EIS Industry Report 2018/19

8 9 EXECUTIVE SUMMARY KEY FINDINGS A NEW FRONTIER FOR EIS HIGHLIGHTS FROM OUR RESEARCH The majority of focus for this year’s EIS Industry Report is on the impact of the rule changes from the 2017 Budget, and how investment managers have grappled with the shift to growth capital investment. Philip Hammond’s 2018 Budget imposed only very minor changes to EIS, which was to be expected considering the significant changes to the scheme in the previous year. It appears that this current landscape for EIS will be similar for several years to come. £1.8bn was raised via EIS IN 2016-17 an 8% DECREASE on the previous year One EIS exit achieved a 75x RETURN in the past year 36% OF ADVISERS said the shift to growth has made EIS more DIFFICULT TO RECOMMEND TOP 4 CROWDFUNDING PLATFORMS invested £215m in UK businesses in 2017 50% OF OPEN OFFERS have a focus on TECHNOLOGY The most common MANAGER TARGET is 10 INVESTEE COMPANIES 80% OF ADVISERS said increased limits for knowledge-intensive companies made NO DIFFERENCE to EIS investment Average target return is over 2x INVESTMENT There are 54 OPEN EIS OFFERS compared with 65 last year 31% of offers target an investment duration of 5 YEARS OR MORE AVERAGE MINIMUM SUBSCRIPTION for an EIS offer is over £18,000 Key themes that this report focuses on include: BEDDING IN THE NEW RULES A year on from Philip Hammond’s 2017 Budget, EIS providers are navigating the new landscape after quite drastic changes to the Venture Capital Scheme. The risk-to-capital condition means that investment providers can no longer focus on capital preservation strategies. Because of this, investment is being funnelled into UK scale-up businesses that will benefit materially from this fundraising. SUITABILITY HAS NARROWED Now that EIS is purely focused on growth capital, the suitability of this investment vehicle has narrowed once again. In our last report, we said that EIS was only really suitable for HNWIs. This rings even truer now. The tax relief on offer is now almost incidental, and acts merely as a risk mitigator. This brings back EIS to how it was originally supposed to be structured. EIS is now only suitable for investors who have the capacity for loss. These are pure growth-focused investments, and the risk of failure should be top of mind for advisers and investors alike. THE MARKET HAS SHRUNK The amount of open EIS offers has notably shrunk compared with November 2017. There are now 54 offers open to investors, compared with 65 last year. Some investment managers had to close their offerings as they were focused on capital preservation strategies, which had been disallowed in the 2017 Budget. Other managers opted to pivot into growth areas, and some of them will be doing this over the coming months. Although the market has slimmed down somewhat, there are still a myriad of EIS investment opportunities for prospective investors. TECH INVESTMENT DOMINATES Technology investments are a focus for approximately half of the open offers in the EIS market. Technology companies are often growth-focused, and many of them will be classified as knowledge-intensive companies. Because of this, they will be able to receive a greater amount of investment, due to the rules laid out in Philip Hammond’s two most recent Budgets. There is, of course, a concern that there is too much focus on technology. However, technology has a multitude of sub-sectors within it. EIS investments in technology range from Biotechnology to SaaS platforms, and thus create a diversified selection of options for investors. Under 17% OF OPEN OFFERS are ones that have pivoted from CAPITAL PRESERVATION