Andrew Aldridge: So Why do EIS Managers do What We do?

  • On July 6, 2018
  • By GrowthInvest

At a time when the government has stated it requires EIS funds to be taking an appropriate level of risk, Andrew Aldridge says is important advisers and clients know why managers are involved in the sector.

It is very rare for any company specifically to highlight its products and services as ‘high-risk’. If anything, there tends to be a downplaying of the risk involved in order to draw in more advisers and clients – and yet, it is vitally important anyone investing in growth-focused businesses should be acutely aware this should always be considered high-risk.

Indeed, the fundamentals of the Enterprise Investment Scheme (EIS) and Seed EIS are that these are products that exist as government initiatives to encourage investors to back growing UK businesses, which by their very nature carry high risk.

It is also fair to say that, without such schemes, the level of investment cash flowing to those companies that are most in need of it would be dramatically lower in the UK. Still, there is no getting around the fact there are no ‘sure thing’ businesses in terms of EIS/SEIS investment – particularly in the modern world of EIS where prospective investee companies must meet the ‘risk to capital’ condition that now accompanies EIS advance assurance.

So, why do we do it? Why should advisers and their clients be looking at EIS propositions? In an environment where the government has quite pointedly stated it requires EIS funds to be taking an appropriate level of risk and has increased opportunities for ‘knowledge-intensive companies’, it is important advisers know why EIS managers are involved in the sector.

In the very recent past, of course, there were those who were most certainly not active in the EIS environment in order to support and grow companies in higher-risk areas. Far from it – much of the focus was on capital preservation and returning the client’s money at all costs with the tax reliefs being the only potential upside for investors.

Thankfully, government intervention and market evolution has taken us away from this approach and now we find that our passion and support for growing technology and life science businesses chimes perfectly with EIS/SEIS as a whole – the desire we share to support UK innovation lies at the heart of the EIS market.

As such, delivering success for the client’s investment is ultimately based on having the experience and knowledge to be able to select, support and grow investee companies through their commercialisation.

So why do we, as EIS managers, do what we do? Ultimately our focus is to grow and exit successful companies, but, along the route to this objective, there are a number of potential success signifiers or ‘highlights’ that we might expect to unearth during an investment, including:

* Finding and funding a piece of innovation that ‘wows’ the sector – whether that is a new medical device, revolutionary new tech, a drug breakthrough and so on.

* It could be when a company seals a key adoption, whether that is life sciences or medical technology being adopted by the NHS, or a device receiving regulatory approval for use in the US, or a major contract with a blue-chip client.

* It might be when a company is acknowledged with a major award or endorsement, such as being invited to take part in a trade mission or partnership with the likes of the DTI or World Bank.

* Perhaps it is when a company recruits talented individuals to deliver on its growth plan.

* It may be the point at which a company starts to scale globally, expanding into new territories and environments.

* Or it could be around the exit-planning of the business – that is, when the innovators and entrepreneurs start to see their dream being realised, perhaps initially through an expression of interest from a blue-chip or a competitor.

All of the above are signals we are likely to have got our investment ‘call’ right and they can be very special milestones – ones we are already fortunate to have had with a significant number of our investee companies.

Repeating The Outcome
As advisers seeking homes for clients’ investment cash, it is important to be aware of these because, while past performance is of course no guarantee of future success, there is a much greater chance of repeating the outcome if the manager has a strong track record of delivering in these key areas.

Part of the joy of our work is sharing these success stories – and indeed we believe this is vital to advisers who are looking to recommend our products to clients.

We are not suggesting there are not plenty of tough conversations to be had with companies that are not performing as expected, or are feeling the brunt of strong market forces beyond their control, but by being actively involved and able to provide support when needed, we can usually work with these companies to help deliver the successes and enjoy those moments of justification; as well as offering practical support during any tougher times.

Finally, there has to be – in our opinion, at least – a focus on growth opportunities, especially given the high-risk nature of EIS/SEIS investments. Even in the old days of contrived EIS propositions, and with the government offering such generous tax reliefs, we found it hard to understand why investors would not seek out growth-focused EIS investments.

Now, however, in a world where the government’s capital condition must be met and where the focus is on knowledge-intensive companies, this certainly reinforces our belief EIS/SEIS investments should be focused on growth, on job creation and on helping firms develop innovative products and services, with the aim of benefiting UK plc.

If we can get that right, then the successes should naturally follow – which is in the interests of the companies, the UK government and, of course, investors and their advisers.

Source: Professional Adviser

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By Andrew Aldridge, Deepbridge Capital.

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