As the number of completed equity crowdfund investments continue to trend higher among high net worth aka HNW retail investors, as well as venture capital (VC) fund managers, the first question prospective investors should or could be asking is “What is the average ROI (return on investment) for equity crowdfund investments?”
The answer, according to Seedrs, the UK based equity crowdfund platform, is for the most part, compelling, at least according to a study of 253 deals offered through that between July 2012 and the end of 2015
Before scrolling down to read the CityWire article, you will want to appreciate that the research findings profiling the companies that raise money via equity crowdfunding are somewhat fuzzy, simply because the returns on investment are closer to best guesses than best practices for those who gauge ROI for alternative investments,,
(CityWire) 12 September –Crowdfunding platform Seedrs has released details of the returns its investors can make in a piece of analysis that it claims is an industry first.
Seedrs’ analysis into its portfolio reveals the return made from the 253 deals offered via its platform was 14.4% between July 2012 and the end of 2015, known as the ‘internal rate of return’ (IRR), compared to the 19.12% that the FTSE All Share has increased by over the same period of time.
After the generous tax reliefs offered by investing in the start-ups via enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS), the return shoots up to 41.8%.
The returns are based not on what the shares trade on, as crowdfunding is an illiquid market, but on a methodology created by Ernst & Young similar to the valuations calculation used by private equity companies.
‘We are valuing the investments in a conservative and robust way,’ said Seedrs chief executive Jeff Lynn. ‘[The performance] is above the performance the elites can obtain.’
Seedrs investors can invest in one of three ways: becoming a shareholder in a single business, setting up a fund and investing across multiple businesses, or buying convertible equity. Convertible equity is raised when a company has a large fundraising planned for the future but wants to raise a smaller sum in the meantime. By offering a convertible the company does not have to put a valuation on the company so the convertible equity is bought at a discount to the future valuation of the company and then converts into equity at a later date.
The crowdfunding market is worth £3.2 billion but what an investor channels their money into has a huge effect on the returns they receive but the analysis showed those with a diversified range of investments performed better, with the IRR hitting 15.01% if they invested in 20 or more investments over the same timeframe.
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However good the returns are, investors have to note that they are only ‘paper returns’ and would remain so for a number of years due to the nature of start-ups. Although there is a small market for crowdfunded equity it is unlikely that investors are able to sell the shares and will only realise the gains when the start-up ‘exits’, usually through the sale of the business.
‘This is the valuation on paper,’ said Lynn. ‘This is a long term asset class and you would not see substantial cash returns for another few years.’
The risky nature of start-ups means investors may never see a return and of the first round of companies that raised money via Seedrs, 40% failed, although Lynn argued the success of the other 60% ‘more than makes up for it’.
To continue reading the CityWire story by Michelle McGagh, please click here