The first quarter of 2020 has certainly been an eventful one. First there were the geopolitical tensions between the USA and Iran, before the coronavirus Covid-19 pandemic swept all before it, creating conditions unseen in peacetime across many different countries and panic on the economic markets.
With the continuing effects of the virus still very much with us, there is a growing clamour for the government to introduce temporary measures to support the industry. And our latest EIS Quarterly Industry Update provides a strong evidence base to highlight why this market is worth protecting. The Update includes a section on the impact of the pandemic, highlighting how the industry is responding and acting as a reminder that such investments are long-term plays. To read that section, click here.
On a more positive note, the recent Budget confirmed a new ‘approved’ knowledge-intensive fund for EIS would be introduced – something you can learn more about in our new Update, here. However, this should not be seen as an effort to kickstart a dormant market – more to raise the profile of a sector that has in some respects remained one of the best kept secrets of UK small business success.
Research carried out by Intelligent Partnership as part of the EIS Quarterly Update has shown just how buoyant the EIS market has proven to be. According to statistics from the MICAP platform, an impressive 21 new funds opened in 2019 – more than double the previous year. With 66 open offers over the course of 2019, that was the highest number for at least four years. To see the key findings from the report, click here
One of the key reasons for the rise in open offers looks to have been the introduction of the risk to capital condition in 2018. While this caused a short-term slowdown, as investors and fund managers alike got to grips with the new rules and the need to invest in higher risk companies, it appears that many are now feeling much more confident about the new rules.
The 2018 changes also helped to bring some new players into the market, with some managers who had previously been focused on growth companies recognising the opportunities that EIS now holds and therefore launching funds of their own.
“We are now seeing both late and early stage VCs who have actively invested in this sector for years now realise that EIS and VCT are exceptionally good ways of raising funding,” said Mark Brownridge, director-general of the EIS Association.
Perhaps another reason why EIS has continued to be a popular choice with fund managers is the uncertainty in the wider economy.
There were plenty of things to keep investors worried in 2019, whether it was the potential of an escalating trade war between the US and China, rising Middle East tensions, Brexit uncertainty or a lack of political clarity in the UK.
While some of those issues have been resolved, others – notably the coronavirus outbreak and subsequent fears in the world’s stock markets – have taken their place and any hopes of entering a decade of stability as we begin 2020 seem to have been blown away.
This may be playing into the hands of EIS investments, as investors look away from traditional markets to find new plays that can offer strong returns. While the risk to capital changes ensure that all investments in EIS are inherently risky plays, some may be willing to take that risk at a time when more conventional investments are struggling.
Furthermore, as the global challenges play out across stock markets, investors may be more keen to focus their money on small British businesses, which may have less exposure to some of the macroeconomic issues affecting multinationals.
Tech out in front
Something that the latest Budget clearly acknowledges is the role of research & development – not just in EIS but across the UK economy. It’s one of the key drivers behind the ‘approved’ knowledge-intensive fund and it is no surprise that technology companies are perhaps the main beneficiaries of this.
The EIS Quarterly Update confirmed this, with 42% of EIS funds focused on Technology, meaning the sector has increased its share of the EIS market by 10 percentage points since Autumn 2018.
The recent global fears of the coronavirus have also thrown the spotlight onto medtech, as many around the world begin to recognise the important role this sector plays in keeping us all safe, and protecting us from the threats of both today and tomorrow.
In the UK, medtech is a burgeoning market and one that has been well supported by EIS over the years. The increased focus on research & development under the rules around knowledge-intensive companies means medtech is attractive for EIS fund managers, and demand for this sector’s skills is likely to continue to increase following the reminder of its importance to all our lives.
To find out more about the first ever EIS Quarterly Industry Update, click here