Review – Chestnut Inns Ltd EIS
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
According to the media the great British pub is dying. That may be true, but with many pubs closing there is surely an opportunity for quality pubs with good food, drink and accommodation to flourish in prosperous areas with less competition. It is the management’s view East Anglia is becoming increasingly prosperous. It is for these reasons that Chestnut Inns was formed.
- Established premium hospitality business
- Two inns in group already trading and profitable
- Mix of freehold and leasehold
- MD invested £400k so far
- £25,000 minimum investment
This offer is raising £2.58 million. The current (pre-money) valuation is £4.6 million. A total of £3.5 million has previously been raised under EIS rules, and the group has outstanding debt of £668,000. In the last fund raise in January 2015, £1.8 million was invested.
Chestnut Group owns and runs premium hospitality venues, or in plain English, upmarket pubs and inns. It currently has two trading sites near Cambridge, The Packhorse Inn at Moulton and The Rupert Brooke in Grantchester. Approximately £1.1 million of new money raised will be used to develop and complete the fit out of two recently acquired sites, with the balance being used to acquire another two.
The founder and managing director is Philip Turner, a city veteran with 20-year experience in the banking world. He has a personal interest in the success of the company: he has invested £400,000 of his money so far and owns approximately 12%.
Mr Turner cites three key reasons for launching Chestnut in East Anglia. Firstly, the young epicentre of London is moving east and not west (i.e. Shoreditch) therefore the closest rail links are to East Anglia and Kent. Secondly, Cambridge is an enormous economic driver for the whole region, for example house price inflation is huge and the ripple effect is going out to the likes of Kings Lynn and Bury St Edmunds. Regional commuting is happening, and not just into London. Finally, infrastructure spend is large - the A11 and A14 are two key roads facilitating travel in the region both of which have had a lot of money spent on improvements.
Mr Turner wants Chestnut to be a destination pub group with great food, drinks and accommodation (at some venues). Food and all alcohol margins are broadly the same, as food is much more labour intensive. Accommodation is much more profitable and the average room rate at the trading inns already is £125-£150 per night. However, due to EIS rules turnover from accommodation can only account for 20% of total turnover. Interestingly, eight rooms are the optimum number as only one housekeeper is needed per site to cope.
According to Mr Turner, drink-led pubs with craft beers are doing well as are great food pubs. It is the ones in the middle that are struggling: either premium food or alcohol is needed to prosper. With both food and alcohol regional provenance is important to customers.
The two sites currently trading are both freehold. Of the next two, due to launch in June and September 2016 respectively, one is freehold and the other leasehold. Further sites may be either - the objective is to grow the group to 14 sites over the next five years.
Mr Turner is also acutely aware of new restrictive EIS rules, whereby investment in existing pubs does not qualify for EIS reliefs. However, if a pub has been shut for six months, it should be eligible. Before any new pub is added, Chestnut speaks with HMRC to ensure that EIS status is protected.
Whilst each premise in the group is managed separately, several functions are performed centrally helping reduce costs and bring efficiencies. Web design, marketing, branding, HR and business development are managed centrally, for example. Reservations and bookings will also be done centrally – if the phone isn't answered on site it bounces through to head office. In addition, a new head chef has recently been hired for one site, who in time is likely to be executive head chef for the group.
The target return is a doubling of money over a five-year period.
Mr Turner has identified a number of exit routes, but isn't wedded to a particular one. Selling to a regional brewer such as Greene King is one option, as is building up enough freeholds within the group so that either private equity investors or even a wealthy individual (for inheritance tax reasons) could consider buying.
A key risk is the experience of the management in running a larger pub group. Mr Turner, the current managing director has a background in finance. As the group expands it will need specialist experience and Mr Turner is currently looking to recruit to fulfil this need. A further risk is the exposure to the consumer. The UK economy has been in a fairly benign environment for the consumer over the last few years with low interest rates and low oil prices meaning more disposable income. If rates and oil were to rise, many would have less money in their pocket to spend on discretionary items, such as dining out.
As this isn’t an EIS fund or portfolio there are no explicit annual management fees. It is a single company EIS and therefore the annual running costs are the business running costs. The fundraising fees are expected to be £125,000 plus VAT, paid for by Chestnut Inns Ltd. The management also benefits from an incentive arrangement via “B” shares in Chestnut. As it currently stands, the management receives a performance incentive of 25% of any value achieved on sale above £1.20 per share, as long as a minimum of £1.60 per share is achieved. Investors buying today invest at £1.50 therefore a sale price in excess of £1.60 is needed to make a profit.
Chestnut looks an interesting offer run by an entrepreneur with sound financial experience and plenty of “skin in the game”. The mix of freehold and leasehold adds some welcome asset backing.