EIS 2018 report (web)

25 24 TECH AND KNOWLEDGE-INTENSIVE COMPANIES’ ISSUE WITH TALENT With the UK’s tech sector being so much of a focus in the Autumn budget, it’s worth scrutinising how well-placed these companies are for growth. Responses to the government’s PCR suggested that a lack of funding has prevented knowledge intensive companies from attracting and retaining the top talent. Brexit will of course be a concern. Will there be a “brain drain” on growing UK businesses - especially in the tech sector? Kealan Doyle, CEO at Symvan Capital, said: In order to attract talent from overseas, the government is doubling to 2,000 the number of Exceptional Talent Visas available for top talent in digital technology, science, arts and creative sectors seeking work in the UK. 21 Such measures may be attractive for technology experts, but the environment is undoubtedly uncertain for non-UK nationals. IS THE TECH BUBBLE AT BURSTING POINT? With Philip Hammond evangelising the benefits of UK technology and promoting the idea of a UK “hub of enterprise innovation”, the question over whether the sector is a solid investment comes to the forefront. It’s no secret that investment in tech is declining globally, and it has been for a while. The number of deals being closed is at its lowest since 2012, and some commentators are speculating that the tech bubble is about to burst in a similar manner to the dot com bust of 2000. 22 Part of the reason for this may be the public perception of tech, and the over- saturation from “app-overload”. However, the slowdown in investment is likely to be more of a gradual deflation, as opposed to an outright crash. Looking at tech investment in the UK, the deflation of the tech bubble is rather subtle in comparison with other global markets. However, if tech companies opt to relocate elsewhere in Europe amidst the UK’s exit from the EU, the slowdown could be far more detrimental. On the other hand, continued government support for VC firms may enable the UK to hold onto innovative tech companies. Firms will no doubt be encouraged by the government’s investment via the BBB, and its continued support for VC schemes. It’s also worth noting that at the smaller end of the tech market, where EIS is being focused, investment is growing. According to MICAP data, over 27% of open EIS offers are focused on tech investment - up from 20% in 2016. SUPPORT FOR R&D AND UNIVERSITY SPIN - OUTS The budget detailed further support for research and development (R&D), with a particular focus on bolstering the growth of university spin-outs; The Treasury has allocated an additional £2.3bn of investment in R&D, and will increase the main R&D tax credit from 11% to 12% in 2018. 23 “The key areas for investors to look at when considering whether a technology should be invested in are: is the technology highly disruptive, is the technology globally scalable and is the management team committed to the scaleup of the business? Advisers and investors can only understand these if they know the types of companies in to which they are investing.” — ANDREW ALDRIDGE, DEEPBRIDGE PERFORMANCE DATA REVIEW HIGHLIGHTS The most recent British Venture Capital Association performance survey 25 reveals that total UK private equity and venture capital for 2016, stands at a 23.1% internal rate of return (IRR). This compares with 16.8% IRR from UK equities. The survey also reveals that private equity has outperformed over the short- and medium-term, producing three and five-year annual returns of 12.7% and 13.7%, respectively, compared to the FTSE All-Share, which returned 6.1% and 10.1% to investors over the same respective time periods. However, it’s difficult to separate EIS fund performance from other VC investments as they are not A tax break is a nice thing to have but the investment strategy still needs to stack up and it was actually some of the budget announcements that did not hit the headlines that will further enhance the investment case - especially for some investment strategies. The ‘knowledge intensive’ companies will indeed benefit from the changes in terms of deployment but it is the increase in research and development tax credits and additional grant monies for university spin outs - not the tax changes - that will positively impact the investment case. 24 In terms of legislation, Brexit has almost no impact. However, from our perspective as a technology fund manager, I think there’s an indirect negative impact, depending on the deal that gets struck. It could restrict talented people coming to the UK 20 . Tom Hopkins, partner at Kin Capital, explained that the increased support for R&D notably improves the investment case for VC firms: listed funds - and there is limited information available in the public domain. But Parkwalk EIS posts its track record on its website and the tax years outside the three-year EIS holding period are showing returns of 1.71x to 2.83x capital invested (not including EIS reliefs and fees). 26 These returns have been generated through £600m of investments across 80 innovative companies in EIS, SEIS, AIM-quoted and Innovation and Enterprise funds. 27 At Q1 2018, Parkwalk had achieved 13 exits via successful trade sales, a secondary sale, and AIM listings. Par Equity has also published performance data showing that, to the end of 2017, the firm had made SOURCE: BVCA UK PRIVATE EQUITY VS FTSE ALL-SHARE ANNUAL RETURNS 2016 (% p.a.) 3 years (% p.a.) 5 years (% p.a.) 10 years (% p.a.) 5% 0% 10% 15% 20% 25% TOTAL UK PRIVATE EQUITY FTSE ALL-SHARE “Total UK private equity and venture capital for 2016, stands at a 23.1% IRR. This compares with 16.8% IRR from UK equities.” EIS qualifying investments into 39 technology companies, of which seven have led to exits. Over these seven investments the average monetary gain was 69%, with four providing bigger than targeted multiples (pre-tax IRRs of 33%, 45%, 40% and 30%) and three going insolvent. 28 Imbiba, which invests in EIS opportunities within the leisure and hospitality sector, reports an average compound IRR since 1998, for all projects that have been realised or written-off, in excess of 35% per annum. All returns exclude EIS tax relief. These realised investments have generated £38m of cash from a cumulative investment of £14m. 29