Aurium Capital Markets LLP
Nimesh is a partner at Aurium Capital Markets LLP ("Aurium"). Aurium is an independent alternative investment manager focussed on structured finance transactions in three main sectors: real estate, business critical assets and renewable energy. Nimesh was previously an owner of a structured finance boutique based in London completing over $5bn of financing transactions prior to which he worked at Deutsche Bank. Nimesh qualified as a tax lawyer at Freshfields Brukhaus Deringer.
Dorothée Queyroux (DQ): Nimesh, could you please give us an overview of what Aurium is doing in the real estate market?
Nimesh Kamath (NK): Aurium provides specialised (and often bespoke) financial solutions to high net worth, family office, institutional and hedge fund clients predominantly in Europe and the US. We are currently working on three distinct structured finance opportunities for our investors in the real estate sector: a Luxembourg bond issue, an inheritance tax solution for high net worth individuals and an EIS offering based on construction of real estate. Our overall aim is to look for innovative methods of financing traditional assets such as real estate with the goal of distorting the risk reward curve in favour of our investors.
DQ: How does the bond issue relate to real estate?
NK: Since the retraction of the major banks from the development finance arena, we have all witnessed various players coming into the market to fill the void – private equity, institutions and even high net worth individuals. Despite the new entrants, we feel that there is capacity in the market for new lenders. We are still coming across significant dealflow where developers require finance in a variety of forms secured against excellent assets with strong yield for the lender. Rather than simply setting up a fund for investors to access these opportunities, we wanted to offer something a little different – a structure which would not constitute a collective investment scheme, so that financial advisers would find it easier to market the structure to their high net worth clients; a withholding tax efficient structure to avoid tax leakage and perhaps most importantly, a structure which avoided a black box approach to lending where the asset manager takes all control away from investors and decides on which loans to pursue. Therefore, we set up a Luxembourg securitisation vehicle and aim to list bonds issued by that vehicle with a fixed 8% coupon, paid semi-annually. Investors would then be able to buy bonds from the vehicle with each bond series corresponding directly to a particular loan – allowing transparency over the underlying asset but also allowing investors to elect whether to participate in a particular bond series or not.
DQ: What type of loans are the bonds secured on?
NK: For this structure we focus only on loans secured by a first charge over the underlying asset, primarily in London and the South East. We are willing to lend up to 75% LTV to developers.
DQ: How has the market reacted to these bonds?
NK: We are in a pre-launch marketing period as the bonds are due to be listed sometime later this month. Of course the listing makes it possible for SIPP trustees to purchase the bonds. As a result we have had a very strong response from the market. In addition, we are designing a bespoke version for our family office and hedge fund clients that wish to invest larger amounts and achieve a higher yield – usually approaching 10%.
DQ: How about your EIS structure?
NK: Well, that is quite a different proposition. We are promoting a series of EIS companies, the first of which is SW Construction (Residential) Limited, which have a trade of providing construction services to property developers. The EIS has a very experienced board of directors – with an ex Davis Langdon partner, a director from CBRE and an established builder. The idea is that the EIS company will use the funds it raises from investors to boost its balance sheet – so that it can tender for better and bigger construction jobs which are often dominated by the larger construction firms. The advantage to the developer, apart from having an experienced team to deal with on the construction side, is that the EIS company has its own funds to pay for much of the development costs although the EIS company will demand a fixed uplift on the construction contract on practical completion of the development.
DQ: What are the tax benefits to investors?
NK: Of course there are all the usual tax benefits of an EIS structure (the structure has received advance assurance from HMRC as qualifying for the following tax benefits). On investment, the investor will receive 30% income tax relief on the amount invested. In addition, any capital gains from the previous three years can be deferred until exit of the investment. Naturally, any upside on the EIS shares is free of any capital gains tax and after two years the investment will qualify for business property relief as a result of which the value of the shares will fall outside of the investor's net for inheritance tax purposes. It is also possible for UK resident non domiciled investors to take advantage of business investment relief – the new relief brought in the last Budget – which allows non domiciled investors to remit offshore funds without any tax charge in the UK and benefit from the tax advantages and investment returns provided by the EIS company, on the basis that the remitted funds are then taken back offshore within a short period of realising the investment.
DQ: What returns can investors expect from SW Construction?
NK: The EIS company will aim to charge an uplift of 10% per annum on its construction services. After fees and performance benefits for the directors the aim is to return £1.20 for every £1 invested. Due to the tax reliefs this equates to an annual return of 19.71%, or gross of tax equivalent of 35.84% per annum. The added advantage is that wherever possible, the EIS company's fees will be secured on the underlying real estate, giving the investor a higher level of protection.
DQ: You mentioned inheritance tax as a possible benefit: how is this different to your inheritance tax solution?
NK: SW Construction, by virtue of its trade, will enable investors to claim business property relief on the value of the shares. However, depending on the decision of the directors, it is unlikely that the trade will continue for many more than 3 or 4 years, and therefore investors will find that the value of the shares, on exit, will return back into the inheritance tax "pot". In addition, since there is a requirement to hold EIS shares for at least 3 years to benefit from the tax relief, investors are unable to sell their shares in that initial period. This might not be attractive to investors that wish to avoid inheritance tax on a part of their portfolio. We have therefore teamed up with a third party, Blackfinch Investment Solutions, to provide a platform which provides investors with the usual inheritance tax benefits, but also liquidity, control and a target annual return of 7% across various asset classes. Aurium will be running two of the underlying strategies on the Blackfinch platform covering first charge real estate development loans and mezzanine/bridging finance.