Last year’s November Budget was always likely to signal a new era for the Enterprise Investment Scheme (EIS)/Seed EIS sector, and so it proved when chancellor Philip Hammond announced a series of positive measures that not just secured its future but, in a very real sense, harked back to its past, its establishment, its original spirit and how the government wishes to see these products used.
Among a number of measures announced, highlights included: the doubling of the annual investment limit for EIS investors from £1m to £2m; a doubling of the annual investment limit for knowledge intensive firms from £5m to £10m; greater flexibility for those firms on how the age limit is applied for when a company must receive its first investment; and a consultation on a new, specific knowledge intensive EIS-approved fund structure.
Many investment managers who operate in certain sectors, particularly those focused solely on preserving capital, might consider this to be something of a stay of execution, but the reality is that with a new principles-based responsibility test introduced to determine whether a company being invested in can benefit from EIS/SEIS money, unless they can meet these new rules, they will not be making the grade.
Yes, the government has chosen not to proceed on the basis that certain sectors are not permissible, however the rules are now much tighter with a clear message around where it wants to see EIS/SEIS focused, with a principles-based approach being introduced.
Mr Hammond talked a lot about the UK leading the way in the delivery of technology solutions that will change the way we live and work; this is why EIS investment has to be concentrated on higher-risk investments, those that have the potential to deliver real change, increase the UK’s productivity, improve employment numbers, and thus contribute significantly to the overall economy.
Key points
- A number of measures were announced last year helping the EIS sector
- Advisers are likely to see a shift from managers who have been in a low risk environment
- Arbnco is a typical company that has benefited from EIS rules
Clearly, this is a shot across the bows for those who have simply used EIS/SEIS investment as a low-risk, capital preservation tool, in which the investment was purely focused on returning that capital to the investor and ensuring that they secure all the tax relief that comes with EIS/SEIS. Those days are now gone and the responsibility test should ensure that such investee companies are no longer applicable in this new environment.
As advisers, you are likely to see a fundamental shift in the sector, particularly from those managers who have operated in the low-risk environment for a number of years. It is interesting to see some in our peer group already attempting to reposition themselves as ‘tech experts’ when their investment ‘charge sheet’ shows that they have been nothing of the kind since inception.
This type of experience, network, relationship-building ability cannot be built over night and therefore we would urge advisers to steer towards those who have a strong record of investment in higher-risk, knowledge-intensive companies in sectors such as the digital economy and life sciences. We believe that genuine sector experience is vital and it will be very clear to advisers which managers have this and which are simply purporting to have such experience – just look at the investee list and you will have a good idea of where their priorities have lain and whether they are geared up for the brave new world that Mr Hammond has outlined as the future for EIS/SEIS.
We believe this is a genuine turning point for the EIS/SEIS sector, and it is clearly earmarked as a priority sector for the government in terms of funding the next generation of businesses in this country that have the potential to make huge strides very quickly, and develop the much-needed technology solutions that are required across so many of the UK’s industries.
Case study: Deepbridge invests in Arbnco
Arbnco is a prime example of the innovative company that Philip Hammond outlined in his Budget speech. It seeks to benefit from the tightening of regulations, being a leading provider of commercial and portfolio real estate energy efficiency reporting and building risk-mitigation solutions.
Over the past two years, it has grown from a team of three to 14 people – again fulfilling the new criteria of investee firms that have the potential to grow and can offer significant job creation.
In one of its projects Arbnco is developing technology with the University of Strathclyde to close the energy performance gap - a global problem that leads to increased energy consumption and fluctuating costs.
As a truly disruptive tech firm, it is a high-risk investment that operates in this new spirit of EIS and again proves that tech-focused EIS investment managers continue to provide investment portfolios of exciting growth-focused investee companies.
Andrew Aldridge is partner and head of marketing at Deepbridge Capital
