ProVen Growth and Income VCT plc: Annual Financ...
PROVEN GROWTH AND INCOME VCT PLC
ANNUAL FINANCIAL REPORT
YEAR ENDED 28 FEBRUARY 2019
Financial summary
Ordinary Shares as at: | 28 February 2019 Pence | 28 February 2018 Pence |
| Net asset value per Ordinary Share | 68.4 | 72.1 |
| Dividends paid since class launch (originally as ‘C’ Shares) | 60.9 | 54.4 |
| Total return (net asset value plus dividends paid since ‘C’ Share class launch) | 129.3 | 126.5 |
| Year on year change in: | ||
| Net asset value per share (adjusted for dividends paid in the year) | 3.9% | 2.7% |
Chairman’s Statement
I am pleased to present the Annual Report for ProVen Growth and Income VCT plc (the “Company”) for the year ended 28 February 2019. The Company has continued to identify a number of attractive investment opportunities, investing a total of £9.9 million in the year. It has also been an excellent year for realisations, with Chargemaster, Chess and Watchfinder all being fully realised in the year.
Results for the year
Over the year, there was an increase in Shareholder total return (Net Asset Value (“NAV”) per share plus dividends) of 3.9%. However, predominately as a result of the dividends paid in the year, the Company’s NAV per share fell from 72.1p at 28 February 2018 to 68.4p at 28 February 2019. The 3.7p reduction comprised dividend payments of 6.5p, offset by 2.8p of uplift arising largely from positive valuation movements.
The total return on ordinary activities for the year was £3.8 million, or 2.7p per share (2018: £5.0 million, 3.6p per share), comprising a revenue loss of £736,000, or 0.5p per share, (2018: revenue loss of £590,000, 0.4p per share) and a capital return of £4.6 million, or 3.2p per share (2018: £5.6 million, 4.0p per share).
Dividends
During the year ended 28 February 2019, the Company paid a final dividend of 2.5p per share in respect of the year ended 28 February 2018 on 20 July 2018. A special interim dividend of 4.5p per share was paid in respect of the year ended 28 February 2019 on 30 November 2018.
Your Board is proposing a final dividend for the year ended 28 February 2019 of 2.0p per share to be paid on 19 July 2019 to Shareholders on the register at 21 June 2019. With total tax-free dividends of 6.5p per share for the year ended 28 February 2019, this represents a cash return of 9.0% on the opening NAV per share at 1 March 2018, which largely reflects the substantial profits crystallised on the realisations of Chargemaster and Watchfinder during the first half of the year.
Portfolio activity and valuation
The Company invested £5.5 million in five new portfolio companies and £4.4 million in ten existing portfolio companies during the year.
It was a strong year for disposals with the full disposals of Chargemaster, Chess and Watchfinder all completed during the year. Aggregate proceeds of £13.8 million were generated from these three sales, resulting in a gain against cost of £10.6 million.
In addition to these disposals, the Company realised its holdings in Charterhouse Leisure and Conversity at an uplift on the carrying value at the previous year end but a loss against cost. The Company’s holding in Perfect Channel was sold at a significant loss against cost after an extended period of underperformance.
Overall, the investment portfolio held at the year end increased in value by £3.4 million (2018: £1.5 million), or 2.4p per share (2018: 1.1p per share). Continued strong performance of Zoovu (formerly SmartAssistant), Deepcrawl and Contact Engine contributed significantly to the net uplift, but there were also valuation uplifts for Blis and Sealskinz. These gains were offset by reductions in valuation for WhistleSports, Cogora and Monica Vinader.
Further details of investment activity and investments held are provided in the Investment Manager’s Review.
Fundraising activities
The Company launched a combined offer for subscription with ProVen VCT plc on 11 January 2019 to raise up to a total of £30 million per company, with an over-allotment facility of £10 million per VCT. At the date of this report gross applications totalling £25.9 million had been received and allotted by the Company under the combined offer.
Share buybacks
The Company has a policy of buying back shares that become available in the market at a discount of approximately 5% to the latest published net asset value, subject to the Company having sufficient liquidity. The Company retains Panmure Gordon to act as its corporate broker. Shareholders who are considering selling their shares may wish to contact Panmure Gordon, who will be able to provide details of the price at which the Company is buying shares.
During the year, the Company purchased 1,929,510 shares at an average price of 68.1p per share and for an aggregate consideration of £1,320,829. This represented 1.3% of the Company’s issued share capital at the start of the year. All shares were subsequently cancelled.
A special resolution to allow the Board to continue to purchase shares for cancellation will be proposed at the forthcoming Annual General Meeting (“AGM”).
Performance Fee
The Company’s performance incentive arrangements are an important aid for the Investment Manager in recruiting and retaining talented investment professionals against competition from other investment management companies. The performance fee structure is designed to align the interests of the Investment Manager with those of Shareholders and encourages capital growth as well as significant payments to Shareholders by means of tax-free dividends, as determined by the Directors. These arrangements are set out in more detail in the Strategic Report.
The Company’s performance during the year means that the performance hurdles continue to be met for certain earlier fundraisings and the significant dividends paid in the year have resulted in a fee payable at 28 February 2019 of £331,000. A provision for this fee has been included in the accounts and is reflected in the NAV per share.
The payment of a performance fee in future years and the amount thereof, if any, will be dependent on both the performance of the Company and the level of dividends paid to Shareholders, as determined by the Directors.
Annual General Meeting
The next AGM of the Company will be held in the Forest Room at The Hospital Club, 24 Endell Street, London, WC2H 9HQ at 9.30 a.m. on Wednesday 3 July 2019.
Three items of special business will be proposed at the AGM. There are two resolutions giving the Directors authority to allot shares, to enable the Company to raise additional funds, if required, and one resolution to allow the Company to continue to make share buy-backs as outlined above.
Shareholder event
The Company’s annual shareholder event continues to be well received, providing Shareholders with an opportunity to meet with the Directors and members of the Investment Manager’s team, as well as other Shareholders and portfolio companies. For your Board and Investment Manager it is an important opportunity to understand and discuss the views of the Company’s Shareholders directly.
This year’s event will take place on Wednesday 13 November 2019 at 10.00 a.m. at the Institution of Engineering and Technology, 2 Savoy Place, London, WC2R 0BL.
A formal invitation will be sent in due course and I would very much encourage Shareholders to attend.
Outlook
The Company has been able to achieve a number of significant realisations as merger and acquisition activity has remained strong throughout the year. The Company also has a diversified portfolio of investments, many of which have the potential to grow significantly as a result of the Company’s support.
After a number of changes to the VCT rules in recent years, it is encouraging that there have been few additional changes in the last 12 months. However, the previous change to the minimum level of qualifying investments from 70% to 80%, which becomes effective for the Company on 29 February 2020, is a challenge throughout the industry and the Investment Manager continues to work hard on identifying potential investment opportunities to ensure that this threshold will be achieved for the Company.
The ongoing delays to the UK’s withdrawal from the EU and the continued uncertainty over the nature of Brexit means there remains a largely unquantifiable risk over whether the final outcome agreed with the EU will adversely impact the Company’s portfolio companies.
Despite the uncertainty over Brexit and the economic and political climate more generally, the Company is well placed with a well-diversified portfolio of over 40 companies. Together with significant funds raised after the year end to expand this portfolio, your Directors remain confident about the prospects of the Company going forward.
Marc Vlessing OBE
Chairman
Investment Manager’s Review
Introduction
We have pleasure in presenting our annual review for the year ended 28 February 2019. During the year, a total of £5.5 million was invested in five new portfolio companies and £4.4 million in ten existing portfolio companies.
The year also saw a strong level of realisations, with aggregate realisation proceeds of £14.6 million and an aggregate realised gain against initial cost of £9.6 million.
At 28 February 2019, the Company’s venture capital portfolio comprised 42 investments at a cost of £61.8 million and a valuation of £62.8 million, an overall uplift of 1.6% on cost.
The net cash outflow for the year was £7.7 million. After the year end, the Company allotted £25.9 million of gross applications under the combined offer for subscription with ProVen VCT plc which launched on 11 January 2019 meaning that the Company remains well capitalised to take advantage of new investment opportunities.
Investment activity
New investments
We continued to experience a strong level of deal flow, with £5.5 million being invested during the year in five new portfolio companies.
The largest new investment for the Company was the investment in Access Systems Inc. (t/a AccessPay) (£1.5 million) as part of one of the largest ever investments in a fintech company in the North of England. AccessPay provides software to automate payments and cash management solutions for corporate clients. The investment is being used to expand the company’s sales and marketing reach in the UK and internationally as well as to further improve functionality of the company’s software.
The Company invested £1.4 million in Festicket in October 2018. Festicket is an online platform that packages together festival tickets with travel, accommodation and add-ons to provide complete festival experiences that can be booked in one place. The Company’s investment was part of a larger $10.5 million investment round that will be used to expand into North America and Asia as the company focuses on becoming the number one global live events platform.
The Company’s investment in Mycs (£1.3 million), a Berlin based online retailer for customisable furniture, was completed in May 2018 and was discussed in the Company’s previous annual report. Other new investments were made in Exonar (£1.1 million), a leading data discovery and management software firm and Aistemos (£277,000), a software company that uses artificial intelligence for intellectual property analytics.
Follow-on investments
The Company has also been active in supporting the development of existing portfolio companies, making follow-on investments in ten companies during the year.
The largest of the follow-on investments was in Poq Studio (£1.1 million) with the investment being used for product development and to expand the company’s sales and marketing team. This brings the Company’s total investment in Poq to £2.8 million.
In November 2018, the Company invested £933,000 in Zoovu (formerly Smart Assistant). Zoovu has shown impressive growth since the Company’s initial investment and the further investment is being used to expand the company’s sales and marketing team.
Other follow-on investments were made in My 1st Years (£924,000), Deepcrawl (£600,000), Disposable Cubicle Curtains (t/a Hygenica) (£287,000), Firefly (£190,000), Perfect Channel (£132,000), MPB (£131,000), InContext (£46,000) and Thread (£45,000).
Investment disposals
The Company achieved a number of successful realisations during the year with the full disposals of Chargemaster, Chess and Watchfinder generating a combined realised gain of £10.6 million on the original investment cost.
Chess has been a portfolio company for over 10 years and the Company has supported the company’s expansion in both the UK and internationally over a number of funding rounds. In December 2018, AIM listed Cohort plc acquired Chess to expand its range of services and products. The disposal generated total proceeds of £5.4 million for the Company, equivalent to a gain of 3.5x the initial investment cost.
Watchfinder, initially funded by the Company in 2014, has grown significantly during the Company’s holding period and on 1 June 2018, Richemont Holdings UK Limited, a subsidiary of the Swiss luxury group Compagnie Financière Richemont SA, agreed to acquire 100% of the share capital of Watchfinder. The realised gain of £4.4 million represents an annual rate of return on the Company’s investment of over 75%.
Chargemaster has also grown significantly over recent years, driven by the increase in electric vehicle usage. In July 2018, the Company realised its investment in Chargemaster in full as part of an acquisition of Chargemaster by BP plc. Total proceeds of £3.4 million were generated from the disposal, representing a gain against cost of £2.3 million.
In March 2018, the Company sold its investment in Omni Dental Sciences for £242,000. Omni Dental was acquired at no cost as part of the Company’s merger with ProVen Health VCT in 2013 and so the realisation proceeds represent a 100% realised gain for the Company.
While the year has seen a number of significant realised gains for the Company, the disposal of Perfect Channel at a significant loss against cost is a reminder that investing in smaller, unquoted companies carries a certain level of risk. Perfect Channel’s delay in converting a pipeline of prospects into orders put pressure on the company’s cash and the Company decided to accept an offer and sold its holding in full for a loss against cost of £518,000.
Other disposals included the disposals of Charterhouse Leisure and Conversity, which were fully realised at a loss against cost but a slight uplift against the carrying value at the previous year end. An interim distribution in respect of the administration of Maplin of £335,000 was also received during the year.
Key developments at existing portfolio companies
Zoovu has grown significantly since the Company first invested in 2017, supported by a number of follow on funding rounds. The money raised has supported the company’s successful expansion into the US, with the company now servicing a number of larger clients in the Americas. Over the course of the year the valuation of the Company’s investment has increased by £2.4 million.
Blis has continued to perform well despite competition from other online advertisers and trading for the current year has been ahead of budget. This has resulted in an increase in valuation of £1.8 million and the Company’s investment is now valued at 3.4x cost.
There have been some downward movements in the valuations in the portfolio, with valuation decreases for Cogora, due to a delay in closing orders for a number of larger projects, and Monica Vinader, due to slower than expected trading during the festive period.
Whistle Sports has expanded rapidly over recent years with a number of fundraising rounds, however, trading has not kept pace with the fundraising activity and increased competition from Facebook and Google in the online advertising space has put increasing pressure on revenues, resulting in a full write down of the Company’s investment at the year end.
Overall, the investment portfolio held at the year end showed an increase in value of £3.4 million (2018: £1.5 million), or 2.4p per share (2018: 1.1p per share). Further detail on the investments is provided in the Investment Portfolio.
Post year-end developments
Between 28 February 2019 and the date of this report, the Company issued 36,598,021 Ordinary Shares for an aggregate consideration of £25.9 million under the combined offer for subscription with Proven VCT plc which launched on 11 January 2019. Share issue costs thereon amounted to £923,000.
In April 2019, the Company invested £2.8 million in Fnatic, an eSports team owner and lifestyle brand, with professional teams in the most popular online games such as League of Legends, Dota 2 and Battlefield 4. The money is being used to fund research and development into products and equipment as well as expand the company’s team internationally.
Outlook
The year has seen a strong flow of both new investment prospects as well as opportunities to continue to support the development of existing portfolio companies. Competition for investments remains high, but we remain disciplined and will not invest in opportunities that we consider to be overpriced.
The disposals achieved in the year have driven the strong performance of the Company and follows on from the past few years where the exit environment has been supported by a high level of merger and acquisition activity. This trend is unlikely to continue forever, however, and we will continue to nurture the existing portfolio as well as find exciting new companies to fund using the money raised after the year end. The opening of a Beringea office in Manchester during the year has extended the reach of Beringea’s investment team, opening up additional investment opportunities across the whole of the UK.
The ongoing uncertainty over Brexit continues to be a risk for the portfolio and the high valuations currently being observed in the market have the potential to adversely affect future performance. Nevertheless, we believe that the current portfolio is well diversified and we therefore remain optimistic about the prospects of the Company for the coming year.
Beringea LLP
Investment activity
Investment activity during the year is summarised as follows:
Additions
| Cost£’000 | |
| Access Systems, Inc. | 1,500 |
| Festicket Ltd | 1,392 |
| Mycs GmbH | 1,275 |
| POQ Studio Limited | 1,098 |
| Exonar Limited | 1,070 |
| Zoovu Ltd (formerly Smart Assistant) | 933 |
| Infinitiy Reliance Limited (t/a My First Years) | 924 |
| Written Byte Limited (t/a Deepcrawl) | 600 |
| Disposable Cubicle Curtains Limited (t/a Hygenica) | 287 |
| Aistemos Limited | 277 |
| Firefly Learning Limited | 190 |
| Perfect Channel Limited | 132 |
| MPB Group Limited | 131 |
| InContext Solutions, Inc. | 46 |
| Thread, Inc. | 45 |
| Total | 9,900 |
Disposals
| Cost**£’000 | Market value at 01/03/18**£’000 | Disposalproceeds £’000 | Realised gain/ (loss) against cost£’000 | Realised (loss)/gain during the year£’000 | |
| Chess Technologies Limited | 1,568 | 6,354 | 5,408 | 3,840 | (946) |
| Watchfinder.co.uk Limited | 551 | 2,145 | 4,961 | 4,410 | 2,816 |
| Chargemaster plc | 1,079 | 2,499 | 3,394 | 2,315 | 895 |
| MEL Topco Limited (t/aMaplin) | - | - | 335 | 335 | 335 |
| Omni Dental Sciences Limited | - | 242 | 242 | 242 | - |
| Charterhouse Leisure Limited | 1,250 | 13 | 129 | (1,121) | 116 |
| Perfect Channel Limited | 594 | 214 | 76 | (518) | (138) |
| Skills Matter Limited* | 34 | 34 | 34 | - | - |
| Conversity Limited | 12 | - | 2 | (10) | 2 |
| MatsSoft Limited | - | - | 65 | 65 | 65 |
| Total | 5,088 | 11,501 | 14,646 | 9,558 | 3,145 |
* Loan note repayment
** Adjusted for additions in the year
Of the disposals above, MatsSoft Limited was realised in the prior year but proceeds were recognised in the current period in excess of the amounts previously accrued.
The proceeds received in respect of MEL Topco Limited (t/a Maplin) reflected an interim distribution in respect of the company’s administration.
In addition to the above disposals, Steribottle Global Limited, which had a cost of £209,000 and a market value of £nil at 1 March 2018 was dissolved in August 2018. No proceeds were received as part of the dissolution, however, the loss of £209,000 had already been recognised as realised in the prior period.
Investment Portfolio
The following investments were held at 28 February 2019:
| Valuation | % of | |||
| Cost | Valuation | movement in year | portfolio by value | |
| £’000 | £’000 | £’000 | ||
| Venture capital investments (by value) | ||||
| Zoovu Limited (formerly Smart Assistant) | 3,652 | 6,099 | 2,446 | 6.2% |
| Dryden Holdings Limited*,*** | 5,000 | 4,761 | (1) | 4.8% |
| Poq Studio Limited | 2,848 | 4,598 | - | 4.6% |
| Sealskinz Holdings Limited** | 3,116 | 4,431 | 1,716 | 4.5% |
| Infinity Reliance Limited (t/a My 1st Years) | 2,769 | 4,045 | (282) | 4.1% |
| Blis Media Limited** | 1,083 | 3,677 | 1,784 | 3.7% |
| D30 Holdings Ltd** | 3,550 | 3,357 | 371 | 3.4% |
| InContext Solutions, Inc. | 2,409 | 2,515 | 298 | 2.5% |
| Response Tap Limited | 1,440 | 2,474 | 332 | 2.5% |
| Disposable Cubicle Curtains Limited** | 3,286 | 2,357 | (77) | 2.4% |
| Written Byte Ltd (t/a DeepCrawl) | 1,612 | 2,194 | 582 | 2.2% |
| ContactEngine Limited | 687 | 2,032 | 596 | 2.0% |
| Thread, Inc. | 1,909 | 1,933 | (87) | 1.9% |
| Rapid Charge Grid Limited* | 1,888 | 1,826 | 134 | 1.8% |
| Litchfield Media Limited* | 1,420 | 1,665 | 286 | 1.7% |
| Donatantonio Group Limited | 1,003 | 1,634 | 325 | 1.6% |
| Access Systems, Inc. | 1,500 | 1,500 | - | 1.5% |
| Been There Done That Global Limited | 1,448 | 1,448 | - | 1.5% |
| Festicket Limited | 1,392 | 1,392 | - | 1.4% |
| Mycs GmbH | 1,275 | 1,275 | - | 1.3% |
| Monica Vinader Limited** | 204 | 1,266 | (524) | 1.3% |
| Exonar Limited | 1,070 | 1,070 | - | 1.1% |
| Honeycomb.TV Limited | 1,100 | 1,066 | (34) | 1.1% |
| Firefly Learning Limited | 857 | 879 | 22 | 0.9% |
| MPB Group Limited | 789 | 789 | - | 0.8% |
| Inskin Media Limited | 1,435 | 729 | 12 | 0.8% |
| Simplestream Limited** | 690 | 709 | (584) | 0.7% |
| Cogora Group Limited** | 1,320 | 516 | (629) | 0.5% |
| Aistemos Limited | 277 | 277 | - | 0.3% |
| Netcall plc | 324 | 142 | (98) | 0.1% |
| Senselogix Limited | 376 | 67 | (4) | 0.1% |
| 51,729 | 62,723 | 6,584 | 63.3% | |
| Other venture capital investments | 10,047 | 46 | (3,209) | 0.0% |
| Total venture capital investments | 61,776 | 62,769 | 3,375 | 63.3% |
| Cash at bank and in hand | 36,380 | 36.7% | ||
| Total investments | 99,149 | 100.0% |
Valuation movement in the year excludes the cost of investments made in the year.
Other venture capital investments at 28 February 2019 comprise:
7digital Group plc **, Buckingham Gate Financial Services Limited, Deltadot Limited, Duncannon Holdings Limited*,***, Lantum Limited, MEL Topco Limited (t/a Maplin Electronics)*, Skills Matter Limited**, Utility Exchange Online Limited (t/a SwitchmyBusiness.com), Whistle Sports, Inc., TVPlayer Limited and Vigilant Applications Limited*.
* Non-qualifying investment
** Partially non-qualifying investment
*** Investee company 100% owned by the Company but not consolidated as held exclusively for resale as part of an investment portfolio.
With the exception of 7digital Group plc and Netcall plc which are quoted on AIM, all venture capital investments are unquoted.
All of the above investments, with the exception of Deltadot Limited, Dryden Holdings Limited and Duncannon Holdings Limited were also held by ProVen VCT plc, of which Beringea LLP is the Investment Manager.
All venture capital investments are registered in England and Wales except for InContext Solutions, Inc., Whistle Sports, Inc. and Thread, Inc., which are Delaware registered corporations in the United States of America and Mycs GmbH, which is registered in Germany.
Strategic Report
The Directors present the Strategic Report for the year ended 28 February 2019. The Board prepared this report in accordance with the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013.
Principal objectives and strategy
The Company’s investment objective is to achieve long-term returns greater than those available from investing in a portfolio of quoted companies, by investing in:
- a portfolio of carefully selected qualifying investments in small and medium sized unquoted companies with excellent growth prospects; and
- a portfolio of non-qualifying investments permitted for liquidity management purposes
within the conditions imposed on all VCTs and to minimise the risk of each investment and the portfolio as a whole.
The Company has been approved by HM Revenue and Customs (“HMRC”) as a Venture Capital Trust in accordance with Part 6 of the Income Tax Act 2007, and in the opinion of the Directors the Company, has conducted its affairs so as to enable it to continue to maintain approval. Approval for the year ended 28 February 2019 is subject to review should there be any subsequent enquiry under corporation tax self-assessment.
The Directors consider that the Company was not, at any time, up to the date of this report, a close company within the meaning of Section 414 of the Income and Corporation Taxes Act 1988.
Business model
The business acts as an investment company, investing in a portfolio of carefully selected smaller companies. The Company operates as a Venture Capital Trust to ensure that its shareholders can benefit from tax reliefs available and has outsourced the portfolio management and administration duties.
Business review and developments
The Company began the year with £61.0 million of venture capital investments and ended with £62.8 million spread over a portfolio of 42 companies. 36 of these investments with a value of £54.5 million were VCT qualifying (or part qualifying).
The profit on ordinary activities after taxation for the year was £3.8 million comprising a revenue loss of £736,000 and a capital profit of £4.6 million. The Ongoing Charges ratio (excluding performance fees) as calculated in line with AIC methodology is an Alternative Performance Measurement used by the Board to monitor expenses. The Ongoing Charges ratio for the year ended 28 February 2019 was 2.8% (2018: 2.6%).
The Company’s business review and developments during the year are reviewed further within the Chairman’s Statement and the Investment Manager’s Review.
Investment policy
The Company’s investment policy covers several areas as follows:
Qualifying investments
The Company seeks to make investments in VCT-qualifying companies with the following characteristics:
- a strong, balanced and well-motivated management team with a proven track record of achievement;
- a defensible market position;
- good growth potential;
- an attractive entry price for the Company; and
- a clearly identified route for a profitable realisation within a 3 to 4 year period.
The Company invests in companies at various stages of development, including those requiring capital for expansion, but not in start-ups or in management buy-outs or businesses seeking to use funding to acquire other businesses. Investments are spread across a range of different sectors.
Other investments
Funds not invested in qualifying investments may be invested in non-qualifying investments permitted for liquidity management purposes, which include cash, alternative investment funds (“AIFs”) and UCITS which may be redeemed on no more than 7 days’ notice, or ordinary shares or securities in a company that are acquired on a regulated market.
Borrowings
It is not the Company’s intention to have any borrowings. The Company does, however, have the ability to borrow a maximum amount equal to the nominal capital of the Company and its distributable and undistributable reserves.
Maximum exposures
No investment will constitute more than 15% of the Company's portfolio by value at the time of investment.
Listing Rules
In accordance with the Listing Rules:
- the Company may not invest more than 10%, in aggregate, of the value of the total assets of the Company at the time an investment is made in other listed closed-ended investment funds except listed closed-ended investment funds which have published investment policies which permit them to invest no more than 15% of their total assets in other listed closed-ended investment funds;
- the Company must not conduct any trading activity which is significant in the context of the Company; and
- the Company must, at all times, invest and manage its assets in a way which is consistent with its objective of spreading investment risk and in accordance with its published investment policy set out in this document. This investment policy is in line with Chapter 15 of the Listing Rules and Part 6 Income Tax Act 2007.
Venture capital trust regulations
The Company has engaged Philip Hare & Associates LLP to advise it on compliance with VCT requirements, including evaluation of investment opportunities as appropriate and regular review of the portfolio. Although Philip Hare & Associates LLP works closely with the Investment Manager, they report directly to the Board.
Compliance with the main VCT regulations as at 28 February 2019 and for the year then ended is summarised as follows:
| i. The Company holds at least 70 per cent. of its investments in qualifying companies (as defined by Part 6 of the Income Tax Act 2007) | Complied |
| ii. At least 70 per cent. in the case of funds raised after 5 April 2011 of the Company’s qualifying investments (by value) are held in “eligible shares” – (“eligible shares” generally being ordinary share capital) | Complied |
| iii. At least 10 per cent. of each investment in a qualifying company is held in “eligible shares” (by cost at time of investment) | Complied |
| iv. No investment in a company constitutes more than 15 per cent. of the Company’s portfolio (by value at time of investment) | Complied |
| v. The Company’s income for each financial year is derived wholly or mainly from shares and securities | Complied |
| vi. The Company distributes sufficient revenue dividends to ensure that not more than 15 per cent. of the income from shares and securities in any one year is retained | Complied |
| vii. The Company has not made a prohibited payment to Shareholders derived from an issue of shares since 6 April 2014 | Complied |
| viii. No investment made by the Company causes an investee company to receive more than the permitted investment from State Aid sources (including from VCTs) | Complied |
| ix. Since 18 November 2015, the Company has not made an investment in a company which exceeds the maximum permitted age requirement | Complied |
| x. The funds invested by the Company in another company since 18 November 2015 have not been used to make a prohibited acquisition | Complied |
| xi. Since 6 April 2016, the Company has not made a prohibited non-qualifying investment. | Complied |
Borrowings
The Company has the ability to borrow a maximum amount equal to the nominal capital of the Company and its distributable and undistributable reserves, which, at 28 February 2019, was equal to £98.5 million (2018: £103.9 million). There are no plans to utilise this facility at the current time.
Investment management and administration fees
Beringea LLP (“Beringea”) provides investment management services to the Company for an annual fee of 2.0% of the net assets per annum. Beringea is also entitled to receive performance incentive fees as described below. The investment management agreement is terminable by either party at any time by one year’s prior written notice. The total fees relating to this service amounted to £2,414,000 (2018: £3,262,000), comprising a management fee of £2,083,000 (2018: £2,124,000) and performance incentive fees as described below of £331,000 (2018: £1,138,000). At the year-end, an amount of £488,000 (2018: £1,301,000) was outstanding.
The Board is satisfied with Beringea’s approach and procedures in providing investment management services to the Company. The Directors have therefore concluded that the continuing appointment of Beringea as the Investment Manager remains in the best interest of Shareholders.
Throughout the year ended 28 February 2019 Beringea also provided administration services to the Company. In the year, total administration fees amount to £54,000 (2018: £52,000). An amount of £14,000 (2018: £13,000) remained outstanding at the year end.
The annual running costs (excluding any performance fees payable) of the Company, are also subject to a cap of 3.6% of the Company’s net assets as at the end of the year. Any costs in excess of this are borne by Beringea.
Beringea also received arrangement fees in respect of investments made by the Company and other VCTs managed by Beringea totalling £361,000 (2018: £256,000) and monitoring fees of £506,000 (2018: £637,000) during the year ended 28 February 2019. These fees are payable by the investee companies into which the Company invests and are not a direct liability or expense of the Company.
Performance incentive fees
Under the performance fee arrangements, the Investment Manager is entitled to receive a performance fee in relation to each major fundraising (a “Respective Offer”) providing that, at the end of a financial year, the relevant Respective Offer Performance Value exceeds the relevant Respective Offer Hurdle. In this event the performance fee per Respective Offer Share will be equal to 20 per cent, of the amount by which each such Respective Offer Performance Value exceeds the relevant Respective Offer Initial Net Asset Value per Share, less the aggregate amount of any performance fee per Respective Offer Share already paid in respect of that Respective Offer for financial years starting after 29 February 2012.
The relevant Respective Offer Performance Value in respect of the relevant financial year end is the sum of (i) the audited net asset value per Ordinary Share for a Respective Offer at that date, (ii) Respective Offer Cumulative Dividends, and (iii) all performance fees per Ordinary Share paid by the Shareholders of the Respective Offer in relation to financial years starting after 29 February 2012.
The Respective Offer Hurdle is the greater of (i) 1.25 times the Respective Offer Initial Net Asset Value per Share and (ii) the Respective Offer Initial Net Asset Value per Share increased by the Bank of England base rate plus one per cent, per annum (compound) from:
• 31 August 2012, in respect of the Original Offer; or
• the date of the first allotment of Ordinary Shares under each Subsequent Offer, in respect of all Subsequent Offers.
If at the end of a financial year, the relevant Respective Offer Performance Value is less than or equal to the relevant Respective Offer Hurdle, no performance fee will be payable for such Respective Offers for that financial year.
The performance fee per Respective Offer Share payable in relation to a Respective Offer for a financial year will be reduced, if necessary, to ensure that (i) the cumulative performance fee per Respective Offer Share payable in respect of a Respective Offer does not exceed 20 per cent, of the relevant Respective Offer Cumulative Dividends, (ii) the cumulative performance fee per Respective Offer Share payable in respect of the Respective Offer does not exceed 50 per cent, of the amount by which the relevant Respective Offer Performance Value exceeds the relevant Respective Offer Hurdle and (iii) the audited net asset value per Ordinary Share at the relevant financial year end plus the relevant Respective Offer Cumulative Dividends is at least equal to the relevant Respective Offer Hurdle.
Performance fees for the year ended 28 February 2019 amounted to £331,000 (2018: £1.1 million), of which £331,000 (2018: £1.1 million) was outstanding at the year-end.
Directors and senior management
The Company has four non-executive Directors at the year end, three of whom are male and one of whom is female. The Company has no employees and the same was true of the previous year.
Key performance indicators
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in meeting its investment objectives (as shown above). The Board believes the Company’s key performance indicators are NAV total return (NAV plus cumulative dividends paid to date) and dividends per share.
Principal risks and uncertainties
The principal financial risks faced by the Company, which include market price risk, interest rate risk, credit risk and liquidity risk (being minimal), are summarised within note 4 of this announcement.
In addition to these risks, the Company, as a fully listed Company on the London Stock Exchange and as a venture capital trust, operates in a complex regulatory environment and, therefore, also faces a number of non-financial principal risks. A breach of the VCT Regulations could result in the loss of VCT status and consequent loss of tax reliefs currently available to Shareholders and the Company being subject to capital gains tax. Serious breaches of other regulations, such as the Listing Rules of the Financial Conduct Authority and the Companies Act 2006, could lead to suspension from the Stock Exchange and damage to the Company’s reputation.
The Company invests in small and immature businesses and there is a risk that the performance of these individual businesses negatively impacts the performance of the Company. The Investment Manager follows a rigorous process in vetting and careful structuring of new investments and, after an investment is made, close monitoring of the businesses.
The Board reviews and agrees policies for managing each of these risks. The Directors receive reports annually from the Investment Manager on the compliance of systems to manage these risks, and place reliance on the Investment Manager to give updates in the intervening periods. These policies have remained unchanged since the beginning of the financial year.
Viability statement
The Board has assessed the Company’s prospects over the three year period to 28 February 2022. A three year period has been considered appropriate as it broadly aligns with the time frame during which the Investment Manager will be required to invest 80% of the funds from the most recent offer for subscription in qualifying investments.
In order to support this statement, the Board has carried out a robust assessment of the principal risks faced by the Company, as detailed above, and considered the availability of mitigating factors.
The Board consider that the primary risk faced by the Company is compliance with the VCT rules and although there are a number of mitigating factors such as a robust deal identification and diligence process, an experienced investment team and consultation with the Company’s VCT status adviser to ensure that investments made comply with the VCT rules, these factors cannot mitigate the risk that insufficient qualifying investments are identified to ensure ongoing compliance with the VCT rules.
Accordingly, the amount required to invest in qualifying holdings to maintain compliance with the VCT rules was a major consideration in the Board’s analysis. Together with the expected liabilities of the Company for the three years to 28 February 2022, the Board considered the forecast cash requirements against the expected cash position, taking into account a level of assumed investment realisations and investment income during the period.
Based on the above considerations, the Board has determined that the Company will be able to continue in operation, maintain compliance with the VCT rules and meet its liabilities as they fall due for the three years to 28 February 2022.
Directors’ remuneration
It is a requirement under Companies Act 2006 for shareholders to approve the Directors’ remuneration policy every three years or sooner if the Company wishes to make changes to the policy.
Greenhouse emissions
Whilst as a UK quoted company the VCT is required to report on its Greenhouse Gas (GHG) Emissions, as it outsources all of its activities and does not have any physical assets, property, employees or operations, it is not responsible for any direct emissions.
Environmental, social and human rights policy
The Board seeks to conduct the Company’s affairs responsibly. Where appropriate, the Board and Investment Manager take environmental, social and human rights factors into consideration when selecting new investments.
Future prospects
The Company’s future prospects are set out in the Chairman’s Statement and Investment Manager’s Review.
The Directors do not foresee any major changes in the activity undertaken by the Company in the coming year. The Company continues with its objective to invest in unquoted companies throughout the United Kingdom or with a presence in the United Kingdom, with a view to providing both capital growth and dividend income to Shareholders over the long term whilst maintaining VCT qualifying status.
Beringea LLP
Directors’ responsibilities statement
The Board considers that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and that they provide the information necessary for Shareholders to assess the Company’s performance, business model and strategy.
The Directors are responsible for preparing the Directors' Report, the Directors' Remuneration Report, Strategic Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report and Accounts 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.
Directors’ responsibilities pursuant to the Disclosure and Transparency Rule 4
Each of the Directors confirms that to the best of each person’s knowledge:
- the financial statements, which have been prepared in accordance with UK Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
- the Directors’ Report, Chairman’s Statement, Strategic Report, Investment Manager’s Review and Review of Investments include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
Statement as to disclosure of information to the Auditor
The Directors in office at the date of this announcement have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors have confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
Income Statement
for the year ended 28 February 2019
| Year ended 28 February 2019 | Year ended 28 February 2018 | ||||||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||||||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||||||||
| Income | 355 | - | 355 | 531 | - | 531 | |||||||
| Realised gains on investments | - | 3,145 | 3,145 | - | 6,880 | 6,880 | |||||||
| Unrealised gains on investments | - | 3,375 | 3,375 | - | 1,481 | 1,481 | |||||||
| 355 | 6,520 | 6,875 | 531 | 8,361 | 8,892 | ||||||||
| Investment management fees | (521) | (1,562) | (2,083) | (531) | (1,593) | (2,124) | |||||||
| Performance incentive fees | - | (331) | (331) | - | (1,138) | (1,138) | |||||||
| Other expenses | (570) | (57) | (627) | (590) | (31) | (621) | |||||||
| Return/ (loss) on ordinary activities before tax | (736) | 4,570 | 3,834 | (590) | 5,599 | 5,009 | |||||||
| Tax on ordinary activities | - | - | - | - | - | - | |||||||
| Return/ (loss) attributable to equity shareholders | (736) | 4,570 | 3,834 | (590) | 5,599 | 5,009 | |||||||
| | |||||||||||||
| Basic and diluted return/ (loss) per share | (0.5p) | 3.2p | 2.7p | (0.4p) | 4.0p | 3.6p | |||||||
All revenue and capital movements in the year relate to continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Income Statement of the Company, prepared in accordance with the accounting policies detailed in note 1 of this announcement. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies.
A Statement of Comprehensive Income has not been prepared as all gains and losses are recognised in the Income Statement in the current and prior year as shown.
Other than revaluation movements arising on investments held at fair value through profit or loss, there were no differences between the return as stated above and at historical cost.
Statement of Changes in Equity
for the year ended 28 February 2019
Year ended 28 February 2019
| Called up share capital £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Share Premium £'000 | Share capital to be issued £’000 | Revaluation reserve £'000 | Capital reserve- realised £'000 | Revenue reserve £'000 | Total £'000 | |
| At 1 March 2018 | 2,330 | 1,168 | 9,970 | 69,935 | - | 10,080 | 11,443 | (1,036) | 103,890 |
| Issue of new shares | 32 | - | - | 1,356 | - | - | - | - | 1,388 |
| Share buybacks and cancellation | (31) | 31 | (1,321) | - | - | - | - | - | (1,321) |
| Total comprehensive income | - | - | - | - | - | 3,375 | 1,195 | (736) | 3,834 |
| Transfer of previously unrealised gains now realised | - | - | - | - | - | (6,412) | 6,412 | - | - |
| Cancellation of share premium account | - | - | 70,345 | (70,345) | - | - | - | - | - |
| Cancellation of capital redemption reserve | - | (1,180) | 1,180 | - | - | - | - | - | - |
| Dividends paid | - | - | (9,318) | - | - | - | - | - | (9,318) |
| At 28 February 2019 | 2,331 | 19 | 70,856 | 946 | - | 7,043 | 19,050 | (1,772) | 98,473 |
Year ended 28 February 2018
| Called up share capital £'000 | Capital redemption reserve £'000 | Special reserve £'000 | Share Premium £'000 | Share capital to be issued £’000 | Revaluation reserve £'000 | Capital reserve- realised £'000 | Revenue reserve £'000 | Total £'000 | |
| At 1 March 2017 | 1,594 | 1,148 | 29,351 | 33,863 | 30,910 | 10,605 | 5,319 | (446) | 112,344 |
| Issue of new shares | 756 | - | - | 36,072 | (30,910) | - | - | - | 5,918 |
| Share buybacks and cancellation | (20) | 20 | (885) | - | - | - | - | - | (885) |
| Share issue costs | - | - | (1,019) | - | - | - | - | - | (1,019) |
| Total comprehensive income | - | - | - | - | - | 1,481 | 4,118 | (590) | 5,009 |
| Transfer of previously unrealised gains now realised | - | - | - | - | - | (7,887) | 7,887 | - | - |
| Realised losses on investments still held | - | - | - | - | - | 5,881 | (5,881) | - | - |
| Dividends paid | - | - | (17,477) | - | - | - | - | - | (17,477) |
| At 28 February 2018 | 2,330 | 1,168 | 9,970 | 69,935 | - | 10,080 | 11,443 | (1,036) | 103,890 |
The special reserve, capital reserve – realised and revenue reserve are all distributable reserves. Reserves available for distribution therefore amount to £88,134,000 (2018: £20,377,000).
During the year the Company repurchased 1,929,510 shares (2018: 1,215,963) with a nominal value of £31,000 (2018: £20,000). All shares were subsequently cancelled.
The composition of each of these reserves is explained below:
Called up share capital - The nominal value of shares issued, increased for subsequent share issues either via an offer for subscription or the Company’s dividend reinvestment scheme, or reduced due to shares bought back by the Company for cancellation.
Capital redemption reserve - The nominal value of shares bought back and cancelled.
Special reserve – A distributable reserve which is used to fund shares bought back by the Company for cancellation and share issue costs on shares issued under an offer for subscription. Dividends that are classified as capital may be paid from this reserve.
Share premium reserve - This reserve contains the excess of gross proceeds over the nominal value of shares allotted under offers for subscription and the Company’s dividend reinvestment scheme, to the extent that it has not been cancelled.
Share capital to be issued – This reserve contains the amount that has been raised under open offers for subscription, but which at the relevant period end had not been allotted.
Revaluation reserve - Increases and decreases in the valuation of investments held at the year-end are accounted for in this reserve, except to the extent that the diminution is deemed permanent.
In accordance with stating all investments at fair value through profit and loss, all such movements through both revaluation and capital reserve – realised are shown within the Income Statement for the year.
Capital reserve realised - The following are accounted for in this reserve:
- Gains and losses on realisation of investments;
- Permanent diminution in value of investments;
- Transaction costs incurred in the acquisition of investments;
- 75% of the investment manager’s fee expense and 100% of any performance incentive fee payable; and
- Other capital expenses and charges.
Revenue reserve - Income and expenses that are revenue in nature are accounted for in this reserve together with the related tax effect, as well as dividends paid that are classified as revenue in nature.
Statement of Financial Position
as at 28 February 2019
| 28 February 2019 | 28 February 2018 | ||||
| Fixed assets | £’000 | £’000 | |||
| Investments | 62,769 | 60,995 | |||
| Current assets | |||||
| Debtors | 481 | 508 | |||
| Cash at bank and in hand | 36,380 | 44,062? | |||
| 36,861 | ?44,570? | ||||
| Creditors: amounts falling due within one year | (1,157) | (1,675) | |||
| Net current assets | 35,704 | 42,895 | |||
| Total assets less current liabilities | 98,473 | 103,890 | |||
| Capital and reserves | |||||
| Called up share capital | 2,331 | 2,330 | |||
| Capital redemption reserve | 19 | 1,168 | |||
| Special reserve | 70,856 | 9,970 | |||
| Share premium | 946 | 69,935 | |||
| Revaluation reserve | 7,043 | 10,080 | |||
| Capital reserve – realised | 19,050 | 11,443 | |||
| Revenue reserve | (1,772) | (1,036) | |||
| Total equity shareholders’ funds | 98,473 | 103,890 | |||
| Basic and diluted net asset value per share | 68.4p | 72.1p |
Statement of Cash Flows
for the year ended 28 February 2019
| Year ended28 February 2019 | Year ended28 February 2018 | ||||
| £’000 | £’000 | ||||
| Net cash used in operating activities | (3,536) | (4,889) | |||
| Cash flows from investing activities | |||||
| Purchase of investments | (9,900) | (8,808) | |||
| Sale of investments | 14,741 | 24,736 | |||
| Net cash from investing activities | 4,841 | 15,928 | |||
| Cash flows from financing activities | |||||
| Proceeds from share issue | - | 34,509 | |||
| Share issue costs | - | (1,018) | |||
| Purchase of own shares | (1,057) | (850) | |||
| Share capital to be issued | - | (30,910) | |||
| Equity dividends paid | (7,930) | (15,158) | |||
| Net cash used in financing | (8,987) | (13,427) | |||
| Decrease in cash and cash equivalents | (7,682) | (2,388) |
‘Net cash used in operating activities’ includes interest received of £284,000 (2018: £462,000) and dividends received of £ nil (2018: £186,000). No interest was paid during the year.
Notes to the Announcement
for the year ended 28 February 2019
1 Accounting policies
Basis of preparation
The Company has prepared its financial statements under Financial Reporting Standard 102 (“FRS102”) and in accordance with the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (the “SORP”) issued by the Association of Investment Companies (“AIC”), which was revised in February 2018.
The financial statements are prepared under the historical cost convention except for the revaluation of certain financial instruments measured at fair value.
The following accounting policies have been applied consistently throughout the period.
Going concern
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.
Presentation of Income Statement
In order to better reflect the activities of an investment company and, in accordance with guidance issued by the AIC, 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 attributable to equity shareholders 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.
Investments
Investments, including equity and loan stock, are recognised at their trade date and measured at “fair value through profit or loss” 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 International Private Equity and Venture Capital Valuation Guidelines (“IPEV Guidelines”) issued in December 2015, together with sections 11 and 12 of FRS102.
Publicly traded investments are measured using bid prices in accordance with the IPEV Guidelines.
Key judgements and estimates
The valuation methodologies used by the Directors for estimating the fair value of unquoted investments are as follows:
• investments are usually retained at cost for twelve months following investment, except where a company’s performance against plan is significantly below the expectations on which the investment was made in which case a provision against cost is made as appropriate;
• where a company is in the early stage of development it will normally continue to be held at cost as the best estimate of fair value, reviewed for impairment on the basis described above;
• where a company is well established after an appropriate period, the investment may be valued by applying a suitable earnings or revenue multiple to that company’s maintainable earnings or revenue. The multiple used is based on comparable listed companies or a sector but discounted to reflect factors such as the different sizes of the comparable businesses, different growth rates and the lack of marketability of unquoted shares;
• where a value is indicated by a material arms-length transaction by a third party in the shares of the company, the valuation will normally be based on this, reviewed for impairment as appropriate;
• where alternative methods of valuation, such as net assets of the business or the discounted cash flows arising from the business are more appropriate, then such methods may be used; and
• where repayment of the equity is not probable, redemption premiums will be recognised.
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. Methodologies are applied consistently from year to year except where a change results in a better estimate of fair value.
Where an investee company has gone into receivership or liquidation, or the loss in value below cost is considered to be permanent, or there is little likelihood of a recovery from a company in administration, the loss on the investment, although not physically disposed of, is treated as being realised.
All investee companies are held as part of an investment portfolio and measured at fair value. Therefore, it is not the policy for investee companies to be consolidated and any gains or losses arising from changes in fair value are included in the Income Statement for the period as a capital item.
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 are expensed.
Investments are derecognised when the contractual rights to the cash flows from the asset expire or the Company transfers the asset and substantially all the risks and rewards of ownership of the asset to another entity.
Fair value
Fair value is defined as the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. The Company has categorised its financial instruments that are measured subsequent to initial recognition at fair value, using the fair value hierarchy as follows:
Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2: Inputs other than quoted prices included within Level 1 that are observable (i.e., developed using market data) for the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable (i.e., for which market data is unavailable) for the asset or liability.
Income
Dividend income from investments is recognised when the shareholders’ rights to receive payment has been established, normally the ex-dividend date.
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection in the foreseeable future. Income which is not capable of being received within a reasonable period of time is reflected in the capital value of the investments. A provision is made for any fixed income not expected to be received.
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 from the Capital Account;
- 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. Accordingly, the investment management fee has been allocated 25% to revenue and 75% to capital in order to reflect the Directors’ expected long-term view of the nature of the investment returns of the Company; and
- performance incentive fees are treated as a capital item.
Taxation
The tax effects of 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.
Deferred taxation, which is not discounted, 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 financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
Share issue costs
Expenses in relation to share issues are deducted from the Special Reserve.
2 Basic and diluted return per share
| Year ended 28 February 2019 | Year ended 28 February 2018 | ||
| Revenue (loss)/ return per share based on: | |||
| Net revenue loss after taxation (£’000) | (736) | (590) | |
| Weighted average number of shares in issue | 143,594,091 | 138,441,901 | |
| Pence per share | (0.5p) | (0.4p) | |
| Capital return per share based on: | |||
| Net capital return for the financial year (£‘000) | 4,570 | 5,599 | |
| Weighted average number of shares in issue | 143,594,091 | 138,441,901 | |
| Pence per share | 3.2p | 4.0p | |
| Total return per share based on: | |||
| Total return for the financial year (£‘000) | 3,834 | 5,009 | |
| Weighted average number of shares in issue | 143,594,091 | 138,441,901 | |
| Pence per share | 2.7p | 3.6p |
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
| 2019 | 2018 | ||||||||||
| Shares in issue | Net asset value | Net asset value | |||||||||
| 2019 | 2018 | Pence per share | £’000 | Pence per share | £’000 | ||||||
| Ordinary Shares | 144,047,261 | 144,004,855 | 68.4p | 98,473 | 72.1p | 103,890 | |||||
| 98,473 | 103,890 | ||||||||||
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 and management objectives
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:
- Market 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:
Market risks
As a VCT, the Company is exposed to market risks in the form of potential losses and gains that may arise on the investments it holds. The management of these market risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Investment Manager monitors investments through regular contact with the management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Investment Manager to manage the investment risk in respect of individual investments. Market risk is also mitigated by holding a portfolio diversified across several business sectors and asset classes.
The key market risks to which the Company is exposed are:
- Market price risk; and
- Interest rate risk.
Market price risk
Market 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 market price movements in respect of quoted investments and also changes in the fair value of unquoted investments that it holds.
At 28 February 2019, the AIM-quoted portfolio was valued at £143,000 (2018: £248,000).
The Company’s sensitivity to fluctuations in the share prices of its AIM-quoted investments is summarised below. A 10% movement in the share price of all of the AIM-quoted investments held by the Company would have an effect as follows:
| 10% movement in AIM-quoted investments | 2019 | 2018 | ||||
| Impact on net assets | Impact on NAV per share | Impact on net assets | Impact on NAV per share | |||
| £’000 | Pence | £’000 | Pence | |||
| AIM-quoted investments | 14 | 0.0p | 25 | 0.0p |
At 28 February 2019, the unquoted portfolio was valued at £62,626,000 (2018: £60,747,000).
As many of the Company’s unquoted investments are valued using revenue or earnings multiples of comparable companies or sectors, a fall in share prices generally would impact on the valuation of the unquoted portfolio. A 10% movement in the valuations of all of the unquoted investments held by the Company would have an effect as follows:
| 10% movement in unquoted investment valuations | 2019 | 2018 | ||||
| Impact on net assets | Impact on NAV per share | Impact on net assets | Impact on NAV per share | |||
| £’000 | Pence | £’000 | Pence | |||
| Unquoted investments | 6,263 | 4.3p | 6,075 | 4.2p | ||
The sensitivity analysis for unquoted valuations above assumes that each of the sub-categories of financial instruments (ordinary shares, preference shares and loan stocks) held by the Company produces an overall movement of 10%. Shareholders should note that equal correlation between these sub-categories is unlikely to be the case in reality, particularly in the case of loan stock instruments. Where share prices are falling, the equity instrument could fall in value before the loan stock instrument. It is not considered practical to assess the sensitivity of the loan stock instruments to market price risk in isolation.
Interest rate risk
The Company is exposed 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. Investments in loan stock attract interest predominantly at fixed rates. A summary of the interest rate profile of the Company’s financial instruments is shown below.
There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:
- “Fixed rate” assets represent investments with predetermined yield targets and comprise certain loan note investments.
- “Floating rate” assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and certain loan note investments.
- “No interest rate” assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables (excluding cash at bank) and other financial liabilities.
| Average | Average period | 2019 | 2018 | ||||
| interest rate | until maturity | £’000 | £’000 | ||||
| Fixed rate | 9.6% | 593 days | 15,333 | 15,475 | |||
| Floating rate | 0.3% | 0 days | 36,498 | 44,284 | |||
| No interest rate | 46,642 | 44,131 | |||||
| 98,473 | 103,890 |
The Company monitors the level of income received from fixed, floating and non-interest bearing 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.
Based on the assumption that the yield of all floating rate financial instruments would change by an amount equal to the movement in prevailing interest rates, it is estimated that an increase of 1% in interest rates would have increased total return before taxation for the year by £365,000 (2018: £443,000). Given the low level of interest rates through the year, a further decrease in interest rates is not considered likely.
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 investments in cash deposits and debtors. Credit risk relating to loan stock investee companies is considered to be part of market risk.
The Company is exposed to credit risk as follows:
| 2019 | 2018 | |||
| £’000 | £’000 | |||
| Cash and cash equivalents | 36,380 | 44,062 | ||
| Interest, dividends and other receivables | 423 | 352 | ||
| 36,803 | 44,414 |
The management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.
Cash is held by the Royal Bank of Scotland plc, rated BBB- and A by Standard and Poor’s and Fitch respectively, and is also 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 are 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 maintains a relatively low level of creditors (£1,157,000 at 28 February 2019) and has no borrowings.
The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as required. 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.
Although the Company’s investments are not held to meet the Company’s liquidity requirements, the table below shows an analysis of the loan notes, highlighting the length of time that it could take the Company to realise its loan stock assets if it were required to do so.
The carrying value of loan stock investments (as opposed to the contractual cash flows) at 28 February 2019 as analysed by expected maturity date is as follows:
| Not later | Between | Between | Between | More | ||
| than 1 | 1 and 2 | 2 and 3 | 3 and 5 | than | Total | |
| years | years | years | years | 5 years | Total | |
| As at 28 February 2019 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Fully performing loan stock | 1,113 | 13,094 | - | 291 | - | 14,498 |
| Past due loan stock | - | - | - | 953 | - | 953 |
| 1,113 | 13,094 | - | 1,244 | - | 15,451 | |
| As at 28 February 2018 | ||||||
| Fully performing loan stock | 2,016 | 1,107 | 11,621 | - | - | 14,744 |
| Past due loan stock | - | - | - | 953 | - | 953 |
| 2,016 | 1,107 | 11,621 | 953 | - | 15,697 |
Of the loan stock classified as “past due” above, £953,000 relates to the principal of loan notes where the principal has passed its maturity date.
Fair Value of Financial Instruments
Fair value measurements recognised in the balance sheet
Investments are valued at fair value as determined using the measurement policies described in note 1. The carrying value of financial assets and liabilities recorded at amortised cost, which includes short term debtors and creditors, is considered by Directors to be equivalent to their fair value.
The Company has categorised its financial instruments that are measured subsequent to initial recognition at fair value, using the fair value hierarchy as follows:
Level 1 Reflects financial instruments quoted in an active market.
Level 2 Reflects financial instruments that have been valued using inputs, other than quoted prices, that are observable.
Level 3 Reflects financial instruments that have been valued using valuation techniques with unobservable inputs.
| 2019 | 2018 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||
| AIM quoted | 143 | - | - | 143 | 248 | - | - | 248 | |||||
| Loan notes | - | - | 15,451 | 15,451 | - | - | 15,697 | 15,697 | |||||
| Unquoted equity | - | - | 27,715 | 27,715 | - | - | 30,784 | 30,784 | |||||
| Preference shares | - | - | 19,460 | 19,460 | - | - | 14,266 | 14,266 | |||||
| 143 | - | 62,626 | 62,769 | 248 | - | 60,747 | 60,995 | ||||||
Reconciliation of fair value for Level 3 financial instruments held at the year end
| LoanNotes | Unquoted equity | Total | |||
| £’000 | £’000 | £’000 | |||
| Balance at 1 March 2018 | 15,697 | 45,050 | 60,747 | ||
| Movements in the income statement: | |||||
| Gains in the income statement | 969 | 5,656 | 6,625 | ||
| Purchases at cost | 221 | 9,679 | 9,990 | ||
| Sales proceeds | (1,436) | (13,210) | (14,646) | ||
| Balance at 28 February 2019 | 15,451 | 47,175 | 62,626 |
Valuations are subject to the fluctuations in market conditions.
5 Post balance sheet events
Between 28 February 2019 and the date of this report, the Company issued 36,598,021 Ordinary Shares for an aggregate consideration of £25.9 million under the combined offer for subscription with ProVen VCT plc which launched on 11 January 2019. Share issue costs thereon amounted to £923,000.
In April 2019, the Company invested £2.8 million in Fnatic, an eSports team owner and lifestyle brand, with professional teams in the most popular online games such as League of Legends, Dota 2 and Battlefield 4. The money is being used to fund research and development into products and equipment as well as expand the company’s team internationally.
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 28 February 2019, but has been extracted from the statutory financial statements for the year ended 28 February 2019, which were approved by the Board of Directors on 30 May 2019 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 s 498(2) and (3) of the Companies Act 2006.
The statutory accounts for the year ended 28 February 2018 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 S498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the year ended 28 February 2019 will be made available to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 39 Earlham Street, London, WC2H 9LT and will be available for download from www.provenvcts.co.uk
- END
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