EIS 2018 report (web)

50 51 We’ve been in the EIS world for about four and a half years. We’re now starting to really get our message across to advisers who seem to appreciate what we are, what we’re about and our approach to investing in EIS companies. Obviously the market has changed over the last 12 months, with the PCR, and the subsequent budget. As far as we’re concerned, that is only positive for us as a business and where we sit in the marketplace. We were very confident that investing in technology and life sciences was exactly where the government wants the money to be going. SB: There’s always challenges, but we’re very much business as usual. We’ve always wanted to get companies, to sow, nurture and sell them - it’s always been about capital at risk in growth companies. In terms of reacting to changes in the market, they’ve not affected our message at all, because we’ve always worked within the guidelines we’ve been given. The Patient Capital Review has very much strengthened what we’re trying to achieve as a fund. KD: Over the last twelve months, it’s been great for our portfolio. Our companies are starting to mature. So we’ve been going since the end of 2013 - a little over four years. Our first investment was in the spring of 2014. But it’s very emblematic of us as a California-style VC. Especially at an SEIS level, we have a lifecycle approach where we like to get involved earlier - that’s how we’re a bit like a California VC. Because really what you’re looking for in venture capital is the outliers. It’s the outliers that’ll make all your return. And that doesn’t mean your others won’t make you a return, but the outliers are what makes this an asset class that people have to invest in if they want to retire at a decent age or on a decent income. WHAT CHALLENGES HAVE YOU FACED IN LAST YEAR’S FUNDRAISING SEASON, AND HOW HAVE YOU RESPONDED TO THEM? LC: A key challenge has been dealing with the market demand for EIS funds that do not fall at the very top end of the risk profile. There are many high-octane technology funds out there but the real demand seems to be for something a little less exciting. Which is logical when you think about it. A number of investors are emerging from, for example, former renewables funds. Of course, these were risky, but to a lesser degree. The investors coming out of those funds see that they have to jump quite a number of steps up the risk ladder to receive the same tax benefits – and this doesn’t necessarily appeal to them. What some people are really after is a fund that invests in the exciting companies while mitigating risk to some degree. That can be hard to deliver. KD: The challenge, which is impacted by the budget even more so, is name recognition - people feeling comfortable with you. People don’t just hear about you and then go and invest in you, they have to see you around. So in terms of the challenges, they’re now becoming less and less of a challenge for us. The sea change cannot be overestimated in the EIS market, and this is why the Patient Capital Review was so important for us. You basically had a cartel operating a system where you were selling people equity risk but dressed up like fixed income in the form of asset backed capital guaranteed, which the Treasury has now eliminated. I was surprised when we first came to the market because I think, from a public policy point of view, the only way you can justify giving tax breaks is if you’re doing something positive for the economy - as opposed to subsidising events that are clearly uneconomic unless they get a subsidy, i.e, you would never invest in them in a million years if there wasn’t a rich subsidy. IB: We are pretty clear about where our capacity lies - £20 to 25 million a year across about 20 deals in EIS terms. Our average ticket size is somewhere around a million to a million and a quarter. We always have about ten businesses in various stages of due diligence throughout the year. So our deal flow conveyor belt is particularly strong. It’s not a case of us rushing out and saying all of a sudden we can raise 60 million because deployment then becomes a major issue. We set our Open Offer capacity at sensible levels and that enables us to deploy it wisely, at the right value, and also in a timely fashion in terms of investor requirements. DB: Our biggest challenge was making sure that we could fulfill all the advisers’ requests for capacity. That was the big problem – we were going to run out, and we did. But it was managing those expectations and making sure people knew they had to get their applications in and in a timely manner, and they’re going to have to do that again this year. AA: The biggest challenge we’ve faced is almost out of our control in some degree, in that there’s been uncertainty in the marketplace. A number of our peers in the market have had to seriously consider the structure of their business, and that uncertainty from provider level down to advisers has been noticed. Thankfully, we sit comfortably in this situation where we’ve not had to change what we do. We are the industry’s tech and life sciences experts, and it is interesting to see that we’re now starting to see competitors who, for maybe the last few years, have been talking about asset-backed investing, are now trying to rebrand themselves as tech experts. MB: One of the challenges we face is making sure our adviser partners and their clients fully understand the lifecycle of an EIS qualifying investment. This varies across managers and services and it is important clients have full transparency of the expected investment lifecycle. We run regular workshops and one-to-one meetings so that this can be clearly explained prior to making an investment. SB: We used to be predominately a SEIS fund manager, but more recently we’ve tried to grow our companies further. The idea has always been to take our companies right from the start through to exit - a lot of our SEIS companies are now coming to the point where they need follow-on funding. So the EIS part of the fund is becoming more and more important. A lot of the challenges we face have been around a lack of understanding in the adviser market as to what SEIS is. It’s about trying to get that message across and to actually explain to them what proper growth means in the market. The adviser market now has to look more closely at the EIS market that is redeveloping itself from asset-backed to pure growth. There have been a number of investment houses that have been very good at asset-backed investments, and are now re-engineering their investment capabilities to continue to provide EIS, but in the growth space. Also, from an investor perspective, would you prefer to invest in an EIS that has found five or 10 new businesses to invest in, or would you prefer to invest in an EIS where managers have already been working with the companies that they’re helping to grow and mature, which is what is in line with the new Patient Capital Review and budget comments. WHAT CHALLENGES DO YOU SEE WITH DEAL FLOWS THIS TAX YEAR? IB: We spend our time working with SMEs and are a northern-based business with deep roots in this part of the world. That keeps our deal flow pretty buoyant. We see well over 500 opportunities to invest each year, and we probably end up investing in about 20 to 25 each year for EIS purposes. Our region is very active from a deal flow point of view and we are seeing more and more good quality business. It’s a little bit of a sweet spot for us, because a lot of the private equity firms are dealing at cheque sizes of five million plus. We sit between £1m-£3m, and that market isn’t well served in the regions generally speaking. Seneca’s market position is well-recognised in this way up and down the Northern Powerhouse cities. The new rules will subtly change the marketplace. The general direction of travel seems to be that they want to see investment in earlier stage, younger businesses. That might well mean that the cheque sizes for investments reduce because a lot of these businesses are much less mature, and therefore aren’t ready for, or justifying of cheque sizes at a higher level at this point in their life cycle. What that might lead to across the market “A key challenge has been dealing with the market demand for EIS funds that do not fall at the very top end of the risk profile. There are many high-octane technology funds out there but the real demand seems to be for something a little less exciting.” — LAURENCE CALLCUT, DOWNING “One of the challenges we face is making sure our adviser partners and their clients fully understand the lifecycle of an EIS qualifying investment. This varies across managers and services and it is important clients have full transparency of the expected investment lifecycle. ” — MATTHEW BUGDEN, INGENIOUS “Some of our R&D companies in the life sciences world could never earn a single penny of commercial revenue in their life. If you don’t know that market, how do you do your initial valuation, how do you support that business and ultimately how do you know how to exit that business? ” — ANDREW ALDRIDGE, DEEPBRIDGE JOHN SCHAFFER DOMINIQUE BUTTERS ANDREW ALDRIDGE LAURENCE CALLCUT MATTHEW BUGDEN IAN BATTERSBY SARAH BARBER KEALAN DOYLE