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UK Government publishes a Study... |
UK Government publishes a Study on the impact of the Enterprise Investment Scheme and Venture Capital Trusts on company performance
HM Revenue & Customs has published a report on the impact of two significant practical policies aimed at addressing the perceived market failure in the provision of sufficient amounts of risk capital for smaller and younger UK companies with growth potential. The full report can be read at http://www.hmrc.gov.uk/research/report44.pdf .
The principal findings were as follows:
General capacity building
- Investments made under EIS and VCT, but particularly EIS, tended to be associated with general capacity building (growth in fixed assets and employment) and an expansion in sales.
- EIS and VCT were, in general found to be associated with higher (real) fixed asset formation, (real) sales turnover and employment
- Company size of EIS and VCT scheme investments was found to be positively related to fixed asset accumulation and employment
- Age of company receiving EIS investments tended to be positively associated with gearing (the ratio of company debt commitments to equity ownership), employment and fixed asset accumulation
Profitability
- On average, the EIS and VCT schemes generally have little discernable impact on real gross profits or investment, although the latter estimation was problematic for missing data reasons
- Investments made under EIS and VCT tended to be negatively associated with company profit margins
- Increasing company size of EIS and VCT recipients was associated with reduced effectiveness of scheme investments as measured by (real) gross profits (and labour productivity)
- The age of company receiving VCT investments tended to enhance employment and profit margins
Productivity
- The VCT scheme appeared to have no statistical effect on labour productivity
- For EIS only, the scheme was associated with lower gearing and higher labour productivity
- Company size of EIS and VCT was negatively associated with labour productivity
Sector
- Companies operating in multiple sectors (ie having more than one SIC code) with EIS investment were associated with higher sales and employment
- Scheme investments in business services companies were associated with higher fixed asset formation (VCT only) and higher employment
- In contrast to business services, “other” service sector companies performed relatively poorly in terms of associations with sales (VCT only) and labour productivity (EIS only).
Age
- Age of company receiving EIS investments was associated with gearing, employment and fixed asset accumulation
- Age of company receiving VCT investments tended to enhance both employment and profit margins
Survival
- Survival rates for EIS and VCT supported companies were lower than those recorded in matched but unsupported companies. However, for companies receiving both EIS and VCT support, survival rates were broadly comparable with those of unsupported companies, However, non-survival is measure imperfectly, and refers to all companies not currently trading which might include genuine failure alongside a host of other reasons.
Overall EIS and VCT investment has a positive effect on capacity building, but in material terms these effects remain at present very small. There is some limited evidence of a profit enhancing effect, but there are big differentials in performance depending on the size, age and sector of the company. These results must be set in the context of the target community of young, growth-orientated smaller companies in higher risk trades and the fact that the purpose of any public scheme is essentially to strengthen the future capability of the economy. Therefore the growth of capacity is likely to be of more importance than factors such as profitability for young and growing businesses in the short term.
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