Gonçalo de Vasconcelos, Chief Executive and Co-founder of SyndicateRoom, looks at the growing appetite for EIS and SEIS investing.
Early stage investing has shown itself to be incredibly mutually beneficial – for the investor looking for returns in a low yield and low growth environment, and for companies looking for funding to achieve their growth objectives.
Encouragingly, our research into investors’ views on early stage investing, which also looks at investor interest in tax efficient investment products such as EIS, shows that there is plenty of appetite for further investment into high-growth businesses.
The low return environment is encouraging many UK investors to look further and increase their risk appetite. They recognise that they need to do something different to make their money work harder for them.
The investment problem
For the past 20 years interest rates have been declining. In the mid-1990s nominal 10-year yields on government debt in rich countries hovered around 8–10%. Today, they’re well below 2%. This poses a problem for investors: it’s increasingly difficult to find yield. On top of this, market volatility has increased, not only because of the after-effects of the 2008/09 financial crisis, but also because of phenomena such as the slowdown in Chinese economic growth, Brexit and the election of Donald Trump as US President.
Despite this volatility, or maybe because of it, our research found that two fifths (39%) of individual investors said that they are more willing to take risks than they were a year ago. Meanwhile, nearly 50% of retail investors in the UK consider themselves to be ‘off-track’ in meeting their financial goals and around half of UK investors in bonds believe they will see zero return, or worse, over the next year. Investors have realised they can no longer rely on the old ‘safe-haven’ of cash or traditional asset classes to provide the returns they need to reach their goals.
Classic mis-match
Our report, Tax Efficient investing in a Digital World, finds that two thirds (67%) of UK investors believe a portfolio of diversified early-stage equities would help them achieve their long-term financial goals. Interestingly, over nine in 10 (92%) investors aged 18-to-30 stated this, compared to just under half (49%) for those aged 51 and above. Younger investors – or ‘millennials’ – are actively seeking early stage investment opportunities. This group are also the most likely to seek out EIS or SEIS opportunities to gain even higher returns on investment. This belief in the value of Britain’s young companies and business ideas by those who will control the economy of tomorrow is highly encouraging.
This year those aged 18-to-30 can be expected to redeploy their wealth in early-stage equities, being 20% more likely than those over the age of 51 to do so. Having asked about average wealth available for investment and appetite to invest in early-stage firms, our study found that each young investor would be looking to invest an extra £3,500 next year in early-stage businesses.
All this sounds very promising for the outlook for early stage funding, but it’s not quite as clear cut as it seems. What is also apparent is that many investors find there are barriers that impact their ability to invest in early stage companies, hindering access to these exciting growth opportunities and in turn, holding back companies that are looking for additional investment.
Our research found that, despite even larger appetite for early stage investing, only 9% of retail investors’ capital is free from barriers and available for redeployment into early-stage companies. A lack of information, access issues and awareness of the EIS tax regime among older investors are just some of the issues investors face. These barriers are causing a mismatch between the increased investor risk appetites and their ability to access early stage opportunities.
This causes a further mismatch in the potential to fill early stage company demand for financing – financing that will help these companies play their important role in fuelling capital markets activity and the economy more broadly. There are lots of young, successful early stage companies that have amazing potential, but need to source additional growth capital to scale their businesses.
From start-up, to IPO and beyond
Traditional routes for raising capital have become more and more difficult to access, with funding harder to come by. Alternative routes, such as that offered by SyndicateRoom, are providing an ideal way to fill this gap.
By offering companies access to previously untapped retail investor demand and at the same time allowing retail investors to access primary capital raises and to participate across the entire funding journey of growth businesses – from early stage seed rounds through to IPOs on the London Stock Exchange– all on the same economic terms as institutions.
EIS allows companies access to growth capital to fulfil their ambitions to do great things. We’ve worked with a number of successful examples.
Recycling Technologies raised £578,808 in May 2015 and £1.5 million in November 2016. It has used this funding to develop its system that recycles mixed plastic waste and turns it into a valuable hydro-carbon, Plaxx™, tackling head-on the global issue of plastic over-consumption, which is set to double in the next 20 years.
Cambridge-based Axol Biosciences raised £971,320 in 2015 to accelerate revenue growth and begin international expansion. Axol uses Nobel Prize-winning intellectual property to create stem cells from human blood and skin cells, which can then be turned into heart cells, brain cells and blood vessel cells. Its long-term goal is to provide a platform where researchers can pick and choose human cell types for specific research purposes, revolutionising the drug testing market and removing reliance on animal testing. Two years into operation, Axol’s revenues exceeded $1 million.
Alternative routes to capital growth
EIS has been hugely successful already, with £14.2 billion invested through the scheme since its inception, according to HM Revenue & Customs’ statistics. Building further awareness on the investment opportunities for EIS could help open up new channels of demand, both for companies needing investment as well as from retail investors who are willing to provide this.
Our tax efficient investing research found that investors that are more knowledgeable of tax efficient products are more likely to believe that a portfolio of diversified early-stage equities will help them achieve their long-term financial goals. Approximately half of investors with over £1 million in investments see EIS (51%) and SEIS (46%) as positive and impactful vehicles to reaching their goals. These results are encouraging as it is hugely important that any retail investor considering an investment in early-stage businesses makes sure they are able to take advantage of the generous tax breaks when doing so. This can have a material impact on returns and, in turn, lead to them reaching their goals quicker.
In response to both investors looking at alternative routes to get the capital growth they need and in supporting the increased need from early stage businesses for funding, we have launched Fund Twenty8, a unique fund that provides a high level of diversification for investors wanting access to early stage companies and the tax benefits of EIS. This provides a solution for individuals, as well as their advisers, looking for EIS investments that can offer higher growth opportunities, while limiting company specific risk.
Clearly EIS provides opportunities that are beneficial for the investor, good for companies and for the market. Early-stage equities are a solid asset class in today’s low-yield environment, and EIS provides an attractive and beneficial way to engage with it.
