A recently-launched platform will seek to leverage UK government tax incentives for investors to put money into early stage start-ups and SMEs.

The Bristol-headquartered Angel Investors Club (AIC) wants to connect Shariah-compliant and ethical start-ups and SMEs to investors by utilising the Seed Enterprise Investment Scheme and Enterprise Investment Scheme.

There is a lot of overlap between the UK venture capital schemes and Islamic finance, according to Ali Kazmi, CEO and founder of AIC.

The UK may be the most developed Islamic finance market in Europe but according to Kazmi, a lot of Shariah-compliant SMEs face funding challenges and they have been neglected and remain untapped.

“We wanted to find a practical solution,” said Kazmi, whose professional background is in tax.

Companies can get on AIC that will connect them with angel investors and family offices for seed and Series A funding. “The investment sweet spot on our platform will range between £150,000 to £1 million,” Kazmi said.

AIC will take 6% on any funds raised on its platform. Other than matching investors to investees, it will also help companies for one to two years, including with their investment pitches. AIC’s in-house team of advisors, lawyers and accountants will also help companies from a structure, tax, legal, and accounting perspective.

The platform is currently only open to self-certifying sophisticated investors due to significant risks investing in start-ups and SMEs.

“Whilst there is significant equity risk, there are potentially very attractive returns,” said Kazmi. “Under the UK venture capital schemes investors can benefit from capital gains tax relief upon an exit, meaning their gains will be tax-free.”

AIC’s investors include James Myatt, a senior partner at law firm Gregg Latchams and an EIS investor for some years, and Robert Hingston, the head of Origin Workspace for start-ups where he is also a mentor.

“We hope that AIC will become a vehicle for connecting capital with tech/start-up/business start-ups,” said James Myatt. “It gets the ball rolling.”

He feels that focusing purely on Islamic investors or start-ups or using Arabic names was not the right way to go.

“AIC has been in the works for two years but we wanted to get it right,” said Myatt. “The timing of the launch is unfortunate with COVID, but there has never been a bigger need for an ethical solution.”

SCREENING

AIC has created its own ethical and SRI framework and will initially screen companies’ ESG credentials internally.

Kazmi said that part of their aim is to combine Islamic and ethical investing.

“Despite the rhetoric, there has been few tangible efforts to bring ESG/SRI to the Islamic investing model altogether,” he argues.

Ethical Screening, a Cheltenham-based ESG screening firm, does the final filtering on AIC’s platform.

On the Shariah side, AIC is partnering with Islamic Finance Advisory and Assurance Services to offer advice and support to investee companies that wish to be listed as Shariah-compliant on the platform, according to IFAAS Director Najib Al Aswad.

“We will develop bespoke Shariah vetting criteria for AIC in accordance with the relevant Shariah Standards of AAOIFI,” said Al Aswad.  “Such vetting will be limited to the fitness of the investee companies for Islamic investing.”

IFAAS will also conduct periodic Shariah audits on the relevant investee companies to provide a reasonable level of assurance to Muslim investors that their funds are continually being used in a Shariah-compliant manner and the return on their investment remains compliant in a given period, where applicable.

DIFFERENTIATION

The platform has attracted interest from players in the domestic Islamic finance industry, including Stella Cox, Managing Director of DDCAP.

Cox said AIC provides institutional investors like DDCAP with various opportunities. It also brings equally interesting opportunities to other UK investors seeking to invest in early stage Shariah-compliant start-ups whilst benefiting from government tax incentives.

“AIC is doing something different,” said Cox, who is a mentor at the new platform. “Through government initiatives like the SEIS and EIS, which are tax efficient for UK investors, it brings a broader spread of prospective investors who are looking for different types of investment. It also brings a new group of businesses together.”

There are other efforts across the industry and they have their place, according to Cox.

“[For example], there is IE5, which is a fintech accelerator, seeking to raise and provide institutional capital,” she said. “The key difference with AIC is that it will bring early stage investment opportunities with lower financial commitment to informed, non-institutional investors through eligible, tax efficient investment  structures.”

TWO-YEAR STRATEGY

AIC in its second year of operations plans to onboard client relationship managers in major cities like Birmingham, London, Manchester, and Leicester to help local businesses look for funding.

It is looking for more financing for itself, around £250,000, and is in discussions with different investors, said Kazmi.

It also hopes to expand its investor base internationally once successful in the UK.

“We hope to develop ties with Shariah VC funds and investors based globally,” said Kazmi. “Within the next three years, we hope to establish our own EIS Shariah fund.”

Stella Cox pointed to investors in other regions who are also seeking opportunities.

“Whilst venture capital and private equity is growing across Islamic jurisdictions, there are a lot of Islamic investors in the UAE, Bahrain, Saudi and Malaysia seeking investment opportunities outside of their local markets as well as within them,” she said.

Adding to this, Middle Eastern sovereign funds with links to the UK are also long-term prospects for AIC, said investor James Myatt, adding that Brexit is unlikely to play a role in the platform’s outlook.

“Whether the UK is inside or outside the EU, a large amount of investment comes outside of the EU,” said Myatt. “The UK government will most likely continue with offering tax advantages on investment opportunities in start-ups.”