Review: Guinness EIS
Asset-backed EIS are perennially popular with investors. This latest tranche of investment for Guinness EIS seeks £10 million to invest in a diverse range of asset-rich businesses, including a fine-wine merchant, crematoria and children's nurseries.
- Second asset-backed tranche of investment from established EIS manager Guinness
- Targeting asset-backed or asset-rich businesses, e.g. nurseries and crematoria
- Focus on capital preservation
- £1.25 per £1 invested target after 4-5 years (not guaranteed)
- Evergreen offering: next tranche due to close on 30th June 2017, raising £10 million
Guinness Asset Management is a specialist fund manager with approximately £90 million invested in EIS funds and particular skills in the asset-backed energy sector, both quoted and unquoted. Five key people, including Edward Guinness and Shane Gallwey, work in the asset backed team, which manages the sustainable infrastructure investments (IHT and EIS) and this EIS.
With this EIS offer the key aspect is some form of asset backing to underpin part of every investment. All businesses will have EIS advance assurance.
The managers consider investments in three areas:
- Businesses that own property and land intrinsic to their activity, e.g. nurseries, crematoria, gyms and pubs
- Businesses with high value stock and equipment, e.g. luxury goods dealers, or businesses with tradeable assets such as classic cars or fine wines
- Businesses with assets and associated long-term contracts, e.g. waste management or recycling businesses with long term contracts
The management team has identified a range of businesses in the above areas. These include:
- Two new crematoria to be built in the North of England. Planning permissions and the management team are already in place and construction partners and equipment providers have been identified. The value of the UK funeral-related services market is estimated at £2 billion
- An animal carcass processing plant to be built next to an existing abattoir. Planning permission is already in place. The abattoir currently has to pay £23 per ton to dispose of the carcasses. The carcass processing plant would buy the carcasses from the abattoir and process them to produce fat, stock and fertiliser. This, according to Guinness, can produce highly visible and predictable revenue streams
- A children’s care centre, operated by an experienced team and contracting with local authorities to provide short term childcare facilities
- A fine wine trading business, building and trading a portfolio of high value wines held in bonded warehouses and traded on the Liv-ex Fine Wine exchange. The value of the assets is held in the tradeable stock
These are just some of the investments Guinness is considering. The manager says the pipeline of deals is strong with over £20 million at advanced stages.
Guinness only invests in equity, avoiding businesses with high leverage as the manager wants to have claim over the cashflow of the business to help mitigate risk.
Please remember: no investment strategy, no matter how cautious, will eliminate risk. All investments can fall as well as rise in value, so you could get back less than you invest.
£1.25 per £1 invested is the target return (which is not guaranteed); this may seem slightly ambitious for a portfolio that has capital preservation and not growth as the main focus, but the manager is confident it is achievable. This is intended to be a four to five-year investment.
As the companies chosen will all be very different, there is no predetermined exit strategy. Exits could be achieved by way of trade sale, IPO, leveraged buyout or liquidation.
This could be a very diverse portfolio of investments from crematoria to children's facilities to fine wines and abattoir services. Therefore, it is quite difficult to assess the individual risks of potential underlying companies. One of the bigger risks is simply that this is a relatively new area of investment for Guinness, even though it has been investing in asset-backed EIS for six years now. Consequently, if Guinness fails to raise sufficient capital, investors may end up with a less diversified portfolio of smaller deals. That said, asset-backed EIS portfolios have historically been very popular with investors. In addition, due to stricter EIS-qualifying rules, we expect to see a reduction in the number of opportunities on offer. So the combination of high demand with low supply could well help Guinness achieve its fundraising target.
The usual risks with unquoted companies apply to this EIS offer. For instance, EIS investments are illiquid and capital is at risk. Investors should only invest money they can afford to lose. The value of tax relief depends on circumstances and tax rules could change.
There is a 5% initial fee (2% of which is paid by the investee companies) and a 2% annual management fee. In addition, there are transaction fees of up to 0.35% and an annual custodian fee of £60. Finally, there is a performance fee of 20% of any amount returned to investors above £1.
Guinness has recently realised some early asset-backed renewable energy EIS investments and delivered a return of £1.22 to £1.34 per £1 invested. Past performance is not a guide to the future. Whilst these were different businesses to the ones being considered for this EIS, they are asset-backed and share some of the same characteristics. Guinness has an experienced and well-resourced investment team that should manage the transition to other forms of asset backed investments.
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 aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment and read the providers documents carefully.