An Introduction

At MB Capital we have the pleasure of working with some of the most exciting private companies in the UK. We work closely with the business owners to ensure that they have what they need to succeed. One of these roles includes bringing investors with the correct suitability the opportunity to work with what we believe to be the next market leaders in their area. This can create a win-win situation where investors and business owners can work together to achieve their goals.

Private Equity for Investors

Investing in private equity backed companies can show a faster increase of growth than other type of companies. An investment within the private equity sector is seen as a medium to long term investment with returns depending on companies’ growth and success. Simply put, the more successful the company is the more profitable they are and the better the returns all investors can receive. These investments are considered high risk due to there not being a liquid secondary market should you wish to exit your position alongside the area being heavily focused on start-up and early revenue companies. The role of the investor provides a solid yet flexible capital base to meet the future growth and development plans of the company.

The private equity firm is an equity business partner and is rewarded by the company’s success, generally achieving its principle return through realising a capital gain through an “exit” which may include:

Selling their shares back to the management;

Selling the shares to another investor (such as another private equity firm);

A trade sale (the sale of company shares to another investor /strategic partner/); or the company achieving a stock market listing (IPO).

Unlike investing in public listed companies, shareholders have the opportunity to work with the company creating the benefit of being a business partner with aligned intentions, whilst giving practical advice and expertise to assist in the company’s success all sharing in the risks and rewards.
A huge potential benefit of investing in early stage companies is their Enterprise Investment Scheme (EIS) qualification. EIS is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares in those companies that qualify. For the investor, it’s a tax efficient way to invest in small companies – up to £1,000,000 per person per year in qualifying companies. There are a number of tax reliefs available:

Income Tax Relief

There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.
EIS allowances are allocated individually; therefore a married couple could invest up to £2 million each tax year and be eligible for Income tax relief. The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.
People connected with the company are not eligible for Income Tax Relief on their shares.

Capital Gains Tax exemption (CGT)

Any gain is CGT free if the shares are held for at least three years and the income tax relief was claimed on them. Shares can be held for much longer and therefore potentially enable the investor to be accrue their CGT exemption over a long period of time which can be a great attraction.

Loss relief

If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set of against any capital gains.

Capital Gains Tax deferral relief

Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose – connection to company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.
What makes it even more attactive is the ‘carry back’ facility where investments can be applied to the preceding tax year. This allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.

Examples

Here’s a few examples of how EIS tax relief works. To make the maths easy, let’s assume you invest £10,000 in each case and you’re in the 45% tax bracket.

Case 1: The company does well and doubles its value and you hold the shares for three years
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
Capital Gains Tax = £Zero
Your gain = £13,000 (£10,000 profit from the sale plus £3,000 income tax relief)

Case 2: The company value stays the same
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
Share sales = £10,000
Your gain = £3,000 (from the income tax relief)

Case 3: The company closes and your shares are worth nothing
Investment = £10,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
At risk capital = £7,000
Loss relief on at risk capital @ 45% = £3,150
Your actual loss = £3,850 (£10,000 – [£3,000 + £3,150])

Our commitment is to give our clients access to some of the most exciting Private Equity opportunities in the U.K whilst ensuring that our investors have the best possible start to their endeavour by knowing all the facts and the potential risk and rewards involved before investing.

Raising Private Equity Funds as a Company

At MB Capital we are fortunate enough to have the foundations to bring investors straight to the companies who are looking for investments. We realise the vast differences each company has and always endeavour to bring the highest suitability of investors to the table.

Business owners frequently do not appreciate how uninvolved their lenders are in their business. A private equity investor, on the other hand, takes a different tack. If the business runs into difficulties, the private equity investors will work hard to ensure that the company is turned around; and as a true business partner, share in your risks and rewards, with practical advice and expertise (as required) to assist your business success.

We have a range of clients wanting to take an interest at arm’s length through to wanting to be more involved and support the businesses they invest in. These are investors that are successful and have a lot of wisdom to offer companies that are in their early stages. The investors can potentially help create a board or take a board seat if you already have a board, set strategy, map out guidelines for future capital infusions, and draft a compensation structure, among other things.

Our objective is always to ensure you are fully comfortable with investors and are confident that with their support whether it is purely financial or with the added value of expertise you have the best possible start to your working relationship.

The Enterprise Investment Scheme (EIS) is something we believe can be incredibly valuable to early stage companies. EIS is a government run scheme so to help grow your business; the advantage being EIS will offer tax relief to individual investors who buy new shares in your company. EIS allows you to raise £5 million a year and a maximum of £12 million in your company’s lifetime. This will include amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of the first commercial sale.

For example, a company gets approval then an individual can invest and get a number of tax reliefs available. This is covered in the section above, Private Equity for Investors.

Your investors will only be able to claim tax relief if you meet the conditions for EIS. You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you don’t follow the rules for at least three years after the investment is made. If your company owns or controls any other companies they need to be ‘qualifying subsidiaries’

In order to apply, when you’ve issued your shares, whether or not you asked for advance assurance, you must complete a compliance statement (EIS1) and provide background on your company including financials and a prospectus.

We work closely with our Companies to fulfil the requirements set out and gain approval. If you have any interest in learning more and how to get started please contact MB Capital below.

Risk Warning

The following information is very important. You should read this information if you are unclear at any time as to the purposes of this site and who is responsible for its maintenance.

The site contains information only relevant to UK investors and financial advisers. This is designed to inform and protect you. There are certain legal and regulatory limitations that apply to the information contained on this web site and by proceeding you are deemed to have read and understood this warning.

The information in this section is intended for persons who are United Kingdom residents for tax and investment purposes or those who advise such persons. In particular the information is not for distribution and under no circumstances is to be considered as an offer or solicitation to deal in investments in any jurisdiction in which such offer, solicitation or distribution would be unlawful, including, but not limited to, the United States of America.

Investment in any of the products described should only be made on the basis of the applicable offer document (e.g. Scheme Particulars, Prospectus or other Terms and Conditions). Nothing in the MB Capital web site constitutes investment legal tax or other advice nor is it to be relied upon in making an investment decision.

You need to carefully consider the risks, make your own assessments of any investment opportunity and seek independent advice before committing to any investment.

Investments typically occur in companies at the beginning of their lives or rapidly growing ventures. It is therefore often difficult to determine the likely success of the investments as they are often at a stage where the product, service or customer proposition is only just being developed and has not been tested in the market. Significant execution risk can also arise as new management teams are built to commercialise the business concepts and the companies seek to scale their operations.

There is potential that investors in making investments in private equity companies will lose part or all of their investment as a result of the nature of early stage investment.

Investment in seed and early stage private equity has a higher risk than traditional asset sectors and some investments may fail, which may result in a loss of some or all of investors’ capital.

There is potential low liquidity of the investments that may make it difficult to sell an investment.

There is no guarantee of any level of return to investors. There may be no return or returns may be deferred or irregular. Even if the Company is successful, because of the nature of the Companies (high growth and reinvestment), there may not be any return for a number of years.
Investment Performance: There is a risk that the investment may perform poorly.

Dilution of an investment may occur as the Company issues new shares and Investors invest in the business. An Investor may not have the capacity or may not wish to invest in a particular Company as it expands. Dilution will therefore occur. Whilst the value of the investment may or may not change as a result of this dilution (this will depend on the success or otherwise of the business), dilution will affect shareholder rights such as voting and value.