SyndicateRoom publishes growth hunter study

The report analyses sentiment and expectations of over 1,000 retail investors alongside five years of company growth data from Beauhurst. It reveals that:

●      Risk appetite is rising among UK investors, driven by low investment returns. 39 per cent of individual investors said that they are more willing to take risks than they were a year ago, compared to 18 per cent who said they would like to take fewer risks. Meanwhile, nearly 50 per cent of retail investors in the UK consider themselves to be ‘off-track’ in meeting their financial goals and around half of UK investors in bonds believe they will see zero return, or worse, over the next year.

●      Early-stage companies are seen as a route to higher returns. Around two-thirds of investors see ‘the prospect of higher returns’ as a big incentive to move into investing in early-stage equities. This is matched by the facts on the ground, with investment in early-stage companies seeing a rate of growth in the past five years that is more than six times faster than that of the FTSE all-share index.

●      One in thirty early-stage businesses is likely to close next year. Of nearly 600 early-stage businesses analysed from 2011, with an average valuation of GBP3 million, 90 businesses (15 per cent) had their valuations written down to zero by 2016.

●      The average retail investor will be looking to allocate GBP20,000 next year for early-stage investment. That works out to be around 14 per cent of the average investor’s current equity investments.

●      Those with over GBP1 million to invest – the Million Pound Club – receive more information on early-stage businesses than the average investor. Around half of retail investors (48 per cent) are not investing in early-stage businesses because of a lack of information about the company. Compared to the average investor, those with more than GBP1 million to invest are 15 per cent more likely to be granted access to an investment opportunity and 13 per cent more likely to be given additional information about a company seeking investment. Only 9 per cent of individual investors said that there are no barriers to them investing in early-stage businesses.

“We set out to provide information for our members – individuals investing alongside professionals – about where to find strong return on investment. In a low-yield environment, compounded by recent macro-uncertainty caused by Brexit and the US election, reliable information on high-growth investment is more important than ever. Our research discovered a fast-emerging part of the UK’s investment market that is hunting for greater growth and willing to accept a higher risk to achieve that investment return,” says Gonçalo de Vasconcelos, CEO, SyndicateRoom.
 
“When we founded the company three years ago, we set off on a mission to provide fair and transparent access to investment opportunities – by allowing retail investors to invest on the same terms as professionals. As we turn our attention to the opportunities for small business investment in 2017, we need to break down the barriers to this multi-billion pound opportunity we have uncovered, which is currently the preserve of the professional investment community.” 
 
“Fast-moving, high-growth technology companies continue to provide a vital stimulus for our capital markets and economy at large, and the findings from this research are a solid endorsement of just that,’ says Suranga Chandratillake, General Partner at Balderton Capital. “Where the main markets can be volatile and performance of traditional assets has slowed, early-stage investments present a compelling opportunity for higher returns in the long term – and it is encouraging to see close analysis which supports this. So many young, ambitious companies have been able to come to market in the past few years and have gone on to do great things, whilst delivering long-term value in the process. What this research shows is the considerable value that these companies can unlock in an environment of growing demand and greater access to finance.”

In carrying out the research, SyndicateRoom identified that just over half the population (58 per cent) holds an investment of some form, and 40 per cent of those investments will be in company equity. With individual investors having an average GBP332,000 of assets, that works out to be around GBP2 trillion of individuals’ combined capital. While an overwhelming majority of this sum is invested in large-cap and mid-cap publicly listed companies, SyndicateRoom’s research found that retail investors are willing to reallocate 14 per cent of their wealth into early-stage businesses, reflecting the attractiveness of higher-growth for early-stage investment.
 
Nevertheless, despite such a large pool of capital, only GBP25 billion is available to be transferred from large-cap to smaller businesses next year, with only 9 per cent of retail investors’ capital free from barriers and available for redeployment into early-stage companies. Those barriers include the cost of moving capital from one asset class to another as well as the fact that many investors just aren’t given access to investment opportunities in early-stage businesses, and even when they are many investors feel like they do not get adequate information.
 
The study analysed the five-year change in valuation of a wide portfolio of 578 early-stage UK companies that received equity investment via seed or venture capital in 2011. Between then and 2016, the study found an average compound annual growth rate (CAGR) of 33 per cent. In 2011 the cohort of 578 companies was valued at GBP1.8 billion, with an average valuation of GBP3 million. By September 2016, the portfolio value had risen to GBP7.98 billion. An investment of GBP10,000 in early-stage companies in 2011 would now be worth about GBP45,000.
 
With an estimated GBP25 billion available to be invested next year into early-stage businesses, if historic CAGR trends continue then 2017 should see up to GBP7 billion of wealth created in the UK through investment in early-stage businesses, the firm says.

SyndicateRoom also found that during this same period, 90 of the 578 companies had their value written down to zero and around 120 companies experienced a fall from their 2011 valuation. Nevertheless, over the same period, firms listed on the London Stock Exchange Main Market saw an average CAGR of about 5 per cent per year, and the AIM market saw a similar CAGR over that period.

The report found that young adults (aged between 18 and 30) are likely to have the most diverse portfolio of investments, with 93 per cent of them favouring a diversification strategy, compared to 67 per cent for the UK average and 49 per cent for older (51+) investors. The firm writes that while this may be encouraging for those looking to safeguard the interests of young investors, 72 per cent of these investors said they will be taking on more risks now than they did a year ago.

Those aged 18–30 can be expected to redeploy their wealth next year in early-stage equities, being 20 per cent more likely than those over the age of 51 to do so. Having asked about average wealth available for investment and appetite to invest in early-stage firms, the study has found that each young investor would be looking to invest an extra GBP3,500 next year in early-stage businesses.
 
Young investors are also the most likely to seek out enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS) opportunities to gain even higher returns on investment.

In an era of social and economic divide, a difference of investment style has also appeared between retail investors with over GBP1 million to invest, and those with significantly less.

Those with over GBP1 million to invest – the Million Pound Club – were found to be more risk-averse than the average investor and more long-term in their investment style. While 39 per cent of investors are going to be investing with increased risk next year, that risk appetite is reduced by a quarter for the Million Pound Club, 64 per cent of whom said that the prospect of long-term returns was ‘very important’ when considering investment in early-stage equities.

Yet the study found that the Million Pound Club investors are nonetheless likely to allocate 5 per cent more of their portfolio to early-stage companies, compared to the average investor. It reveals that this greater focus on early-stage investment from the Million Pound Club, despite a more risk-averse style, is driven by the ease of access to investment opportunities afforded to individuals with significant amount of wealth available for investment. Compared to the average investor, those with more than £1 million to invest are 15 per cent more likely to be granted access to an investment opportunity; and even when access is given to all investors, members of the Million Pound Club are 13 per cent more likely to be given additional information about a company seeking investment. They are also 40 per cent less likely to be put off an investment in an early-stage business because of the high cost of a third-party advisor or broker.

“This research has brought to light a key question for the investment industry: how can it be that the Million Pound Club investors, who are more risk averse than the average investor, are willing to allocate a greater proportion of their investment portfolio next year to early-stage businesses? The answer is clear – our study has discovered a disparity of information for early-stage business investment,” says Tom Britton (pictured), CTO and Co-Founder, SyndicateRoom. “The ultra-wealthy seem to be getting greater access to investment opportunities and better information on the businesses looking for investment. That is not okay. It is selective disclosure and if equity investment is to shift from large-cap to early-stage companies next year, this needs to change. The growth of the online investment industry can serve as a catalyst to increase transparency and fairness. Since its creation, SyndicateRoom has proudly been a key driver of that ethos, offering equal access and information to all investors.”