Ian Warwick, Managing Partner at Deepbridge Capital, explains how an abundance of information is helping advisers make the right choices for their clients.
In a world of ‘big data’, consumer choice and unprecedented access to information, it should not be a surprise that investors are behaving with similar traits to retail consumers. Gone are the days of having what you are given and being grateful for it.
Whether the client of a bank, a consumer in a supermarket, a diner in a restaurant, a purchaser of a car, the user of social media or an investor; it is commonly expected that people have choice or if they don’t have choice, they have information – and lots of it.
Within the tax-efficient investment space, this is also increasingly true. If you go back even just a few years, the historic approach to tax-efficient investing (let’s use EIS as an example) was to hand over cash to a fund manager who would place your money in a ‘black box’. Then, when they were ready, the fund manager would invest your money in whatever they thought was appropriate (or whatever they could get their hands on) and the investor would a) be grateful for the tax reliefs, b) pay for the privilege of investing in the first instance and c) pay a success fee on any returns (or, in some places, losses) to the manager.
When laid out as above and in the modern context, it seems laughable that investors agreed to this state of affairs. However, that was largely the norm and such propositions were indeed seen as cutting edge at the time. However, you can understand why financial advisers might have been nervous about such propositions as there was a great deal of unknowns.
Knowledge is power
Fast forward to the present day; investors, and advisers, have never had more choice in terms of products and opportunities available. First of all, these days most managers should be able to eloquent their investment criteria and secondly, the good managers should be able to tell you exactly which companies an investor will be invested. Suitability of the investment should go beyond simply identifying whether an EIS is appropriate for tax purposes. Suitability should also evaluate the underlying assets and the appropriate experience the investment manager has in investing in those sectors.
As you wouldn’t use a UK property expert to invest in an emerging markets fund, equally an EIS manager with sector experience should be used for their respective sector knowledge and experience. If an investment manager has developed a new product simply because it complies with EIS eligibility criteria but is a sector in which they have never invested before then perhaps additional scrutiny and questions should be deployed?
The industry is now seeing a growth in sector targeted investment managers, whether that might be technology, life sciences, energy, pubs or media. Our team specialise in technology, life sciences and renewable energy. These areas have been targeted because we have team members who have considerable global experience in these sectors. Our team knows how to select opportunities in these sectors, how to commercialise businesses in these areas and how to achieve optimum exits for investors. Experience in these sectors is essential and only by understanding the background of the team and where clients’ monies would be invested can an adviser or investor really appreciate the suitability of the investment for their needs.
Self-selecting
Another avenue by which investors have ever increasing choice is via crowdfunding and such self-selection platforms. If a client has a tax liability and is seeking investment opportunities that qualify for EIS then the internet is awash with opportunities. These range from robustly assessed opportunities that have undergone rigorous due diligence to early stage businesses which, from an investors’ perspective, are no more than a speculative punt.
When involved with panel discussions and Q&A sessions, we are regularly asked for our thoughts on how advisers should interact with crowdfunding. Our response is simply that most clients an adviser has had over the years will have private holdings which they don’t receive advice on but which are disclosed to the adviser for completeness of records. Any crowdfunding holdings should be treated the same. The adviser should know about the client’s activity but any company selection should be left up to the investor.
Budget
I would also go as far as saying that the adviser may be prudent if they were to agree a ‘budget’ with the investor so that they know how much of their EIS eligibility is going to be used up annually outside of their management. It may also be appropriate for an adviser to signpost, not advise, a client to online platforms where there is sector experience or enhanced due diligence from the manager.
Another important differentiation is that between a ‘manager’ who has an ongoing interest in the investee company and a ‘broker’ who is purely transactional and therefore has no ongoing influence over the investee company. My colleagues and I work predominantly with financial advisers and are fully committed to supporting the advisory community.
However, we are seeing an increasing number of experienced investors who would like to be able to pick and choose companies which appeal to them. This is particularly true in the life sciences sector, where academics and medical practitioners perhaps like the idea of being able to select in to which treatments, devices or R&D they wish to invest.
To that end we believe it is important to be able to facilitate this self-selection. Self-selection of investment opportunities is now the norm for many investors and the ease with which they can invest is evident in the volume of crowdfunding platforms. I believe that the key differentiator for investing alongside a venture capital focused organization rather than simply taking a punt on a crowdfunding site is twofold: Due diligence Due diligence, particularly of very early stage companies, in the life sciences sector will often involve a theory or idea based on practical observations.
Academics
Understandably, many individuals in this sector are academics and may have little previous commercial experience. They may have never before written a business plan or outlined financial projections. Company valuations and the broader equity journey may be completely alien and creating documentation to attract finances may be a new concept. There are of course many extremely commercially proficient individuals but there are also those who are not, so it could be important that an appropriate organisation has the experience and knowledge to be able to understand and interact with the academic voice.
Without this due diligence, an investor could be biased towards a fantastic proposition from the more financially polished companies and be enticed to invest in propositions which are scientifically inferior but better marketed. Ongoing management A decent investment manager or venture capitalist will work with investee companies for the lifespan of their investment.
This could be hugely beneficial and provide a company with a better opportunity to succeed for a number of reasons, including; mentoring, contacts and dooropening, imparting of experience, commercial savvy, etc. By investing alongside a sector-experienced investment manager or venture capital, an investor could go some way to mitigating their investment risk.
Whether investing via an EIS portfolio or via an online selfselection platform, investors should seriously consider the reassurance that investing alongside a sector-experienced professional could bring.