Review - The City Pub EIS Fund – Tranche 2 top up
This is a top-up offer for the second tranche of fundraising of The City Pub EIS for the 2016/17 tax year. £14.2 million has already been raised to date and this offer aims to raise another £15 million. The fund will invest in three existing EIS companies that own and operate freehold high-quality pubs across the South of England.
- Exceptional management team with a history of delivering strong shareholder returns. Management includes the founders of The Capital Pub Company PLC, which first floated on AIM and was then sold to Greene King PLC, delivering a total return of £2.43 per £1 invested (excluding tax relief) to its original EIS shareholders. Past performance is not a guide to the future
- Asset backed qualifying EIS
- Well established pool of trade buyers or IPO to allow an exit for investors within 5 years
- Raising a further £15 million, topping up existing £14.2 million raised
- Minimum investment £25,000
The fund is led by a highly experienced team with excellent track record. David Bruce (Chairman) and Clive Watson (Investor consultant) have founded and grown many EIS pub companies including Capital Pub Company plc which went from a start up to 35 pubs and was sold to Greene King in 2011 returning investors £2.43 per £1 investing before any tax reliefs.
Clive Watson will identify the sites, whilst Peter McDonald and James Watson, also formerly of Capital Pub Company plc, will be responsible for the operational management.
Funds raised in this top up to the second tranche of the City Pub EIS will be invested into three asset-backed EIS companies which will own and operate high quality pubs across the South of England. These companies, already incorporated and operating, are The Liberty (City) Pub Company (“Liberty”), The Phoenix (City) Pub Company (“Phoenix”) and The Summit (City) Pub Company (“Summit”). Approximately £ 4.7 million has gone into each of these three companies already.
The same team has other funds under management including The City Pub East and West which now owns 24 pubs. Accounts for the nine months ending 28 December 2014 show over £2m of EBITDA, a 64% increase from the prior period.
They also raised £14.3m in the first tranche of the City Pub EIS and invested in Galaxy (City) Pub company, Pioneer (City) Pub company and Sovereign (City) Pub company. So far, they have acquired a total of seven sites, all of which are believed to be of great quality and promise.
Each company in the second tranche will aim to develop a high-quality managed pub estate free of tie to any brewer. The pubs will be be situated in affluent cities or large towns. They will be non branded and aimed at the local market, using local suppliers. They will be family friendly with a good range of ales, premium coffees as well as traditional pub fare and on-trend dining with an increased range of vegan and vegetarian dishes.
The success of this fund relies upon identifying and acquiring the best sites (Clive Watson’s expertise should help) and managing the refurbishment, creating a successful retail concept for each site, and delivering the profit targets through good day-to-day management. Achieving a profitable exit price will be dependent on strong financial performance of the pub and also a stable to good property market. The more sites the fund operates, the better the economies of scale and purchasing power, which should in turn help profit margins.
We have been informed all three companies Liberty, Phoenix and Summit are already in advanced negotiations and several sites are expected to be refurbished and trading before Christmas 2016.
The majority of the sites acquired by Liberty, Phoenix and Summit will be freehold providing some asset backing. Bank debt will be used in the funding of these sites and the target gearing level is set around 25% to 30%, capped at 50%. Sensible levels of gearing can drive shareholders returns. The management team expects an exit will be considered from 2020, once all pubs are hopefully mature and generating strong profits.Minimum investment in the Fund is £25,000. Funds raised will be allotted prior to 5 April 2017. The EIS 3 certificates are expected in June 2017.
No target return has been specified. By way of a benchmark, previous returns from EIS pubs from this management team ranged from £2.43 for every £1 invested to £1.10 for every £1 invested.
Clive Watson believes that this four to five year timescale will enable each of the New EIS Companies to build up a portfolio of quality managed pubs that will be attractive, in particular, to a trade buyer.
Alternatively, if market conditions are suitable, then the Fund Manager and each New EIS Company may consider a flotation.
- Identifying, sourcing and acquiring sites is key. In line with changes to EIS rules which precludes the acquisition of existing trades, the investment strategy is to seek to acquire, convert, license and operate new pubs
- Competitive market with larger operators with significant market share
- Economic factors and market sentiment may impact exit prices for the sites and also the amount of disposable income and discretionary spend of consumers
- The offer relies heavily on its key people, namely Clive Watson and David Bruce
- There does not appear to be a hurdle rate for payout of the staff bonuses. In the downside case, management could be paid profit-related bonuses whilst shareholders could lose money
- While there is debt outstanding, the bank will have first charge over the freehold. The company will need to operate within agreed covenants and interest rates may vary over the term of the loan
- Occasionally the same site may match the criteria of more than one company run by this management team, accordingly there is a mechanism in place to deal with it. It would appear the earlier funds and EIS companies have priority over Liberty, Phoenix and Summit, however as the other EIS companies are close to being fully invested and also have the option of acquiring going concerns, this is unlikely to cause an ongoing problem to Liberty, Phoenix and Summit
There is an initial charge of 2.75%, plus VAT, which will be paid by the New EIS Companies and should not affect the level of tax reliefs. In addition Wealth Club charges a 2% Introducer Fee.
There is also an Annual Management Fee of 1.5% plus VAT, decreasing to 0.75% from 31 May 2021. A Performance Incentive Fee of 0.5% p.a. will apply for a maximum of five years, provided that returns equal to or greater than £1.30 per £1.00 invested.
Notwithstanding the risks flagged above, overall a good opportunity to invest in an EIS qualifying investment with asset backing led by highly experienced and proven team.