A seminar aimed at informing the potential investor of the practicalities of making an equity investment.
Event hosted by Winter Rule on 19 May 2011 - Part of Cornwall Business Week.
2. Format A perfect storm is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically
3. Perfect for whom? Small high growth Companies Squeezed by the banks Customer demand down Payment terms becoming more aggressive Public funding tight!!! Space to innovate
4. Perfect for whom? Investors Poor returns elsewhere Company valuations are low (www.perda.co.uk) Tax incentives Change in culture within companies Government initiatives Small high growth Companies Squeezed by the banks Customer demand down Payment terms becoming more aggressive Public funding tight!!! Space to innovate
5. Banks attitudes Business Growth Fund - £2.5B 40 deals per year – SMEs? Statement BBC this morning “… it’s to support risky growth – for instance a high quality company looking to build a new factory…” Cultural change!
6. Result More investors More companies Shift in type of investor Greater level of DD More involvement Syndication v Lone ranger Effect on deals The jury is out!
7. Nesta report (1) Profile 53 years old 13 years with large company EIS 57% 10% of wealth is in angel investments 83% made with co-investors
8. Deal profile 87 deals (14 deals per year); 63 businesses (64% first round); £6.75m from SWAIN investors; £44m total finance; Ave. Stake 18.5% Typical post money valuation <£1m Failure rate approx 20%
9. 9 The Tax Tale... John Endacott, Tax Partner, Winter Rule LLP
10. Don’t let tax tail wag the dog But need to consider tax stimulus for individuals to invest in Companies George did... www.winterrule.co.uk 10
11. EIS – overview Enterprise Investment Scheme Tax relief for qualifying individuals investing in ordinary shares in qualifying companies Tax reliefs Income tax relief Capital Gains tax deferral relief Budget 2011 – good and bad news Basics and beyond www.winterrule.co.uk 11
12. EIS – the bad news A company whose trade consists substantially in the receipt of FITs will only be eligible for EIS relief where commercial generation commences before 6 April 2012. This will not affect shares issued before 23 March 2011. www.winterrule.co.uk 12
13. EIS – the good news Rate of income tax relief increased from 20% to 30% for qualifying shares issued after 5 April 2011 Certain limits on qualifying companies will be increased as follows with effect from shares issued after 5 April 2012: Number of full-time employees – 250 Limit on gross assets increased to £15 million before the investment Maximum annual amount that can be invested in the company increased to £10 million Maximum annual amount that can be invested by an individual in all EIS companies is £1 million www.winterrule.co.uk 13
14. EIS – The Tax Reliefs Income tax relief 30% of sum invested allowable as a deduction in computing an Individuals Income Tax liability Capital Gains Tax Deferral Can defer capital gains incurred on different assets indefinitely If gains made < 36 months previous or < 12 months after EIS investment CGT freedom No CGT on disposal If investment qualified and continued to qualify for Income Tax relief Loss relief Inheritance Tax Exemption www.winterrule.co.uk 14
15. EIS – the Investment In cash In ordinary shares No preferential rights No risk protection www.winterrule.co.uk 15
17. EIS – Qualifying Individuals: Connected By financial interest (in Co or Subsidiary) Control Hold > 30% of share capital (or share capital and loan capital) Entitled to receive > 30% of assets on winding up Conditions apply 2 years pre and 3 years post investment (or commencement of trade if later) Associates interests taken into account By employment Partner, Director (but see Business Angel) or Employee Associate of Conditions apply 2 years pre and 3 years post investment (or commencement of trade if later) www.winterrule.co.uk 17
18. EIS – Business Angel Can be a director No previous involvement in trade carried on prior to share issue No remuneration or subsequent remuneration reasonable Can qualify for Income Tax relief on investments subsequent to becoming paid Director if within specified period of original subscription www.winterrule.co.uk 18
19. EIS – Qualifying Company UK Resident Not a subsidiary Qualifying trade Size criteria Clearance Application www.winterrule.co.uk 19
20. Other tax related matters to think about? Entrepreneurs Relief Enterprise Management Scheme R&D Tax Relief www.winterrule.co.uk 20
24. Finding a company Mix of all of the above Clear selection criteria – what do you really want – where is your comfort zone? Clear rejection criteria and be brutal The initial hunt is a numbers game
25. Working the odds In-depth market research – surprised what you learn from google Test the companies commitment early on – visit the business Talk to their suppliers and customers Mystery shop the business Work with other experienced investors Use professional firms Develop your own skills
26. De-risk the opportunity Tranche investment Consider the use of ratchets Structure deals – use of debt / loan notes On-going involvement Develop a portfolio approach A good deal is painful for both sides!
27. Co-operation / syndicates Agree a common approach Establish allocation of resources both through evaluation / due diligence and on-going monitoring Understand the “groups” attitude to future rounds If more than two investors then use a lead investor
29. Nesta report (Returns) Ave hold 3.6 years Exits (incl failures) 406 Overall multiple 2.2x Approx IRR 22% 9% of exits gave 80% of cash returned In US 10% gave 90% of cash returned
30. 19th May 2011 Finance in Cornwall 2011 Sally Norcross Webb Corporate Partner Stephens Scown LLP
47. Deal phases Understand offering Legal & final neg Due Diligence Prepare Bus Plan Heads of terms Prepare investment case Initial Negotiations Prepare pitch Read plan / Evaluation / Visit / Syndicate Rehearsal Introduction
49. Investable business Market Domains Industry Domains Macro Level Market Attractiveness Industry Attractiveness Mission, Ability to Aspirations, Execute Propensity on CSFs for Risk Connectedness up and down Value Chain Team Domains Micro Level Target Segment Benefits and Attractiveness Sustainable Advantage
50. Key criteria Management – management – management Attitude to risk and growth Attitude towards equity – loss of some control Commitment Workmanlike relationship Controlled flexibility Plan A – plan B …… Clear vision of exit
51. Using SWAIN effectively Prepared for Investment Expert panels Investor lunches Pipeline review meetings Forums
