Enterprise Investment Scheme

Madeleine Ingram, Calculus Capital, London, 25 August 2015.



Calculus Capital is the focus of this wealthbriefing.com article on how the UK’s Enterprise Investment Scheme landscape is shifting and where Calculus Capital sits in the new EIS market.

By Tom Burroughes.

In the first part of a feature examining the views of practitioners within the UK’s Enterprise Investment Scheme landscape, this publication probed firms about returns, investment exits, and strategy. In this item, WealthBriefing spoke to Calculus Capital, a Mayfair, London-headquartered firm operating in this space.

Madeleine Ingram, head of investor relations at Calculus, sets out thoughts about how her firm’s investments are progressing. In mid-August, the firm announced that it had put £2.1 million ($3.28 million) into the synthetic biology company Synpromics. This firm creates synthetic promoters which are used to help cure diseases sure as haemophilia and hereditary blindness.

Ingram talks also about Venture Capital Trusts, a listed form of structure holding small businesses and start-ups carrying certain tax advantages, pitched more towards the retail end of the spectrum. She explains her firm’s approach and gives some case studies about specific outcomes.

Unlike VCTs where the investor has to sell his or her shares in the VCT to exit – usually at a discount back to the VCT – most EIS funds are self-liquidating, as when the various investments are realised, the proceeds are distributed to the investors. Clearly, the exit process is key and of interest to investors.

Calculus, which has two former heads of M&A amongst its senior ranks, has used many different approaches to exit – trade sales, sales to larger private equity firms as part of the investment ‘food chain’ and the initial public offerings process.

Consideration of the exit starts during the initial investment assessment period when the likely buyers are first identified.  Our investment agreements are written with the exit in mind, and the formal exit process commences well prior to the end of the 3 year holding period. The exit is regularly discussed with management throughout our holding period and all key players are aligned with regards to exit time frames and expectations.

Our most common exit method is trade sale, essentially selling one of our investee companies to a larger firm, often in a similar sector to enable further growth. It is frequently a simple all-cash offer that allows us to distribute returns quickly to investors.

A route attractive to our life science businesses is AIM (London’s Alternative Investment Market). An IPO is not usually an exit as existing shares are generally not sold at that time. Following the IPO, we would work with the company’s management to generate interest amongst larger institutional investors and would make blocks of shares available to meet that institutional demand. This helps to keep a good tension between supply and demand for what are generally smaller, less liquid stocks. It means that the exit is a little more complicated than a trade sale but this method has garnered our investors some incredible returns – two examples from 2014 include Scancell an 8.2 times return and Epistem a 2.0x return.

Scancell: This is a biotech company which develops novel immunotherapies for the treatment of cancer. In price per share: 4.5p; average out price per share: 36.9p. Epistem: A personalised medicine and biotech company commercialising its expertise in stem cells, infectious disease diagnostics and pharmacogenomics as a guide to therapy selection. Cost price per share: 163p; average sale price per share: 320p.

In recent years we have seen a large upswing in the interest from financial buyers, namely mid-market private equity firms. It is an area with a lot of dry powder, and the size of firm Calculus tends to invest in, resulting in perfect bite-size investments for secondary investment firms.

These mid-market private equity firms have deeper pockets and can take our investee companies to the next stage in their development. This method is equally advantageous to the end investor; a good example is the December 2014 exit of catering company, Waterfall. Calculus sold its stake in Waterfall to mid-market PE Firm LDC, producing a 5.3x return.

In a time when the first solar investments are maturing and delivering capital back to investors, many are considering where to place their capital and whether to utilise another EIS. Given that the ‘renewables’ option is no longer available through EIS, it is vital that investors fully understand an EIS fund’s exit strategy and track record of delivering cash back to investors. Investing in earlier stage investments often results in a longer time to exit, whereas some generalists focusing on more established businesses are able to start returning capital back to investors much sooner.

The importance of exits for a PE firm focused on tax efficient investments is paramount. With that in mind, Calculus hired Robert Davis, a 25-year veteran of the M&A world, previously head of European M&A at Nomura, to turbocharge the exit process.

Robert’s sole focus is to take the investments that have been held for two and a half years and manage them through to exit as soon as commercially feasible, after the obligatory three year holding period. Calculus’s average holding period across exited investments is under four and a half years (as of July 2015), a relatively short timeframe compared with the wider private equity market.

To read the article on WealthBriefing.com please click here