Review – Deepbridge Technology Growth EIS
The Deepbridge Technology Growth EIS is an unusual EIS fund. It invests in companies that have already proven demand for their products or services. Investors know precisely in which companies their money will be invested and can choose to invest in just one, all or a combination.
- Technology-focused EIS fund
- You know, and can choose, in which three companies your money is invested
- Experienced management, who are required to invest their own money in the offer
- Invests in tax year 2016/17, allowing investors to offset this year’s or last year’s tax bill
- £10,000 minimum
This EIS is evergreen, and is continually seeking investors’ funds. It invests in later-stage, growth-orientated technology companies. Unlike many growth portfolios, if you invest today, you know exactly in which three companies your money will be invested (a further three will open later in February) and can choose to invest in one, all or any combination.
Portfolio companies will typically have two important traits. Firstly, all have developed a product or service and are in the process of commercialising it. They have identified their market and established revenue streams, thereby showing market demand. Secondly, each company typically owns either intellectual property or a patented product, providing some downside protection.
Each company is assigned an investment adviser, typically an industry expert. Their role is to guide, mentor and counsel the investee management team, as well as taking a seat on the board and monitoring progress. This hands-on operational experience combined with the financial expertise provided by the Deepbridge team sets this growth EIS apart in our view and helps mitigate (although not eliminate) the risk borne by the investor.
Companies currently open for investment
SurveyMe is an online and mobile app that allows businesses to collect real-time feedback from consumers and employees and offer them instant rewards.
For instance, a consumer might be filling in a survey on their smartphone whilst having a meal in a restaurant and receive a discount as a reward. The restaurant manager sees the feedback in real time and, in case of complaints, can take immediate action.
Clients are charged an annual licence fee or can pay per survey. Today SurveyMe generates operating annual revenues of c. $1 million. It has a diverse client base including Nandos, NHS Wales, and Everton FC in the UK. Since 2016 the management has focused its growth strategy on two main markets – the cinema and restaurant sector – as well as the US market. Currently SurveyMe is in discussions with US cinema chains and several international operators covering 28 countries. SurveyMe showcased in Cinemacon in Las Vegas in April this year, then proceeded to secure a further six programmes with US and UK cinema chains. The largest in the US is Bow Tie cinemas, and Odeon in UK.
AlgaeCytes exploits freshwater algae grown in controlled conditions to produce Omega 3, biomass rich in proteins and clean water, leaving no waste.
The algae use nitrates and phosphates in discharged water from a wide range of manufacturing companies to produce Omega 3. So AlgaeCytes can benefit from two sources of revenue: the treatment of water discharged from industrial processes and the production of Omega 3.
Today 95% of all Omega 3 manufactured is from fish oil. With global demand for Omega 3 growing, the already limited fish populations are depleting. AlgaeCytes provides a sustainable and scalable alternative. In addition, Omega 3 derived from algae also meets increasing consumer demand for vegetarian or taste-neutral products.
AlgaeCytes is in negotiations with a number of care products manufactures, nutritional food businesses and biopharmaceuticals. It has already a contract with a leading manufacturer of ingredients for the personal care market, which is expected to buy at last 50% of AlgaeCytes’ production in 2017.
Deepbridge Capital was set up by Ian Warwick. Initially he intended to launch an unquoted growth technology fund, however after the rules changed to allow investments of up to £5 million in an individual company, he considered EIS more appropriate. Mr Warwick has had a varied career: he was in the Royal Navy, then an oil engineer in Houston and worked for one of the biggest printer companies before settling on technology start-ups in New York.
When he founded Deepbridge, he didn’t have experience of managing money but he and his founding partners all had experience in technology and in listing and floating businesses.
Deepbridge’s investment team is required to invest their own money in the portfolio companies. If the portfolio loses money, they lose money, so there’s an added incentive to apply a tight investment selection process and help businesses achieve their objectives.
The portfolio aims to deliver a return of £1.60 for every £1 invested over three to four years. If you take into account EIS 30% income tax relief, that’s £1.60 for every £0.70 effectively invested. Please note though: returns are not guaranteed. Capital is at risk and you could get back less than you invest. Moreover, tax benefits depend on circumstances and tax rules can change.
Before Deepbridge invests, it tries to identify potential buyers for investee companies, but there is no set exit strategy. Thus far there have been no exits, nor failures, although they are possible, indeed likely as with any portfolio of this nature.
These are early-stage technology businesses, so they will be more prone to failure than later stage, more mature businesses. It is also likely they will require multiple rounds of funding thus diluting the stakes of earlier investors. These are long-term 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 underlying investee companies will pay a fee of 2% per annum to Deepbridge. There is a 2.5% corporate advisory and arrangement fee, paid from the underlying companies. In addition, there is a dealing fee of 0.65% for sales and purchases charged to underlying investee companies and a further 0.5% per annum custody fee. Finally, there is a performance fee equivalent to 20% of the profit from each individual company with a minimum hurdle of £1.20 per £1 invested prior to any performance fee being applicable. VAT is charged where applicable.
When you invest via Wealth Club, you pay no initial fees from the subscription, so you should receive tax relief on the full amount. Deepbridge fees are paid by the investee companies.
This is an interesting, albeit higher-risk EIS offer. Your money should be invested this tax year, so you can offset the tax relief against this or last year’s income tax bill and defer chargeable gains made as far back as April 2014.
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 aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment and read the provider's documents carefully.