EIS 2018 report (web)

52 53 is a slightly expanded investment horizon – because essentially, you join that investment journey at an earlier stage and it will take these businesses a little bit longer to develop and grow and ultimately progress towards exit. MB: We come at fundraising from a different angle to many other EIS managers. We don’t launch an EIS, raise the capital and then find the companies. We know what the companies are before we launch and seek to raise capital into these companies. For instance, in respect of a film production EIS company, we know what films are proposed to be in production, we know what counterparties are associated with those films, we know the producers, the directors, the distributors, the cast and the budgets. Through our sector experience and expertise, we can identify which of those independent production companies we then wish to support. It is then through the EIS scheme that we raise and deploy the capital. In effect, deal flow is almost the other way around for us. We have the deals; we are just looking for the capital. That is why, for example, for the last two years we capped our fundraising as too much capital could give rise to deployment challenges, which is not good for our investors. LC: We don’t foresee any problems with a shortage of deals. The real issue is selecting the best opportunities from the many that are presented. We have a large amount of deals in the early stages – so we have to deal with all the usual sifting and selecting issues that come at this point. You need to kiss a lot of frogs to find what you want. Finding deals less orientated to early-stage technology is challenging. This is reflected through the restricted supply of lower risk-EISs in the market. AA: We have deals approaching us from across the UK, as well as international deals where people are potentially rehousing to the UK within tech and life sciences. We are well-known within the VC world for tech and life sciences, and we have a strong pipeline of quality deals. From our perspective, it’s not really been an issue. Some of our competitors are saying there are capacity issues and deal flow issues, and some are saying that it may take up to 24 months to deploy funds, which from our perspective, we don’t think sits right. If a client is investing this year, or for tax needs this year, they should be investing in companies where the tax relief is available from this tax year. SB: Deal flow is not a problem in terms of finding great companies. What we’re tending to find is that investors are getting a little bit more savvy, and they’re understanding what EIS and SEIS is, but they’re not getting that across to their IFAs. We’re seeing quite a lot of investors doing individual company investments, which then makes it difficult for us to do business with them, because we tend to only invest between £100-150 thousand. That’s what works for us in terms of making sure that we’ve got a well-diversified portfolio for our investor base. If you have it too low, then you don’t get enough of a share of those businesses. Part of the challenge is investing in companies early enough. We work closely with a lot of incubators, accelerators and corporate finance people. We’ve got a lot of ability to go out and find deal flows, but the real challenge is IFAs not understanding what we’re trying to achieve. It’s going to potentially be an issue for some of those investors who are investing into single companies, as there is a high risk of failure in these businesses. It’s important for people to understand how useful it is for an investor to have a diversified portfolio. We have a minimum of 10 companies in our SEIS, that’s a good amount of diversification for those investors. There’s still an issue of getting people to understand the benefits of working with a fund. DB: The Autumn statement and the resulting Finance Act, which is currently going through the legislative process in the Houses Of Parliament, has disrupted the normal EIS timeline. The deal flow means people have got to come in quickly and they should not leave planning to the last half of March. There’s two problems: one, capacity will be filled so we might not have any money left. As soon as you don’t have much supply, the demand goes up even more; and anyway, in the EIS market it tends to be there’s more demand than supply. It’s great that we can still raise money on the companies that have Advance Assurance, and reliable information is that Royal Assent will be in the third week of March 2018, but it is probable some of the Blackfinch current companies in the stable of EIS Portfolios will not be able to raise post Royal Assent. KD: We’ve been spoiled for choice, but this is actually a potential risk for us. We’ve been a bit lucky in that there’s a lot more good products out there than money chasing it. So all these companies that were chasing solar panels, etc., if they start coming into chasing early stage technology, it could be problematic for us. The reason is it’ll be dumb money chasing returns, and that always results in an asset bubble. WHAT ARE THE UNDERLYING ASSETS YOU’RE CURRENTLY INVESTED IN, HOW HAVE THEY CHANGED, AND HOW ARE THEY GOING TO CHANGE? IB: We’re very much generalist. It’s all about the investment thesis behind each individual business, rather than any particular bias. I wouldn’t say that the underlying assets have changed. When you start with five hundred opportunities, we can be very careful about what would fit into our investment mandate and at what value and select those that we feel have the best chance of delivering the desired outcomes for our investors. Quite a lot of these businesses present themselves on pretty hefty valuations! It’s about making sure that we’re investing at the right value, because if you invest at too high a value, then four or five years is a very tight time scale in order to right side the investment. We see ourselves as second and third stage funders rather than start-up or early stage. We don’t do SEIS, for example. It’s about seeing businesses that have actually proven concept, that are already revenue-generating and where we can actually add value to the growth journey, rather than starting off as something brand new. So very much ‘’as you were’’ for us. LC: Our recent pub EIS remained unchanged due to Advance Assurances we received from HMRC prior to PCR. We didn’t act on these assurances as the deals were not quite ready to proceed prior to PCR. They still fit within the new scope following the PCR and as they had Advance Assurance, we are now fundraising. In terms of assets changing - we are considering new sectors. For example, we are currently looking into the hydroponics sector. Of course, this may not come to conclusion but we are always searching for new investment opportunities. We also manage a ventures EIS, which invests across a range of tech sectors. The team’s focus remains unchanged and they’ll continue to look at new opportunities, if they’re the right fit for the portfolio and investors. MB: We don’t view ourselves as a provider of EIS solutions. We view ourselves as sector specialists in real estate, infrastructure and the creative industries, in particular film, television, music, theatre and live events. As a business, by the end of the 2018 financial year, we are looking to have raised and deployed close to £1bn of capital into those sectors. KD: Our sweet spot is technology, but we like to see ourselves as a generalist technology firm. We invest in technology but we don’t invest in biotech or cleantech. We’re largely digital-software based and within that we’re very much enterprise B2B-based. So our sweet spot is a B2B play that’s scalable. However, we have a very interesting consumer company that’s dealing with how individuals are controlling data. It’s very disruptive to Facebook and Google and it’s very in line with GDPR. I know everyone has started to talk about GDPR and have they been for the last year, but these guys have been working on this for some time. SB: We’re sector agnostic but we tend to have a slight leaning towards something having a tech background. In terms of the new regulations coming in, it probably will steer a lot of people towards knowledge intensive businesses. In terms of what we’re doing, we’ve always looked at that genre anyway. AA: We’ve launched two new products in the last calendar year. In March “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.” — KEALAN DOYLE, SYMVAN CAPITAL “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.” — IAN BATTERSBY, SENECA “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.” — SARAH BARBER, JENSON FUNDING PARTNERS JOHN SCHAFFER DOMINIQUE BUTTERS ANDREW ALDRIDGE LAURENCE CALLCUT MATTHEW BUGDEN IAN BATTERSBY SARAH BARBER KEALAN DOYLE