Sunday 17 December 2017

The EIIS could be the right business funding source for you to bank on

Stephen McGiven
Stephen McGiven
The Employment and Investment Incentive Scheme has been opened up to the nursing home sector

Stephen McGivern

Companies should explore if the Employment and Investment Incentive Scheme could be a good fit for them.

Now that many businesses across the board are seeing growth again, it can be tempting to forget the lessons of the past, but if there is one thing the downturn made clear, it is that companies cannot leave themselves dependent on bank funding.

When the banks stopped lending, there were serious restrictions on the level of expansion a business could contemplate. Corporate Ireland's focus became about survival and, in many instances, it was challenging just to keep a business ticking over with sufficient cash flow. It's not just an Irish problem but a Europe-wide one. Many owners or managers are all inclined to think of the bank as the principal source of funding and are not sure where to turn if that door is not open to the business.

The US model, where there are a diverse range of funding options, has not popularly taken hold here. Sometimes bank lending is the correct option, but many times it's not. Or for many it is simply not an option. When that is the case, business owners of viable and high-potential companies need to have a wider range of options to support their growth and development plans.

Employment and Investment Incentive Scheme (EIIS) funding is one option for businesses that meet particular criteria. I would encourage companies to explore the options and to consider whether or not it's a good fit for them.

The first thing to note is that EIIS is open only to businesses with up to 250 employees and a turnover of less than €50m, or gross assets of less than €43m.The EIIS is open to the majority of trades, except for those dealing in commodities or futures in shares, securities or other financial assets, financing activities, professional service companies dealing in or developing land, forestry/coal/steel operations, and the production of a film. In a new development since Budget 2016, the EIIS has been opened up to the nursing home sector.

Early stage and start-up companies love EIIS because it makes the high-risk investments they represent more appealing for their likely investors, who often include family and friends. The risk associated with investing in an early stage company is compensated by tax relief. Under the scheme, tax payers can claim a deduction from their total income of a qualifying EIIS investment. An investment of €50,000 could result in tax relief of up to €20,000 or 40pc. More developed companies and lower-risk investment opportunities such as wind farms and nursing homes raise EIIS funding with a cap on the maximum return payable to the investors in the scheme. It is seen as a viable alternative to bank debt and some companies are leaning on it as a means of funding the ongoing trading activities of the business.

The 'capped' investment model minimises the cost to companies and gives the EIIS investor access to larger investment opportunities in established companies. For example, it might mean that for every euro invested in the company, the maximum the investor can receive after the four-year holding period is €1.20. This is still a good return and certainly is favourable when weighed up with some of the more risky options that are out there.

Something for the investor to consider is how long they want to invest. Some are happy to tie up capital over the long term while others want the quick returns that can be available through the selection of the right equities. However, the EIIS investment gives a good balance. It is made by way of new ordinary shares in the company and must be held for a minimum of four years from the date of investment. After the four-year holding period, the shares can be sold or re-purchased by the investee company to deliver a return to the investor. Any gains on the shares will be chargeable to capital gains tax at the rate in force at the time of the sale.

There are many appealing elements for investors, including the fact that EIIS investment can be set against rental income. That makes a stark contrast to the severe restrictions on tax relief an individual can claim on their annual pension contribution, which can't be set against rental income.

An individual investor can chose to invest directly in one single company - something known as "private placement", or they can invest into a designated EIIS fund. When private placement is the route selected it is usually on the basis of an investment memorandum that has been prepared by the investee company. Something to be careful of here is that the investor will have limited opportunity to complete any due diligence and will be unlikely to have any representation at the board of directors of the investee company.

A more controlled way to invest through EIIS is through the vehicle of an approved fund. For example, at Hughes Blake we have formed a joint venture (JV) with Goodbody to provide fresh funding for quality Irish SMEs under the scheme. The JV's first fund, the Goodbody 2015 EIIS Fund, is prepared to raise up to €20m from private investors. This fund will then be invested in a wide range of eligible Irish companies including hotels, manufacturing businesses, nursing homes and wind farms, thus diversifying the investor's risk.

All parties are served by the fact that funds are managed by professionals who will monitor the investments over their lifetime.

The EIIS route is growing in favour with investors, with more than €60m EIIS funding invested in Irish SMEs during 2014. It is expected that the scheme will breach the €100m mark in 2015 and will become a widespread source of funding for Irish SMEs. These companies will be at the heart of Ireland's growing economy and this source of funding will be central to them being able to achieve their potential.

EIIS will not be the perfect fit for every company and every investor. But for entrepreneurial owner-managed and family-owned businesses looking to diversify how they raise funds, and for investors adding diversity to their portfolios, it's certainly worth a look. The scheme is open for new investment until December 2020.

Stephen McGivern is a partner at Hughes Blake and the Managing Director of EIIS Management Limited, the manager of the Goodbody 2015 EIIS Fund

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