EIS Industry Report 2018/19

28 29 TOP INVESTMENT SECTORS A SHIFT TO GROWTH CAPITAL With the new rules implemented from the 2017 Budget, low-risk EIS investments are now no longer permitted. EIS offers that were previously focused on capital preservation strategies had to close. The most common method of obtaining capital preservation was via asset backing in the underlying investments. It’s worth noting that the new rules are not being applied retrospectively. This means that investment providers will still be managing companies that do not comply with the new investment rules, and will be looking for exits. However, these offers will not be open to new EIS investors. The EIS market, as it stands today, is purely focused on growth capital. As a result, certain sectors have gained prominence. Nearly 50% of open EIS offers are now purely focused, or have a significant allocation on technology investment. Of course, this has upped the risk profile of EIS investment, but it has also increased the growth potential. It’s important to remember that the government doesn’t want people to invest in EIS as a pure tax avoidance play. The investment case of these companies has to stand up in their own right, i.e. the tax dog mustn’t wag the investment tail. We will discuss the risks associated with EIS investment in the new environment later in the Considerations for Investment section of this report. Deep dive on Tech Within tech investment itself, there are a few sub- sectors that are proving popular with EIS investment providers. These include, but are not limited to: medical technology, SaaS, Fintech, e-commerce, EdTech, and machine learning & AI. Tech investment itself has a wide array of risk profiles within it, as well as different times to exit. For example, a medical technology investment may take several years to be developed and to pass through regulatory hurdles. However, the demand for the end product is likely to be more predictable. On the other hand, a SaaS investment might be easier to implement, but take-up from consumers is not necessarily guaranteed. The following is a taster of the technology sub- sectors that EIS managers are focusing on. Medical Technology The UK has a very well-established biopharmaceutical and medical technology industry, which has a significant input into worldwide research and development. There are more than 3,700 companies in the UK medtech sector. The vast majority of them are SMEs, together generating sales in excess of £21bn a year. 27 There is a significant case for growth within this sector. In the UK, 30% of the population suffers from a chronic condition, and the management of chronic disease has been estimated to account for 70-75% of all UK healthcare costs. With the NHS being perpetually stretched, there is an ever-increasing demand to improve efficiencies. This is where medical technology plays its crucial role. Often, SMEs are carrying the burden of innovation, paired with the extensive work that occurs at university spin-outs. These are the sort of projects and companies that the government is keen to divert capital to, and many of them will qualify as knowledge-intensive companies. A significant amount of open EIS offers cite medical technology as an investment focus. Some investment managers will have years of experience in this sector, others will have pivoted from areas focused on capital preservation. Investment Manager: Boundary Capital AngelPlus Investment Fund Image Scan is a manufacturer of x-ray devices, with a portfolio of advanced real-time x-ray screening systems with applications in both the security and industrial inspection markets, offering ‘best in class’ x-ray images and a powerful range of processing tools to provide optimum clarity and resolution. It is notable, in particular, for its portable security systems. The company is listed on AIM. Investment Manager: Deepbridge EligoChem Ltd has developed a proprietary technology that aims to facilitate the design of highly water- soluble drugs that are absorbed well by the human body, particularly suited to antibiotic drug discovery. Since its founding, the company’s technology has created a library of diverse compounds that possess this watersoluble property, and are therefore intended to offer high absorption. EXAMPLES OF CURRENT EIS MEDTECH INVESTMENTS: Market Update / Top Investment Sectors