By Madeleine Ingram, Director at Calculus
AFTER a show of resilience to the pandemic and a particularly strong 2021, private markets have seen falls in value, particularly in technology and life science sectors, although it should be remembered that this was after a period of significant gains. Both life-sciences and technology feature heavily in the investment strategies of many VC funds and the decline in valuations has been widely reported. However, by nature, VC investments (which refers to the financing of smaller companies with growth potential) are long-term and good companies should be able to ride out periods of volatility. The current market has encouraged experienced investors and fund managers to find attractively priced investment opportunities in both public and private markets.
What do you believe will be the main challenges in 2024?
A higher Bank Rate means the cost of capital is higher, which will moderate the valuations of all assets, including private companies. As EIS and VCT investors, we understand the long-term nature of the investments into private unquoted companies and have the flexibility to ride out these periods. The companies we invest in often face challenges in raising capital, especially when they are in their early stages and not yet profitable. The schemes provide a pathway for these higher-risk businesses to access the capital they need, while offering incentives for UK investors to support them.
Where do the best opportunities lie?
We are seeing some attractively priced investment opportunities in the fast-growing sectors of life sciences and technology. Companies in these sectors typically require significant capital and so their valuations have been most impacted. Now we can invest at more reasonable valuation expectations.
What does fundraising look like in 2024 for the sector?
Geopolitical tensions, high interest rates and elevated inflation have created an environment where investors are increasingly risk averse and cash has seemed an attractive option. However, we are seeing a change in attitude as investors understand over allotment to cash could be a short-term view. As EIS and VCT managers, we are investing in companies which have the potential to grow and exit at high multiples, and investors also receive attractive tax benefits such as 30% income tax relief and no capital gains tax to pay on the growth.
What does a potential change in UK government mean for the sector?
Specifically for EIS and VCT, the Chancellor Jeremy Hunt extended the sunset clause to April 2035 in his Autumn Statement. This means the tax reliefs associated will continue for subscribers in these products. The Labour party has also voiced support with Shadow Chancellor Rachel Reeves welcoming recommendations to continue the schemes, saying: “Labour should maintain and build on existing incentives, such as SEIS, EIS and the R&D tax credit system, to ensure investors and firms have the best possible incentives for growth.” Providing crucial funding for UK startups and scale ups is hugely important for the economy. It empowers entrepreneurs whilst increasing productivity, creating jobs, and boosting growth.
