ISSUE 420. November 2014 Guinness AIM EIS Contents EIS Review 2 Risk Warnings 3 Conclusion 4 Description 9 Manager 11 Financials

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1 ISSUE 420. November 2014 EIS Review Guinness AIM EIS Contents 2 Risk Warnings 3 Conclusion 4 Description Overview Due Diligence Process Investee Companies Guinness AIM 2014 Investment Committee AIM 9 Manager Investment Committee Investment Team Manager Record 11 Financials Costs EIS Review The Guinness AIM EIS Portfolio (the Fund) is a discretionary managed EIS portfolio and an approved EIS fund for HMRC purposes. Following on from the success of the Guinness AIM EIS 2014, the Fund seeks to invest in a portfolio of at least ten EIS qualifying companies, whose shares are likely to be listed on the Alternative Investment Market (AIM). The Fund will be managed and promoted by Guinness Asset Management (the Manager). The minimum investor subscription is 10,000. The maximum fund size is 10 million and the minimum is 500,000. The close date is 6th April Investors should be able to claim EIS Income Tax relief in the 2015/16 tax year, or carry back to the 2014/15 tax year. The approved structure simplifies the procedure for claiming tax relief: each investor receives a single EIS 5 certificate for their whole subscription, rather than having to submit a separate EIS 3 certificate for each underlying investment made by the Manager. Shares will be held in a nominee account so share certificates will not be issued (contract notes are issued for each share bought). EIS 5 certificates should be issued when 90% of investments have been made, which is expected to be around April Investments will only be made into Investee Companies that have received EIS Advance Assurance from HMRC they should qualify for EIS benefits. EIS tax benefits are expected to be claimed on the full subscription by the investor.

2 Risk Warning for EIS and Seed EIS Schemes Individuals should always read and bear in mind the risk warning notices that are included within providers investment offer literature/documentation, including prospectuses, information memorandums, securities notes, brochures and other related marketing literature. While the following list may not be exhaustive, some of the main risks to be aware of include: Investments are in small, unquoted companies and should be considered as high risk Investments are illiquid and generally need to be held for at least three years before any tax benefit can be claimed An EIS/Seed EIS investment should be viewed as a long-term investment Legislation, along with the nature and level of tax reliefs is subject to change. There can be no certainty that investments will be eligible or remain eligible for EIS/Seed EIS Relief Historic investment performance cannot be used as a guide to future performance, and the value of any given investment may rise or fall Many EIS/Seed EIS Schemes involve investment in a single company or sector and therefore should only be considered as a small part of an overall portfolio Investors may not have independent representation on the Boards of investee companies which can mean their interests are not adequately considered relative to those of the executive team EIS/Seed EIS investments should only be undertaken by sophisticated investors who not only understand, but have also given careful consideration to the underlying investment strategy and associated risks. For help in determining potential investment suitability, professional advice should be sought Often there will be no regulatory oversight and investors will usually not be eligible for compensation if things go wrong. 2

3 Conclusion The offer is a second, follow-on opportunity to invest in an approved EIS fund that will invest exclusively in EIS qualifying companies listed on AIM. The first approved fund, closed in April 2014, raised 2.3 million, and is around two thirds invested (as at 30 September 2014). It is one of a small group of EIS investing only in AIM. Given the visibility of the EIS offers available, the opportunity has been launched as an Approved Fund for HMRC purposes. Guinness Asset Management (the Manager) has a tradition in stock picking and is in its fourth year of managing EIS funds, though it should be noted that Andrew Martin Smith, the lead manager, has recently joined the investment team. Andrew Martin Smith is a seasoned investment professional with a long career in investment management, however, it should be noted that prior to the Guinness AIM EIS 2014 he did not have a track record of investing in AIM per se. Nevertheless, we believe it is reasonable to accept that he has abundant transferable skills to apply to the task of choosing from a limited number of qualifying listed companies, and, we take into account that he will not have to actively trade these stocks; they have to be held for a minimum of three years. In short, Andrew Martin Smith is being tasked to ensure that the companies whose shares he buys on behalf of investors are financially robust, have good management, and prospects are healthy to sustain the share price (a potential crisis collapse in AIM markets not withstanding) over the following three years. Andrew Martin Smith s career includes being CEO of fund management of Hambro s fund management division. Alongside Andrew on the investment team are Shane Gallwey and Hugo Vaux (see below for bios). Gallwey spent five years as a registered nominated adviser for companies seeking an AIM listing (NOMAD), has strong experience in EIS, and should be able to offer valuable support to Andrew Martin Smith s decision making, particularly concerning whether the companies will qualify for EIS as is expected. While there are many pitfalls to investing AIM through an EIS approved fund (in 2008 the index crashed by as much as 60%) many investors will enjoy the benefits that stem from the companies being listed. The shares can be valued daily, thereby, by default providing the EIS portfolio with a transparent and reliable valuation (open market prices), though the lack of liquidity is likely to mean sales will have to be carefully managed to achieve the market price. The potential ability to exit an EIS promptly should not be under estimated. The number of companies listed on AIM that are eligible for EIS and VCT investment has grown thanks to rule changes over the last few years, however only a proportion are expected to issue the new shares that would qualify for EIS (existing shares do not qualify). The pool of offerings can, therefore, be narrow, although with 88 EIS-qualifying new share offers* of over 1 million from AIM-listed companies in 2013, there appear to be ample issues for managers to choose from, particularly since the Manager has reserved the right to invest in companies listed on the ISDX Growth Market, and up to 20% in non-aim-listed companies, such as pre-ipo investments. It is worth pointing out that the previous Guinness AIM EIS fund is still not fully invested, although this is to be expected when the manager is targeting full investment over a 12 month period. We do have some reservations about the ability of the Manager to invest their target of up to 9 million in twelve months Below we summarise the advantages and disadvantages of AIM for EIS. In summary, investors uncomfortable with the problems that beset investment in unquoted private equity opportunity in EIS, as referred to here, are likely to welcome AIM investment within an EIS. The opportunity to buy equities listed on a London bourse and to receive the EIS 30% tax credit on the aggregate amount has strong investment potential. And the ability of a portfolio of AIM-listed companies to revert to cash and exit by end of year three might represent a financial planning opportunity in itself, by allowing a second application to be made for the obtaining of a further tax credit. The Manager has stated its intention to offer investors a choice on exit of a return of cash, an in specie distribution of shares or continued management of the investment portfolio. This is to maximise flexibility for investors who wish to retain IHT reliefs. In conclusion, the offer is likely to attract investors keen to combine AIM and EIS, and would welcome the opportunity to benefit from the long equity experience of this traditional equity investment house. The charges appear fair and the interests of Manager and EIS shareholders aligned (the Manager defers all its fees until profits become available from securing exits). The investment team s record with their existing AIM EIS investments is positive, and the key personnel are seasoned and well regarded. 3

4 Definition Overview This Approved EIS Fund will seek to buy shares in at least ten EIS qualifying companies, listed on AIM, or, in exceptional circumstances, in companies listed on ISDX Growth Market. Andrew Martin Smith, the key investment professional, who is responsible for selecting the investee companies, is regarded as a traditional, fundamental-style investor. He picks stocks using a bottom-up process, focused on the investment opportunity and ignoring thematic or macro considerations. Comprehensive due diligence (DD) is conducted by Andrew and his two investment management colleagues (Shane Gallwey and Hugo Vaux) including ensuring a prospective investment has received EIS Advance Assurance from HMRC, and establishing that management intend that the company remains EIS qualifying. The Manager will source prospective investee companies through its network of contacts with NOMADS, Shane Gallwey having been one himself for several years, and the Manager is well known among this group. The Manager also reviews all Stock Exchange announcements of upcoming share issues. Due Diligence Process Initially, the Manager will review admission documents for an IPO, annual report and accounts, corporate literature and brokers research. This is set in the context of the sector and the market as a whole to provide the Investment Manager with an initial view of the attractiveness of the investment proposition. Companies that make the short list are invited to present to the Manager. Time is spent meeting and understanding the management team, its business and its market. References may be taken and site visits made. Where the Manager wishes to proceed with an investment, a short form report is given to the Investment Committee to review and provide approval. The Investment Committee has the opportunity to question the individual investment manager on his argument for investing, and further analysis will be undertaken if required. AIM companies are required to publish results half yearly. The Investment Manager will meet the boards of each Investee Company regularly and question management on progress and performance. The Investment Manager will challenge management teams on their business plans and seek robust justification for assumptions. Broker research and forecasts provides useful market guidance but is not relied on as a standalone investment tool. The ability to set and to deliver on realistic targets is given considerable importance by the Investment Manager. The Investment Manager will review a range of profit and loss and balance sheet ratios appropriate to an investee company s stage of growth and industry. These ratios may include profit to earnings, and Enterprise Multiples (EV/EBITDA). Liquidity is important to achieve a clear and timely exit, but it is not a pre-requisite on entry, since the Manager will not trade for three years from initial investment. In many cases the Manager will be providing funding for a growth strategy, which, if successful, will generate the buyers to enable the Investment Manager to exit at the end of three years. The investment team is based in the Manager s office in Westminster and works closely together on investment analysis. The team benefits from the operational advantage of being part of a wider team of fund managers following a variety of investment themes. Investee Companies The Manager will target companies on AIM that have market capitalisations of around 5 million and upwards at point of investment (the maximum for EIS purposes is based on gross assets not market capitalisation; and is 15 million pre-eis funding). Investee companies must display the potential for growth over three to five years, and companies with good visibility of revenue and profits are favoured. Participation can be early in the Investee Companies growth trajectory. However, since the Companies are quoted on a stock exchange, a proportion of Investee Companies are expected to be more mature, and have robust finances, where operating capital will be adequate. 4

5 The Manager prefers companies whose gearing is low and manageable, and where costs will not impinge inordinately on profit margins. By definition, start-ups may not comply with these parameters, though young companies will be considered for their growth potential. Key investment considerations are that management will be settled and stable, and market share defensible. The Manager has no sector bias, though the most active sectors for AIM-listed EIS companies include software & computer services, pharmaceuticals & biotechnology, electronics and electrical equipment, support services and healthcare equipment & services. Conversely, the Manager is likely to exclude the following sectors in line with EIS guidelines, which feature strongly in AIM-listed companies: Non-Life Insurance Real Estate Investments and services Real Estate Investment Trusts Real Estate General Oil and Gas exploration Mining exploration Money Lending (including hire purchase and factoring). Guinness AIM EIS 2014 The Manager raised 2.3m overall. Twelve investments have been made in eleven different companies to date (two small investments were made in Union Jack Oil plc for an aggregate amount of 131,000). The largest investment was 250,000 into Coral Products plc and the smallest was 30,000 into Eagle Eye. Details of the full portfolio can be provided by the Manager on request. This fund closed on 5 April As at 30 September has invested 64% of the fund across 12 investments. The fund is on course to be over 90% invested by 5 April 2015, as required by HMRC for an Approved EIS fund. Below are four examples of the types of Investee Companies that the Manager chooses for the Guinness AIM EIS 2014 portfolio. The Manager believes the four are indicative of the maturity and variety of the investee companies preferred. Market Capitalisation 8m Sector General Industrials Coral Products Coral Products are specialists in the design, manufacture and supply of injection moulded products across a wide range of industries. Employees 110 Turnover EBITDA (pre-exceptional): 17.2m 1.4m Dividend yield 3.7% 5

6 Market Capitalisation 46m Sector Pharmaceuticals Employees 90 Ergomed plc Ergomed plc is a profitable UK-based company, dedicated to the provision of specialised services to the pharmaceutical industry and the development of new drugs. It operates globally in over 40 countries. Turnover EBITDA (pre-exceptional): Dividend yield 15.1m 1.8m n/a Software Radio Technology plc Market Capitalisation 23m Sector Tech Hardware Employees 47 Turnover 6.1m The Software Radio Technology plc (SRT) group is the global leader in Automatic Identification System (AIS) based maritime safety and security systems. The Company provides an extensive global network of customers with a broad range of AIS-based core technology module and white label OEM product solutions. EBITDA (pre-exceptional): Dividend yield - 1.5m n/a Chapel Down Market Capitalisation 24m Sector Beverages Employees 36 Turnover 5.0m Chapel Down is England s leading wine producer. Producing wine in Kent using grapes from their own and partner vineyards across the South East of England, Chapel Down creates world-class Traditional Method sparkling wines and a range of still wines and craft beers. EBITDA (pre-exceptional): Dividend yield 0.5m n/a 6

7 Investment Committee The Fund will be overseen by an investment committee, comprised of Tim Guinness, Lord Flight and Edward Guinness. The Investment Committee will have the opportunity to review proposed investments and challenge and contribute to the due diligence process. In addition the Investment Committee helps establish compliance protocol, ensure investee companies qualify for EIS, and review sales/purchases. AIM Deal Flow AIM was opened in 1995 and is now regarded as one of the world s foremost opportunities for companies to raise finance outside the main stock markets. The following salient statistics give an idea of the potential deal flow open to the Fund: Around 1,090 companies are listed on AIM, of which around 80% are UK and 20% are international. Aggregate capitalisation is around 72 billion, suggesting an average market size of around 70 million. AIM covers over 40 sectors of which the top ten can be seen illustratively as follows: Under current rules, analysis by the Manager believes that there are around half have a market value of less than 25million, though some are deemed ineligible because they operate in the EIS-prohibited activities. In 2013 there were 88 EIS qualifying issues of over 1m by AIM-listed companies The Advantages for EIS The Manager believes AIM-listed companies are apposite for EIS investment, for reasons which can be summarised as follows: AIM-listed companies must show a greater level of governance than private companies as they have to comply with stock exchange rules. Before a company can be listed on AIM, it must demonstrate to the appointed nomad that its finances are in order, that its business model is sound and its management is settled. The nomad, in turn, must conduct its own due diligence to reassure itself that the company is worthy of a listing. An AIM-listed company s financials should be more transparent than those of an unlisted company, which has no obligation to make public its accounts. An AIM listing provides a potential exit for small tranches of shares, such as the size of an average EIS investment. (Large sales will depend upon liquidity, which may be limited). Having an existing quote makes it easier for a company to raise capital, for example, through a private placing or rights issue. For a share purchase to qualify for EIS relief it must be a purchase of new shares. A listing gives investors some indication of prevailing values, while unlisted investments can remain at cost indefinitely, thereby potentially disguising problems within that company. 7

8 As shares can be bought with certainty at outset, the Manager can run an approved EIS, thereby providing investors with the administrative ease of a single EIS 5 certificate, once 90% of the funds have been invested. The Disadvantages for EIS Market sentiment can swiftly and indiscriminately affect valuations of quoted companies. External, non-related factors can drive down valuations of companies that the Manager might rightly have identified as having strong growth potential. Were this to happen, the Manager would, in all likelihood, delay effecting an exit if it coincided with a severe downturn in global markets, and would wait for some stability to return, and for lost ground to be reclaimed. The financial crisis of 2008 is a good example of a broad brushstroke sell-off (the AIM index fell by almost 60%) when the good were caught up with the bad, but eventually markets rose in the aftermath. Since AIM shares have an open market value, the Manager may not be able to negotiate as preferential terms as it might have done with an unquoted company, which would not benefit from having an appointed broker to trade shares on its behalf, as happens with AIM companies. The Manager argues that its ability to negotiate remains intact since, to qualify for EIS, the Investee Companies must issue new share capital, whose price will be influenced, in part, by what the Manager is willing to pay. If the Manager cannot influence the Investee Companies strategy owing to its being a minority, (relatively) latecomer, the board might act in interests outside those of the EIS shareholders, such as paying a dividend or exiting early, or even trading in a way that would jeopardise the EIS qualification. The Manager will ensure a good understanding with the boards of investee companies, particularly the Investee Company s plans for the period during the life of the EIS, and can reasonably expect a board to act in good faith to follow its business model coherently 8

9 The Manager Guinness Asset Management (Guinness) is a specialist fund manager focusing on the energy sector. Founded in 2002, Guinness manages seven Dublin-quoted Open Ended Investment Companies, including the Guinness Global Energy Fund and the Guinness Alternative Energy Fund. Together with its US affiliate, Guinness manages approximately US$1billion. Investment Committee Tim Guinness Chairman and Founder From 1999 to November 2002, Tim was Joint Chairman of Guinness Flight Global Asset Management Ltd., which merged with Investec in 1998, and was CEO from 1997 to Tim graduated from Cambridge in engineering, and has a Master s in Management Science from the Sloan School, M.I.T.. Edward Guinness Investment Manager Edward co-manages the Guinness Alternative Energy Fund, having joined the company in 2006 after three years working as a merger arbitrage analyst for the Arbitrage Associates Fund at Tiedemann Investment Group in New York. Prior, from 1998 Edward worked in the corporate finance department in the Energy & Utilities Team and in the Telecoms & Technology Team of HSBC. Edward graduated from Cambridge with an MA in Engineering & Management Studies. Lord Flight Howard is chairman of the EIS Association and a director of Flight & Partners, which manages the Flight & Partners Recovery Fund. Howard co-founded Guinness Flight, which merged with Investec in From 1997 to 2005 he served as a member of parliament and as a member of the Conservative Shadow Treasury Team. Investment Team Andrew Martin Smith Lead Investment Manager Andrew Martin Smith began his career at Hambros Bank in 1975 as a graduate from Oxford University. He has over 30 years experience in the financial services industry and currently works as a senior adviser with Guinness Asset Management. He is Chairman of Parmenion Capital Management and a Director of Church House Investments and three quoted investment trusts. Andrew has spent the last 20 years specifically involved in the fund management industry firstly as Chief Executive of Hambros Fund Management. He joined Berkshire Capital Securities after Hambros successor fund management interests were acquired by Investec, and joined Guinness Asset Management in Shane Gallwey CFA Investment Manager Shane launched Guinness Asset Management s EIS business in He was formally a director of Northland Capital Partners, a niche institutional investment banking business serving growth companies, with a focus on the EIS and VCT sector. From 2002 to 2006 Shane was based in Gibraltar with Trafalgar Financial Futures. Previously, he spent six years at HSBC Investment Bank in corporate finance for small companies. Shane graduated with an MA from the University of Edinburgh, and is a CFA Charterholder. Hugo Vaux Analyst Hugo joined the Guinness EIS investment management team in His role includes sourcing and assessing potential transactions, monitoring existing investments and assisting on marketing. Prior to joining Guinness Hugo gained experience at SandAire Wealth Management undertaking macroeconomic analysis in the investment team. He has an MSc in Finance and Investment from the University of Bristol and a BA in Economics from Exeter. 9

10 Manager Record Andrew Martin Smith has a long career in investing in listed and unlisted equity investments. Andrew was formerly Chief Executive of Hambros Fund Management. Shane Gallwey has worked closely with growth companies since 1998, and has acted for a variety of AIM-listed companies as a director of Northland Capital Partners. Edward Guinness has been manager of the firm s alternative energy funds since March 2006 and prior was analyst on the team of a merger arbitrage fund at Tiedemann Investment Group in New York. Tim Guinness has been managing listed equity funds since the early 1980s and has been fund manager of the best performing global energy fund since He has built two successful fund management businesses Guinness Flight and Guinness Asset Management, and is highly experienced in investment management and equity analysis. 10

11 Financials Costs Charges Levied on Investors= Initial fund raising fees 5% Non advised clients 2% Advised clients Annual management fee per annum 1.75% Calculated on NAV, accrued and paid from dividends or realisation through sale. All fees, including the initial fee, are deferred until they can be paid from gains or dividends. Annual custodian fee 0.35% Performance fee Calculated on Capital distributions to EIS shareholders as follows: Zero to 100p zero 101p+ 20% General Notes on EIS charges Miscellaneous fees levied at prevailing rates may vary widely and can significantly dilute the value of the Investee Companies equity. EIS fees, whether applied to subscription or to the Companies, potentially dilutes investor returns. All fees may be subject to VAT. 11

12 Team Anthony Yadgaroff Anthony Yadgaroff is founder and Chairman of Allenbridge Limited, which publishes research through its Tax Shelter Report on VCTs and EISs, Ground Rents, high yielding Property Funds and other investment vehicles through the Yadgaroff Report. Anthony founded Allenbridge Group plc in 1984, the retail division of which was acquired to Close Brothers Asset Management in February He is chairman of Allenbridge Investment Solutions LLP ( AIS ) and is a member of the partnership alongside Moody s, the global rating agency. AIS is a leading UK investment advisory business, consulting to pension funds and charity clients which control some 45 billion of assets. Anthony is also a non-executive director of Anglo-Pacific Group plc, a FTSE All-Share, London-listed company specialising in mining royalties, and serves on the boards of a number of charities and non-profit organisations. He is a member of the Chartered Institute for Securities & Investment. Alan Saunders Alan Saunders has had a long career in financial markets in a variety of roles which have given him a broad perspective on investment issues. He has been involved with Allenbridge for some ten years but has a variety of other directorships and consultancies. He started his career as a stockbroker at Simon & Coates, becoming a partner before leaving the City to join Shell as their Chief Economist. He then returned to the City as an investment director at Lazards before joining UBS Private Banking where he was responsible for discretionary and advisory clients. Currently, he is the independent adviser to Dorset CC Pension Fund and an independent trustee of Hays plc and Fujitsu Pension Schemes. Alan is a member of the Oversight Committee of CBRE Global Investors, the UK property fund management company. He is also chairman of the JP Morgan Emerging Markets Investment Trust plc, and a member of the Investment Committee of Lloyds Bank Insurance. Gareth Robertson Gareth Robertson has over twenty five years' experience in institutional fund management, with Barclays Bank, M&G and Invesco, and in UK and European corporate stockbroking as a director of Swiss Bank Corporation. He has also carried out management consultancy work for a wide range of clients such as Siemens, Compart-Montedison, Sumitomo Finance International, Man Group and the European Commission, and was group marketing director at a London-listed financial services company for six years before joining Allenbridge in

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16 Allenbridge Limited th Floor, 125 Old Broad Street, London EC2N 1AR Telephone Nothing contained in this report constitutes investment advice nor should it be relied on as such. The views contained in this research paper are aimed at investment professionals and other experienced investors in tax sheltered products. The comments may not be suitable for less experienced investors. Issued by Allenbridge Limited an appointed representative of Allenbridge Capital Limited, which is authorised and regulated by the Financial Services Authority under Firm Reference Number Tax Shelter Report is published by Allenbridge Limited. It is normally available to Professional Advisers by private subscription at prices starting at 495 p.a. for payment by standing order. Allenbridge Limited All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, photographic or otherwise without prior permission of the copyright holder. Website reminder If you haven t already done so, please let us have your address. If you do so, we will let you know when we add reviews or other items to the restricted area of our site. Just Log In and go to My Profile then Edit My Details. You can also see news items on the home page of the site, and professional subscribers can see additional news items on FCA restricted products just by clicking Log In as soon as they visit the site. Readers should note that investment in a Venture Capital Trust or EIS carries a greater risk than some other investments, there is unlikely to be an active market in the shares, which will make them difficult to dispose of, and proper information for determining their current value may not be available. Prospective investors are strongly advised to consult their professional adviser about the amount of tax relief (if any) they can obtain. Although we have taken reasonable care to ensure statements of fact and opinion contained in this document are fair and accurate in all material respects, such accuracy cannot be guaranteed. Accordingly, we hereby disclaim all responsibility for any inaccuracies or omissions, which may make such statements misleading, and for any consequence arising there from. While reports in this publication may make specific investment recommendations, nothing in the publication enclosed with it is an invitation to purchase or subscribe for shares or other securities.