ESVCLP Article - Co-investment among angel investors to rise

Angel investors are motivated by more than just return on investment. Typically angel investors are high net worth individuals who have been successful in previous entrepreneurial endeavours. The experience gained equips angels with valuable practical understanding of the mechanics of business building and an acute ability to identify and resolve the pitfalls inherent in start-up businesses.

Often therefore, when an angel investor decides to invest in an early stage business, he or she will do so not only for financial gain but also in order to bring this entrepreneurial expertise to the board. If one accepts, as the author does, that ‘the execution’ is more important than ‘the idea’, then it becomes clear that the expertise an angel investor brings to an emerging business is often just as valuable as the injection of capital.

Angels do not always invest directly but may pool their funds with other angel investors and co-invest through a special purpose vehicle, typically, a unit trust. One of the reasons for this indirect investment may be to reduce exposure to risk. Another reason may be that the value of the investment and the forecast follow-on investments necessary to execute a particular investment strategy may be greater than an individual angel is prepared to make alone.

In the current climate, there is likely to be greater levels of co-investment between angel investors who share a similar investment style and philosophy.

Often, angels cite the flexibility of unit trusts as the reason for their popularity as a co-investment structure. However, as the profitability of investees in a portfolio begin to plateau, angel investors are moving toward more tax-effective co-investment structures.

One of the most tax-effective structures for angel group co-investment is the Early Stage Venture Capital Limited Partnership (ESVCLP). The ESVCLP is a tax flow through vehicle, through which distributions of income and capital gains to investors will be exempt from taxation.

In the following post we explore some of the myths around the ESVCLP as a structure for angel group co-investment.

For further information in relation to this article please contact Steven Maarbani of PricewaterhouseCoopers on 02 8266 6834 or steven.maarbani@au.pwc.com.