Why ‘portfolio effect’ of a fund is more important than ever

The tax break offered by EIIS is a much-lauded benefit of the scheme for investors, but with the changes in rates for 2024 favouring earlier-stage companies, it’s more important than ever that investors understand the risks of investment and balance this with the tax relief on offer.

These changes, says Sinéad Heaney, Davy EIIS fund director and partner at BDO, mean that the expertise of a successful and experienced fund manager becomes invaluable.

“The benefits of a fund include the experience of the fund manager and the portfolio effect – this is now more important than ever with these changes. There is now a 50 per cent, a 35 per cent and a 20 per cent level. The 50 per cent is for very early-stage businesses.

“We need to balance the tax break with the investment risk, so the 50 per cent businesses are not our target but we will be looking at earlier-stage businesses to get the 35 per cent and get a blended approach between those and more established businesses to spread the risk. There’s no other tax breaks out there, so even a blended rate is very welcome for investors.”

Having been in operation since 1995, the Davy EIIS Fund is the longest-running fund in the market; in fact, Heaney herself has been involved since 2002. Each year, however, the fund directors make a very careful choice whether to offer the fund or not.

With the changes this year, the decision to run it again was a carefully considered one, but bearing in mind the current landscape of rising interest rates and the support the fund has given to so many businesses over the year, the directors ultimately believed there was still value for investors.

“This year’s changes are very significant but they are driven by EU legislation,” Heaney says. “We consider ourselves to be very experienced fund managers able to navigate this change, the complexities of the scheme, and being able to identify suitable investees with the objective of delivering a return for investors.

“But there is a different level of risk now for investors, and they should be aware of this. That said, we still think this is a very attractive investment opportunity for investors.”

The Davy EIIS Fund is looking to raise €10 million once again this year, the same figure as in each of the last few years, and again, the model is to invest in exciting businesses in a number of different sectors.

Variety of sectors

“We invested in a portfolio of six companies in a wide variety of sectors,” says Heaney. “This year there is again a wide variety of companies in the mix, including those in the ICT and software space, those with a recurring monthly or annual revenues that are going from strength to strength despite the downturn.

“We also target some niche areas, such as online education, aviation, healthcare, and smaller tech businesses servicing these sectors. Renewables is a huge growth area, anything to do with ESG.”

When looking at what attributes a company needs to have to be considered for inclusion in the fund, Heaney says the following: “There is one company that springs to mind that demonstrates what we are looking for.

“A really experienced team, very strong market growth opportunity, huge growth over the last two years – so although it’s an earlier-stage company, they’ve demonstrated that the market does exist and they’ve already got a solid track record of growth and success.”

Despite the changes in legislation, the EIIS remains a great opportunity for companies. “For companies, the EIIS is extremely attractive,” says Heaney. “It’s helped many companies in the past, and it’s a very viable proposition for businesses in this world of growing interest rates.

“You can buy back your equity after four years, and you have full use of those funds over that period – it’s not like a bank loan where you have to start paying it back immediately.

“These typically are businesses that are looking to scale; obviously we are working closely with them to make sure they are in a position to repay the money at the end of the four years, but for the first year or two, they have the freedom to take off the blinkers and just go for it. From a company perspective, that’s a huge opportunity.”

The help and guidance of an experienced fund manager is important, too, with Heaney adding: “EIIS legislation is complicated; we guide the company and protect them throughout the four years. We’ve seen everything, have invested over €200 million in over 150 companies and supported so many businesses through all types of situations, from exciting growth times, to product development, to challenging times.

“So while we would actively monitor businesses to ensure they follow their business plan and stay on track, if things do go wrong, we are there to help them revise their strategy and re-align the businesses.”