32
“the absence of institutional or corporate buyers for those businesses with an enterprise value
of £5 million or less, means that, through the injection of new development capital and
management, profitable businesses can be created”
David Hitchcock, Cyrus Investment Management
Exit from both EIS and VCTs will be
variable and is likely to be by way of sale
of the underlying investee company(ies)
or their unlisted shares after the 3 or
5 year holding period has elapsed and
sometimes longer, depending on the
optimum time to sell and interest of
buyers.
The 2015 Finance Bill makes changes to
the EIS and VCT regimes by introducing
qualifying criteria which limit relief
on investments in companies that
are labelled ‘knowledge intensive’ to
within 10 years of their first commercial
sale, and 7 years for other qualifying
companies. The legislation
60
states that
this will not apply where the investment
represents more than 50% of turnover
averaged over the preceding five
years
61
. Lawyers Osborne Clarke assert
that, “The Government’s policy position
is that “investments are intended to
support the growth and development
of the company itself and not expansion
by the acquisition of existing companies
or trades”
62
.
RW Blears, specialist lawyers in the EIS,
VCT and Private Equity markets, quote
their correspondence with a member
of the Upper House, David Gauke MP,
Financial Secretary to the Treasury,
who wrote on 27 July 2015 that “The
new rules will make sure that EIS and
VCT money is used for the growth and
development of investee companies.
Companies will still be able to acquire
businesses using other funds, and EIS
and VCT investments can still be made
in those businesses, provided all the
relevant conditions are met.”
63
There are VCT funds which invest in
Precision Engineering companies, with
one example being the Foresight VCT
investing £3.5 million in Dundee-based
Precision Engineering firm Aerospace
Tooling Corporation Limited in 2012
65
.
Since that time, the company has
performed strongly with sales up
66.6% year on year, and an increase in
EBITDA of 114%, with growth forecast
to continue in 2015. However, this
is just one of its investments in the
manufacturing sector and it also
invests across 4 other sectors including
Business Services, Consumer and
Leisure.
59
For an EIS/VCT structure with specific
focus entirely on Precision Engineering,
ordinary investors have only one option;
the Cyrus Precision Engineering EIS
Fund 2 managed by Cyrus Investment
Management LLP, whose Managing
Partner, Peter Schwabach feels that,
“Whilst many VCT or EIS managers
invest in single small companies in
different sectors, they are unable to
build them into an integrated company,
which uses it’s amalgamated skills,
contacts, capital, synergies, embedded
supplier relationships, overall
experienced management structure
and associated cost savings, to actively
grow value, rather than just relying on a
rising market”. As a specialist investor
in UK Precision Engineering companies
Peter Schwabach feels that investors
in the fund are able to realise greater
value through this aggregation strategy
rather than delivering organic growth
within individual companies.
Cyrus IM derives much of its expertise
in the field from its connection to Cyrus
RW Group, of which Cyrus IM’s David
Hitchcock is a director and Cyrus IM’s
CIO, Ian Watkins is an executive. Both
David Hitchcock and Ian Watkins have
been involved for many years in the
acquisition and successful growth of
small engineering businesses and in
2013, the Cyrus RW Group was in the
top 20% of companies in the Precision
Engineering sector in terms of sales and
profit ranking
66
.
Non-Executive Cyrus IM director, David
Taylor, also brings twenty years of
experience of acquiring and aggregating
sub £1 million Precision Engineering
companies.
“Cyrus IM’s first Precision Engineering
EIS fund closed in April 2015 and has
already invested in three leading British
Precision Engineering Companies –
FGP Systems Ltd, a leading Aerospace
and defence engineer, Rhino Doors, a
speciality Security Door Designer and
manufacturer and City Engineering – a
specialist components supplier to the
Electronics, Oil and Gas Industries.”
94
The second fund aims to continue to
invest in British Precision Engineering
businesses, having identified a
significant pipeline of under-capitalised
businesses with highly skilled
workforces, valuable engineering
accreditations, industry leading designs,
state of the art machinery and long
standing clients. David Hitchcock’s view
is that, “the absence of institutional or
corporate buyers for those businesses
with an enterprise value of £5 million or
less, means that, through the injection
of new development capital and
management, profitable businesses can
be created (with gross margins of up
to 50%) and ultimately sold at a higher
enterprise value”
67
.
The low level of investors in smaller
companies is linked to the cost of
capital which is relatively high for such
small investments. However, this is
not so keenly felt by an EIS fund which
benefits from 3 to 4 years of capital
growth without the cost of having to
issue dividends which are generally not
paid to investors because it is inefficient
from a tax perspective to do so rather
than as an accrued capital gain on exit.
“The financial model of Cyrus
IM is to inject new capital,
products, management and
infrastructure into “ best in
class” individual businesses
and in so doing, make them
more competitive, resilient
and valuable as part of a
single aggregated entity. This
in turn transforms them into
valuable acquisition targets for
multi -national corporates and
private equity houses wishing
to take them to the next level in
scale.”
Peter Schwabach, Cyrus Investment
Management
