An innovative venture capital fund launching next week could help allay government fears that the credit crunch is starving start-up companies of cash.
With Lord Mandelson, business secretary, warning that finance is retreating from the regions in what could be “a huge setback”, the Manchester-based fund has found a tax-efficient way for wealthy investors to back young businesses.
Aquarius Equity Partners is raising £7.5m ($11m) to invest across the north through tax-friendly pension plans, hitherto closed to venture capital. Individuals can contribute via their self-invested personal pensions (Sipp).
Steve Sealey, the toilet tissue entrepreneur who chairs Aquarius, said it offered a tax-efficient way to tap into fast-growing companies.
“The Sipp is a real incentive,” he said. “This scheme is in the right place at the right time. You have economic turbulence, shares and property have bombed. It is a way of giving people access to an alternative asset class. Venture capital has outperformed the stock market over the last decade,” he said, citing British Venture Capital Association figures. Government tax breaks to encourage venture capital have restrictions, Mr Sealey said. The Venture Capital Trusts and Enterprise Investment schemes do not give relief on higher rate tax and investors must hold shares for 3-5 years to avoid tax on their sale. A £100,000 investment through a Sipp would save between £10,000 and £20,000 in tax, he said.
Lord Mandelson appealed to the industry in March to help plug a gap left by banks who no longer wish to take risks on young companies. “It’s a real problem,” he told the BVCA annual dinner. “The market is telling us that the supply of long-term equity-based finance to smaller businesses has retrenched. We know the downturn has led to a decline in the funding for spin-offs and small companies looking to grow.”
Tim Hames, spokesman for the BVCA, said the regime could tempt investors, and that other funds could follow with pension-compliant products. “This appears to be an interesting new idea and good luck to them. Anything that encourages investment in these difficult times is welcome.”
Mr Sealey, 51, who co-founded and sold AM Paper for £200m in 2000, said many entrepreneurs in his situation had lost millions on overseas investments and were looking for alternatives closer to home.
“There is disillusionment with the financial sector,” he said. “We have all been hit. I think people want to invest in companies they understand, where they can ask questions and get involved.”
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