Money managers sourcing businesses to back with funding through the tax efficient Employment Incentive and Investment Scheme (EIIS) are becoming more cautious due to Covid-19 and the blow-ups of investor-backed firms Maximum Media and Dublin Food Sales.
"There is an uncertainty in the market," said Mark Richardson, director of EIIS Management, a joint venture between Baker Tilly and Goodbody. "Investors are more risk averse and certain sectors of the economy are really struggling with Covid."
Investment managers are assessing target companies "with a different lens", according to Mr Richardson, and avoiding firms reliant on rapid growth or in sectors like food and hospitality.
Reduced appetite for EIIS means SMEs in some sectors are facing a recession with one less source of critical funding, which will be more acute once banks and Government withdraw pandemic supports.
Maximum Media and Dublin Food Sales were both backed by the Davy/BDO EIIS joint venture BES Management and went into examinership this year, leading to losses for private investors.
Maximum Media - the online publisher behind Joe.ie - entered examinership in May with €6m in debts hit by plunging advertising. Dublin Food Sales sought protection from creditors just two weeks into the Covid lockdown, citing a collapse of demand among its restaurant and catering customers. EIIS investors had invested about €3m across both companies.
Although some are still expected to seek out EIIS opportunities for the generous tax relief - on up to €500,000 subject to a seven-year lock-up - they may be harder to persuade this year given Covid and Brexit.
"In the last recession, private investors stood back," said Sarah-Jane Larkin, director-general of the Irish Venture Capital Association (IVCA). "Although this recession is different, we already know that is likely to happen again this year and into next year."
IVCA's pre budget submission lays out a five-point plan for improving EIIS, including broadening the scope of participants beyond designated investment funds to include private equity partnerships and other early stage investors.
However, Mr Richardson of EIIS Management thinks equity will be in demand as pandemic supports are phased out from next year. "There is an opportunity for us when the tax deferral and repayment holidays unwind," he said. "If you have equity on the balance sheet, you're going to be more secure - it will allow you to ride through a bump in the road."
Covid has even benefited some EIIS companies, like Buymie, a grocery delivery app backed by funding from BVP's EIIS fund that had a product suited to lockdowns.
"Buymie is one such example of a successful investment," said BVP managing director Elliott Griffin. "As we all know, things rarely turn out quite like the original plan."