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Riding the EIS wave

As part of IFA Magazine’s ten year anniversary celebrations, EISA’s Mark Brownridge takes a retrospective look at the huge developments within EIS and SEIS since 2011 and shares his optimism as to why he believes the sector will go from strength to strength over the next ten years

Happy 10th anniversary IFA Magazine! As an investment scheme that has been in existence for 27 years, here at the EIS Association we appreciate what an amazing achievement is to reach such a big milestone!

10 years, a decade, tenth of a century. However you put it, 10 years is a long time and plenty of water has since passed under the EIS bridge. However, as a history graduate, there’s nothing I like better than delving back into recent history and coming up with a retrospective. So let’s get misty- eyed and see what EIS aged 17 to 27 looked like.

That was then…

In 2011, I was still working at a financial planning firm where EIS was beginning to take up more and more of my time. EIS itself was about to embark on another major change to its mechanics as George Osborne rang significant changes at the 2011 Budget. In came a new rate of EIS income tax relief, increasing from 20% to 30% from April 2011 and an announcement that from April 2012, the government would increase the annual EIS investment limit for individuals to £1m and increase the qualifying company limits to 250 employees. Another major shift was the banning of Feed-In Tariffs as a qualifying investment after 6 April 2012, effectively sounding the death knell of FITs use within energy generation as an EIS investment sector.

A growth spurt

It’s easy to underestimate the effect which each of the changes had on the industry. For a start, in the year after the EIS income tax limit was raised, there was an 87% increase in the amount of investment raised by companies under EIS, from £545m to £1,017m. £1,017m amounted to the highest amount raised under EIS since 2000‐01 and in each of the previous ten years, the amount raised did not exceed £800m. The figure has steadily grown year on year since, reaching £2bn in 2019. Early-stage businesses were the beneficiaries of this money. The scheme once again proved its worth to Government by channelling private investors’ money to exactly those hard to reach businesses that Government had intended it to.

Additionally, in its last hurrah as a qualifying trading activity, FITS within renewable energy generation saw £191m of investment up from £40m the previous year. However, that wasn’t totally the end of renewable energy generation as an investment sector for investors as renewable energy generation, even without the generous FITS, continued to be popular right up until the complete exclusion of energy generation as a qualifying investment in 2015.

Looking back, energy generation as a qualifying EIS investment has been both a blessing and a curse. On one level, it did exactly what it was asked to do i.e. raise money from private investors to fund much needed renewable energy generation projects throughout the UK at a time when the UK was desperate to meet its climate change ambitions but couldn’t afford to so from public coffers. Effectively, EIS was hijacked to motivate private investment into these projects which it did very effectively. Actually too effectively, as the swell of money moving to this sector to fund mega projects forced the Government to reconsider its strategy leading to the eventual total exclusion of energy generation. So it was a blessing in that EIS very successfully raised money for energy generation projects as the Government desired. It also introduced many new investors to EIS who would not previously have used the schemes so helping to democratise EIS. But a curse, in that EIS was partly blown off its original course for raising money for new, innovative, entrepreneurial early stage businesses and rebadged, because of the Government incentives in addition to tax reliefs (FITS and ROCS) as a “low risk” or “capital preservation” investment. This wasn’t EIS’s natural and historic home and the industry has subsequently had to go through a significant re-education programme so investors could understand the alteration in investment risk profile bought about these changes to legislation.

Growing pains

History is a good judge and it’s hard to look back on this time fondly. Whilst this was arguably EIS’s most successful time in terms of fundraising and investor interest, the “spirit of EIS” felt somewhat bypassed. The spirit of EIS harks back to EIS’s introduction in 1994 under Michael Portillo. At the time he announced the scheme’s arrival accordingly “The purpose of the Enterprise Investment Scheme is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well targeted means for some of those problems to be overcome”. Does a £50m investment into a solar park in the South West of England sound like a well-targeted use of EIS money? Arguably not. We shouldn’t look back on this time with rose-tinted glasses though. It paved the way for the Patient Capital Review, more of which later.

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