Private equity fundraising is difficult, especially for venture capital firms. Consequently there are a number of well-known UK firms now looking at Enterprise Investment Scheme Funds (EIS) as a source of funding given the tough current institutional LP fundraising environment.
These schemes therefore not only support growth businesses for the benefit of the wider economy they also provide an important link in the private equity investment chain. All private equity managers, and the government, can thus be relieved with a recent decision by the Financial Conduct Authority (FCA) to exempt EIS funds and Venture Capital Trusts (VCT) from proposed changes to the regulatory environment.
Without going into the technical minutiae, the proposed regulatory changes would have limited the ability of EIS and VCT funds to raise money from retail investors, the majority source of total investment into these schemes. This would have cut off significant capital available to growth businesses at a time where banks continue to offer little support and the broader UK economy is struggling. It seems reasonable to assume that the government played a significant part in the final decision by the FCA.
EIS and VCT funds provide a large portion of the growth capital in the UK. To have included these funds in the crackdown on marketing alternative asset classes to retail investors would have cut down the schemes at the very time the UK economy needed it the most. It would also have had repercussions on the broader private equity spectrum, breaking an important link in the funding chain.
The UK Government has been a keen supporter of both schemes but particularly the EIS scheme, passing several positive legislative changes over the last couple of years. The scheme offers certain tax reliefs to individuals in return for investing in higher risk growth businesses. The policy rationale is that the money the government forgoes in income and capital gains taxes, it will regain through PAYE and company tax. EIS Fund managers also re-disk the government’s investment in that scheme to some extent by ensuring a portion of the total money raised is managed professionally as opposed to individual direct investments.
To have included these funds in the crackdown on marketing alternative asset classes to retail investors would have cut down the schemes at the very time the UK economy needed it the most
In addition EIS and VCT growth funds play an important part in the UK private equity community; investing in the so called equity or finance gap. This gap has many definitions depending on who one talks to but here at MMC Ventures we view it as investing post seed / angel investment and pre series A rounds, the £0.5 million to 3 million equity cheque to support businesses to the next stage of growth.
MMC Ventures is benefitting from strong deal flow which is in part driven from various initiatives and innovation. For instance technology allows an entrepreneur to set up a business relatively cheaply; regional funds and the private sector are providing infrastructure to incubate start-ups; Seed EIS is boosting the level of angel community funding in the UK; crowd-funding is feeding additional capital into early stage business etc. All of which increases the quality of growth businesses in the investment pipeline which in turn, after our investment, results in better quality deal flow for the larger venture capital firms and mid-market private equity firms.
Tom Hopkins is portfolio director at MMC Ventures, a London-based venture capital firm.