Riding the EIS Wave
- On July 21, 2021
- By luke Miles
As he comes to the end of his tenure at the EIS Association, we asked Director General Mark Brownridge to take a look at key developments over the last decade, and to share his optimism as to why he believes the sector will go from to strength
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.
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.
The birth of SEIS
Another major change came in 2012 with the introduction of EIS’s little brother/sister, Seed Enterprise Investment Scheme (SEIS). SEIS targeted seed funding for very early stage businesses, effectively startups, and proved so popular it was made permanent in 2014. SEIS was an acknowledgment of the success of EIS. It cemented the Government’s commitment to the schemes and to equity funding to start and scale-up businesses. Despite many changes in personnel at Government level since then, the scheme’s success means they continue regardless.
The capital preservation period
With so much change in such a short period of time, the one thing the industry now yearned for was a period of consolidation and stability and this duly followed for the next couple of years. In the meantime, an undercurrent was slowly building within EIS and the newly formed SEIS. With the withdrawal of FITs and energy generation as an investment, fund managers seeking to replicate these so called “capital preservation” assets and buoyed by their popularity with investors (capital preservation is a catch all term for an EIS investment that is focused on mitigating risk usually through a combination of the EIS tax reliefs and another stable source of income or other form of available tax relief. Often by adopting this approach, the fund could be promoted as “assuring” an investor that in the region of 60-80p of their £1 investment was “backed” by the income/tax relief meaning only a small percentage of their investment was actually at risk) found increasingly ingenious ways of doing so. The rise in funds being diverted to these types of investment began to catch the eye of HM Treasury who became increasingly of the opinion that such investments were not within the spirit of EIS.
Hello Patient Capital Review
This culminated with the Patient Capital Review being announced in 2016 and undertaken in 2017. The review’s overriding aim was to strengthen the UK further as a place for growing innovative firms to obtain the long-term ‘patient’ finance that they need to scale up. However, a large microscope was also placed on the role of tax-advantaged investment within the early-stage funding ecosystem and in particular, capital preservation EIS funds. At the time, EISA worked tirelessly with HMT to help them understand the funding environment. Indeed, the majority of our recommendations were taken up by the review and subsequent legislation, ultimately resulting in the Risk to Capital condition. This is a principles-based condition that depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low-risk return for investors and ensures that a company in which the investment is made must have objectives to grow and develop over the long term.
In short, the risk to capital condition was a return to the original intention of EIS and enshrined the idea of the spirit of EIS into actual legislation. From now on, only companies with significant growth plans would receive funding and every £1 of an investor’s money would need to be at risk to help fund that growth. SEIS and EIS’s reaffirmed role was to fund the next generation of exciting, growth- orientated, tech-focused early stage UK businesses.
So, we have almost come full circle. The last 10 years have been a bit of a rollercoaster for EIS. Indeed, in my first year alone as EISA Director General, I faced up to challenges from Brexit, the aforementioned Patient Capital Review (which as the time was a huge threat to the very existence of EIS) and Trump being elected US President! It was certainly a baptism of fire and that’s before we even get to Covid in 2020! As I’ve talked a lot about Covid and the pandemic’s effect on EIS previously in previous articles, I opted not to cover it here.( Recent article “Where will we find the next Uber?” in IFA magazine covers many of the key points.
However, as we sit here in 2021, it feels like EIS is in a good place despite the pandemic. There’s a lot of positivity in the industry; investors are investing, innovative, exciting companies are being built and I’m absolutely convinced the next wave of big companies to come out of the UK will be SEIS and/or EIS funded.
We have already seen the likes of Revolut, Charlotte Tilbury, Cobra beer and Eve Mattresses come through the EIS path and that’s just to mention well known product names. There are also a whole raft of life science and medtech businesses you would be less familiar with but which are equally successful both financially and in improving the quality of our lives.
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 PFS and also sits on the CISI’s 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.
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