EIS 2018 report (web)

54 55 we launched our life sciences EIS, which means that we now have two EIS propositions – the technology growth EIS, and the life sciences EIS. We also launched, in the back end of 2017, the innovation SEIS, which sits alongside our life sciences SEIS. We’re fairly agnostic about what tech is. It could be hardware, software, it might be medical technology, it might be an online app, AI, robotics, blockchain, etc., Likewise, life sciences, could be anything from medical technologies again, biotech, drug discovery, pharma research, etc. We know that there are plenty of investors that would like to invest in healthcare and medical ideas, but actually understanding how those businesses work, and that market is much more of a minefield for your average investor. Our message, for both, but particularly life sciences, is that if you are investing in life sciences, you have to be investing alongside sector experts who know that market inside out. For example, some of our R&D companies in the life sciences world could never earn a single penny of commercial revenue in their life. If you don’t know that market, how do you do your initial valuation, how do you support that business and ultimately how do you know how to exit that business? DB: Currently we are awaiting the clear definitions of what will be considered to be asset- focused and, therefore, whether future Advance Assurance will be given. We believe that our current understanding may mean that the potential to develop the Blackfinch EIS Construction companies will continue. We also believe that our project of building a shipping fleet will also be allowed as neither are asset-focused under current definitions. We also believe that both Construction and Short Haul Shipping fleets fulfil the risk criteria and the growth requirements set out under the Autumn Statement. The Blackfinch Media EIS, you could say is more tenuous with the asset, because you’ve got TV distribution rights, however, it tends to be the broadcaster, who’s actually asked us to do a programme, for instance, has actually paid 70% of the cost back when we’ve produced it. There is the real risk is that we can’t sell that programme worldwide. But you do still have the TV programme, it is still an asset to sell. With the film music score, we get paid a royalty which is paid for 70 years when any film is played. So again, from the government’s point of view, we do have an asset and we are getting a recurring income from it - we’re not going to be allowed to do that going forward. Prior to the Patient Capital Review being announced, the Blackfinch CEO and investment team were already investigating going into the growth EIS, which will fit beautifully within the new rules. We’re in advanced talks already, and that one will be launched in the summer this year. We have started talks with another one. So hopefully we’ll have at least one, if not two, EIS Portfolios which fit with the new rules. HOW HAVE THE CHANGES FROM THE BUDGET IMPACTED YOUR BUSINESS, WHAT CHANGES HAVE YOU MADE IN RESPONSE TO THE NEW LEGISLATION? AA: With all of our companies, we’ve never had any issue or worry that they wouldn’t qualify for EIS going forward. A vast majority of them will be classed as knowledge- intensive businesses as well. From our perspective, it’s had zero effect on what we do and how we do it. The only thing is that knowledge-intensive is even more of a key focus in our due diligence. Obviously we’re getting more guidance from government on what knowledge- intensive looks like. In terms of Advance Assurance, we are finding that HMRC, over the last 12-18 months, has been asking more questions but nothing untoward. The theme of those questions hasn’t changed hugely, so I think in terms of what we’re submitting to HMRC etc., we’re confident that we’re sending them the right information they need. IB: From a growth cap point of view, we’ve been doing it for years. So, to that extent there’s not been too much change. MiFID has been a bigger issue!! But we always say that if tax relief were abolished tomorrow, we would still invest in the businesses that we select for our portfolios, because their fundamentals support a growth investment objective. LC: I have already mentioned the restructuring within the investment team to allow our growth team to provide a ladder of funding to companies. This seemed like a logical step for us as the government moves to focus on knowledge- intensive companies. It is an exciting opportunity for us to help these businesses grow beyond the seed stage. KD: In terms of our portfolio composition, we were completely unaffected by the budget. We are one of those few asset managers that was unaffected in a negative way. In a positive way, we’re one of the games in town and we don’t have to change what we invest in or anything like that. SB: The changes haven’t impacted our business model, other than to underline that what we’re doing is what was originally intended for SEIS and EIS. MB: We welcome the changes that have come about in the budget, which aim to make the EIS more targeted. It’s important to say that the government has reiterated that EIS does currently and will continue to form a major part of encouraging growth in the UK economy, and that film and television is a major part of that. What will change for the companies receiving EIS funding is the level of commercial risk they need to be exposed to in order for the investment to qualify for tax relief, which will in turn impact the investors providing the equity capital. Our sector expertise and track record means that we have the ability to recognise and deploy the capital into the highest quality companies which will manage commercial risk carefully. Again, with the changes coming into force, it will be a challenge for advisers to adjust to the new risk/ return profiles so choosing their EIS managers based on scale and track record will be key. Our business is not wholly reliant on EIS and we are always exploring new and innovative ways to deploy capital into our three chosen sectors. That said, our EIS experience and track record has led to the imminent launch of a new Ingenious Infrastructure Ventures EIS proposition, which is designed to take into account the new legislation and which will be managed by our team of 30 infrastructure professionals, and we are concurrently launching new EIS qualifying investment opportunities in online gaming, film and television. As has always been the case, we will only deploy investors’ capital in companies which have received the appropriate Advance Assurance from HMRC that their business is a qualifying activity. While there are inevitably challenges to overcome, we see this as an exciting time for the EIS market. DB: The impact of the budget has been quite positive, because it’s actually buy now while you can. For this current tax year until that key date of Royal Assent we expect there to be a high demand for the remaining asset-focused EISs available in what seems to be an already constricted market. But, to be honest with you, when we actually have the new EIS funds, I can’t see that capacity necessarily is going to go down. I do see a different type of client who will be buying it. At the moment when you can have asset-backed capital preservation mandated, you actually have an older demographic. You might have older clients deferring capital gains tax for inheritance tax purposes. It’s not going to be nearly as appealing now with the real high-growth innovation EISs, but who it will appeal to is the younger company director types, the high net worths. And those people, now they’re limited on pensions, are going to have to look at other avenues for getting tax relief and investment. WHAT CHANGES WOULD YOU LIKE TO SEE IN THE MARKET AND WHAT ARE YOUR CONCERNS FOR THE FUTURE? DB: One thing that is good is that the government has absolutely backed EIS in the autumn statement. “The biggest challenge we’ve faced is almost out of our control in some degree, in that there’s been uncertainty in the marketplace. A number of our peers in the market have had to seriously consider the structure of their business, and that uncertainty from provider level down to advisers has been noticed.” — ANDREW ALDRIDGE, DEEPBRIDGE CAPITAL JOHN SCHAFFER DOMINIQUE BUTTERS ANDREW ALDRIDGE LAURENCE CALLCUT MATTHEW BUGDEN IAN BATTERSBY SARAH BARBER KEALAN DOYLE “It’s great that we can still raise money on the companies that have Advance Assurance, and reliable information is that Royal Assent will be in the third week of March 2018, but it is probable some of the Blackfinch current companies in the stable of EIS Portfolios will not be able to raise post Royal Assent.” — DOMINIQUE BUTTERS, BLACKFINCH “The impact of the budget has been quite positive, because it’s actually buy now while you can. For this current tax year until that key date of Royal Assent we expect there to be a high demand for the remaining asset-focused EISs available in what seems to be an already constricted market.” — DOMINIQUE BUTTERS, BLACKFINCH