MJ Hudson Allenbridge, an investment consultancy specialising in alternatives and venture capital, has released the results of a survey of the UK’s top venture capital managers, investors, and advisers as part of its broader commentary in advance of the Government’s Patient Capital Review, which will be released on the same day as the Budget.
The results of the survey, answered by over 120 top venture managers and investors, highlight the need to close the “scale-up capital gap” identified by the government in its Patient Capital Review, as well as the extent of which current tax allowances are relied on by investors looking to put money into early-stage growth. In addition, the survey flags up an industry split over whether government plans for a National Investment Fund aimed at growth capital would be of benefit.
The ten-question survey looked at the general outlook of Venture Capital Investing in the UK as well as taking a closer look at potential reforms to the tax-advantaged system (EISs/VCTs/etc.) currently in place and how it is viewed by the top players in the industry.
The findings concerning the wider VC industry agree with the Government’s diagnosis of a “scale-up gap” which motivated the undertaking of the Patient Capital Review, and urges the Government to work to improve the current system rather than take more drastic action.
Eighty per cent of top players in venture capital agree that early-stage businesses in the UK lack the long-term finance to scale up successfully, while 79 per cent argue that the Government should introduce incentives to encourage investing through the ‘scale up phase’.
Respondents are split on whether the Government should launch a new scale-up fund for UK early-stage companies, with 45 per cent being in favour and 41 per cent against. However, a majority (51 per cent) felt that Government-run investment funds (eg. Northern Powerhouse, British Business Bank) are playing an important role.
Out of five options, 51 per cent believe that in order to close the gap between UK and US successful scale-ups, the bottleneck which is most urgent for the Government to address is access to UK scale-up capital.
Overall the industry does not seem to place much faith in the likelihood that the Government will help to improve conditions in this budget, with only 15 per cent thinking that the upcoming budget will have a positive effect on their or their client’s business.
Qualitative responses to the survey exhibited a large concern over the ramifications of Brexit, with particular emphasis placed on a lack of access to talent, capital and markets.
The current system of tax advantages, such as the Enterprise Investment Scheme and Venture Capital Trusts have come under scrutiny in the PCR as a potential area for radical reform. Survey respondents are generally supportive of the schemes and feel that any changes should maintain what works.
Over 85 per cent of respondents believe that EIS and Seed EIS has aided the development of the companies they or their clients have invested in, with 64 per cent feeling that without EIS/SEIS, they would not have invested in one or more companies they or their clients invested in.
Answering an MJ Hudson Allenbridge proposal that tax relief should not be lost if (within the obligatory three-year holding period) the proceeds from a sale were recycled into another qualifying business, 82 per cent either strongly agreed (54 per cent) or agreed (a further 28 per cent).
However, 75 per cent of respondents believe that the current three-year holding period is appropriate (with those who disagreed splitting between shorter and longer period alternatives).
Sixty per cent state that the VCT regime has aided the development of the companies they or their clients have invested in, with 58 per cent further suggesting that it has aided their companies’ growth potential (a key line of inquiry for the Patient Capital Review).
“This survey offers an endorsement and a warning: an endorsement of the Government’s view that the scale-up capital gap needs to be tackled, but also a warning that the reforms should work with the grain of the current system and not against it,” says Karma Samdup, Partner-Venture Capital, MJ Hudson Allenbridge.
Odi Lahav (pictured), CEO, MJ Hudson Allenbridge, says: “After much anticipation, we are excited to see the results of the government’s expected announcement of the Patient Capital Review. As one of the largest specialist independent advisors looking at tax-advantaged investments, we do see that the government needs to take action to ensure that these investor incentives continue to accomplish the government’s intentions and, where asset managers are concerned, to reinforce the need for transparency and alignment of interest with investors.
“The government has done a great job of identifying the challenges facing venture capital in the UK and the difficulties that companies in this sector face in scaling up. The Treasury has a fantastic opportunity to make the market more efficient and to target support from the government at a critical and volatile period for the UK’s economy.”
There has been much speculation that Film and TV tax incentives will be excluded from the EIS scheme due to a perception that they do not take enough risk and divert capital which might go to more growth companies.
“Film and TV look to be within the crosshairs of the Treasury because some packaged products don’t take sufficient risk and rely too heavily on government tax reliefs. According to our data, for every one product designed to maximise the tax benefit and not investor return (for a given level of risk) there are four trying to build businesses well within the spirit of the tax-advantaged schemes. It would be a pity to let the bad apples spoil the batch,” says Jack Fishburn and Dr Simon Radford, media analysts, MJ Hudson Allenbridge and authors of the recent Tax-Advantaged Overview of Film and TV Investing.
There has also been speculation, not least from the EIS Association (EISA), of Government reform to so-called asset-backed investment products.
These can be defined a number of ways but will generally have some form of contractually guaranteed income or the company will own some asset (such as property) which has often been marketed to investors as a way of ‘mitigating risk’, which has come under criticism as being antithetical to the intended ‘high-risk’ nature of EIS and VCT products.
“When it comes to reforming asset backing the Government has to make sure that the investments allowable under the scheme serve the greater industrial strategy that the Government is due to set out. We saw when renewable energy was allowed under these schemes huge inflows of capital, which allowed the industry to stand on its own two feet after tax relief was withdrawn. Tax relief in asset backed products should show a similar alignment with the best interests of UK PLC,” says Lahav.
