EIS’ have a vital role to play in a post-Covid world of economic recovery, argues Robert Weigold, Investment Manager, Shard Capital
While it’s nearly impossible to overstate the seismic impact of the coronavirus outbreak on the UK’s economy, it’s also entirely possible that the long-term structural damage to the fundamentals of the economy is also just starting to be felt.
With even mainstays of the high street struggling in the face of a rapid shift in consumer behaviour and some industries (including hospitality, leisure and aviation) facing unprecedented challenges, it’s entirely foreseeable that the UK is just at the start of a long and difficult road.
Suffice to say that stymied bank lending and challenging fundraising conditions create an incredibly difficult environment to stimulate innovation and growth within the small business sector. With so many focussed on keeping their heads above water, it’s hard to foresee widespread expansion among start-ups.
Nevertheless, the creation of new businesses is a vital consideration, potentially underpinning any kind of economic recovery – not least given that the huge role that small and medium-sized enterprises have in job creation.
Figures from the Federation of Small Businesses stated that, in 2019, there were 5.9 million privately owned SMEs in the UK, accounting for three-fifths of employment and half of turnover. Data from the OECD predicts significant impact on both supply and demand sides having a material impact on SMEs’ ability to function, coupled with a constriction in financial markets. Further data from 13 May indicated that 41% of firms had temporarily closed and 35% feared they would not reopen again, potentially accounting for just under two million small business closures across the country.
The outlook for small businesses across the board looks decidedly bleak and significant public policy interventions are still required in order to minimise and hopefully save the swathes of the sector that stand to be hit worst. However, and even against this stark backdrop, value remains to be found in SMEs, with signs that the government will rely heavily on schemes designed to promote the flow of capital into the sector.
EIS and SEIS schemes
Enter the EIS and SEIS schemes. Well-established for a number of years, the schemes stand to take on a new significance in a post-COVID landscape. For investors looking to find pockets of value, EIS/SEIS create an efficient and convenient route into a comparatively narrowed field of potential growth opportunities.
The COVID winners have already begun to emerge – for example, the pandemic has accelerated both consumer and commercial reliance on tech and remote working and leisure solutions by around three years. The explosion of popularity of platforms such as Zoom is a strong example. While usage of such solutions may gradually decline as lockdowns begin to be lifted, the shift in consumer and business mentality regarding remote networking is likely to persist. It seems increasingly hard to justify huge outlay in business travel when remote meetings have now become normalised. The pace of innovation can be expected to increase in this field, including within the burgeoning UK tech start-up scene.
The shift towards remote interface pervades across numerous other sectors too. For example, research from McKinsey shows that consumer intention is to continue engagement with remote solutions particularly related to fitness and wellness, remote pickup and physical telehealth. This intention, in turn, stands to create opportunity for significant cost cutting around physical business premises. Solutions that allow increased interface between business and customer, potentially with an VR or AR element, stand to elevate the trend and offer significant growth potential.
Regarding the accessibility of EIS/SEIS, both schemes remain compatible with the Coronavirus Business Interruption Loan scheme, meaning that businesses using the loans can still continue to receive investment through EIS/SEIS. As restrictions loosen and businesses continue to adjust to new working practices, investors can take heart in the knowledge that those businesses who have weathered the storm and used the funding options offered by government can still be well-placed to deliver value in a widely hoped-for post-COVID “bounce” in consumer sentiment and optimism.
During what looks set to be a protracted global recession and in the face of sweeping changes to our ways of life, some temporary and some permanent, the role of EIS and SEIS stands to take on unprecedented levels of significance.
Key to facilitating successful recovery is facilitating effective and efficient flows of capital. The schemes provide a means to facilitate this, while likewise offering investors the chance to be at the cusp of the most significant, rapid and far-reaching developments in commercial and consumer behaviour in a generation.
EIS and SEIS offer investors the chance to be at the forefront of the national recovery – prudent investors should look closely at the options the schemes afford.
