as by advisers understanding the types of investments that are available for their target audience, and being able to qualify who the product is suitable for but, also, importantly who the products are not suitable for."
Remember that investments offering exposure to venture capital, such as VCTs and EIS, place capital at risk. Clients may not get back the full amount they invest. The shares of small unlisted businesses are high risk, their price may be volatile, and they are harder to sell than listed shares. There are also tax risks you must consider. Tax treatment depends on individual circumstances and tax rules could change in the future. Tax reliefs depend on EIS-qualifying companies and Venture Capital Trusts maintaining their qualifying status.
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By Jessica Franks, Head of Investment Products, Octopus Investments
Delivering good outcomes – increasing expected returns
Clients suitable for venture capital
Venture capital is high risk
These investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Personal opinions may change and should not be seen as advice or recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No. 03942880. Issued August 2023. CAM013067.
octopusinvestments.com support@octopusinvestments.com
Head of Investment Products, Octopus Investments
Jessica franks
Note
Implicit in any financial planning is a commitment to get the best possible returns for clients within their liquidity needs, risk appetite, and objectives.
Watch now
webinar
“If you’re not used to recommending venture capital, you must educate yourself,” says Brian. “You need to understand the benefits and the risks of tax-efficient investments and venture capital.” "You should review your client bank to see where these tax-efficient investments can deliver value and good outcomes." says John. Octopus has an on demand webinar to help you take both of these steps. Watch Readying for Consumer Duty with tax-efficient investments which features Matt, Brian, Linda and John who explore Consumer Duty in more depth.
Readying for Consumer Duty with tax-efficient investments
Next Steps
“If you’re not used to recommending venture capital, you must educate yourself,” says Brian. “You need to understand the benefits and the risks of tax-efficient investments and venture capital.” "You should review your client bank to see where these tax-efficient investments can deliver value and good outcomes.” says John. Octopus has an on demand webinar to help you take both of these steps. Watch Readying for Consumer Duty with tax-efficient investments which features Matt, Brian, Linda and John who explore Consumer Duty in more depth.
2021 AIM LISTINGS
05
Our burgeoning life sciences sector contributes £94 billion to the UK’s economy each year and employs over 280,000 people. But did you know that Cambridge as a region is home to one of the world’s most successful life sciences and biotechnology hubs?
therwise known as the ‘Cambridge Cluster’, the region has evolved over time into a global hub for innovation that is recognised today to be on par with other world-leading biotech clusters, such as Boston and San Francisco. The region’s success can largely be attributed to an exceptional talent pipeline fed by the University of Cambridge, its abundance of science parks and incubators, university spin-outs, and a strong VC landscape that has created a thriving ecosystem for innovation. Furthermore, Cambridge’s world class status is further enhanced by being part of the ‘Golden Triangle’, formed by the university cities of Oxford, London and Cambridge. According to a recent report by Beauhurst, an impressive 65% of high-growth life sciences companies are based within this specific region. o2h Ventures is spearheading the charge for regional VC biotech investment into Cambridge, with a team at the helm collectively holding over 75 years of combined grassroots experience in the sector. Operating from The Mill SciTech Park in Cambridge, o2h Ventures has backed more than 60% of its portfolio into Cambridge-based biotech businesses or Cambridge University spin-outs. It was the first fund to obtain the coveted knowledge-intensive EIS approval status from HMRC, given the team’s presence in the sector.
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What are knowledge-intensive approved EIS funds?
Knowledge-intensive (KI) approved EIS funds specialise in investing in companies that prioritise research and development (R&D) and must allocate a significant portion of their costs to R&D. For a fund to qualify as a KI approved fund, it must meet specific conditions set out by HMRC and 80% of its investments must be in “knowledge-intensive” companies. Operating in the same way as a usual EIS fund, investors are able to claim up to 30% income tax relief on KI EIS investments. The main attraction, however, is that a KI EIS fund is already HMRC-approved, meaning that the investment date for tax purposes is the tax year of the fund close, as opposed to the tax year in which funds are deployed. The advantage of this? Investors are not relying on the speed of deployment and can target a specific tax year to receive income tax year and carry back one year earlier than with a typical EIS. In addition, investors in KI funds can expect to receive a single EIS5 certificate issued by the fund once it has invested 90% of its capital, which it is required to do within 24 months of fund close. This differs vastly for investors in non-approved funds who can expect to receive individual EIS3 certificates for each investee company as and when deployment of capital occurs.
Why invest in biotech?
By Sunil Shah, CEO, o2h Ventures
The UK biotech sector has impressive potential to scale with remarkable opportunities given Britain's deep science base however, we often see these opportunities being seized by larger overseas companies due to the scarcity of financial resources, incentives, and other essential support systems. Our mission is to address this issue head-on and develop a strong pipeline of innovative drugs with companies that can scale and develop medicines poised to make a significant impact on human health.
The Covid-19 pandemic undeniably shone a light on the importance of biotech as a sector and how supporting investment into the field is crucial for the long-term success of bringing new drugs to the marketplace. Record levels of investment into biotech were witnessed globally across 2020/2021 during the peak of the pandemic and this consequently dipped moving into 2022. This was not entirely unexpected as the world began to move away from the initial urgency the pandemic presented and the accompanying investor enthusiasm. Taking a longer term view however, the sector has demonstrated extraordinary growth in the last 10 years and has outperformed other sectors, including pharmaceuticals and tech, in both venture capital and public markets. In addition, investment into the broader healthcare sector continues to present compelling growth opportunities and a report by PWC UK and BMS has revealed that increased investment into healthcare has the potential to add £45-90 billion to the UK economy. This market sentiment has been mirrored by the government’s unwavering commitment to cement the UK’s place as a “global life sciences superpower” by 2030. In May earlier this year, the Chancellor of the Exchequer Jeremy Hunt announced an ambitious Life Sci for Growth’ package to shape policy and bring renewed funding to core areas of focus, such as £121 million to improve commercial clinical trials and bring new medicines to patients faster.
To position the UK as a global biotech leader, it is crucial to foster the growth and strength of the local biotech community. This begins at a grassroots level and entails building relationships with US investors, thereby facilitating collaboration and knowledge exchange. By embracing these strategies and fuelling economic growth across the regions, the UK can unlock its biotech potential, drive innovation, and pave the way for a prosperous future as a prominent player in the global biotech landscape. o2h Ventures is playing a vital role in this and according to recent data published by the UK BioIndustry Association (BIA) was recognised as one of the top 10 VC investors in UK biotech financing in 2022. The team has backed 28 early-stage biotech companies over the past three years, making investments into critical fields such as oncology, anti-ageing, genomics, neuroscience, and digital therapeutics. The o2h human health EIS knowledge-intensive fund is currently open for investment which aims to build a diverse portfolio for investors with an initial portfolio of 5-10 unquoted and/or AIM-listed companies. Actively seeking out companies that operate at the forefront of innovation, the team strongly believes in the power of the life sciences industry to improve human health and help drive the UK’s economic growth.
Powering regional investment
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https://www.gov.uk/government/news/chancellor-reveals-life-sciences-growth-package-to-fire-up-economy#:~:text=Our%20Life%20Sciences%20sector%20employs,help%20them%20go%20even%20further.
Notes
https://www.bioindustry.org/policy/invest-in-biotech.html
o2hventures.com invest@o2h.com
CEO, o2h Ventures
Sunil Shah
Neil Blankstone
Building an AIM portfolio is about building for the long-term, with ‘time in the market’ as important as any other exchange.
contact
blankstoneSington.co.uk 0151 236 8200 Enquiries@BlankstoneSington.co.uk Micap offer
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Inevitably, prompted by the FCA’s new labelling regime, as investors demand greater transparency and reporting, it will expose those fund managers whose ESG claims have been somewhat greater than their actions!
Get in touch
closebrothersam.com/ifa 01606 810325 ifaclient@closebrothers.com Micap offer
"We ensure all our investments are sustainable and have positive environmental impact, and we are pleased that the rest of the investment community are following this trend" says another EIS manager.
In this insightful article, Matt Currie of Seneca Partners takes a closer look at the truth behind what it really takes to realise a successful EIS investment and deliver a meaningful return to investors.
Up tp 30% income tax relief Capital gains deferral Tax-free growth Inheritance Tax (IHT) relief Loss relief available on company failures
The tax breaks explained
Please note: tax treatment depends on individual circumstances and may change in the future. Tax-reliefs depend on the investee companies mantaining EIS-qualifying status.
Earlier this year, HMRC released its latest estimate figures which highlight that more people are expected to be caught in the higher and additional income tax rate this year. Indeed, by 2027-28 the number of people paying income tax at 40% or above is expected to reach 7.8 million - a figure that is nearly quadruple the share of adults paying high rates since the early 1990s. In a climate currently dictated by frozen tax thresholds that have not risen in line with inflation, more and more experienced investors are turning to tax-advantaged investments as an attractive alternative for tax-planning solutions. The Enterprise Investment Scheme (EIS) offers numerous tax benefits with investors able to offset up to 30% tax relief against their current year’s income tax bill - or the previous year’s, if they use carry back. In addition, EIS-qualifying investments are free of capital gains tax with investors also able to defer any capital gains. EIS shares whilst still held also offer inheritance tax exemption after two years and should there be a company failure, investors can utilise loss relief to offset losses against income. But with an abundance of EIS providers all offering different things in the market it can sometimes be hard to know where to start looking. Speed of deployment, sector-specialism, strength of investment teams, hands-on involvement with investee companies, and geographical spread are usually some of crucial elements that attract money into funds. And of course, investment memorandums will inevitably point their investors towards proposed exit routes, which will usually be through a trade sale or initial public offering (IPO). In addition to those invested in private companies, AIM-only EIS portfolios are also available, backing later-stage companies which have access more readily to follow-on funding by virtue of access to the public markets. Exits in AIM EIS portfolios usually occur within a much shorter time frame due to market liquidity, although daily market price volatility isn’t appealing for all investors.
Recent research... suggested that just four EIS managers out of circa fifty have ever returned more than 50% of the funds they had raised into their schemes to investors.
he market landscape
By Matt Currie, Investment Director, Seneca Partners
Recent research by independent reviewer, MICAP, suggested that just four EIS managers out of circa fifty have ever returned more than 50% of the funds they had raised into their schemes to investors. A quite damning statistic that begs the question “why does realising value from these investments appear to be trickier than first thought?” A prevailing reason that has come to the fore in recent years is lengthening investment time horizons. Following the introduction of the Patient Capital Review in 2016, which aimed to identify the barriers to accessing long-term finance for growing innovative firms, there are now many EIS offers in the market that have undertaken a ‘patient capital’ approach. It is now not uncommon to see some early-stage businesses approach the 10 year mark with little sign of anything coming to fruition for investors. When you take into consideration that several years ago investment time horizons were often pitched at four or five years, this is quite a marked difference. Even more recently, risk to capital conditions have also meant that investment terms have stretched to five to seven years or more with many managers investing much earlier in the company’s life-cycle.
But what’s the reality of achieving a successful exit?
Valuations
With investment time horizons indeed stretching out, this inevitably brings valuations and reporting into sharper focus for investors. Holding valuations “at cost” is often a default position, but is it really credible to suggest that nothing has got better or worse once an investment begins to hit the four or five year mark? It would usually be at this point that investors would normally expect positive developments towards commercialising a business that could lead to a return on investment. If not, then investors ought to challenge the manager over the short and medium-term prospects. An uplift in valuation can often occur through further fundraising rounds for the investee company and is often part of the growth cycle. This too can pose a dilemma for managers. Often the result of raising further capital will dilute existing shareholders, which is not always a great message. Of course, if things are going well, funds may be raised at a value that is higher than earlier rounds, reducing this dilution. Although managers rarely waste the opportunity to announce an uplift in company valuations, so therein lies a material conflict when the same manager is leading multiple rounds. How this is reported can sometimes not paint the entire picture, with investor reports usually just showing the value of an individual’s investment holding as opposed to the value of the company as a whole. This is particularly relevant in the context of an upcoming exit for investors. While, on the face of it, a private company valued in the tens of millions is very encouraging, trade sales at that level are not regular occurrences, especially in this current climate. The IPO market in 2023 has been subdued and buyers are in much shorter supply, with not much prospect for improvement looking towards the remainder of the year. The AIM-quoted EIS companies have at least overcome this hurdle by already having a listing and a technical exit route.
The issue of fees charged by managers to investee companies (which ultimately detracts from the resources available to that company) is another area to consider closely in the wider context of achieving exits. With private companies, there might be an arrangement fee at the point of investment, plus ongoing monitoring fees to cover working with investee companies, attending board meetings, etc. These fees can be substantial and offer a valuable annual source of income for fund managers but could also be seen as a hidden cost to the investor. A cynical investor may also question whether this gives rise to conflict of interest between manager and investor in respect of exits and realisations, given the potential monetary reward to continuing to back businesses that are potentially not sellable. Therefore with the bigger exit picture incredibly nuanced, it is imperative to fully get to grips with understanding the exit track record of a prospective EIS manager, not just the value at which they hold their portfolio (ultimately, one supports the other). Seneca Partners EIS Fund and AIM EIS Fund both specialise in the provision of growth capital and strategic support to ambitious SMEs. A market leader in the landscape, Seneca has continued to back successful businesses that deliver exits to investors. A prime example of this was witnessed earlier this year when the EIS Portfolio Fund realised its 36th investment with the sale of investee company, Quidini, a customer engagement company, to Verint (NASDAQ: VRNT). Seneca first invested into the company in March 2019 to help scale the business both in the UK and US, before providing a return to investors just under 4 years later despite challenging market conditions.
Focusing on fees
Selecting a motivated manager
Performing appropriate due diligence into prospective EIS managers can be a daunting prospect when there are so many great providers in the marketplace to choose from. However, taking a closer look at who has a proven track record of exiting investments and is motivated to provide a return to investors is often a great place to start.
senecapartners.co.uk matt.currie@senecapartners.co.uk
Matt Currie
Investment Director, Seneca Partners
07
alking about ESG and sustainability with financial advisers, two clear themes emerge; “my clients aren’t interested in ESG” and “I know I need to talk about it, but I don’t know how”. Let’s unpack these and see what the FCA has to say.
That got your attention didn’t it? It is a serious question but let me provide some context and all will become clear.
And what does the FCA think about this? Well, that’s easy to show:
The FCA 2020 Financial Lives Survey found that 80% of consumers would like their money to “do some good”
"I need to talk about it but I don’t know how"
Clients aren’t interested in ESG – this is a valid statement and one that needs to be formally recorded as part of Consumer Duty obligations. The problem, however, seems to be that in many cases this outcome is based on an assumption made by the adviser, rather than a fact based on a client being asked the question and supported to make an informed choice. Herein lies the compliance risk; for a client to answer Yes or No to an ESG question, the adviser needs to demonstrate that the client has received information on what ESG is, to enable them to make an informed choice. Asking the question without providing an explanation, would be in breach of Consumer Duty because the adviser cannot demonstrate that the client’s choice was informed. It isn’t important whether the client answers Yes or No to ESG. What is important is that the choice is an informed one.
The FCA 2022 Financial Lives Survey shows that ESG issues resonated broadly across all age groups and among adults with pensions or investments, 62% were interested in investing in Responsible Investments in the future
Consumers have different preferences and objectives - recording the preferences and objectives is critical to meet the Consumer Duty
Our advice at ESG Accord is not to talk about ESG or sustainability as a separate ‘thing’. We recommend that when introducing these areas to clients, include them as part of broader ‘preference pathways’. Client comprehension of ESG/sustainable investment is higher when they can see how these types of investment relate to conventional investment funds – the spectrum of capital is a client-friendly way of introducing different investment options that can be used to meet client preferences and objectives. This approach will be essential when the sustainable fund labels arrive (likely 2024).
What does the FCA say about discussing sustainable investment in isolation?
Including consumer facing disclosures for products without a sustainable label, increased consumer comprehension of sustainability information compared to when disclosures were provided only for those products with a sustainable label.
What next?
The ESG Accord suitability framework has been built for Consumer Duty. It is suitable for all clients and all funds and is designed to help advisers ask the right things in the right way and is to be used for all clients. The framework can be accessed via the Accord Initiative web site (accordinitiative.com). The site also provides information on how to build ESG and Sustainability into the advice process, includes education and learning, client friendly information for Tax Efficient providers on interesting stocks held in portfolios, access to a deep dive Tax Efficient Vehicles database to help match funds and so much more. The Accord Initiative is completely free to access for all financial services professionals. Register now, find out more, get involved: www.accordinitiative.com
Clients aren’t interested in ESG
By Lee Coates OBE, Director, ESG Accord
esgaccord.co.uk lee@esgaccord.co.uk
Lee Coates OBE
Director, ESG Accord
Read more about what the FCA says
MORE AIM POSITIVITY
08
This might surprise you but, just like diamonds, billion-dollar companies (or ‘unicorns’) are renowned for taking shape under pressure. For example, some of the most successful VC-backed businesses, like Airbnb, Zoopla, and Uber, were formed in the wake of the 2008 global financial crisis. As the global economy once again faces fresh challenges, we’re seeing many of the same trends appearing which helped to create these unicorns: existing businesses are spending less on innovation, there’s a growing pool of available talent due to company layoffs, and there’s less competition to invest in the best entrepreneurs. While slowing global growth can be tough on any business, if you look closely, there are some opportunities to unearth tomorrow’s success stories. In this environment, managed portfolios of EIS investments have come into their own.
www.guinnessgi.com eis@guinnessfunds.com
Will Clark
Business Development Manager, Guinness Ventures
The best time to invest in a decade?
By Will Clark, Business Development Manager, Guinness Ventures
https://hardmanandco.com/wp-content/uploads/2021/11/TES-white-paper-How-much-should-clients-invest-in-venture-capital-November-2021.pdf
he conversation financial advisers are having with clients around investment into the Enterprise Investment Scheme (EIS) is shifting. Launched in 1994, the government initiative was introduced to encourage investment into early-stage companies to help aid their development and growth, all whilst offering investors a range of attractive tax benefits:
Income tax relief up to 30% Tax-free growth Capital gains deferral Inheritance tax relief through Business Relief Loss relief
Historically, it’s been the available tax reliefs that have usually sparked investor interest into EIS investments, and is often viewed as a powerful tool for those looking to complement traditional investments and planning strategies. However, the EIS market has matured a great deal since its introduction and latest figures released by HMRC in May this year demonstrated that record levels of EIS investment was received in the 2021-2022 tax year. With a notable 39% increase in total funds raised to the previous year, this data reflects how vital the scheme is for the growth of UK early-stage businesses and job creation across the regions. This data was very warmly welcomed by the EIS industry and it was interesting to see how as a scheme it remained resilient in the wider venture capital (VC) market against a challenging backdrop of geopolitical tensions and macroeconomic pressures. Furthermore, it signals a growing momentum and confidence within the financial planning community to allocate a proportion of clients portfolios to venture capital. It therefore comes as no surprise that the usual rhetoric around EIS investments is receiving a make-over. No longer just an option for those wanting to get ahead on their tax-planning, it's now an important pillar of the UK’s VC landscape and many client conversations are now focusing on how EIS can offer attractive growth opportunities, and deliver as an effective portfolio diversifier away from other asset classes.
This data was very warmly welcomed by the EIS industry and it was interesting to see how as a scheme it remained resilient in the wider venture capital (VC) market against a challenging backdrop of geopolitical tensions and macroeconomic pressures. Furthermore, it signals a growing momentum and confidence within the financial planning community to allocate a proportion of clients portfolios to venture capital. It therefore comes as no surprise that the usual rhetoric around EIS investments is receiving a make-over. No longer just an option for those wanting to get ahead on their tax-planning, it's now an important pillar of the UK’s VC landscape and many client conversations are now focusing on how EIS can offer attractive growth opportunities, and deliver as an effective portfolio diversifier away from other asset classes.
Moretta points out that many advisers tend to fall back on the usual rule of thumb of 10% rather than adopting any measurable rationale. The reason? Quoted investments can be largely quantified which allows for well-established methodologies to be used.
In a research paper conducted by leading independent investment research firm, Hardman & Co, titled the ‘TES white paper: how much should clients invest in venture capital’, Dr Brian Moretta makes a strong case that adding VC to a portfolio can improve its risk/return profile. But where’s a good starting point for asset allocation? Moretta points out that many advisers tend to fall back on the usual rule of thumb of 10% rather than adopting any measurable rationale. The reason? Quoted investments can be largely quantified which allows for well-established methodologies to be used. Unquoted investments, on the other hand, do not hold the same data and therefore the 10% allocation is usually landed on out of default. Taking a holistic approach to asset allocation, Moretta demonstrates that it’s possible to keep a portfolio’s risk profile the same when adding in a higher-risk asset class like VC, if an investor adjusts the weighting of other asset classes - for example, listed investments, property, pensions etc. Interestingly, the research’s findings also demonstrated this to be true when disregarding the tax-reliefs on offer from tax-efficient investments such as EIS. Using an industry standard procedure and well-justified assumptions, further findings in the report highlight that a 10% allocation of VC should be the bare minimum in order to see a positive effect on a return profile. Rather, Moretta makes a case that an allocation in the mid-to-high teens is more realistic for investors with an average risk appetite. Of course, VC and EIS exposure in portfolios isn't appropriate for every investor and recommendations should be made to appropriate clients based on a holistic review across their financial situation, needs and objectives.
But how much should investors allocate to VC?
In today’s market, venture capital and EIS in particular, is proving to be a compelling addition to investor portfolios. Outside of the generous tax-breaks, EIS investments can bring diversification to a portfolio as both an asset-class and the exposure to underlying sectors the EIS-qualifying investments are made in. This can prove to be an effective investment strategy when encountering market volatility across public markets, as the unquoted nature of the investments often demonstrate low correlation with other asset-classes. Utilising a specialist EIS investment manager provides an excellent opportunity to invest in sectors that may not be typically accessible for retail investors and offers the chance to invest in exciting growth opportunities early-on in their lifecycle. Furthermore, the potential upside for EIS investments is uncapped providing significant opportunity to drive investor returns. Choosing the right EIS provider is crucial and Guinness Ventures has firmly established itself as a leading fund manager in the space. The Guinness EIS Service is currently open for investment and is focused on investing in growth companies that require scale-up capital across a wide range of sectors including technology, manufacturing, retail, healthcare, leisure and food & drink. It is this generalist approach that allows for risk mitigation by targeting a balanced portfolio of around ten investee companies for investors. To find out more about the Service’s investment proposition, please do reach out to our business development team or visit https://www.guinnessgi.com/ventures/guinness-eis
Accessing EIS investments
WILL CLARK
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By Sam McArthur, Partner, Praetura Investments
lients considering investing in a portfolio of EIS-qualifying companies, managed by a specialist provider, are often daunted by the abundance of offerings available.
With a plethora of investment approaches, sector specialisms, and track records to consider, it is vital to establish a client’s needs, risk-appetite and any investment preferences. In this article, Sam McArthur of Praetura Investments takes a closer look at some of the not-so-obvious factors an investor should consider when selecting an EIS manager.
Secondly, a core part of the More Than Money ethos is a commitment to championing regional investment and finding opportunities in the North of England. Aiming to be the VC of choice for underserved founders in the North, Praetura is driving awareness to not only the abundance of opportunities in the region but also the shortfall in funding compared to London and the South East. Recent research that Praetura carried out has highlighted a £600m funding shortfall per year. The funding gap has started to make the investment community take notice of the North, where the competition for deals is sometimes lower and the valuations can be more competitive when compared to London. Since 2011, we have significantly grown our Northern EIS portfolio with investments into Northern based businesses such as Arctic Shores, Wi-Q, Modern Milkman and Aerocloud. It is no secret that the number of early-stage businesses in the North is growing and these success stories are filtering talent and capital into the regional eco-systems to support the next generation of start-ups.
Selecting a fund manager that can offer more than just capital can be a crucial factor in delivering returns to investors. Deep sector expertise and an experienced investment team who seek to work closely with founders, offering support and advice, can help turn young businesses into breakout stars. Through the Praetura Operational Partner programme, investee companies receive input from experienced business leaders and help to increase their chances of success. These industry heavyweights have had celebrated careers, holding leadership positions in success stories such as AO.com, Apple, ANS, Dr Martens and JD Sports. Fund managers like Praetura can provide geographical diversification to investors via exposure to Northern businesses, can increase the chances of investment success via the extensive support provided to investee companies and can ensure that advisers are at the forefront of the investor journey via a transparent approach to communication. The Praetura EIS Growth Fund is now open for investment. Investors will be able to support growth companies predominantly across the North of England and back exciting founders.
EIS managers often sell themselves on factors such as deal flow, track record, speed of deployment and others. All are incredibly important for the success of an investment, but frequently overlooked factors in the selection of an EIS manager are geographic diversification, the support the manager provides to portfolio companies and the transparency of communication throughout the investor journey. EIS shares must be held for a minimum of three years and investment time horizons can range from 4 to 10 years, depending on sector and investee company. This can leave a substantial time frame where interaction between client, adviser and fund manager may be limited and reporting may only occur in line with regulatory requirements. A dedicated investment manager like Praetura can make a real difference in the transparency of communication and we have endeavoured to support investors and advisers in this regard with our ‘More Than Money’ approach since 2011. What is More Than Money? It means a commitment to creating an unrivalled experience for investors and advisers throughout the entire life span of an investment and striving to provide industry-leading levels of service. One notable example of this includes Praetura’s regular, transparent and timely communications, as well as our ongoing investment into a bespoke online portal where investors are able to find all the information pertaining to their investment holdings. In addition, we release our detailed Investor Updates, a major piece of work, taking the form of a professionally designed report with company snapshots, case studies and KPIs to articulate the status of each investor’s portfolio on a regular basis.
Communication: An investment manager’s activities from initial investment to exit
Diversification: Offering meaningful diversification through unique opportunities
Portfolio Support: A hands-on approach to growth
A dedicated investment manager like Praetura can make a real difference in the transparency of communication and we have endeavoured to support investors and advisers in this regard with our ‘More Than Money’ approach since 2011.
C
www.praeturainvestments.com sam.mcarthur@praetura.co.uk
Partner, Praetura Investments
Sam McArthur
With a plethora of investment approaches, sector specialisms, and track records to consider, it is vital to establish a client’s needs, risk-appetite andany investment preferences. In this article, Sam McArthur of Praetura Investments takes a closer look at some of the not-so-obvious factors an investor should consider when selecting an EIS manager.
Secondly, a core part of the More Than Money ethos is a commitment to championing regional investment and findingopportunities in the North of England. Aiming to be the VC of choice for underserved founders in the North of England, Praetura is driving awareness to not only the abundance of opportunity in the region but also the shortfall in funding compared to London and the South East . Recent research that Praetura carried out has highlighted a £600m funding shortfall per year. The funding gap has started to make the investment community take notice of the North, where the competition for deals is sometimes lower and the valuations can be more competitive when compared to London. Since 2011, Praetura has significantly grown its Northern EIS portfolio with investments into Northern based businesses such as Arctic Shores, Wi-Q, Modern Milkman and Aerocloud. It is no secret that the number of early-stage businesses in the North is growing and these success stories are filtering talent and capital into the regional eco-systems to support the next generation of start-ups.
Selecting a fund manager that can offers more than just capital can be crucial factor in delivering returns to investors. Deep sector expertise and an experienced investment team who seek to work closely with founders, offering support and advice, can help turn young businesses into breakout stars. Through the Praetura Operational Partner programme, the investee companies receive input from experienced business leaders and help increase their chances of success. These industry heavyweights have had celebrated careers, holding leadership positions in success stories such as AO.com, Apple, ANS, Doc Marten’s and JD Sports. Fund managers like Praetura can provide geographical diversification to investors via exposure to northern businesses, can increase the chances of investment success via the extensive support provided to investee companies and can ensure that advisers are at the forefront of the investor journey via a transparent approach to communication. The Praetura EIS Growth Fund is now open for investment. Investors will be able to support growth in companies predominantly across the North of England and back exceptional founders.
EIS managers often sell themselves on factors such as deal flow, track record, speed of deployment and others. All are incredibly important for the success of an investment but frequently overlooked factors in the selection of an EIS manager are geographic diversification, the support the manager provides to portfolio companies and the trasparency of communication throughout the investor journey. EIS shares must be held for a minimum of three years and investment time horizons can range from 4 to 10 years, depending on sector and investee company. This can leave a substantial time frame where interaction between client, adviser and fund manager may be limited and reporting may only occur in line with regulatory requirements. A dedicated investment manager like Praetura can make a real difference in the transparency of communication and have endeavoured to support investors and advisers in this regard with their ‘More Than Money’ approach since 2011. What is More Than Money? It means a commitment to creating an unrivalled experience for investors and advisers throughout the entire life span of an investment and striving to provide industry-leading levels of service. One notable example of this includes Praetura’s regular, transparent and timely communications, as well as its ongoing investment into a bespoke online portal where investors are able to find all the information pertaining to their investment holdings. In addition, the team releases its detailed Investor Updates, a majorpiece of work taking the form of a professionally designed report with company snapshots, case studies and KPIs to articulate the status of each investor’s portfolio on a regular basis.
Partner, Praetura Investment
- Van Hoang, Investment manager, Blackfinch Investments
The clearer market environment post-Brexit, as well as a tighter grip on the pandemic, creates an outlook conducive to increased listings on AIM.
I
10
BIDDER JURISDICTION (FIRM OFFERS)
role, Intelligent Partnership
Smaller stakes have little choice
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. But, on the other hand, in the vast majority of takeovers seen in the first half of 2021, there was a substantial bid premium where the share price increased during the offer period. The highest was an eye-watering 79%, although more commonly, it was in the lower, but still very pleasing 20% - 50% range.
The last few years have undoubtedly caused a stir for start-up valuations across the UK and the rest of the globe.
By Mark Bower-Easton, Head of Distribution, Oxford Capital
n 2021, a huge influx of funds into the VC market, especially across later-stage start-ups, led to skyrocketing start-up valuations across the entire marketplace despite pandemic uncertainty. This was a completely plausible outcome, as the more investors there are with surplus capital to deploy, the higher valuations rise, with everyone trying to get in as early as they can and source the best deals. These ballooning valuations were most noticeably witnessed across the tech sector which was undeniably driven by an immediate need for digitalisation in a post-pandemic world. Interestingly, a quarter of the UK’s 116 unicorn tech companies achieved this status during 2021. Moving into 2022, however, this narrative changed drastically as the investment-frenzy began to subside and the effects of the pandemic receded into the rearview mirror, causing a decline in fundraising activity. Other market drivers such as inflationary pressures, global supply-chain issues and a shift in investor sentiment favouring start-ups with a clear path to profitability over rapid growth, also led to a knock on effect of starkly declining valuations across the board. With more companies competing for a smaller pool of funds, this trend has not slowed down now that we are well into the second half of 2023. According to recent Pitchbook data published earlier this year, average early-stage valuations (Series A to C) are down 23% from Q1 of 2022, while later-stage valuations (Series C+) have fared considerably worse, demonstrating a year-on-year decline of 77%.
It’s certainly been a wild ride of peaks and troughs, but where does this leave investors and start-ups now?
As early-stage UK tech investors here at Oxford Capital, we take the view that this recalibration of valuations is most welcome. Looking comparatively at the last few years, valuations are now looking far more realistic at the seed/Series A stage providing investors with an excellent opportunity to get in now. To paint the picture more succinctly, we are now finding opportunities for investment where we are able to capitalise companies at valuations of between £3-4m, whereas 18 months ago they might have been trying to raise at a valuation of over £10m. This represents a great opportunity for investors to get in at a favourable valuation, as a company now only needs to grow at a valuation of £30-40m to get a 10x return, rather than £100m previously. Despite a difficult fundraising landscape, it’s also important to stress that good companies with strong fundamentals can still raise money. In addition, you often find that investing during a period of relative capital scarcity also means that companies are more focused on capital efficiency - how much growth can a business generate for a given amount of capital? There’s a clear case to be made for harsher funding climates focusing the mind of founders and boards. Indeed, as capital becomes more available, they can come back to market to raise new rounds to accelerate growth, but this can be more an option rather than out of necessity. One standout example from our own portfolio proving to successfully weather market volatility can be witnessed with the recent fundraise of one of our investee companies, Hometree. The Company successfully closed a $46m oversubscribed Series B funding round, led by specialist energy and sustainability investors 2150 and Energy Impact Partners, alongside financial services finance Legal & General Capital. The residential energy services challenger brand embarked on a new funding round despite challenging market conditions following the fallout of the Truss/Kwarteng administration, firmly demonstrating market appetite for high-growth companies.
There’s a clear case to be made for harsher funding climates focusing the mind of founders and boards.
Reporting valuations transparently
Selecting an investment manager that is committed to reporting valuations as accurately and realistically as possible is key for transparency. It’s common for investment managers to hide behind the price of the latest funding round, where share prices may be inflated and not provide a truly indicative picture of the company’s financial health. This is why we have felt it was important to review our valuation methodology. A recent example of this can be seen by one of our portfolio companies which had been held at the valuation of its last fundraise which had occurred a few years prior. We felt as an investment manager it was prudent to paint a more realistic picture to our investors given the recent downturn in VC valuations and took the decision to change our valuation methodology using the multiple of revenue method. Up until a year ago, the methodology would have used a multiple of 15-20x. However, in this new VC landscape, the new methodology gives a more realistic 6x multiple to use. While we appreciate this has led to a significant hit in valuation for our existing investors, it has enabled a much more accurate as possible reporting of the overall valuation. This particular company in question is still performing exceptionally well with revenues increasing substantially year-on-year. This is why we now think it is the time to have an honest conversation with investors around valuations. There is a growing opportunity here to take advantage of investing across cycles, especially in a down cycle which often presents a better entry valuation. Given that VC investments usually have a multi-year duration it can also mean that the business is more likely to be more mature when the cycle picks up again and can be better positioned for an exit when M&A markets are buoyant. The Oxford Capital Growth EIS is now open for investment. Please reach out to our dedicated business development team to hear how we are building a portfolio of exciting UK tech companies that have the potential for rapid value growth.
www.oxcp.com MBower-Easton@oxcp.com
Head of Distribution, Oxford Capital
Mark Bower-Easton
1 https://www.cityam.com/exclusive-uk-tech-special-the-rocky-but-unstoppable-rise-in-startup-valuations-in-data/ 2 https://sifted.eu/articles/startup-valuations-continue-to-fall
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Outline regulatory developments that could impact the EIS in the near future
Identify main developments and news in the EIS market
Describe some of the practical mechanisms used by EIS investment managers to deliver specific objectives to clients
Define some of the key events likely to impact EIS in the near future
Disclaimer
To find the content relevant to each of the learning objectives, simply check the top right of each article where there is a colour bar corresponding to the learning objective(s) it relates to. Each learning objective is assigned it's own colour in the left hand column below.
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Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC? Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC?
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Analyse some sectors and strategies that successful EIS managers are leveraging
The EIS universe today Consumer Duty: What it could mean for EIS investments EIS: The smart money goes north Find the gems: The art of identifying and investing in resillient businesses Three need-to-knows about knowledge-intensive-companies EIS: A tool in the net zero journey, despite renewables ban How the rise of healthtech is transforming our healthcare experience Going for growth with EIS EIS open offers jump by 24% Regulation 2023: It's more than just Consumer Duty EIS dealflow: Building pipelines for funding success Bionic Arms for Ukrainian soldiers Continuing professional development About Intelligent Partnership
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See pages 4, 6 and 10
See pages 3, 5, 8 and 9
See pages 3, 8 and 9
See page 7
See pages 3 and 9
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Evaluate the key fees and charges applied by EIS managers
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