Type: Enterprise investment scheme fund
Aim: Growth by investing in solar PV systems already installed in residential properties in and around Yorkshire
Minimum investment: Lump sum £10,000
Closing date: March 12, 2012
Charges: Initial 5.5%, annual 2%, performance fee 30%
Commission: Initial 2.25%, 0.5% renewal for up to 25 years
Tel: 020 3006 7530
The Goldfield solar EIS fund provides one of the last opportunities investors will have to benefit from feed-in-tariffs with enterprise investment scheme tax relief. FITs are Government incentives for individuals and companies to generate their own electricity using renewable energy such as solar power. They provide a fixed payment for each unit of electricity generated for 20 to 25 years, providing a predictable, long-term inflation-protected revenue stream for investors. But from April 5, 2012, EIS funds that benefit from feed-in-tariffs will not be issuing new shares because these will no longer qualify for inclusion in an EIS.
This EIS fund charges a 30 per cent performance fee only once investors have received the equivalent of their original investment plus an annual 8 per cent internal rate of return.
Holden & Partners managing partner Mark Hoskin says “The Goldfield solar EIS fund enables home owners to lease their roof space in return for free electricity, courtesy of the solar panels the EIS fund has paid for on their roof. The government feed-in tariff for solar panels less than four kilowatt peak in capacity pay the EIS fund 44.8p for each kilowatt of electricity produced – generation and export tariff combined – and not electricity used. This is financed through our electricity bills under government legislation. Furthermore this tariff increases each year with inflation for a period of 25 years from the installation and receipt of a Microgeneration Certification Scheme certificate for the solar panel.”
The key point for Hoskin is that the product provides an inflation-linked 25-year income. He feels this compares very favourably to an insurance annuity, or alternative income product with investment market risk.
Hoskin says his clients do not want to give their money away at retirement to buy an annuity. “They have worked hard for their savings and they don’t like the idea of losing them in return for a level annuity at 6 per cent. They also don’t particularly like watching the markets fall 20 per cent.”
He thinks the Goldfield solar EIS fund provides clients with an excellent alternative for a portion of their savings. “It provides an inflation-linked yield of about 5 to 6 per cent gross equivalent over 25 years, providing an excellent diversifier and stable income stream, with tax breaks on entry.”
Hoskin adds that the Goldfield solar EIS fund is the top rated Enterprise Investment Scheme in the Martin Churchill’s Tax Efficient Review.
Discussing the potential risks, Hoskin says: “The most important aspect to an EIS scheme is the underlying business model. There are risks, but this business model is less risky than its competitors. It is comparable in risk and return to owning your own commercial property in a pension with a blue-chip tenant and a 25-year lease.”
He regards the product as a natural income producer providing income from inception, but due to the EIS structure will not be paid out until after year four.
Hoskin says the EIS will also have some great planning opportunities attached.
“Courtesy of the recent tax changes an EIS provides for 30 per cent income tax relief at investment, which for some clients with planning can all but remove a tax bill in 2011/2012. This is because EIS relief is a reducer, so as long as you have paid income tax you can utilise EIS relief to reduce this bill to zero. It therefore plays well with pension contributions.”
Hoskin adds that for many of his clients, the spouse is not a higher rate taxpayer, or likely to be in retirement. “This provides an excellent further tax planning opportunity. After the three year period the ordinary shares can be transferred into the partner’s name, meaning that no further tax is payable on the 22-year dividend income stream.”
The income stream over 25 years sets this investment apart for Hoskin. “Many of my clients are age 50 to 60 and the key income need will be from age 60 or 65 to 85 or 90. It parallels with the years they need retirement income.” He adds that the adviser remuneration remains at 0.5 per cent of the initial investments throughout the life of the client’s investment in the EIS fund.
Turning to the potential drawbacks of the EIS fund, Hoskin says: “The key concern for an investor in this type of scheme is liquidity. This is a new market and no one can know at outset what sort of liquidity can be provided in the long term.
“This is why I use it for clients that I know need a 25-year inflation-linked income, much like I would consider a pension contribution for a client. However, Goldfield Partners is confident that it will be able to provide liquidity in four years and depending on take up, many of the investors could be bought out from the cash the EIS companies will accumulate over the first four years.”
Hoskin’s second concern is around the strength of the covenant, which he says is in effect the working of the UK electricity market and political tinkering.
“This is where an investor needs to consider the main risk involved in the scheme, because it is unlikely that the sun will stop shining and the technology is well proven – solar panels have been providing energy for satellites since the 1950s.
“There have been many scare stories around, about the UK government reducing tariffs. However, where this has occurred internationally it has nearly always been for future installations and not panels already installed and receiving the tariffs.”
Government legislation is a risk for Hoskin, but he expects electricity prices will continue to rise above the rate of inflation, making these inflation-linked tariffs cheaper to the electricity market going forward.
Hoskin believes Goldfield’s focus on residential houses reduces the political risk further in two ways. “First, it would directly impact voters to retrospectively alter the tariff. Second, the Government is increasingly worried about fuel poverty and this scheme helps in some way to address this issue, by providing free electricity.”
Another concern is that Goldfield Partners is new to the market. “It does not have experience of managing an EIS Scheme. The team are ex-property professionals who provided loan finance on commercial buildings up until the financial crisis. However, it has brought in Prosper Capital as sponsor and operator to look after investors’ interests and a property background does have direct relevance in dealing with the leases, which are so central to the business model.
“The on-going management is not technically difficult, or beyond property professionals and it has already demonstrated an innovative approach and keenness to make this work by keeping advisers and clients up to date on the performance of the solar panels through smart phone technology.”
Discussing the potential competitors, Hoskin says: “There have been numerous entrants to the solar market, many of whom pulled out when the tariff cuts were introduced. Others have come in very late, once the situation was resolved, but are now working under such tight time constraints.”
Other than Goldfield, Hoskin highlights Foresight and Downing. “Their models are based less around the residential tariffs and more on commercial schemes. Downing has split its product between wind and solar, providing extra diversification. There are extra risks to this business model, but the key risk now is the time to invest the money.
“There is a race on to get assets invested prior to April 5, 2012, not simply because of the tariff review which has been announced, but because, as it currently stands, after this date schemes with FITs will not be eligible for EIS relief. It is therefore imperative that the money is invested quickly. “
Hoskin is confident that Foresight and Downing have the experience and relationships in place to manage the timeline, but he feels there may be a few others who come unstuck.
Summing up, Hoskin concludes: “It is often difficult for IFAs to do something which is a bit different, but it is worth looking into this. After April 5, 2012 the opportunity will most likely be closed and in the current economic climate, locking into 5 to 6 per cent inflation-linked yield for 25 years looks very good value.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good
Overall 9 /10