Review: Rockpool EIS Portfolio Service
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
An interesting EIS portfolio service from an accomplished manager, Rockpool gives investors control over the type and number of investments made and how they should be split between asset-rich and growth-orientated companies.
- Unusual flexibility and control
- Choice or combination of growth and asset-rich investments
- Typically invested over 8-10 months
- Target return of £1.20-£1.30
Rockpool was founded in 2011 by Matt Taylor, a 21-year veteran of private equity. He is managing partner and runs the business with four others. In total Rockpool employs 17 – six on the investment team with further recruits likely in the near future. Andrew Green is Head of Investment and has 18 years’ experience in corporate finance and fund management.
Investors into Rockpool’s service get a significant degree of flexibility and choice. Rockpool offers two investment strategies: Asset Rich and Growth. Investors can choose either or both. They can also choose the number of companies in which to invest.
Rockpool has so far invested £180 million in 37 companies with a mix of equity and loans (Rockpool has a separate service whereby investors lend money to underlying businesses).
Rockpool treats every deal as separate so investors will receive annual reporting per deal and not on a fund basis – this aids transparency.
Deals are sourced from a variety of areas, from corporate finance houses to Rockpool’s investor network. Once a deal comes in, one of the investment team conducts due diligence. If a deal looks interesting enough, it gets passed to the investment committee. Four sit on the investment committee, including two external members, Roger Kendrick and Alan Armstrong. Roger is a successful entrepreneur. Alan is ex NatWest Private Equity. For a deal to be accepted, a majority needs to approve it. The individual leading the deal would put the investment paper to the committee.
Asset rich is the biggest single part of Rockpool’s business, with about £130 million invested. Its ideal asset-rich company currently is a crematorium; indeed, it has invested in five so far. Typically, building a crematorium costs about £3-4 million. It suits EIS as banks don’t like lending to finance the build. Operating costs are low, for example normally just four employees are needed. Planning permission is hard to get, which is the main barrier to entry. However, the crematorium management company obtains the planning prior to EIS funds being invested. The EIS owns the site and building. Currently Rockpool has backed three operating crematoria, two more are under construction and one about to open.
Rockpool will look at other asset-rich deals including managed storage, construction and diamond sourcing.
To date Rockpool has invested about £10 million of EIS equity funding in seven growth deals, but also lent about £40m to growth businesses. It looks to invest in established companies, with substantial revenues and profit. Generally, these are management buyouts, although Rockpool has to be careful about this under the new EIS rules. No sector is specifically targeted as the fund manager believes good management can be in any sector.
The first growth deal was in 2013: Airedale, which installs kitchens in pubs and schools. That business was making £1.3 million in profit when it received the investment and expects to make £2.6 million this year. It was profitable and of good size, but new management came in with flair and appetite to grow it substantially and Rockpool’s investment replaced existing shareholders.
Rockpool aims to exit its growth deals within about four years, but clearly there are no guarantees. Four new growth deals have been completed in the last year. The typical company currently targeted for investment has turnover of approximately £5 million per year.
The target return is dependent on the strategy chosen. In the asset-rich pool, the target return is £1.20 -£1.40 per per £1 invested, whereas in the growth pot the target return is 2-4x. Each deal is structured so that if successful investors typically receive the first £1 of every return prior to performance fees being paid.
The exit route is partly determined by the type of deal. The plan is for asset-rich deals to be bought out by the management team behind the projects, refinanced or packaged together and sold off to a trade buyer. The plan for growth investments is usually to exit by way of a trade sale. As Rockpool only launched in late 2011, it is unsurprising there haven’t been any exits thus far. Some of its earlier asset-rich deals should be coming to fruition in the near future. Exits within four to five years are targeted, but of course not guaranteed.
Similar to many EIS offers, the biggest risk surrounds exits and as Rockpool has only been around since 2011, there have been no exits thus far; in other words, the exit strategy hasn’t been tested.
Rockpool doesn’t charge investors any fees directly – all the fees are charged to underlying companies. This ensures investors can receive EIS relief on the entire investment amount. Rockpool’s initial fee is 7% and there is an additional intermediary fee of 3%. Rockpool’s management fee is 2% per annum, again paid by the underlying company based on the amount invested. If successful, Rockpool receives a performance fee of 30% of any profit, after giving investors their original investment back.
Rockpool is very professionally organised. The investor has flexibility as to the strategy pursued with a choice of asset-rich and growth deals, as well as the number of deals. Even though the business is in the early stages, the signs look encouraging. Like any embryonic business, managers should learn from their mistakes and Rockpool has refined the offering and process to the benefit of investors. One downside is the fee structure. It is upfront and transparent, but rather high. That aside, this service is worthy of consideration.