When am I ready to launch my EIS fund? Some practical advice on steps to take before engaging advisers.
2nd June 2017
You want to launch an EIS fund? Over the coming weeks, we at Mainspring will be publishing a series of short articles to walk you through the process.
PART 1: FIRST STEPS
Firstly it’s important to note that an EIS fund is not actually a “fund” in the sense that there is no separate legal entity which constitutes the “Fund”. Instead it’s a collection of individual managed accounts – one for each investor. From an FCA regulatory perspective, it can indeed be regarded as a fund (an AIF), but we will look at this in more detail in a later article. For this first article in the series it is worth noting that the term EIS “fund” refers to a collection of “managed accounts” under the direction of a regulated manager.
Launching a fund can be a time-consuming and expensive exercise and there are certain steps that it is wise to follow, prior to formally engaging with advisers. And you will need to engage advisers!
First of all, it is imperative to have a high degree of confidence in four things, without which raising a fund may not be a good idea:
1. that you have a clear understanding of the area of the market you will be investing in;
2. that you have a specific plan of how to pin point the types of companies which will qualify for relief under the Enterprise Investment Scheme (EIS) that you will be backing;
3. that you have the ability to source sufficient investment opportunities from this group of companies; and
4. that you will be able to raise the money required to make these investments.
Each of these is equally important. Without a clear understanding of exactly which types of businesses you are hoping to back with the fund’s capital, you will find it difficult to articulate to investors where you are putting their money and this unfocussed approach will give a mixed message to entrepreneurs, whose businesses you are seeking to support.
Even with a clear understanding of your preferred investment targets, you will still need to be sure of your ability to originate a sufficient quantity of high-quality deals. How many relevant businesses are there? Do you know which are the attractive ones? Do you have deep industry networks that can help introduce the businesses you want to back? This will also be a key concern of investors.
Finally, we come to the question of being able to raise the capital for the fund’s investments. Whilst it can be difficult to approach a fundraising campaign with absolute certainty, it is important that you have certainty around interest in your investment thesis and that you have relationships with investors (or introducers to investors) who have the means and inclination to back you.
This soft-circling of investor appetites must be done very carefully. Marketing is a regulated service and you must not market your fund before it (or, rather, you) are regulated. You can canvas opinions, but there is a murky line between chatting and regulated activity. There are a number of different interpretations amongst advisers, and there is no clear guidance other than that you have to be careful and it is wise to err on the side of caution – so if in doubt, seek advice!
So, what are the key take-aways? Before you spend money on professional advisers:
Firstly know the sector and geographies you will focus on, secondly know which types of EIS-eligible companies you will target, thirdly know that you can source sufficient companies of the right quality that meet the criteria you have selected, and lastly know the potential investors for the fund.
Of course, that’s just the beginning…
Next – PART 2: THE DEVIL IN THE DETAIL
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