Given the UK’s Venture Capital Schemes (SEIS, EIS, VCT and SITR) fall under the EU State Aid rules there is the possibility that a ‘hard’ Brexit would allow the Government to loosen restrictions regarding these schemes, but it seems unlikely given the Government’s agenda. However, under any compromise deal the UK will probably have to comply with EU rules on a variety of issues (State Aid included) in order to access the single market and operate freely as we do now (such as FCA passport into European markets). In reality, the Brexit impact on the tax efficient industry has already happened with a number of well documented changes to the rules governing the schemes over the last few years to ensure the capital was directed to growth businesses. These rule changes were in part a reaction to the Government’s 12-point plan for Brexit: “10. Ensure that the UK remains the best place for science and innovation” The November 2017 budget changes regarding ‘risk to capital’ test for the schemes, post the Patient Capital Review, were all part of preparing the UK for a post-Brexit world – our view is that the Government is unlikely to step back to allowing these schemes to invest in lower risk assets. The UK is looking to support growth businesses in various ways As well as changing the rules for the UK Venture Capital Schemes, with the European Investment Fund (EIF) potentially turning off the taps in terms of investing in UK venture capital funds, the Government has announced a number of measures to plug perceived funding gaps. The headline announcement came in the November 2017 Budget and was a £2.5bn programme to invest in growth business via the British Business Bank and the creation of the new Patient Capital Bank. This will have an indirect impact on the UK Venture Capital Schemes as this large pot of capital will co-invest with EIS and VCT funds and provide follow-on funding for the growth businesses that the schemes now must invest in. Also, in the 2018 Budget the Government announced it was opening a consultation on enabling investors to invest a small portion of their pension pots into venture or patient capital – this could be a game changer for the VC industry (but a topic for another day). So, whilst the Brexit driven changes to EIS and VCT have shifted the risk profile upwards given the move away from tax-driven products to investment led funds with tax benefits, the Government is actively assisting in that transition with its support of the venture capital ecosystem. Plus, obviously the Government is underwriting some of the risk given the tax benefits, for the EIS in particular. Certain EIS sectors are more in Government focus than others post Brexit In early summer the Government announced its new industrial strategy and, in doing so, highlighted once again the UK’s position as a global leader in innovation and research and development (R&D). “We are ranked first in the world for research into the defining technologies of the next decade, from genomics and synthetic biology, to robotics and satellites,” said Mrs May, “with one per cent of the world’s population, we are home to 12 of the top 100 universities”. The Government had already created ‘knowledge-intensive’ qualifying businesses, allowing more EIS/VCT funds to be deployed in the university spin-out sector. And in the latest Budget the Government announced plans to change the Approved EIS Fund structure to use it as an investor-friendly investment vehicle for Knowledge Intensive businesses. This is our sole area of focus at Parkwalk. Recent data from Global University Venturing ranked Parkwalk as the second most active investor, globally, in the university spin-out sector, and we have now invested in over 100 companies. Given the above and the importance of the R&D and university spin out sector to a post Brexit UK Plc the c. £6bn, mostly Government funded, research budget has already been ring-fenced and likely to be increased as the Government’s goal is to achieve a 2.5% of GDP spend on R&D. EU grants are also helpful in paying for some of the development of future products in our portfolio, and currently a good chunk of that money comes from a pan-European project called Horizon 2020. The UK is a net contributor to this programme and Innovate UK is being tasked with making up the shortfall post Brexit. But we don’t know what we don’t know Whilst EIS looks set to be part of the Government’s investment strategy post Brexit, especially for Knowledge Intensive Businesses, there are obviously current unknowns which might impact EIS investors. For instance, the movement of people. Many of our companies have international founders and or directors and employees. Clearly those here will be free to remain in the UK and my personal belief is that the Government will encourage a ‘sensible’ visa / residency programme for people who are key to the industrial strategy. Whether people will want to come is another point! And there may be issues with exporting products (tariffs, possible c.4% if under WTO rules), with ‘made here’ rules (eg if a project is US or EU state funded (such as railways), 50% of component parts have to be made in the US or EU respectively). On the positive side the UK’s patent box scheme, lower corporation tax and potentially lower sterling value may increase acquisition activity for our portfolio companies. So, on balance EIS investors should be confident that EIS is well supported for a post Brexit world whatever the outcome. Governments of all political leanings can’t argue that we need to help support UK Plc. The Parkwalk Opportunities EIS Fund’s investment strategy focusing on the specific asset class of university spin-outs seems to be at the centre of the Government’s industrial strategy, which we believe we continue to generate attractive returns for our investors.