Are we heading for negative interest rates? Bank of England policymakers have reported this as a possibility.
If negative interest rates become a reality account holders would likely be asked to pay to hold money in a savings account.
Between negative returns on savings accounts, lower yield on bond holdings, a volatile stock market and a projected dip in property prices, investors have few options to diversify their portfolio.
However, for HNW investors who are comfortable with risk, early-stage/angel investing may provide opportunities for greater returns.
What is angel investing and why is it attractive?
An angel investor (aka a private investor, seed investor or angel funder) supports early-stage enterprises by providing funding and getting actively involved in the business. Typically, the amount invested is £5,000-£50,000 per investment.
Early-stage investments are high risk as the number of early-stage businesses that grow through to an exit is low. Previous research suggested that 56% of investments in early-stage companies went bust. This is why experienced angels aim to build a diverse portfolio of 20+ investments.
Although deemed precarious, early stage investments have the advantage that investors can buy company shares, in a business that has identified an addressable market, yet to be exploited, at a much lower price.
While angels usually have to wait years before recovering their initial investment, returns can be considerable. The high risk nature of angel investing means that HNW individuals usually look for a 2.5x Return of Investment (RoI).
Angels are often highly experienced in business and can support companies with know-how, introductions, and strategic direction. If investors have an appropriate tolerance for risk, and a track record, angel investing may be the best fit for both parties.
When starting, investors should look for a well put together business plan with a defined exit strategy. Initially many angels choose to join an angel network where investors can pool investment capital and invest alongside like-minded, experienced investors.
Tax relief through EIS and SEIS
To encourage investment in start-up companies the UK government has launched several tax relief programmes, including the Enterprise Investment Scheme (EIS). This scheme, which makes investing in early stage enterprises tax-efficient, has encouraged £22bn in investment in 31,365 companies.
By investing in an EIS eligible company, angels receive income tax relief of 30% of the amount subscribed for eligible shares. Investors can put in up to £1m per tax year in EIS qualifying companies for the tax relief; this cap rises to £2m if investing in knowledge-intensive EIS companies.
To qualify, companies have to be trading for less than seven years and can raise a maximum of £12m.
Through EIS, angels receive a Capital Gains Tax (CGT) exemption, carry back and loss relief which can be offset against CGT or Income Tax.
Here’s a practical example: Say an angel invests £10,000 and the company fails, their actual loss would only be £7,000, given the 30% income tax relief. However, a top rate income taxpayer paying tax at 45% will be able to claim loss relief on their tax liability at the 45% level. In this example, they’re eligible for further relief of £3,150, making their actual loss £3,850.
The success of EIS led to the introduction of the Seed Enterprise Investment Scheme (SEIS), promoting investments in riskier, earlier stage companies.
SEIS allows HNWIs to invest up to £100,000 and receive 50% tax relief on their investment. In order for companies to be eligible for SEIS, they have to have been trading for less than two years and cannot have more than £150,000 in previous investment.
Hot investment sectors
Reports from the British Business Bank and the UK Business Angels Association reveal that many investors are still seeing positive returns during the pandemic.
While angels are battling economic uncertainty, around three quarters are optimistic about the market bouncing back within the next 12 months.
Healthcare, Digital Health and MedTech, BioTech, Life Sciences and Pharmaceuticals are the leading sectors in terms of investor engagement during the COVID-19 crisis.
Software as a Service and FinTech have fared well throughout the pandemic and are still attracting a large number of investors.
Getting started with angel investing is now easier than ever, with an array of angel networks that can provide advice and support.. Industry-association, the UKBAA, offers an Angel Investment Accelerator which is designed for those new to early-stage investing.
To choose the right angel network, HNWIs should look for the most active networks; Research body Beauhurst recently published a list of the most active networks in the UK.
Active networks will present a greater array of screened opportunities and connect new investors to more experienced ones.
The best networks cover a variety of regions, sectors, and investment sizes, and they’re forthcoming with examples of previous investments, thus helping first-time angels make the right choices while growing their portfolio.
ABOUT THE AUTHOR
Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.