Review: Guinness AIM EIS
This is the fourth tranche of the established Guinness AIM EIS fund, the only EIS portfolio investing specifically in AIM-listed companies. This latest offer will invest in 10 to 20 businesses across a variety of sectors. Previous investments include English sparkling wine production and one of the largest retailers of fishing tackle in the UK.
- The only EIS fund investing specifically in AIM companies
- Portfolio of 10-20 companies expected
- Four-year track record
- Target return of £1.30 per £1 invested net of fees over four to five years (not guaranteed)
- One EIS5 tax certificate for entire portfolio
- Deferred fees payable on exit to maximise growth
- Investments should be deployed in 2018/19 with tax relief available against 17/18 and 18/19 tax years
- £20,000 minimum investment
Guinness Asset Management is a specialist fund manager with approximately £50 million invested in EIS funds. Andrew Martin Smith is the lead manager on this AIM EIS and is a former CEO of Hambro Asset Management (which merged with Guinness in 1998). As well as the Guinness AIM EIS, Mr Martin Smith manages the Guinness Global Money Managers Fund and has been making small and unquoted company investments for many years.
Guinness’s AIM team have worked together for five years and for four years on the AIM EIS service.
This latest offer is looking to raise £10 million. It is structured as an approved EIS fund so investors receive a single EIS tax certificate (EIS5) instead of one per underlying company (EIS3). The certificate is issued once all the money raised has been invested. The investments are expected to be deployed in the 2018/19 tax year: investors should be able to use the income tax relief against their 2017/18 or 2018/19 tax liability.
Each investor in the fund should have the same portfolio of 10 to 20 companies with a spread of sectors. The companies sought are mainly AIM listed shares which qualify for EIS status, but they must also be profitable with an established management team which has a sound track record.
In a typical year, the team looks at 80-100 different opportunities. They will only review companies that have EIS Advance Assurance. Guinness’s Investment Committee reviews every deal and offers guidance, but Mr Martin Smith makes the final decision. He is assisted by Hugo Vaux and Shane Gallwey, as well as Tim Guinness, who founded the firm.
AIM is a market of extremes. The best performing companies have significantly outperformed the index so there are opportunities to invest in solid fast-growing businesses. As well as newly listed AIM businesses, Guinness can also invest up to 20% in new issues on the NEX exchange and pre-IPO firms. The NEX exchange is a small cap stock market formerly known as ICAP Securities and Derivatives Exchange (ISDX). For the team to create a portfolio of 10+ investee companies they might have to participate in 1 in 6 new listings or more.
There is no stated preference for any sector but the nature of AIM will lead the investment team into certain areas. The most active sectors for AIM-listed EIS-qualifying companies include software and computer services, pharmaceuticals and biotechnology, electronics and electrical equipment, support services and healthcare equipment and services.
Guinness will largely steer clear of biotech businesses and companies in the oil and gas sector. Both are volatile and biotechnology companies - particularly those with a focus on drug discovery – tend to either sink or swim.
In the existing AIM EIS portfolios there is a wide range of companies including some unquoted ones. Guinness has previously invested in companies such as wine maker Chapel Down, fishing tackle retailer Fishing Republic and Coral Products who manufacture and supply injection moulded products.
Guinness team members have £1 million personally invested in the service which aligns their interests with investors.
The target is to return over £1.30 per £1 invested at launch with a timeframe of four to five years, although this is not guaranteed.
As most portfolio companies are listed on AIM, there is some natural liquidity and an exit route, although please remember AIM investments are generally less liquid than more mainstream investments. Guinness intends to offer the option of transferring the portfolio to an Inheritance Tax portfolio or to transfer the underlying companies to an investor’s own name during the fourth to fifth year.
The benefits of AIM EIS
Firstly, the exit routes may be clearer as AIM businesses can present a natural exit route and there is some external price validation. Investors should be able to sell their holdings after the three-year qualifying period with relative ease (dependent on market conditions at the time). Note this is compared with unquoted companies: shares in AIM can still be illiquid and hard to sell when compared with the main market. Market consensus determines the price rather than the investment manager or a third party.
Whilst the reporting standards required for AIM are not as rigorous as the main market, investors may have increased transparency on the underlying company performance as against unquoted EIS businesses.
AIM businesses that qualify for EIS tend to be newly listed. Those that are successful can offer good growth prospects for investors – remember though that many don’t work out so well.
The downsides of AIM EIS
The flipside to having price validation and live pricing is that market sentiment and factors could go against EIS investors. Their investment is vulnerable to this sentiment and the associated volatility.
Unquoted EIS investments are less tied to the markets. Their investment managers typically have a greater say in the running of the business. They will take board seats or non-executive roles. Managers of AIM shares tend to take a less active role.
As the price of an AIM business is driven by the market, the manager doesn’t have the same scope to negotiate entry price.
The quality of businesses within this AIM EIS will be dependent on what comes to market in the next twelve months.
The underlying companies are early stage and could be quite small therefore their share price may be volatile and they may be more prone to failure. However, in that scenario, EIS loss relief could be claimed.
Investors should not invest money they cannot afford to lose. The usual risks with smaller companies exist with this EIS offer. For instance, EIS investments are illiquid (even those listed on AIM) and capital is at risk.
The value of tax relief will depend on the circumstances of the individual investor and tax rules could change in future.
There is an initial fee of 4.5% through Wealth Club (normally 5%) and an annual management fee of 1.75% per annum. There is an annual administration fee of £60 and a transaction fee of 0.35%. The performance fee is 20% of any returns over the original £1 invested at launch.
Guinness’s fees are deferred until the portfolio is sold, to maximise growth. VAT will be charged where applicable.
This is the only specific AIM EIS fund currently available. It is a higher-risk, more volatile portfolio, aiming for higher returns. AIM has been a mixed market ever since it launched over 20 years ago, however amongst the poor-quality companies there are also some gems. Mr Martin Smith seeks to find these but so do many other AIM managers. Performance of the existing three Guinness AIM EIS portfolios is encouraging, but share prices could be more volatile than more established AIM listed stocks and could be exacerbated by a market downturn. The deferred fees mean growth potential is maximised, but there are of course no guarantees, and the performance to date is not a guide to what might happen in the future.
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 25.08.17