This publication recently interviewed one of the senior figures driving forward what he says is a new, more flexible way for high net worth individuals to tap into venture capital opportunities.
It is not always easy to recall but there have been times when venture capital was operated by a closed circle of players with even the chunkier family offices and private banks struggling to get a seat at the table.
To some degree this changed after the shocks of 2008-09 meant purveyors of venture capital had to humble themselves somewhat in their quest for backers. A traumatised market took time to adjust. This publication remembers being told by private investment offices and multi-family offices that VC was a niche area. Sorry old chap – we’re just not that into it. (See an example here.)
Attitudes have brightened in recent years (see here). Results have certainly helped. In 2014, it was a banner year for VC with funds achieving internal rates of return of almost 26 per cent and far ahead of other forms of private equity (source: Preqin). There's more: According to the British Private Equity and Venture Capital Association, venture capital funds in 2014 had an "exceptionally successful year", with pre-2002 vintages obtaining an annual IRR of 34.2 per cent in 2014 and the class as a whole reaching an annual IRR of 14.6 per cent. This, coupled with a performance from 2013, drove the 10-year IRR for venture up from 3.3 per cent to 4.6 per cent.
Such numbers, even with all the usual caveats, are hard to ignore if other more mainstream markets are struggling.
But the access issue remains a significant one to surmount, which
is why, as this publication found out recently from operators of
what in the UK are called Enterprise Investment Schemes (EIS),
new routes to tap the asset class can change the picture. (See a
feature article on the issue see
here.) Recently, we met with Martijn de Wever, chief
executive of Force Over
Mass Capital, a technology start-up fund, that launched a
Seed Enterprise Investment Scheme (SEIS) earlier in February
2015. According to one report at the time of the launch, the
fund targets a return £5.00 - £10.00+ for every £1.00 invested
with a five- to seven-year investment horizon.
Investors into the EIS must put in a minimum of £25,000 ($37,900), and this is spread across 30 investments; investments can be as high as £500,000. At the moment, the EIS has investors of £500,000 but the amounts can go up substantially from that point.
“Whether you are an investor of £25,000 or £500,000 you will have exposure to 30 companies. Investors have the freedom to add to individual company exposures after this initial investment process, which is a valued degree of flexibility. This combines the power and flexibility of angel investing with the diversification effect of fund investing – full flexibility,” de Wever said.
The investment model he adopts is very different, for example, to crowdfunding because crowdfunders don’t “curate a portfolio”, he said, arguing that their interest is not aligned with the investor.
Since the EIS launch, 11 investments have been made already and there are another 14 investments in the pipeline for the coming two months, he said. The investment model suits “angel-like” investors who like a hands-on connection with the firms they support.
A problem has been that venture capital firms tend not to let in outside investors and VC can be a closed market, even for investors with deep pockets such as a family office – the EIS investment model is a great way to open the door: “I feel very strongly that we should be open to anyone,” he continued.
Force Over Mass Capital curates the portfolio of 30 companies for
each investor; it later returns the power to the investors to
follow their investments or to add other companies to their
portfolio. To keep the EIS or SEIS tax reliefs, an investor
must hold the asset for three years; that investor will get a
cash event each time a portfolio company has an exit whether
through trade sale or IPO.
“The majority of exits are through trade sales which in essence means that most investors never have access to this asset class through the regular channels of stock exchanges. It is one of the last illiquid asset classes that needs to be opened up,” he added.
The EIS sector is still a relatively small slice of the total investment pie and dwarfed by other models of VC and private equity investing, but if the need to get easier access to this asset grows, VC-type activity through an EIS structure could become more important in the years to come.