EIS Industry Report 2018/19

38 39 YEAR IN REVIEW A SNAPSHOT OF RECENT EXITS It’s encouraging to see a number of notable exits from EIS managers over the past year. The following companies are all reflective of growth strategies which would be compliant with the new rules implemented from the 2017 Budget. With the greater focus on technology within the EIS landscape, we would expect there to be a number of company failures. Failures will now become more common; however, these should be balanced out by the high growth returns of the winners. CONCLUSIONS MARKET UPDATE CONCLUSIONS 1. FUNDRAISING DIPS ARE NOT A RED FLAG Although the most recent figures from HMRC indicate a dip in EIS fundraising, this should not be a deterrent for advisers and investors. The latest figures take into account the 2015 Budget, where the first restrictions were placed on capital preservation strategies for EIS. It’s likely that there will be less fundraising available for growth capital options — it is, of course, a riskier bet for investors. However, the capital that will now be invested via EIS will be funnelled into the UK’s fledgeling businesses, generating income for UK PLC and creating a myriad of employment opportunities. 2. CLARITY IS STILL NEEDED ON GREY AREAS With the risk-to-capital condition being a principles-based approach, there were undoubtedly going to be grey areas in how the new rules were to be implemented. It is inevitable that the fog will clear over what precisely HMRC is looking for. However, this will take some time as information materialises on which companies qualify for EIS, and which do not. It’s worth noting that HMRC’s approach is “in the round” when it comes to the risk-to-capital condition. One would hope that a pragmatic approach will be taken towards companies that are truly growth capital opportunities. 3. TECH IS DOMINATING THE MARKET Around 50% of currently open EIS offers are investing in technology companies. This is a sector that, more often than not, is focused on growth capital. Many of these companies will also be able to take advantage of the government’s added incentives for knowledge-intensive companies. However, it would be encouraging to see other sectors take advantage of growth capital funding via EIS. There are so many fantastic UK businesses that could benefit from follow-on-funding. Intelligent Partnership’s 100 Stories of Growth 37 campaign illustrates this. We will likely see a more diverse range of sectors receiving EIS funding in the future. “The best EIS fund managers are those that can add strategic value and direction, without restricting entrepreneurial flair.” — JOHN DAVIES, SENECA PARTNERS Seneca Partners invested £1.25m from its EIS Portfolio Service in Gear4Music in June 2015 as a cornerstone for the company’s IPO on AIM. 34 Annual revenues have increased from £24m to more than £80m in three years, while its market capitalisation has been boosted to more than £150m. 35 In total, £6.5m was returned to investors, amounting to 5.2x. The target return was between 1.5x and 1.8x. Underlying company details Gear4music is one of the largest UK online retailers of musical instruments and equipment. Founded in 1995, Gear4Music Limited had been profitable since its launch as Gear4Music in 2003. Operating from York, the group sells own-brand musical instruments and equipment alongside premium third party brands including Fender, Yamaha, and Gibson. SENECA EXITS GEAR4MUSIC FOR 5.2X RETURN In May 2018, VC firm Par Equity delivered one of the strongest investor returns in recent years following its sale to the International Correspondence School (ICS Learn). 36 After five years of refocusing and growing ICS Learn, the business syndicate delivered a 75x return for investors after a sale to a private equity-backed MBO. Underlying company details ICS Learn provides online accredited courses for people wishing to take a range of GCSE, A-level, management, and sport courses. Its personal fitness course was the first in the world to let students to complete their qualification exclusively through video submissions of their work. The gym and sports market has been growing in popularity in the UK in recent years. Par Equity raised investment to acquire the business, and funds were used to improve existing technology, course content and staffing. About 20 new employees were hired and new tools, support and virtual learning environments were acquired. PAR EQUITY EXITS ICS LEARN FOR 75X RETURN Symvan’s first investment in 2014 was in Nottingham-based technology group Buying Butler (BB), that emerged from a Microsoft accelerator program. In 2018 there was a joint venture with automobile insurtech group, RightIndem, who acquired BB for its technology. Underlying company details RightIndem utilised BB’s tech to develop a digital AI tool which it combined with a voice technology product developed by Deloitte to disrupt the insurance claims market. The acquisition resulted in BB shareholders receiving a 2X return on their original investment. SYMVAN EXITS BUYING BUTLER FOR 2X RETURN