Investing in Innovation John Leech KPMG LLP 11 June 2014
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UK Automo)ve R&D has been increasing recently
£1.7 billion
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2006 2012
Automotive share of UK corporate R&D expenditure
£1.7 billion
UK has a 2% share of global R&D expenditure by automotive companies Companies in China, Germany, Japan and US together spend over 60% of automotive R&D
£0.8 billion
Source: KPMG analysis of OECD, ONS, corporate announcements
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Financing of R&D is a key challenge reported by automotive supply chain SMEs
Banks
Inward Investor
Private Equity Asset Backed Lenders
Parent Company
Customer Finance
Angel Investor Tax incentives
Peer-to-Peer (P2P) funding
There are many financing alternatives
Source: KPMG Analysis
Emerging Peer-to-Peer (P2P) Funding Models: UK example
■ KPMG presents an analysis of the UK P2P funding market through collaboration between Nesta, the University of Cambridge, and the University of California, Berkeley and is the first intensive country–level study of a P2P alternative finance market anywhere in the world.
37 © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Peer-to-Peer funding overview: UK example P2P funding, which is facilitated through online platforms, is gaining traction rapidly
“Crowdfunding is a way businesses, organisations and individuals can raise money.
Generally, it involves a number of people pooling money through
a website, often called a
platform”.(1)
Source: (1) BIS Economics Paper No. 16, “SME Access to External Finance”, January 2012
38 © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Description of sub-segments and funds raised in the alternate finance market
Segment Description 2013
Peer-to-Peer Lending ■ Debt-based transactions between individuals; mostly are unsecured personal loans £287m
Peer-to-Business Lending
■ Debt–based transactions between individuals and businesses who are mostly SMEs £193m
Invoice Trading ■ Firms sell their invoices or receivables to a pool of individual or institutional investors £97m
Equity-based Crowdfunding ■ Sale of registered security by mostly early–stage firms to investors £28m
Reward-based Crowdfunding
■ Donors have an expectation that recipients will provide a tangible reward or product in exchange for their contribution £20.5m
Debt-based Securities ■ Lenders receive a unsecured debt obligation typically paid back over an extended
period of time. Similar in structure to purchasing a bond, but with different rights and obligations
£2.7m
Revenue/Profit Sharing Crowdfunding
■ Issuers incur an obligation to repay lenders, but these payments are variable and a function of the revenues or profits of the firm £1.5m
Microfinance/ Community shares
■ Microfinance refers to the lending of small sums to entrepreneurs who are often economically disadvantaged and financially marginalised. £0.8m
Donation-based Crowdfunding/ Peer-to-Peer Fundraising
■ No legally binding financial obligation incurred by recipient to donor; no financial or material returns are expected by the donor £310m
TOTAL £940m
Peer-to-Peer funding overview: UK example Several distinct P2P niches have emerged with their own unique characteristics aimed at businesses (SMEs) and individuals
Source: (1) “The rise of future finance”, December 2013, http://www.nesta.org.uk/publications/rise-future-finance;
39 © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Government supported
venture capital
schemes
Amount of finance sought
Ret
urn
Bank Finance
Early Stage Venture Capital Private Equity
Public
Markets
Mezzanine Finance
Business Angels
Enterprise Finance
Guarantee Scheme
Peer-to-Peer funding overview: UK example The UK’s P2P funding is currently aimed at less than £1m financing, though this is changing
£940m was raised through the UK’s alternate finance market in 2013(2)
Possible consequences for established lenders:
■ Increased competition in the smaller sized loans (i.e. Below £1m) for SMEs
■ As the investment-based and loan-based crowdfunding platforms become more sophisticated and trusted, it is likely that they will gain the ability to raise larger funds
■ Bargaining power of Business Angels, Venture Capitalists and Private Equity Houses is likely to weaken where deals require smaller capital amounts to support SME growth and expansion
■ Bank knowledge and establishment of relationships with newer SMEs might be delayed or not develop as loans are obtained elsewhere
Source: (1) BIS Economics Paper No. 16, “SME Access to External Finance”, January 2012 and KPMG Analysis;
40 © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Peer-to-Peer funding overview: UK example The SME focussed market in the UK achieved 253% CAGR from 2011 to 2013 (1)
£463 million raised
P2P finance for SMEs in the UK for 2011-2013 (1)
Source: (1) “The rise of future finance”, December 2013, http://www.nesta.org.uk/publications/rise-future-finance;
5000+ SMEs using P2P
0
50
100
150
200
250
300
350
2011 2012 2013
£26.7m
£104m
£332m
£m
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2011 2012 2013
Num
ber o
f SM
Es
Number of SMEs raising funds through P2P financing in the UK for 2011-2013 (1)
550
1,406
3,706
41 © 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Peer-to-Peer funding overview: UK example A plethora of P2P companies have launched in the last two years, with a number operating both locally and globally(1)
Source: (1) Company websites, December /January 2013/14
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....and don't forget the R&D tax credit
Undertake activities qualifying as R&D for tax purposes
Capital Expenditure
Revenue Expenditure
R&D Allowances 100% in year
of expenditure
SME
R&D Tax Relief Super Deduction of 225%
Surrender Losses for Tax Credit
R&D Tax Relief 130% Super Deduction
And Above-The-Line Tax Credit
Large Company
Potential for
Any claim must be made within 2 years of the end of
the relevant accounting period
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....and don’t forget patent box
■ Profits from the sale of products incorporating patents taxed at 10% rate rather than Mainstream Corporation Tax rate
■ Only profits attributable to patents eligible
■ In order to qualify for the Patent Box regime, a company must hold qualifying IP rights or an exclusive licence in respect of qualifying IP rights
– Patents granted by UK, European or EEA Patent Office
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