Peter Schwabach, Managing Partner at Cyrus Investment Management investigates how companies are picked for investment and how fund managers work with them.
The summer of 2016 will no doubt be remembered as the hottest summer on record but for EIS investment managers, more pertinently, it will be remembered as a historically difficult one as managers chased overworked part time HMRC case officers to find out whether their applications for advanced assurance – under the new Finance Act rules of November 2015 – would be approved.
In the heat of that process – critical to both Investors, IFAs and managers – it was no doubt easy to forget that the EIS investments themselves and not just the certificates, were the priority. Setting aside the requirement to secure EIS approval for investments our job is all about investing our clients’ money wisely and delivering a meaningful return after three years.
One of the unintended (or perhaps) intended consequences of the 2015 Finance Act is that it radically transformed the role of many EIS managers from astute buyers of EIS eligible assets into that of entrepreneurial managers of multiple small businesses.
Furthermore, by introducing a seven year age limit on businesses where a manager could take a majority stake and restricting investments into businesses older than seven years into a specific new product or market, the focus of the manager shifted still further into the heart of the business by requiring a manager to determine which product or market the business should now focus on.
At Cyrus Investment Management, where we have been investing EIS funds into existing British engineering companies since 2013 with the specific aim of doubling their size and value in three years, the change of focus from the macro to the micro (as introduced by the Finance Act) has made little impact on our modus operandi. Managing SMEs is the core competence of our investment team and it is the direct engagement with the management and workforce of the different businesses we invest that remains our focus.
As venture capitalists our particular brief is to invest in “best in class”. British engineering businesses which have long term orders with blue chip clients in growth industries such as aerospace, security and defence. We only invest in businesses that have exclusive or difficult to obtain “moat” accreditations, ie. industry accreditations granting them the right to make products in strategically sensitive and technically advanced industries such as nuclear, aerospace or defence, thereby restricting the number of national and international competitors.
We then monitor over a hundred different aspects of a potential investment which vendors are then put to proof in an extensive due diligence process, which CIM funds itself. Historically we will only invest in 5% of all the businesses we consider for investment.
What happens next?
Having made an investment we will then introduce into each business a centralised financial reporting system, a uniform quality control system, a sophisticated monitoring system that enables us to understand the actual cost of each product and component made and monitor the individual efficiency of each machinist and engineer. To these measures can be added the improvement in the financing terms on pre-existing machinery or new equipment, the improved terms negotiated with suppliers where raw materials are bought not just for one business but on behalf of all of them. Add to that the standard re-negotiation of leases on existing premises or alternatively the signing of leases on new premises.
Notwithstanding the fact that many of our businesses are fully state of the art with robotic machinery operating 24 hours a day – and machines whose costs run into the hundreds of thousands of pounds – we regard our most valuable assets as the people who manage and operate them. They, and not the machines, are the ones who can grow the business and particular attention is paid to hiring or replacing them.
Our aim at the end of the three year period is to have a complimentary group of companies, centrally managed that can be sold as a single going concern at a premium to trade buyers or institutional investors.
Post Brexit – we remain very confident as the particular sector of the market we service – precision engineering – has seen a growth in orders as a result in the fall in the pound.
Let’s hope next summer is a lot cooler!
