Half-yearly report

11 NOVEMBER 2014

NORTHERN 2 VCT PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2014

Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity Limited.  It invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.

Financial highlights:

	Six months to 30 September  2014	Six months to 30 September  2013	Year to 31 March  2014
Net assets	£77.5m	£63.3m	£76.6m
Net asset value per share	84.2p	85.1p	83.9p
Return per share: Revenue Capital Total	0.9p (0.6)p 0.3p	1.0p 2.7p 3.7p	1.8p 6.8p 8.6p
Dividend per share declared in respect of the period	2.0p	2.0p	5.5p
Cumulative returns to shareholders since launch: Net asset value per share Dividends paid per share Net asset value plus dividends paid per share	84.2p 73.4p 157.6p	85.1p 67.9p 153.0p	83.9p 73.4p 157.3p
Mid-market share price at end of period	77.00p	74.75p	75.38p
Share price discount to net asset value	8.6%	12.2%	10.1%
Tax-free dividend yield (based on mid-market share price at end of period)	7.1%	7.4%	7.3%

For further information, please contact:

NVM Private Equity Limited Alastair Conn/Christopher Mellor Website:  www.nvm.co.uk

0191 244 6000

HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS

Results and dividend
The unaudited net asset value (NAV) per share at 30 September 2014, after deducting the 2013/14 final dividend of 3.5p per share paid in July 2014, was 84.2p (31 March 2014 83.9p).  The return per share for the period before dividends, as shown in the income statement, was 0.3p compared with 3.7p in the six months ended 30 September 2013.  This outcome reflects both the relatively low level of investment sales in the period and our prudent approach to valuation in an uncertain economic climate.

Investment income for the period amounted to £1.4 million (corresponding period £1.2 million), reflecting an improved contribution from the venture capital portfolio.

The board has declared an unchanged interim dividend of 2.0p per share, which will be paid on 16 January 2015 to shareholders on the register on 5 December 2014.  It remains our target to maintain the annual dividend at not less than 5.5p per share, a level which has now been achieved or exceeded in ten consecutive financial years.  This represents a substantial investment yield to shareholders in an era of persistently low interest rates, with the added benefit of being exempt from income tax.

Investments
There was a high level of investment activity during the six months to 30 September 2014, with the result that four new holdings totalling £6.1 million were added to the venture capital portfolio:

• Arnlea Holdings (£1,287,000) - developer of asset management software for the oil and gas industry, Aberdeen
• Agilitas Holdings (£1,638,000) - provider of outsourced IT inventory management services, Nottingham
• Fresh Approach (UK) Holdings (£1,454,000) - creative events manager, Manchester
• MSQ Partners (£1,671,000) - marketing and communications agency group, London

Proceeds from investment sales and repayments amounted to £2.7 million, generating a realised gain of £0.3 million compared with 31 March 2014 carrying values.  Tinglobal Holdings raised new equity funding from a strategic trade investor and was able to repay £1.6 million of our loan stock.  Altacor and Mantis Deposition Holdings, both of which had been written down in value at 31 March 2014 after periods of disappointing performance, were sold for aggregate proceeds of £0.5 million.  Our managers continue to seek profitable exit opportunities and several investee companies are currently the subject of offers from third parties.

Although the venture capital portfolio is generally making satisfactory progress, a small number of companies are currently having to deal with challenging market conditions and this has been reflected in our cautious approach to valuation.

Following the successful outcome of last year's share offer, the company has continued to hold a higher than usual level of liquid funds for future investment in the venture capital portfolio.  Cash balances reduced by £3.5 million during the half year, with new investments being partly offset by the proceeds of sales and repayments.  We expect a further gradual reduction in liquidity, and with the long-expected rise in interest rates still on hold we have continued to invest part of our assets in a portfolio of income-yielding blue-chip listed equities, pending investment in the venture capital portfolio, with the aim of achieving a better return whilst seeking to preserve capital value subject to market conditions.

Shareholder issues
The board has reviewed projected future cash requirements in the light of new investment activity and potential realisations of existing investments, and has concluded that it would not be appropriate to raise further funds by launching a share issue in the 2014/15 tax year.

We have maintained our policy of being prepared to buy back the company's shares in the market at a 10% discount to NAV.  In the half year under review a total of 310,000 shares, equivalent to 0.3% of the issued share capital, was repurchased at an average price of 75.8p.  The policy will be kept under review in the light of market conditions and peer group practice.

Earlier this year the opportunity was extended to shareholders to receive communications from the company electronically rather than by paper copy.  The take-up of this option has been encouraging and it remains open to any other shareholders who wish to join the scheme.

VCT qualifying status
The company has continued to meet the qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT.  The board has retained PricewaterhouseCoopers LLP as independent advisers on VCT taxation matters.

VCT legislation and regulation
We have previously reported on the Government's proposals to introduce restrictions on investors who sell shares in a VCT within the period six months before and after subscribing for shares in the same VCT, and to restrict the ability of VCTs to pay dividends to shareholders out of distributable reserves created by cancelling the share premium arising where new shares are allotted after 6 April 2014.  The 2014 Finance Act containing the relevant legislation duly received Royal Assent in July 2014.  The company already has ample reserves available for distribution and we do not expect the new measures to have any impact on our dividend or share buy-back policies.

The Government has recently undertaken a consultation exercise on the future of VCTs and other tax-advantaged investment schemes, against the background of a European Commission review of the rules relating to state aid for businesses in member countries, which in the UK includes VCTs.  The outcome of this review is awaited;  we hope that there will be no significant change in the positioning of VCTs as an important part of the UK government's strategy for supporting small and medium-sized enterprises.

The Commission's Alternative Investment Fund Managers Directive (AIFMD) is now part of UK law.  The Directive regulates the management of alternative investment funds, including venture capital funds such as VCTs.  The directors have appointed the company's existing manager, NVM Private Equity, as our AIFM for the purposes of the Directive with effect from May 2014.

Board of directors
Cecilia McAnulty, who is an experienced investment professional and a former director of Barclays Capital, was appointed as a non-executive director on 18 September 2014.  We welcome Cecilia to the board and look forward to working with her.

Prospects
The financial markets have recently shown signs of being affected by UK and global uncertainties, both political and economic, and this may have an impact on the performance of some investee companies.  However the flow of potential new investments is good and we expect to see some exits coming through in the second half of the year.  Our company is in a strong position to make further progress in the future.

On behalf of the Board

David Gravells
Chairman

The unaudited half-yearly financial statements for the six months ended 30 September 2014 are set out below.
+

INCOME STATEMENT
(unaudited) for the six months ended 30 September 2014

	Six months ended 30 September 2014			Six months ended 30 September 2013
	Revenue  £000	Capital  £000	Total  £000	Revenue  £000	Capital  £000	Total  £000
Gain on disposal of investments	-	277	277	-	416	416
Movements in fair value of investments	-	(419)	(419)	-	1,947	1,947
	----------	----------	----------	----------	----------	----------
	-	(142)	(142)	-	2,363	2,363
Income	1,368	-	1,368	1,207	-	1,207
Investment management fee	(197)	(592)	(789)	(162)	(485)	(647)
Other expenses	(196)	-	(196)	(193)	-	(193)
	----------	----------	----------	----------	----------	----------
Return on ordinary activities before tax	975	(734)	241	852	1,878	2,730
Tax on return on ordinary activities	(150)	150	-	(131)	131	-
	----------	----------	----------	----------	----------	----------
Return on ordinary activities after tax	825	(584)	241	721	2,009	2,730
	----------	----------	----------	----------	----------	----------
Return per share	0.9p	(0.6)p	0.3p	1.0p	2.7p	3.7p

				Year ended 31 March 2014
				Revenue  £000	Capital  £000	Total  £000
Gain on disposal of investments				-	2,695	2,695
Movements in fair value of investments				-	3,970	3,970
				----------	----------	----------
				-	6,665	6,665
Income				2,517	-	2,517
Investment management fee				(343)	(1,391)	(1,734)
Other expenses				(396)	(15)	(411)
				----------	----------	----------
Return on ordinary activities before tax				1,778	5,259	7,037
Tax on return on ordinary activities				(328)	328	-
				----------	----------	----------
Return on ordinary activities after tax				1,450	5,587	7,037
				----------	----------	----------
Return per share				1.8p	6.8p	8.6p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
(unaudited) for the six months ended 30 September 2014

	Six months ended  30 September 2014  £000	Six months ended  30 September 2013  £000	Year ended  31 March 2014  £000
Equity shareholders' funds at 1 April 2014	76,588	62,844	62,844
Return on ordinary activities after tax	241	2,730	7,037
Dividends recognised in the period	-	(2,608)	(7,608)
Net proceeds of share issues	921	828	15,149
Shares re-purchased for cancellation	(236)	(465)	(834)
	----------	----------	----------
Equity shareholders' funds at 30 Sept 2014	77,514	63,329	76,588
	----------	----------	----------

BALANCE SHEET
(unaudited) as at 30 September 2014

	30 September 2014  £000	30 September 2013  £000	31 March 2014  £000
Fixed assets:
Investments	55,532	49,986	51,836
	----------	----------	----------
Current assets:
Debtors	338	290	363
Cash and deposits	21,891	22,860	25,417
	----------	----------	----------
	22,229	23,150	25,780
Creditors (amounts falling due
within one year)	(247)	(9,807)	(1,028)
	----------	----------	----------
Net current assets	21,982	13,343	24,752
	----------	----------	----------
Net assets	77,514	63,329	76,588
	----------	----------	----------
Capital and reserves:
Called-up equity share capital	4,601	3,721	4,562
Share premium	1,243	28,395	377
Capital redemption reserve	22	799	7
Capital reserve	60,287	20,228	62,007
Revaluation reserve	10,199	9,215	9,298
Revenue reserve	1,162	971	337
	----------	----------	----------
Total equity shareholders' funds	77,514	63,329	76,588
	----------	----------	----------
Net asset value per share	84.2p	85.1p	83.9p

CASH FLOW STATEMENT
(unaudited) for the six months ended 30 September 2014

	Six months ended  30 September 2014			Six months ended  30 September 2013			Year ended  31 March 2014
	£000		£000	£000		£000	£000		£000
Cash flow statement
Net cash inflow/(outflow) from
operating activities			(374)			(491)			391
Taxation:
Corporation tax paid			-			-			-
Financial investment:
Purchase of investments	(8,000)			(5,106)			(9,933)
Sale/repayment of investments	4,163			2,885			10,164
	----------			----------			----------
Net cash inflow/(outflow) from financial investment			(3,837)			(2,221)			231
Equity dividends paid			-			(2,608)			(7,608)
			----------			----------			----------
Net cash outflow before financing			(4,211)			(5,320)			(6,986)
Financing:
Issue of shares	939			855			15,505
Share issue expenses	(18)			(27)			(356)
Share subscriptions held pending allotment	-			9,729			-
Re-purchase of shares for cancellation	(236)			(465)			(834)
	----------			----------			----------
Net cash inflow from financing			685			10,092			14,315
			----------			----------			----------
Increase/(decrease) in cash and deposits			(3,526)			4,772			7,329
			----------			----------			----------
Reconciliation of return before tax to
net cash flow from operating activities
Return on ordinary activities before tax			241			2,730			7,037
Gain on disposal of investments			(277)			(416)			(2,695)
Movements in fair value of investments			419			(1,947)			(3,970)
Decrease in debtors			24			267			194
Decrease in creditors			(781)			(1,125)			(175)
			----------			----------			----------
Net cash outflow from operating activities			(374)			(491)			391
			----------			----------			----------
Reconciliation of movements in net funds
	1 April 2014			Cash flows			30 September 2014
		£000			£000			£000
Cash and deposits		25,417			(3,526)			21,891
		----------			----------			----------

INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2014

Company	Cost £000	Valuation £000	% of net assets by valuation
Fifteen largest venture capital investments:
Kerridge Commercial Systems	1,593	7,874	10.2
Advanced Computer Software Group*	382	2,585	3.3
Wear Inns	1,868	2,349	3.0
Volumatic Holdings	2,095	2,307	3.0
Silverwing	1,388	2,019	2.6
Buoyant Upholstery	1,508	1,826	2.4
Arleigh Group	505	1,725	2.2
MSQ Partners	1,671	1,671	2.2
Agilitas Holdings	1,638	1,638	2.1
No 1 Traveller	1,629	1,629	2.1
Control Risks Group Holdings	746	1,534	2.0
Fresh Approach (UK) Holdings	1,454	1,454	1.9
Kitwave One	1,246	1,394	1.8
Intuitive Holding	1,508	1,352	1.7
Cawood Scientific	1,031	1,341	1.7
	----------	----------	-------
	20,262	32,698	42.2
Other venture capital investments	16,761	14,048	18.1
	----------	----------	-------
Total venture capital investments	37,023	46,746	60.3
Listed equity investments	4,048	4,548	5.9
Listed fixed-interest investments	4,262	4,238	5.4
	----------	----------	-------
Total fixed asset investments	45,333	55,532	71.6
	----------
Net current assets		21,982	28.4
		----------	-------
Net assets		77,514	100.0
		----------	-------
*Quoted on AIM

BUSINESS RISKS

The board carries out a regular review of the risk environment in which the company operates.  The main areas of risk identified by the board are as follows:

Investment risk:  Many of the company's investments are in small and medium-sized unquoted and AIM-quoted companies which are VCT qualifying holdings and which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies.  The directors aim to limit the risk attaching to the portfolio as a whole by careful selection and timely realisation of investments, by carrying out rigorous due diligence procedures and by maintaining a wide spread of holdings in terms of financing stage and industry sector.  The board reviews the investment portfolio with the investment managers on a regular basis.

Financial risk:  As most of the company's investments involve a medium to long-term commitment and many are relatively illiquid, the directors consider that it is inappropriate to finance the company's activities through borrowing except on an occasional short-term basis.  Accordingly they seek to maintain a proportion of the company's assets in cash or cash equivalents in order to be in a position to take advantage of new unquoted investment opportunities.  The company has very little exposure to foreign currency risk and does not enter into derivative transactions.

Economic risk:  Events such as economic recession or general fluctuations in stock markets and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company's own share price and discount to net asset value.

Stock market risk:  Some of the company's investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards.  External factors such as terrorist activity can negatively impact stock markets worldwide.  In times of adverse sentiment there tends to be very little, if any, market demand for shares in the smaller companies quoted on AIM.

Credit risk:  the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment.  The directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one counterparty.

Liquidity risk:  The company's investments may be difficult to realise.  The fact that a stock is quoted on AIM does not guarantee its liquidity and there may be a large spread between bid and offer prices.  Unquoted investments are not traded on a recognised stock exchange and are inherently illiquid.

Legislative and regulatory risk:  in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK as well as the European Commission's state aid rules.  Changes to the UK legislation or the state aid rules in the future could have an adverse effect on the company's ability to achieve satisfactory investment returns whilst retaining its VCT approval.  The board and the manager monitor legislative and regulatory developments and where appropriate seek to make representations either directly or through the relevant trade bodies.

Internal control risk:  The board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the manager.  These include controls designed to ensure that the company's assets are safeguarded and that proper accounting records are maintained.

VCT qualifying status risk:  The company is required at all times to observe the conditions laid down in the Income Tax Act 2007 for the maintenance of approved VCT status.  The loss of such approval could lead to the company losing its exemption from corporation tax on capital gains, to investors being liable to pay income tax on dividends received from the company and, in certain circumstances, to investors being required to repay the initial income tax relief on their investment.  The manager keeps the company's VCT qualifying status under continual review and reports to the board on a quarterly basis.  The board has also retained PricewaterhouseCoopers LLP to undertake an independent VCT status monitoring role.

OTHER MATTERS

The unaudited half-yearly financial statements for the six months ended 30 September 2014 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company's independent auditor and have not been delivered to the Registrar of Companies.  The comparative figures for the year ended 31 March 2014 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies.  The auditor's report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.  The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2014.

Each of the directors confirms that to the best of his or her knowledge the half-yearly financial statements have been prepared in accordance with the Statement "Half-yearly financial reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

The directors of the company at the date of this announcement were Mr D P A Gravells (Chairman), Mr A M Conn, Mr E M P Denny, Mr C G A Fletcher, Miss C A McAnulty and Mr F L G Neale.

The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the six months ended 30 September 2014 and on 92,018,141 (2013 74,548,285) ordinary shares, being the weighted average number of shares in issue during the period.

The calculation of the net asset value per share is based on the net assets at 30 September 2014 divided by the 92,026,038 (2013 74,422,079) ordinary shares in issue at that date.

The interim dividend of 2.0p per share for the year ending 31 March 2015 will be paid on 16 January 2015 to shareholders on the register at the close of business on 5 December 2014.

A copy of the half-yearly financial report for the six months ended 30 September 2014 is expected to be posted to shareholders by 24 November 2014 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity Limited website, www.nvm.co.uk.

Neither the contents of the NVM Private Equity Limited website nor the contents of any website accessible from hyperlinks on the NVM Private Equity Limited website (or any other website) is incorporated into, or forms part of, this announcement.

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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: Northern 2 VCT PLC via Globenewswire

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