The UK is set to leave the European Union on 31st of October. All bets are off as to whether it will actually happen, especially when one considers the number of extensions and the never-ending drama unfolding at Westminster. Like me, I am sure many readers are suffering from “Brexit fatigue”. However, it would be remiss to brush the topic aside. Brexit is a known unknown. Whilst it is widely expected to take place, the timing and impact of an eventual deal is less certain. In this edition of View From the Bridge, I explore the potential impact, if any, that the ongoing uncertainty around Brexit could have on the tax-advantaged market. Although I am sure that most of you have been bombarded with Brexit articles from all directions, I hope that this can bring some clarity, and maybe even some reassurance, on the lead up to the 31st October.
The impact which the EU Referendum has had on investor sentiment is perhaps best illustrated by the amount of capital which has been withdrawn from UK markets, in particular equity funds. According to data provider EPFR1, almost $30 billion has been pulled out of UK equity funds since the decision was made to leave the EU, back in June 2016. It is interesting to note therefore, that VCT fundraising figures have seen continuous growth over the same period. According to data released by The Association of Investment Companies (AIC), in the 2018/19 tax year. Venture Capital Trusts (VCTs) enjoyed the second highest fundraise since their creation in 1995, raising a total of £731 million; albeit at only a marginal increase on the year prior.
Another factor to consider is the potential effect which Brexit may have on underlying investee companies and their ability to sustain growth. While the UK is widely regarded as being at the forefront of science and innovation across Europe, a significant proportion of the talent behind this title are non-UK nationals, and their immigration status in the UK is uncertain. One of the key drivers of success for young, innovative companies is the people behind the ideas, and their ability to commercialise them. As such, there is a risk that restricting the movement of people could reduce the pool of available talent to start-up companies.
On the other hand, one could argue that British start-ups could benefit from the withdrawal from the EU. In particular, there is a view that, outside of the EU, the UK could amend the current rules around fundraising limits for EIS (Enterprise Investment Scheme) and VCT investments. Currently, it is possible for investee companies to receive £5m per year from EIS, VCT and other State aid risk finance, although this increases to £10 million for knowledge intensive companies. The investment limits through EIS/SEIS and VCT are determined within the limits of EU State Aid rules and, as such, a departure from the EU could give the UK more room in which to adjust and potentially increase the limits for qualifying investments.
Along these lines, in a survey of approximately 2000 investors undertaken by the EIS association2, 28% agreed that “knowledge intensive companies such as those in energy-tech, med-tech and fin-tech areas will benefit as a result of Britain formally exiting the EU”. Regardless of the endless speculation around how Brexit will, or will not, effect UK SMEs, the majority of Fund Managers claim little change in deal flow, pointing to Britain’s entrepreneurial spirit being difficult to break. In turn, investors are also optimistic, with more individuals in the survey feeling encouraged to invest in UK SME opportunities (25%) than those feeling the need to hold back until after Brexit (18%).
Overall, the uncertainty that the Brexit vote has given rise to over the last three years has caused mountains of speculation and differing opinions over almost everything, the tax-advantaged space being no exception. However, this is not the first time that these niche investment products have faced uncertainty. There have been many changes to the space that have brought about concerns on the ability of these investment products to both fundraise and deploy. The patient capital review is perhaps just one example, through which tax-advantaged funds have proven their ability to weather change. Further, notwithstanding ongoing uncertainty, anecdotal evidence suggests that, at this stage, the impact on fundraising capabilities for tax-advantaged investments has been subdued. Nevertheless, one would be forgiven for taking a more cautious stance in the run up to the main event.
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