NEW: Draper Esprit VCT – Manager interview with William Horlick

NEW: Draper Esprit VCT – Manager interview with William Horlick


Hello, I’m Alex Davies,
founder of Wealth Club. Today I’m with William Horlick
of Elderstreet Investments to talk about the
Draper Esprit VCT. [Music] First off, Will – tell me about
the Draper Esprit VCT. What does it aim to do,
what’s its background? It was founded in 1998 as a generalist VCT, and in 2016 we did a deal with Draper Esprit plc, who are an AIM-listed venture capitalist,
they have a market cap of over £500 million, and we co-invest alongside that PLC
balance sheet money and their EIS funds. Since we did that deal, the
syndication arrangement with Draper, we have invested in
15 new deals with them. So tell me about your own
background. Have you been at Elderstreet since
the beginning? I’ve been at Elderstreet since 1998. Previous
to that I did some investment banking, but more importantly I ran a business,
so, like you, running your business, we know and understand
the models, cash flows, etc. So within the wider team at Draper Esprit
there are 17 investment professionals. The wider team is about 30. There’s a
huge amount of experience within that team, from 3i through to entrepreneurs,
doctors, all sorts of skill sets. What sort of companies
will I be investing in? Well, they’ll be tech focused,
but we have four sectors really. But let me give you a flavour of
some of these businesses. So in the enterprise space, for example,
we have a business called Roomex. It is a business-to-business workforce
travel management platform. It has over £40 million of gross bookings
going through that platform. It’s growing quite quickly, so if you think
of a Booking.com for consumers, this is down at the SME level.
All of these players need to have their corporate travel organised
for them. That’s one. Another one is Endomag, which is
a healthcare medtech business. It has hardware, it’s in cancer detection
and pinpointing where the cancers are. That is growing very quickly, it has
international scope through its resellers. I think last year when I was here I said that
the Draper EIS has invested in a unicorn called Graphcore, which is an advanced chip
designer. We have a business in the VCT which has all the attributes of being
a very, very valuable company. It’s a business called Evonetix and
it’s in the DNA synthesis area. So the reason we invested in it
is because of the management. The CTO had been part of the team
that broke the human genome. That was commercialised and turned into
a business called Solexa, that was eventually sold for £600 million
to an American outfit called Illumina, that has gone on to be
worth many billions. So the management have come back,
and we have backed them to effectively build the technology
on chipsets to build long strands of DNA. Highly complex, but very good
management, very good tech. So where do you get
these deals from? Well, that one came from Cambridge,
where Draper Esprit have got a very good reach. A number of
their executives and partners are part of the Cambridge network,
so we have very good deal flow. Do you find there’s a lot of
competition for these deals? There’s always competition, it’s a
pretty competitive space at the moment. If I was to say who our immediate competitors
for the joint Draper Esprit, our VCT and EIS, we wouldn’t traditionally look at the other
VCT players out there, we would think of Index [Ventures], Atomico, Balderton [Capital],
so the institutional venture players, who if you’re an individual retail investor
you probably would have no chance of getting into those funds.
Via our VCT you do have the chance to get into that deal flow
at that level. There’s a lot of talk about very
high valuations – are you finding that? Yes, yes. It is competitive – we have turned
down some deals this year, over the summer, because the pricing, we felt we couldn’t pay the prices that some of the other investors wanted to pay. Particularly there were two businesses
we liked and they went to US VCs. We do have to maintain some
price discipline in this. While we can use instruments,
financial instruments to benefit our shareholders in the deal,
you know, price is key. Am I right in saying that most of the
companies you’re investing in, they’re quite a long way off profit,
and they will require an awful lot of cash. So is there a danger that if everything
stops for a while, maybe the economy isn’t quite so good, that these
companies could run into trouble? Ah, is that a reference to WeWork,
if I’m allowed to say that? Yes, well the businesses we’re backing,
we’re backing for growth, so we really aren’t interested in making profits on a short-term
basis. So we want to make sure that the cash that’s generated in the business
goes back into growing the business itself. Underlying, though, they must have a
feasible business model so that, at the end of the day, when you
sell that business to a trade buyer, there is actually a
real business within it. So let’s talk about the older
part of your VCT portfolio, the traditional VCT investments.
Tell me about those. If I give you an overview of
what’s in the VCT today. Just over a third are
Draper Esprit tech investments. About the same amount, a third, are
what I call the legacy investments, and just under a third is in cash.
So on the legacy side, 94% of the value of that legacy
portfolio is made up of four companies. Two of them are AIM-quoted, two of them are
private businesses where we own, or the VCT owns just under half of those.
They are going quite nicely, there’s an element of technology to two of those
businesses. One is a software business, that’s the AIM one, with £12 million
recurring revenue now, and the other is a tech-enabled manufacturing business
which has just posted its highest turnover and best EBITDA for the year. Unfortunately
they have all repaid our debt, so we have no income from our loan notes, but they do
pay us a rather nice dividend every year. So, those are fine – for new investors
coming in now, I would say that by the time they qualify there will be
very little of that legacy portfolio in the pot. So does that mean that
dividends are going to go down? No – we have over £25 million
of distributable reserves. We will pay the dividend, which
we target 3p, which comes out to just over 5% on a flat yield –
just over 7% with the tax breaks. We have the reserves to pay that for the
next 7 years, all things being equal. And I assume there’s a wish really
to keep those older companies, although there’s only four,
which make up most the portfolio you’ll want to keep them
as long as you can? When the time is right, we will sell them.
There’s one we can’t sell, because as you know VCTs cannot have control, so
we will wait for that to run through its normal course of action. I would say
two of the others are growing quite nicely. And you know, when the time comes, we
aren’t wedded to keeping them particularly, but we would probably have to see quite
a nice offer from the trade to sell them Have you had any
recent exits? We haven’t, we haven’t had an exit
actually for two years, where we sold down some of one of our
AIM companies, we took out cost and the same amount again as profit, and
we’re running the rest. So, we haven’t – but I think there is some promise within
some of these early Draper companies, and within 12 months I think we will see
some interest for some of those businesses. So the VCT today is very different from
the VCT three or four years ago – how risky is it,
would you say? Well there’s risk associated with
everything, and if I was to say out of ten companies, if I look at what
Draper Esprit PLC in the EIS have achieved since their IPO in 2016,
out of all these exits there’s only one which has returned nothing.
There will be some businesses which we don’t follow on, and that do
recoup no funds for us. However, we do have that big alpha possibility where
we can get a 7x to 10x on some of these. So Will – if someone wants to put
money into a VCT this year, why should they go
with Draper Esprit? The strategy of investing
alongside these other funds – Draper Esprit and the plc and the EIS – really I think makes a difference to us. We’re doing very large deals of £10 million a go across those three vehicles, and I think that makes us
very different to a lot of VCTs out there. If you ally that with the dividend
that all VCTs are paying, and the possibility of getting that
because of the distributable reserves, then I think we’ve got a very
interesting play here in our VCT. William Horlick, Draper Esprit VCT,
thank you very much. Thank you Alex. [Music]

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