Laurence Callcut, Partner and Head of Sales at Downing, and Portfolio Director Mike Kennedy took the time to chat to GBI Magazine about EIS in general and Downing in particular as we head towards a new year.
What was your approach in 2019?
Downing Ventures EIS has now backed 60+ companies. Throughout 2019 we saw more and more capital being deployed back into the portfolio, while the businesses scale up and raise larger follow-on rounds as their progress attracts wider investor interest. We aren’t afraid to step up and lead funding rounds and are writing larger cheques alongside syndicate partners to provide more firepower to our portfolio.
What’s your firm’s USP?
Our ladder of funding means we’re able to identify fast growing, high potential scalable UK businesses, invest and continue to financially support them as they progress through the start-up life cycle. We build long-term relationships with founders in sectors we know and are passionate about and have the funds to follow-on
Has your firm changed in any way during the year?
We are becoming increasingly thematic in our investment approach. To do this well you need to bring in people that are completely immersed in their sectors, bringing with them a wealth of relevant knowledge and powerful networks. Will Brooks (30 years investing in the healthcare space) joined our team to head up our investments in healthcare and life sciences, and James Nettleton recently joined us from InMotion (Jaguar Land Rover venture capital arm) to focus on transport and mobility.
Our Portfolio Management team has recently been strengthened with Laoise McGarry, to ensure we are encouraging governance excellence and developing open and collaborative relationships with portfolio FDs and CFOs.
The UK appears to have a strong start-up/entrepreneurial culture – what do you put that down to?
It hasn’t happened overnight. Our world class institutions, universities and centres of excellence have encouraged the entrepreneurial spirit, which is as much a feature of today’s commerce as it was a rarity just 25 years ago. The entrepreneurial genie is out of the bottle for good now.
What are your views on recent changes to EIS?
Two significant changes resulting from the Patient Capital Review, have been particularly impactful. The risk to capital test, which, because of our overall investment strategy, aligned EIS more closely with us, and the introduction of knowledge-intensive companies make the whole EIS scheme more flexible and realistic.
Do you have any fears that future Government changes could undermine the schemes’ effectiveness?
In the Conservative manifesto, the Enterprise Investment Scheme is said to be ‘spectacularly successful’ and the government will continue to support it.
Also the UK is attractive thanks to EIS and the UK growth engine is too important for politicians to tinker with too much – although you never know with Whitehall.
If you could influence changes to the schemes, what would you suggest?
Keep an open mind and constantly consider innovation in these schemes, which are the envy of the world. We’d also suggest that SEIS could be extended and the cap raised.
How can EIS investments continue to help diversify client portfolios?
It’s the fact that these assets are not correlated with mainstream, traditional portfolios – most investors don’t really have access to smaller start-up type businesses, which nowadays are generating a lot of media coverage and investor interest. Furthermore, this type of investment is hard, if not impossible, to access through traditional product structures. Many investors today are more sophisticated, and attracted to the esoteric. There’s a philanthropic angle, too – people like to feel they can do good at the same time as potentially doing well from investments themselves.
What sectors do you specialise in and why are these important?
We embrace thematic-based investing – looking at macro level trends in, for example, the healthcare and fintech sectors, along with tech-enabled brands and transport & mobility. Knowing the entrepreneurs industry and getting down to the detail fast is how we appeal to the best entrepreneurs and attract and secure the most attractive deals.
Are advisers more receptive to the schemes?
It depends on their clients. Tax relief was always the major attraction, but now we’re going back to more of a focus on investment. So, yes, more receptive, but maybe to a narrower group of investors.
Are clients more savvy about EIS and SEIS nowadays?
Probably yes, thanks to education in this area. As advisers have become more interested in the opportunities, so too have their clients – it trickles down. Again, with the focus swinging back to investment, IFAs are keen to offer clients more options.
Are there more clients becoming interested in the schemes?
Most of the growth has probably come from over a decade of pension regulation changes, which led to a surge in interest, particularly when lower risk options were available. This is now slowing, although we expect continued organic growth.
How can advisers continue to educate their clients about the investment opportunities in EIS?
Again, trickle-down, if advisers keep building their knowledge, their clients should follow. If the adviser understands the sector well and is enthusiastic about it, a client will more likely be receptive to the conversation.
Does the industry need to do more to promote the schemes to a wider investor base?
Not really, it’s not too exclusive as it is. Maybe it needs more promoting and updating to IFAs, especially given the Patient Capital Review, which makes EIS a very different animal from before.
Did the continued confusion over Brexit affected the future of EIS?
No specific impact – the overall appetite for investment is rather subdued, but there’s been nothing dramatic so far.
Are there any clouds on the horizon?
The UK is Europe’s tech centre and, like any industry, it needs certainty. It needs access to talent, to customers and to capital – and uncertainty is not its friend.