EIS Industry Report 2019/20

21 20 SECTOR ANALYSIS MANAGERS ARE GETTING TO GRIPS WITH EIS AGAIN This section will look at some of the key data in the EIS sector, based on the open offers available at the start of September 2019. The information in this section is based on data from the MICAP platform unless otherwise stated and is correct as at 1 September 2019. We have chosen to focus on the data where there have been notable changes since last year’s report. For a closer look at some of the other metrics which have shown little change, see the 2018/19 edition of the EIS Industry Report. After last year’s dip, when the number of open EIS offers dropped by nearly 17%, the figure has returned to almost the level of 2017, with an increase of 16% in 2019. This suggests that investment managers are gaining confidence once again in the wake of the changes made to the EIS regime. Anecdotally, a number have been working to refocus themselves since the introduction of the higher risk to capital requirements and it appears that the dip seen in 2018 while this effort took place is now passed. As more managers become comfortable with the new rules, it is likely that the number of open offers will remain buoyant. OPEN OFFERS 2017 0 Number of Open Offers 20 40 60 80 2018 2019 Offers by sector Technology continues to increase its share of the EIS market. Having become the largest sector in 2018, it increased by nine percentage points in 2019. This is driven in part by the government’s focus on knowledge-intensive companies, with technology often a good fit for these types of organisations. Anecdotally, experts suggest that medtech and fintech are two areas that are likely to continue to be popular with investors regardless of the economic climate and potential uncertainty in the coming years post-Brexit, meaning that these areas are also pushing demand for technology-focused EIS offers. It may also signal a move by managers to focus on specialisation to act as a differentiator from their competitors, with more managers coming into this market. It also gives the managers a chance to focus on their expertise as they manage higher risk profiles. General Enterprise is the second highest sector in the list and although in 2018 it was joint top with Technology, it has still managed to increase its overall market share from 32% to 38%. This may be a reflection of the fact that, outside technology, the new risk to capital requirement means that smaller companies across a more diverse sector base are now benefitting from EIS - something that the rule changes were designed to achieve. Meanwhile, Media & Entertainment continues to fall, down from almost a quarter of the market last year to a tenth this time around. In 2017, it represented a third of the overall EIS marketplace, so the risk to capital changes have had a major impact on this sector. A deep dive into the future of the Media & Entertainment sector is featured later in this publication. 3% INDUSTRY & INFRASTRUCTURE 5% PHARMA & BIOTECH 9% MEDIA & ENTERTAINMENT 41% TECHNOLOGY 38% GENERAL ENTERPRISE 4% BLEND Open offers by sector Diversification We use the target number of investee companies stated by the managers as a measure of diversification. We consider an offer with a larger number of investee companies as more diversified than an offer that holds fewer portfolio companies. The average target number of investee companies has risen from 6.6 in 2018 to 7.5 in 2019, suggesting that managers are looking to increase the level of diversification they can offer. This would make sense from a risk point of view, as investment managers look to mitigate the higher risk to capital conditions now required for EIS investments by investing across a wider pool of companies. This is perhaps underlined by the fact that the minimum of any of the open EIS offers in 2019 is two investee companies, compared to one in 2018. Meanwhile, the maximum is 20 investee companies, considerably up on the 15 company maximum offered in 2018. Investment type Since 2018 there has been a significant shift among managers towards alternative investment funds (AIFs). AIFs have been increasing their share of the market for a number of years, having equalled discretionary portfolio services on 41% of the market in 2018. Since then, they have continued to grow and while discretionary portfolio services have dropped to 27% of the market, AIFs have continued to grow in popularity, hitting 71% of the market in 2019. AIFs are considered to be the most simple form of EIS fund to manage and it appears that many providers are comfortable with this relatively new approach. TARGET NO. OF INVESTEE COMPANIES Average 0 5 10 15 20 Median Max Min 2018 2019 EIS OFFERS BY INVESTMENT TYPE 2018 2019 Alternative Investment Fund Discretionary Portfolio Service 80% 60% 40% 20% 0% Market Update / Sector Analysis