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Morning Briefing Strap Line
Fri 14th Aug 2015 - Friday Opinion
Subjects: Last orders for EIS companies, the changing face of City of London drinking holes and Liverpool highlights
Authors: Steve Kenee, Glynn Davis and Ann Elliott

Could it be last order for EIS companies, wonders Steve Kenee

The announcement in July’s emergency budget that a National Living Wage is to be introduced has generated a significant amount of debate. However, another significant announcement in the budget that seems to have flown somewhat under the radar is changes to the EIS rules that will take effect following Royal Assent (expected October 2015). These changes will mean it will no longer be possible to use money raised under an EIS to purchase a business.

Whilst this may not sound particularly exciting or catastrophic, when we consider that purchasing a business includes buying trade and assets, ie a pub, and when we consider that EIS has been an incredibly popular way to fund pub companies (Capital Pub Company, Oakman Inns and Brewhouse & Kitchen to name but three high prolife EIS-funded pub companies), it is clear the impact on the sector could be significant.

So what is the EIS scheme and why have the changes been made? EIS or the Enterprise Investment Scheme is a government initiative that provides investors with significant tax breaks for investing in small UK-based trading businesses. The tax breaks include 30% income tax relief (so a £1 investment effectively only costs you 70p), roll-over relief, no capital gains tax, exemption from inheritance tax and loss relief should things go really wrong. These tax breaks are awarded in order to encourage investment in smaller, higher risk trading companies that struggle to attract traditional finance but are crucial to driving a successful economy.

The spirit of the rules is that money invested should be at risk and should be used to drive growth and employment. For this reason a number of rules are attached to the tax breaks including: a limit on how much a company can raise (£5m per annum); limits on the size of the company raising the funds; the prohibition of pre-agreed exits/arrangements to protect the investors from normal risks associated with investing in shares; and a list of non-qualifying trades such as leasing, property development, hotels, nursing homes, renewable energies and, for a reason I have never quite understood, shipbuilding and steel production.

So why have the rules been changed? Well, as usual, is appears to be a case of unintended consequences combined with a healthy dose of meddling from the EU. Whilst we will never fully understand the workings of HMRC’s mind, we believe that it is because EIS-type funding has for many years been a popular source of funding for management buy-outs (MBOs). However, rightly or wrongly MBOs aren’t seen as high risk or driving growth. Further, the EU feels the tax breaks give these companies an unfair competitive advantage over other, non EIS-funded EU companies. As a result, the purchase of shares has been a non-qualifying use of funds for a number of years. However, many funding providers have sought to get round this issue by purchasing trade and assets instead. We believe the new changes have been introduced in order to close this loophole and that pub companies have been caught in the unintended crossfire.

The irony is that most of the pub companies that have raised money under the EIS have used it to purchase dying pubs on dying high streets. These pub companies then invest significantly into the properties in order to reposition them and bring them up-to-date. The investment not only revitalises the pub itself but can also have a profound positive impact on the local area. This drives employment and fills the government’s coffers with VAT, PAYE/NI, corporation tax, and rates. If this isn’t driving growth, then I don’t know what is. It would also be very hard to argue that a UK pub will have any impact on other businesses in the EU.

So what does this mean for the sector? Well, the first thing to note is that the rule changes do not explicitly prohibit EIS funds being used for pubs, rather it is the purchase of a business that has been prohibited. This means that new-build or change-of-use sites should still qualify, as would buying a site that had been closed and boarded up for some time. It may also be possible to purchase a tenanted pub if you convert it to a managed house at the point of purchase. However, another sting in the tail is that the current drafting appears to prohibit a company that raises EIS funds now from purchasing a business for the next three years regardless of whether this purchase is from the EIS fund raise or not. This means if a pub company raises EIS money to purchase a number of closed pubs (qualifying), it would be prevented from buying an existing pub for the next three years regardless of how this is funded.

So, whilst not impossible, we believe the EIS funding route will no longer be attractive to pub companies that want to grow their businesses by taking advantage of the best opportunities in the market, no matter what their guise. Will this stop the entrepreneurs behind these pub companies from raising money and growing their businesses? Probably not, but it will certainly make it significantly harder as many investors are nervous about the sector and the tax breaks are often needed to convince them to do so.

For Downing the impact should be limited as, whilst much of the £600m fund we manage is EIS-based, we have £20m of funds ready to invest now and are in the process of raising another £10m-£30m, which will be deployed before the changes come into play (and should therefore operate under the existing rules). In addition we also raise, invest and manage a variety of other sources of funding which will allow us to continue to support the sector. However, the news for operators considering raising their own EIS fund to help them grow their business is somewhat less rosy as, in our view, the taps have effectively been turned off.
Steven Kenee is a partner of Downing LLP, and active investor in the sector with over £600m under management. Downing’s success is based on backing good quality operators who have the ability and ambition to grow their business. Please get in touch if you think you have what it takes

The changing face of City of London drinking holes by Glynn Davis

Dark and dingy, sawdust on the floor, complementary crackers and celery for bar snacks, beer served from battered pewter tankards and, most notably, frequently rammed to the gills so standing room only.

This was the scenario at the City FOB on Lower Thames Street in the City of London on most lunchtimes and evenings during the working week in the late 1980s. I’d just started work in fund management and joined the mass of other pin-striped suits in spending almost every lunch and evening in the wine bars and boozers of London’s financial district.

These were glorious times for drinking on the job and as a result it meant boom time for the wine bars including the FOB that was owned by Davy’s. It was one of a triumvirate of storied family-owned wine merchants that had each plied their trade for well over 100 years and built up very successful wine bar chains as complementary additions to their distribution/merchant arms.

Davy’s, El Vino’s, and Balls Brothers were the grandaddies of drinking in the Square Mile and their families had enjoyed years of dividends rolling in as their positions in the market remained unchallenged. That was until “Big Bang” came along in 1986.

This was the deregulation of the stock market that led not only to seismic changes in the way finance was undertaken in London but also its drinking culture. “Big Bang” prompted a number of changes – there was an influx of foreign-owned banks, and with them more women came into the City, and these banks wanted flashy new head offices so lots of property development took place.

These banks, many of them American, disliked drinking at lunchtime, the increase in women prompted a surge in demand for food to be consumed rather than just alcohol, and the new head offices invariably had retail/food and beverage space on the ground level with large windows creating light and airy restaurant/bar environments.

The male-dominated basement venues of Davy’s, El Vino’s and Balls Brothers without any kitchen facilities were wholly unprepared for this revolution. After centuries-plus of trading they were hit hard and fought valiantly to redress the issues they faced. Efforts were made to lighten the basements, kitchens were added where there was sufficient space, and the menus took on a lighter more Mediterranean feel rather than being meat-heavy that had been the earlier focus.

They also began to look at opening ground level venues that had the more feminine feel and were the antithesis of the dark basement wine bars of old. Needless to say, these changes were not easy to handle. A revolution had taken place in the City and the old wine bars had to take equally revolutionary action.

The recent purchase of El Vino’s by Davy’s represents just one more step on that journey of recovery and a tough flight towards relevance. The deal adds five wine bars to the 26 currently owned by Davy’s and extends its wine merchant business. When announcing the acquisition Davy’s chairman James Davy stated it was a logical step in an “increasingly competitive marketplace”. Clearly there has been no let up since 1986.

Along the way Balls Brothers fell into administration and its once illustrious name no longer lives on in the City. It over-extended itself when acquiring a modern gastro-pub business Lewis & Clarke in 2006 when looking to reposition itself as a lighter, more modern brand.

This new type of venue can today be seen all over the Square Mile in the form of bars from the likes of Drake & Morgan, and Jamies. These are the City bars of today and they are a world away from the wine bars of my days toiling in the financial district. Some of these operations now blend cafe, bar, nightclub, restaurant, and coffee bar seamlessly into one all-day trading environment that attracts a very varied bunch of customers.

What helps make the running of such establishments work today is the way the landlords and developers of the City of London’s property have adopted a very much more leisure-focused approach. Whereas once the bars were all closed by 9pm weekdays and completely closed all weekends, they are now open until the early hours seven days a week. It is not unusual nowadays to see ropes and bouncers outside certain popular venues, which was a sight only seen in the West End.

I very much hope that the Davy’s acquisition will provide it with a more robust base with which to fight its corner against the newer food and beverage operators that today fill the City as the triumvirate is now down to only one.

And sadly the FOB is no more, having no longer been seen as attractive to today’s City workers. It is now just a memory for those who trod its sawdust-strewn floorboards and added a little more patina to its battered pewter tankards.
Glynn Davis is a leading commentator on retail trends

Highlights in Liverpool by Ann Elliott

Liverpool was the most awesome place to be last weekend. The whole city seemed to be out and about in the sunshine with the area around the Albert Dock absolutely jam-packed with street food, craft stalls and great music.

The first stop on our 12-bar/restaurant odyssey was Panoramic 34 ( which does exactly what it says on the tin with amazing 360 degree views of this amazing city. I had asparagus soup with a caper and lemon dressing followed by goat’s cheese and black pepper bon bon with a beetroot and walnut salad. Two courses for £22 was fantastic value for superb food in the most brilliant setting.

Then it was on to a tour of Albert Dock. I once broke in there as a student when it was being left to rack and ruin so it’s so nice to see it vibrant, lively and full, with a huge variety of household names in terms of bars and restaurants. We had a quick look round Circo ( which was pretty dire in the cold light of day but, we were reliably informed by locals, is packed to the gunnels by midnight.

Not far away, The Smugglers Cove (part of New World Trading Company) was a nice respite from the heat, and surprisingly full of 25-35 year olds drinking and eating in the semi-darkness. I thought it was a bit kitsch when I walked in (think Beefeater in the 1980s) but when I sat in a booth, drank my wine and listened to the (great) music I realised how well thought-through this whole place was. It’s very easy here to just appeal to tourists but The Smugglers Cove is much more than just a tourist trap. The lighting is great, the service was friendly and efficient, the people were beautiful and it was just a brilliant place for hanging around in. I didn’t want to leave.

The City Tuk Tuk company ( run by the wonderful Tony took us on a tour of some of the Liverpool bars and restaurants we wanted to see. We were dropped off at The Restaurant Bar & Grill in the stunning Halifax building on Brunswick Street. It was patently clear that this was where the really beautiful people of Liverpool go to socialise. The service was totally flawless and professional though I don’t think they were expecting us to take what was left of our Gavi di Gavi back out with us around Liverpool in the tuk tuk. Classy.

Ditching our mode of transport, we hit Yee Rah for evening snacks and more drinks. Informal, unpretentious, friendly and relaxing, this place was just what we needed to recharge our batteries. The food was interesting, tasty and nicely presented and the place was buzzing with a nice atmosphere. We had a look in Salt House Tapas ( as we were walking to our next bar. This looked spot on trend – unfortunately we were too full of prawn tempura and chicken satay to eat (and they didn’t have a table free until 10pm anyway).

We all loved The Gin Garden (checking out Bridewell on the way) in the Baltic triangle, which it describes as “the epicentre of creativity in Liverpool”. It is home to game designers, app developers, a skate park, drone flyers, musicians and now Botanical Garden, a pop-up urban wonderland of everything gin, plant and summer related. The quintessential British garden but not as you’d expect it. The very definition of a hidden gem, so much so that even Google Maps doesn’t know where you’re on about. The inside is an urban wonderland and what we imagine Banskys’ garden looks like. Near enough every inch of space is covered in every pantone you could imagine and adds real atmosphere.

Camp and Furnace ( looked absolutely amazing but I realised I shouldn’t be in there when I rubbed shoulders with a bride at the bar. It is stunning and worth a second look. Baltic Social in the same area had come highly recommended but looked dark, dingy and grubby in the fading evening light. Constellations was a bit like Camp and Furnace and seemingly comes to life later in the evening. All in all the Baltic Triangle was just brilliant – interesting, challenging, lively and great fun – a bit like the city itself. I can’t wait for an autumn revisit.
Ann Elliott is chief executive of sector public relations and marketing agency Elliotts –

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