"In financial services you will hear a lot talked about ‘smart’ versus ‘dumb’ when it comes to investment decisions that are made"
Although this phrase appalls me, I guess the underlying sentiment is valid, as having smart people who make smart decisions and act smartly, should be a benefit in all walks of life not just business.
In financial services you will hear a lot talked about ‘smart’ versus ‘dumb’ when it comes to investment decisions that are made, and indeed you will probably be aware of ‘smart money’ as opposed to ‘dumb money’ when it comes to traditional equity investing. Smart money is deemed to be invested by the experts in their field, who are foreseeing trends in the markets before others, while ‘dumb money’ tends to follow later, attempting to ride out those trends, often after most of the profit has been made and the trend is probably of the downward variety.
Slightly closer to home, in the world of venture capital and investment, there is regularly a discussion that takes place around the fundamental differences between ‘smart money’ investing as compared to ‘dumb money’ investing. They carry slightly different meanings in the venture capital world but, in fairly crude terms, when we refer to the managers behind the investments and talk about them as ‘smart’ we’re acknowledging sector experts who offer more than just their money; instead they offer their contacts, their mentoring skills, their relationships, their commercial support, etc.
In this context, when we refer to ‘dumb’ we’re talking about the delivery of often low-cost funding and pretty much nothing else. Once the cheque has been issued and cashed, the investee company is left to their own devices – there is little support from the investor and the company is left to live (and potentially die) by the decisions it makes on its own.
Now, you might actually think, that the latter approach wouldn’t work at all, and (as an investee company) you’d want much more than just the money, however in a number of cases this is exactly what’s required. There are examples of both models providing attractive returns and you’ll find plenty of investee companies who want the cash injection but nothing else – happy to do it on their own terms with the investor as ‘silent’ as possible.
Our approach however weighs much more heavily towards the ‘smart’ definition, not because there’s any inherent snobbery about the way others might invest, but because we have a team that comes (predominantly) from a business-building background, and therefore providing that ‘smart’ support to help others build their own firms is what they know how to do, and it’s what they want to do.
For clarity, we don’t think this means we are ‘smarter than anyone else’, and if we’re honest, that ‘smart’/’dumb’ jargon is way too simplistic. However, our team members are not from a traditional fund management background, where it might be considered appropriate to focus solely on mass-diversification, covering off as many potential businesses as possible – which are believed to be capable of delivering the necessary returns - across a variety of sectors, providing the necessary funding and leaving them to it.
In the Enterprise Investment Scheme world, our view is that (in a very general sense) stakeholders are much more likely to be looking for that ‘smart’ approach – the EIS environment has fundamentally changed with a focus now on growth capital. We believe this means you need investment managers who are sector experts and have the individuals available to help investee companies thrive. Other managers in the EIS, who do not historically have that background, are either having to change or are having to try to convince advisers/investors that they have ‘the smarts’ – this is reinvention on the grandest of scales.
To help advisers/clients ascertain the ‘smarts’ of those active in EIS, there could be a couple of pertinent questions to ask:
• Firstly, how long have they had a growth EIS proposition? Or if sector-focused, how long have they had an EIS proposition operating in that sector?
• Secondly, speed of deployment. Those who have been ingrained in a sector for an extended period should be able to deploy funds quickly, as they should have a continually developing pipeline of investee opportunities. Ask how long it is taking the manager to deploy and, if it is a lengthy period, why?
Overall, we would say there are no wrong approaches, and certain ways of investing will be right for different clients and different investee companies. However, we believe a ‘smart’ approach offers reassurance to our stakeholders, who we tend to find want to know what companies are up to, how they are progressing and ultimately whether they’re focused on the exit that we all ultimately want to achieve.
