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Shoe meets foot

1 March 2016

A perfect storm of start-ups looking for angel investment and a plethora of willing investors saw growth companies benefit handsomely in 2015.

Throughout last year we saw a significant increase in investment by private individuals in growth companies and we expect this trend to continue through 2016. There are a number of influences contributing to the continuing increase in activity in this sector of the market.

One of the key factors driving investment in growth companies has been the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) tax reliefs (income, capital and deferral). They offer a substantial tax benefit and risk mitigation to individuals investing in qualifying companies. We see this as continuing to be a key driver, notwithstanding proposed changes to the EIS and SEIS rules.

Something that would encourage an even greater level of investment of this kind would be a simplification of the EIS and SEIS rules. Unfortunately, these have become increasingly complicated to the point where they actually have an adverse effect on investment.

The legal and accounting advice needed to ensure that the rules are strictly complied with can effectively become a barrier, making what are often fairly small investments in early stage companies, a very difficult process. These are small companies which will often struggle to pay for legal and accounting fees. Despite this, it is usually possible to structure these deals successfully.

Plenty of fish in the sea

With the rise of TechCity and other government initiatives, as well as the UK becoming a hub for technology businesses more widely, there are a large number of good quality primary stage companies looking for early stage angel investment (start-up funding).

Early stage companies developing apps, software and online businesses in the retail, leisure and education sectors, not forgetting companies involved in the commercialisation of social media, are just a few encountered in 2015.

Many of these companies have been founded by serial entrepreneurs with experience of growing companies, who often have connections with professional advisers who can assist in fund raising, as these companies continue to grow and develop.

Shoe meets foot

The market has also seen the establishment of a network of good early stage companies seeking investment, being matched by an expanding base of investors in growth companies.

As more individuals make such investments and gain experience of investing in early stage companies, while benefiting from the opportunity of availing themselves of the relevant tax reliefs, the angel investor base has expanded significantly. Once investors see the benefits, they are often quick to become serial early stage investors.

In addition, angel investment groups are continuing to expand, with entities such as the Business Growth Fund giving a significant boost to growth capital investment.

The Business Growth Fund has also set up a £200m venture fund. This means that they are now also aiming their considerable fire power at venture and early stage companies, as well as companies looking for growth capital. UK venture capital investors, who have not in the past seen the same levels of investment as the US venture industry, have seen a boost in terms of investment and, with the continuing focus on tech companies, would expect to continue to expand in the UK market.

These other participants in the market also expand opportunities for individual private investors. On several occasions during the previous 12 months, we saw co-investment by private individuals alongside venture or growth capital providers.

Favourable winds

In 2016, the winds would appear to be fair for the continued increase in investments in early stage companies, alongside the continued growth of the technology sector.

A favourable tax regime for investment by private individuals in early stage companies, a large number of good quality early stage companies seeking investment, and an expanding investor base will all be key to this trend.

Of course, professional advice should be sought when making such investments to make sure that these are structured correctly, and in the most tax efficient manner to help maximise returns. „

This article was originally published in Private Client Adviser, February 2016

For more information please contact Malcolm MacDougall on +44 (0)20 7427 4544 or at malcolm.macdougall@crsblaw.com