Advisers are likely to know which specialist they would turn to if they were looking for an emerging market or property fund so why, asks Andrew Aldridge, do many people still entrust EIS investing to generalist managers?

We have all witnessed the evolution of the financial services sector over recent years. As the sector has become increasingly complicated and it has become impractical for advisers to be experts in all aspects of the financial services world, one of the key changes we have observed has been the move towards specialist providers. Whether that is specialist advisers or dedicated investment managers, this move has been extensive.

As an adviser, you probably know which investment managers you would look to if considering an emerging markets fund and, similarly, who you would look to for a property fund. It is therefore perhaps surprising the Enterprise Investment Scheme (EIS) sector continues to be represented by generalist managers. We are, however, starting to see an increased appetite from advisers and investors to use sector-focused tax-efficient managers and, hopefully, we will see this trend continue.

It is my assertion investment managers should be able to show genuine expertise and experience in their chosen sectors. I often wonder how it looks to the outside world to see certain EIS managers changing sector focus at the drop of the hat, or providing products in areas as diverse as film to waste management, storage to artificial intelligence.

This is not an approach we would be comfortable with. We believe it is ultimately better for our investors for us to focus solely on the sectors we know and understand, such as technology and life sciences. This is likely to be of even greater importance when you consider the changes announced in last year’s Budget, which focused EIS investing towards ‘knowledge intensive’ businesses.

In this market, sector experience and being specialist operators will be required more than ever – and one would hope advisers place a premium on these when determining where to invest client’s money. Take, for instance, the technology sector, which – perhaps more than any other – moves at an incredible pace and where investment opportunities arise at a staggering rate.

Without the necessary experience how can an investment manager sort the proverbial wheat from the chaff? How do you ascertain which investments are ‘good’ and which may burn brightly and quickly, before being extinguished in the same time span? The sector is littered with ‘good ideas’ that soon became obsolete as technology moved on – it can be a brutal sector and, as mentioned, it is not as if the market is short of start-ups all seeking investment.

So, how best to ensure we as investment managers choose the right companies to invest in? Well,, if we take this back to the start of a business, at seed-stage a huge part of our process is understanding the team involved, and the problem they are solving – in other words, the commercial opportunity – rather than any major focus on whether the technology involved merely seems ‘a good idea’. Many tech firms appear to be solving problems that do not actually exist and that is clearly not an investment worth pursuing.

On top of this, we also want to know what progress has been made to date, how the business has proven its viability and how it can evidence it has commercial relevance, with a life and demand perhaps beyond this country but across many territories.

In this regard, it is also important we have sector contacts in these overseas markets – we have helped investee companies source commercial opportunities in the US, the Middle and Far East. Again, having this ability, broadens the commercial prospects for a business and makes the chances of delivering a successful business for investors that much greater.

Andrew Aldridge is partner, head of marketing at Deepbridge Capital.

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Source: Professional Adviser



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