One winner, one day? No way!

The chatter in the coffee shops and meetings rooms these days seems to be all about the explosion in FinTech - before Christmas the discussions circled around whether there will be a crisis in the world of the crowd - a fraud, purported crazy valuations damaging the investment market in the long term, a day when platforms will offer (at a cheaper price?) everything a fund manager does and therefore remove the point of having one at all? 

With the New Year, the debate has now extended to whether one platform become the monopolistic gorilla either across the whole angel and venture market whether in equity, debt or even over the whole lot.

Before I joined Kleinwort Benson in the autumn of 1990 I was sent a reading list by the HR department.  The selection of books I was required to read included a number of histories of the City of London. They were highly illuminating, explaining the development and role of the stock market, the insurance industry, the discount houses, the arrival of Sigismund Warburg and the explosion of Eurobond market, metals and other exchanges and so on. 

Whilst it's always dangerous to say that history repeats itself, we all know that there are lessons to be learned from history. I think it is safe that in terms of crowdfunding and indeed the wider FinTech revolution we can get a sense from the past of where the future is likely to head. This is not only from the history of financial services but also from observing the impact that the web has had on industries such as music and books.

Essentially, throughout history, the financial services industry, like the media industry, has thrived on the fact that many players exist.  Few organisations have ever held a dominant sway for long and none on a permanent basis.  Whilst technology makes transacting in the financial services sector faster, more accurate and more efficient, it also enables more people to find ways to exploit the need for some to obtain money and others to put theirs to work in a way that makes a decent return.  Those organisations which fail to respond to the increased efficiency of the market die, but are soon replaced by others.

If we look for precedents in how the internet has changed other markets, it is obvious that we should look to music and latterly other forms of "content", such as news and books, for clues as to how the FinTech world will develop.  In music, what began as Napster has now become a world of iTunes and its ilk, YouTube, Spotify, Shazam, Netflix, BBC iPlayer and more.  In books, out of copyright material is now more freely available than ever before. iBooks and Kindle allow a more convenient, if less emotionally bonded, route to books both rich and poor in quality.  Fifty Shades of Grey is as accessible as the works of the Marquis de Sade.  Previously dead business models such as the concept of the subscription book have been reignited with the emergence of the glorious Unbound book crowd funding platform; and it's as if divine retribution had been served when Unbound author Paul North last year made it onto the long list of the Booker Prize with The Wake - a book that was only published because the Crowd wanted it to be - not because someone in an office somewhere thought it would be a profitable exercise.

The arrival of the internet as a major disruptive force in any market does not permit monopolies, it does precisely the opposite, enabling more diversified competition to thrive.  And so it will be with the FinTech revolution.  Financial Services is and will be more accessible than ever before to the masses.  And the masses are not as stupid as the dinosaurs like to think. They will enjoy the greater and more transparent choice on offer to them. And they will get pretty discerning pretty quickly.

It will take time for the ramifications of the FinTech revolution to become clear.  Caxton's press did not immediately (and indeed has never quite) destroy the illuminated manuscript.  The likes of Nutmeg, for example, will not remove the role of the wealth manager, but everyone in financial services will need to learn to adapt to the new world.  The winners will be those who respect the Crowd, educate and enable them so they can do it for themselves and focus instead on helping them to uncover the best returns.  Anyone who cynically tries to build a business that makes a profit at the expense of the Crowd's naivety will be punished - not by the regulator but by the market. 

Will the Crowd make mistakes?  Yes of course it will - but the Establishment might be wise to listen to and help them not to make the same mistake twice. 

I am going to be bold with my own predictions for who and what will win in the FinTech revolution. 

Firstly, I think it will be those who give investors what they want (especially when in the past they have not been able to have it!) - companies like Asset Match which is enabling liquidity for small shareholders in privately owned companies like BrewDog (after all does not every investor have the right to an exit at a time when they want it- even if at a loss?) and companies like Syndicate Room which are helping entrepreneurs to complete rounds of investment more efficiently.  Those platforms which are most transparent and have the best communications will beat the more opaque. Those who try to disassociate themselves from the Crowd are doing the business equivalent of swallowing cyanide.

Secondly, we will see winners in areas where they respect the power of the Crowd.  Platforms like Ratesettter and Funding Knight in the Peer to Peer world, which are staying firm in their belief that retail lenders and not institutional investors should remain the predominantly influential funders of debt, will hold firm when others who have come to depend on institutions see their source of funds disappear to support something else that is buzzy, fashionable and above all offering better/more reliable returns. 

Thirdly, the firms that use the Big Data they are gathering will become very, very powerful.  When the mainstream players in world of Crowd Equity - CrowdCube, Crowdbnk et al - start to provide data that proves (or not) whether, for example, the higher valuations that are an inevitable consequence of investing large sums of money in very young companies are more "right" than the traditionally meaner valuations of the angel and VC worlds, we really will be able to support, with evidence, the theory and practice of venture investment.

Fourthly, the angel groups that have clocked the power of the internet, like Envestors with its neat digital platform, will continue to take market share, especially where they have understood the fundamentals of investment - you need to do the best deals, on the best terms with the best investors. And the other winners in the angel world will be those who clock that no angel rationally just invests for financial returns - they invest also for the social value such investment provides to both themselves and the recipient of the cash.  Forget this at your peril if you want to have a sustainable angel business.

Fifthly, the increased commoditisation of software development will mean that owning the platform will not mean owning the market - the winners will be those business that have the right pro-active relationship with their customers - be they investors or entrepreneurs. 

Sixthly, recognising that investing in venture is personal will be vital. That is why those who continue to enable live or near live meetings between themselves and the Crowd will win over those who think there this is a market that can be commoditised online.  Videos and online chat will be vital in the new blend of a fundraising campaign. And the personal touch will have to continue after the deal has been struck; we will see the Annual Shareholders' meeting becoming more rather than less important.

And lastly, we will see a change in the nature of how the financial industry earns from its efforts.  The firms that will be able to protect their margins will be the ones that prove, wholeheartedly, the value of their service - Venture Capitalists who open the black box and show just how much work is involved in finding, due diligencing and monitoring investments, Crowd platforms that can get you the money you want in hours or days not weeks or months, Angel Clubs and networks that "get" that people do not become and certainly do not stay as angels simply to make money, but also to make a difference. The best of breed will be able to command premium prices for the services they offer.  The others will see margins collapse and will wither, then die.

When I re-read this article in five years' time, I very much hope that the basic tenets remain true. By then I expect we will be in a world with more angel and venture activity and with more successful businesses growing at a far greater pace than ever before. The names of some firms in the market will have changed, some will have died, but many of the individuals will still be around in the new organisations that replace them.  There will be new interpretations of financial services, new services based on historical precedents.  It will be exciting and much, much more sophisticated, whilst simultaneously being accessible to many more people.

What I fear is that the Government, via the Regulator, will have failed to adapt in turn to ensure that the real destroyers of value for investors - theft, fraud and their ilk (whether illegal, grey or legal, but unacceptable on prima facie basis) - are excluded from the market.  Sadly the current direction of travel, forcing early stage investment into the "get out of jail free" system of Certification is taking us all in completely the opposite direction to the one that, in my view, is needed.  If the Regulator does not address this problem soon, it will become surplus to requirements as the combined power or the web and the Crowd will do the regulatory job for itself.

Abolition of Stamp Duty on Growth Markets - has the Chancellor done enough?

The failure of the Chancellor to include ALL private companies in the provisions for the abolition of Stamp Duty on the purchase of second hand shares, rather than just those on AIM and ISDX, will hold back the development of the early stage equity capital markets in the UK 

This government's abolition of Stamp Duty for the 'growth' sector is highly commendable, but as sometimes happens the move includes some for whom it wasn't intended and excludes many of those for whom it was clearly meant to help. In that respect to include the many foreign companies on AIM and ISDX, and not the growing UK companies that are not part of these 'exchanges', is an oversight and, one assumes, unintended in the light of the Policy Objective behind the move.

Stamp duty in its 'modern' form stems from the Dutch in 1624. Since its introduction to the UK in 1694 to pay for the war with France, Stamp Duty in this country has had a mixed history and some unintended consequences along the way. A hundred years on to 1795 and the attempted enforcement of stamp duties in English colonies in America led ultimately to the Boston Tea Party and the outbreak of the American War of Independence.

How various governments have opportunistically used Stamp Duty is exemplified by William Pitt the Younger in 1797, describing stamp duty thus; '...easily raised, pressing little in any particular class, especially the lower orders of society, and producing revenue safely and expeditiously collected at small expense'. He virtually doubled the tax that year!

Whilst we are perhaps more familiar with the tax as it pertains to property transactions, it is also an HMRC earner in the world of share transactions. In April 2014, this Government implemented the abolition of Stamp Duty on what it termed 'Growth' markets. In reality these were securities quoted on the AIM and ISDX markets regardless of whether they were UK growth companies or overseas entities listing in the UK. 

Under the current rules, therefore, HMRC still lays claim to the duty on share purchase transactions involving UK private companies that not quoted on these markets thus creating the odd situation where a private company and publicly quoted company selling shares will each attract Stamp Duty, but one listed on AIM or ISDX will not. It would make more sense if all shares NOT on the Main Market were treated equally and trades in them were exempt from Stamp Duty.

Whilst the cash impact of Stamp Duty clearly matters on the pricing of a share sale, it's also worth noting that the time it takes to settle via an HMRC Stamp Office can be several weeks, which acts as a brake on the efficient transfer of value from one shareholder to another.  This further restricts the market and is in direct contradiction to the Policy Objective of improving the overall conditions for growing companies raising equity financing. 

Last year the investors using Asset Match were charged a collective £40k of stamp duty because the shares we auction attract stamp duty, although essentially they are no different to the shares traded on AIM or ISDX, but, just as importantly, they also faced delays in settlement because of the requirement to liaise with HMRC.

We established Asset Match, as the platform for shares in UK private and unquoted companies in order to enable shareholders of "locked in" equity in privately owned companies to exit from their investments.  One of the reasons we did this was because we recognised the illiquidity of such investments was reducing the funds investors had available to invest in new early stage businesses.  Whilst the Stamp Duty issue is very alive for us and our investors, it is worth pointing out that as the companies that have raised money on the Crowdfunding platforms start to mature the issue will begin to affect thousands more people. Unless Stamp Duty on private company shares is abolished it will start to hamper this easy way of recycling capital into growth companies and will hold back the development of the market for early stage equity.

I assume that it was oversight on the part of the Chancellor in the last budget not to include the sale of "unquoted" shares not listed on AIM and ISDX and hope that he will rectify it in the next one.  In doing so he would create a level playing field for growth companies that wish to enable their investors to get an exit without the need to seek a (relatively time consuming and expensive) quote on AIM or ISDX. 

The financial impact is likely to be negligible as evidenced by the paper introducing the abolition contained a 'Summary of Impacts' which suggested the cost of abolition to HMRC was circa £170m per annum in pure cash terms, with negligible impacts elsewhere.  Indeed this paper referred to positive developments through the abolition in terms of settling the share transactions.  It should only take one line in the next Finance Act to make the change - all that needs to be said is that,"all private company share transactions will be included under the same provisions as those traded on AIM and ISDX"

Along with the many thousands of investors now enjoying the opportunity to recycle their investment monies from long established BES and EIS companies into new growth companies, I hope that the Chancellor will take the opportunity in the Budget to rectify this situation thereby proving that he really understands that the UK's Growth Markets are all over the UK and not just in the most obvious places.

Stuart Lucas, Co-Founder Asset Match 

The VCT Industry Grows Up

The VCT industry is once again seeing strong early inflows of capital this season from investors, well ahead of the traditional rush prior to 5th of April. The VCT industry is once again seeing strong early inflows of capital this season from investors, well ahead of the traditional rush prior to 5th of April.  When I first became involved in the VCT industry around 15 years ago, it was not uncommon for up to half of the annual fundraise for a VCT to come in the last week before the end of the tax year.  Investors would literally turn up at the office on the last day of the tax year with a cheque in their hand.  So why has that changed?

There are many reasons for this, but a combination of early investment incentives and a need to act quickly to get into the most popular offers before they sell out are the main cause.   VCTs are now viewed as a mainstream product, and are well known and understood by investors who choose to follow managers they trust, who they know have delivered good returns over many years with a tried and trusted investment strategy.

Over the last decade the VCT industry has improved beyond recognition, and the old adage about VCTs being a 'tax efficient way to lose your money' is now firmly consigned to history.  The sector has professionalised and consolidated into a capable and experienced group of managers who have a track record of consistently generating positive returns for shareholders.  Amongst the range of investor benefits, dividends paid by VCTs are tax free and the core group of managers have maintained attractive levels of income paid to investors over many years, in tandem with steady growth in net asset values.   Although there is a limited secondary market for VCT shares, most managers have embraced the need to ensure that investors can exit and sell their shares after the 5 year minimum holding period through a formal buyback policy aimed at maintaining a tight discount. Consequently many VCTs trade on discounts which are often much better than some large conventional Investment Trusts.  When one considers the initial tax break of 30%, if an investor can exit at close to NAV, having enjoyed meaningful tax free income and NAV growth, they should be very pleased with that outcome.

The appeal to investors is therefore obvious - exposure to a different asset class, investable in a tax efficient manner, with returns being achieved substantially in the form of regular tax free income.  In an environment of low interest rates and poor returns on cash deposits, it's not hard to see why many investors in the UK see VCTs as an important part of their portfolio and a means to gain low cost entry into the private equity business.

This year two of the most recognised generalist VCT managers (NVM and Baronsmead) have decided to either not raise funds, or have a very modest new issue.   Together these managers raised a total of £90m last season leaving many repeat VCT investors looking at alternative offers to back this year.   This is no bad thing for the industry or investors, as performance achieved by the principal managers has narrowed over recent years, meaning in practice having a wider spread of VCT holdings is arguably a better option for investors.  The leading VCT managers are all capable of unearthing a business which might deliver an outstanding return to the VCT, and in those circumstances most managers would elect to pay a special or one-off dividend to investors.   All VCT managers aspire to find 'big winner' businesses that will produce exceptional returns for their investors, but at the same time have a structured approach to building portfolios which don't rely on that outcome to produce good returns.  The VCT industry has well and truly grown up.

Bill Nixon, Maven Capital Partners

Autumn Statement 2014 - The Deepbridge View

The Chancellor's Autumn Statement of Wednesday 3rd December 2014 brought with it some headline-grabbing announcements; including a revolution to stamp duty land tax, air duty being scrapped for children and changes to business rates.

However, one largely unreported announcement was the eligibility rules surrounding renewable energy projects within the Enterprise Investment Scheme and we have been asked by a number of partners to provide our thoughts and clarification.

The relevant article of the full Autumn Statement is as below.

2.59 Venture capital schemes: changes to scheme rules – All community energy generation undertaken by qualifying organisations will be eligible for Social Investment Tax Relief (SITR) with effect from the date of the expansion of SITR, at which point it will cease to be eligible for the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and VCTs. All other companies benefiting substantially from subsidies for the generation of renewable energy will be excluded from also benefiting from EIS, SEIS and VCTs with effect from 6 April 2015 (Finance Bill 2015).

In short; from 6th April 2015, commercial hydropower projects will no longer qualify for EIS tax reliefs. (Although, community projects will still qualify under SITR status.)

The implication of this move is that we have until the end of March 2015 to raise and deploy EIS capital for Deepbridge identified hydro projects. This will be the last time that private investors will be able to potentially benefit from both tax incentives and government subsidies such as Renewable Obligation Certificates and Feed In Tariffs.

From Deepbridge’s perspective, whilst we expected this announcement, its timing is somewhat surprising: in the Budget Statement of March this year, the Chancellor stated that hydro would remain eligible for EIS given the relative under-development of this resource compared to wind or solar. However, in our opinion, it was inevitable that the Government would eventually make this decision on EIS investment in renewable energy as the UK approached the renewable obligation target of 15% of UK energy produced from renewable sources by 2020 (currently approximately 13.9%).  We have a number of investors looking to deploy funds in to hydro projects before the end of March 2015 and we remain committed to helping investors and advisers in the short-term who are looking fo such an investment.

Generally the underlying investments of an EIS / SEIS are likely to be both illiquid and high risk, not suitable for all investors and investors should not consider investing unless they can afford the full loss of their investment.  Applications are only accepted on the basis of suitability and qualification criteria. Please refer to the full disclaimer and risk section in the respective Information Memorandum for further details.

If you have any queries or wish to discuss please give me a call on 01244 893182 or email me at [email protected].

Ian Warwick, Managing Partner, Deepbridge Capital