EXCLUSIVE: Total funds raised by Enterprise Investment Scheme promoters fell by one third in 2018 to just over £400m, according to analyst Tax Efficient Review.

HMRC estimates the total EIS funds fell to £1.4 billion last year, down from £1.8bn. However, the Treasury includes funds raised directly through angel investors and wealthy individuals.

Brian Moretta, financial analyst at Hardman & Co, said: “Both of those figures agree with my sense of where the market is at. Clearly, there has been a big change in the EIS market. Some advisers were lost in that change. The biggest products two years ago aren’t there now, and there’s no equivalent out there.”

Last year’s worst-performing funds, according to Tax Efficient Review, were Blackfinch EIS, which only raised £5.5m in 2018/19 compared with £20.1m the year before (down 74pc); Foresight Williams Technology Fund, which raised £12.8m in 2018/19 compared with £22m in 2017/18 (down 42pc); and Oxford Capital Growth EIS, which raised £11m (down 32pc).

Richard Cook, CEO of Blackfinch, points out that its new EIS product only had a soft launch in summer 2018 with the majority of marketing taking place in December. Because its EIS is an evergreen product, Cook is confident Blackfinch “will now return to, and exceed, the previous year’s fundraising level”.

Oxford Capital, which has backed companies such as online medical service Push Doctor, has stopped accepting EIS funds and has made several staff redundant.

Start-up funding increased

Although the headline figures does appear bad, the appetite for investment in start-ups and growth companies increased slightly last year, according to analyst Hardman & Co.

Fintech is the hottest area for EIS to invest in, reflecting the wider economy, accounting for 25pc of all money raised through EIS, per the Enterprise Investment Scheme Association.

Other tech areas including artificial intelligence, cyber-security and data security are also investment hotspots.

Anything involving a “subscription box” model, where goods are delivered to your door – a model pioneered in Britain by fruiterer Abel & Cole and widely mimicked — is also popular.

Moretta said: “EIS is still a good option for entrepreneurs. The growth part of the market, as opposed investors trying to preserve their capital, actually increased last year. The growth part of the market is still there and will probably grow this year.”

And the number of EIS funds has not shrunk either. According to analyst MJ Hudson Allenbridge, there are at least 35 investment firms offering EIS.

Moretta added: “Technology is an area of emphasis and the phrase I see being bandied around is ‘technology enabled businesses’; businesses that are not technological per se but where there’s a real-world problem and technology is used to solve it.”

“As long as you can show that you’re using EIS funding to grow your company, there aren’t any sectors which aren’t suitable,” agreed Churchill.

How much can you raise through EIS?

Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime.

Investors can receive a tax break of up to 30pc for backing high-risk start-ups through the scheme.

Since its introduction, over £18bn has been invested into over 28,000 companies through EIS, according to EISA.

Why the EIS market has shrunk

In recent years, the Treasury has moved to exclude “asset-backed” businesses such as pubs, film companies and renewable energy providers in favour of start-ups using money for growth and development.

In 2015 the government introduced a seven-year age limit for companies applying for EIS funding and said no single company could raise more than £12m in investment.

It then banned funds and companies from applying for EIS funding if they were not sufficiently putting investors’ capital at risk.

Film and TV companies, which had extensively used EIS as a way to part-fund movies and TV shows, could no longer underpin investors’ money using co-financing such as tax breaks and broadcaster backing. For example, notable media financier Ingenious was a major player, raising millions for TV through EIS, but has now exited the market.

Moretta said: “Several of those media schemes were really little more than secured lending. They’re just not in EIS anymore.”

Crematoria and self-storage units – also examples of businesses backed up with assets, in this case real estate – were also in HMRC’s crosshairs, says EISA.

Mark Brownridge, director general of EISA, said: “They want every pound to be at risk … you can’t have a low-risk EIS.”

“The risk-to-capital requirement came in, which has led to wholesale change of products in the market. That in particular has left IFAs a little unsure about what to recommend. They don’t like this new regime,” said Moretta.

However, Moretta is upbeat that IFAs will eventually come around, with advisers becoming more comfortable with increased risk. The way that the Venture Capital Trust market has grown with private investors gives him encouragement.

Brownridge said: “The change in the rules is what’s driving the fall in investment. Advisors such as IFAs have gone cold on the market because of the increased risk. The government clamped down on asset-backed EIS to focus the market on growth and innovation.

“Whenever we go and see the Treasury, the words we hear are growth, innovation and technology.”

According to EISA, between £700-800m a year has traditionally come into EIS through IFAs, with the rest flowing in either through business angels or high-net-worth individuals.

EISA hopes that last year’s fall was a blip as advisers become more comfortable with higher risk.

Investor return

Churchill has a question mark as to what returns investors eventually make from EIS, as most companies are still too early in their life cycle to have offered exits.

Said Churchill: “As Mao Tse-Tung once said, when asked if the French Revolution was a success, it’s just too early to tell.”

Further reading

VCTs and EIS remain popular and valuable for businesses and investors