One of the recurring themes preached by myself and my colleagues is the importance of sector experience when managing growing businesses. Operating in the tax-efficient investment space, including via the enterprise investment scheme, we invest our clients' subscriptions in to unquoted companies which are at varying stages of their life cycle. To have the best chance of producing a satisfactory exit, and therefore the best possible returns, for investors we need to understand how the companies we invest in plan to grow, how they plan to maximise markets opportunities and how they plan to produce an exit.
There can be stark differences in how businesses grow and how investors may be able to exit, depending on the sector. Which is why we insist on sector experience. For example, I would not have the first idea of how to manage and exit a media investment proposition. That is not my experience, and therefore I would only ever consider having such a proposition if we had a partner experienced in this sector.
Where my team and I currently have experience is in renewable energy, technology growth companies and life sciences. I mention these in order to highlight how these specific sectors may differ, with the biggest difference possibly being with regard to exits. Of course, no exit can be guaranteed.
The appeal of renewable energy projects is often the relatively predictable income generation that is provided. There are of course various complex matters to be managed during planning, construction and operating, but if those are managed correctly then the returns on offer are largely predictable and in many cases subsidised. This predictable income is therefore likely to be appealing to pension providers, energy companies themselves and/or institutional investors, thereby providing natural potential exit opportunities.
Technology investments are usually growth opportunities. Before investing in any such company it is important to understand what the potential exit opportunities will be in the future. Within this sector, that may well be trade purchases or an IPO. Understanding at the earliest opportunity who might potentially consider a trade acquisition is important. If an IPO is likely to provide a more optimum exit, then understanding which exchange to list on is also important. Understanding the sector is therefore vital. Within the tech sector there are also differences between sub-sectors. For example, a medical technology is likely to have different commercial characteristics to a software innovation.
The third of my examples is life sciences. Life sciences is again a unique sector with its own issues to be aware of. Life sciences companies are likely to take considerably longer than tech or renewable energy companies to produce an income or exit. Life sciences, whether that is med tech or pharmaceuticals, tend to have numerous funding rounds before being available in a commercial market. Early stage investors in this sector are potentially likely to exit long before commercialisation is achieved and almost certainly before profitability. The key in many life sciences businesses is to build the data and R&D to such a position that a larger company acquires the IP to further develop.
These three sectors are merely an example of how and why sector experience is important when managing companies on behalf of investors. When considering investments in growing unquoted companies, such as via Enterprise Investment Scheme propositions, advisers and investors should seek to understand the experience of the manager when assessing whether they have the specific knowledge and understanding of their sectors to best manage such investments.