Dáil Éireann debate -
Tuesday, 4 Feb 1997

Vol. 474 No. 3

Written Answers. - Investment in Private Companies.

Séamus Hughes

Question:

240 Mr. Hughes asked the Minister for Enterprise and Employment his views regarding the lack of attractiveness of investing directly in small private companies having regard to the capital gains tax rate which gives no allowance in the rate for the period that a shareholder retains his investment as against the many alternative tax efficient investments available such as special savings accounts and that venture capital and BES funds are not freely available to all start up situations; his views in relation to the necessity to look at the capital gains tax regime to encourage business angels and other private investors to invest in private companies balancing the reward risk element as against other secure low tax investments currently available. [3059/97]

Minister for Enterprise and Employment (Mr. R. Bruton)

Investors will seek to find investments that strike a balance between high returns and low risk. This balance between risk and reward varies between investors and their portfolios. It is a recognised problem internationally that investors are more inclined to invest in larger quoted companies than in smaller unquoted companies, especially start-ups, because of the perceived lower risk profile.

In Ireland we have a lower rate of capital gains tax applicable to investments in small private companies, market value less than £25 million. A reduced capital gains tax rate of 26 per cent, 27 per cent for disposals before April 6, 1997, applies to individuals who sell shares in a qualifying company provided they have owned such shares for at least three years. As such this incentive gives a substantial allowance against CGT to investors who hold their investment in small companies for at least three years. I regard this measure to be a significant incentive for private investors, including business angels, to invest in smaller private companies.

It is the experience of my Department that there is often an unwillingness, albeit an understandable one, on the part of entrepreneurs to part with equity stake in their businesses, especially in the case of small private companies where founders generally retain the large bulk of all share ownership until they have substantially built up the net worth of the company. At such a stage those companies may seek a public quotation or sell a substantial block of their share-holding by way of a trade sale.

In the above circumstances it is often difficult for firms to expand without investment from external sources, and to this end the State has actively encouraged small businesses to seek external funding assistance through the development of various funding mechanisms and initiatives.

Before outlining some of the more significant improvements it should be noted that the supply of venture capital is primarily the responsibility of the private sector and the principal role of Government is to encourage and support private sector initiatives, sometimes on a partnership basis. In this regard the actions of this and previous Governments have been successful. The venture capital market has undergone significant positive change over the past number of years in improving the supply of venture capital to start-up and early stage companies.

The business expansion scheme is a good example of public and private sector partnership making a significant contribution to enterprise funding. However, it is clearly understandable that not all start-ups can freely access BES or venture capital funding. Where this arises there are a range of other financial supports available to start-ups from sources such as the industrial development agencies and the county enterprise boards. However, both the marketplace and my agencies will, of necessity, apply the appropriate qualification criteria in the provision of all financial support for enterprise.

Some of the more significant measures that have been put in place over the past number of years to improve the supply of venture capital for private companies, including start-up and early stage companies, include the following: under the operational programme for industrial development £66 million of early stage equity is being made available for investment in growth orientated firms. The funds are available through approved seed/venture funds. Fifty per cent of the funding is being provided by the European Regional Development Fund and the balance by the private sector. The measure specifically provides for a target level of seed capital investment of 25 per cent of the available funds; the business expansion scheme has been extended to April 1999. Since its inception the BES has been successful in channelling equity capital into unquoted businesses in Ireland, including a substantial number of small firms requiring smaller amounts of capital, i.e., up to £50,000; in addition the scope of the BES has been widened to provide a refund of certain income tax already paid by an individual who sets up and takes employment in a new qualifying business; in the past few years a number of new seed-venture capital providers have become active in the venture capital market and are characterised by their concentration on start up and early stage financing and the industrial development agencies, as part of their development mandate, are increasingly devoting more resources to equity investments in developing indigenous companies.

Evidence of improved access to equity capital for unquoted companies is contained in the results of 1992 and 1995 Equity Capital surveys carried out by my Department. Whereas in 1992 57 per cent of the respondents were of the view that the then climate for raising equity had deteriorated, this figure had dropped to only 5 per cent in the 1995 survey.

While I am reasonably satisfied with progress to date in improving the taxation and financing conditions for smaller private companies, I assure the Deputy that I and my Department keep these issues under regular review and that new or improved measures will continue to be proposed and supported in line with the changing demands of the business environment.