Moray Wright, CEO, Parkwalk, was featured in Investment Week discussing the impact of the Autumn Budget for start ups, the argument for pension cap reform and the vital role of EIS in helping UK businesses scale-up. To see the full article click here.
When the pandemic first hit, the outlook for riskier, alternative asset investment opportunities looked bleak. In times of crisis, it is often the way that individuals and businesses retreat into what they know, rather than taking a larger risk and investing in start-ups and businesses which are preparing to scale. Despite this, the 2020/2021 tax year was, in the end, a successful one for the Enterprise Investment Scheme (EIS), with fundraising from EIS Funds hitting over £380m.
Beyond this, the pandemic created an appetite for early-stage technology businesses, which now make up the bulk of the EIS funds industry, as investor demand increased for businesses with technology at the heart of what they do. As a result, according to industry figures, fundraising is up well over 50% on this time last tax year, and 20% up on the tax year before.
Argument for pension cap reform
These promising statistics for the start-ups and technologies that will shape our future must continue to be supported. The Chancellor’s budget took the next steps to do exactly that, announcing a consultation on the relaxing of the regulatory charge cap for larger pensions schemes.
There is currently £2.2trn limit to higher growth, less liquid start-ups, because pension funds are restricted to investing in funds with an annual fee of no more than 0.75%. As it stands, less than a fifth of British venture capital funding between 2010 and 2019 came from pension funds, because venture capital funds tend to charge higher fees. To put this into context, in the US 70% of early-stage investment comes from pension funds.
The British Business Bank’s most recent report on venture capital fund performance shows a sharp increase in performance over the past 12 months and they continue to perform well compared to their US counterparts. As a result, both retail and institutional investors are increasing their exposure to this asset class. The time has come for pension funds to be encouraged to do the same.
As the consultation period over the regulatory charge cap begins, there is a bigger challenge at play here. The government hopes that redirecting pension assets will help their ‘levelling up’ ambitions and support the wave of green infrastructure and early-stage, innovative firms that will allow the UK to retain its crown as a ‘science superpower’. While the consultation may indeed allow for pension funds to invest in more innovative technologies and companies that are ready to scale across the UK, traditional fund managers will also need convincing.
The risk is that they will continue to funnel money into lower risk, lower return assets such as infrastructure investments, even when given the opportunity to invest in higher risk and potentially higher returning businesses. This later stage funding pot is crucial to create a sustainable self-financing ecosystem for technology investment.
Argument for going beyond just foreign investment
Alongside the pension regulatory charge cap, the Chancellor also announced a new £1.4bn investment fund to help encourage overseas investment in certain key sectors including electric car manufacturing, offshore wind and life sciences. Overseas investment is critical for a successful and vibrant UK start-up ecosystem and encouraging foreign investment is certainly key to ensuring these companies can grow.
But why not look at the vast amounts of dry powder that can be deployed from within the UK, right now? EIS funds have proven that with the right tools, such as the HMRC Approved Knowledge Intensive EIS funds, they can deploy larger amounts of capital into businesses scaling up. These Knowledge Intensive Companies (KICs) are companies that are carrying out research, development or innovation at the time that they are issuing shares. Not only would greater encouragement for investors to make use of such funds help support key sectors within the UK, but it would help support the government’s R&D spending commitment of £22bn by 2024-25.
Knowledge-intensive rules also differ at company level, with Knowledge Intensive EIS companies allowed to raise £20m (versus £12m for normal EIS companies) over their lifetime and raise £10m per year, vs £5m. This is important as it allows the larger EIS funds to participate in the larger transactions alongside institutional investors, especially at a time when venture capital deal sizes are increasing. Further to this, the current limits for the likes of EIS were driven by EU state aid rules, which are no longer relevant. We now have the ability to move quickly and propose changes, such as increasing the investment limits for Knowledge Intensive EIS companies to help support UK ingenuity and enterprise. All forms of consultation that would help support UK businesses at the earlier stages in their growth journey are welcome, as is foreign investment.
