Andrew Aldridge: Understanding the tax-efficient investment process

When assessing tax-efficient investments, writes Andrew Aldridge, it is important to understand the similarities and differences between mainstream investing and unquoted, early-stage stocks

One of the key differences to contemplate, and a key understanding that should be imparted by any good manager in the tax-efficient space, is that of the investment process. For example, how does the manager identify investment opportunities, what are those opportunities and what timescales are likely when it comes to deploying the funds into those investments?

Most managers in this space will likely source investee companies from a myriad of places, possibly including academia, corporate advisers, accountants, professional introducers, incubators, etc.

Describing this source of deal-flow and how the initial relationship with the introducer was born is easy, but advisers and investors should be able to look beyond that and be provided with real-life examples of where investees have originated from.

For example, can the manager talk through which academic institution each company came via? What has been the process in terms of forging those relationships with the introducer, and for each investee company, how did that progress through to investment?

Over the past couple of years we have seen a number of new providers enter the Enterprise Investment Scheme (EIS) space. We have also seen a number of historically large players in this market having to dramatically pivot their approach.

This has been primarily due to legislative changes designed to ensure EIS funding is only going to the types of companies that need it and that the investment supports the sectors which Government wants it to. This change in tack might seem simple but, in reality, unless a manager is immersed in a sector in which they are investing, how can they really know the quality of investment opportunities and how can they support those companies going forward?

Indeed, it may be that the manager takes a passive approach to the investment and therefore they do not need to know a sector. However, this would be entirely at odds with the approach we take, for example but I am sure some will argue it has its own validity and that certain investees want to be able to get on with their business without any such external support.

We would however respectfully disagree with a hands-off approach. Since incarnation, our ethos has been that of a sector-focused investment manager giving proactive, hands-on support to investee companies.

Deal-flow

This support can manifest itself in many different ways depending on the wants and needs of the investee company – for example, it could simply mean acting as a sounding board and speaking regularly with founders/CEO. It could be helping the company recruit the right individuals to help the company grow, assisting with their initial marketing plans, or even dictating the commercial path a company should be taking.

In a very true sense, managing and supporting early-stage companies is fundamentally different to managing a portfolio of listed stocks and we believe young companies benefit best when they have partners around them to assist them through their journey, rather than merely being handed a cheque and being left to it.

Overall, advisers should therefore be looking for managers who have long-lasting industry contacts and networks and be able to show the value this brings. It is also about ensuring there is a strong pipeline of deal-flow that ultimately means the manager can continue to deploy investor funds on a regular basis – in our case, usually monthly.

After an adviser has established a manager produces bona fide quality opportunities, then the next question an adviser should be asking is how quickly an investment can be deployed. From a tax-planning and investment management perspective, the speed of deployment is critical and is likely to make a considerable difference in terms of the investment decision.

If a manager can tick all of the boxes on the above, then they are likely to be going a long way to providing the confidence and certainty all advisers and their clients are looking for, especially given these investments are higher-risk than normal.

Andrew Aldridge is partner, head of marketing at Deepbridge Capital