Midlands-based businesses could offer attractive prospects for investors, and often qualify for the tax-efficient Enterprise Investment Scheme (EIS). Tony Stott explains the rationale behind Midven’s launch of the Greater Birmingham EIS Fund
Midven has been investing in the Midlands’ leading entrepreneurs for 25 years, helping them to build high-growth companies, that are winning an ever greater share of national and international markets. That work continues: in March 2018 Midven was awarded the mandate to manage £35m of equity investment on behalf of the Midlands Engine Investment Fund – and now the venture capital firm is launching the Greater Birmingham EIS Fund (GB EIS).
The Enterprise Investment Scheme is designed to offer potentially compelling benefits for investors coming to this asset class. In return for committing their capital to early-stage, small-scale businesses, investors may qualify for a range of valuable tax breaks; these can include 30 per cent income tax relief, tax-free capital gains, and exemption from inheritance tax.
However, it’s important to recognise these tax reliefs have been granted because successive governments have accepted that the risk of investing in this area of the market is and investment into EIS qualifying securities is high risk. To qualify as a potential EIS investment, a company must be no more than seven years old, have fewer than 250 employees and assets of less than £15m. These ventures by their very nature carry high risk, but these early-stage businesses have the potential to deliver hugely attractive returns over time. Recent Midven investments underline the point: it enjoyed returns of 36 times’ its initial stake on Coventry-based healthcare software business Scriptswitch, and 22 times’ on the Warwick IT developer Allinea.
For investors, a collective fund approach to the EIS represents a potential means to balance risk and return. Investors get access to the fund manager’s professional expertise and experience in early-stage company investment, as well as crucial diversification benefits, while still enjoying the tax incentives that the EIS has to offer.
Betting on Birmingham
Enter Midven’s Greater Birmingham EIS Fund. Midven will aim to build on its experience of investing in high-growth businesses in the region to develop a new portfolio of EIS-qualifying companies with the potential to deliver attractive returns. The firm expects that as a minimum, it will potentially double investors’ money over a three- to five-year period, whilst providing target of a full return of the initial investment within four years.
Part of the portfolio will overlap with Midven’s active investments in other areas of its business, notably in the £35m Midlands Engine Investment . But at least half the holdings will be unique to the EIS, building on the deal flow the firm enjoys as a prominent investor in the region – many of these businesses will be targeted as they are more established and potentially less risky than those eligible for the Midlands Engine.
Midven believes the portfolio has the potential to deliver substantial value. It points to the extensive investment that has gone into the Midlands in recent years and the area’s growing reputation for innovation and entrepreneurship. We also believe that there is a potential gap in the marketplace for investors to exploit: while the West Midlands is home to 7.4 per cent of the UK’s fastest-growing businesses, it only accounts for 2.4 per cent of the equity funding raised across the country.
The Greater Birmingham EIS Fund’s diversification will be key in balancing out the inherent risk of investing in early-stage companies. Investors in GB EIS will benefit from the expertise of an established fund manager – both from Midven’s hands-on experience working with these types of businesses over the last 25 years, as well as a thorough knowledge of the opportunities in the local area.
Moreover, this fund offers private investors a rare chance to invest in local businesses that have typically been the preserve of specialist private equity and venture capital funds. It’s an exciting chance to invest in one of the most dynamic areas of the country.
Tony Stott is the Chief Executive of Midven
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