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Spin, Inaccurate, Flawed… But Enough About Eddie’s Prospectus

Posted on: October 8th, 2007

I want to say sorry to Eddie Hobbs. It was last Sunday week. Eddie was in a hot snot. I had burrowed right up the great man’s nose. In a previous posting here, I had dared to question Eddie’s latest property product.

Happily, I was out walking the Wicklow hills when Eddie charged onto RTE’s Marion Finucane show. So I missed the guru’s robust defence of his controversial investment offer to the Irish public. The next day, I heard a recording of his little outburst. It was vintage Eddie. He was busting a gut. All a bit personal, probably libellous, but good cut and thrust entertainment.

No one can blame Eddie for being tetchy. He stands to make a fortune if the foolish fish swallow his Brendan Investments bait. There is a lot of loot at stake. He likened the Sunday Independent and its business editor to The Simpsons – a clear libel on poor Homer and Bart. My piece about his property vehicle was “spin”, “inaccurate”, “false” and “flawed.”

And then the unkindest cut of all. Eddie insisted that I “hadn’t read the documentation”.

Let me apologise. He is right. I had been so staggered by Brendan Investments’ decision to base its strategy on a 14-month-old property report that I had not paid enough attention to other parts of the prospectus.

So in fairness to Eddie I read it again last week. He may be sorry. The first figure that stunned me was the €750,000 costs of the Brendan launch. The prospectus cleverly pooh-poohs this massive amount by assuming that Eddie and the boys will raise a whopping €50m. The costs of the launch would then be a mere 1.5 per cent of the total.

But what if they only raise a more realistic €10m? The Brendan adventure will still probably go ahead. But the fixed launch costs will suddenly be 7.5 per cent. And any investor who puts ten grand in would see the first €750 vanish, much of it spent by the promoters on advertising, trying to lure others to jump into the same property swamp.

The advertising campaign is saturation stuff. Eddie is rarely off the airwaves flogging the Hobbs unregulated property brand. Eddie says there are no entry charges. As always, he is technically correct. The €750,000 is called something else. Ominously, only €9,250 of every ten grand will be invested.

Add to that the one per cent management fee for the Brendan promoters. Sadly for investors the one per cent charge is actually four per cent because the lads have promised to borrow three times the equity raised. And very, very generously to themselves, they have agreed to charge investors one per cent on the total capital, borrowings and all. That makes four per cent of investors’ equity.

I must apologise to Eddie again. I originally under-estimated the actual charge as only three per cent. A kind critic has pointed out that it is four, not three. Even worse than I thought. He was right – I should have read the small print more carefully. That’s 11.5 per cent down the tubes already. Not to mention VAT.

The figure of intended borrowings quoted in the prospectus is €148m. All to be used to buy property in Germany, Portugal, the UK and Ireland. Interest alone on this figure could come to at least €7.5m a year.

At least the above numbers are relatively solid certainties. Disturbing maybe, but certain. So we know that the investors will initially be clobbered, the company will be heavily borrowed, the promoters will be well-rewarded and the launch costs will be crippling. Even more disturbing are the figures we do not know. Like how much will the promoters trouser out of the pot? The prospectus is silent on detail.

Yet one thing is quite clear: the lads are looking forward to a blank cheque. The prospectus partly spells it out. The total ordinary remuneration of the board is determined by ordinary resolution of the company. No figures given. Eddie and the lads can then divide “the total ordinary compensation [less charitably known as the spoils] amongst the directors as they may agree, or failing agreement, equally.”

And they are entitled to “additional remuneration” for committee work, etc. Ah, the familiar old “committee” trick. Brendan Investments is learning from the Bank of Ireland. No figures given. Silence on all the amounts.

All four directors, including Eddie Hobbs, have contracts with the company. How much are they paid? No figures given. Silence on the amounts. So much for transparency.

How about share options? The prospectus is clear. “The company currently does not operate (nor has it ever operated) any share option schemes.” Which would have been difficult, as Brendan Investments is barely born. Bravo! But what about future share options? On future share options the prospectus is again silent.

So I apologise to Eddie for not highlighting all those points in the original article. He is right, I had not done enough research.

In the meantime I have been looking again at his outfit’s investment policies. On Marion‘s show he downplayed the commitment to Irish property, claiming that I was distorting the strategy. He promised to put 60 per cent of the fund into German property. And after rightly saying that I knew as much about investing in Germany as you could write on the back of a postage stamp, he lauded Berlin and Dusseldorf, because they had been favoured by Quinlan Private. A debatable distinction.

I sincerely hope none of the innocents pondering an investment in Eddie’s outfit read last month’s report about German property in the Financial Times. It was sobering reading. According to the FT, Goldman Sachs has put German property portfolios worth €3bn up for sale. The article signals that international property investors are exiting Germany. The upward trend in German property could be in reverse. Just in time for Eddie’s entry.

Three billion euros are flowing out. A unique opportunity for Eddie to sink innocent Irish punters’ small savings into Berlin and Dusseldorf. He should not have much difficulty finding German homes for his money. They will all be empty. So Germany has peaked. Sixty per cent of Brendan Investments is heading for a home vacated by Goldman Sachs.

The UK market has changed substantially since Brendan released its over-optimistic, but out-of-date, report. And a third target, Irish property, is now a basket case. That just leaves Portugal.

I should never have reacted to Eddie’s tantrum and revisited all that detail about the rewards for Brendan’s directors. And on reflection, the original case against Eddie’s investment strategy is stronger than ever.

But if you insist, lock in your money with Eddie’s group of well-rewarded developers for ten long years. Bite the high-charges bullet. Let them borrow three times your investment. Do not ask to see the directors’ contract. Let them buy property in Germany, Ireland and the UK. Do not begrudge them the special Founders’ Shares. And to hell with the dangers of sinking your savings into an unregulated product.

Alternatively, swim out of the swamp while you still can.