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 – and can normally choose – in which companies their money will be invested.
- Technology-focused EIS fund
- You know, and can normally choose, in which of the five 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 companies your money will be invested.
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
AlgaeCytes has developed a patented process that exploits freshwater algae grown in controlled conditions to produce Omega 3, biomass rich in proteins and clean water, leaving no waste. AlgaeCytes thus benefits from two sources of revenue: the treatment of water discharged from industrial process and the production of Omega 3, currently largely produced from a limited and depleting fish population. AlgaeCytes is in negotiations with a number of parties. 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.
Liverpool ChiroChem (LCC) develops, manufactures and supplies specialist chemical building blocks using its own patented process, which is much shorter and cost effective than its competitors’. Drug manufacturers require a continual supply of new chemical building blocks to discover and produce new drugs. LCC is succeeding where traditional chemical methods have failed: in supplying low volumes with short lead times efficiently and retaining a gross margin of over 95%. LCC has already customers in the UK, US, Europe and Japan, including the likes of chemical giant Sigma Aldrich, which supplies chemical components to 1.3 million scientists and technologists in life sciences companies, university and government institutions, hospitals and the pharmaceutical industry.
Sky Medical Technology has developed two devices, geko™ and firefly™ that use trademarked technology and are proven to dramatically improve blood circulation when applied to the back of the knees. geko™ is used to prevent and treat deep vein thrombosis (DVT) – the consequences of which kill more people than AIDS, breast cancer and road accidents combined – and for patients recovering from surgery. Firefly™ applies the same technology to an entirely different purpose: to help athletes recover. It’s currently used by the likes of Team GB, British Cycling, AC Milan, Chelsea and the USA Olympic team. The margins for both products are very favourable with manufacturing costs of less than £5/pair (potentially dropping to £2/pair with increased volumes) and sale price of £17.25/pair. 25 UK hospitals are already in an advanced phase of the sale process for DVT use; distribution partnerships are in place in China, Turkey, Australia and New Zealand; successful trials have been completed with the Canadian healthcare system.
VoxSmart has developed patented technology which captures, records, stores, transcribes and analyses all calls, messages and voicemail on mobile devices, regardless of the manufacturer or operator, without the need for infrastructure changes (as is the case with VoxSmart’s competitors). The target market is financial services firms, which are already required to record and retain client calls for six months. From 2018 many of these firms will need to do this for five years. It is estimated 7 million European and US companies will need to comply with the new rules. Voxsmart is already in partnership or in discussion with global enterprise mobile providers.
Zilico develops medical diagnostic devices. It launched its flagship product, ZedScan, in 2013 and began commercialising it in 2014. ZedScan is a diagnostic device that helps prevent and treat cervical cancer much more objectively and accurately than current diagnostic methods. A number of UK hospitals have already adopted it and agreements with medical technology distributors are in place in the UK, Ireland, Holland, Bulgaria, Israel, Bahrain, Thailand and Australia. New products are in the pipeline, applying the same diagnostic technology to other types of cancer, starting with oral, anal, oesophageal and bowel cancer.
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.