07 Sep Why it pays to become a local investor
16 per cent of the investors who put £39 million into Brewdog were from Scotland
Environmentalists have long been urging us to think globally but to act locally — and it seems investors are following suit.
Appetite for investing in local businesses is growing, with 42 per cent of those with £100,000 or more to invest saying that they would support a local business or entrepreneur who benefits their community, according to a survey by IW Capital, an investment house.
“Investment is becoming increasingly local,” says Jenny Tooth, the chief executive of the UK Business Angels Association (UKBAA), which represents roughly 15,000 “angels” — high-net-worth individuals who invest directly in private companies. “Brexit is a driver. People are aware that small businesses will struggle most to get funding after we leave the EU. Property is looking weak, the recent Woodford scandal has shown how even listed holdings can be hard to sell. People are saying, ‘Why not back local companies?’ ” she says.
Luke Davis, the chief executive of IW Capital, says: “Private investors are a hugely important source of finance for small companies that are typically turned away by banks and traditional lenders.”
Becoming a local investor, however, can be challenging. Opportunities are rare, typically require deep pockets and take time and effort to research. There are three main routes.
Luke Lang, a co-founder of Crowdcube, a crowdfunding platform, says that users can opt to be notified when a business located near them launches on the site. “Outside London and the South East, the South West has the most businesses raising finance and the highest amount raised on Crowdcube.”
Cornish Lithium, which has exploration rights for lithium and other “battery metals” across a large area of Cornwall, recently raised £1.44 million.
When the Scottish brewer Innis and Gunn raised £2.4 million on Crowdcube in 2016, 37 per cent of the 1,913 investors were from Scotland. Brewdog has raised £39 million, most recently in September 2018, with 16 per cent of the 5,623 investors based in Scotland.
Davis says: “Crowdfunding is one of the easiest ways to support small businesses, with thousands of opportunities, but can be higher risk.”
VCTs and EISs
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) offer investment in small companies and are available to sophisticated investors with large portfolios, typically requiring investment of at least £5,000.
VCTs are tax-efficient listed funds that invest in early-stage unquoted companies; investors can claim tax relief of 30 per cent on subscriptions to new share issues, which is repayable if the shares are sold within five years. VCTs can offer tax-free dividends and capital gains.
An EIS provides tax relief of up to 62 per cent (in the case of losses) for investments into eligible companies. Advisers such as Seneca or Parkwalk offer EIS funds, which are portfolios of shares in companies that have been chosen by the adviser, which often sits on the companies’ boards.
Investment in an EIS-eligible company provides 30 per cent income tax relief (which must be repayed if you sell the stake within three years) and any gains are free from capital gains tax. If losses are made on EIS shares, loss relief can be claimed against either an income tax or a capital gains tax liability. After two years EIS shares qualify for business relief, which means they are exempt from inheritance tax.
Local options include Mercia EIS and Seneca EIS and VCT, which typically invest in companies in the North and the Midlands and have minimum investments of £25,000 (£5,000 for Seneca VCT). Par Equity EIS typically invests in technology businesses from Scotland and Northern Ireland and has a minimum investment of £20,000. Parkwalk EIS offers three funds that collect EIS investments associated with UK universities. “The companies come from sectors including AI, machine learning and medical tech,” says Moray Wright of Parkwalk.
Alex Davies from Wealth Club, an investment platform for experienced investors, says that choosing a local business can offer benefits. “For many, EIS investment is a leap into the unknown. Therefore, investing in a business that is local can add some comfort. You can walk past and see if there is much activity, you can listen out for local gossip.”
Angels typically invest between £10,000 and £50,000 in private companies for three to eight years, taking an active role in advising the company. They will often be part of a syndicate, and many favour EIS-eligible companies because of the tax benefits.
“Syndicates share opportunities. Try to invest alongside people you know well,” Tooth says. Hunting in a pack is more efficient: you bring a diverse set of skills from your professional backgrounds. The UKBAA has regional angel hubs in Leeds, Cambridge, Belfast, Manchester, Bristol and London.
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