Angel Investors Plan to Stay in the Game
Tax Changes Won’t Alter Angel Investment Strategy
Contrary to the conventional wisdom, the wide-ranging new tax increases recently enacted by Congress may not have the dampening effect on private equity investments that many believed. In fact, it may be a ‘mini stimulus’ as some individuals with an appetite for Angel and early stage investments actually intend to increase rather than decrease their investments in early stage companies.
The results of the recent Spencer Trask Institute survey of nearly 2,000 accredited, high-net-worth (HNW) Angel Investors (conducted after the U.S. Congress had enacted changes to the U.S. Federal Tax code, increasing marginal tax rates and changing the limits on capital gains), 75% of all respondents said they would either maintain their current Angel Investments levels (68%) or increase the level of Angel Investments they planned to make (7%) in the coming year.
A common fear during the public discussions and backdoor Congressional negotiations was that changes to the tax code to be enacted early in 2013 – a combination of increases in the marginal income tax rates affecting most HNW Angel Investors, as well as increases in the tax on capital gains, dividends, and interest income – would be absorbed by HNW investors through a reduction in the amounts of capital they allocated to high risk/high reward, early-stage opportunities. Most financial analysts consider this category of investment to be ‘discretionary’, representing only a small (3%-5%) portion of HNW portfolios, and therefore one of the first to be eliminated if Congress moved to increase taxes on any forms of disposable or investment income.
Analysis of the survey results tells a different story and may provide some unique insight into the thinking of the Angel community during this uncertain economic climate. Even those HNW Angel Investors who indicated that they would reduce their investment levels over the next 12 months were less affected by changes in the tax code than by other factors – the biggest reason among them being that their prior Angel experiences were not successful (46%) or did not meet their investment return objections (35%). Only 21% of those who said that they were reducing their allocations to early stage opportunities complained of the lack of investable capital while 18% said that the risk/reward ratio was the primary reason for investing away from Angel-like deals.
Given that most HNW Angel Investors do not plan to make substantive changes in their investment allocations to this category over the next four years, a few facts emerged from the survey that were telling in terms of which tax issues would affect their future decisions – and an increase in the marginal income tax rate was the least influential item! Far and away the biggest issue weighing down future Angel investments would be changes to the tax code which limit itemized deductions – things like mortgage interest, state and local taxes, property or asset-based taxes, charitable deductions, etc. Fully 50% of respondents listed this category as the number one variable affecting their appetites for future Angel investing. Following closely behind at 43% was the issue of taxes on capital gains – understandable amongst this base of investors with an eye toward keeping as much of their hard won, early stage gains as possible.
As a backdrop to their thinking on future Angel-like investments, respondents were asked to share their assumptions on the overall economic climate in the US over the next 4 years. Given a range of economic forecasts on overall economic growth, unemployment, and interest rates, a resounding 58% said their investment decisions assumed the “the economy will grow slowly during this period, unemployment will remain high, and interest rates would remain low through 2016.” In other words, their investment inclinations as reflected above were all conditioned on a somewhat negative but likely sanguine view of the overall state of the US economy through 2016. Changes in any of these key variables could have an impact on their appetites for Angel-like opportunities – with the most likely scenario being a more rapid economic recovery and therefore a greater stimulus for Angel investments.
As a further insight into the thinking of these financially savvy, successful HNW group, it is interesting to note that only 6% thought that over the next 4 years the economy would grow rapidly, unemployment would fall significantly and interest rates would rise – so there are optimists within the HNW group, but they are few and far between when it comes to overall U.S. economic conditions.
The Spencer Trask Institute (STI) is an independent, not-for-profit research group whose mission is to provide high net-worth (HNW) angel investors with a forum to share their thoughts and sentiments on a wide range of investment topics.
Our objective is to help investors to collaborate amongst people of similar circumstances in a totally independent, unbiased and anonymous way by sharing their sentiments and concerns in a forum that allows them to see and understand what others are thinking, planning and doing to respond to an ever-changing financial landscape. Our survey-based research topics range from asset allocation and tax policy to technology trends, seed and mezzanine funding options and early-stage best practice management. We strive to deliver relevant facts based on unbiased data and promise to share the results of our surveys combined with hard-hitting insight back to our research community.
STI is managed by professionals with a long history in market research, investment analysis and a deep understanding of early-stage investing. There are no fees associated with becoming a member of our survey community, and we accept no paid sponsor or advertisements.