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Thought Leadership
The summer of 2016 will no doubt be remembered as the
hottest summer on record but for EIS investment managers,
more pertinently, it will be remembered as a historically
difficult one as managers chased overworked part-time
HMRC case officers to find out whether their applications
for advanced assurance - under the new Finance Act rules
of November 2015 - would be approved.
In the heat of that process - critical to both Investors, IFAs
and managers – it was no doubt easy to forget that the EIS
investments themselves and not just the certificates, were
the priority. Setting aside the requirement to secure EIS
approval for investments our job is all about investing our
clients’ money wisely and delivering a meaningful return
after three years.
One of the unintended (or perhaps) intended consequences
of the 2015 Finance Act is that it radically transformed
the role of many EIS managers from astute buyers of EIS
eligible assets into that of entrepreneurial managers of
multiple small businesses.
Furthermore, by introducing a seven year age limit on
businesses where a manager could take a majority stake
and restricting investments into businesses older than
seven years into a specific new product or market, the
focus of the manager shifted still further into the heart of
the business by requiring a manager to determine which
product or market the business should now focus on.
At Cyrus Investment Management (CIM), where we have
been investing EIS funds into existing British engineering
companies since 2013 with the specific aim of doubling
their size and value in three years, the change of focus from
the macro to the micro (as introduced by the Finance Act)
has made little impact on our modus operandi. Managing
SMEs is the core competence of our investment team
and it is the direct engagement with the management
and workforce of the different businesses we invest that
remains our focus.
As venture capitalists our particular brief is to invest in
“best in class”. British engineering businesses which have
long term orders with blue chip clients in growth industries
such as aerospace, security and defence. We only invest in
businesses that have exclusive or difficult to obtain “moat”
accreditations, ie. industry accreditations granting them
the right to make products in strategically sensitive and
technically advanced industries such as nuclear, aerospace
or defence, thereby restricting the number of national and
international competitors.
We then monitor over a hundred different aspects of a
potential investment which vendors are then put to proof in
an extensive due diligence process, which CIM funds itself.
Historically we will only invest in 5% of all the businesses
we consider for investment.
What happens next?
Having made an investment we will then introduce into
each business a centralised financial reporting system, a
uniform quality control system, a sophisticated monitoring
system that enables us to understand the actual cost
of each product and component made and monitor the
individual efficiency of each machinist and engineer.
To these measures can be added the improvement in
the financing terms on pre-existing machinery or new
equipment, the improved terms negotiated with suppliers
where raw materials are bought not just for one business
but on behalf of all of them. Add to that the standard renegotiation
of leases on existing premises or alternatively
the signing of leases on new premises.
Notwithstanding the fact that many of our businesses
are fully state of the art with robotic machinery operating
24 hours a day – and machines whose costs run into the
hundreds of thousands of pounds - we regard our most
valuable assets as the people who manage and operate
them. They, and not the machines, are the ones who can
grow the business and particular attention is paid to hiring
or replacing them.
Our aim at the end of the three year period is to have a
complimentary group of companies, centrally managed
that can be sold as a single going concern at a premium to
trade buyers or institutional investors.
Post Brexit – we remain very confident as the particular
sector of the market we service – precision engineering
– has seen a growth in orders as a result in the fall in
the pound.
Let’s hope next summer is a lot cooler!
EIS Yearbook 2016/17
11