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Thought Leadership
In fact, much of what is loosely called
‘research’ in the EIS space does
nothing more than combine factual
‘cut and paste’ from the manager’s or
company’s website with the manager’s
response to the research house’s
questionnaire. This is not research
– it is advertorial copy. It might save
the adviser or investor the bother of
reading the manager’s investment
memorandum, but it doesn’t add value
and should not be considered research
by professional investors.
Some research providers have
attempted to produce a scoring
system. The aim is commendable
– to provide a simple measure for
advisers and investors. Unfortunately,
the scores are entirely subjective,
opaque and unverifiable. The
assessment is divided into sections
such as ‘Objectives/Business Model’,
‘Management Team’ and ‘Deal Flow/
Exit’; a score is given for each section
and a total calculated. But there are
two glaring issues here.
First, there is no publicly available
explanation as to how the score
is determined in each section -
what justifies 17/20 for one fund
in one section versus 18/20 for
another fund?
Second, how is the weighting for each
category determined? For example,
one provider’s report weights the
‘Track Record’ at 40% of the score,
whilst ‘Management Team/Deal Flow/
Exit’ all together only merit 20%.
We are not suggesting these sector
scores and weights are wrong, our
point is that, without disclosure of
the underlying template for scoring
and weighting, the outsider can
only assume that the numbers are
plucked out of thin air. The idea of
scoring may be laudable, but the
execution is specious. Thus advisers
are kidding themselves if they think
they have carried out due diligence
by considering these scores – if
prompted by the FCA how would they
explain how they are derived?
Some advisers seek to overcome the
lack of analysis by advising clients to
diversify – don’t put all your eggs in
one individual company or fund. Such
diversification should certainly be
part of an investment strategy, but it
should not be a substitute for research
on each fund or company – how can
you be sure that diversification does
not mean you end up with ten duds
instead of one?
In response to this need for rigorous
analysis Hardman & Co entered the
EIS research market less than a year
ago at the behest of a number of
the participants.
Hardman is an FCA registered firm,
which already has a long roster of EIS
clients. Our aim is to bring the analytical
rigour for which we are known in other
asset classes to the tax-enhanced
world. The firm has a 20-year track
record of writing independent
research on quoted companies, with
market capitalisations ranging from
the smallest to £750 million.
It also carries out due diligence for
investment banks, corporate finance
boutiques, and private equity houses.
It is asked to conduct investment
case evaluations for major global
businesses, family offices, sovereign
wealth funds and act as expert
witness in complex court cases where
the valuation of a business is critical.
We have a team of investment
analysts, most with more than 20
years’ experience of understanding
the fundamentals of their industries
and businesses and discerning the
investment case and risks. Indeed, our
media analyst, Derek Terrington, was
cited by the Financial Times in its 2006
article ‘A catalogue of great analyst
notes of our time’ for his so-called ‘crap
circular’ regarding the float of “Robert
Maxwell’s Mirror Group” empire where
his advice was ‘Cannot Recommend
A Purchase’.
As the demand for EIS grows, there
has never been a more critical time for
EIS advisers and investors to raise their
game in research and understanding.
Only by doing so can the EIS industry
throw off the accusation that it is all
about risk, tax benefit and poor return.