investing in innovation john leech kpmg llp · p2p funding, which is facilitated through online...

Investing in Innovation John Leech KPMG LLP 11 June 2014

34 © 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.

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


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.


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


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;


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;


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


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


....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


....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

© 2012 KPMG LLP, a UK Limited Liability Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

investing in innovation john leech kpmg llp · p2p funding, which is facilitated through online...

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