In these uncertain times post the surprise vote to leave the EU, investors are (quite rightly) focusing on macro risks and volatility.
However, as the dust begins to settle they are now looking across the fringes of their portfolios, including alternative assets such as VC and PE. As a small part of that portfolio with our knowledge-intensive university spin-out EIS funds we thought we should offer our thoughts to our investors.
The Enterprise Investment Scheme
The EIS has been in place in various guises since 1981 (the ‘BSUS’ then the ‘BES’ which was replaced by the EIS in 1993). It has had cross-party support, and successive governments of both political persuasions have increased the reliefs available over the years.
In Parkwalk’s opinion, this is understandable. Creating jobs and generating and keeping skills in the UK is vital and easy for politicians to support.
In fact, our portfolio companies have raised over £500m between them since 2010, and we have contributed £50m of EIS tax-advantaged monies to that £500m (as of Dec 2015). That means the initial tax reliefs have ‘cost’ HMRC £15m. Our portfolio companies employ c.1,200 people, over half of which are educated to MSc or PhD, and their annual NI and PAYE bill is c.£28m (nearly twice the ‘cost’ of the initial tax relief).
Economy / Currency
Many of our portfolio companies are at an early stage so the immediate impacts of a potentially weaker UK economy / currency are limited.
The majority of our portfolio companies are developing ‘global products’, so the UK economy is not the sole driver to sales – our two recent trade-sales of portfolio companies were to international acquirers.
A lower currency may also reduce global sales costs.
Funding / Grants for companies
Could a weaker UK economy affect Government backing for Research and Development?
The Oxford Conservative MP Nicola Blackwood seeks assurances the government will fight to protect access to research collaborations and recruitment of EU researchers. “They are essential to our knowledge economy,” she adds. The (current) PM says it is important to ensure advances in British sciences are maintained.
Many of our companies do receive funding from EU backed entities. Any grants already awarded are likely to continue to be honoured but there will probably be a different process in future and one assumes it may take time to implement and to access new schemes. That said, we have until at least 2019 to implement them.
Investors / Tax Benefits
Our network of high net worth individuals will have been affected by the repercussions of Brexit in the market place. That will affect their propensity to invest in the UK and in private companies.
The Government has been committed to providing tax benefits to SMEs for a long period. It is unlikely that Brexit will change this position but the nature and scale of the benefits may come under examination. That said, some consider that the EIS reliefs have been constrained by EU law historically.
Markets / Exits
We expect the London markets to be shut for IPOs in the short to medium term, but six months is a long time in politics, and the decline in sterling has made UK assets significantly cheaper to potential purchasers from abroad, enhancing their merits relative to assets in other denominations. We believe this applies more directly to assets with a high technology component and global potential.
We believe the ‘patent box’ regime will continue to make IP-heavy UK tech companies attractive to international OEMs.
Staffing
The situation with regard to staffing is likely to be mixed, with the potential for lower wages locally but a potential risk of skills shortages. Some specialised fields may be difficult to fill as access to EU workers may become more problematic – however we believe novel technologies will continue to attract global skilled workers.
Competition
There are few European VCs who compete for investments in UK start-ups and likewise there are few UK VCs who invest in European start-ups, who might re-focus on the UK, so we see little change here.
Summary
Obviously it is a difficult time with both ‘known and unknown’ unknowns ahead, but we believe the UK economy is fundamentally resilient.
