Elderstreet VCT plc : Final Results

Elderstreet VCT plc
Final results for the year ended 31 December 2014

FINANCIAL SUMMARY

	2014 pence		2013 pence
Net asset value per share ("NAV")	70.8		78.0
Cumulative dividends paid since launch	81.0		62.0
Total return (NAV plus cumulative dividends paid per share)	151.8		140.0
Dividends in respect of financial year ended 31 December 2014
Interim dividend paid per share	2.0		2.0
Special dividend paid per share	15.0		-
Second interim dividend per share (payable on 29 May 2015)	2.5		2.0
	19.5		4.0
Special dividend in respect of year ending 31 December 2015 (payable on 30 June 2015)	5.0		n/a

CHAIRMAN'S STATEMENT
I am delighted to report on an active and very successful year for your Company. A significant number of new investments were completed along with several disposals, including a highly profitable exit from a business that had been in the portfolio since 1999.

Net asset value, results and dividends
At 31 December 2014, the Company's NAV stood at 70.8p, an increase of 11.8p (15.1%) over the year after adding back dividends of 19.5p per share which were paid during the year.

The total return to Shareholders who invested at the launch of the Company in 1998 (NAV plus cumulative dividends) is now 151.8p compared to the original cost (net of income tax relief) of 80.0p per share.

The return on ordinary activities after taxation for the year was £3.7 million (2013: £4.0 million), comprising a revenue return of £147,000 (2013: £309,000) and a capital return of £3.5 million (2013: £3.7 million).

Venture capital investments
The Company invested a total of £3.5 million during the year in one new investment and six further investments into existing portfolio companies. There were also four full disposals and two part disposals which produced proceeds of £11.0 million.

The most significant disposal was that of Wessex Advanced Switching Products Limited ("WASP").  As I have reported previously, the investment in WASP was sold in April 2014 realising a profit against previous carrying value of £4.3 million and allowing the Company to pay a special dividend of 15p per share in September 2014. The investment was originally made in 1999 and produced a steady flow of investment income throughout the period that it was held. Part of the consideration is currently held in escrow and the first tranche is expected to be released later this year. A proportion of the escrow funds have not been valued, pending the expiry of the warranty period, so there is the possibility of an additional gain in due course.  The Investment Manager worked closely with the business throughout the whole life of the investment and played a valuable role in supporting the business through the sales process. The Board congratulates the Manager on delivering such a profitable outcome for Shareholders.

The other disposals generated total gains against previous carrying value of £222,000, such that total realised gains for the year were £4.5 million.
At the year end, the Company held a portfolio of 22 venture capital investments valued at £17.7 million, with more than 80% of this value in the top ten investments.

In reviewing the investment valuations at the year end, the Board made a number of valuation adjustments. Smart Education Limited has produced significantly improved results and has supported an uplift of £900,000. On the negative side, an adjustment has been required to the valuation of AngloINFO Limited. With a new management team in place, a further investment has been made to support the development of the business, which the Manager believes has good potential. However, in view of the historic losses a write down of £1.2 million for the year was required. Overall, the portfolio showed a small net unrealised loss of £81,000 for the year.

Further commentary on the portfolio, together with a schedule of additions, disposals and details of the largest investments, can be found within the Investment Manager's Report and Review of Investments on pages 6 to 14.

Fixed interest investments
The Company also continues to hold a small portfolio of fixed interest investments which is managed by Smith & Williamson Investment Management Limited. The portfolio, valued at £1.5 million at the year end, generated investment income of £18,000 during the year and unrealised capital gains of £42,000 were recognised.

Dividends
The Company has modified its financial calendar slightly so that in future the final dividend will be paid earlier than previously. The next dividend will be paid as a second interim dividend (rather than a final dividend) and will be 2.5p per share to be paid on 29 May 2015 to Shareholders on the register at 1 May 2015.

This will bring total dividends in respect of the year to 19.5p (2013: 4.0p), equivalent to a tax-free yield over 29.1% p.a. based on the share price at the date of this report.

As mentioned above, further proceeds are due to be released from the WASP disposal shortly. The Board has decided to declare a further special dividend from these proceeds of 5.0p per share, which will be paid on 30 June 2015 to Shareholders on the register at 5 June 2015. The Company will again offer Shareholders the opportunity to reinvest the special dividend in new shares in the Company by way of a Special Dividend Reinvestment Scheme (DRIS").  Full details of the DRIS will be sent to Shareholders.

Fundraising activities
In October 2014, the Company launched a new Offer for Subscription seeking to raise up to £2.9 million. The offer has been well received by investors and has now been fully subscribed. In addition, the Company offered Shareholders the opportunity to reinvest the special dividend paid in September. This resulted in new subscriptions of £685,000.

Share buybacks
The Company operates a policy of buying in shares that become available in the market at a discount of approximately 7.5% to the latest published NAV.

During the year the Company purchased a total of 370,720 shares at an average price of 85.5p per share.

Any Shareholders who are considering selling their shares will need to use a stockbroker. Such Shareholders should ask their stockbroker to register their interest in selling their shares with Shore Capital.

Annual General Meeting ("AGM")
The next AGM of the Company will be held on 29 June 2015 at 10-11 Charterhouse Square, London EC1M 6EE at 4 p.m.

Three items of Special Business are proposed; one ordinary resolution and two special resolutions in relation to the allotment of shares and share buybacks.

Outlook
Over the coming year the Manager will continue to work closely with all portfolio companies and will also be looking to add a small number of new investments with the funds that are now available.

With much of the existing portfolio value concentrated in a reasonably small number of investments, major investment exits are not expected to be a frequent occurrence. However, the Board remains satisfied with the portfolio and believes, in time, it has the potential to deliver further profitable outcomes.

David Brock
Chairman

INVESTMENT MANAGER'S REPORT
Over the year the Company recorded an increase in the total return of 11.8p (net asset value including cumulative dividends), from 140.0p to 151.8p including paying dividends of 19p per share. NAV per share increased by 15.1% (after adjusting for dividends paid during the year).

2014 has seen a lot of portfolio activity. One new investment was made into Macranet Limited; five follow-ons were made into Concorde Solutions Limited, AngloInfo Limited, Aconite Technologies Limited, Access Intelligence plc, and Baldwin and Francis Limited; and three exits were completed for Wessex Advanced Switching Products, Aconite Technologies Limited, and The Engine Group Limited. Overall the core portfolio has performed satisfactorily with the exception of AngloInfo Limited which is commented on below. The most notable valuation increase over the year is to Smart Education Limited.

The major news of the year was the exit from Wessex Advanced Switching Products ("WASP") in April 2014. WASP is a manufacturer of military and aerospace switches and lighting products. The investment was made in 1999 and the exit has returned an IRR of over 30%. The exit allowed the Company to declare a special dividend payment of 15p, equivalent to £4.5 million which was paid in September 2014, and represented a significant 15% of the net asset value of the VCT at the time.

The WASP exit was instrumental in the Company being awarded Investment Week's 2014 VCT Investment Company of the Year organised by Incisive Media. These awards highlight investment companies that produce consistent performance and where there is, in the judges' opinion, a high likelihood that the investors will not be disappointed in the future.

Other exits were made in Aconite Technologies limited ("Aconite") and The Engine Group Limited ("Engine"). Aconite was sold to AIM listed Proxama plc for shares, and Engine was sold to a private equity buyer, both for a small increase on the carrying value at the time.
 A new investment was made into Macranet Limited, a social media software analytics company, alongside AIM listed Netcall plc. This is an early stage company in an exciting sector which has attracted a lot of interest and funding from the venture capital community in both the USA and Europe.

Concorde Solutions Limited, attracted a £1 million investment from a third party USA based investor which completed in March 2014, and in which the Company invested a further £250,000 alongside matched funding from our incumbent syndicate investor. Turnover has increased by 12% year on year.

AngloInfo Limited has been the subject of much change over the year. A new management team has been recruited and further investment of £0.3 million has been made. The company continues to lose money while it invests in its digital platform, but reassuringly the turnover has grown year on year. We expect to invest further in this year and implement the necessary changes to take the company to breakeven.

Smart Education Limited has continued to grow its turnover and the subsequent cash generation has resulted in the repayment of all the Company's loan notes post the year end. Smart has been valued up by £0.9 million during the year.

The transition of Baldwin and Francis is almost complete. While the mining sector has gone through a marked downturn globally, the company has made good headway in the oil and rail sectors. A new management and new sales team have set the company up with improved prospects for future growth. A further investment of £0.2 million was made in the year to support the oil sector contracts.

Fords continues to invest in its R&D and innovate new products. The foil sealant sector is being led by large corporate marketing departments who are striving to be creative with advertising alongside more efficient, cheaper, and better sealing solutions. Fords is debt free, pays a regular dividend and consequently has been uplifted in value by £353,000.

A further investment of £0.2 million was made into Access Intelligence plc ("Access") in December. Access released a trading statement that its year end November 2014 figures would be at similar levels to those achieved in the same period last year. At the half year recurring revenue was up 10% year on year representing 79% of revenue. The company continues to invest in its software platforms and the total technical spend represented 50% of revenue. Access is listed on AIM and the share price has declined 8.3% year on year.

Generally it is worth noting that in nine out of the top ten companies by value at 31 December 2014 the Manager has at least one board seat or observer rights and is very actively involved with these businesses. The expected return of capital from the WASP escrow and the successful fundraising will leave the Company with a high level of liquidity to make new investments, to support the existing portfolio, and to pay further dividends. Overall the portfolio retains a low external debt profile.

In summary, we are pleased with the WASP exit and the general state of the portfolio companies. Your Manager also believes that with continued work on the portfolio, and the addition of some new investments, we can continue to add further value to the Company. We maintain a cautiously optimistic outlook and are hopeful that further profitable exits can be achieved from the portfolio in the near future.

Elderstreet Investments Limited

REVIEW OF INVESTMENTS

Portfolio of investments
The following investments were held at 31 December 2014. All companies are registered in England and Wales, with the exception of Fulcrum Utility Services Limited which is registered in the Cayman Islands.

	Cost	Valuation	Valuation movement in year	% of  portfolio by value
	£'000	£'000	£'000
Ten largest venture capital investments (by value)
Smart Education Limited	160	3,670	900	17.6%
Fords Packaging Topco Limited	2,882	3,235	353	15.5%
Baldwin & Francis Limited	1,534	2,498	321	12.0%
Access Intelligence plc *	1,833	1,608	(111)	7.7%
Lyalvale Express Limited	915	1,598	229	7.7%
Macranet Limited	863	863	-	4.1%
Concorde Solutions Limited	750	750	-	3.6%
Proxama plc*	890	666	(224)	3.2%
SnackTime plc *	1,775	612	(36)	2.9%
AngloINFO Limited	1,405	605	(1,174)	2.9%
	13,007	16,105	258	77.2%
Other venture capital investments
Interquest Group plc *	226	422	53	2.0%
Cashfac plc	260	328	-	1.6%
Fulcrum Utility Services Limited *	500	312	20	1.5%
Mears Group plc **	188	298	(81)	1.4%
Servoca plc *	333	204	132	1.0%
Sift Limited	250	38	-	0.2%
SparesFinder Limited	103	34	-	0.2%
The Kellan Group plc *	657	9	4	-
Infoserve Group plc	127	-	-	-
The National Solicitors Network Limited	501	-	-	-
The QSS Group Limited	268	-	-	-
RB Sport & Leisure Holdings plc	188	-	(47)	-
	3,601	1,645	81	7.9%
Fixed income securities
United Kingdom 1.00% Gilt 07/09/2017	614	918	16	4.4%
United Kingdom 1.25% Gilt 22/07/2018	892	617	26	3.0%
S&W Investment Funds Cash Fund	10	10	-	-
	1,516	1,545	42	7.4%
	18,124	19,295	381	92.5%
Cash at bank and in hand		1,562		7.5%
Total investments		20,857		100.0%

All venture capital investments are unquoted unless otherwise stated

*    Quoted on AIM
** Quoted on the Main Market

Investment movements for the year ended 31 December 2014

ADDITIONS

	£'000
Venture capital investments
Proxama plc*	890
Macranet Limited	863
Baldwin & Francis Limited	844
AngloINFO Limited	296
Concorde Solutions Limited	250
Aconite Technology Limited	207
Access Intelligence plc *	200
	3,550
Fixed income investments
United Kingdom 1.25% Gilt 22/07/2018	892
	4,442

* Quoted on AIM

DISPOSALS

	Cost	Value at 01/01/14*	Proceeds	Profit vs cost	Realised profit
	£'000	£'000	£'000	£'000	£'000
Venture capital investments
Aconite Technology Limited	669	416	580	(89)	164
B&F Management Limited	700	763	763	63	-
The Engine Group Limited	496	171	180	(316)	9
Interquest Group plc	110	180	229	119	49
Smart Education Limited	351	351	351	-	-
Wessex Advanced Switching Products Limited	60	4,627	8,918	8,858	4,291
	2,386	6,508	11,021	8,635	4,513
Fixed income investments
United Kingdom 2.25% Gilt 07/03/2014	830	848	845	15	(3)
	3,216	7,356	11,866	8,650	4,510

*Adjusted for purchases in the year where applicable

STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Report of the Directors, the Strategic Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

*select suitable accounting policies and then apply them consistently;
*make judgments and accounting estimates that are reasonable and prudent;
*state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and *explained in the financial statements; and
*prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions, to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In addition, each of the Directors considers that the Annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

By order of the Board

Grant Whitehouse
Secretary of Elderstreet VCT plc

INCOME STATEMENT
for the year ended 31 December 2014

	2014				2013
	Revenue	Capital	Total		Revenue	Capital	Total
	£'000	£'000	£'000		£'000	£'000	£'000
Income	544	-	544		625	-	625
Gains on investments	-	4,891	4,891		-	4,115	4,115
	544	4,891	5,435		625	4,115	4,740
Investment management fees	(128)	(383)	(511)		(106)	(317)	(423)
Performance incentive fees	-	(991)	(991)		-	(61)	(61)
Other expenses	(269)	-	(269)		(210)	-	(210)
Return on ordinary activities before tax	147	3,517	3,664		309	3,737	4,046
Tax on ordinary activities	-	-	-	-	-	-	-
Return attributable to equity shareholders	147	3,517	3,664		309	3,737	4,046
Basic and diluted return per share	0.5p	11.4p	11.9p		1.0p	12.2p	13.2p

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement as shown above.

Other than revaluation movements arising on investments held at fair value through the Income Statement, there were no differences between the return as stated above and at historical cost.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2014

	2014		2013
	£'000		£'000
Opening Shareholders' funds	23,977		20,588
Issue of shares	1,527		871
Issue of shares under Dividend Reinvestment Scheme	685		-
Share issue costs	(8)		(48)
Purchase of own shares	(319)		(238)
Total recognised gains for the year	3,664		4,046
Dividends paid	(5,757)		(1,242)
Closing Shareholders' funds	23,769		23,977

BALANCE SHEET
at 31 December 2014

		2014			2013
	£'000	£'000		£'000	£'000
Fixed assets
Investments		19,295			21,828
Current assets
Debtors	3,704			831
Cash at bank and in hand	1,562			1,556
	5,266			2,387
Creditors: amounts falling due within one year	(792)			(238)
Net current assets		4,474			2,149
Net assets		23,769			23,977
Capital and reserves
Called up share capital		1,678			1,537
Capital redemption reserve		465			446
Share premium		2,908			856
Merger reserve		1,882			1,882
Special reserve		2,991			6,950
Capital reserve - unrealised		4,908			8,683
Capital reserve - realised		8,713			3,118
Revenue reserve		224			505
Total equity shareholders' funds		23,769			23,977
Basic and diluted net asset value per share		70.8p			78.0p

CASH FLOW STATEMENT
for the year ended 31 December 2014

	2014		2013
	£'000		£'000
Net cash outflow from operating activities	(431)		(105)
Capital expenditure
Purchase of investments	(3,880)		(1,004)
Sale of investments	8,362		303
Net cash inflow/(outflow) from capital expenditure	4,482		(701)
Equity dividends paid	(5,790)		(1,242)
Net cash outflow before financing	(1,739)		(2,048)
Financing
Proceeds from share issue	1,380		870
Proceeds from shares issued under Dividend Reinvestment Scheme	685		-
Share issue costs	(1)		(58)
Purchase of own shares	(319)		(238)
Net cash inflow from financing	1,745		574
Increase/(decrease) in cash	6		(1,474)

NOTES TO THE ACCOUNTS
for the year ended 31 December 2014

1. Accounting policies

Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted Accounting Practice and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 ("SORP").

The financial statements are prepared under the historical cost convention modified by the revaluation of certain financial instruments.

The Company implements new Financial Reporting Standards issued by the Financial Reporting Council when required.

Presentation of Income Statement
In order to better reflect the activities of a venture capital trust, 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 net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Fixed asset investments
Investments are designated as "fair value through profit or loss" assets, upon acquisition, due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter, investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 26.

Listed fixed income investments and investments quoted on AIM and the Main Market are measured using bid prices in accordance with the IPEV.

For unquoted instruments, fair value is established using the IPEV. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

*Price of recent investment;
*Multiples;
*Net assets;
*Discounted cash flows or earnings (of underlying business);
*Discounted cash flows (from the investment); and
*industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Where an investee company has gone into receivership, liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised. Permanent impairments in the value of investments are deemed to be realised losses and held within the Capital Reserve - Realised.

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment expensed.

It is not the Company's policy to exercise significant influence over investee companies. Therefore the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS9 that do not require portfolio investments to be accounted for using the equity method of accounting.

Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment have been established, normally the ex-dividend date.

Interest income is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

Expenses which are incidental to the acquisition of an investment are deducted as a capital item.

Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.

Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating investment manager's fees, 75% to capital and 25% to revenue as permitted by the SORP. The allocation is in line with the Board's expectation of long term returns from the Company's investments in the form of capital gains and income respectively.

Performance incentive fees arising are treated as a capital item.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting period.

Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arise.

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costs
Issue costs in relation to the shares issued are deducted from the share premium account.

2. Basic and diluted return per share

	2014		2013
Return per share based on:
Net revenue return for the financial year (£'000)	147		309
Capital return per share based on:
Net capital gains for the financial year (£'000)	3,517		3,737
Weighted average number of shares in issue	30,865,652		30,684,457

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share. The return per share disclosed, therefore, represents both basic and diluted return per share.

3. Basic and diluted net asset value per share

			2014				2013
Shares in issue			Net asset value				Net asset value
2014		2013		Pence per share		£'000		Pence per share		£'000
Ordinary Shares	33,561,433	30,743,158		70.8		23,769		78.0		23,977

As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset value per share. The net asset value per share disclosed therefore represents both basic and diluted net asset value per share.

4. Principal risks
The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

*Investment risks;
*Credit risk; and
*Liquidity risk

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below.

Investment risks
As a VCT, the Company is exposed to investment risks in the form of potential losses that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

*Investment price risk; and
*Interest rate risk

The Company has undertaken sensitivity analysis on its financial instruments, split into the relevant component parts, taking into consideration the economic climate at the time of review in order to ascertain the appropriate risk allocation.

Investment price risk
Investment price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through investment price movements in respect of quoted investments and also changes in the fair value of unquoted investments that it holds.

Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers and on liquidity funds at rates based on the underlying investments. Investments in loan notes and fixed interest investments attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

Interest rate risk profile of financial assets and financial liabilities
There are three levels of interest which are attributable to the financial instruments as follows:

*"Fixed rate" assets represent investments with predetermined yield targets and comprise fixed interest and loan note investments.
*"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate and comprise cash at bank and Cash Trust investments.
*"No interest rate" assets do not attract interest and comprise equity investments, loans and receivables (excluding cash at bank) and other financial liabilities.

The Company monitors the level of income received from fixed, floating and non-interest rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

The Bank of England base rate stood at 0.5% per annum throughout the year. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and total return of the Company.

Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan notes in investee companies, investments in fixed income securities, cash deposits and debtors.

The Manager manages credit risk in respect of loan notes with a similar approach as described under investment risks above. In addition the credit risk is partially mitigated by registering floating charges over the assets of certain investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Royal Bank of Scotland plc, with a balance also maintained at Bank of Scotland plc, both of which are A-rated financial institutions and ultimately part-owned by the UK Government. Consequently, the Directors consider that the risk profile associated with cash deposits is low.

There have been no changes in fair value during the year that can be directly attributable to changes in credit risk.

Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company normally has a relatively low level of creditors (2014: £759,000, 2013: £238,000) and has no borrowings. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.

The Company's liquidity risk is managed by the Investment Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

5. Related party transactions
Michael Jackson is a director of Elderstreet Investments Limited which provides investment management services to the Company. During the year, £511,000 (2013: £423,000) was due in respect of these services. Performance incentive fees totalling £991,000 were due to Elderstreet Investments Limited in respect of the year under review (2013: £61,000). £642,372 was outstanding at the year-end (2013: £61,000).

Nicholas Lewis is a partner of Downing LLP which provides administration services to the Company. During the year, £50,000 (2013: £50,000) was due to Downing LLP in respect of these services.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2014, but has been extracted from the statutory financial statements for the year ended 31 December 2014, which were approved by the Board of Directors on 22 April 2015 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 December 2013 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 December 2014 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Ergon House, Horseferry Road , London, SW1P 2AL and will be available for download from www.downing.co.uk.

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This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Elderstreet VCT plc via Globenewswire

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