How could you back Britain’s brightest?

In higher education, the UK is a superpower. 

Four of the 10 top-rated universities in the world are British. Interestingly, they’re not just centres of academic excellence. Defibrillators, LCD screens, Maglev trains, pacemakers and fibre optics are all products of UK universities. 

At the time of writing it has just been announced that Evox Therapeutics, a spinout of Oxford University received funding from GV, the venture capital arm of Google. It was founded two years ago and is now valued at £85 million.

Similarly, Bristol University spinout Ziylo was recently acquired by Novo Nordisk, one of the world's biggest makers of diabetes drugs, for up to $800m.

It's further evidence university spinouts have the potential to be incredibly lucrative. Indeed, Cambridge University has spun out 15 companies valued at more than $1 billion. Two are now worth more than $10 billion. 

Could investors benefit?

Possibly the best option for private investors is to consider an EIS fund that focuses on the university spinout sector. 

Two of such funds currently available are Parkwalk Opportunities EIS and Mercia EIS

Parkwalk specialises in investing in innovative companies. It co-manages funds with Oxford, Cambridge and Bristol universities. It has exited eighteen investments; some have been stellar. For instance Tracsis – a software company used by the UK’s train operators – delivered close to 10x return in three years and two days. The proceeds from just the exit of waterless washing machine manufacturer Xeros were sufficient to return, in cash, more than the cost of investors’ entire subscriptions in the Parkwalk Tech Fund I. You can see performance figures across all Parkwalk funds at the bottom of the page. Please note, past performance is not a guide to the future. 

Read more and watch an interview with the manager of the Parkwalk Opportunities EIS 

Mercia specialises in investing in early-stage technology and life sciences. It has a focus on the Midlands, the North of England and Scotland and has partnerships with 19 universities. Although it has yet to have any major exits through its EIS, the Mercia Group has a good record of exiting investments. For instance, in 2016 Allinea Software Limited was sold to ARM Holdings for £18 million. Allinea, originally spun out of the University of Warwick and then aided by Warwick Ventures, develops software tools for computing applications. The sale represented a return of circa 21x the investment cost. You can see performance figures of the Mercia EIS at the bottom of the page. Please note, past performance is not a guide to the future.

Read more and watch an interview with the manager of Mercia 

The valuable benefit of investing through EIS

As one would expect, for every Ziylo there are probably tens of companies that fail. 

But this is why investing in this type of company through EIS could deliver a valuable benefit. 

EIS tax relief can mitigate the impact of any failures. You could receive 30% income tax relief, capital gains deferral, inheritance tax relief and tax-free growth. If the investments don’t go to plan, you could also benefit from loss relief, which could limit your effective loss to as little as 38.5p for every £1 you invest. Remember, tax rules change and the value of tax benefits depends on circumstances.

What to consider next

Backing Britain's brightest is undoubtedly a high-risk venture. That said, the returns could be lucrative for those who have the tolerance for the risk. Investors should not invest money they cannot afford to lose. 

If you are interested in the sector, you could consider specialist EIS funds such as Parkwalk Opportunities EIS and Mercia EIS. For more information, key documents and interviews with the fund managers please visit the offer pages. 

Source: Parkwalk Advisors. Valuations as of 31 July 2018, on all investments made across all Funds per tax year. Total Return includes realised returns (cash returned to investors per £ invested, including loss relief if applicable) and unrealised returns (value of the balance of the portfolio including escrow and potential earn-outs on exits). Performance figures exclude performance fees. Returns calculated using Parkwalk's own valuations. Past performance is no guide to future performance.

Source: Mercia Fund Management. EIS funds only. Returns calculated using Mercia's own valuations. Figures exclude the benefit of tax relief. Past performance is not a guide to the future.

Annual performance figures for Mercia EIS funds

  March 2014 March 2015 March 2016 March 2017 March 2018
Mercia Growth Fund 1 34.4% 33.7% 1.7% -3.4%
Mercia Growth Fund 2 13.7% 39.9% 39.6% 16.9%
Mercia Growth Fund 3 84.2% -20.1% -8.3%
MDF 69.2% 16.2% 7.8%
MGF4 9.4% -6.1%
UGF 30.9% -8.2%

Source: Mercia Fund Management. Shows annual % growth in Mercia Growth Funds since April 2013. Returns calculated using Mercia's own valuations. EIS funds only. Figures exclude the benefit of tax relief. Past performance is not a guide to the future.

Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 04.09.18