SyndicateRoom has released research that indicates up to £7 billion in wealth creation will occur in 2017 for individuals investing in early stage companies – undeterred by Brexit fallout. Of course past results are no guarantee of future returns but the findings are positive for both investors and the UK economy.
According to SyndicateRoom, a 33% CAGR for early stage companies compares favorably to expectations of only 5% growth for LSE-listed companies. The same research predicts one in thirty early stage companies will shut down in 2017.
The SyndicateRoom report, entitled “Rise of the Growth Hunters” analyses sentiment and expectations of over 1,000 retail investors alongside five years of company growth data from Beauhurst.
The study analyzed the five-year change in valuation of a wide portfolio of 578 early-stage UK companies that received equity investment via seed or venture capital in 2011. In 2011 the cohort of 578 companies was valued at £1.8 billion, with an average valuation of £3 million. By September 2016, the portfolio value had risen to £7.98 billion. An investment of £10,000 in early-stage companies in 2011 would now be worth about £45,000.
SyndicateRoom states that if historic CAGR trends continue then 2017 should see up to £7 billion of wealth created in the UK through investment in early-stage businesses.
Their findings predict:
- Risk appetite is rising among UK investors, driven by low investment returns. 39% of individual investors said that they are more willing to take risks than they were a year ago, compared to 18% who said they would like to take fewer risks. This is contasted with nearly 50% of retail investors in the UK consider themselves to be ‘off-track’ in meeting their financial goals and around half of UK investors in bonds believe they will see zero return, or worse, over the next year.
- Early-stage companies may be the route to higher returns. Approximately two-thirds of investors see the potential of higher returns as a significant incentive to move into investing in early-stage equities. SyndicateRoom states investment in early-stage companies are experiencing a rate of growth in the past five years that is more than 6X faster than that of the FTSE all-share index.
- The average retail investor will be looking to allocate £20,000 next year for early-stage investment. That works out to be around 14% of the average investor’s current equity investments.
- Individuals with over £1 million to invest, labeled the Million Pound Club, receive more information on early-stage businesses than the average investor. Around half of retail investors (48%) are not investing in early-stage businesses because of a lack of information about the company. Compared to the average investor, those with more than £1 million to invest are 15% more likely to be granted access to an investment opportunity and 13% more likely to be given additional information about a company seeking investment. Only 9% of individual investors said that there are no barriers to them investing in early-stage businesses.
- The report found that young adults (aged between 18 and 30) are likely to have the most diverse portfolio of investments, with 93% of them favoring a diversification strategy, compared to 67% for the UK average and 49% for older (51+) investors. While this may be encouraging for those looking to safeguard the interests of young investors, 72% of these investors said they will be taking on more risks now than they did a year ago.
- Young investors are also the most likely to seek out enterprise investment scheme (EIS) or seed enterprise investment scheme (SEIS) opportunities to gain even higher returns on investment.
- Those with over £1 million to invest were found to be more risk-averse than the average investor and more long-term in their investment style. While 39% of investors are going to be investing with increased risk next year, that risk appetite is reduced by a quarter for the Million Pound Club, 64% of whom said that the prospect of long-term returns was ‘very important’ when considering investment in early-stage equities.
- Of the nearly 600 early-stage businesses analyzed from 2011, with an average valuation of £3 million, 90 businesses (15%) had their valuations written down to zero by 2016.
Gonçalo de Vasconcelos, CEO of SyndicateRoom, said that in a low-interest rate environment compounded by Brexit uncertainty and the US election “reliable information on high-growth investment is more important than ever”.
”Our research discovered a fast-emerging part of the UK’s investment market that is hunting for greater growth and willing to accept a higher risk to achieve that investment return,” said de Vasconcelos. ”When we founded the company three years ago, we set off on a mission to provide fair and transparent access to investment opportunities – by allowing retail investors to invest on the same terms as professionals. As we turn our attention to the opportunities for small business investment in 2017, we need to break down the barriers to this multi-billion pound opportunity we have uncovered, which is currently the preserve of the professional investment community.”
Suranga Chandratillake, General Partner at Balderton Capital, said that agile, high-growth companies continue to provide vital stimulus for the UK economy. He said the SyndicateRoom research was a “solid endorsement of just that”.
“Where the main markets can be volatile and performance of traditional assets has slowed, early-stage investments present a compelling opportunity for higher returns in the long term – and it is encouraging to see close analysis which supports this. So many young, ambitious companies have been able to come to market in the past few years and have gone on to do great things, whilst delivering long-term value in the process. What this research shows is the considerable value that these companies can unlock in an environment of growing demand and greater access to finance.”Significant barriers to significant growth
While SyndicateRoom’s findings is very encouraging for investors in early stage companies, the same report sees barriers to growth of early stage investing. In the UK 58% of the populace holds some sort of investment with about 40% being in company equity. With individual investors having an average £332,000 of assets, that works out to be around £2 trillion of individuals’ combined capital. The overwhelming percentage of this amount is invested in mid-cap and large-cap firms traded on public exchanges. SyndicateRoom said that retail investors are willing to reallocate 14% of their wealth into early-stage businesses, reflecting the attractiveness of higher-growth for early-stage investment.
SyndicateRoom estimates that only £25 billion is available to be transferred from large-cap to smaller businesses next year, with only 9% of retail investors’ capital free from barriers and available for redeployment into early-stage companies. SyndicateRoom pointed to the cost of moving into other asset classes and information asymmetry as challenges.
”This research has brought to light a key question for the investment industry: how can it be that the Million Pound Club investors, who are more risk averse than the average investor, are willing to allocate a greater proportion of their investment portfolio next year to early-stage businesses? The answer is clear – our study has discovered a disparity of information for early-stage business investment,” commented Tom Britton, CTO and Co-Founder, SyndicateRoom.
Britton says the ultra-wealthy have better access to investment opportunities and information. He said, “that is not okay”.
”It is selective disclosure and if equity investment is to shift from large-cap to early-stage companies next year, this needs to change. The growth of the online investment industry can serve as a catalyst to increase transparency and fairness. Since its creation, SyndicateRoom has proudly been a key driver of that ethos, offering equal access and information to all investors.”