Ian Warwick discusses the investors keen to encourage an entrepreneurial economy.
According to statistics, compiled by the Department for Business Innovation & Skills (DBI), there were a record 5.2 million private sector businesses in the UK at the start of 2014. This figure is expected to have increased by around 400,000* (8%) during the past year to roughly 5.6 million [Source: Figure estimated via various statistics reported on www.startups.co.uk in January and February 2015]. DBI also defines 99.9% of all UK private sector businesses as small or medium sized (SMEs).
Growth in the number of SMEs in the UK has been steady this century, growing by 49% from 3.5 million in 2000 [Source: DBI statistics, November 2014]. In this same period, the UK population has increased by approximately just 10%; thereby showing an increasingly entrepreneurial society with a more diverse business mix and greater competition. Gone are the days of towns being reliant on a handful employers or a single employer.
This increase in the number of businesses has led to the wider acceptance of ‘alternative’ funding as it becomes recognised traditional funding is no longer sufficient. Banks are no longer expected to be the only providers of funding and increasing numbers of successful entrepreneurs and investors are looking to invest in growing UK businesses.
"Banks are no longer expected to be the only providers of funding."
As well as the potential for financial returns, we are also finding sophisticated investors are looking at funds such as EIS, VCT and their like to be a small proportion of their overall portfolio for two reasons; 1) ‘a bit of fun’, the thrill of potentially seeing a business grow and succeed and 2) philanthropy, the knowledge that a proportion of their portfolio could actually help an entrepreneur and stimulate jobs.
The question, I hear you ask, is that is all very nice but what relevance do these statistics have for the advisory community? Well, it is my belief that this growth in new businesses being formed is partly a sign of the development of our economy but also indicative of the appetite for UK investors to ‘buy British’ and support growing local businesses. For advisers, perhaps the question should therefore be; how can I offer investors access to such investments so that I may maintain sight of their assets rather than risk my clients investing directly via Crowdfunding sites and such like? The simple answer is to research the market and find trusted parties to look after such investments for you, even though it may only be for a minority of clients and a small proportion of their funds. There are of course a plethora of such providers in the market, of which Deepbridge is just one, but be aware of what your clients will be investing in. We have seen a number of advisers in this space move away from the large portfolio approach which often focus on undefined AIM stocks with little clarity shared with the investor prior to deployment of funds. Rather, we are seeing increasing appetite from advisers to know exactly which underlying investee companies their investors will be exposed to and the steps taken by the company and investment manager to mitigate investor risk.
Investments via the likes of EIS are by their very nature high risk. However; understanding what underlying companies investors will be exposed to, and understanding the strategy and ethos of such companies, could lead to risk being mitigated and greater confidence from those investors who are keen to look at such propositions and keen to continue the encouragement of an entrepreneurial economy.