Budget changes mean advisers need to know their investment manager better than ever, says Andrew Aldridge, Head of Marketing at Deepbridge Capital
Being an adviser comes with a whole raft of responsibilities; too many to list here, but let’s agree that there is not a task undertaken that doesn’t put a significant amount of pressure on you, the professional, to get things right.
In the financial services world, we rightly talk a lot about ‘knowing your client’ with a whole series of processes and systems in place to help advisers’ understand their wants and needs, their motivations, their attitude to risk, and what they would like to achieve over all kinds of timescales. Clearly, having this information provides the adviser with the knowledge to make appropriate recommendations and to steer the client in the right direction.
Within the EIS and SEIS sector it is imperative that advisers marry up their client knowledge with ‘knowing their investment manager.’ In a sector where the managers vary in their approach, where the manager may have a direct influence on the performance of investee companies and in a sector which has undergone a considerable amount of change recently it is absolutely important to know your investment manager.
We are fortunate that due to our commitment to investing in innovative growth companies we have not had to alter how we operate at all following the EIS changes that were announced in last year’s Autumn Budget, but we appreciate that it hasn’t been so straightforward for many of our peers and making investment comparisons is not always plain sailing for advisers.
Know the investment criteria
However, in the EIS and SEIS sector I don’t believe it is possible to ‘overegg the pudding’ in terms of ensuring advisers have a deep understanding of an investment manager’s investment criteria; how and why they are investing in the companies they choose to invest in, being comfortable with how robust that criteria is and, rather importantly, appreciating the differences/similarities and sometimes ‘blurred lines’ that some managers employ with both their EIS and SEIS investments.
It is our approach that EIS and SEIS investments should be treated separately, and I’d suggest that managers who believe otherwise could be in danger of running into trouble. EIS and SEIS may well be viewed as two sides of the same coin – and the industry might well be too inclined to marry them up together for ease of understanding – but EIS and SEIS investments should not be treated the same, even if there are mechanisms for SEIS investee companies to make the transition to EIS investment. Of course EIS and SEIS investing should both be treated as high risk, but all parties need to understand what they are investing in, and the likelihood of potentially far greater risks when it comes to SEIS companies, which by definition are early (seed) stage– hence, the enhanced tax reliefs offered by government on SEIS.
Different growth stages
It is for these very reasons that we separate our EIS and SEIS products – we want advisers and clients to know exactly what they are investing in and at what stage they are investing, for example, our EIS investments are going to be much later-stage operations than SEIS. If we are looking at seed funding for a business this is likely to be very early in proceedings; it could just be a great idea, and the brains behind this idea are then going to utilising the funding to create a minimal viable product (MVP), or they are going to use the cash to explore the research and development required to get to this stage, or perhaps they are a little further down the road and need the funds to establish initial commercial sales.
With our EIS propositions, the investee must be further along their commercialisation path, and the likelihood is they will have completed at least some (if not all) of those stages outlined above. If a company does not have any of those stages completed, it means they’re unlikely to be an EIS investment for us. As mentioned above, companies can, and do, make the SEIS-to-EIS graduation, but there are different considerations to be made in terms of securing investment – for example, our SEIS investee companies have to meet key milestones before they can graduate up to EIS.
Our concentration as an investment manager is in two sectors – technology and life sciences – and in some circumstances firms may cross-fertilise, but there will be certain ‘core’ criteria that we are looking to be met for EIS regardless of the investment or the sector they’re in. For instance, a majority of our technology EIS companies will be receiving commercial revenues before we begin investing – this is to prove they are beyond the ‘good idea’ stage that we would associate with SEIS firms, and that they have evidenced there is a genuine commercial market for their product and/or service.
The specific criteria we expect to be met by companies will vary, depending on the proposition itself and the stage they are at, plus (as mentioned) it may differ depending on the sector, but advisers should be aware there are a number of overarching criteria, that we like to see in any business. Some of these are:
- A robust intellectual property strategy – this is essentially the ‘asset’ we are investing in and we will want to ensure it is protected as robustly as possible.
- Global scalability – in the US they say that the product/service on offer is ‘globalisable.’ We are looking at the potential within a company to deliver an offer that could be commercially adopted not just in this country but across multiple countries.
- Multiple vertical markets – products which have multiple uses or multiple target-sectors are appealing to us as they offer the potential for far greater scalability and potentially a greater number of exit opportunities for our investors.
- A clear exit strategy – under EIS rules, companies cannot have a predefined exit. However at the outset we can have a good idea about how a company might exit in due course, be that a trade sale or an IPO, and with this in mind we can gain a far better understanding about what the market for such an exit looks like and how it behaves. This is also likely to influence our valuation expectations at the outset.
- A great team – this might seem like it goes without saying but it can still be overlooked. Other than the intellectual property of the business, the other asset we are essentially backing is ‘the team.’ They have to be engaged, passionate and committed to the same goals as us. They also have to be exitfocused, rather than looking to create a lifestyle business. As we work hand-in-glove with investee companies, providing a range of hands-on support and resources, we need to ensure the team is one we want to work with. And of course that works both ways– if we don’t have a constructive relationship when handing out the investment cheques then it’s highly unlikely we are going to get on further down the line if there might need to be some home truths said.
A different approach
Ultimately, we believe that developing young growth companies requires a very different approach to mainstream investing. We are committed to providing pro-active support to investee companies and handson management. This ethos is something that our serial advisers buy in to and appreciate. By knowing our team and our investment criteria they are reassured that their clients’ EIS/SEIS investments are being managed in a manner conducive to growth companies.
Hopefully, that gives you a little insight into what an investment manager in the EIS/SEIS might be looking for when it comes to making its investments. If we can convey how we operate, and what is important to us, then this should provide a greater degree of reassurance to both you and your clients. Managers should also be helping bring to life the underlying investments for you by sharing their passion for their investees – if the manager is investing in line with the real spirit of EIS then it should be easy to be excited about the innovations receiving investment. That excitement, with an experienced team and sector experience, should mean there is a far greater chance of success for all.