Mark Brownridge, Director General at EISA, reflects on 2020 and explains why he remains optimistic that 2021 will be a good year for tax-efficient investing.
As coronavirus continues to dominate almost every aspect of our lives, the stark realisation of the economic impact of the coronavirus epidemic is being laid out vividly before us.
At the time of writing, the number of people claiming benefit in the UK has risen by 23%, GDP is down 20%, and UK public debt is now larger than the size of the UK economy. All hopes of a V shaped recovery seem to have dissipated and we still face huge uncertainty. Oh, and you can throw in the still unresolved Brexit situation just for good measure. Two words sum things up. Doom and Gloom.
For startups and scaleups, the funding situation is dire. Positively, there is much appreciation of the role the UK’s start-ups and scale-ups can play in reigniting growth in the UK amongst Government and Westminster and perhaps this will spark a renewed and sustained interest in supporting the UK’s SMEs.
We believe that there is momentum behind the EIS and SEIS cause and expect to see a number of measures aimed at growth capital introduced either early in 2021 or at the Budget in March.
Where are we now?
But let’s rewind and consider where the EIS and SEIS industry currently stands. Firstly, the usual end of tax year fundraising season in 2019/20 took a massive hit from the first lockdown. This is normally the biggest fundraising time of the year for EIS and SEIS investments. As a result, for Covid19 to hit then, had a devastating effect on fundraising with investors seemingly taking risk off the table and not being prepared to invest at such an uncertain time.
EIS and SEIS fund managers report that their fundraising fell by as much as 60-80% of what they were expecting. The domino effect of this has unfortunately fallen on the start-up and scale-up businesses that fund managers had identified for investment, with many being left with either severely cut allocations or none at all. As we begin to focus in on the 20/21 tax year end, we are starting to see an uptick in interest from planners and advisers and it seems as if clients are coming back to the risk table and taking tentative investment steps. This is to be welcomed. After all, one of the side effects of Covid19 is that it has created plenty of demand for equity funding from companies as well as lower valuation points so there are a number of exciting companies available for investment at great value.
Opportunity knocks
Many of these companies have been the first responders to the pandemic. With the guidance and support of their fund managers, entrepreneurs and innovators have transformed and pivoted their businesses to help. Beermakers and distilleries have shifted production to hand sanitizers. 3D printers have been used to create the valves used in ventilators. Those just-in-time valves are saving lives.
What these innovations have in common is that they solve problems, which is always at the heart of innovation. But there is much more to the generative nature of a crisis that leads to innovation than simply an opportunity to solve problems. Crises present these companies with unique conditions that allow innovators to think and move more freely to create rapid, impactful change. Early stage businesses are able to do this much better than older, more established businesses. They can take advantage of their smaller size, be more nimble and act quicker than blue chip businesses for whom change is anathema and who move at the pace of an oil tanker.
When we look back on the current health pandemic, there’s no doubt that we’ll learn that it resulted in a number of innovations: new drugs and medical devices, improved healthcare processes and manufacturing and tech breakthroughs. This is why EIS and SEIS investment is so important in providing smart, seed capital for these innovations. Fund managers play an important role in developing the CEOs and innovators in these businesses, many of whom have a great idea, product or concept but no experience or inkling as to how to market or commercialise these.
We are already starting to see the fruits of this process. Normally an EIS or SEIS portfolio plays out over the course of 5 or 7 years and it’s only at this time, we find out who the winners and losers are. Covid19 has significantly accelerated this process and diluted it to around 6-9 months. In many portfolios, it’s already clear who the winners and losers are. Take for example, one portfolio. 12 investments overall, one is a home delivery baking kit specialising in baking with children. With everyone locked up at home for 3 months and baking became very en vogue, sales have sky rocketed and the company has scaled up quickly. At the other end of the spectrum, a travel company specialising in holidays for the over 60s faces a very tough time but is still managing to operate thanks to support from its VC. Two companies with very different future prospects and their fate largely determined within 6 months.
Is now a good time to invest?
For those thinking of investing, now is a great time. Many of these companies still require investment and investors have the chance to acquire an equity stake at an early stage of their development which could stand them in good stead in future. As always though, diversification is the key.
So, there is much to be hopeful for in the EIS and SEIS world. After the financial crisis of 2008, many now successful companies started in reaction to being displaced by the crisis, innovated and flourished. Famous names include WhatsApp, Groupon and Uber. Those opportunities exist now so do your research and go and find them!
Finally, our role at EISA is to ensure the schemes are functioning as they should and are supporting both investors and businesses, particularly at times like these. In our conversations with Government, we are confident EIS and SEIS has been earmarked to play a part in the next round of growth funding. It was heartening to hear the Economic Secretary, John Glen MP, say on a webinar recently that he was aware EIS hadn’t been able to be included as part of the Future Fund and this was “a gap he hoped to fill”. I’ve also been told the Chancellor has seen EISA’s representations and is said to be sympathetic of expanding the schemes. If this is true, watch this space next year!
About Mark Brownridge
Mark has over twenty years’ experience in financial services and prior to becoming Director General of the EIS Association, he was Head of Research and Development at Mazars, a leading UK financial planning firm. Mark is highly qualified being a Certified Financial Planner, Chartered Financial Planner, Chartered Wealth Manager and Fellow of the Personal Finance Society and also sits on the Chartered Institute of Securities and Investments Accredited firms committee and TISA’s Distribution Policy Council. Mark’s involvement with EIS began 8 years ago and he has since championed EIS investing within a financial planning context and is extremely passionate about promoting the industry, increasing its effectiveness and ensuring the private sector continues to drive much needed funding to small companies.
