Review: Deepbridge Innovation SEIS
The new Deepbridge Innovation SEIS was previously known as the Deepbridge Sci-Tech Daresbury SEIS. Deepbridge is an investment manager with a bias towards technology growth companies. Like all SEIS offers this is very high risk and investors should expect failures. However for those prepared to take the risk, this offer could be a good way to access high-growth technology businesses at a very early stage.
- Portfolio of five early stage technology companies
- Some of the companies will be based at the highly regarded Sci-Tech Daresbury campus, which acts as an innovation hub
- Each investee company will have significant intellectual property
- Potential to attract government and regional grants and matched funding
- Target return of 200p per 100p invested (net of fees), returns not guaranteed
- Pay no initial charge through Wealth Club
- Minimum investment £10,000
Deepbridge Capital was set up by Ian Warwick in 2010. He started his career in the Royal Navy, then became 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 floating businesses.
Mr Warwick sits on the investment team of the SEIS, alongside Dr Savvas Neophytous who heads the Deepbridge Life Sciences team and who will manage the portfolio. Dr Neophytous worked in the City for 15 years as an investment banker at JP Morgan, Bear Stears, Shore Capital, Cantor Fitzgerald and Panmure Gordon. He holds a PhD in psychopharmacology and a degree in pharmacology.
The Deepbridge investment team is monitored by the Supervisory Investment Committee, which reviews every aspect of an investee company. The committee acts as a partner to the portfolio companies’ own management teams.
Deals will come from Deepbridge’s network which potentially includes research and innovation organisations, commercial enterprises, academia, venture capital institutions, as well as Government backed development funding agencies. One example of this is Sci-Tech Daresbury.
Sci-Tech Daresbury is a science campus in Cheshire, one of only two National Science and Innovation Campuses in the UK.
The campus aims to provide world-class facilities for successful sci-tech businesses. The site was previously home to the Daresbury Nuclear Physics Laboratory, a government test centre set up in the 1960s.
Businesses at Sci-Tech Daresbury have access to high-quality office, laboratory and technical space. Shared facilities bring notable benefits and mean individual companies can potentially save on capital assets and carry out work more quickly. Firms can tap into on-site business support services, which amongst other things will work with them to secure government grants and other support.
Three quarters of Daresbury companies work with a university or research institute. 60% liaise with at least one other company on site.
Today the campus is home to over 100 high-tech companies in areas such as advanced engineering, digital/ICT, biomedical and energy and environmental technologies. These vary from start-up companies to more mature firms – including IBM and Lockheed Martin. It thus has the potential to provide a rich source of deals for the Deepbridge team.
As with all SEIS firms, these are the smallest unlisted companies which are statistically more prone to failure. There is a high chance of firms going bust. Being based at Daresbury could provide an advantage here. Over a decade, just 5% of businesses based on the campus have gone into administration. This attrition rate is low considering around 50% of UK start ups generally fail within the first five years. Remember, past performance is not a guide to the future and there are no guarantees this will continue.
Daresbury-based businesses benefit from the tax breaks afforded by the Government’s Enterprise Zone scheme. Enterprise Zones are specific areas in the UK. Businesses within these areas can claim up to 100% business rate discounts (worth up to £275,000 per business over 5 years), simplified local authority planning and government support for superfast broadband throughout the zone.
Deepbridge will invest across at least five technology-focused companies.
It will focus on commercialising intellectual property (IP). The companies must be scalable and not in need of too much capital. Typical examples of IP are software development or medical technologies developed by an entrepreneur or university spin out.
Investee companies must show some, if not all, of the following characteristics:
- Significant market potential
- An improvement on current market offerings or the potential to carve out a new market segment
- Businesses using a technology-derived platform and/or an innovative approach to meet a newly-identified or existing market demand
- Technology-driven businesses with a clear and realistic path to commercialisation
- Robust intellectual property which may or may not yet be patented
- Passionate, energetic and experienced founding teams
- Clear exit strategy with a four to five year time horizon
- Proof of concept
Deepbridge will seek non-dilutive matched funding from regional development funds and government grants. An investment of £100,000 for instance might be matched by a grant of £100,000. The company therefore has £200,000 of capital to deploy but an investor has only invested £70,000 (net of tax reliefs). Leverage of this nature doesn’t carry the same risks as bank debt or private loans. Please note, there is no guarantee the investee companies can attract these grants. Tax benefits depend on circumstances and tax rules can change.
Investors can expect investments to be focused on the following sectors:
- Energy and resource innovation
- Medical technologies and diagnostics
- Business enterprise IT
- Data analytics
- Control technologies
- Advanced Materials
- Robotics and artificial intelligence
Deepbridge may take a seat on the board of directors of each investee company and may also co-invest alongside SEIS investors.
Exits of portfolio companies are targeted in four to five years, although there are no guarantees.
Given the nature of the sector and the market expectations a trade sale seems one viable route investee firms may take. Deepbridge will seek to invest in opportunities that have the potential of becoming either a threat or a complement to existing products on the market to appear on acquirers’ radars.
The target return is 200p for every 100p invested net of all fees over five years, not guaranteed. This is an ambitious target, and the risk of failure is high.
These are very early-stage science and/or technology businesses, which makes this a very high risk investment. By their very nature these firms will be more prone to failure than later-stage, more mature businesses.
Out of five portfolio companies held, all of these could fail.
Your capital is at risk and investors should not invest money they cannot afford to lose. Investors should be aware these are long-term investments and are illiquid. Tax rules change and the value of tax benefits will depend on circumstances.
There is an annual maintenance fee of 2% levied against the investee company.
Deepbridge will charge the Investee Companies a corporate advisory and arrangement fee of up to 2.5% of funds invested in that Investee Company. Dealing and custodian fees are also charged at 0.65% and 0.5% respectively.
Deepbridge is entitled to a performance fee of 20% of returns above a hurdle rate of 150p per 100p invested. The performance fee is due if the total cash returned to investors exceeds the amount of the initial investment by 50% or more.
Deepbridge and Enterprise IP, the manager, retain the right to charge additional fees to investee companies to meet costs relating to future fundraising, marketing and administration.
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 exciting offer in our view, but the risk is commensurate with the potential reward. The risks are mitigated partly by the generous reliefs afforded by SEIS. Deepbridge has a high-quality and experienced team and a rich source of deals for the portfolio.
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 30.11.2017