The willingness of wealthy private investors to back fledgling Scottish companies dipped significantly last year, according to a new report by international law firm Pinsent Masons.
The conclusions come following an analysis of the take-up of a government scheme designed to promote direct investment into small firms.
Enterprise Investment Schemes (EIS) offer private individuals generous tax breaks in return for providing direct financial backing for small companies.
In a mark of their wider importance to the economy, the Treasury has extended the schemes in each of the past two Budgets to try and stimulate further investor appetite.
Pinsent Masons analysed the number of applications made by Scottish companies to qualify as eligible for the schemes; something typically done immediately before investment by a wealthy backer.
The latest available figures show that such applications dropped by almost 20% in 2011 compared with the previous year.
Karen Davidson, an expert in startup funding and EIS at Pinsent Masons, said: “When an individual wishes to invest directly into a small company and claim EIS tax relief, the target company needs to apply for qualifying status. Our research shows that the number of Scottish companies applying for that status dropped by almost 20% in 2011, suggesting a decline in investment levels.
“These figures have to be looked at in the context of a generally challenging market, but there is no doubt that they are disappointing; particularly given that the tax relief available for investors rose from 20% of the investment made to 30% in April last year.
“The question will be asked as to whether that is sufficient to stimulate greater investor appetite.”