The following is the manager report for the six months to September 2023 provided to investors in DSW Ventures portfolio companies. Please email email@example.com for further information.
Overview and Market Conditions
In terms of quoted markets, the broader technology market has recovered since our last half-yearly review, driven by the AI boom. Meanwhile, the biotechnology market remains subdued. The effect of quoted market movements eventually percolates down to the depths of early-stage investing. We see these trends manifested in continued pricing and quality pressure on technology investments on one side, combined with a tough market for raising co-investment in our life sciences deals on the other.
Both trends were unhelpful to us in closing new investments, and we were further distracted by the amount of portfolio management work in the period. That said, whilst we have not closed an investment since Q1, the pipeline is full, and we are drawing down for our next two investments and expect to close six or seven investments before the end of the tax year. We are currently working on £3.25m of investments to be funded by DSW Ventures.
This includes several Seed EIS investments, and we expect to have invested most, if not all, of the SEIS fund’s commitments by 5th April, next year. We are now preparing for further fund offerings, which we will be discussing with investors in the first quarter of 2024.
In overall terms, the portfolio performed well in the period, with the carrying value of investments being £11.1 million, a 44% increase on the cost of £7.7 million. This represents an IRR of 14% before the effect of EIS and 28% after EIS, calculated on a relatively prudent basis. We feel there is further value to come from our portfolio and are very pleased with the overall progress.
We were joined by a new partner, Doug Quinn, at the end of the period. Doug is very experienced across finance and operations in the life science sector and will add considerable value to our firm and the portfolio. Doug has hit the ground running and is leading on some of the new investments in the SEIS fund as well as helping us scale the firm and secure succession.
We should give a passing mention to HMRC in this overview. Their efficient management of the SEIS and EIS schemes is a crucial part of our investing process. Latterly they have been both slow to provide pre-clearances, and we observe anecdotal evidence of some capricious behaviour in challenging ongoing qualification – even on matters which were provided clearance in the past. We mitigate the risk of losing SEIS or EIS qualification through our due diligence process, advance assurance applications, and in how we manage the portfolio companies. However, it is important to re-emphasise that these reliefs are not guaranteed. We have tried to improve the situation by feeding in to the UKBAA, of which we are members, to assist their lobbying in Whitehall.
It is worth mentioning also that the National Security and Investment Act 2021 is now in force and, in a case of legislative over-reach, impacting even our own small investing activity. The process is manageable but a distraction of our time and, importantly, another cause of potential delay in closing investments.
- The portfolio generally performed well in the period, either in scaling revenues, or in achieving technical or other milestones in the case of our spinout companies.
- Four of our portfolio companies are in various stages of funding rounds, all for very positive reasons in supporting continued progress and growth. In each case we propose to participate in the funding rounds – to follow our winners and invest in their continued success. We are pleased with the quality of candidate co-investors which comprise major late stage or private equity investors, overseas corporates, and sector-specialist VCs.
- One of our earlier investments, Shopblocks, raised £1.5m in the period from a Mercia-led syndicate which puts it in strong position to capitalise on its unique enterprise-grade ecommerce suite and existing market presence. Shopblocks has also appointed a new CEO who will be taking up the post imminently.
- Encouragingly, some of our companies are also receiving attention from trade buyers – we will continue to assess opportunities as and when they arise, though none of our current portfolio companies are currently actively pursuing an exit.
- We were pleased to hear that a deferred consideration arrangement on one of our previous exits is likely to return significantly more than expected on exit. We are expecting a further cash distribution in H1 2024 and for the present have marked-up the carrying value of the investment. This is expected to increase our realised proceeds to over £1.3m on a cost of realised investments of £781,000 before the effect of EIS.
Portfolio returns and valuation in the six months ended 30 September 2023
- We have revalued the portfolio to 30 September 2023. Individual investors’ holdings will be updated in the portfolio area of investors.dsw.vcin coming days.
- The carrying valuations and the proceeds of previous exits generated an IRR of 28% after tax relief (14% before reliefs), with a net uplift of £558,000, ignoring any tax relief, in the last six months.
We have not closed an investment since January 2023, though this is not because of a lack of applicants for funding. Our flow of investment opportunities continues to grow, assisted by our hiring Ed Lee as intern earlier in the year.
We continue to be highly selective of business propositions and disciplined in company valuations – we would do many more deals if we were not so choosy. However, the current pipeline is quite significant and at a very advanced state, reflecting a huge effort by the team in deal-sourcing, negotiation, and due diligence.
Thanks to directed marketing at incubators, universities and other hubs of innovation, we are seeing an increasing number of knowledge intensive startups to feed the Seed EIS fund and the occasional doable deal for our EIS Investment Service.
We were pleased to promote Emma Cassidy to manager in the period. Our intern, Ed Lee, has settled in well and is assisting greatly in managing the huge inflow of new deals. Of strategic significance, in the period we appointed a third partner, Doug Quinn, to help develop and grow our business whilst ensuring its long-term succession. Doug is a finance professional whom we have known for a long time, with extensive operational experience in industry, spending over 15 years in the life sciences sector.
Alignment of interests and transparency of fees
The cumulative investment by partners and staff of the DSW group has so far amounted to 21% of the aggregate investment by individual investors. Our collective commitment to the Seed EIS Fund amounts to 24% of individual commitments.
We aim to protect the relationship between us and our investors by clearly disclosing fees earned as investment manager as well as any fees earned by DSW advisory businesses. Specific fees on each investment are detailed in the investment circulars as well as in the datasheets for each investment.
The last six months were quiet in the sense of deals done and exits achieved, but we have made good progress in delivering the next wave of investments including the first few from our SEIS fund. We have worked hard in supporting the portfolio companies which seem to have climbed a few more steps up the ladder.
We thank our investors for their continuing support for DSW Ventures.
DSW Ventures, 15 November 2023