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Returns from Unlisted Investing

Investment return graph

The mire of uncertainty and speculation surrounding angel and equity crowdfunding investment has long shrouded the industry, allowing many to project their own (mis)conceptions onto the framework of an emerging industry. However, with increased research into PE/VC returns, and a substantial window of time having elapsed since the emergence of the earliest successful equity crowdfunding platforms, there is now sufficient evidence to legitimise the investment of both angel and equity crowdfunding investors. 

As the investing world becomes more educated on the returns from unlisted investments, it’s important to illustrate how they work and where they can be found. The results of this education are exciting for all those intrigued by the sphere of unlisted investments.

 

Why investors are wary of unlisted investment

Unlisted investment refers to investing in new or emerging companies and assets that are not traded on the public market. They often possess ambitious plans for investment, and are deemed high-risk by the traditional financial market. New sectors of alternative finance such as equity crowdfunding have eliminated the traditional barriers to investment that these privately-held companies faced, and exposed new investor types to them – democratising that sector and improving access.

Nonetheless, the impression from within and outside the investment community that unlisted investing is a risky prospect is accurate. 

There seems to be a false equivalence, however, between this cliché of the gung-ho angel or equity crowdfunding investor, and the impression that their returns are fruitless. Ultimately, the main tenets of investment advice apply to angel investing or equity crowdfunding investing in the same way as they do to any investment – don’t aggressively invest in a single proposition; spread and diversify wherever and as much as possible; this strand of investment is high-risk, and all who enter are advised of this fact.

 

How has data shaped our insights?

The emerging data from both Silicon Valley and beyond has done much to shift the conceptions surrounding unlisted investing – outlining the credible returns made from alternative investments. The Kauffman Foundation, Nesta, and Willamette University have all unveiled research on the distribution of outcomes. 

The Willamette report, compiled in assistance with Dr Robert WIltbank, is striking. While it buttresses our conventional notions of angel investment – that in any one investment, an angel investor is likely to earn less than 1x return. However, looking at the aggregated data, Wiltbank is able to demonstrate that angel investors produce a gross multiple of 2.5x their investment. This is more than three times the return on stocks. This rate of return is thus competitive with venture capital. 

Wiltbank speculates too on the importance of angel investors “most ventures, even great ones, don’t ever take venture capital investment. A little less than one-third of IPOs are of venture capital-backed firms.  While this is really impressive given that UIVCs invest in less than 1 percent of new ventures, it still means that two out of every three IPOs are of companies that never had any venture capital investors.” Angel investors are entrepreneurs – supposedly 85% of them are ‘cashed-out’.  

 

Changing times 

They are not the foolhardy entrepreneurs tackling fruitless investment as some industry figures seek to depict them. Instead, as FiBAN’s annual angel business training data shows, smaller venture deals do get exits. 

Governments are latching onto the willingness of entrepreneurs in this domain, with schemes like the Enterprise Investment Scheme in the UK, offering income tax and capital gains tax reliefs to investors. Individual income tax relief of 30% is offered under the EIS Scheme. The increased visibility and success of private investment companies responsible for unlisted investments has driven all sorts of new investment types towards this sphere. The Financial Times makes the case for those with pension funds to direct their investment there: “Buy in at launch and hold for at least five years and you will get 30 per cent income tax relief up front and your dividends and capital growth tax-free.” According to investor service Wealth Club, VCTs saw their strongest demand in a decade in the tax year to April, raising £542m.

Evidently, the shifting tides of finance have unveiled the promise of unlisted investment. As countries across the globe realise the ability to educate their investment communities on its potentials, whilst continue to inform them of the relevant risks that are inherent to all unlisted investment, the research will continue to emerge and shed new insights.

 

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Richard Andrée Wiltens

Written by Richard Andrée Wiltens

Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.