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.