EIS 2018 report (web)

29 28 A SNAPSHOT OF RECENT EXITS TANGIBLE SUCCESS STORIES ROCKPOOL EXITS NCE GROUP LIMITED AT 67% IRR Exit details Rockpool Investments LLP announced the sale of NCE Group Limited to Park Place Technologies in August 2017. 35 Rockpool backed a management buyout of NCE in September 2015. The exit provided an IRR of 69% and 2.6x equity invested for investors. Underlying company details NCE provides a range of IT maintenance services and tailored solutions to a global customer base, from secure servers and data systems to equipment repairs and part sales. It has offices in the UK and the US, and has been active since 1981. EXIT FOR MMC VENTURES EIS: LOVE HOME SWAP ACQUIRED BY US HOTELS GIANT Exit Details The sale of Love Home Swap, which has been reported to be around £40m 36 , is an exit for MMC Ventures, which invested through its EIS fund and two other funds it manages. The deal, which took place in July 2017, included the sale of all shares. The business was acquired by RCI, which focuses on vacation exchange. RCI forms part of the WyndhamWorldwide family of brands which includes Ramada, Travelodge and James Villa Holidays. MMC first invested in Love Home Swap in 2011, and injected further capital in 2013 37 . In total, MMC Ventures invested £2.65m over two rounds and held the equity across three of its funds – the EIS portfolio, Enterprise Capital fund and London Fund, an investment vehicle for the Mayor of London’s office 38 . This was MMC’s second EIS exit in 12 months after the trade sale of Breathing Buildings in December 2016. Underlying company details Love Home Swap has grown over six years to be one of the largest home exchange platforms. It lists over 100,000 home-swap properties in more than 140 countries. EXIT FOR GOLDFINCH PICTURES LIMITED Exit details Goldfinch Entertainment exited it’s Goldfinch Pictures Limited EIS in November 2017, gaining a 23% return for its investors 39 . The company stated that it achieved a return of £1.23 for investors. Underlying company details Goldfinch Pictures invested in a number of films including: Le Mans: Racing is Everything, You Can Tutu, and Hector. NOT ALL INVESTMENTS CAN BE A SUCCESS There will of course be failures among underlying EIS companies. This is a high risk investment, and that’s why there is a significant amount of tax relief available. Transparency around investment failures could be improved among EIS providers. There is minimal publicly available information about unsuccessful EIS investments. Although it may be a hard pill to swallow, EIS managers may find investor confidence is improved by being less reserved about their failures. These issues allow them to evidence how their portfolio approach works to offset losses. After all, the basket of investments that managers assemble will assume that some of the companies will be failures. REASONS FOR EXITING EARLY Usually exits occurring before the three-year holding period has been achieved involve an investment that has failed, often meaning the portfolio company has gone out of business. In this event, there still may be an upside, as, if a company goes into liquidation, with an administrator formally appointed, then HMRC would most likely not request the tax incentives back from investors. 40 However, there may be instances where an EIS manager simply decides to cut its losses. For example, an opportunity to sell a company at a favourable price may arise. The alternative may be for the company to seek significant follow-on investment to support it through a further growth phase. However, this follow-on investment may be difficult to attract, and there is no guarantee that there would be a successful exit in the future that would compensate for the additional risk and elapsed time. 41 On the other hand, a deal may be available to sell which will offer greater returns to the investor than waiting for the 3 years to complete. Although the tax relief is lost, the significant investment gain mitigates that loss. “Having a portfolio approach to EIS and SEIS investing will reduce the risk and increase the potential for positive returns.” — SARAH BARBER, JENSON “LE MANS” SOURCE: EISA EIS PORTFOLIO EXAMPLE X X X X Four companies fail completely and the investment is worthless - loss relief can be claimed on the £4,000 invested Assuming the investor is a 45% tax payer, loss relief amounts to £1,260 Two companies return the money invested £2,000 Two companies perform reasonably well and double their value £4,000 Two companies perform very well and quadruple their value £8,000 £10,000 INVESTMENT SPLIT EQUALLY ACROSS 10 COMPANIES (Net cost of investment after initial EIS income tax relief = £7,000 ) TOTAL RETURN TO INVESTOR IS £15,260 This is for illustrative purposes only and should not be viewed as representative of how a real EIS fund investment is likely to perform. Some portfolios may perform better and some may perform worse than in this example.