Changes to the R&D rules come into effect on 1 April 2019
We have recently read Bad Blood, the intriguing story behind the corporate fraud at Theranos as well as kept a keen eye on the Patisserie Valerie and Plus500 stories as they develop. Would you have picked up on any of these if you had been sent the Investor Deck? Would our process, which is ever evolving, have raised red flags? Certainly, there were intelligent investors who were stung but what are the lessons learnt?
We would highlight an area for each case which might have helped but please - tell us what you would have done differently?
Theranos - Don’t be impressed by the names on the board unless they have actual experience within the sector. Make sure they are competent and exercise independent judgment. Also, if possible - verify claims made by the CEO before investing and talk to clients!
Patisserie Valerie - It’s easy to say ‘if things look too good to be true then they probably are’ but when a business is being audited, you can normally get a sense of comfort. The warning sign may have been just the growth in outlets - growth, through acquisition of outlets, can lead to vulnerable accounts. Dissecting the accounts is difficult but viewing the management accounts tells a story - financial and management accounting need to have greater collaboration and as the company grows, the information within the management accounts should do.
Plus500 - currently no fraud has been shown following a reporting error in which a loss of £100m was overlooked. Is there anything that investors could have done to mitigate this? Probably not, but how would you interpret the opportunity after the error has been reported and the share price has plummeted? What steps would you take in order to crystallise your opinion on whether this is a genuine mistake or something more sinister? Does one simply have to say that there is not enough information to make an informed decision and therefore default to "no"?
All thoughts welcome - what would you have done?
Today Finstock Capital officially launched into the Film and TV credit space to support film producers following the success of our R&D loans.
Finstock Capital continues to look at underserved markets where we can provide bespoke, efficient and supportive solutions to SMEs.
Finstock Capital provides both debt and equity finance to UK SMEs. Please get in touch to learn more.
Many of you will know Yogi Berra all too well already but one of our favourite quotes of his is "No one goes there nowadays, it’s too crowded”. It nicely sums up various equity trades through the first half of the year and exemplifies why we founded Finstock Capital: to do something different and maintain control of our destiny. We were reminded in a recent meeting with a management team of the importance of ‘not being a busy fool’ and this has been one of our aims for the first few months - find a niche and do it well. Don't try and do everything!
We have two strands of the business: short-term bridge financing and long-term private equity deals.
With the short-term deals, we have found our niche in providing high-growth, technological companies with capital secured against their government grants (R&D tax credits). In this way we can support these companies while managing the overall risk that we are exposed to and are willing to take. We have now completed a number of these and are officially open for more business. Know anyone awaiting a credit from HMRC? Then please do get in touch.
For the long-term private equity deal, we have now met a large number of attractive and well run businesses in the sectors that we like. We are yet to come to final terms but through meeting a wide range of knowledgeable and experienced contacts, we feel we are getting close. The reasons that we entered this market (VCT and EIS rule changes; valuation opportunities; and fragmented markets) have not changed and we continue to meet strong management teams seeking investment to propel them to the next stage. It is a competitive market but we feel that our focus on the lower end of the UK SME market sets us apart from others and we can add value to well run businesses looking to take the next step in their long-term growth story.