Members of Envestors, the leading sophisticated investor network, realise you can’t back all the winners. Of the last four exits, three went well and one sadly went into administration.
The three successful exits include Loco2, the European train timetable company which sold to French rail operator SNCF, generating a 3.5 multiple return for investors; Paperless Receipts, the digital receipt repository acquired by a major retailer, which realised a 2.9 multiple return, and Ebury, the specialist foreign exchange company which provided a 4.7 multiple return when shareholders had the option of selling their shares to a private equity house. However, sadly one of our stronger companies, Plasrecyclewent into administration as a result of plummeting commodity prices. But thanks to generous tax breaks under the Enterprise Investment Scheme (EIS), investors were able to claw back 61% of their investment*.
Each of these investments exited over a timescale of four to six years. If an investor had invested £50,000 into each company (total of £200,000 which equates to £140,000 after allowing for the 30% income tax relief under the EIS) they would have achieved a total return of £569,000 (net gain of £429,000). Allowing for the average timescale for the investments to be realised (5.3 years) this would represent an Internal Rate of Return of 30.29%. This presumes the investor is a UK higher-rate taxpayer and includes loss relief of £14,000 on the failed investment.
These four investments are great examples of the Enterprise Investment Scheme (EIS) being used as it should be. If an investment fails, investors can offset the loss against income tax. If the investment is a success, gains are exempt from Capital Gains Tax (CGT).
Those in the know are aware there are a number of EIS investments which are designed to exploit the rules, such as investing in crematoria, but we expect these loopholes to be closed off as a result of the Treasury’s Patient Capital Review, which is looking at how to increase the supply of capital to growing innovative firms.