Three of Britain’s most successful pub entrepreneurs are back in the saddle and using the enterprise investment scheme (EIS) to fund their latest venture.
Clive Watson, John Roberts and David Bruce are the team that masterminded the Capital Pub Company and City Pub Company, while Bruce brought us the Firkin chain that was a huge success in the 1980s and 90s.
The trio have teamed up to launch the City Pub EIS Fund that aims to invest £100mln over the next three years.
It will raise an initial £25mln over three to five separate companies using the EIS structure, which provides investors significant tax and capital gains relief in return for backing riskier start-up businesses.
The deadline for the first tranche is the March 27 and to date the group has raised around £3mln.
The fund will be managed by Watson, who is currently chairman of the City Pub Company, and was chief executive of the Capital Pub Company, an EIS vehicle that had an enterprise value of £93mln at the time of its sale four years ago to Greene King.
The plan is to invest in good, local freehold pubs or sites with long leaseholds.
There are opportunities to pick these of properties up from the major chains, which are still shedding outlets, as well as from owner-operators.
“We like buildings that have some historic aspect to them,” Watson told Proactive Investors
“We aren’t looking at pubs in city centre or office block locations, but just off the High Street; something that can be considered to be the local in that particular area. We looking for an ambiance that is ageless and classless.
“So, if you are a student you are comfortable, but equally if you are retired we want you to be at ease in our pubs too. We don’t target segments of the market specifically.”
With new management in place, the plan is to increase a new pub’s weekly takings by expanding market share.
A decent food offering and wider array of ales helps in this regard.
But Watson and his team have succeeded in other ventures by devolving oversight to local managers, who receive a share of the profits.
Incentives such as these and a company-wide bonus scheme motivate staff and help with retention, Watson said.
“The big boys have wised up to the fact you can have local, independent looking pubs, but these are still managed from head office,” he added.
“We leave decision making to the manager and chef.
“So, every menu is created at pub level to give that independent feel. So, there are no plastic menus that change perhaps once every six months. At the same time we don’t want to get too gastro and too expensive.”
The fundamentals for the pub sector are good and improving, with interests rates near all-time lows and consumer confidence returning after the financial crisis and the recession.
It means the City Pub EIS fund works on a number of levels – it will track the recovery of the industry; it is a play on the retail sector; and, unlike many investments of this class, it has significant asset backing.
And at some point down the line there may be the opportunity to bring the chain to the stock market; however, this probably won’t happen in the next few years.
“AIM for a start-up such as ours is very tricky – you are immediately under the spotlight. We are on a four to five year journey. That gives you the time to build a business for the medium to long term,” said Watson.
“But once you build a portfolio of lovely pubs you don’t necessarily want to get rid of them. So, in that respect an AIM float at a later date is a definite possibility. It would give shareholders an exit but also keeps the show on the road.”
What is an Enterprise Investment Scheme?
In essence, an Enterprise Investment Scheme (EIS) is an alternative, government approved way of funding start-up businesses.
It’s about giving much-needed capital to businesses that cannot get funding from traditional methods, like banks.
For investors, it’s a tax-efficient way of putting money into the new shares of a young, unlisted company.
Those who invest get an income tax relief of 30%.
So, if you invest £100,000 in a company that is eligible for EIS, you can knock £30,000 off your income tax bill in the year that you invest.
Better still, you also pay no capital gains tax or inheritance tax.
You can put money into single companies or via a collective investment, such as an EIS fund.
You can invest a maximum of £1mln each year through EIS.
There are some catches; you still have to pay tax on dividends and a small business means 250 employees or less, and maximum gross assets of £15mln (before the investment).