University spinouts: the sector growth investors should not ignore

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

Have you noticed how these days everyone is an entrepreneur? One in five UK adults is – or plans to be. Indeed, nearly 590,000 new businesses launched last year alone. Statistically only half of them will make it to their third year.   

There is, however, a particular group of start-up companies that appears to buck that trend. 

I’m talking about university spinouts, companies formed to commercially exploit intellectual property developed at a university. Those that receive private investment appear to be four times more likely to survive and prosper than start-ups as a whole. They could also be extremely lucrative for experienced investors, although high risk, too. 

Cambridge University alone has spun out 15 companies valued at more than $1 billion. Two are now worth more than $10 billion. 

What makes university spinouts different from other startups? How could you access this market? What could investors gain? What are the successes? What are the risks? 

We’ve discussed this in our expert roundtable video with Enrico D'Angelo from Parkwalk Advisors and Sandy Reid from Mercia Fund Managers. Both companies manage specialist EIS funds that invest in university spinouts (Parkwalk Opportunities EIS and Mercia EIS Fund). We were also joined by Tom Hockaday, who has over 20 years of experience working within universities to help them commercialise their intellectual property. 

If you’re an experienced investor at all interested in growth opportunities, you should not ignore university spinouts. And this video roundtable could be a great introduction.

Watch video: expert roundtable – university spinouts, the opportunity

Two ways to invest in university spinouts

Possibly the easiest option for experienced private investors is to consider an EIS fund that focuses on the university spinout sector. The fund structure provides diversification across all the spinout companies in the portfolio. 

Two of such funds are Mercia EIS and Parkwalk Opportunities EIS.  

Mercia EIS Fund

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.

Parkwalk Opportunities 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. 

Important: Backing Britain's brightest is undoubtedly a high-risk venture. The returns could be lucrative for those who have the tolerance for the risk, but there is no guarantee of success. Investors should not invest money they cannot afford to lose.

Source: Parkwalk Advisors. Valuations as of 1 Nov 2018, on all investments made across all funds per tax year. Total Return includes realised returns and unrealised returns. Performance figures exclude performance fees and tax relief. Returns calculated using Parkwalk's own valuations. Please note, data for the 2017/18 tax year is not yet available. Past performance is not a guide to the future.

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 (excluding tax relief)

  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. Tax rules can change and tax benefits depend on circumstances.

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