EIS Industry Report 2019/20

6 7 EXECUTIVE SUMMARY KEY FINDINGS A NEW FRONTIER FOR EIS HIGHLIGHTS FROM OUR RESEARCH Changes introduced to the Enterprise Investment Scheme (EIS) in 2018 have repositioned the market towards investments with greater risk. While the impact of this will not be seen in the official HMRC data until its 2020 update, it is estimated that any consequent fall in EIS investment will be somewhat bolstered by new opportunities such as those in knowledge-intensive companies. Even some areas expected to die out as a result of the changes have demonstrated their ability to remain players in this field. Key themes that this report focuses on include: FUNDRAISING HOLDING UP The latest figures, published by HMRC in May 2019, show a further increase in the amount of money being raised through EIS. These figures only go up to 2017-18, so do not cover when the new rules came into force. However, while it is predicted that 2018-19 will see a drop, experts believe this will only be temporary, with investment growing again in the future as managers, advisers, investors and HMRC get to grips with the new rules. They will be driven by ongoing opportunities in UK SMEs and a continuing desire for tax efficient growth. RISE OF KNOWLEDGE-INTENSIVE COMPANIES The growth of knowledge-intensive companies was predicted in the wake of the rule changes to EIS, giving these organisations higher limits on the amounts they could raise and how big they could grow while still qualifying for EIS. This has proved to be the case, with 199 companies successfully applying to become knowledge-intensive companies between April 2018 and July 2019. There were more in the first seven months of 2019 than in the last nine months of 2018, suggesting this sector is gathering pace. THE IMPORTANCE OF TRANSPARENCY There is a belief among advisers that there needs to be greater transparency from investment managers, so that accurate and reliable comparisons between products can be made more easily. This is a theme that came up in both the adviser survey and roundtable, with alignment of fees being a particular source of irritation among advisers. For managers, this is an important consideration, as a lack of a level playing field in this area is potentially discouraging advisers from recommending EIS investments to their clients. MARKET COMPOSITION The industry looks to be getting comfortable with the risk to capital rule changes as figures from the MICAP platform show an increase in the number of open EIS offers, bringing them back up to almost the same level as 2017. Technology is now the dominant sector, even overtaking General Enterprise as the top sector for EIS offers. This trend is likely to continue as the government’s knowledge-intensive fund changes are expected to come into force after the next Budget, with technology companies likely to benefit the most from this focus. £759m raised by companies raising cash for the first time VIA EIS 5% of investments into companies that have received fundraising through EIS and SEIS since 2011 have exited via ACQUISITION OR IPO 50% OF ADVISERS have not seen any change in attitude to EIS since the shift to GROWTH CAPITAL HMRC approved 2,040 advance assurance applications in 2018-19 (lowest number in seven years) 30% OF ADVISERS put LACK OF TRANSPARENCY in their top 3 concerns when selecting EIS The number of companies RAISING FUNDS THROUGH EIS continues to rise, reaching 3,920 in 2019 88% OF ADVISERS see their use of EIS increasing or staying the same over the next year Experts estimate a reduction of £350m IN FUNDS RAISED THROUGH EIS due to rule changes (2018-19) AVG MINIMUM FUNDRAISE in 2019 was £630,714 (down from over £3.2 million two years ago) The number of companies RAISING FUNDS THROUGH SEIS remains steady since 2014-15, being over 2,400 TECHNOLOGY now accounts for 41% OF ALL EIS OFFERS 199 EIS COMPANIES successfully applied to become KNOWLEDGE-INTENSIVE COMPANIES between April 2018 and July 2019