WHERE ANGELS FEAR TO TREAD? THE LACK OF INFORMAL INVESTMENT IN WALES
These so-called ‘business angels” are defined as individuals, acting alone or in a formal or informal syndicate, who invest their own money directly in unquoted businesses in which there is no family connection in the hope of financial gain. They also, after making the investment, take an active involvement in the business either as a mentor, adviser or member of the board.
They are therefore important additions to the funding market for early stage businesses and potentially, given the reluctance of banks to lend to such firms, have a critical role to play in ensuring a strong private sector-led recovery within the UK economy.
Unfortunately, there is very little data available on business angels and their investments on a regional level. The best proxy for this, at least in terms of informal investment by individuals into SMEs, is the Enterprise Investment Scheme (EIS).
This initiative, which applies to individuals investing in companies of less than 250 employees with assets of less than £15 million, has been designed to help small higher risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
In this case, investors can invest up to £1 million in qualifying shares and receive 30 per cent of the cost of the investment as a relief against income tax as well as deferral of some capital gains tax liability.
So where are business angels to be found?
The latest data from the tax authorities show a concentration of investments in companies registered in London (48 per cent) and the South East (17 per cent) between 2008 and 2011.
In contrast, there have been only 146 EIS investments in Wales during the same period, raising a total of £23 million. This represents 2.5 per cent of the number of investments in the UK and only 1.4 per cent of the value of investment. Therefore, with Wales having around 4.2 per cent of all businesses in the UK, we are underperforming as an economy when it comes to attracting private sector investments for new and growing firms.
There is also the issue of the amount of funding that is going into businesses in Wales, which is again lower than the average for the rest of the UK - the average Welsh investment via EIS is £157,000 as compared to £286,000 for the UK.
Therefore, not only do Welsh companies underperform in terms of attracting private sector investors, the amount of funding they get to help the business to grow is also lower than for the rest of the UK.
Simply put, Wales needs more business angel investors in place to invest more money into Welsh firms, especially at a time when access to capital for growing firms remains restricted.
How can this be achieved?
Some of it is down to a lack of information and on the demand side, there needs to be greater awareness raising of equity investment by business angels as a viable form of funding amongst growing firms within Wales.
But there is also a need to stimulate greater number of investors into the Welsh economy and therefore the Welsh Government may wish to consider how it could add value to initiatives such as the EIS to further support and encourage investment by private individuals, especially those from outside of Wales.
This would not only ensure that greater levels of investment flows into Welsh businesses over the next few years but may also, through such positive interventions, attract entrepreneurs from outside the country to relocate their businesses as a result of a more favourable business and financial environment that is supportive of growing firms.