Investments  

Investors should beware conflict of interest with EIS

 

Advisers helping clients invest in enterprise investment schemes need to look "very closely" at the levels of exits made by EIS managers and examine whether there are potential conflicts of interest, a senior EIS manager has said.

Seneca Partners' investment director Matt Currie told FTAdviser: "If you look across the institutional EIS manager space you probably have a handful of EIS fund managers who have what you would classify as a strong exit track record.

"There are certainly not as many as there potentially could be who have returned a significant portion of [investors'] capital."

This could be for a number of reasons, such as the Patient Capital Review or Covid-19 slowing things down, as well as a couple of "bumps and bruises" in the UK economy generally, but Currie cautioned advisers and their clients to pay close attention to EIS managers' track records. 

"You need to see who's done well over a longer period of time and match that up with their exit track record", he told the latest FTAdviser Fireside Chat, adding: "The investor will not benefit until the manager exits the investment."

But even more attention needs to be paid to each EIS as they all have slightly different set ups and fees – and in some cases the way in which EIS managers charge their portfolio companies could create a conflict of interest.

Currie explained: "A lot of EIS fund managers charge additional fees to the portfolio companies, so then you might have a slight conflict.

"For example, if companies have not quite shot the lights out [but are growing slowly], there's a potential to pull the trigger and exit now, versus waiting three years, but the fund manager is thinking, 'Well, that's three years of monitoring fees that we get for looking after a low-risk business there'.

"There are different elements that are worth investors and advisers digging into a little bit more closely."

Each EIS manager might also have different criteria for triggering an exit, whether it is the company growing from a small handful of team members to have 70 or more members of staff, having grown the number of sites exponentially, set up new geographies or added significant value to the UK economy.

One of Seneca's more recent exits was Mission Labs. The team made an initial £1mn investment and exited it in 2021 at five times return, when the business was acquired by Gamma Communications in a deal worth up to £46mn.

Mission Labs saw its revenues grow by more than 20 times throughout Seneca’s investment period, with the Mission Labs team growing from 12 at the time of investment to more than 70 at the time the business was sold.

Similarly, Seneca put a £1.5mn investment into SkinBioTherapeutics in 2017. Investors have now exited at an average of four times return. Over the time, the company has developed a suite of IP and multiple propositions across five specific healthcare sectors.