On the face of it the maths add up. A group of investors use their collective buying power to purchase a diverse portfolio of collectable classics, wait while they appreciate, sell them off and share the capital gains-free proceeds. What could go wrong? Welcome to the world of the classic car fund.
In this decade we have seen a number of car funds come to the market in the UK and Europe. Probably the most high profile was the Guernsey based IGA Automobile Fund which launched in 2011 with what can only be described as a heavyweight management team which included former BRDC Chairman Ray Bellm, Le Mans winner and historic racing guru Paul Lanzante and ex- HR Owen Chief Executive Nick Lancaster. Special advisors to the fund included Nick Mason and Gordon Murray. Following the initial press launch the fund appears to have acquired some vehicles but IGA’s fate is unclear and the website no longer exists.
Since 2011 other classic car schemes of varying size have also surfaced including the PHD Equity Partners Classic Car Fund in 2014 and the Chillingham Classic Cars EIS in the UK, the Dubai/ Channel Islands based Inside Consulting Partners, and in Switzerland The Velocity Classic Auto Fund and the The Classic Car Fund.
The Classic Car Fund appears to have been the first fund to launch, possibly the best known and potentially the most successful claiming a four year positive track record of almost 5% net per year as of 31 December 2016. Run from the Count of Custoza’s Family Office in Switzerland, it is headed up by classic car enthusiast and fund manager Filippo Pignatti Morano who is certainly active in the classic car world and hosts the Classic Car Fund group on Linked In which boasts over 2,300 members.
WMG Collectable Car Fund
WMG come to market with a clear automotive pedigree. Their founder and chairman is Mehmet Dalman who also happens to be chairman of luxury car group H.R.Owen and Cardiff City Football Club. BTCC driver and investment banker Richard Hawken is the portfolio manager. WMG is a Mayfair based fund manager specialising in alternative asset investing, founded by Dalman in 2004. They operate a suite of alternative/diversified investment products of which the car fund is one.
WMG is raising up to £50 million of equity to invest in classic cars as an alternative asset “for the purpose of capital appreciation”. Their targeted IRR is 20% per annum over the fund’s three year term with an option to extend by another two years. The fund is in £GBP which according to WMG is currently attractive to overseas investors. The first close deadline for investment into the fund is 31st May 2017.
WMG say that the Collectable Car Fund is the first and only to be authorised and regulated by the FCA as a bona fide investment product, as opposed to the type of asset securitisation sought by some car collectors and clubs. WMG are keen to point out that they are experienced, FCA authorised investment professionals investing in blue-chip cars as alternative assets.
Their growth strategy is to purchase blue chip stock that will naturally appreciate, identify undervalued cars with the potential to make significant gains and to enhance the value of select vehicles through restoration. Cars in the collection would also then benefit from detailed research, manufacturer certification, maintenance and promotion to further enhance the values. In their own words, WMG will:
“exploit an emotional and fragmented market place where supply, demand , pricing and other factors affecting valuation is complex”
Who could argue with that assessment of the classic car marketplace?
As a limited partnership the fund structure allows for tax efficiencies – ie no capital gains. WMG have sensibly taken tax advice on existing and future tax regimes.
The minimum investment is £100,000 and fees are a 2% p.a Partners Share and 20% carried interest after 8% pa preferred return. What does this actually mean? Richard Hawken explains:
“Standard management fees are 2% per annum. The 2% covers costs of fund administration, car collections storage, servicing, insurance, revaluations and other related costs.
20% carried interest is the 20% performance fee, so if we make the fund £10m we would charge 20% and return the 80% to investors.
8% PA preferred simply means if we don’t return 8% per annum we don’t charge any performance fees, so it’s a hurdle rate we must exceed.
We also operate a “high watermark” which ensures investors are not charged fees for poor performance. It works like this hypothetical example:- Investor places £100k into the fund. In year 1 the fund returns 15% taking the investor’s investment account to £115k and the investor is due to pay a 20% performance fee of £3k. Then in year 2 the fund loses 20% meaning the investor’s account drops to £92k. Then in year 3 the fund returns 50% taking the investor’s account to £138k. As the high watermark was set at £115k (the previous highest investment account level), fees would only be charged on the difference between £115k and £138k so £23k @20% equalling £4.6k. Without a high watermark fees would be charged on the difference between £92k and £138k so £46k @ 20% equalling £9.2k.”
Given their automotive connections, WMG claim to have a competitive advantage which will maximise investor’s returns when it comes to the overheads involved in purchasing, insuring, maintaining, enhancing, storing and disposing of the cars in the fund. These connections will also enable WMG to enhance the lifestyle related element of the investment through their manufacturer connections with factory tours, events and networking opportunities. They also believe that those connections will offer significant advantages when it comes to the acquisition of cars.
The Investment Case
The investment case is pretty standard stuff. WMG highlight the fact that collectable cars have had a good run over the last decade, the increase in number and lower average age of HNWIs across the globe, diminishing supply of classic cars and emerging classic car markets. Potential risks to profitability such as a global economic turn down, the high cost of holding the cars (assets), provenance, over concentration on particular marques and vehicle usage are all taken care of with aplomb in the fund brochure. The only major factor it doesn’t tackle is the potential for future price growth.
According to portfolio manager Richard Hawken the WMG Collectable Car Fund is aimed at professional investors looking for diversification rather than classic car enthusiasts and this may be the clear point of differentiation that sets them apart from other classic car funds. In our experience classic car collectors would usually choose to invest their own money into their own collection. If you were looking to invest professionally in alternative assets WMG have put together a compelling argument and which benefits from a link to one of the big names in the luxury car sector.
Is 20% pa achievable in a classic car fund?
Is a 20% pa IRR achievable? We think it will be a tough challenge, but one that the team at WMG seem confident they can rise to.
Perhaps we’ll know in three years time.
For more information on the WMG Collectable Car fund visit http://www.wmgfunds.com/car-fund/
Image credit – Jaguar XJ220 photo: Phil Davis/ The Telegraph.