Annual Financial Report

RNS Number : 1264C

Bluehone AIM VCT2 PLC

01 March 2011

 



To:                    Company Announcements

From:                Bluehone AiM VCT2 plc

Date:                1 March 2011

Investment Objective

To provide shareholders with a tax efficient means of gaining long term capital growth and an attractive dividend stream primarily through investment in a diversified portfolio of AiM companies and unquoted companies which anticipate a stock market quotation

Ordinary shares

·      Net asset value total return of -9.9 per cent for the year

·      Share price total return of 1.8 per cent for the year

·      Tax free dividend of 1.5p per share equivalent, to a dividend yield of 6.5 per cent on the year end share price (equivalent to 10.8 per cent for a higher rate tax payer)

·      Cumulative tax free dividends of 21.5p per share since launch

The Chairman, Gordon Brough, said:

Market Background

The year ended 30 November 2010 has seen a continuation of the steady recovery in global financial markets, as world economies emerge from the worst of the credit crisis that so dominated corporate prospects throughout 2009 and 2010. In the early weeks of 2011, the FTSE 100 Index has been stable at around the 6,000 mark and large UK defensive companies have continued to generate a healthy yield for shareholders. It is, however, far too early to feel confident about a permanent emergence from this prolonged recession as UK macro-economic indicators remain mixed, with weak growth, high levels of consumer debt, concern about rising inflation and falling house prices. It is clear that the UK faces a continued threat of another recession, and 2011 will be pivotal for the hopes of long term recovery as the effect of public sector spending cuts begin to impact on the general economic environment.

Performance

The Net Asset Value ('NAV') per share at 30 November 2010 was 36.00 pence, compared with 41.59 pence at 30 November 2009, a reduction of 13.44 per cent. Over the same period, the NAV Total Return was -9.9 per cent against a comparative recovery in the FTSE AIM All-Share Index of approximately 30 per cent. As noted previously, the Company's AIM portfolio does not accurately reflect the sectoral allocations of the FTSE AIM All-Share Index, which is more weighted towards the better-performing Oil & Gas and Basic Resources sectors. Nevertheless, the investment performance of the portfolio has been disappointing.

Review of Strategy and Circular to Shareholders

Against this background, the Board has conducted a thorough review of investment strategy, and has concluded that it is in the interests of shareholders to reduce the Company's reliance on AIM and to widen the focus of investment strategy to include exposure to later-stage private companies with strong yield characteristics. Quoted markets tend to be highly sensitive to news flow and the Company's investment performance has suffered from the volatility of AIM. By amending the investment strategy in the manner proposed by the Board, the Company will be able to place greater emphasis on investing in income-producing private companies whose valuations and growth prospects are established by careful due diligence and close monitoring.

It is also worth noting that the number of companies quoted on AIM has reduced from 1,600 three years ago to less than 1,300 now as companies delisted at a rate of more than one a day during 2010. There has been a significant reduction in the number of IPOs and, consequently, few good VCT qualifying investments available for AIM-focused managers. In addition, the share prices of a number of companies have remained depressed due to the lack of secondary buyers.

Consequently, the prospective returns from many AIM and PLUS quoted investments are poorer than they were when the Company was launched. Many AIM stocks now exhibit reduced liquidity and provide little or no dividend yield, in contrast to the yields available from many unquoted private equity investments. The Board, therefore, wishes to gradually realise part of the AIM portfolio, and to redeploy the proceeds in establishing a portfolio of mature, income producing private companies.

A Circular will be sent to shareholders shortly which sets out the rationale for the Board's proposal to change the Company's investment policy to implement this broader strategy and to seek shareholder approval of the proposed change to the investment policy.

Investment Manager

In order to implement this change in focus, the Board has appointed a new investment manager, Maven Capital Partners UK LLP. Maven currently manages six later stage private equity focused generalist VCTs, employing approximately 30 people from a network of five offices across the UK, providing access to a large number of attractive private company transactions each year from the UK corporate finance advisory community. Maven has an investment strategy aimed at building a diversified portfolio of holdings in profitable and income generating private companies through transactions with a significant loan stock component, thereby offering attractive income yields from the outset of each investment. It also has two full time executives with many years' experience of AiM, who will ensure that the existing portfolio is actively managed for the benefit of shareholders. The proposed change in the investment policy as set out in the Circular as referred to above would result in the Company's investment policy being brought into line with that of the other VCTs managed by Maven.

In November 2010, Maven was named Small Buyout House of the Year 2010 at the British Private Equity Awards, in a category recognising managers who achieve consistently high standards throughout their deal activity. Maven also offers hands-on proactive portfolio management to investee companies and, in 2010, was awarded Exit Team of the Year at the BVCA Portfolio Company Management Awards (London and SE) for the 3.3x return achieved on the exit from Cyclotech Limited.

Prior to the Annual General Meeting, at the request of the Board, you will receive an introductory letter from Maven along with the latest copy of its six-monthly newsletter.

Fees

Maven will be paid an investment management fee of 1.5 per cent of net asset value per annum, an annual administration fee of £70,000 and a performance fee of 15 per cent of returns above a threshold to be agreed. However, the Board has agreed with Maven that the entire investment management fee (as distinct from the administration fee and any performance fee) will be waived for the first two years, while the portfolio is being rebalanced, thereby reducing costs to shareholders significantly.

Change of Company Name

The Board considers that it would be appropriate for the Company to adopt a new name to reflect the change of investment manager. Accordingly, following the Annual General Meeting, the Company will change its name to Maven Income and Growth VCT 5 PLC.

Dividends

The Board declared an interim distribution of 0.5 pence per share which was paid to ordinary shareholders in August 2010.  The Board recommended the payment on 28 April 2011 of a final capital distribution of a further 1 pence per share, to shareholders on the register on 8 April 2011, giving a total distribution for the year of 1.5 pence.  Following the payment of the final distribution, the Company will have paid 21.5 pence per ordinary share to shareholders since launch.

Outlook

Economic conditions in the UK and global markets continue to be uncertain, as investors remain cautious about the sustainability of the recovery. The modest levels of growth seen through 2010 are, perhaps, indicative of the markets waiting to see the full impact of the recent spending cuts on UK consumers who will also bear a heavier tax burden. However, there is a continued scarcity of bank debt available for good quality private companies, which continues to create opportunities for well managed generalist VCTs.

The Board expects that the change of investment manager and the proposed revision to its investment strategy, will allow your Company to benefit from exposure to the significant level of introductions to interesting VCT qualifying private company transactions that the new Manager is seeing throughout its UK network. The Board is confident that the Company should experience a significant medium to long term recovery through a gradual refocusing of the portfolio towards private company assets, which over time should produce much improved returns for shareholders.

Enquiries:

Maven

Telephone:        [phone]

Email:               [e-mail]

Audited Income Statement

for the year ended 30 November

 

	2010	2010	2010
	Revenue	Capital	Total
	£'000	£'000	£'000
Profit on realisation of investments	-	624	624
Changes in fair value of investments	-	(2,496)	(2,496)
Income	183	-	183
Investment management fee	(109)	(329)	(438)
Other expenses	(286)	-	(286)
Loss on ordinary activities before taxation	(212)	(2,201)	(2,413)
Tax on ordinary activities	-	-	-
Loss on ordinary activities after taxation	(212)	(2,201)	(2,413)
Return per share	(0.36p)	(3.72p)	(4.08p)

Reconciliation of Movement in Shareholders' Funds

for the year ended 30 November

	2010
	Total
	£'000
Opening shareholders' funds	24,632
Loss for the year	(2,413)
Increase in share capital	2,038
Purchase of shares	(1,881)
Share issue expenses	(148)
Dividends paid	(891)
Closing shareholders' funds	21,337

Audited Income Statement

for the year ended 30 November

 

	2009	2009	2009
	Revenue	Capital	Total
	£'000	£'000	£'000
Loss on realisation of investments	-	(347)	(347)
Changes in fair value of investments	-	6,176	6,176
Income	253	-	253
Investment management fee	(87)	(262)	(349)
Expenses of capital restructure	-	(30)	(30)
Other expenses	(359)	-	(359)
(Loss) / profit on ordinary activities before taxation	(193)	5,537	5,344
Tax on ordinary activities	-	-	-
(Loss) / profit on ordinary activities after taxation	(193)	5,537	5,344
Return per share	(0.35p)	9.99p	9.64p

Reconciliation of Movement in Shareholders' Funds

for the year ended 30 November

	2009	2009	2009
	Ordinary	C Shares	Total
	£'000	£'000	£'000
Opening shareholders' funds	17,894	1,665	19,559
Profit / (loss) for the period	5,413	(69)	5,344
Conversion of C shares	1,596	(1,596)	-
Increase in share capital	9	-	9
Share issue expenses	(3)	-	(3)
Dividends paid	(277)	-	(277)
Closing shareholders' funds	24,632	-	24,632

Audited Balance Sheet

as at 30 November

	2010	2009
	£'000	£'000
Fixed assets
Investments	20,936	23,913
Current assets
Debtors	33	87
Cash at bank and on deposit	489	958
	522	1,045
Creditors (amounts falling due within one year)	(121)	(326)
Net current assets	401	719
Net assets	21,337	24,632
Capital and reserves
Called-up share capital	5,928	5,922
Share premium account	1,388	4
Capital redemption reserve	2,666	2,117
Revaluation reserve	(9,556)	(9,015)
Profit and loss account	20,911	25,604
Equity shareholders funds	21,337	24,632
Net asset value per share	36.00p	41.59p
Number of shares in issue at Balance Sheet date	59,277,137	59,226,066

Audited Cash Flow Statement

for the year ended 30 November

	2010	2009
	£'000	£'000
Operating activities
Investment income received	225	245
Deposit interest received	10	2
Other income received	7	-
Investment management fees	(436)	(336)
VAT on management fees refund received	-	748
Other cash payments	(288)	(423)
Net cash (outflow) / inflow from operating activities	(482)	236
Taxation
Tax paid	-	-
Capital expenditure and financial investment
Purchases of investments	(4,739)	(3,178)
Disposals of investments	5,646	3,950
Net cash inflow from capital expenditure and financial investment	907	772
Equity dividends paid	(891)	(277)
Net cash (outflow) / inflow before financing	(466)	731
Financing
Issue of ordinary shares	2,038	9
Purchase of ordinary shares	(1,881)	-
Expenses of share issue	(160)	(3)
Net cash (outflow) / inflow from financing	(3)	6
(Decrease) / increase in cash	(469)	737
Reconciliation of net cash flow to movement in net cash
(Decrease) / increase in cash	(469)	737
Opening cash	958	221
Net cash at 30 November	489	958

Reconciliation of net (loss) / profit before taxation to net cash (outflow) / inflow from operating activities

	2010	2009
	£'000	£'000
(Loss) / profit on ordinary activities before taxation	(2,413)	5,344
(Profit) / loss on realisation of investments	(624)	347
Changes in fair value of investments	2,496	(6,176)
Decrease in debtors	52	742
Increase / (decrease) in creditors	7	(21)
Net cash (outflow) / inflow from operating activities	(482)	236

Principal risks, risk management and regulatory environment

·                    Loss of approval as a Venture Capital Trust - the Company must comply with Section 274 of the Income Tax Act 2007 which allows it to be exempted from capital gains tax on investment gains.  Any breach of these rules may lead to the Company losing its approval as a VCT, with qualifying shareholders who have not held their shares for the designated holding period having to repay the income tax relief they obtained and future dividends paid by the Company becoming subject to tax.  The Company would also lose its exemption from tax on capital gains.

·                    Investment and strategic - inappropriate strategy, poor asset allocation or consistent weak stock selection might lead to under performance and poor returns to shareholders.

·                    Regulatory - the Company is required to comply with the Companies Acts, the rules of the UK Listing Authority and United Kingdom Accounting Standards.  Breach of any of these regulatory rules might lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

·                    Reputational - inadequate or failed controls might result in breaches of regulations or loss of shareholder trust.

·                    Operational - failure of the administrator's accounting systems or disruption to its business might lead to an inability to provide accurate reporting and monitoring.

·                    Financial - inadequate controls might lead to misappropriation of assets. Inappropriate accounting policies might lead to misreporting or breaches of regulations.

·                    Market Risk - Investment in AiM-traded, PLUS-traded and unquoted companies, by its nature, involves a higher degree of risk than investment in companies traded on the main market.  In particular, smaller companies often have limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals.  In addition, the market for stock in smaller companies is often less liquid than that for stock in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock.

·                    Liquidity Risk - The Company's investments may be difficult to realise.  The fact that a share is traded on AiM does not guarantee its liquidity.

The Board seeks to mitigate and manage these risks by setting policy, regular review of performance, enforcement of contractual obligations and monitoring progressing and compliance.  In the mitigation and management of these risks, the Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Statement of Directors Responsibility in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report for the year ended 30 November 2010, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with applicable  UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

G Brough

Chairman

1 March 2011

Notes

1. Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources.  The Company holds financial assets to invest in accordance with its investment policy, in UK companies raising new share capital predominately on AiM.

Fixed asset investments held are valued at bid market prices or Directors' valuation which equate to their fair values.  The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet. 

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii)         Interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        credit risk, being the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(iv)        liquidity risk, being the risk that the Company may not be able to liquidate its investments quickly enough to meet its ongoing financial commitments.

Market price risk

The Company's strategy for managing investment risk is determined with regard to the Company's investment objective.  The management of market risk is part of the investment management process and is a central feature of venture capital investment.  The Company's portfolio is managed in accordance with the policies and procedures described in the corporate governance statement having regard to the possible effects of adverse price movements, with the objective of maximising overall returns to shareholders.  Investments in unquoted companies, by their nature usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by diversifying the portfolio across business sectors and asset classes.  The overall disposition of the Company's assets is monitored by the Board on a quarterly basis.

Interest rate risk

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate for the relevant currency for each deposit.

Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.  The carrying amounts of financial assets best represents the maximum credit risk exposure at the Balance Sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement.  Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the diversity of counterparties used.

All the assets of the Company are held by JPMorgan Chase Bank, the Company's custodian.  Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.  The Board monitors the Company's risk by reviewing the custodian's internal control reports.  The Managers have in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

The credit risk on liquid funds is controlled because the counterparties are banks with high credit ratings, rated AA or higher, assigned by international credit rating agencies.  Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost.

Liquidity risk

The Company's liquidity risk is managed on an ongoing basis by the Managers.

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and expenses.

2.         The audited results which cover the year to 30 November 2010 have been prepared under UK Generally Accepted Accounting Practice (UK GAAP) and on the assumption that the Company maintains VCT status.

The Company is no longer an investment company as defined by Section 833 of the Companies Act 2006, as investment company status was revoked in order to permit the distribution of capital profits.

Where presentational guidance set out in the Statement of Recommended Practice (SORP), for investment trusts issued by the Association of Investment Companies (AIC) in January 2009, is consistent with the requirements of UK GAAP, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

In order to better reflect the activities of a VCT and in accordance with the SORP, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. The revenue return is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 274 of the Taxes Act 2007.

3.         There were 59,277,137 ordinary shares in issue at 30 November 2010 (30 November 2009: 59,226,066 ordinary shares). 

4.         Returns for the year to 30 November 2010 are based on 59,272,902 ordinary shares (30 November 2009: 55,408,414 ordinary shares) being the weighted average of shares in issue during the year.

5.         The management fee for the year ended 30 November 2010 was 2.0 per cent of the average net assets of the Company. In order to support the merger with Bluehone AiM VCT, the management fee was reduced from 2.0 per cent to 1.5 per cent of the average net assets of the Company (including the assets attributable to the C shares) per annum from 23 July 2008 to 30 November 2009.  From 23 July 2008 Bluehone LLP waived all rights to a performance fee.  For the year ended 30 November 2010 the annual running costs were capped at 3.25 per cent of the average net assets per annum of the Company; any excess being refunded by the Manager by way of an adjustment to the management fee.  The management agreement with Bluehone LLP was terminated on 10 February 2011 when the Board appointed Maven Capital Partner UK LLP ('Maven') as investment managers.

Under the new investment management agreement, Maven will receive an investment management fee of 1.5 per cent of total assets per annum, paid quarterly in arrears, and a performance fee of 15 per cent on terms and above a high watermark to be agreed in due course.  The Board has negotiated a two-year waiver of the investment management fee.

The investment management agreement will continue for a minimum of three years and is terminable by either the Company or Maven on at least 12 months' notice.

            During the year to 30 November 2010 investment management fees of £438,000 (2009: £349,000) were incurred of which £35,000 (2009: £33,000) was payable at the year end.

6.         The Company paid an interim dividend of 0.5 pence per ordinary share on 27 August 2010.  The Board propose to pay a final dividend of 1 pence per ordinary share on 28 April 2011 to shareholders on the register on 8 April 2011.

7.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year to 30 November 2009 have been lodged with the Registrar of Companies and have received an audit report which was unqualified and did not contain any emphasis of matter.  The annual report for the year to 30 November 2010 will be sent to shareholders during March 2011 and will then be available for inspection at F&C Asset Management plc, Exchange House, Primrose Street, London, EC2A 2NY, the registered office of the Company and on the Company's website: www.bluehoneaimvct2.com

8.         The Annual General Meeting will be held on 30 March 2011 at 10am.

 

END

 

 

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