Review - Guinness Sustainable Infrastructure EIS

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

This offer is now closed

The Chancellor is shutting the door on most of the renewable energy sector for new EIS investors - until now one of the most popular. Renewable energy companies that benefit from government subsidies are already excluded for new EIS investors.
From 6 April 2016 all EIS investments in the renewable energy sector will be banned, therefore investors who want to access the area only have a short time left to do so.
The good news is that despite subsidies having been removed, falling production costs mean that attractive opportunities still exist.

Highlights

  • Well-trodden exit paths
  • Low development risk with long term deals (10 years plus)
  • Focus on low cost of installation
  • Predominately invests in combined heat & power generators and unsubsidised renewable electricity

The offer

Guinness Asset Management is a specialist fund manager with approximately £50 million invested in EIS funds and particular skills in the energy sector, both quoted and unquoted investments.  Five key people work in the sustainable infrastructure team (which includes renewable energy investments), including Edward Guinness and Shane Gallwey.

This latest £20 million EIS offer supplements Guinness’s existing assets in this sector and is intended to be split four ways: combined heat and power (CHP), unsubsidised renewable electricity generation, waste heat and waste management. The bulk of the funds raised are expected to be invested in the first two areas.

Combined heat and power

There is nothing renewable about CHP. It is simply a small gas-fired power station. The plan is to install these in factories so the electricity generated can be sold to the factory owner at a discount to the prevailing electricity price. A by-product of the electricity generation is heat, which is effectively produced for free but also has a resale value to the same factory. Generally, 10-year deals are struck for the generation of electricity.  No real development risk is taken as there’s a strong pipeline with developers lining projects up and offering them to Guinness. Each CHP generator costs about £2.2 million to buy and install with approximately a six-month installation time.

Solar

There isn’t much to say about Guinness’s solar exposure. It is a fairly standard solar panel installation and electricity generation outfit. The team will be looking for projects with low installation costs, which is crucial in an unsubsidised world. The team have an initial project lined up on the Isle of Man, not renowned for sunshine, but where the costs of installation are low.

Target Return

These investments offer fairly predictable revenue streams, which can be valued simply and are attractive to very long term investors. This predictability comes at a price and the returns will be modest. A return of £1.10-£1.15 is the minimum target.

Exit strategy

As with many other renewables projects, solar investments have a reasonable stream of buyers waiting in the wings. With the CHP projects, the developer of the projects will often be keen to reacquire the asset and have first right of refusal to repurchase after three and a half years.

Risks

There are three key risks with CHP. Firstly, the factory owner could go bankrupt. This is a genuine credit risk. 100% of revenues come from the factory owner so careful due diligence as to where CHP generators are placed is important. If the factory owner did fail, the CHP generator could be moved elsewhere and still have a value. The second key risk is you are buying gas to generate electricity and then sell it on. If the gas price is low, and electricity price is high it's good, but the reverse isn't. Finally, if there was a shortage of gas, problems could occur. With solar projects, once installed there is very little technological risk. When looking at exits, there is the usual danger of not being able to sell unquoted assets.   

Fees

The initial fee and the annual management fee of 2% are charged to investee companies in order to preserve more of the tax breaks. The performance fee is based upon investors receiving their original £1 back. Guinness retains 20% of any return over £1, however only if a total return of £1.15 is achieved. For example, with a return of £1.15, investors receive the entire amount, but with a return of £1.20, Guinness would receive 4p, and investors £1.16. Both seem reasonable for this specialised product.

Summary

Although four areas of investment are considered, the manager believes the primary focus will be solar energy generation and combined heat and power projects as these provide the most potential.

In our view the management team is credible and have a full understanding of the different aspects of the energy market. Asset backing helps provide downside protection in the event of a failure of any of the businesses. Overall this is an attractive offer with a thought out mandate from an experienced team.