Low rates and QE push angels of the north to invest in start-ups

For the past six years, the Bank of England's quantitative easing programme has been credited with, and blamed for, many of today's unusual economic conditions: historically low interest rates, negative bond yields and record share prices. But an even more unforeseen consequence is an increase in the number of entrepreneurs in the north of England.

With central bank asset purchasing increasing the price of both bonds and equities, investors have been hunting for alternatives as they search for higher returns.

Throw in the generous tax breaks for backing riskier ventures, such as the Enterprise Investment Scheme, and it seems more Britons have decided to become angel investors instead: putting their money into entrepreneurial start-ups that they hope will pay them back with high returns.

"By purchasing bonds, central banks increase prices and lower yields, which encourages investors to move into other investments, in turn driving up the prices of these other investments," said Karan Sejpal, UBS Wealth Management's regional director for the northwest.

Individual angels are making more investments than ever before. The average number today is five compared with 2.5 in 2009, according to the UK Business Angels Association.

Tony Loftus, who owns a chain of souvenir shops in Liverpool, recently joined an angel syndicate after becoming frustrated with low savings rates. "The stock market is at a high and on deposit I will get 1-2 per cent," he said. With pension investment capped, it was also a tax-free way of taking money out of his business, he said.

Since last year Mr Loftus has backed several companies, including Storelectric, which wants to solve the problem of intermittent wind power by storing compressed air in disused salt caverns in Cheshire.

The air, compressed with power from wind turbines, would be released at times of low wind and high demand to drive a turbine and generate electricity. Mr Loftus typically puts about £25,000 into each company and is looking to invest £200,000 in all.

That is "not more than I can afford to lose", Mr Loftus says, adding that he expects about of half his investments to fail. To reduce the risk, he sometimes invests alongside the North West Fund, a £155m EU-backed investment pot providing debt and equity for small and medium-sized businesses.

"Really, you are looking for the next Facebook. But it's an enjoyable ride nonetheless," Mr Loftus said.

The success of AO World, the Bolton-based online seller of white goods that is worth about £770m, has become an incentive for many other entrepreneurs in the north of England looking for alternative investments.

A group of angels, including Norman Stoller, Bill Holroyd and Chris Hopkinson, who invested about £1m each in AO since 2000, made up to 100 times their money when the company floated on the London stock market last year.

"Investors see angel investing as an attractive way to earn higher returns while helping other entrepreneurs, particularly if they were once entrepreneurs themselves," said Mr Sepjal at UBS.

They also like sharing their personal fortune with the community. As governments and councils cut back, successful business people have become ever more important to fundraising, he said.

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Mr Holroyd, who made his money from food distribution, has put millions into his charity Onside, which runs a network of Youth Zones across Greater Manchester.

As more and more wealthy individuals turn to company financing, it has become a bigger source of funds for start-ups than traditional venture capital funds. Private equity provided an estimated £450m in venture capital in 2014. There was at least £1.2bn from angels, though many transactions are unrecorded.

"The angel market is much bigger than the venture capital market," said Jenny Tooth, chief executive of the UK Business Angels association.

She points out that there are 18,000 active angels in the UK, yet there still remains a significant north/south divide, with more than six out of 10 angels residing in London and the southeast.

With bank lending to small businesses still falling, the government has looked to encourage angel investors with a range of incentives and set up a £100m fund to invest alongside them. Ms Tooth said that future governments must continue the tax reliefs.

EIS was used for a record £1.4bn of investment in 2013-14. It offers 30 per cent income tax relief on the first £1m of investment annually, exemption from capital gains tax on disposal of shares after three years, allowing losses on share sales to be set off against either income or capital gains.

<>The even more generous Seed EIS offers 50 per cent tax relief up to £100,000 annually but is only available when investing in companies with fewer than 25 employees.

"Some things go pear-shaped," said Ms Tooth. "Tax breaks are incredibly important. They are used in nine out of 10 deals. Some 90 per cent said it influenced them to take the risk of investing in a small business. Tax breaks are a safety net. Angels are not looking for tax avoidance."

Norman Stoller: 'farmer' who helped AO World grow

Norman Stoller does not like the word angel. "I see myself as a farmer. You find the seed, water and nourish the crop, and sometimes you get the harvest."

Now aged 80, Mr Stoller started out in business with a £100 bank loan and a converted post office van for deliveries.

"Today the bank manager does not have that discretion. I was in the right place at the right time," he says, explaining why he is eager to finance young businesses.

His father Ivor had invented a tubular bandage and by the early 1950s Mr Stoller had sold it to a Danish company.

The pair established Seton Healthcare and bought a local manufacturer in Oldham to make medical products. It floated in 1990 and in 1998 it bought Scholl, the footcare brand, and a year later London International, maker of Durex condoms. Mr Stoller then left the board.

SSL International, the renamed group, was bought by Reckitt Benckiser in 2010.

Mr Stoller's early investments were non-profit-making but aimed at giving business people a start. "I would sell the stake back for the price I paid for it," he said.

But founders of businesses, Mr Stoller says, must be prepared to make sacrifices. "I would make them take out a second mortgage," he said. "If I am risking my money I want to know they are not going to relax."

He was an early backer of AO World, the online white goods retailer, after he took a shine to John Roberts, its ambitious founder.

Many of his millions have gone to his charitable foundation, which is paying for a new organ for Manchester cathedral. He is heavily involved in youth zones that give young people in towns such as Oldham and Bolton a place to go in the evenings.

AO World shares have fallen a third since the IPO last year, following a profit warning. Mr Stoller blames the bankers who priced it and those who drove its value up 33 per cent on the first day of trading, not the early investors.

"Many of the people I meet want to invest to profit. That is very hard to do in the short term."

Ajaz Ahmed: unafraid to cut losses on ugly babies

The biggest threat to angel investors is "ugly baby syndrome", warns Ajaz Ahmed. "Parents have an ugly baby but they love it because it is theirs. You invest in something and you think it is great when others can see it's awful. It is like the X Factor. People who can't sing are up there and all the family is backstage telling team they can sing. They have a vested interest. It is the same with investing."

Mr Ahmed became a millionaire at 36 when Dixons sold Freeserve, the internet service provider he founded, to France Telecom in 2001. He was too young to retire and was deluged with business offers. He invested in several companies in sectors he knew nothing about, and soon realised he had also handed over his money without receiving any control over the business.

"I was an innocent bystander. I could not affect the outcome. I learnt an awful lot from losing money in those companies. It makes a man of you. Ninety per cent of businesses are crap."

He also backs the mantra "fail faster", where entrepreneurs believe if things are not going well, you give up and start again.

"People are more willing to take a risk when you are looking at a loss. But if you have lost £50,000 you will lose another £50,000. Pull out."

Mr Ahmed, from Huddersfield, now backs a smaller number of businesses. He is still involved in an Asian restaurant chain, Abduls, he set up more than a decade ago with a school friend.

He backs Quba, a digital marketing agency; Browzar, a web browser that promises privacy; and Legal 365. The last absorbs most of his time and provides simple, fixed-cost legal services in a fast changing market.

He said angels such as himself were vital to help exciting businesses grow. "Venture capitalists do not have any venture. They just want safe bets."

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