EIS Industry Report 2018/19

50 51 More opportunities, but potentially smaller fundraising targets With EIS’s shift to growth capital, there is a far greater focus on early-stage businesses. These businesses may not have the need, or capacity, to receive vast levels of fundraising. Many of the qualifying businesses are now less mature than in previous years and, therefore, potentially unable to justify initial investment much north of £1m at this point in their development. The due-diligence process alone may mean that transacting more than 20 deals a year at provider level is a challenge. However, among open EIS funds, only nine out of 54 (16.7%) have a target raise of £5m or less. The most common target raise of open EIS offers is a hefty £10m. In terms of diversification, the average target number of investee companies for currently open offers is 6.6. It appears that providers are not engaging in a large number of deals. Investors and advisers should consider whether investing in one offer alone is adequate enough diversification. On the other hand, providers tend to be quite conservative on the number of companies they suggest that they will target. In reality, some offers have over 40 underlying investments in their EIS portfolios. THE BREXIT IMPACT HOW IS EIS FAIRING? It’s not all doom and gloom when it comes to Brexit. EIS providers are still finding a pipeline of investable projects post-Brexit, with technology investments seeing particular benefit. The British Business Bank saw that the value of SME asset finance deals was up 12% in 2017, while the value and number of equity deals rose 79% and 12%, respectively. A record £2.99bn was invested in technology SMEs in 2017, while a record £46bn was invested into tech-focused funds – a 600% increase on 2016. Brexit hasn’t dampened demand for private companies A survey of over 2,000 investors by the EIS Association (EISA) revealed the UK’s decision to leave the European Union, as voted on in June 2016, has done little to dampen enthusiasm for private investing. 49 A total of 29% of respondents felt Brexit would strengthen SME productivity. Another 28% felt that knowledge-intensive companies will benefit from Brexit. While there is clearly stock market nervousness about investing in the UK, over a quarter of affluent investors feel more encouraged to invest in UK SME opportunities, as a result of Brexit, while 18% are holding back until after Brexit. A fifth of those with £75,000 to £100,000-plus to invest want to invest but are holding back to see the outcome of Brexit. For advisers active in this sector, investors holding back presents an interesting conundrum. Waiting several months until Brexit is formalised means opportunities can be lost and potential growth opportunities could be missed. 50 However, investors in EIS should have a far more long-term trajectory — they are looking to invest for several years, rather than a matter of months. Mark Brownridge, director general of the EISA, said: ”We must remain optimistic yet cautious; we need to ensure that investors have the confidence to continue to look to UK SMEs as a viable investment, and also ensure that there is enough capital for investors to reinvest back into UK businesses.” 51 Alternative investments less correlated to domestic markets Investing in private companies may not be positively correlated to the performance and volatility of open markets. This could be somewhat of a USP for private company investing. Average Mode Medium Minimum Maximum TARGET RAISE £9,3m £10m £10m £1m £20m Average Mode Medium Minimum Maximum TARGET NUMBER OF INVESTEE COMPANIES 6,6 10 6 1 15 Considerations for Investment / Deal Flow