Earthworm Capital (Fund)

EW Cap / Thompson Taraz Managers – EIS Report

25 Aug 2017 / Tax enhanced research

Summary: The Fund’s investment strategy is to invest in a portfolio of EIS qualifying companies that will operate waste management and recycling facilities in the UK; it plans to have operations at eight sites within the next few months.

Why Invest

Positives

Strategy: Exposure to a portfolio of plants to manage and recycle organic waste: the £86+/tonne Landfill Tax makes traditional disposal a far more expensive option.

Issues

Operations: Although there will be some heads of terms in place before investment, further contracts and good management will be required to reach target returns.

Investment Advisor

Positives

Team: EW Cap has a strong team with experience in planning and developing projects in a variety of environmental areas.

Issues

Track record: EW Cap managed a return of £1.15 over 4 years for the one EIS company that has surpassed the 3-year EIS holding period.

 

Nuts & Bolts

  • Offer period: Further tranches will be issued in tax years 2017/18 and 2018/19.
  • Diversification: The aim is to invest in at least three waste management and recycling
    companies per investor: the latest tranche is invested in four.
  • Valuation: Updates will be provided every 6 months.

 

Specific Issues

  • Fees: All fees are charged directly to the investee companies. Annual fees are reduced from year 5 onwards.
  • Performance fee: This fee only applies if the return exceeds the £1.20 per £1 invested threshold. The Fund receives 30% of the investor share of any such surplus on a portfolio basis.
  • Sourcing: It is expected that Sycamore Planning, which is owned by a former member of the EW Cap team, will be contracted to develop the sites and will be paid accordingly. This arrangement is new and the company is indirectly connected to EW Cap. The non-executive Director will need to ensure this process is managed effectively.

 

Risks

  • Target returns: The Fund has a target return of £1.20 for each £1 invested over a 4-5 year period, exclusive of EIS tax reliefs. In the absence of tax reliefs, the target return may not compensate for the business risk.
  • Waste Management and Recycling Sector: Although any investment will be a minority stake in each investee company, the potential risk is managed by the Fund having effective board control and rights over any decisions on cash within the investee companies. More specifically, a failure to win sufficient waste management and recycling contracts – at the right price – constitutes a very material risk, though mitigated by having heads of terms in place prior to the investment of EIS capital.