Martin Sherwood at EIP thinks he has found the answers, and wants you to join the debate!
They may be on different sides of the financial divide, but High Net Worth individuals and start-up companies have plenty of common ground, thanks to the government.
Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) are tax efficient vehicles designed to help smaller, unlisted and therefore higher risk companies raise finance by offering a range of tax reliefs to investors prepared to buy shares in them.
Tax relief of 30% of the cost of shares purchased can be offset against Income tax liability for the tax year in which the investment is made, and Capital gains made during the period holding the shares are also tax exempt. In the event shares are disposed of at a loss, this too can be offset against income made during the same tax year the shares are disposed of.
EISs were first launched 2 decades ago in 1994, the “grandchild” of the Business Start-up Scheme, itself launched all the way back in 1981. Back then the UK economy was in a similar position to what we are experiencing today, with entrepreneurs struggling to obtain loan capital from high street or investment banks. EIS made it possible for small companies to approach VCs and HNWs with a reasonable chance of securing the relatively small amounts they required to help their businesses grow.
Although in 2012 the government had responded to accusations that it had set EIS qualifying barriers too low by significantly widening the scope of EIS, allowing for investment into a range of new industry sectors, the EIS industry was already demonstrating a resourcefulness and ability to find investment opportunities that was attracting significant flows of capital. One such opportunity was the solar power industry, another, wind power. These 2 sectors quickly came to dominate EIS investment to an extraordinary extent.
Research suggests that in 2013 alone, some £627m of investment poured into EIS schemes, with a staggering 62% of those funds, £387m, flowing into renewable energy projects, of which solar and wind projects made up 95%.
Almost every small cap investment firm launched a renewable energies fund or product, whose popularity can be further explained by government sponsored feed in tariffs (FiTs), providing further incentives for investors, including payments for the electricity the underlying products produce, plus money off energy bills. Renewable energy had become the most attractive EIS investment opportunity on offer, but, inevitably, the loophole would not remain open for long.
This year, the government decided that enough was enough, and solar and wind were removed from the list of qualifying investments, causing, it would be reasonable to assume, widespread panic among small cap investment firms. A deficit of nearly £400m to be made up is enough to make any fund manager go weak at the knees.
Where some see an impending crisis, however, others sense opportunity, and Martin Sherwood, Partner at small cap investment boutique Enterprise Investment Partners, and a founder and director of the EIS Association, places himself firmly in the latter category.
“The sun may have set on Solar, but the future still looks bright for EIS”, he has declared, and to all intents and purposes, he is absolutely spot on. What could have spelt disaster for the tax efficient investment sector, may actually be the shot in the arm that the industry, which was at risk of becoming overly dependent on renewable energy and somewhat immobile as a result, needed.
In the spirit of creating an open and honest debate about where the future of EIS investment now lies, Martin is set to rally the troops on November 25th at popular bar / restaurant, and EIS funded, No. 11 Pimlico Road. Martin will chair a seminar to address the state of the EIS market following the disqualification of Solar, and to a lesser extent, wind power. As well as Martin himself, and fellow partner at EIP, former Smith and Williamson tax efficiency guru Christian Elmes, the speakers will be EIS generalist fund manager Ole Bettum from Bestsport Ventures, Start-up funding specialist Stephen Page, who recently launched his 2015 SEIS fund, investing in 8 early stage companies, and James McCulloch from Ducalian, the storage specialists, who will be speaking on one of Martin’s favourite subjects, storage as a new sector for EIS funding.
“The demand is now for secure, growing asset-backed businesses”, explains Martin, who also intends to review other “asset backed” EIS investment sectors at the event, such as schools, children’s nurseries, private function venues, shipping and fine wine. The speeches will be followed by informal networking and will be directed at fellow wealth managers, financial advisors and high net worth individuals.
EIS investment into renewable energy is more than just a fad, with alternative options, such as anaerobic digestion, already being mooted, but there is no doubt that the EIS investment landscape will change dramatically in the short term. Tax efficient planning will never go out of fashion, and asset backed investments are an attractive proposition because, if the trade does not work out, the value of the underlying assets offer protection against excessive losses.
For anyone struggling to get to grips with the implications of a post-solar EIS environment, or those keen to understand more about asset backed investment, November’s seminar promises to be a genuine eye opener; compulsive viewing for start-ups and investors alike.