EIS 2018 report (web)

23 22 Philip Hammond’s budget had a clear focus on growing the UK’s technology sector, whilst continuing government support for VC schemes. The Chancellor was keen to avoid merely addressing the issues arising from Brexit, and looked to generate support for fledgling businesses. Hammond said in his budget speech: UNCERTAINTY OVER EUROPEAN INVESTMENT FUND One of the uncertainties in the VC market is the status of the UK’s relationship with the European Investment Fund (EIF), in light of Brexit. This has an impact on EIS schemes, as a significant portion of eligible funds are backed by this fund. The EIF is one of the largest sources of funding for British VCs (including EIS, VCT, SEIS and SITR schemes - it has been referred to as the cornerstone of the European venture capital industry, giving other investors the confidence to come on board). The fund accounted for over a third of all money going into VC funds between 2011-15, putting €2.3bn into 144 UK venture capital firms. 16 However, UK firms are already being cut off from the fund as it freezes its support, even before the UK officially exits the EU. Since the triggering of Article 50, several VC funds have complained that EIF has withdrawn from commiting capital to their funds. 17 EIF UP FOR NEGOTIATION The EIF invests in a limited number of non-EU countries, so it’s not entirely implausible that the UK could be included in that list. In response to the PCR, the government suggests that there is still scope for negotiation: The EIF has denied pulling out of the UK altogether, stating: THE BRITISH BUSINESS BANK FILLING IN The Autumn budget revealed that a new dedicated subsidiary of the British Business Bank (BBB) would be setup to invest in patient capital across the UK. MINIMUM FUNDRAISE It’s worth noting that the mode for Capital Preservation and Growth has risen to £15m from £4m in 2016, revealing that investment companies are requiring much higher levels of fundraising before proceeding with an EIS investment fund. Perhaps surprisingly, this does not apply to Growth products, for which the 2016 mode of £2,000,000 remained FEES ARE RISING Fees are rising, even if the fees directly charged to investors don’t appear to be. Transparency around fees to investee companies is important, and this is something that advisers should be aware of when suggesting EIS portfolios to their clients. SECTOR ANALYSIS CONCLUSIONS “EIS is a valuable tool for investors seeking to reduce their tax burden and gives investors the opportunity to access exciting UK companies with potential for growth and development.” — JERRY PRICE, BLACKFINCH MARKET DYNAMICS A FRUITFUL ENVIRONMENT FOR UK VC? A new tech business is founded every hour in the UK, I want that to be every half hour. While some respondents proposed that the government should set out plans to replace EIF at the budget, the UK’s negotiating position remains to explore the potential for a mutually beneficial relationship with the EIF once the UK has left the EU. Allocation of resources across programmes would be reconfigured if the UK does not retain a mutually beneficial relationship with the EIF. 18 There is no moratorium on lending to UK projects. It is the case that due diligence on them now needs to take into account a wider range of factors. 19 THE HEADLINE DETAILS INCLUDE: A new £2.5bn investment fund incubated in the BBB is to be floated or sold once it has established a sufficient track record. By co-investing with the private sector, a total of £7.5bn will be released. £500m of public money through the BBB into a series of private sector funds of funds to encourage new institutional investment in high-growth sectors. Up to two further waves of investment will be launched, facilitating up to £4bn of financing in total. £1.5bn through the BBB’s existing Enterprise Capital Fund programme. £1bn of support for overseas investment in UK venture capital through the Department for International Trade. The launch of a commercial investment programme run by the BBB to develop groups of business ‘angels’ outside of London. A National Security Strategic Investment Fund to invest in advanced technologies that contribute to national security. AVG MODE MIN MEDIAN MAX CAPITAL PRESERVATION & GROWTH £8,125,000 £15,000,000 £1,500,000 £6,500,000 £15,000,000 GROWTH £1,480,000 £2,000,000 £150,000 £950,000 £5,000,000 “A key challenge has been dealing with the market demand for EIS funds that do not fall at the very top end of the risk profile. There are many high-octane technology funds out there but the real demand seems to be for something a little less exciting.” — LAURENCE CALLCUT, DOWNING MAKE HAY WHILE THE SUN SHINES? MICAP data suggests that some managers may have looked to exploit strategies that they believed would be outlawed in the Autumn budget - namely capital preservation strategies. MANAGERS ARE CHANGING THEIR ATTITUDE TOWARDS RETAIL INVESTORS The move towards alternative investment funds as a structure is restricting the ability for funds to be offered to retail investors. High barriers to entry in the form of very large minimum subscriptions may also put EIS portfolios out of reach for the vast majority of retail investors. MINIMUM FUNDRAISE OF OPEN OFFERS BY INVESTMENT STRATEGY unchanged in 2017. It seems clear then, that the overall increase in minimum fundraise in open 2017 offers was driven by managers of Capital Preservation and Growth offers. Such a large increase seems to lend more weight to the argument that managers were keen to make the most of the existing regulatory landscape before the introduction of new rules.