Ian Battersby, our Business Development Director, gives his view on the forthcoming Patient Capital Review.
The latest bulletin from the EISA, has probably brought recent speculation into much sharper focus for EIS providers, wealth managers, investors and the SME sector which depends so much on SEIS and EIS capital to bring its ideas and businesses to life. It is often said that SMEs are the PLCs of tomorrow and the UK’s entrepreneurship is envied amongst many of our counterparts both in Europe and far beyond.
We are being told to prepare for some potentially sweeping changes to the ‘tax advantaged ecosystem’ and in truth not much of it will sound overly helpful to small business owners if it does eventually transpire.
Of course it is entirely right and proper that tax reliefs should be well targeted. In the main, the changes to EIS qualifying businesses, outlined and implemented in 2015 with the removal of industrial scale deployment into ‘renewables’, went a long way down the road to ensuring that happens. For probably the first time in this tax season, the lag effect of those changes are starting to hit home as advisers and investors are transitioned into true growth capital investments.
More so than ever before, conversations are being held, plainly pointing out the real investment risk associated with investing in young companies. And that marks quite a shift for some who have made ‘full use of facilities’ in the last few years. That in itself presents a strengthening of the appropriateness test for advisers who also have the FCA to contend with when making these recommendations and it may indeed quell investor appetite in some quarters.
The point, will I am sure be proven too at provider level this year, with available capacity amongst even the bigger players unlikely to breakthrough much above the £20 million mark. And the reason for this? Well, EIS rules were amended remember, notably in the form of the seven year limitation meaning that we are already well on the way to supporting much younger, higher risk companies. Investment periods are likely to stretch out as these companies will inevitably take longer to progress up their growth curves. Plus, the dynamics involved in taking them through the necessary but extensive due diligence process and funding the best value investment propositions inherently restricts capacity even as things currently stand. Growth Capital is a world away from the landscape of a couple of years ago. Isn’t that a progression towards Patient Capital already?
But there is a real danger of missing the point here. For most of the businesses that we support in our EIS Portfolio Service, it isn’t simply about the size of the cheque. Essentially, we are deploying investors’ capital and it is incumbent on us to try to deliver the best investment outcomes that we can achieve. The businesses we support become growth ‘partnerships’ that we and our investee companies are signing up to together. We guide, we advise and we help them.
Note to HM Treasury; these outcomes are far from an exact science because these are real life trading businesses and tax reliefs simply make it that bit more palatable for investors who in our experience like to feel that they are playing a part in supporting the UK businesses of tomorrow.
So with the spectre of Brexit and all that might bring, by all means a little fine tuning where necessary but please don’t destabilise something that actually looks like it will achieve what was planned for in the changes of only two years ago. I think there are more pressing economic challenges ahead for now.
Seneca Partners Ltd manages the Seneca EIS Portfolio Service and the Seneca Managed Storage EIS Funds.