Review – Downing 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.
Downing EIS Tranche 2 has just opened for investment and is seeking £15 million to invest in asset-backed businesses. The asset backing will typically be in the form of freehold or long leasehold premises with a resale value. Downing currently manages over £200 million in asset-backed investments.
- Asset-backed businesses with freehold or long leasehold premises preferred
- Experienced investment team
- Spread of 4-6 companies anticipated
- Target return £1.10 (not guaranteed)
- £15,000 minimum investment
This EIS will focus on investing in businesses that trade from freehold or long leasehold premises or businesses with predictable revenue streams. There are five key sectors the managers will consider:
- Children nurseries
- Wedding venues
- Data centres
- Leisure centres
Downing’s 35-strong investment team is led by partners Chris Allner and Jonathan Boss. There is a strong specialism in asset-backed deals with over £200 million of investments currently and £125 million across the five sectors listed above. In total Downing manages over £700 million across EIS, VCT and IHT investments.
Downing generally invests with management teams it has worked with previously: in its view the key to success is building long-term relationships. Management is expected to invest significantly in each deal so their interests are aligned with investors’.
Examples of businesses backed by the team include Hedley James Limited, an exclusive use wedding venue operator which recently acquired a country hotel from administration to convert into a wedding venue under the new name of Swynford Manor, and Pilgrim Trading, which specialises in purpose-built children’s day nurseries and is led by a 14-year veteran in the sector.
New EIS rules dictate existing trading businesses no longer qualify for EIS relief as new investments. Downing typically buys freehold premises from businesses that have gone into administration or buy a business or building and convert it to a new trade, so is unaffected by these rules. This also means the deal can be cheaper than buying a trading business as there is no element of goodwill to be negotiated (i.e. paying for future profits).
A primary objective of this EIS is to preserve capital, hence the focus on businesses seeking to trade from freehold or long leasehold premises. In the event of the failure of an underlying business, the base value of the asset should be recoverable, although not necessarily in full. The target return is therefore modest at £1.10 per £1 invested. Please remember investments can fall as well as rise in value so you could get back less than you invest, and returns are not guaranteed.
Downing anticipates investing in most deals in the 2017/18 tax year meaning income tax relief will be available for that tax year and 2016/17 if using carry back. EIS3 certificates could take between 4 and 12 months to arrive typically after each individual investment is made.
Downing aims to offer an opportunity to exit the EIS after four years, although there can be no guarantees. On previous Downing asset-backed EIS, specifically renewable energy, Downing provided timely exits.
Whilst Downing aims to reduce risk where possible and provide a stable long-term return, there are clearly no guarantees. The asset-backed nature of many of the investments will provide a degree of underpinning but this is unlikely to cover the entire investment. It leaves investors exposed to the property market, which in a downturn can be an illiquid asset class.
The usual risks with unquoted companies exist with this EIS offer. For instance, EIS investments are illiquid and capital is at risk. Investors should only invest money they are prepared to lose. The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future.
There is a 5% initial charge upon investment into this EIS and an annual management fee of 2.5% plus VAT. Downing could also receive deal arrangement fees of up to 2% plus VAT from the underlying companies. Finally, there is a performance fee of 20% of returns between £1 and £1.10 based on £1 invested and 30% of returns thereafter.
Downing has a long history and pedigree in investing in asset-backed businesses. The tightening of the EIS investment rules should have a lesser impact on its approach than it will for other EIS managers. Returns are predicted to be modest on this EIS offer, but Downing is more concerned with two things. Firstly, it aims to protect your capital and secondly it invests in businesses that it believes can easily be sold after three to four years. There is likely to be a dearth of asset-backed EIS this year and we expect this quality offer to sell quickly.
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aim to highlight investments we believe have merit, but investors should form their own view on any proposed investment.