GBI | EIS Round Table London | March 2020

M AGAZINE

EIS ROUND TABLE LONDON

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Round Table

PARTICIPANTS Richard Angus

Ketan Patel

Head of Business Development

Chartered Financial Planner

Hardman & Co E: ra@hardmanandco.com T: 0207 194 7635

Prerak Financial Services E: ketancfp@gmail.com T: 07771 997857

Chris Sandfield

Bruce Elliott-Smith

CEO

CEO

CoInvestor E: chris.sandfield@coinvestor.co.uk T: +44 (0) 203 095 8551

Venture2Grow

Clive Nicholas

John Glencross

Director

Chief Executive

Morgans Independent Financial Advisers E: c.nicholas@morgans.co.uk T: 0207 491 5069

Calculus Capital

Curran Samuel Anstock

Kalp Shah

Director – Financial Planning

Wealth Manager

Tilney Financial Planning E: Curran.anstock@tilney.co.uk T: 0203 818 6843

Vintage Wealth Management E: kshah@vintagewealth.co.uk T: 020 8371 3111

Timothy James Mckechnie

Andy Davidson

Investment Director

CEO

S4 Financial Limited

Nova E: andy@wearenova.co.uk T: 0151 558 0161

E: tim@s4financial.co.uk T: 01276 34932

E: bruce@venture2grow.co.uk M: 07710 700750

E: info@calculuscapital.com T: 0207 493 4940

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WHEN THE ADVISERS MET THE EIS FUND MANAGERS Back at the end of November, Calculus Capital kindly played host to GBI Magazine’s latest EIS Round Table session; the participants were an even even split of financial advisers / planners and fund managers / providers. The highly flexible agenda included the Patient Capital Review’s effect on EIS, investee company selection, levels of investment success and failure and how to make the Scheme work harder.

The intention was for both sides to get a clearer picture of the issues and concerns that they each face.

J

ohn Glencross, CEO and co-founder of Calculus Capital, kicked off with a sobering statistic: “The UK is number 3 in the world when it comes to starting companies – but we’re 13th in terms of being able to scale them.”

He noted that in the 25 years of EIS, it had proved to be the most important source of funding for UK growth companies. Two years ago he had taken part in the Patient Capital Review and the result had been “a mixed bag – which is normal. EIS was supported, but certain abuses and misuses were addressed.

VCTs were supported too – both were regarded as playing a significant role.

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“What it didn’t crack is scale-up. We’re still struggling when a UK company needs £30-40m to grow, except in certain tech areas. A lot of our best companies end up getting bought, usually by Americans. That’s fine for investors, but what UK PLC needs to sort out is scale-up. Do we persuade the big pension funds to put in more? Woodford hasn’t helped there. Ask a fidelity with a small company fund, they won’t put in less than £250m.

“The Patient Capital Review closed a few loopholes around film project finance, but it didn’t do much for companies which want to continue growing but aren’t in the corporate tech bubble. Such funds are

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available in the US, but we’re pushed to find them over here.”

Chairman for the session was Richard Angus, Head of Business Development at Hardman & Co; he invited the rest of the participants to give a quick snapshot of their specialist areas and what they hoped to learn from the session.

Chris Sandfield, CEO of Co Investor, the fintech platform explained: “We started in the world of EIS, that’s the DNA of the business and we’re now looking at working with fund managers with VCTs. The goal is to help facilitate the marketplace to the advisors and financial planning community and fund managers and digitise the investment process.

“It’s an inefficient process to review and access research material, review the funds, invest, and the big bugbear is on the reporting of those funds. We’ve built the tech for four years to digitise the investment process. We’re looking at strategic partnerships for a complete digital universe and see how we serve the investors. The one thing we’ve done is we’ve made it free for the community. We try to work with the funds and provide the service free of charge to investors.

“There is still plenty to do, not least increasing a full straight-through process and transaction capability.

We’ll soon be launching a custodian suite, so we have a safe place to operate and handle complaints, then everything else is offline. The next evolution is the end-to-end process. Every advisor and investment manager we speak to says they’ll do it if we can make it easier. How can we create that marketplace in a scalable manner?

“We can be more transparent. We can have better reporting to create a level of intelligence and trust. We believe we have the tech to serve the community, we just need to embrace the digitalization.”

Curran Anstock, Director at Tilney Financial Planning, said this was his first Round Table, “so I look forward to hearing everyone’s thoughts. I’ve been working with clients with the EIS for 4-5 years, and there is still negativity when you speak to clients around taxefficiency.

“It’s therefore about demystifying that and learning more about the actual companies and benefits of

the tax advantages and how they can drive these companies.

So understanding that better and showing we’re investing in real things rather than just a product with a few tax benefits. It’s about if you would invest without the benefits.”

Ketan Patel, Chartered Financial Planner at Prerak Financial Services, took over his father’s business in 2007. “I’ve got about 125 wealth clients and about 700 mortgage and protection clients. They’re not interested in buy-to-let any more, so I’m new to EIS and VCT, and that’s the next best place for them to invest. The majority of my clients have parents with 4-5 properties they’re going to inherit, so we’re looking for alternative investments and I’m hoping today will help clear things up.”

Tim McKechnie is Investment Director at S4 Financial.

“We now look after about 160 reasonably high net worth clients, most have their retirement planning sorted and are looking for something more interesting.

EIS and VCT are options for many of those, particularly with the pension restrictions. A number of clients have set up as angel investors and we help them with EIS compliance and do all the HMRC. “We’ve done some EIS investment via funds; one of the questions that keeps coming up with a number of clients is many funds are set up as blind and they don’t know what they’ll be investing into. We’ve seen things where we’ve seen EIS companies, who’ve historically invested into a different area announcing they’ll be investing in regional manufacturing, so how does this translate across?

The key question is how do people select investments and how can we give the clients confidence that the investment manager has the expertise in a given area? Take the film and media space - a lot of clients will have read that HMRC have challenged the film partnerships so there is a negative perception of the sector, and a lot of clients and investors won’t invest into that area because of the history.”

Kalp Shah is an IFA with Vintage Wealth: “We’ve been going for 30 years. We primarily advise clients, mostly businesses; a lot of referrals come from joint ventures with accountancy firms in London. As a firm, we’re a cautious investor, so the majority of clients want to protect their cash. I’ve been advising on EIS for about

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eight years, I like them, but the appetite seems to have gone down. My role is to work with our compliance department and educate them that that tax efficient planning should be part and parcel of our advisory role, and in doing so encourage other advisers to use them more.”

Bruce Elliott-Smith is CEO of Venture2Grow: “I raise money, consult and provide deal flow for 8 EIS funds and other investment funds too. I’m also an early stage investor in the GrowthInvest Platform. I’m not normally a participant at these things, but GBI Magazine invited me.”

The CEO of We Are Nova, Andy Davidson, has built an operating model which allows the company to cofound businesses with passionate co-founders. “We’ve done 80 businesses now and we have an 80% yearon-year growth record in our portfolio. Over a 10-year period, we’ve co-invested a lot, we have some luminary investors, we’ve also co-invested with EIS funds, and about a year ago we launched our own EIS fund.

“The thinking in our business is quite disruptive and tech-backed and looks to use technology to improve operations in the sector. We’ve looked at that with EIS funds. We’re building a platform around our fund to allow us to make it easy for investors to have a broad portfolio.

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“We want to get to a point where an investor can sign up to invest £500 a month, have their money deployed into 50 different companies, the certificates to be generated automatically, and for the forms to be filled out and tax reclaimed. We’re trying to drive out the paper trail and make it easy to take advantage of the tax breaks out there and investing in a class of assets that can deliver returns.”

Clive Nicholas is a Director of Morgans Independent Financial Advisers and he added “we’ve been doing EIS for 10-15 years, with VCTs as well. They all fit in with retirement and pension planning, and are all part of what should be considered for high net worth individuals and we get involved with the products.

“What I’m looking to find out is how others are sourcing the market as it’s hard to find what’s out there, who’s good in what sector, what they’ve done in the past, it can be difficult. It’s not like life insurance, it’s hard to select who’s good in what sector. You have to look at promoters, then the underlying investments they go for so it can all be a bit daunting for small and medium sized IFAs.” So, an interesting opening round. Rounds 2 & 3 will be reported later in this issue... GBI

Round Table

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL: IT IS THE COURAGE TO CONTINUE THAT COUNTS.” WINSTON CHURCHILL

At a recent GBI Magazine EIS Round Table, kindly hosted

by Calculus Capital, the spotlight fell on the success/failure rate among early stage companies and how it is perceived by fund managers and investors alike.

C

hairman for the day Richard Angus of Hardman & Co reported a recent conversation with an investor who said that of “...the next 10 investments he would make, 3 would survive (with 1-2 being successful) and 7 would fail. “And that’s a good risk reward profile.

But do you as advisers think you can take the investment proposition to the next stage with your client with that information?

John Glencross of Calculus agreed: “Anyone who says they’ve never had a failure in business is not being totally straightforward as this is about growth investment. As growth investors, we know it works, we know there’s plenty of intellectual capital in this country, and the communication of that risk and reward to the outside world can be tricky.

I went last night to my old university where they brought together people from the fund management industry and students, and someone said if they get it right 60% of the time, they’re ahead of the market, which is true.

“The important thing is the investor. If you were as rich as Steve Jobs, I’d say if you like that company, invest in it, but for people for whom this isn’t their day job, you have to have a portfolio to spread the risk.

After Andy Davidson of We Are Nova reminded the participants that 90% of early stage companies fail to make it past year 3, John emphasised “I think you have to tell clients there will be failures and say that’s okay because that’s part of growth investing, but the loss relief on failures is very attractive.

“The bottom line is if you want a big income fund, fine, you don’t expect companies to fail, but they seem to quite regularly. In growth investing, though, you will get failures. You have to tell the client it’s okay, the important thing is to have a portfolio and have a growth manager with a track record.

Andy Davidson suggested it all comes back to the data: “You need to go back to your client and say what the market has done. What appears to be happening is that all this growth in the market is coming from a small number of companies so you need a really big portfolio. Fund managers have different specialities, but I’d say if you’re going to invest £100,000, I’d put £10,000 with 10 different managers. Different managers have different specialities. It is important to talk about failure in the context of the wider market growth, and the way to mitigate risk is to put your money with as many as possible.”

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Andy Davidson reckoned that in early stage, you need a portfolio of 50-80 companies to offset failures and as you can’t influence the outcomes you need them to fail quicker and thereby consume less capital.

Over the previous year, Calculus explained that they had explored investing in around 600 companies, while We Are Nova had looked at 1,600 founders and completed 27 deals.

Davidson noted that he and Calculus are at opposite ends of the lifecycle.

“For us, we’re big practitioners of the lean movement, we fund a number of things we do, we don’t try and fund high counting businesses, we try and build in a variable cost base and we try and achieve the next proof point.

We might work with a medical professional, we’ll buy at £400,000 and take 25% of the equity, we will provide them with a team to get to a minimum viable product to get tested in a hospital. You might fund them for six months with an outcome they need to achieve. If you don’t fund them, the business doesn’t fail, but you don’t put in any more money until they hit their next traction point. If they need to get hospitals to trial their product, it can take three days, three months or three years, it doesn’t matter to us.

“We don’t fail things, we just ‘not yet’ them. If they want to take the next steps and need capital, we won’t fund that until something happens and then we might fund it for another six months. That’s the strategy we use to make sure we spend as little investor capital as possible.

“We do that with 45 companies at once and we want to expose investors to all those. We buy at £400,000, so a successful EIS funding round for us would value the business at maybe £5m, as you get more than 10 times the uplift in value. It’s important that we have a broad spread of risk.”

John Glencross told how one of Calculus’ portfolio companies, Essentia Analytics, had been founded by an ex-fund manager who had identified that investment manager bias influences outcomes.

“The investment decision is very scientifically driven in active fund managers, it’s very controlled. However,

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sale decisions can be more emotional, especially if the company is not performing as expected. One of the hardest parts about what we do is to say we will not finance a business anymore as we don’t believe it will achieve its objectives. We don’t just pull the plug on a business when it’s not working, you can’t do that as an investor, we work with the management teams to help enact positive change, and if they can’t look to further capital from us we may help them raise other sources of funding, or if appropriate, we’ll look to sell in the market. Making investment is the easy bit, the tough bits are the decisions afterwards. This is real, these are real companies and we have to be prepared to take tough decisions. By and large, we get it right.”“The three important things in property are location, location, location. What’s important in growth investing? People, people, people, because it doesn’t matter if you have the best business plan, if you don’t have someone capable, it’s not going anywhere. We spend a lot of time working with pre-investment to ascertain how they will function, and we do our own due diligence. Our people assess the strength of a management team including the senior people.

“What do we look for? Experienced management that has a reasonable track record that will give us a good indication and a service that is ready for market. We want a discernible market lead and a reasonably competitive situation. People, people, people; then ‘ is the product ready for market and is there a need?’ You do an awful lot of due diligence in making an investment, but you have to be ready to pull the plug. If you have 35%, you control the situation, or you say they’re not having any more money. There’s the famous adage that the best way to lose money is to double up.”

The best thing about having a portfolio of EIS investments is that when an investment does fail, not only do you have the downside protection of loss relief, but you have other potentially successful investments to fall back on and provide you with a strong return.

The discussion then moved on to cover communication, EIS admin and exit strategies, which are covered in our next article. GBI

Round Table

PROVIDERS AND ADVISERS – IS THE COMMUNICATION GETTING BETTER?

At a Round Table session in November hosted by Calculus Capital, one of the main topics was the varying criteria that make an investee company attractive to capital providers and to IFAs and their clients.

Chairman for the day Richard Angus, of Hardman & Co, wanted to know if the two sides were beginning to understand each other better.

T

“

hey are,” said Bruce Elliot-Smith, CEO of Venture2Grow. “I’ve gone from when there was no provider information, no IFA involvement, and I was doing demos for about a year, so I was getting a lot of feedback.

Then the GrowthInvest platform came along. I raised money for hundreds of companies. When I met new IFAs, I knew they just wanted to know how to do it.

“Let’s face it, IFAs want clients, so if they meet the CEOs of the companies, it changes as they develop a relationship with that provider. That became the norm for me, and more recently I have another trend which is in philanthropic investing. If you have that element to your fund, it makes it easier for me to go that way round, so I’m essentially in the adviser’s shoes working backwards.”

“The first thing that is asked is what is different about the provider? It could be track record but the big thing that made a difference was taking the investment, so I found when you introduced the company, it would spark the interest to look at that provider.

Andy Davidson, CEO of We Are Nova, agreed. “It’s a dichotomy, you should look at data, portfolio spread and how to maximise returns, but that can be perceived as dull. If you can get your client in front of someone who talks well, that really works. People

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do get excited so you need to say it’s great, but it might not work, so spreading the risk out allows you to match up the interest with the financial element of needing to build a portfolio.”

IFA Clive Nicholas, Director of Morgans, noted that “As IFAs, we have to look at who’s managing these and investigate whether they’re managing them properly.

We have to look at day to day money; if we give you money, how quickly it will be deployed? We need to know about these things and finding out it’s fair to say can be very difficult. The key question we want answer is what’s lined up and when are you likely to put that money in?”

Glencross of Calculus Capital agreed and added “We’re aiming for 15 months. I think we’ll get closer to a year as we go through the first part of next year. If I talk to investors now, I say 15 months to invest that money.

Each investment gets an EIS3 but the timescale to get an EIS3 varies, if we’re the only investor it can all be given to the revenue within a week, the revenue will probably come back in six weeks with the forms.

“The challenge is, if we’re co-investing with someone and getting their investment, I won’t invest alongside a so-called private client investor. If a private client investor comes into an investment, and sometimes they do, it can be very difficult to get the tax details for all the people, so we tend to invest with a knowledgeable peer group and do lots ourselves,.

That way it can be a quick process and investors will start to get EIS3s in a few months, but my aim is to bring that 15 months down to 12.”

Curran Anstock, Director at Tilney Financial Planning commented: “Engagement is a really important aspect of it. People want to know where their money is being invested and what it’s doing. We’ve had a change towards a more philanthropic mindset of wanting to help, so knowing you’re close to these companies and working with them gives us a lot more confidence

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speaking to clients to say we know what management is being provided and that’s a great comfort to the client to know there are processes in place.“ Asked about understanding the investment opportunity and communicating it to his clients, Kalp Shah, IFA at Vintage Wealth, was confident. “I’m comfortable with the investment and the engagement part is easy. My clients trust me, if I say it’s good for them, that’s it, but I’m not confident investing their money in something they don’t understand. Further down the line, they could complain.

“I like Andy Davidson’s idea a lot, where they can put the money in monthly and then it’s spread, that reduces the risk a lot. I would explain to my clients that you don’t just chuck the money at a company and it gets invested. There is this statistic that 90% of companies don’t make it past year three...It’s the support the company is getting, it’s not just giving them the money, you’re asking them for accountability and you’re supporting them, so they have a much better chance of being successful. They’ve learnt how to invest money better and provide that support.

This is what I would do. I’ve started to go into VPR investments, but with 4-5 different providers and I would do the same with EIS. Andy Davidson raised a common gripe: “We also need to remove 18-page application forms.”

Chris Sandfield, CEO of Co Investor, offered a solution – “I have an efficient service where you only have to fill out the form once and can apply it to all the funds.”

This would suit Tim McKechnie, Investment Director of S4 Financial: “You can end up with a position where you’re waiting for 15-20 different EIS3s. If that were automated, which is where you come in, if we could do that with one application and one set of reporting to clients, that would be easier. A challenge we have is with regard to some of the EIS funds, you suddenly

Round Table

have a number of providers or fund managers who have completely changed their game and are investing in an area that doesn’t fit. As far as that’s concerned, it does make it more difficult. These companies who were the stalwarts are now going into areas that we need to be confident they understand.”

From an investor perspective, going back to this, the clients want to know what they’re going to be investing into, that’s why investing into an individual with someone they know is easier because they like him and what he’s doing.

The whole deployment period is also difficult as I’d like to be able to invest all the money we get in 1215 months. We’ve got a hefty portfolio, so we have 45 companies and we know they’ll all raise money in the next 12 months, so we currently deploy funds quarterly and are looking to monthly.

Tim McKechnie added “this comes down to automation and single application. We’ve seen this with simple cash accounts, now there are aggregators where they spread the money. Unless you have something like that, investor apathy is such that if they have to fill out 10 forms, they can’t be bothered.

If they can’t be bothered to do it for their own bank accounts, it’s hard to sit down and run through 5-10 different applications for funds. It’s easier for them to invest in one company that they know.

The Chair asked the fund providers how much was dictated by the end of the tax year? The consensus in the room was that it was too much.

In response Clive Nicholas observed that it shouldn’t be difficult because of the carry back provision and it shouldn’t be an issue. He said “We’ve talked about selecting companies, but not exit strategies, which is equally important. If your money is locked up for longer than expected, are there exit strategies in place?”

One of the key takeaways from the day was that the industry is changing and technology solutions will allow more people to invest.

“We’ve got technology now that can make it efficient,” offered Chris Sandfield. “We’re speaking with a number of fund managers about standardising an application pack, a lot of them are keen. More importantly, what can technology do next? I’m encouraged. My background has been asset allocation, and I think we all recognise that what the industry needs to do next is to utilise technology to bring the funds together for an easier way for investors and advisors to have an automated diversification process.

“That de-risks investments and creates some liquidity for the smaller fund managers who don’t have the marketing budgets but have specialised teams. If tech can facilitate diversification, I’m encouraged by the openness to explore that and I’d like to pick up on that in another round table.”

Clive Nicholas liked this; “I think the process we have in house is on the right track, selecting the EIS providers, but I’m encouraged there will be technology to help us in getting more diverse portfolios. 18 pages on one form is a nightmare and having EIS3 forms coming out of our ears, the clients don’t know where they are, so this is very encouraging.”

As the session drew to a close, Ketan Patel, financial planner at Prerak Financial Services, observed: “We’re a cautious firm. What I got out of today as I’m sure we all did is that it’s useful to really understand the providers. We spend a lot of time doing due diligence on which products to recommend, and sometimes we have to handhold clients all the way through and it’s an expensive process. This is a value-added service we GBI provide, so I hope we’ll get the reward over time.”

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