Tax-Advantaged Investments. Guinness EIS 9 September EIS Review. 3 Executive Summary. 7 Manager Quality. 13 Product Quality Assessment

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1 Analysing tax-advantaged investments since 1985 EIS Review Guinness EIS 9 September 2017 Guinness Asset Management Ltd ( Guinness or the Manager ) is seeking to raise and invest up to 40 million before the end of the current tax year for Guinness EIS ( the EIS Fund or the Fund ). This will enable investors to obtain EIS Income Tax Relief in the 2017/18 tax year, or carry back to the 2016/17 tax year. Further funds will be invested in the 2018/19 tax year. This is an evergreen, multi-cohort fund, currently raising funds for the ninth tranche of the Fund. The offer is open to new and existing investors and launched on 19 September Score Card Contents 3 Executive Summary 7 Manager Quality Manager Profile Financial & Business Stability Track Record Quality of Governance and Management team 13 Product Quality Assessment Investment Team Investment Strategy & Philosophy Fund Type Evergreen Pipeline/Prospects and Current Portfolio 84 EIS Strategy Generalist EIS AUM (Pre-offer) 90m Manager AUM 1.1bn Investment Process Risk Management Key Features Closing Dates EIS Risk Level Medium Risk tax year 30 Sep 2017 Investment tax year 31 Dec 2017 Minimum subscription 20,000 Maximum qualifying subscription per tax year 1 million Early bird discount No 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.

2 Risk Warning for 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, AIM-listed and 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 Executive Summary Offer: Guinness Asset Management Ltd ( Guinness or the Manager ) is seeking to raise and invest up to 40 million for investment before the end of the current tax year for Guinness EIS ( the EIS Fund or the Fund ). This is an evergreen, multi-cohort fund, currently raising funds for the ninth tranche of the Fund. This offer aims to deliver a gross return target of 1.25x money-in (net of all fees) over a five-year investment horizon. Manager: Guinness Asset Management Ltd ( Guinness or the Manager ) is a UK based, privately owned, investment management firm, established in 2003 by Tim Guinness. As at 31 August 2017, Guinness had total assets under management ( AUM ) of approximately 1.1 billion, spread across 11 Dublin domiciled OEIC s, two enterprise investment schemes ( EISs ), one Business Relief Scheme ( BR ) and eight SEC registered US mutual funds. We note that the US mutual funds are managed under Guinness Atkinson Asset Management ( Guinness Atkinson ; formerly Guinness Flight US), the Manager s US based sister company acquired from Investec in Guinness has been making EIS investments since 2010 and is relatively experienced in this space. Product: Guinness EIS ( the EIS Fund or the Fund ) aims to provide investors with a portfolio of three to six EIS-qualifying investments in businesses backed by tangible assets (on balance sheet) or long-term contractual agreements, across a range of sectors. The primary focus of the Fund is on capital preservation, whilst aiming to deliver a gross return target of 1.25x money-in (net of all fees) over a five-year investment horizon. We note that the Fund has historically focused on companies involved in the generation of sustainable energy. However, this focus has changed following the exclusion of companies involved in the subsidised generation of electricity from the list of EIS qualifying investments. Summary Opinion: Guinness have an established track record of investing in EIS qualifying companies; investing over 90 million into EIS & BR qualifying companies over the last seven years and delivering three exits to date with an average net exit multiple of 1.22x money-in after all costs and fees. Overall, we perceive the Fund to be medium risk, in comparison with other EIS offerings, due to some downside protection being provided by the asset backed nature of the strategy. Guinness particular area of expertise has historically been in the energy sector and the track record it has developed in EIS is very much focussed on the energy sector. Notwithstanding this, the pipeline of identified investment opportunities for the Fund is strong and provides a good level of tangible assets in the form of property, high value stock and equipment and visible cashflows. The investment team ( the Team ) focuses on the quality and experience of investment company management teams in those areas it is looking to invest. Investors will however need to accept a potential exposure to what we consider to be more speculative businesses within the EIS structured space given; i) the cyclical nature of the demand in these industries and ii) the reliance on the network of a few individuals. Consequently, we do not consider the Fund to offer a pure capital preservation strategy. Investors should consider the nature of the proposed portfolio and assess whether the 25% target return offered by the Fund, is sufficient compensation for the risks inherent in the portfolio and the lack of a track record. 3

4 Positives At the Manager level: Guinness is a relatively large investment manager and would comfortably sit within the top quartile of investment firms with a tax advantage product offering, ranked by total assets under management and the second quartile ranked by EIS assets under management. The Manager has been making EIS investments since 2010 and is relatively experienced in this space. However, the Manager s institutional focused non-tax product offering remains the fundamental driver of AUM growth. The Manager s approach to client servicing is robust, transparent and fit for purpose. Investor communications are thorough, supported by a sizeable investor relations team, with regular updates offered to investors. Guinness offers a relatively diversified product offering and we understand that recurring income accounts for greater than 90% of the Manager s total income stream. Consequently, we consider the Managers revenue base to be relatively stable. We note that the Manager s tax efficient product offering accounts for approximately 20% of the Manager s turnover and 50% of if its pre-tax profits in Consequently, the Manager is less susceptible to legislative changes in the tax efficient space than others are. Guinness has a solid capital base with no debt on its balance sheet and a good liquidity position. The Manager s corporate governance standards are suitable for the size of the business and there is appropriate policy documentation in place (i.e. compliance, allocations policy, conflicts of interest). At the Product level: The investment team has worked together for over five years and, overall, the composition of the team has, to date, been stable with low employee turnover. We understand that a proportion of the Team s remuneration is linked to the performance of the Fund; a feature, which helps, align their interest with that of EIS investors and improves the stability of the Team. Moreover, the investment team and members of the investment committee have collectively invested over 1 million in the Fund to date. The Fund aims to provide some level of diversification between sectors although investors should note that the investment strategy prioritises capital preservation over growth. EIS investors are allocated a separate class of equity, where possible, in all investee companies, which entitles them to a high proportion of initial returns ( a Priority Return ) ahead of all other equity stakeholders in the investee company. This provides an extra layer of downside protection above the value of the assets backing the underlying investments. We understand that the Priority Return may vary per Investee Company but is generally above the 25% return targeted by the Fund. We however note that the cost of this preferred equity position, for the investor, is a smaller share of the upside, above the Priority Return, on the underlying investments. There appears to be a strong pipeline of transactions and it is reasonable to assume that the Team will meet its 12-month deployment target. We note that 17 million of potential transactions have been identified highly likely ( the Current Capacity ) for completion before the end of the current tax year and a further 58.5m are at earlier stages of due diligence and may fall into the 2017/18 tax year and some might not be executed until the following tax year. 4

5 We consider the variety in the assets backing the investee companies targeted by the Fund to be a positive feature of the Fund. Additionally, all identified opportunities have a good level of downside protection provided by their asset backing or Priority Return. Investors should however note that the liquidity of the assets backing the investee companies will impact their realisation value under stressed conditions and hence the quality of the protection derived from the asset backing. Guinness adopts a sufficiently comprehensive investment process using a diverse dealsourcing channel that reflects their level of expertise in the EIS market. We however note that their investment process has historically focused on energy related transactions. We reviewed the Team s investment committee papers ( IC Papers ) and note that they present a comprehensive level of due diligence and analysis behind the selected investment opportunities. Underlying investments will be closely monitored with special attention paid to: i) threats of or actual loss of EIS reliefs (with the support of Philip Hare & Associates), ii) change of directors and/or management, and iii) material deviation from company strategy or business plan. The Manager will require board representation at each investee company and will hold minority equity positions with veto rights on certain key actions that affect the risk/reward profile of the investment. HMRC advanced approval is sought to ensure that each new investee company is EIS qualifying at the time of investment. Issues to consider At the Manager level: The concentrated ownership structure, with Tim Guinness owning a significant majority of the business, presents key man risk and may mean there is insufficient challenge on business decisions, although the Manager states that there is an operational board in place that meets every month and is responsible for key business decisions. With regards to its EIS fund raising track record, we note that Guinness has raised an average of 23 million per annum over the last three years and would consequently need to ramp up its fund-raising capabilities to meet its 40 million to 50 million annual target. The recruitment of a dedicated EIS Business Development manager, in late 2016, could help achieve this goal, while the recent repositioning of the EIS strategy potentially adds an extra hurdle to meeting the fund-raising target. The Manager has historically been predominantly focused on the energy/energy generation sector and since early 2016 has had to reposition its EIS strategy because of legislative changes. At the Product level: The Team has limited recent track record in the EIS s target sectors, their sector expertise largely relates to renewable energy. As such, it is difficult to comment on their ability to execute and exit the identified investment opportunities over the proposed investment horizon. However, we recognise that the team members have strong backgrounds in private equity and corporate finance, and we note that they will be partnering with established investee company management teams with the right sector expertise. We note that the investee company management teams involved in some of the current pipeline of identified opportunities are not all contributing significant equity capital to the investee companies. This creates a potential risk relating to the misalignment of interest albeit 5

6 we note that most management teams remuneration is tied to the realised return upon exit of the investee company. The 25% return targeted by the Fund over the five-year investment horizon, which implies a 4.6% IRR (approximately 8% IRR gross of fees); suggest risks beyond that expected from a pure capital preservation strategy. We highlight the potential start-up risk in the Fund as some of the investee companies in the portfolio will be newly established businesses. Investors will need to accept some concentration and construction risk in the portfolio and should note that they will be vulnerable to a reduction in UK real estate price. They will also need to accept a potential 25%+ exposure to what we consider to be more speculative businesses within the structured space due to; i) the cyclical nature of the demand in these industries and ii) the reliance on the network of a few individuals. The investment strategy is relatively new to the Manager and to the Fund. Consequently, there is no performance track record to evaluate and it is difficult to assess the likely performance of the Fund with any degree of confidence. In our opinion, the portfolio construction process would benefit from formal parameters that provide clarity to investors on the risk profile of their portfolio. There are varying levels of risk associated to each investment opportunity in the current pipeline and the overall risk profile of the Fund will be dependent on the mix of selected opportunities. We reiterate that the cost to EIS investors, for their preferred equity positions in the underlying investments, is a smaller share of the upside, above the Priority Return ( the Surplus Upside ), on the underlying investments. We understand that the investee company management teams share of the upside ranges from 20% to 70% depending on the level of risk inherent to the business model of the investee company. This is effectively an indirect cost on performance borne by EIS investors. We note that the Surplus Upside is earned by the investee company management teams and not the Manager. Guinness fee structure is not entirely transparent due to reserving the right to charge a monitoring fee and/or directors fees, without stating the average amount they expect to charge. The team have indicated to us that these fees would only be charged in lieu of the annual management charge, and have not been levied on any EIS investee companies to date which will be in line with MiFID II requirements. 6

7 Millions Tax-Advantaged Investments Manager Quality Manager Profile Guinness Asset Management Ltd ( Guinness or the Manager ) is a UK based, privately owned, investment management firm, established in 2003 by Tim Guinness following his departure as chairman of Investec Asset Management. Tim had previously been chairman of Guinness Flight Global Asset Management ( Guinness Flight ); a business he co-founded with Lord Howard Flight and sold to Investec in Prior to 2008, Guinness was principally acting as a sub advisor to the Investec Global Energy Funds however, this relationship ended in February 2008 resulting in reduction in the Manager s AUM from approximately 1.1 billion in December 2007 to 220 million by December Since 2008, the Manager has launched a number of its own funds, predominantly open-ended investment companies ( OEIC s ) and has grown AUM at an approximate constant annual growth rate ( CAGR ) of 20% to 1.1 billion as at 31 August 2017; 273 million of which relates to Guinness Atkinson Asset Management ( Guinness Atkinson formerly Guinness Flight US), the Manager s US based sister company acquired from Investec in The chart below presents the evolution of AUM since December CHART 1: FIRM AUM AS AT 31 AUGUST ,200 1, Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 Aug-2017 The Manager s AUM comprise of four different segments as follows: 1. Dublin OEIC s: a group of 11 Dublin domiciled, growth, income and specialist OEIC s predominantly focused on investments in companies active in the energy industry. The funds have a combined AUM of million (at 31 August 2017) with the key funds being: 7

8 a. The Global Energy Fund: a growth focused long only, energy focused equity fund with an AUM of million in AUM; b. The Global Equity Income Fund: a dividend focused global, long-only equity strategy with large exposure to the US and Europe (AUM of million). 2. Tax advantaged Funds: includes two enterprise investment schemes ( EISs ) and one business review scheme ( BR ) with a combined AUM of 96.3 million (at 31 August 2017) broken down as follows: a. Guinness EIS: offers an asset backed capital preservation strategy historically focused on sustainable energy generation projects. The product was launched in 2010 and has a current AUM of 77.2 million; b. Guinness AIM EIS: established to make EIS-qualifying investments in AIM-listed companies across a broad range of sectors. The product was launched in 2013 and has AUM of 16.5 million; c. Sustainable Infrastructure IHT: a new IHT product, which invests in unquoted sustainable energy companies that qualify for BR, and has AUM of 2.6 million. 3. Segregated Mandates: includes a UK Equity Income Fund and an exploration and production fund in the oil and gas industry, with a total AUM of 15.9 million, the E&P fund accounting for over 15.7 million of this. 4. Guinness Atkinson Funds: a group of eight SEC registered, growth, income and specialist US mutual funds focusing on long-only equity investments in Asia, and across the energy sector. The funds have a combined AUM of million. CHART 2: ASSETS UNDER MANAGEMENT BREAKDOWN AS AT 31 AUGUST % 1% 25% 65% Dublin Funds Guinness Atkinson Funds Tax-Advantaged Products Segregated Mandates Note: Segregated Mandates includes a UK Equity Income Fund and an exploration and production fund in the oil and gas industry. 8

9 Guinness is a large investment manager and would comfortably sit within the top quartile of investment firms with a tax advantage product offering, ranked by total assets under management and the second quartile ranked by EIS assets under management. We note that the Manager has been making EIS investments since 2010 and so is relatively experienced in this space. However, the Manager s institutional focused non-tax product offering still remains the fundamental driver of AUM growth. We note that the Manager has developed a specialism within the energy/sustainable energy generation sector and runs several bottom-up long only strategies in this space. With regards to its EIS experience, in addition to the Guinness EIS AIM offering, the Manager has launched eight previous offers predominantly focused on leveraging its in house expertise in the sustainable energy generation sector. Since 2010, the Manager has invested over 90 million in over 70 EIS qualifying companies of which approximately 30% have been energy related opportunities. We however note that following the recent EIS legislative changes, in April 2016, it has been forced to reposition its EIS strategy (we elaborate more on this in the strategy section of the report). We understand that the Manager has set an AUM target of 1.5 billion by end 2018 and is hoping to raise up to 50 million per annum through its two EIS offerings ( 40 million per annum through the Guinness EIS and 10 million per annum through the AIM strategy) and are considering launching new tax and non-tax advantaged products. We note that the Manager s average net inflows, over the last three years, have been approximately 109 million per annum. With regards to its EIS fund raising track record, we note that Guinness has raised an average of 23 million per annum over the last three years and would consequently need to ramp up its fund-raising capabilities to meet its 50 million annual target. For the EIS fundraise in the tax year 2016/17, Guinness raised 19 million for Guinness EIS 8 and 4 million for Guinness AIM EIS. The recruitment of a dedicated EIS Business Development manager, in late 2016, could help achieve this goal, while the recent repositioning of the EIS strategy potentially adds an extra hurdle to meeting the fund-raising target. In previous years (Guinness 1-7) these had been limited time open offers whereas the current Guinness EIS is evergreen with funds being raised throughout the year which will enhance the overall fundraise. Overall, fundraising capabilities have been variable since 2008, but have remained strong since 2014 on a gross level, as presented in the chart below. However, we note that most of the funds raised have been from the Managers institutional client base and predominantly through the Global Equity Income and Innovators funds. The chart below presents a summary of The Manager s fund raising performance over the last five years. 9

10 Millions Tax-Advantaged Investments CHART 3: FUNDRAISING TRACK RECORD Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 Aug-2017 (100) (200) Net Fundraise Gross Fundraise Note: This is an approximation as it uses average exchange rates. Guinness has a dedicated six-person investor relations team which carries out the ongoing reporting to investors; four employees focus on the quoted funds and two on the tax-advantaged products. Additionally, we note that The Share Centre provides custodian and administration services to clients on behalf of the Manager. Guinness has procedures in place that set the standards for client communication for each of its product lines. We note that the reporting frequency for EIS investors is bi-annual, in April and October. Additionally, Guinness will provide clients and their advisers with up to date valuations of their portfolios when requested. The average time from closing date to receive EIS 3 certificates has been nine months. We note that the Manager follows the FCA rules for handling complaints, and maintains a complaint register. We understand that there have not been any investor complaints over the last 12 months. Financial and Business Stability Recurring income (which includes annual management charges across all product offerings) accounts for greater than 90% of total income. Consequently, we consider the Managers revenue base to be relatively stable. However, as with any other pure investment management firm, revenue growth will be vulnerable to AUM outflows and hence AUM should be monitored closely. We note that the Manager s AUM base has some concentrated in the energy sector and hence significant deterioration/uncertainty in the energy markets could affect the mangers ability to grow its AUM base. We consider the variety of products offered by the Manager to be a positive contributor to the stability of the business as there is less reliance on individual product offerings. However, we note that most of the Manager revenue base is derived from three key products: its Global Energy Fund (30%), its Global Equity Income Fund (30%) and its EIS product offering (20%). Finally, we note that although the Managers tax efficient product offering accounts for only 9% of its AUM, it accounted for approximately 20% of the Manager s turnover and up to 50% of its pre-tax profits in Consequently, the Managers profitability is susceptible to significant legislative changes on taxefficient products ( Rule Changes ). Nevertheless, 50% of pre-tax profits come from its non-tax advantage offering which means that it is not heavily reliant on its tax advantaged product offering and can provide considered responses to legislative changes in this space. 10

11 TABLE 1: KEY FINANCIAL METRICS SUMMARY Current Ratio Total Debt/Equity Total Assets/Liabilities Source: Guinness Asset Management Ltd Financial Statements for the year ended 31 December Note: Debt/Equity is 0.00 for all five years, as the Manager has no long-term liabilities. 1 yr. Change Revenues 3,072,328 2,880,152 3,972,504 5,029,432 7,683,962 53% 39% Revenue growth (%) Costs 2,721,847 2,771,614 3,874,299 4,645,362 7,152,840 54% 37% Cost to Income ratio Pre-tax Profit 356, ,614 99, , ,041 37% 69% Pre-tax Profit Margin (%) 11.60% 3.84% 2.51% 7.73% 6.95% Net Profit 272,129 78,897 60, , ,721 21% 68% Net Profit Margin (%) 8.86% 2.74% 1.53% 6.14% 4.88% Net Assets 1,737,552 1,805,234 1,866,812 2,175,525 2,550,246 17% 12% 3 yr. CAGR The Manager s profitability, over the last five years, has been relatively volatile with net profit margins ranging from 1.5% to 8.9%. This appears to have been predominantly due to significant increases in staff costs and other expenditures aimed at driving AUM growth. We note that staff and director remuneration has grown at a CAGR of 27% over the last five years, whereas turnover has grown at a rate of 17%. However, we note that the Manager is largely equity funded and has a solid capital and liquidity position, which suggest a stable and conservatively run business. The Manager currently employs 30 people and operates out of two offices, one in London and one in Los Angeles, United States, the latter being where Guinness Atkinson is based. The Manager is expecting to expand the employee count as the AUM grows over the next three years. We consider the Manager concentrated ownership structure, with Tim Guinness owning a significant majority of the equity in the business, to presents a risk to the provision of sufficient challenge on business decisions. 11

12 Quality of Governance and Management Team We consider the Manager s organisational structure to be simple, flat and appropriate for the nature of its business. The board, which consists of Tim Guinness, Edmund Harriss, and Jim Atkinson, with Andrew Martin Smith as senior adviser (see the appendix for a summary of their experience), have the ultimate decision-making responsibility for the Manager. However, we note that the concentrated ownership structure, with Tim Guinness owning a significant majority of the business, presents some risk to the provision of sufficient challenge on business decisions. We understand that all members of the board have equal voting rights. We however note that the governance structure would benefit from the appointment of non-executive directors. We note that all members of the Board are suitably qualified with long track records in the asset management industry: for example, Andrew Martin Smith was the Chief Executive of Hambros Fund Management, Jim Atkinson served as the president of MAX Funds, Edmund Harriss has been managing Asian equity funds since 1994, and Tim Guinness, the Manager s founder, is a logicbased value investor with nearly 35 years experience. Guinness has a comprehensive set of internal controls in place to manage the operations of the business. This includes a bespoke code of professional conduct and ethics manual, a conflicts of interest policy and other relevant documents we would expect of an institution of this size with a predominantly institutional client base. TABLE 2: OVERSIGHT COMMITTEES Committee Senior Management Committee Investment Committee EIS Steering Committee Work In Progress Committee Details - Mandate: Board-level strategic/operational discussions - Members: Tim Guinness, Andrew Martin Smith, Edmund Harriss, Deborah Kay, Giles Robinette - Frequency: Monthly - Mandate: Will review and approve all the investment decisions taken by the Manager. - Members: Tim Guinness, Andrew Martin Smith, Edward Guinness, Lord Flight and Shane Gallwey - Frequency: Quarterly - Mandate: Oversees management of the EIS - Members: Tim Guinness, Andrew Martin Smith, Edward Guinness, Shane Gallwey and Giles Robinette - Frequency: Monthly - Mandate: Rank and comment on investment opportunities in a live document, decide which opportunities to take to the Investment Committee. - Members: Shane Gallwey, Edward Guinness, Chris Villiers, Malcolm King and Hugo Vaux - Frequency: twice a month Compliance, Operations & Risk Committee - Mandate: Compliance, regulatory and risk issues - Members: Giles Robinette, Caroline Posse, Charlotte Warre, Tim Guinness, Edmund Harriss - Frequency: Monthly 12

13 Overall, we are believe the quality of the governance procedures is commensurate with the size of the organisation. The Manager has a dedicated compliance team responsible for, amongst other things, ensuring adherence to the reporting requirements of the FCA and the Central Bank of Ireland. Finally, Guinness has a detailed procedures manual that covers internal procedures, policies and conduct. We note that there are currently no regulatory issues affecting the Manager. Product Quality Assessment Investment Team The investment team ( the Team ) comprises eight investment professionals who are responsible for managing the Managers tax advantaged product offerings, which includes two EIS products and one BR offerings. We note that the Team has a proven track record of investing in EIS qualifying investments: they have invested over 90 million into EIS & BR qualifying companies over the last seven years. Though the Team is indeed experienced, the Team has limited recent track record in the EIS s target sectors, their sector expertise largely relates to renewable energy. As such, it is difficult to comment on their ability to execute and exit the identified investment opportunities over the proposed investment horizon. However, we recognise that the team members have strong backgrounds in private equity and corporate finance, and we note that they will be partnering with established management teams in the space, thereby compensating for their lack of sector expertise. In our opinion, therefore, the team s ability to evaluate the skills of the management teams with which they partner, along with the general drivers of good investment opportunities, will play a bigger role than their lack of in-house sector knowledge in the successful execution of the EIS strategy. The Team has worked together for over five years, and its composition has, to date, been largely stable with low employee turnover. We understand that the Team aims to grow within the next three years as new products are launched. Finally, addressing the Team s stability and incentives, we note that there appears to be a very collegiate approach to the investment process aided by; a flat team structure and the sharing of responsibilities across team members; this helps mitigate potential key man risk issues. Further to this, a discretionary bonus and a share of the performance fee forms part of the Team total remuneration, helping to align their interests to those of EIS investors. Moreover, the investment team and members of the investment committee have collectively invested over 1 million in Guinness EIS investments to date. Investment Strategy & Philosophy The investment philosophy focuses primarily on capital preservation, whilst aiming to deliver a gross return target of 1.25x money-in (net of all fees) over a five-year investment horizon. The investment strategy aims to expose investors to a portfolio of three to six EIS-qualifying investments in asset-backed businesses across a range of sectors. Guinness has recently repositioned it s EIS offering following the EIS rule changes introduced in April 2015; the changes excludes investments in companies involved in the subsidised generation of electricity from the list of EIS qualifying investments. Prior to this rule change, the Manager s EIS offering had focused almost exclusively on companies involved in energy generation. The Fund will no longer have a sector bias and will select investee companies that can be broadly categorised by one of the following ( the Categories ): 13

14 1. Businesses in the Leisure and Services sectors with strong balance sheets; potential investee companies include a crematoria business and a nursery school. 2. Businesses with good visibility on cashflows; potential investee companies include a waste management business with visibility on long-term future cash flows. 3. Businesses requiring capital to purchase stock and equipment; potential investee companies include a luxury goods dealer and a freight business. The Manager plans to invest between 1 million and 5 million into each investee company, with an average investment size of 3 million. A typical investment opportunity will have the following characteristics: 1. The potential to deliver returns above the 25% target over the five-year investment horizon. 2. A good level of downside protection derived from the market value of the tangible assets backing the business. We understand that the Fund does not specify a minimum percentage to be protected by the market value of the assets backing the business. 3. An equity capital structure providing EIS investors with a prioritised return over the distributions of the businesses. Additionally, investee companies will have an ability to raise secured debt finance on unencumbered tangible assets as a means of providing liquidity for investors without the need to fully exit the underlying investments. 4. In partnership with experienced investee company management teams. We note however that some of the management teams involved in the current pipeline of identified opportunities (we elaborate on this in the following section) are not contributing significant equity capital to the investee companies. This creates a potential risk relating to the misalignment of interest albeit we note that most of the management team remuneration is tied to the realised return upon exit of the investee company. We perceive the Fund to be towards the medium to lower end of the risk spectrum, in comparison with other EIS offerings, due to the limited downside protection provided by the asset backing. Within the subset of asset backed EIS offerings, the Fund aims to provide a greater level of diversification (with regards to investee company and Asset Type) and hence a more favourable risk adjusted return profile than the typical single sector/single investee company structure product offering. We note that the risk of material loss of investment capital is partly mitigated by: i) the downside protection provided by the unencumbered assets in the underlying business and ii) the priority returns offered to investors in the Fund (we expand on this point in the risk management section of this report). However, we highlight the potential start-up risk in the Fund as some of the investee companies in the portfolio will be newly established businesses. Finally, we note that the 25% return targeted by the Fund over the five-year investment horizon, which implies a 4.6% IRR (approximately 8% IRR gross of fees), is relatively attractive and suggest risks beyond that expected from a pure capital preservation strategy. It should further be noted that the investee company management teams are incentivised to take risks over and above the target returns for investors and these risks could ultimately lead to impairment of the asset backing. 14

15 Pipeline/Prospects and Current Portfolio The first investor cohort in the Fund, exposed to the new strategy saw their investments deployed within four months following the close of the 2016/17 tax year; 19 million was raised and deployed across five investee companies. We present summary information of the historical transactions and the current pipeline of investments to provide investors with an indication of the types of deals that they might be exposed to in the Fund. TABLE 3: CURRENT PORTFOLIO AS AT SEPTEMBER 2017 Company Description Asset Backing Cost ( m) Fund Stake Rare Metal Trading plc Classic car dealership with high-value stock of tradable assets. Stock & Equipment % Cellar&Co Ltd Rare/expensive wines prebottled from the vineyard kept in bonded warehouses Stock & Equipment % Gravity Fitness Ltd Currently has five trampoline sites across the UK with three further venues under construction. Property & Land % Barts Pub Ltd London pub currently undergoing renovations. Expected to open mid Property & Land % CFS Care Ltd Provides foster care services, not yet operational. Manager expects the business to be up and running in the coming months. Property & Land % Total 18.7 We note that the Fund s stake in the Investee Companies do not reflect the capital distribution profile of the investments, which is often subject to a waterfall, where returns falls to EIS investors first before the operating partners. We however note that the investee company management team will typically get a larger share of the upside above an agreed priority return. CHART 4: GUINNESS CURRENT EIS PORTFOLIO BREAKDOWN BY ASSET BACKING AS AT SEPTEMBER % 60% Stock & Equipment Property & Land 15

16 There is a clear concentration to the UK property market in the portfolio. We note that four out of the five investments in the current portfolio were identified as being highly likely to be included in the portfolio prior to the end of the 2016/17 tax year. This evidences the strength of the Team s visibility of its future investments. Guinness have indicated that the next cohort of investors would likely be exposed to between three to six companies and have identified a pipeline of 17 million of highly likely investments and a further 59 million of investment opportunities that are at very early stages of due diligence. TABLE 4: PIPELINE OF HIGHLY LIKELY INVESTMENT OPPORTUNITIES AS AT SEPTEMBER 2017 Investment Type Asset Backing Cost ( m) Description Expected deployment year Crematorium Property & Land 5.0 First of 2 crematoria to be built with planning permission in place. Construction commencing Q Delayed as EIS AA received Q /2018 Abattoir Services Assets & Contract 4.0 Processing abattoir waste into stock and fertilisers with offtake contracts for different product lines 2017/2018 Construction Services Property & Land 1.0 Providing construction services to property developers with pre-sold commercial & residential units 2017/2018 Children s Nursery Property & Land 2.0 Children s nursery based in Birmingham. 2017/2018 Hydroponics Stock & Equipment 5.0 Produces year-round sustainable high density and high-yield commercial food production. 2017/2018 Total 17.0 Note: All pipeline opportunities listed above have received EIS Advanced Assurance (AA). Of the 17 million of deals identified as highly likely for investment before the end of the current tax year ( the Current Capacity ), all have received EIS Advanced Assurance from HMRC and are at advanced stages of due diligence. The first four investments in the Current Capacity ( 12m of the identified pipeline) were meant to be executed as part of the previous tranche of investments but were delayed and will likely be deployed very quickly following the next fund close on 30 September. 16

17 TABLE 5: FURTHER PIPELINE OF OPPORTUNITIES AS AT SEPTEMBER 2017 Asset Backing Number of Investments Investment Cost ( m) Assets & Contract Property & Land Stock & Equipment Total Note: Of the 15 investments, five of them are with existing Guinness investments. These investments are expected to be deployment in the forthcoming tax years (2018/19, 2019/20). CHART 5: GUINNESS TOTAL PIPEPLINE BREAKDOWN BY INVESTMENT COST AS AT SEPTEMBER % 42% 45% Assets & Contract Property & Land Stock & Equipment As for the rest of the pipeline, there are some risks, namely failure to receive HMRC Advance Approval and the identification of performance concerns following completion of the Managers due diligence process. However, five of the 15 possible projects identified as part of the further pipeline of opportunities, are from existing partnerships totalling 18.8 million and we expect there to be a high chance of completion for these deals. Based on our knowledge of the pipeline and discussions with management we would expect investor portfolios to consist of between three and six holdings. Consequently, investors will likely benefit from a small level of diversification in the portfolio. Investors will need to accept some concentration and construction risk in the portfolio and should note that they will be vulnerable to a reduction in UK real estate price. They will also need to accept a potential exposure to what we consider to be more speculative businesses within the structured space due to; i) the cyclical nature of the demand in these industries and ii) the reliance on the network of a few individuals. We would place the classic cars and the wine dealer in the more speculative group. We consider the variety in the type of assets backing the investee companies to be a positive feature of the Fund and we note that all identified opportunities have a good level of downside 17

18 protection from the asset backing. Investors should however note that the liquidity of the assets will impact its realisation value under stressed conditions and hence the quality of the protection the asset backing offers. Overall, the Manager appears to have a strong pipeline of transactions and it is reasonable to assume that they will be able to meet their 12-month deployment target. However, due to the speculative nature of some of the identified opportunities, we do not consider the Fund to offer a pure capital preservation strategy. Investors should consider the nature of proposed portfolio and assess whether the target return offered by the Fund, is sufficient compensation for the risks inherent in the portfolio. Investment Process The Manager has described its investment process as follows in AllenbridgeIQ: TABLE 6: Investment Process Deal sourcing/origination Details The Investment Manager sources Investments through its networks of contacts. Guinness Asset Management has made more than 70 EIS investments since 2011, and has consequently established a broad pipeline of investment opportunities and introducers. Deal filtering and selection All origination leads are discussed at the Investment Manager s regular pipeline meetings where they are prioritised according to the investment strategy. These meetings take place every two weeks. Due diligence process Origination leads that have been prioritised are initially screened internally. The Investment Manager will usually secure a period of exclusivity while due diligence is completed. This may involve external advisers and concludes with negotiating investment terms. The findings are compiled into a long-form investment memorandum, which is circulated to the Investment Committee for discussion at Investment Committee meetings. Deal Approval If the Investment Committee grants final approval for a potential Investment, it provides the Investment Manager with a budget and timeframe for completing the transaction. The Investment Manager primarily manages transactions internally, but it may also engage third parties such as lawyers and accountants for transaction support. Post-Investment Monitoring The Investment Manager usually seeks Board positions in Investee Companies. We seek to establish regular formal communication with management teams. The Investment Manager remains closely involved in each Investee Company during the life of an Investment. Investee Companies are also required to provide the Investment Manager with regular management reports and financial statements. We have reviewed the investment process for the EIS and believe there entails a sufficient level of governance around the process. Overall, Guinness adopts a sufficiently comprehensive investment process using a diverse deal-sourcing channel that reflects their level of expertise in the EIS market. We however note that their investment process has historically focused on energy related deals. We reviewed the long-form investment committee papers ( IC Papers ) and note that they present a comprehensive level of due diligence and analysis behind the selected investment opportunities. 18

19 We understand that the Team reviewed approximately 200 businesses for this fund in the last 18 months, before concluding on its shortlist of identified investment opportunities; evidencing its ability to get access to a relevant pipeline of potential investment opportunities. Risk Management We identify the following as the key risks of an investment in the Fund: failure/poor performance of an investee company, execution risk, liquidity risk, exit risk and maintenance of EIS tax benefits. We have assessed the policies and controls that Management has in place to minimise these risks and have found them to be appropriate for the size and strategy of the Fund. Risks relating to investee company default are partly mitigated during the investment process through the analysis and due diligence undertaken before an investment decision is made. We note that that, where possible, EIS investors are allocated preferred equity, in the investee company, which entitles them to a senior priority return ( a Priority Return ) ahead of all other equity stakeholders in the company. This provides an extra layer of downside protection above the value of the assets backing the underlying investments. We understand that the Priority Return vary per investee company but is generally above the 25% return targeted by the Fund. We however note that the cost of this preferred equity position, for the investor, is a smaller share of the upside, above the Priority Return, on the underlying investments. We elaborate on this point under the fees section of this report. Execution risk is controlled through an ongoing, active involvement by the Team in the management of the underlying investments. We understand that the underlying investments will be closely monitored with special attention paid to: i) threats of or actual loss of EIS reliefs (with the support of Philip Hare & Associates), ii) change of directors and/or management, and iii) material deviation from company strategy or business plan. The Manager will require board representation at each investee company and will hold minority equity positions with veto rights on certain key actions that affect the risk/reward profile of the investment; such as the introduction of leverage or a change of focus for the business. In our opinion, the portfolio construction process would benefit from formal parameters that provide clarity to investors on the risk profile of their portfolio. There are varying levels of risk associated to each investment opportunity in the current pipeline and the overall risk profile of the Fund will be dependent on the mix of selected opportunities. We note that HMRC advanced approval is sought to ensure that each new investee company is EIS qualifying at the time of investment. We consider this to be good practice, but investors should be aware that if the investment holding conditions are not met, they will not be entitled to the full tax benefits of EIS investments. 19

20 Key Features The following fees (number 1-4) describe the fees directly payable by the investors and the product fees (number 5) incurred by Guinness. 1. Initial and Ongoing Fund Management Fee TABLE 7: FEES PAID TO THE MANAGER Initial Fees On-Going Annual Management Fees 3% of NAV* 2% of NAV + VAT *Applications through an adviser incur an application fee as agreed with the adviser and are not subject to The Manager s initial fees Note: All fees are paid by Investee Companies. If this is not possible, equivalent fees may be charged to Investors. 2. Early bird fees and other discounts There are no early bird or other such discounts. 3. Subscription/Application Fees TABLE 8: SUBSCRIPTION/APPLICATION FEES Type of Investor Direct Application (Investors who make an application, without using a financial advisor or execution-only intermediary ) Initial Application Fee (and initial commissions/initial adviser charges) Ongoing management charges (and ongoing commissions/ongoing adviser charges) 3% of the gross subscription 2% + VAT Application through an adviser (investors who make an application through a registered financial adviser without an ongoing fee) 0% to Guinness and adviser fees as agreed with adviser 2% + VAT Application through a non-advisory intermediary 3% of the gross subscription 2% + VAT 4. Performance Fee There is a performance fee of 20% payable on returns above the investors initial subscription in the Fund. We reiterate that the cost to EIS investors, for their preferred equity positions in the underlying investments, is a smaller share of the upside, above the Priority Return ( the Surplus Upside ), on the underlying investments. We understand that the investee company management teams share of the upside ranges from 20% to 70% depending on the level of risk inherent to the business model of the investee company. This is effectively an indirect cost on performance borne by EIS 20

21 investors. We note that the investee company management teams and not the Manager earn the Surplus Upside. 5. Product Fees The other fees charged are listed in the following table. TABLE 9: FEE DETAILS Fees Custodian Charges Details Up to 0.35% and 60 annual management fee Transaction Fee (% of deal) 2% Average Annual Costs 0% Directors Fees 0% Excluded Costs 0% Guinness retains the right to charge each investee company a monitoring fee and directors fees. Guinness fee structure is not entirely transparent due to reserving the right to charge a monitoring fee and/or directors fees, without stating the average amount they expect to charge. Guinness have assured us they have never charged either of these fees, and that they would only be charged in lieu of the annual management charge. Performance The investment strategy is relatively new to the Manager and to the Fund. Consequently, there is no performance track record to evaluate and it is difficult to assess the likely performance of the Fund with any degree of confidence. Nevertheless, we note that Guinness has an established track record of investing in EIS qualifying investments and have delivered three EIS exits, all from companies focused on energy generation, since inception. The exits were at 1.35x, 1.22x and 1.25x multiples, over a period of four to four and a half years. 21

22 Appendix 1: Key Personnel Biographies Management Team Name Job title Date started Biography Shane Gallwey Fund Manager 2010 Shane has launched, advised, invested in and sold a number of EIS & BPR-qualifying businesses. Prior to Guinness, he spent six years with HSBC Investment Bank in equity research and corporate finance, four years with an investment fund in Gibraltar, and a further five years advising growth companies on EIS/VCT structuring and financing. Shane holds an MA from the University of Edinburgh, and is a CFA Charterholder. Edward Guinness Fund Manager 2007 As well as being a Fund Manager on the Guinness EIS Team, Edward has managed the Guinness Alternative Energy Fund since 2007, raising over US$100 million and making investments in listed wind, solar, hydroelectric and energy efficiency companies globally. He joined HSBC Investment Bank in 1998 working in the Energy & Utilities Team in Corporate Finance, Tiedmann in New York in 2003 and Guinness Asset Management in Dr Malcolm King Fund Manager 2013 Malcolm joined Guinness Asset Management's EIS Team as an Investment Manager in Prior to joining Guinness, Malcolm worked for the Carbon Trust and its subsidiary CT Investment Partners (now 350 Investment Partners) where he led or managed 15 transactions in the cleantech and renewables sector. From 2006 to 2008 Malcolm worked as a Consultant for Angle technology plc where he was heavily involved in the management of the Carbon Trust Angle Incubator, the leading cleantech incubator of its kind in Europe. Malcolm has a PhD in Physical Chemistry from Cambridge University and a BSc (Hons) in Chemistry from the University of Pretoria. Chris Viliers Fund Manager 2015 Chris joined Guinness EIS investment management team in 2015 after spending 10 years working in the carbon and renewable energy markets. The majority of this time was spent with EcoSecurities (a wholly owned subsidiary of JP Morgan) ultimately as Head of Portfolio Management. Between 1999 and 2004 Chris worked in Corporate Finance at Dresdner Kleinwort. He holds an MA from the University of Edinburgh and an MSc from Imperial College in Environmental Technology. Hugo Vaux Fund Manager 2012 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 micro and macro analysis in the investment team. He has an MSc in Finance and Investment from Bristol and a BSc in Economics from Exeter. 22

23 Andrew Martin- Smith Fund Manager 2007 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 as well as managing the Guinness AIM EIS Fund. 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 Board of Directors Name Job title Biography Tim Guinness Jim Atkinson Founder & Chief Investment Officer Director As founder and Chief Investment Officer of Guinness Atkinson Funds in the US and of Guinness Asset Management in the UK, Tim Guinness is a logic-based value investor with nearly 35 years of experience. From 1999 to November 2002, he was Joint Chairman of Guinness Flight Global Asset Management Ltd. (which merged with Investec in 1998), and was the CEO from 1997 to Tim graduated from Cambridge University with a degree in engineering. He then completed a Master s Degree in Management Science at the Sloan School M.I.T. in the United States. Jim is a director of Guinness Asset Management. He also serves as the CEO and Chief Compliance Officer of Guinness Atkinson Asset Management, Inc., and is the president of Guinness Atkinson Funds. From 1993 to 2000, Jim was the managing director of the US subsidiary of Guinness Flight Global Asset Management, Ltd. (which merged with Investec in 1998). Prior to that, he was a senior vice president of Huntington Advisers, a mutual fund manager specialising in foreign currency money funds. In addition, Jim has served as the president of Max Funds, and as the principal at a mutual fund marketing research and consultancy firm. Jim graduated from the University of California, Los Angeles with a degree in History, with an emphasis on the history of science and technology. 23

24 Edmund Harriss Andrew Martin Smith Director & Asian Fund Manager Adviser Edmund has managed Asian Funds since 1994 both from London and from Hong Kong. Edmund worked for ten years from 1993 for Guinness Flight, which became Investec after the merger in After joining the Far East Investment Desk in 1994, he served as a member of the investment team managing the China & Hong Kong Fund (now the Guinness Atkinson China & Hong Kong Fund, for US investors). He moved to Hong Kong and became the Fund s lead manager in In addition, Edmund has managed the Guinness Atkinson Asia Focus Fund (for US investors) since 2003, and the Guinness Atkinson Asia Pacific Dividend Fund (for US investors) since its inception in Edmund graduated from Christ Church, University of Oxford, with a Master s degree in Management Studies and has a Bachelor s degree in History from the University of York. He is also an Associate of the Society of Investment Professionals. Edmund is manager of the Guinness Best of China Fund, and lead manager of the Guinness Asian Equity Income Fund. 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 as well as managing the Guinness AIM EIS Fund. 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

25 This report is published by Allenbridge Limited. It is normally available to Professional Advisers by private subscription. Allenbridge Limited Old Jewry, London, EC2R 8DN Telephone Allenbridge is a trading name of Allenbridge Limited which is incorporated and registered in England and Wales - Registered number Registered office 8 Old Jewry London EC2R 8DN. Allenbridge Limited is an appointed representative of Allenbridge Capital Limited which is Authorised and Regulated by the Financial Conduct Authority. NOTE: 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.