HNW Investors Can Spread Risks, Earn Returns By Becoming Angelic
Angel investing is a way for HNW investors to earn returns by filling a funding gap for small firms.
As many asset classes have been hit or driven to expensive levels
in the rush for safety, the sector known as angel investing can
be easily overlooked as it is dwarfed by other sectors. But
according to a
UK firm specialising in such finance, high net worth investors should find this area attractive.
Angel investing, made a popular talking point by shows such as the UK's BBC Television series Dragon’s Den, involves investors providing early-stage finance to businesses looking to step their operations up a gear. It is akin to venture capital in that investors are taking a punt on a small, nascent business that will bear fruit several years in the future.
Beer & Partners, which says it is the largest such angel
investor network in the
UK, this model of investing is gaining increasing traction because many firms are using such sources of finance while conventional debt funding has all but totally dried up.
“We look at about 3,000 companies a year and we take on about 100 firms and end up funding about 50 of them. Finding good quality companies has been the hardest thing. We are now getting a better quality of business in the current climate because they can’t get debt financing or working capital,” Mike Weaver, chief executive of Beer & Partners, told WealthBriefing in a recent interview.
Investors can either work with Beer & Partners to arrange a series of direct financing deals themselves or hold such assets via a Beer & Partners vehicle, structured as a UK tax-advantaged Enterprise Investment Scheme. Beer & Partners charges firms that obtain angel financing and will also take out a warrant in the equity of the firms in which the “angels” invest to capture any eventual rise in the value of the firms.
Compared with mainstream assets, angel investing is relatively small, however. Beer & Partners’ “angels” have raised more than £110 million to invest in new firms over the past 10 years; the total value of funds held available by B&P's investors stand at more than £4 billion. Average investment per investor per project is £100,000 and ranges between just £25,000 and up to £1 million.
Exact returns data for such investment is hard to come by. For an approximate idea, the private equity research firm Preqin has data on annualised internal rates of return for venture capital as a yardstick. In the year to September 2008, the latest period for which data are available, IRRs were a negative 1.7 per cent, which is disappointing but a great deal better than the 40 per cent-plus losses sustained in major Western equity markets in 2008. In the three years to last September, annualised IRR was 10 per cent, and over five years, it was 9.1 per cent. Over the year to December 2007, IRR was 21.3 per cent.
Such figures are getting investors interested. There are a number
of such angel network firms: the London Business Angels Network
has raised £44.6 million in funding for 146 firms since 2000. In
US – the traditional home of venture capital – there are groups such as US Angel Investors, based in the San Francisco Bay/Silicon Valley area. The sector even has its own magazine in the
UK, The Angel Investor.
As launched yesterday, the business First Funding (www.firstfunding.org), is an internet-based business which hooks up firms needing loans and HNW investors able to plug an otherwise expensive-to-fill gap. The company was founded by William Flatau. The launch of this business is also a further demonstration of how internet-based firms can connect HNW investors and small firms to get investment funding that is otherwise hard to obtain from a mainstream bank.
As for angel investing generally, the attractions of this investment model are that it is a good diversifier of risk and investors typically get closely involved in mentoring the firms involved, which can be hard work but also very rewarding, Mr Weaver said.
Investors typically tend to be recently-retired businessmen or entrepreneurs who, while they wanted to enjoy a less taxing business life, still had the energy and enthusiasm to support up and coming firms. In many cases, investors had benefited in the past from having a business mentor and wanted to give other businesses the same support.
“These are investors who have registered with us to invest in early-stage companies, in pre-IPOs and recovery opportunities. Even in this climate, we are getting one investor signed up per day a month,” said Mr Weaver.
Such investing is, in some ways, less risky than holding conventional listed securities, he said. “You can influence the outcome; if you just invest in BP, for example, you have no influence whatsoever.”
In general, with such investing, up to 60 per cent of any firms will fail, about 30 per cent will survive and 10 per cent will prosper, such as going on to list on the stock market. In recent years, the share of firms that have gone bust has been far less than 60 per cent, more like 25 per cent, he said.
If private banks do not currently mention such angel investing
ideas to their clients looking for a bit more direct involvement
in their portfolios, then they should do so, Mr Weaver says. Beer
& Partners is holding an “investment fair” in central
London on 13 May to introduce firms seeking cash and potential “angels”.