EIS Industry Report 2019/20

49 48 Market Research / Industry Debate Market Research / Industry Debate Seneca focuses its attention on regional, “off market” deals, where there’s a strong flow of high quality investment opportunities and less competition, hence, better value. AA: Not a concern for Deepbridge; but a consideration that investors should be reviewing keenly is that of managers’ dealflow and therefore speed of deployment. A potentially alarming trend of managers stating they may take many months (or indeed years) to deploy investors’ funds suggests a lack of quality investment opportunities. RW: It was difficult to predict the impact that risk to capital changes would have on inflows. We are encouraged to see a strong appetite remaining. Investors appear motivated not only by tax relief and return potential but also by helping to shape the world through backing top UK entrepreneurial talent. What impact do you think the government’s focus on knowledge-intensive companies will have on the EIS market? AA: The outcomes of the government’s Patient Capital Review, in 2017, and the subsequent focus towards knowledge-intensive companies was great news for the EIS market and those advising clients. These outcomes not only rubber-stamp government commitment to EIS but also provide everyone involved with a clear understanding of how government/HMRC expect funds to be utilised – supporting growth-focused, innovative companies. RW: Many earlier stage companies are not yet applying for knowledge-intensive status due to lower funding needs and a perception of complexity. However, as these companies grow, the additional tax-efficient funding that KIC unlocks will motivate applications. In turn, driving greater R&D activity and innovation, in line with government strategy. JD: The increase in the upper limits for knowledge- intensive companies should lead to an increase in investment in earlier stage companies, particularly for those with a biotechnology focus, where historically the increased level of funding required has been harder to achieve in the UK versus the US. Is there enough diversification within EIS offerings for investors and what sectors do you see performing well in the future? RW: Blackfinch diversifies across sector and stage, keeping a technology focus. Investments span SaaS, EdTech, Wearables, AI and SleepTech companies, with MarTech and FinTech firms on the horizon. Company stage ranges from seven-figure existing revenues to pre-revenue, helping balance risk. FinTech companies built around open banking are particularly interesting currently. JD: Diversification is key in the EIS market and whilst investors could look to diversify investment across a number of EIS funds with specific sector focus, Seneca’s generalist investment approach coupled with its strong regional dealflow already offers a certain level of diversification. AA: At Deepbridge we have always been focused on the innovative technology and life sciences sectors. These are sectors which we continue to be committed to and which we believe are very much at the heart of the ‘spirit of EIS’. Within these worlds, there are great diversification opportunities with limited correlation – for example, in the life sciences sector, the performance of drug-discovery investments could hold little association to the success of digital healthcare apps. “We are encouraged to see a strong appetite remaining.” — REUBEN WILCOCK, BLACKFINCH VENTURES “The increase in the upper limits for knowledge-intensive companies should lead to an increase in investment in earlier stage companies.” — JOHN DAVIES, SENECA PARTNERS How could the EIS market be improved? AA: Education. The Enterprise Investment Scheme remains one of the UK’s best kept secrets. It is up to us, as an industry, to help entrepreneurs better understand the power of EIS funding and to better inform investors of the potentially great growth opportunities available in early-stage UK innovations – all underpinned by working with the right EIS manager. RW: The EIS market is thriving, benefiting both investors and founders and helping to grow the wider economy. The earlier end of our portfolio supports those companies stuck between angel investment and their first ‘proper’ round. Greater support from the market for companies at this stage would be valuable. JD: Simplification of rules and regulation. Moderator: Paul Jarvis, Intelligent Partnership TRANSPARENCY A GROWING PRIORITY : The adviser sections of this market research have revealed how important transparency of fee structures are to the adviser community. There remain concerns that offers are difficult to compare, and as a result advisers may not be recommending relevant products to their clients because of this uncertainty . EDUCATION IS KEY : Linked to the above consideration is the importance of education of advisers and potential investors on the opportunities that EIS can offer. While over half of advisers responding to our survey felt they had sufficient tools and knowledge in this area, a third replied ‘somewhat’ to this question. Given that the cohort of respondents are likely to already be active in this area, it suggests that more education would be beneficial . THE MARKET IS GROWING : Both advisers and providers see a growing market that is bringing greater competition into the sector. With more products available, while on the one hand this can lead to greater confusion in finding the most suitable product, it also offers a wider menu from which to pick an appropriate offer - so advisers need to make sure they are knowledgeable on EIS. FOCUSING ON KNOWLEDGE-INTENSIVE COMPANIES IS BEING EMBRACED : Knowledge- intensive companies (KICs) appear to be the future for the EIS market and there are plenty of offerings springing up in this area to support a likely rise in demand. As more companies obtain KIC status, the more the market appears ready to respond and it is an area that is becoming increasingly attractive for investors. MARKET RESEARCH CONCLUSIONS