Review - Calculus EIS fund
Calculus Capital has been at the forefront of EIS investing for years. It created the UK’s first approved EIS Fund in 1999 and won ‘Best EIS Fund Manager’ at the EIS Association Awards in both 2016 and 2015. This offer focuses on established businesses with growth potential and will be typically split between eight to ten investments.
- Growth-focused, more mature private businesses sought
- Wide range of sectors covered
- £50,000 minimum investment
- History of exits - 27 thus far, with 18 of them above par
Calculus Capital was founded by John Glencross and Susan McDonald in 1996; both are still actively involved with the firm today. They made their first EIS investment in 1996 and launched their approved EIS fund in 1999 (it raised £1 million) – the UK’s first.
Last year Calculus raised approximately £25 million for its EIS and today manages over £120 million predominantly in the EIS and a small amount in its VCT.
The focus of the Calculus EIS hasn't really changed over time: it remains on mature private companies pre-flotation. The main reason behind this choice is the risk/return profile. Failure rates for more established businesses tend to be lower, and the time to exit typically tends to be shorter.
Calculus aims to build a portfolio that is lower risk than other growth EIS funds by targeting companies that share the following characteristics:
- Some mileage on the clock, so even if not profitable, it is clear where profits might come from
- Predictable cash flows, recurring revenues and a strong balance sheet
- Their primary constraint is access to finance
- Proven successful products or services
- Companies which can achieve their target IRR of 20%.
Please remember, whilst the aim is a lower-risk portfolio than other growth EIS funds, all EIS are by their very nature higher risk.
Each investor will invest in at least six different companies, but typically eight over a 12-18-month period.
New rules on EIS have reduced the general number of deals available, but this has not affected Calculus, according to Mr Glencross, because of its focus on growth investing. In his view 80% of companies considered in the past would still qualify under new rules. Most of the deals come to Calculus exclusively either via corporate advisers or by the management teams of their underlying companies coming back for a second or third time.
The Calculus EIS is sector agnostic. The existing portfolio is broadly spread, however healthcare is currently a focus, as is applied technology and IT.
An example of one healthcare company Calculus has invested in is Mologic, a developer of cutting edge Point of Care (PoC) diagnostic devices. Mologic has a pipeline of products, which target respiratory disease, women’s health, sepsis, wound care and peritoneal dialysis infection. In addition, the company has a number of contract partnering programmes which include the creation of a companion diagnostic tool for a new malaria therapy. Mologic has an impressive senior management team, which includes Professor Paul Davis, Chief Scientific Officer and co-founder, who was a coinventor of the well-known Clearblue pregnancy test.
Calculus’s investment team is strong in our view. Each new deal goes to Calculus’ investment committee three times, covering all aspects of the deal such as price and terms.
The committee comprises founders Susan McDonald and John Glencross as well as deputy CEO Robert Davis. Their role is to scrutinise and review deals rather than seek out new ones themselves, to avoid biases. The fourth member of the committee reviewing any deal will be the sponsoring director. Unanimity is required for a deal to proceed. On average, the investment team reviews around 500+ deals a year and completes around 12-15 investments.
When reviewing a potential deal, the team analyses the company’s own forecasts, pulls them apart and compares them to its own forecasts. Exit price is considered first, from which the entry price is worked out. How a company will perform under a cautious scenario, is always important. Calculus is happy to incentivise management by offering them an increased return above a certain performance.
As well as sitting on the investment committee, Robert Davis takes responsibility for the portfolio after the initial investment, growing value, reducing risk and ultimately exiting the company.
If we have any concern over the team it is that it has grown very quickly over the last few years.
Each company is invested in with a minimum target of 2.5 times the invested capital, clearly this is a target and is not guaranteed.
There is no predetermined exit route for a company, with a mix of trade sales and flotations the obvious avenue. Encouragingly, Calculus has exited three portfolio companies in Autumn 2016. One company was already listed on AIM, the other two were sold privately. Whilst the price hasn’t been released for the latest deal, Human Race, the previous two exits realised multiples of 1.81x and 1.82x. Due to the “pre-IPO” nature of many investments, the number of exits is greater than most other EIS managers with a total of 27 thus far, with 18 of them above par.
This EIS will be fairly concentrated with between six and eight different investments.
The usual risks with unquoted companies exist with this EIS offer. For instance, EIS investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future.
There is a 2% initial transaction charge on entry into the fund, with a 1% set up fee for Wealth Club investors. Existing investors in the EIS benefit from a 1% discount to the set up fee. In addition, there are dealing charges of 0.65% levied on sales and purchases. There is an administration fee of 1.5% per annum and 0.1% charge per quarter to cover audit and legal fees. Calculus may keep back a proportion of the investment to cover the first three years’ fees. There is a performance fee of 20% of the excess returned above the initial subscription. VAT will be charged where applicable.
Unlike many other EIS providers, Calculus can point to a steady stream of exits over the years. Whilst the returns might not be as high as some early-stage focused EIS, getting cash back to investors is a vital part of any investment proposition. Its longevity in the market is virtually unrivalled too, having launched the first EIS approved fund in 1999.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aim to highlight investments we believe have merit, but investors should form their own view on any proposed investment.