Review - Jenson Fund 3 SEIS and EIS
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
Whilst the renewable energy sector is dominating the tax-efficient investment space this year, the rules were designed to back and finance small and growing companies. Sometimes embryonic, but often very exciting. The Jenson SEIS and EIS offer looks to back the type of company for which the rules were intended.
- Target return of 185p per 100p invested
- Gives investors the option of SEIS or EIS investment
- Focuses on early stage mostly technology-focused companies
- High conviction portfolio of 10-12 companies
Jenson was founded in 2001 by Paul Jenkinson to help start-up businesses with fundraising, operational support and ongoing guidance. As well as Jenson’s full time staff, it also has a partner network of 25-30 individuals who provide support and assistance to underlying companies as well as introducing business ideas.
Unusually this offer allows investors the choice of SEIS or EIS investment. The SEIS will invest in earlier stage businesses whereas the EIS will invest in follow-on funding for some of Jenson’s earlier SEIS investments that have progressed well.
The fund will invest in a minimum of 10 companies. Companies backed (in the SEIS) will generally be loss making and might not even have any sales, however the SEIS funding is intended to commercialise the product or service offered and get the company earning revenue. Although early stage, they won’t just back an idea; it has to be something more tangible than that. Credible management teams need to be in place with some form of intellectual property a “nice to have”. Companies don’t always have to have experienced management teams, as they do seek to back teams of hungry young entrepreneurs too, however Jenson doesn’t like backing one man band businesses.
Every deal at the initial SEIS stage is reviewed by at least three to four of Jenson partners prior to the investment committee reviewing the deal. As well as financial due diligence, more emphasis is placed on reviewing the technology and viability of the business too. The investment committee comprises Paul Jenkinson and Sarah Barber – Jenson’s founder and chief executive as well as Peter English, one of the Foresight Group’s founders (Foresight is an experienced EIS and VCT investor and provides regulatory oversight to Jenson).
Jenson is agnostic on the sector for investment; however the majority of early stage companies will have some technology related angle. It generally won’t invest in healthcare, especially drug discovery as the outcome is often binary – either it fails or succeeds and nothing in between. Software as a service and big data are two prevalent themes currently.
In total Jenson has completed about 60 deals in their SEIS funds. In their earlier investments, about 25% of companies were revenue generating at the time of investment whereas about 75% are expected to be revenue generating at the point of investment going forwards.
The target return of 185p per 100p is ambitious, but reflects the reality of investing in early stage, high growth businesses. Those that succeed often deliver returns many times that of the initial investment. However the flipside is a few will almost certainly fail.
In the SEIS offer, companies will require more rounds of financing, either from Jenson’s EIS offer or external bodies. The scrutiny undertaken before financing rounds helps validate the value of the business. Realistically, as many of the companies will be early stage, profitable exits are largely expected from trade sales rather than from flotations. As technology is expected to be a large feature of the portfolio, selling companies in their earlier stages is much more common than with more traditional businesses. However, investors should still consider this to be a long term investment in the region of five to seven years.
The key risk in this EIS and SEIS offer is the risk of company failures. These are very early stage investments; therefore of the expected portfolio of 10-12 companies, there will almost certainly be some that fail. A second key risk is lack of funds for follow-on investing with the probability of early investors being diluted. However, with the recent launch of the EIS offer and the judicious use of other external funding, this can be somewhat mitigated. In addition, Jenson has forged arms-length links with some growth orientated VCTs, which may also offer later stage funding.
There is an initial charge of 5.5%, charged to the underlying investee companies. In addition, Jenson receives £295 per month from each company and 2% plus VAT per annum of the total amount invested. Jenson will also charge for an initial due diligence report on potential investee companies. There is a performance fee of 25% of any profits, on an individual company basis, once investors have received the amount invested back (from that company), either from dividends or capital return. Jenson may also charge exit fees to underlying companies.
This is a high risk EIS and SEIS offer. Whilst the manager shows early promise and intent, their first SEIS is barely two years old and we would like to see them develop further. Having said that, the team seem committed to make this work over the long term and early teething problems have been ironed out. There aren’t many high risk opportunities offering SEIS, EIS or both so for those wanting to back proper early stage, high risk companies, often in the technology space, this may be worth considering - noting Jenson’s relatively short track-record.