For experienced investors, private companies could be rewarding, both financially and personally
ANGELS ARE WELCOME
The emergence of crowdfunding and the growth of investor clubs are helping bring companies and individual investors together. Small businesses are receptive to private capital from high-net-worth individuals, and not just because they want patient investors who can provide financial support on flexible terms. Many are also looking for the valuable advice and important contacts that these ‘angel investors’ can provide as mentors or non-executive directors.
Investing in a company at an early stage can be very attractive but investors must be comfortable with the risks involved. Notably, private investments are illiquid - investors cannot easily sell or value their holdings - and the timing for exiting is often over a decade. This can be a problem if the investor needs cash.
The direct route can also be tax-efficient through a number of government-backed structures, including the Enterprise Investment Scheme (EIS) which offers entrepreneurs and individual investors attractive and valuable tax relief from certain qualifying, unlisted companies.
GET CLOSER TO YOUR INVESTMENT
Small and medium-sized companies (SMEs) power the UK economy. Yet eight years on from the financial crisis, many are still finding it difficult to raise sufficient capital for growth from banks, particularly where the funding needed carries more equity-like risk. Private investors are helping bridge this gap by backing enterprises that are vital for the country’s economic future and, in doing so, creating jobs in an increasingly competitive global economy.
There are many considerations involved in making a private investment, and one of the most important is the quality and experience of the people managing the business. Do they have their own wealth invested so that there’s an alignment of interests to maintain focus and dedication?
It’s essential for investors to conduct their own thorough due diligence and consider any existing information that’s available. A key difference from investing in public markets is the ability of investors to ask very detailed questions directly to management teams, with the expectation of receiving an equally detailed response.
“One aspect is fundamental in every situation – the calibre of the management team” Hans Prottey, Coutts
WHAT PROSPECTIVE ‘ANGELS’ SHOULD CONSIDER:
- Can you justify the valuation? Are you being asked to pay “tomorrow’s price” today?
- Beware of aggressive business plans as projections almost always differ from future reality
- Be prepared to make follow-on investments, or have your shareholding diluted
- Some may take comfort in knowing there are other investors. Is there already a lead investor? What are their terms? Have they done due diligence?
“Angel investors back people and they need to have complete confidence and trust in management to make the right decisions” Hans Prottey, Coutts
Coutts’ Strategic Solutions team sources and reviews opportunities before they are introduced to clients. These involve companies across a range of sectors that includes some of the most innovative and fastest-growing areas of the economy.
“We consider a broad range of factors when looking to find opportunities to introduce to our clients,” says Hans Prottey, who leads Strategic Solutions. “But one aspect is fundamental in every situation – the calibre of the management team. Angel investors back people and they need to have complete confidence and trust in management to make the right decisions and to lead the business through both good and bad times.”
With opportunities to become actively involved in small fast growing businesses and perform your own detailed hands on analysis, a private company investment is an exciting way to diversify and potentially enhance investment returns - as well as helping the next generation of entrepreneurs.
Private company investments are illiquid - investors cannot easily sell or value their holdings - and the timing for exiting is often over a decade. This can be a problem if the investor needs cash. As with any investment, past performance should not be taken as a guide to future performance, the value of investments can go down as well as up, and you may not recover the amount of your original investment.