Review – Cyrus Precision Engineering 2 EIS
Despite what many think, the UK is a hotbed of quality manufacturing companies. This EIS offer from Cyrus Investment Management looks to tap into the niche, but potentially highly profitable, precision engineering sector.
- Invests in precision engineering companies
- Minimum £50,000 investment
- Investing in complementary businesses
Cyrus launched its first fund in 2015 (raising £5 million), however some of the founders have been investing in engineering businesses for many years.
Cyrus has three partners: David Hitchcock, Peter Schwabach and Ian Watkins. Both Mr Schwabach and Mr Hitchcock are former Goldman Sachs bankers. Mr Watkins is an engineer by trade who has been acquiring and turning around engineering companies for the past 15 years. Messrs Watkins and Hitchcock bought their first engineering firm together in 2009 out of administration.
The model is simple. Of the 500,000 engineering enterprises in the UK, about 1,500 are high precision engineers with a turnover greater than £0.5 million per annum. According to the management team, the British and Germans are the world leaders in this field. Precision engineering encompasses many areas, from reinforced security doors, to makers of airplane parts and specialists surface coatings.
The team believes there is a quirkiness and innovation about British engineering. Many of these businesses are relatively small and large-scale private equity and venture capital simply never look at them as they aren’t based in London or the South East. This creates opportunities, especially when the founder wants to retire.
Cyrus’ team believe businesses can be bought on multiples of 1-3 times earnings (although they have bought firms on significantly less). They only buy what they consider leading-edge businesses to which they can add their experience.
The plan is to invest in businesses that are complementary so various functions can be performed centrally and when the businesses have grown sufficiently they maybe of interest to one buyer as a “package”. Top-line growth is important, but it is the cost savings through the synergies and then being able to sell on a much larger company that creates the potential for profits for investors.
Because manufacturing and engineering is often politically sensitive, there are many EU and other governmental grants available, both for machinery and providing jobs, which Cyrus have experience in applying for.
There is a stark valuation table in precision engineering according to Cyrus. For companies up to £5 million turnover, companies are bought at a multiple of 1-3 times earnings, whereas with companies in the £30 -£60 million turnover range it is 8-10 times. There is no specific target return with this EIS.
Various exit routes have been identified and companies could either be sold as a package or individually. In the view of the management, precision engineering companies with larger turnovers command more of a multiple of profits than those with much smaller turnovers.
With these type of businesses there is always the risk that another firm will come along and do what you are doing in a better or cheaper way. In addition the engineering sector depends on a number of key industries such as military, aerospace, automative, and industrial. In an economic downtown expenditure in these areas maybe reduced. A further key risk is the ability to package up the companies bought and make them attractive to buyers down the line, this appears key to achieving a high return on investment.
Cyrus Investment Management charges an initial fee of 2%. They also receive a 1% deal arrangement fee. The annual management fee is 1.75%. In addition, there is a performance incentive fee of 30% of returns above £1.27 at the portfolio level.
In a nutshell Cyrus aims to buy quality businesses at a low price, centralise costs, package them together and then sell them on at a much higher valuation. According to Mr Hitchcock, they don’t need to be heroes, they just need to manage these businesses sensibly. This is an interesting way of investing into high-quality UK manufacturing and engineering businesses.