EIS Industry Report 2019/20

34 35 DEAL FLOW A DEEP DIVE INTO EQUITY FUNDRAISINGS AND POTENTIAL EIS EXITS In this section, we look at some of the figures behind the UK’s small businesses to give an indication of deal flow within the EIS and SEIS world, as well as an insight into how companies have exited, either through an IPO or by being acquired. To help in this endeavour, we have been supported by Beauhurst, the online source for high-growth company information, which has provided the figures on which our analysis is based. These figures are based on three separate criteria. For EIS, it is equity fundraisings that are less than £5 million (the annual upper limit for EIS - other than knowledge- intensive companies - therefore making these ‘EIS likely’ fundraisings); equity fundraisings that are less than £150,000 (the annual upper limit for SEIS and therefore ‘SEIS likely’); and for knowledge-intensive companies, fundraisings of less than £10 million where the recipient company is operating in tech or intellectual property, OR has received a research & development grant (‘KIC likely’). Since 2011, there have been over 33,000 ‘EIS likely’ fundraisings into UK companies. To give this some context, HMRC’s figures suggest that a total of 12,040 companies raised funds through EIS from 2010/11 to 2017/18 in just under 25,000 fundraisings. In the most recent of those years, around 4,000 EIS fundraisings took place. If we extrapolate from that, to calculate the number of fundraisings in EIS at the end of the 2018/19 tax year, even if we infer a slight drop in fundraisings as a result of the new rules, we can assume that the vast majority of ‘EIS likely’ fundraisings (85% or more) identified by Beauhurst's research were in fact EIS fundraisings. 16 Notably, there were 19,893 fundraisings into KIC likely firms in the period and given the government’s focus on this area, it looks likely that this will continue to grow over the coming years. When the number of fundraisings are broken down by year, there appears to be an even stronger case for the growth of KICs. While EIS as a whole saw something of a slowdown in 2018 - no doubt in part because of the new rules coming into force and uncertainty over what will and will not be considered to meet the new risk to capital requirements - the knowledge-intensive area seemed to suffer less than the overall market. NO. OF EQUITY FUNDRAISINGS INTO UK COMPANIES 2011-H1 2019 40,000 30,000 20,000 10,000 0 EIS likely SEIS likely KIC likely EIS AND KIC FUNDRAISING 2012 2014 2016 2018 40,000 50,000 60,000 30,000 20,000 10,000 0 EIS LIKELY EQUITY FUNDRAISING KIC LIKELY FUNDRAISING As well as the new rule changes coming into force, there are a number of other factors that are likely to have affected deal flow in 2018. To begin with, financial turmoil hit markets across the world in the final quarter of 2018, as a variety of concerns - such as US-China relations - stymied investment. Together with the uncertainty of Brexit at that time, it may well have been the case that companies were deterred from undertaking fundraisings in such a volatile climate. Meanwhile, rumours of significant changes to inheritance tax ahead of the 2018 Autumn Budget may have also held back some fundraisings in this area. The majority of EIS investments also qualify for Business Relief (which offers 100% inheritance tax relief after two years) and with uncertainty over inheritance tax’s status, some may have thought it prudent to wait and see what the outcome of any changes might be before advertising a BR-qualifying investment one week, only to see that particular incentive removed the next. Having said that, the impact on EIS would likely have been considerably less than on BR investments, because EIS is considerably higher risk and therefore few people tend to invest in it for BR purposes until they are older. In the event, then-chancellor Philip Hammond did not opt to make any changes to inheritance tax. EXITS Beauhurst’s data also considers the number of IPOs and acquisitions made since 2011, giving an insight into the number of likely successful exits achieved by EIS and SEIS investors. The figures are only taking into account companies that raised an "EIS likely" round between 2011 and 2018, and this will be reflected in the increase in exit events in recent years: there will be a time lag between them raising funds to further develop the company and undergoing an exit event. Across the board, the number of acquisitions significantly outweighs the number of IPOs achieved. Anecdotally, some in the market believe that this is partly due to the drive for growth at larger companies: many see the fastest route to higher growth is to bring in innovative, high growth companies through acquisitions, meaning that a number of smaller companies never make it to the IPO stage (i.e. listing on a recognised stock exchange). EIS SEIS NO. OF IPOS AND ACQUISITIONS IPOS ACQUISITIONS 800 600 400 200 0 KICs Considerations for Investment / Deal Flow