With renewable energy businesses no longer permitted as qualifying EIS investments, many providers have been searching for opportunities with similar defensive characteristics in different sectors and areas. Guinness believes it has found a raft of businesses with asset backing that qualify for EIS and could deliver this offer’s key target of capital preservation.
- New offer 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 5-6 years
- Raising £20 million
- Aims to be invested in the 2016/17 tax year, in time to claim tax relief for this or the last tax year
Update (10.03.2017) – now fully subscribed for 2016/17. Funds received after 14.03.2017 will be invested the following tax year.
Guinness Asset Management is a specialist fund manager with approximately £60 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 new EIS.
With this new EIS offer the key aspect is some form of asset backing to underpin part of every investment.
The managers are considering investments in three areas:
- Businesses that own property and land, e.g. nurseries, crematoria gyms and pubs
- Businesses with high value stock and equipment, e.g. luxury goods dealers, or businesses with tradable assets such as logistics and freight
- Businesses with assets and associated long-term contracts, e.g. waste management or recycling businesses with long term contracts
All businesses will have advance EIS assurance.
The management team has already identified a raft of businesses in the above areas and is already in negotiations with six. These include:
- An existing nursery in London that is looking to expand to a new site and purchase the freehold. The nursery already has an annual revenue of £1.6 million with profit before tax of £400,000;
- 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 dry bulk shipping business. With day rates at an all-time low, it may seem an odd time to consider investing, however Guinness believes ship values closely correlate to the day rate, indeed vessel prices are at historic lows with no new ships being built. The asset-backing is provided by the scrap metal of the vessels.
These are just some of the investments Guinness is currently considering. The manager says the pipeline of deals is strong with over £20 million at advanced stages and a further £50 million if demand was very strong.
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; 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 even liquidation.
This could be a very diverse portfolio of investments from shipping to children’s nurseries to classic cars 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 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 amongst investors. In addition, due to the new and stricter EIS-qualifying rules, this year 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.
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 £75. 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 made and delivered a return of £1.22 to £1.34 per £1 invested to investors. 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.
- Min. Investment
- Asset backed
- Amount Raising
- Full for 2016/17; open for 2017/18