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A seminar aimed at informing the potential investor of the practicalities of making an equity investment. Event hosted by Winter Rule on 19 May 2011 - Part of Cornwall Business Week.
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A perfect storm brewing
19th May 2011
Format
A perfect storm is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically
Perfect for whom?
Small high growth Companies
Squeezed by the banksCustomer demand downPayment terms becoming more aggressivePublic funding tight!!!Space to innovate
Perfect for whom?
Small high growth Companies
Squeezed by the banksCustomer demand downPayment terms becoming more aggressivePublic funding tight!!!Space to innovate
InvestorsPoor returns elsewhereCompany valuations are low (www.perda.co.uk)Tax incentivesChange in culture within companiesGovernment initiatives
Banks attitudesBusiness Growth Fund - £2.5B40 deals per year – SMEs?Statement BBC this morning “… it’s to support risky growth – for instance a high quality company looking to build a new factory…”Cultural change!
Result
More investorsMore companiesShift in type of investor
Greater level of DDMore involvementSyndication v Lone ranger
Effect on dealsThe jury is out!
Nesta report (1) Profile
53 years old13 years with large companyEIS 57%10% of wealth is in angel investments83% made with co-investors
Deal profile
87 deals (14 deals per year);63 businesses (64% first round); £6.75m from SWAIN investors;£44m total finance;Ave. Stake 18.5%Typical post money valuation <£1mFailure rate approx 20%
www.winterrule.co.uk9
The Tax Tale...
John Endacott, Tax Partner, Winter Rule LLP
Don’t let tax tail wag the dog
But need to consider tax stimulus for individuals to invest in Companies
George did...
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EIS – overview
• Enterprise Investment Scheme• Tax relief for qualifying individuals investing in
ordinary shares in qualifying companies• Tax reliefs
– Income tax relief– Capital Gains tax deferral relief
• Budget 2011 – good and bad news• Basics and beyond
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EIS – the bad news
• A company whose trade consists substantially in the receipt of FITs will only be eligible for EIS relief where commercial generation commences before 6 April 2012. This will not affect shares issued before 23 March 2011.
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EIS – the good news
• Rate of income tax relief increased from 20% to 30% for qualifying shares issued after 5 April 2011
• Certain limits on qualifying companies will be increased as follows with effect from shares issued after 5 April 2012:– Number of full-time employees – 250– Limit on gross assets increased to £15 million before the investment– Maximum annual amount that can be invested in the company
increased to £10 million– Maximum annual amount that can be invested by an individual in all EIS
companies is £1 million
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EIS – The Tax Reliefs
• Income tax relief– 30% of sum invested allowable as a deduction in computing an
Individuals Income Tax liability
• Capital Gains Tax Deferral– Can defer capital gains incurred on different assets indefinitely– If gains made < 36 months previous or < 12 months after EIS
investment
• CGT freedom– No CGT on disposal– If investment qualified and continued to qualify for Income Tax
relief
• Loss relief• Inheritance Tax Exemption
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EIS – the Investment
• In cash• In ordinary shares
– No preferential rights– No risk protection
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EIS – Qualifying individual
Criteria Income Tax Relief CGT Deferral
UK resident Y Y
Individual Y Y
Connected N Y
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EIS – Qualifying Individuals: Connected
• By financial interest (in Co or Subsidiary)– Control– Hold > 30% of share capital (or share capital and loan capital)– Entitled to receive > 30% of assets on winding up– Conditions apply 2 years pre and 3 years post investment (or
commencement of trade if later)– Associates interests taken into account
• By employment– Partner, Director (but see Business Angel) or Employee– Associate of – Conditions apply 2 years pre and 3 years post investment (or
commencement of trade if later)
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EIS – Business Angel
• Can be a director– No previous involvement in trade carried on prior to share issue– No remuneration or subsequent remuneration reasonable– Can qualify for Income Tax relief on investments subsequent to
becoming paid Director if within specified period of original subscription
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EIS – Qualifying Company
• UK Resident• Not a subsidiary• Qualifying trade• Size criteria
• Clearance Application
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Other tax related matters to think about?
• Entrepreneurs Relief• Enterprise Management Scheme• R&D Tax Relief
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Finding a company to invest in and what to look for?
19th May 2011
Personal contactsProfessional firmsAngel networks
Leads
Leads
Personal contacts Professional firms Angel networks
Direct links to the business P W OImplied recommendation O P OAn angle P P W
Pre-qualified O P PSyndication / co-operation O O PLeverage co-investment O O P
Finding a company
Mix of all of the aboveClear selection criteria – what do you really want – where is your comfort zone?Clear rejection criteria and be brutalThe initial hunt is a numbers game
Working the odds
In-depth market research – surprised what you learn from googleTest the companies commitment early on – visit the businessTalk to their suppliers and customersMystery shop the businessWork with other experienced investorsUse professional firmsDevelop your own skills
De-risk the opportunity
Tranche investmentConsider the use of ratchetsStructure deals – use of debt / loan notesOn-going involvementDevelop a portfolio approachA good deal is painful for both sides!
Co-operation / syndicates
Agree a common approachEstablish allocation of resources both through evaluation / due diligence and on-going monitoringUnderstand the “groups” attitude to future roundsIf more than two investors then use a lead investor
Nesta report (Investment)
£ size per investor £42,000Pre-money £875,00015% seed36% start up
Nesta report (Returns)
Ave hold 3.6 yearsExits (incl failures) 406Overall multiple 2.2xApprox IRR 22%9% of exits gave 80% of cash returnedIn US 10% gave 90% of cash returned
Finance in Cornwall 2011Sally Norcross Webb
Corporate Partner
Stephens Scown LLP
19th May 2011
Finance in Cornwall 2011 19th May 2011
• Non Disclosure Agreement
• Heads of Agreement
• Due Diligence
• Investment Agreement (or Sale and Purchase Agreement)
• Disclosure Letter and Documents
• Completion Documents
Documents
Finance in Cornwall 2011 19th May 2011
• Newco
• New Articles of Association
• Investor shares
• Reserved matters
• Directors
• Information
Structure of the deal
Finance in Cornwall 2011 19th May 2011
Shares• Ordinary / Convertible / Preferred
• Voting
• Pre-emption Rights
• Dragalong and Tagalong
• Exit
Finance in Cornwall 2011 19th May 2011
Any questions?
Sally Norcross Webb – Corporate Partner
Contact Information:Email: [email protected] Mobile: 07976 829584
Investment readiness
19th May 2011
Deal phases
Prepare Bus Plan
Introduction
Read plan / Evaluation / Visit / Syndicate
Initial Negotiations
Heads of terms
Due Diligence
Legal & final neg
Understand offering
Prepare investment case
Prepare pitch
Rehearsal
Bringing it all together
Investable business
Macro Level
Micro Level
Market Domains Industry Domains
Mission, Ability toAspirations, Execute Propensity on CSFsfor Risk
Connectedness up and down Value Chain
Team Domains
Market Attractiveness
Target Segment Benefits and Attractiveness
Industry Attractiveness
Sustainable Advantage
Key criteria
Management – management – managementAttitude to risk and growthAttitude towards equity – loss of some controlCommitmentWorkmanlike relationshipControlled flexibilityPlan A – plan B ……Clear vision of exit
Using SWAIN effectively
Prepared for InvestmentExpert panelsInvestor lunchesPipeline review meetingsForums
Any Questions?
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