Specialist managers can see beyond the flash-in-the-pan investments and the ones that have a real future, says Deepbridge Capital
When it comes to life, you’ll often hear the phrase ‘you can’t buy experience’ bandied around. Long in the tooth individuals may also paraphrase George Bernard Shaw with ‘youth is wasted on the young’, and suggest that those who are new to something have no chance of success because they haven’t ‘learned their trade’.
That’s not always true of course, football aficionados will remember pundit Alan Hansen in August 1995 suggesting that ‘you can’t win anything with kids’, only to find less than 12 months later the team he was criticising, Manchester United, had gone on to win the double of League and FA Cup. Now, while it’s true to say that United had a very young team at the time, they also had a number of ‘old heads’ who were absolutely vital in bringing those trophies back to Old Trafford. Kids were the heartbeat of the team, but the likes of the vastly experienced Peter Schmeichel and Eric Cantona were the heads.
I’ll stop being side-tracked by football now, but as professionals in the world of financial services we are all continually bombarded with the ‘new’ on a weekly, even daily, basis. There will be new product launches, new managers seeking to make their way in the world, new platforms, and a raft of new technology and services that purport to be the future, and want your backing to make it so.
Given that we are an investment manager that predominantly invests in both life sciences and technology investee companies, we know only too well how quickly the market can change, and how what seemed like the ‘cutting edge’ just moments ago, might soon become usurped as some new disruptive individual or firm taking it to the next level – indeed it is these highly disruptive innovations that we seek to invest in.
However, history is littered with products and services which appeared to be the best thing since sliced bread, only to go incredibly mouldy in a very short space of time. Being able to sort this proverbial wheat from the chaff is therefore crucial when it comes to choosing investments that have the best opportunity to last the course. The sectors we invest in are by their very nature rapidly evolving, but the decisions we make have to come from a point of experience and understanding.
History is littered with products and services which appeared to be the best thing since sliced bread, only to go incredibly mouldy in a very short space of time
Over recent years and months, EIS has been refocused by government towards ‘knowledge-intensive’ companies and to have the best opportunity of investing successfully we believe that you need an ‘intensive knowledge’ of what works in any given sector and, crucially, what doesn’t. Understanding the commercialisation process, the valuation metrics and the ultimate exit opportunities within such sectors, is crucial and these can only really be achieved with experience. Taking ‘a punt’ on the technology or life sciences sectors could leave the inexperienced entirely at the whim of lady luck.
Experience comes from having been consistently committed to supporting both the sectors and those companies that work within it – we would absolutely say beware of those managers who have historically sought to sell ‘low risk’ EIS propositions in recent years, and yet (following the government changes) are suddenly trying to source and invest in new technology innovations. For those considering EIS opportunities, my message is two-fold; firstly work with sector-focused managers, and secondly work with those managers that have been ingrained in those sectors, rather than those who are now turning to certain sectors simply because they have been forced to by government changes to the scheme.
Advisers and their clients should (rightly) expect that the investment managers they use know their chosen sectors like the backs of their hands. And that expertise and experience simply can’t be developed overnight, despite some attempting to convince that it can.
Without the necessary understanding and experienced personnel within the management, those who have strong relationships with the relevant sector academia and innovators, those who have been through the process of finding investable companies and have taken them on to bigger and better things, those who understand the needs of such companies, especially when they are just starting, those who have exited such innovative companies; it is incredibly difficult to articulate a robust investment process and expectations to clients – any claims or projections are merely pie in the sky.
We believe that supporting and commercialising technology and life science companies, for example, is hugely different from doing it in other sectors and therefore it is absolutely vital and crucially important that the manager is immersed in these sectors and it knows how to select, value, support, develop and ultimately exit such companies. These can be both incredibly technical businesses and intricate products and services which, for want of a better phrase, could ‘blind others with science’. If the manager can’t understand the proposition, its application, and where it could deliver its greatest growth potential, then the opportunity might be lost before it’s even begun.
So, what might we be looking for when considering an investee company?
Well, the first thing is making sure we know the team involved inside-out, and making sure we understand the problem(s) they are attempting to solve and the commercial opportunity that exists. Also, is this just a problem that exists in the heads of the owners, or is it a genuine issue which requires their specific solution? Also, what have they done by the time we meet them for the first time? Can they prove the viability of their service/product, and can they evidence the market there is for it? Importantly, can it be utilised across different geographical areas and territories? If it can, then the appeal for us as an investment manager is immediately broadened and we can also help the business explore those opportunities?
A key part of our working with certain companies is around whether they are already part of a support network that can also help develop their proposition. As mentioned above, being a specialist means that we have cultivated strong relationships in a number of areas and we have forged key relationships with academics, healthcare professionals, tech experts, venture capitalists, agencies, grant funding bodies, etc. Investee companies that are ultimately successful tend to have strong support networks around them and part of our approach is to ensure that investees have the support and foundations to provide them with the best possible opportunity to flourish and grow.
Overall, therefore, I hope advisers and their clients appreciate the benefits of working with managers that are immersed in their sector(s). Our view is that having specialist expertise and knowledge in focused markets will be key in determining potential ongoing successes. Although EIS propositions are unquoted stocks, and should therefore be treated as high risk and illiquid, it is my belief that when investing without sector expertise the risk to client’s money becomes far greater. Our advice is to opt for those sector experts who have been there, done it and ‘bought the t-shirt.’
Andrew Aldridge is a Partner,
Head of Marketing at Deepbridge Capital
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