IW Capital is a private equity firm that seeks to invest in promising early stage companies while taking advantage of the Enterprise Investment Scheme (EIS) tax exemption. The EIS (along with the Seed Investment Enterprise Scheme) mitigates a certain amount of investment risk and has been declared a significant success in boosting SME growth in the UK. IW Capital, founded by Luke Davis in 2011, looks to invest from £500,000 to £5 million in these smaller companies. Davis stated last year that “far too much talent [in the UK] is inhibited due to funnel neck funds”. Davis wants to provide the necessary resources for growth and looks towards “people over product” when investing in early stage companies. Davis is also co-founder of Money&Co. an emerging peer to peer platform founded by well-known banker Nicola Horlick.
Recently Crowdfund Insider reached out to Luke to hear about progress at IW Capital, his thoughts on the EIS / SEIS programs as well as Money&Co.
Luke Davis: IW Capital is a private equity house that I founded in 2011. Its main purpose is to use the UK’s Enterprise Investment Scheme (EIS) as a means of facilitating private investment into early-stage companies, while offering tax incentives to investors. I set up IW Capital at a time when legislation was changing, and the 20% income tax break was being increased to 30%. I thought this was a great opportunity for the scheme to go more mainstream and encourage greater financing for promising companies. Now, myself and our team of private equity specialists identify businesses with great potential but that are in need of finance to scale up. We then tap into our expanding investor network to support them. It’s all about liquidity, fairly balanced governance and confidence in the UK’s entrepreneurial spirit.
Crowdfund Insider: You are also cofounder of Money& Company along with Nicola Horlick. How is that proceeding?
Luke Davis: Now is proving to be a really exciting time for Money&Co. We are about complete our third round of fundraising. To date, the company has completed 22 loans to UK SMEs with a total value of £7 million. The average loan size is £312,000, compared to £76,000 for the industry, and we have developed a niche in funding transactions such as management buy-outs, management buy-ins and acquisitions. Excitingly, we are also looking to add other lending verticals in the coming months which will include leasing and property finance. I’m pleased to say that there are a number of institutions that are interested in lending through the platform, which is part of the reason why Money&Co. is set to perform strongly over the coming year.
Luke Davis: When it comes to selecting companies for our portfolio, I am a firm believer in innovation as a driver of productivity. So when the team at IW Capital sit down to assess business proposals, we naturally have a preference for dynamic companies that exhibit high-growth potential, with an excellent management team behind them. As we’re more concerned about the viability of each individual business, we’ve built a portfolio that’s sector agnostic, although it is weighted in favour of high-growth industries. As we do not focus on any particular industry, IW Capital has a portfolio that reflects our confidence in the UK’s multifarious business prowess, ranging from traditional sectors such as manufacturing to the younger product-service sharing and digital industries.
Of course, you have to be able to differentiate between the ‘fad’ opportunities, and the ones that are truly poised to make a mark in their respective industries. We rely on our experience and due diligence to separate a business that is a flash in the pan from one that has scalable, long-term growth prospects. In terms of the best sectors to source these businesses from, IW Capital’s High-Growth 16 report is a useful starting point – it profiles the top 16 industries investors should be keeping an eye on in 2016. I don’t want to give away IW Capital’s entire game plan for 2016, but this report does contain some useful hints.
Crowdfund Insider: The UK government has been touting its support of SMEs. What is your opinion on their efforts to support a vibrant small business ecosystem?
Luke Davis: In terms of an international benchmark, the UK Government’s support of SMEs has been commendable. The UK’s business ecosystem is constantly revered for its ability to initiate, cultivate and support small and medium companies. The Government has been proactively engaged with SME development for the best part of 20 years, and rightly so. After all, small companies now account for 99.3% of all private sector businesses, 99.9% of which are SMEs.
But we cannot become complacent; more has to be done. What investors and companies need is the commitment from the Government that it will continue to adapt support schemes and policy to align with innovation. While the UK has proven ability in terms of visionaries and innovators, the hindrance currently lies with business accessibility to finance. One looming concern is overregulation, which could reduce the number of companies and investors able to access important alternative finance options. The Government must continue to be resourceful in terms of supporting high-growth businesses, not only in developing a tax system that backs alternative finance, but also acts as a catalyst for SME innovation.
Crowdfund Insider: How important has the EIS program been to investing in UK SMEs?
Luke Davis: Naturally, I’m a firm believer of EIS in fueling much needed investment into SMEs. The most recent stats speak for themselves. EIS is plugging a huge funding gap in the UK, which is why it is so important that the scheme is protected and supported by the Government. In my opinion, EIS has been a significant growth engine, putting the UK economy back on track and allowing SMEs to drive national productivity and growth.
Luke Davis: SEIS is hugely important as well, but for companies that are much earlier in their development. We don’t work with the scheme at IW Capital because our focus is on companies that need finance to scale up, so businesses in the second and third phases of their progression. Of course it is encouraging that in recent years a great deal of emphasis has been placed on the need to accelerate the British start-up boom, but as these companies plan to grow and develop their operations, they need money to scale. For the momentum of our small and medium businesses to continue, we have to start concentrating on where businesses are going next and what they need to expand.
Crowdfund Insider: Are these effective subsidies for small businesses?
Luke Davis: The EIS is extremely effective for small businesses. It must be recognised that there are limitations on which companies can receive funding through the scheme, including a lifetime cap on the amount of funding they can obtain and certain industries that do not qualify. However, on the whole EIS has been vital for SMEs so they can access the funds they need in their scale-up phase. With banks hesitant to lend to small businesses, particularly since the economic crash, these firms have had to find alternatives to traditional loans. While there has been a slight improvement in institutional lending to SMEs (net lending by banks fell by an average of £500 million a quarter in 2014), the number of SME applications has slowed significantly. Private equity investment through the EIS has been one of the main initiatives to fill this gap, and the statistics show that it has grown in popularity year-on-year.
Crowdfund Insider: How should the UK government improve the two programs?
Luke Davis: The EIS and SEIS are already subjected to regular reviews to ensure they direct capital into industries that need it most. This much makes sense. However, what we need from the UK Government is the commitment and vision to reassure investors and companies alike that tax-incentive programs will remain a cornerstone of state-policy towards alternative business funding. To achieve this, we need to encourage access to these schemes through greater awareness, education and resolve. We recently commissioned research which demonstrated high levels of UK investor interest in the EIS. What this clearly shows is that the motivation is there, we just need to ensure that the structure is in place to help manifest these intentions.
Crowdfund Insider: There is significant concern that EC regulations may hobble both programs and send certain businesses off a cliff. Why would they do that?
Luke Davis: Last year saw the EIS undergo several legislative changes. Many of these were made because the scheme needed to adhere to EU regulations – this has prompted concerns that regulations from the European Union might hinder the effectiveness and growth of schemes such as EIS.
Protection for companies and investors is important. So too is regulation to ensure legitimate schemes are not abused. But a balance must be found between regulating the EIS and building on its success – an over-use of red tape could put investors off using the scheme, which would ultimately harm the UK’s expanding SME community.
In terms of the effective utilisation of programmes such as the EIS, the UK has set a strong example as how to effectively use tax-incentive schemes to push economic progression. In part, this is due to an autonomous regulation structure. The EIS has raised over £12.2 billion since its introduction in 1994, setting a global benchmark. There has, however, been a capping on funding as a consequence of EU regulations in recent years. Pending EU State-aid regulations could further limit the number of companies and investors able to use the EIS, which could undermine the scheme’s effectiveness.
Crowdfund Insider: Are not small businesses the life-blood of the UK economy? Shouldn’t elected and appointed officials be doing everything they can to support them?
Luke Davis: Small businesses are without question the life-blood of the UK economy; George Osborne has said as much on multiple occasions. This is why the UK Government has been supporting productivity in the north through the so-called ‘Northern Powerhouse’ strategy. In relation to this, IW Capital’s SME Heatmap Report champions the vital role of regional business hubs in spurring national economic growth. Furthermore, the Government recently announced its plans for a ‘devolution revolution’ – this will grant local governments new powers related to business development and growth. Local officials understand the business environment they represent and engage with better than anyone else. I’m excited to see how this power shift away from Westminster and towards regional SME communities will help small business growth over the coming years. I’m also excited to see the future development of enterprise and innovation across all industries, given that councils have the awareness, capabilities and knowledge to support and nurture their local business ecosystem.
Crowdfund Insider: How do you see policy issues supporting SMEs evolving in the UK? The EU?
Luke Davis: To effectively support SMEs in the UK, it is important to understand what they need nationwide, and to not focus solely on London. On the one hand this means improving infrastructure – things like broadband speed and transport links across the country – and ensuring businesses have a rich pool of young talent to recruit from. But it also means making sure that SMEs can access the capital that is so important to their growth.
As such, supporting the alternative finance industry is going to be absolutely key. From private equity investment through to crowdfunding, these sources of finance are now essential to business growth. These alternative finance markets must be nurtured and supported so they can continue to evolve – the EIS is a fundamental part of this.