CREATING A POSITIVE CIRCLE

From understanding the portfolio approach to the investment philosophy driven by the fourth industrial revolution, Sanjeev Gordhan, Director at Newable Ventures, talks to Peter Wilson about why he is passionate about EIS

PHILOSOPHY-LED INVESTMENT

Newable Ventures offers two ways of investing through EIS; firstly, the Newable Scale-Up Fund 3 and secondly, on a deal-by-deal basis. All the investments on offer, explains Sanjeev Gordhan, are connected by a strong investment philosophy, namely following a strategy in line with the expectations of the fourth industrial revolution. This term was popularised at the World Economic Forum, and stipulates in the near future there will be a blurring of the lines between the biological, physical, and digital worlds. Sanjeev said it is this philosophy that drives the sectors which Newable invests in. The philosophy serves a purpose too. Sanjeev wants a better labour market, more equality and more sustainability. EIS can allow investors to offset the risk that is involved in early stage business investing, while getting exposure to the potential for achieving amazing returns. Newable are constantly looking at exit strategies and just last year they saw an exit return 5.6 times their capital investment.

However Sanjeev wants to “get past hype” of tech, and approach EIS with a deeper investment philosophy. Along with potential for high growth and reducing tax liability, EIS also allows investors to support truly innovative businesses that will shape the society of the future.

Along with potential for high growth and reducing tax liability, EIS also allows investors to support truly innovative businesses that will shape the society of the future

HOW EIS HAS AFFECTED THE UK’S START-UP SCENE

Since EIS was first launched in 1994, more than £22 billion has been directly invested into UK businesses through the scheme (as of May 2020). Asked how he thought EIS has influenced the UK’s burgeoning start-up scene, Sanjeev said, “In the UK we have a lot of delegates come from all over the world to try and mimic what we’ve done with EIS and VCT schemes.”

Sanjeev explained that EIS has helped to incentivise investors to get into the early stage investment market, while helping to acknowledge and manage the risks - “put simply, that’s what EIS does, it helps to manage risk.” Sanjeev suggested that EIS has had a large impact on the UK start-up scene, and explained it as a positive circle. Investors were attracted because it’s a good policy, and the investors attracted good businesses, and then these good businesses attracted more good investors. Sanjeev, continued, “It grows out of that, we now have a really strong ecosystem throughout the UK.” According to the Federation of Small Businesses (FSB), SMEs account for three fifths of the employment and around half of turnover in the UK private sector. 72% of this growth happened over the last 20 years. Sanjeev acknowledged that a lot of EIS investment was London-centric. According to the Office for National Statistics (ONS), 65% of all EIS investment in 2018-19 was into companies registered in the South East and London. However, this is something that Newable is helping to counteract with their regional work spaces, something you can read more about here https://ifamagazine.com/ article/newable-helps-to-demystify-eis-for-advisers/

CHANGES TO THE SCHEME

Our conversation started with Sanjeev reflecting back to when he was a Wealth Manager. Before the Finance Act of 2018, asset-backed EIS were still widely used by advisers. These investments were considered less risky as the companies looking for capital had assets that could offset cost if the venture went wrong. Sanjeev commented, “I struggled with that… it wasn’t about high growth opportunities, and that’s what EIS is meant to be.” Sanjeev continued, “If you’re looking for safer investments, EIS is not what you should be doing.” Sanjeev added “the true spirit of EIS is investing in real innovation and technology.” In 2016-17 the EIS Association (EISA) recorded around half of EIS investment went into asset-backed schemes. Following legislation in 2018, these projects ceased to work on this model. Sanjeev thinks that advisers are still adapting to this situation and that many advisers see VCTs as the safer option, but are missing an opportunity for high growth.

THE IMPORTANCE OF PORTFOLIO DIVERSITY

So how should advisers incorporate EIS into their client’s portfolio? Considering Sanjeev’s experience as a wealth manager before joining Newable, he is the perfect person to ask.

Sanjeev started by highlighting the necessary barbell approach when considering a client’s portfolio diversity. Sanjeev gave the example of a client with a risk profile of seven, saying “that doesn’t mean you write off EIS as high risk and not incorporate it.” Instead, Sanjeev suggests that an adviser should flex the amount they allocate, instead of 10% of the portfolio, allocate 5% and, balance this, an adviser could also put 5-10% of the portfolio into a cash/income funds. Sanjeev continued, I think more advisors need to start looking at EIS as part of the whole investment portfolio rather an individual investment products alone. Tying the EIS investment strategy to the wider portfolio.” Sanjeev continued to suggest that advisers should start first by looking at the investment scale from a risk and reward basis, and bring in the tax benefits as an additional benefit. Sanjeev also stressed the importance of knowing what the underlying investments are in an EIS fund. Both clients and advisers should know what businesses they’re funding.

Asked if the industry needs to do more to tap into a larger investor base, Sanjeev replied, “absolutely 100%. The amount of people who still aren’t clear on how EIS works, both on an adviser level and an investor level, is huge.” Sanjeev added that though adviser engagement in EIS has barely scratched the surface, recently, Newable are getting many more advisers coming directly to them for information.

The amount of people who still aren’t clear on how EIS works, both on an adviser level and an investor level, is huge

WHAT WOULD SANJEEV CHANGE ABOUT EIS?

Asked if there were any changes to the EIS scheme Sanjeev would like to influence he said, “I would look at increasing the amount under SEIS, so more companies could raise a bit more at seed level.” SEIS caps investment into very small, very high risk companies at £100,000 but offers an increased 50% income tax relief and carry back options. Often this cash is used to get these small companies onto the EIS stage. Sanjeev compared this to the United States. “In America seed stage is still several million pounds.” Sanjeev continued “it’s a different model, but more money would help.” Sanjeev emphasised he would like to simplify the EIS structure overall, “EIS is not really a fund in the true sense, it’s a pooled investment structure.” The underlying tax relief is based on the actual subscription going into a nominee account, or rather when a clients’ money is deployed into a business within the fund.

Sanjeev continued, this change “would make it a lot easier to understand for advisers, it would make the whole process a lot easier, and it would help fund managers to focus on the underlying investments, rather than all the bits of admin and logistics around that side of things.”

GBI

About Sanjeev Gordhan

Sanjeev became Director of the Newable Ventures arm in May 2020. He is responsible for the strategic focus of the fund and angel network as well as its day to day management. Sanjeev started as an entrepreneur before going onto selling his own business, and spent five years as a Wealth Manager specialising in venture capital. He holds a diploma in Regulated Financial Planning and an MBA from CASS Business School.