The outlook for tax efficient investing as we head into the New Year presents something of a paradox says Dermot Campbell CEO of Kuber Ventures:
Uncertainty surrounding the Brexit process and the possibility of constitutional deadlock means investors considering Enterprise Investment Scheme (EIS) products, like many other investors, have been slower to make decisions.
However, every cloud has a silver lining and market uncertainty ultimately leads to lower valuations, making this an excellent time to invest in EIS, not least because there are signs that investor nervousness may be on the wane. It is, currently, a buyers’ market.
As it stands, Parliament’s apparent inability to agree on the details of Britain’s exit from the European Union, and the possibility of a full-blown political crisis, has impacted investment of all kinds. The unease that Brexit has generated is perhaps felt more keenly among those being asked to fund new enterprises with little by way of a track record.
In effect, risk takers are being asked to assume yet more risk.
At the time of writing, it is unclear whether we face a no deal Brexit, a clean Brexit or no Brexit at all. Another possibility would be an in-between Brexit, with the UK remaining associated with some aspects of the EU.
Asking the investor in the street to make decisions in this environment may seem to border on the unreasonable, and it would be harsh to criticise investors for sitting on the side-lines, for the time being.
But the good news is that a reluctance to write cheques is not the same as a lack of interest in the EIS space. On the contrary, interest is strong and growing.
All the signs suggest the interest into the EIS investment space will eventually be transformed into deferred investment decisions in the first quarter of 2019, for a number of reasons.
First, there is the approaching end of the tax year, which tends to concentrate the mind.
Second, there is every chance that the first three months of 2019 will see greater political stability, domestically and internationally, than has been the case in the last quarter of 2018. Abroad, turbulence in France, political disturbance in Germany and the US-China trade dispute seem likely to subside.
At home, Brexit is expected to come to a close in the early part of 2019, which will lead to some alleviation of the uncertainty as markets begin to adapt either way to the final deal.
Third, the increase in the level of enquiries into the EIS investment sphere, suggests a clear demand for EIS investment, and experience shows, such potential demand can very rapidly become actual investment once obstacles are cleared away.
Given companies have had to drop their valuations to attract investors, now is a very opportune moment for EIS investment, just ahead of the sales surge that will, inevitably, exert upward pressure on prices.
So much for the investment environment. In terms of the “exit” side of the equation, there has been a pause, with reduced deal flow as fewer people are selling. This, too, will change over time.
The bigger economic picture in 2019 is likely to prove supportive for growth companies. It has been widely reported that the vast majority of economists are looking for a decent level of UK growth next year, with most forecasts ranging between 1.2 per cent and 1.9 per cent.
This is a great improvement on 2018, since in the first six months of 2018, the UK was one of the slowest growing economies in the G7.
To sum up, the outlook for EIS investment is positive, and this is not yet reflected in valuations, which are currently depressed. Put simply, the earlier an EIS investment is made going into 2019, the better.