The US is usually seen as offering the global benchmark for innovation but, as John Glencross illustrates, the UK is now trumping the world’s largest economy on several counts.

Some advisers may be mourning the fact the door has now closed on asset-backed Enterprise Investment Scheme (EIS) offerings even if it should come as no surprise the government withdrew tax relief for low-risk investment. Nevertheless, this is a particularly exciting time for UK growth investing.

The US is usually seen as offering the global benchmark for innovation and entrepreneurship, against which all other countries are measured – and usually fail. But the UK is now trumping the US on several counts.

Between 2006 and 2016, the number of new businesses ‘born’ in the UK rose by 62% – up from 256,000 to 414,000 a year. That is 45 new businesses every hour. By contrast, according to the latest figures available, the number of business births in the US fell by 25%, from 558,000 to 414,000 annually, between 2006 and 2015.

This means the UK launched exactly the same number of new businesses in 2016 as the US did in 2015. Bear in mind, however, that our population is around 66 million compared to their 323 million.

Admittedly, not all these new business owners are budding James Dysons but OECD numbers suggest a healthy proportion of new UK businesses are genuine start-ups. The UK leads the OECD nations in terms of the number of employer business births – though American start-ups still beat everyone in terms of job creation.

The US and the UK are almost neck and neck in the World Bank ‘Doing Business’ ratings on ‘ease of doing business’ ­- the UK is seventh and the US sixth. When it comes to starting a business, however, the UK is 14th and the US 49th. Since 2015, there has been a 40%-plus decline in the number of angel and seed deals closed in the US, but late-stage deal values are at record highs.

And there lies the challenge for both economies. In my opinion, Britain is a better place to start a business – and EIS investments are helping to create that environment, with almost £16.2bn raised for 26,355 individual companies since the scheme’s launch in 1993. The greater access to later stage funding in the US may, however, be helping companies there scale up faster – hence the stronger record in job creation.

Mitigating risk

There are risks in investing in entrepreneurial growth companies. These are mitigated by the highly attractive tax benefits of EIS, including generous loss relief, which can be claimed as an income tax deduction.

The potential returns of investing in exciting new businesses meanwhile can be attractive – and even more so on an after-tax basis. There are also inheritance tax and capital gains tax benefits too.

Diversification Element

EIS investments can also offer a useful diversification element within portfolios. During February’s market upheaval, for example, our portfolio valuations barely flickered because most of the assets are in private equity and so less susceptible to short-term market volatility.

What is most exciting about EIS investing at the moment, though, goes back to the UK v US comparison. Last year was a record year for Calculus, in terms of capital raised and businesses opportunities made available to us. We reviewed more than 500 companies, identifying 15 suitable opportunities – in which we were able to invest a total of £30m.

These firms included Africa-focused marketing services company, Every1Mobile, whose clients include multi-nationals, NGOs and government departments; Cambridge-based Axol Bioscience, which supplies cell lines for research purposes to pharma companies and research organisations; and chip designer, Blu Wireless, supplying the 5G chip market. These investments illustrate the breadth of entrepreneurial businesses taking root in today’s Britain.

As highlighted by the government-commissioned Patient Capital Review, there is still much room for improvement in the provision of funding to growing UK companies – not least the need for more capital to support the scale-up of companies that have moved beyond the EIS and VCT stage. With the government focusing more on this issue, we may see Britain move even closer to becoming the entrepreneurial capital of the world.

In our experience, many wealthier investors are excited to be part of this growth revolution.

It is a virtuous circle where, done well, attractive returns are achieved while ensuring capital is available for the potential champions of tomorrow.

Source: Professional Adviser

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