Proven Growth & Income VCT plc : Annual Financi...
PROVEN GROWTH AND INCOME VCT PLC
ANNUAL FINANCIAL REPORT
YEAR ENDED 28 FEBRUARY 2018
Financial summary
| Ordinary Shares as at: | 28 February 2018Pence | 28 February 2017Pence |
| Net asset value per Ordinary Share | 72.1 | 82.7 |
| Dividends paid since class launch (originally as 'C' Shares) | 54.4 | 41.6 |
| Total return (net asset value plus dividends paid since 'C' Share class launch) | 126.5 | 124.3 |
| Year on year change in: | ||
| Net asset value per share (adjusted for dividends paid in the year) | 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 2018. The Company has continued to identify a number of attractive investment opportunities, investing a total of £9.1 million in the year. It has also been a strong year for realisations, with Abzena, APM Healthcare, Dianomi, MatsSoft and Third Bridge all being fully realised.
Results for the year
The Company's net asset value ("NAV") per share decreased from 82.7p to 72.1p over the year, predominately as a result of the dividends paid during the year. The 10.6p reduction comprised dividend payments of 12.75p, offset by 2.15p of uplift arising, in part, from positive valuation movements.
The total return on ordinary activities for the year was £5.0 million, or 3.6p per share (2017: £8.1 million, 8.8p per share), comprising a revenue loss of £590,000, or 0.4p per share, (2017: revenue return of £86,000, 0.1p per share) and a capital return of £5.6 million, or 4.0p per share (2017: £8.0 million, 8.7p per share).
Dividends
During the year ended 28 February 2018, the Company paid a final dividend of 2.5p per share in respect of the year ended 28 February 2017 on 14 July 2017. A special interim dividend of 10.25p per share was paid in respect of the year ended 28 February 2018 on 17 November 2017, following the successful realisations of Abzena, APM Healthcare, MatsSoft and Third Bridge.
Your Board is proposing a final dividend for the year ended 28 February 2018 of 2.0p per share to be paid on 20 July 2018 to Shareholders on the register at 22 June 2018. With total tax-free dividends of 12.25p per share for the year ended 28 February 2018, your Board is pleased to report that the Company has been able to deliver a dividend yield of 14.8% on the opening NAV per share, which is comfortably above the target 5% yield.
Portfolio activity and valuation
The Company invested £5.8 million in four new portfolio companies and £3.0 million in seven existing portfolio companies during the year. In addition, shares in Netcall plc with a value of £0.3 million were received as part of the Company's disposal of MatsSoft.
It was a strong year for disposals with the full disposals of Abzena, APM Healthcare, MatsSoft and Third Bridge all completed during the year. Aggregate proceeds of £19.8 million were generated from these four sales, which represented a gain against cost of £14.1 million and which contributed to the Company paying a special interim dividend in November 2017. In addition to these four disposals, the Company realised its holding in Dianomi in February 2018 at a multiple of over 3.3x cost and there were also loan repayments during the year from Rapid Charge Grid, Celoxica, Conversity and Skills Matter.
Overall, the investment portfolio increased in value by £1.5 million (2017: £7.5 million), or 1.1p per share (2017: 8.1p per share). Continued strong performance of Chess Technologies, Watchfinder, Monica Vinader and Chargemaster contributed significantly to this uplift but there were also valuation uplifts for My 1st Years and POQ. These gains were partially offset by reductions in valuation for Blis Media, D3O, Disposable Cubicle Curtains and Sealskinz. In addition, Maplin was fully written down following the company entering administration in February 2018.
Fundraising activities
As reported in last year's Annual Report, the Company launched a full offer for subscription in September 2016, which effectively closed well ahead of schedule in January 2017 and raised gross proceeds of £38.8 million against an initial target of £30 million. Of the proceeds raised, £31.0 million was allotted in the year ended 28 February 2018.
In response to the continuing strong investor demand for VCT share issues, the Company launched a top-up offer on 20 October 2017, which raised gross proceeds of £3.4m, all of which was allotted during the year ended 28 February 2018.
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 1,215,963 shares at an average price of 72.4p per share and for an aggregate consideration (net of costs) of £880,809. This represented 1.2% 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 significant payments to Shareholders by means of tax-free dividends, as well as capital growth, before any performance fee is payable. 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 2018 of £1.1 million. A provision for this fee has been included in the accounts and is reflected in the NAV per share.
Proposed changes to the investment policy
A number of further changes to the VCT scheme in response to the consultation paper 'Financing growth in innovative firms' (the "Patient Capital Review") were announced as part of the Budget on 22 November 2017. These changes are aimed at ensuring that tax-advantaged schemes, such as VCTs, are focussed on long-term investments in higher risk companies that intend to grow and develop. The changes include increasing the proportion of funds raised that a VCT will need to invest in 'qualifying' companies, reducing the time to invest funds raised and removing the ability to take security for loans provided by the Company. Some of these changes came into effect from 15 March 2018, the date of Royal Assent of the Finance Act 2018, and others will take effect over the coming years.
Importantly, these changes will not affect the Company's overall objective of investing predominately in small and medium sized unquoted companies with excellent growth prospects and so the activities of the Company should be largely unaffected. However, in order to improve clarity for Shareholders, a further revision to the Company's investment policy is being recommended to align the investment policy with the revised rules. An Ordinary Resolution to change the Company's investment policy to remove the ability to make secured loans will therefore be proposed at the forthcoming AGM and your Board is recommending that Shareholders approve this resolution.
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 1.30 p.m. on Wednesday 11 July 2018.
Six items of special business will be proposed at the AGM. There are two resolutions giving the Directors authority to allot shares and enable the Company to raise additional funds, if required, one resolution to amend the Company's investment policy and one resolution to allow the Company to continue to make share buy-backs. In addition, there is also one resolution proposed to cancel the amount standing to the credit of the Company's share premium account and one resolution proposed to cancel the amount standing to the credit of the Company's capital redemption reserve.
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 Tuesday 30 October 2018 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 take advantage of the strong level of merger and acquisition activity as well as a period of high prices, with the disposals of Abzena, APM Healthcare, MatsSoft and Third Bridge all achieving valuations which resulted in significant gains for the Company. There are also a number of other companies in the portfolio that are nearing an exit, which could result in further gains being realised by the Company in the coming year.
The changes to the VCT rules arising from the Patient Capital Review place further restrictions and requirements on the Company, however, as with the previous changes introduced over recent years, I believe the Company is well placed to deal with these effectively.
During the year, the Company's portfolio has started to be impacted by negative trends in certain sectors such as retail and ad-tech and there remains a risk of a wider economic downturn in 2018. In addition, the nature of the UK's withdrawal from the EU is still to be finalised and with less than a year until the official departure date, there remains a risk that the final deal agreed with the EU will adversely impact the Company's portfolio companies.
Nevertheless, your Board remains confident in the overall strength of the Company's portfolio, which is well diversified across over 40 portfolio companies in a range of sectors and I therefore feel that the Company is well positioned going into the new financial year.
Marc Vlessing OBE
Chairman
Investment Manager's Review
Introduction
We have pleasure in presenting our annual review for the year ended 28 February 2018. During the year, a total of £5.8 million was invested in four new portfolio companies and £3.0 million in seven existing portfolio companies. In addition, shares in Netcall plc with an aggregate value of £0.3 million were received as part of the Company's disposal of MatsSoft.
The year also saw a number of disposals resulting in aggregate realisation proceeds of £25.1 million and realised gains against initial cost of £14.8 million.
At 28 February 2018, the Company's venture capital portfolio comprised over 40 investments at a cost of £57.2 million and a valuation of £61.0 million, an overall uplift of 6.6% on cost.
The net cash outflow for the year before fund raising was £5.0 million. The Company's cash balances were, however, partly replenished by net funds raised of £2.6 million. After the significant fundraisings undertaken in recent years, the Company continues to remain well capitalised to take advantage of new investment opportunities.
Investment activity
New investments
We continued to experience a strong level of deal flow, with £5.8 million being invested during the year in four new portfolio companies.
The Company's initial investment in Smart Assistant (£2.0 million), a provider of interactive guided selling software that assists the online buying process, was discussed in the Company's half-yearly report. A further investment of £0.7 million, agreed as part of the initial closing, was completed in December 2017.
In October 2017, the Company invested £1.5 million in Been There Done That, a provider of a tech-enabled platform that develops brand media strategies. The investment is being used to expand the sales team as the company looks to increase its client base, both in the UK and internationally.
Other new investments were made in DeepCrawl, a leading web crawler and search marketing analytics company (£1.0 million) and MPB, an online marketplace for second hand cameras and lenses (£658,000).
Follow-on investments
The Company has also been active in supporting the development of existing portfolio companies, making seven follow-on investments
The largest of the follow-on investments was in POQ (£875,000). POQ has grown steadily since the Company's initial investment and the further investment is being used to expand the company's sales and marketing team and further develop the company's technology.
In November 2017, the Company invested £824,000 in Thread, with the investment being used to enable the company to continue its growth in the UK as well as funding an initial expansion to the US. This brings the Company's total investment in Thread to £1.9 million.
Further follow-on investments were made in HoneyComb.TV (£495,000), InContext (£387,000), Disposable Cubicle Curtains (£230,000), ContactEngine (£137,000) and Perfect Channel (£22,000).
Investment disposals
The Company achieved a number of successful realisations during the year with the full disposals of Abzena, APM Healthcare, Dianomi, MatsSoft and Third Bridge generating a combined realised gain of £14.7 million on the original investment cost
In July 2017, APM Healthcare's UK network of 18 pharmacies was acquired by Day Lewis Group, one of the largest independent pharmacy chains in the UK and Europe. The Company first invested in APM Healthcare in 2011 to support the company's expansion of its pharmacy network. Over the investment holding period, APM Healthcare delivered a total return, including loan stock interest, of 3x the initial investment cost.
Third Bridge, initially funded by the Company in 2012, was one of the Company's strongest performing companies over recent years, having been included in the Sunday Times Fast Track 100 in both 2016 and 2017. In August 2017, IK Investment Partners, a pan-European private equity company, acquired a minority stake in Third Bridge, allowing the Company to realise its investment in full at multiple of 5.7x cost and an annual rate of return of 46%.
In August 2017, MatsSoft was acquired by AIM-listed Netcall plc. The Company received cash proceeds of £2.4 million as well as shares in Netcall valued at £0.3 million. This resulted in a realised gain against cost of £1.6 million, or 2.4x cost. There is a potential future earn-out based on Netcall's share price over the next two years.
The Company was able to take advantage of liquidity in the shares of Abzena plc, which were received as a result of the initial public offering of unquoted investment Polytherics Limited, and sell its remaining holding of shares. The overall return on the investment, including previous sales, was 43%.
In February 2018, the Company realised its investment in Dianomi at a multiple of 3.3x cost, as part of a transaction led by the Business Growth Fund.
In addition, a capital repayment of £3.9 million was received from Rapid Charge Grid in August 2017 and loan repayments were also received from Skills Matter (£306,000), Celoxica (£118,000) and Conversity (£38,000).
Key developments at existing portfolio companies
Chess Technologies had a strong year, increasing revenues by over 100% in 2017 predominately as a result of an increasing number of international orders. During the year, the valuation of the Company's investment increased by £3.3 million and it is now valued at 4.1x cost.
My 1st Years also had a strong year and has grown significantly since the Company's initial investment in December 2016, both in the UK and through expansion into the US. Over the year, the valuation of the Company's investment increased by £1.6 million and post year-end, the Company invested a further £924,000 to support the company's continued growth.
Chargemaster has benefited from the wider growth in the electric vehicle market as the Government announced plans to ban the sale of new diesel and petrol cars by 2040. The company has continued its expansion of the Polar Network, which allows members to charge their electric vehicles at charge points across the UK, and now has over 6,000 public charging points. Over the course of the year, the valuation of the Company's investment increased by £1.1 million.
There have been some downward movements in the valuations in the portfolio, including valuation decreases for Blis Media, which was adversely impacted by the declining trend in advertising spend and Perfect Channel, due to a delay in converting a strong prospect pipeline into orders.
In addition, impacted by a depreciation in Sterling against the Euro as well as challenging market conditions on the high street, Maplin entered administration in February 2018. Over the course of the year, the valuation of the Company's investment decreased by £2.3 million, however, the investment had already been significantly reduced over the course of the year, so the full provision which was made when Maplin entered administration had minimal impact on the most recently announced net asset value of the Company.
There were also valuation decreases for Disposable Cubicle Curtains, Inskin and Sealskinz.
Overall, the investment portfolio showed an increase in value of £1.5 million (2017: £7.5 million), or 1.1p per share (2017: 8.1p per share).
Post year-end developments
In May 2018, the Company invested £1.3 million in Mycs, a Berlin based online retailer for customisable furniture. The investment will be used to expand the company's presence in Europe.
There were further investments in POQ Studio (£1.1 million), My 1st Years (£924,000) and Perfect Channel (£132,000).
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.
The Company realised its investments in Charterhouse Leisure and Conversity in May 2018. Both of these investments had been substantially written down at the year-end and the realisations completed at amounts slightly above their respective carrying values at 28 February 2018.
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 transaction is subject to legal and regulatory approval and is expected to close in the summer of 2018.
Outlook
We continue to see a strong flow of interesting new investment opportunities, however, increased competition for deals means that we are still seeing inflated valuation expectations. We remain disciplined in our investment approach and have rejected a number of potential investments that we considered were overpriced
The changes in VCT rules announced in November 2017 place further restrictions and requirements on the Company, however, as with the earlier changes announced in 2015 and 2016, we believe that the Company is as well placed to deal with these as any of its competitors. We continue to be an active participant in the VCT Association, which maintains an open dialogue with HM Treasury in demonstrating the ongoing advantages of the VCT scheme. We are now hopeful of a period of regulatory stability to allow us to focus on achieving the Company's core objective of supporting growing UK companies in achieving their potential.
The existing portfolio continues to perform well, with several of the more recent investments such as My 1st Years and POQ making strong progress. There are also a number of new investments in the pipeline that we hope to complete over the coming months. The indications are that the strong exit environment from 2017/18 has continued into 2018/19 and there are several companies that could be realised during the year ending 28 February 2019, providing the opportunity to crystalise the unrealised valuation appreciation recognised on some of these investments.
Overall, therefore, we are 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 | |
| Smart Information Systems GmbH (t/a Smart Assistant) | 2,719 |
| Been There Done That Global Limited | 1,448 |
| Written Byte Limited (t/a Deepcrawl) | 1,012 |
| Poq Studio Limited | 875 |
| Thread, Inc. | 824 |
| MPB Group Limited | 658 |
| Honeycomb.TV Limited | 495 |
| InContext Solutions, Inc. | 387 |
| Netcall plc* | 324 |
| Disposable Cubicle Curtains Limited | 230 |
| ContactEngine Limited | 137 |
| Perfect Channel Limited | 22 |
| Total | 9,131 |
Disposals
Cost£'000 | Market value at 01/03/17£'000 | Disposalproceeds£'000 | Realised gain against cost£'000 | Realised gain during the year£'000 | |
| Third Bridge Group Limited | 2,051 | 8,142 | 11,815 | 9,764 | 3,673 |
| APM Healthcare Limited | 1,731 | 2,957 | 4,201 | 2,470 | 1,244 |
| Rapid Charge Grid Limited *** | 3,912 | 3,912 | 3,912 | - | - |
| MatsSoft Limited* | 1,140 | 1,609 | 2,771 | 1,631 | 1,162 |
| Abzena plc | 791 | 652 | 987 | 196 | 335 |
| Dianomi Limited | 270 | 545 | 906 | 636 | 361 |
| Skills Matter Limited**,*** | 306 | 306 | 306 | - | - |
| Celoxica Limited** | 118 | 118 | 118 | - | - |
| MyOptique Group Limited | - | - | 61 | 61 | 61 |
| Conversity Limited**,*** | 35 | - | 38 | 3 | 38 |
| Isango! Limited | - | - | 6 | 6 | 6 |
| Total | 10,354 | 18,241 | 25,121 | 14,767 | 6,880 |
* MatsSoft Limited was disposed of during the period. As part of the disposal, the Company received shares in Netcall plc valued at £324,000 on the date of disposal. The Netcall plc shares are shown as an addition and a disposal, as part of the MatSoft Limited proceeds, in the tables above.
** Loan repayments during the year
*** Partial disposal
Of the investments above, Isango! Limited and MyOptique Group Limited were realised in prior periods but proceeds were received in the current period in excess of the amounts previously accrued.
Investment Portfolio
The following investments were held at 28 February 2018:| Valuation | % of | |||
| Cost | Valuation | movement in year | portfolio by value | |
| £'000 | £'000 | £'000 | ||
| Venture capital investments (by value) | ||||
| Chess Technologies Limited | 1,568 | 6,354 | 3,296 | 6.0% |
| Dryden Holdings Limited*** | 5,000 | 4,762 | 26 | 4.6% |
| Poq Studio Limited | 1,750 | 3,500 | 1,750 | 3.4% |
| Infinity Reliance Limited (t/a My 1st Years) | 1,845 | 3,402 | 1,557 | 3.3% |
| D30 Holdings Ltd** | 3,550 | 2,985 | 154 | 2.8% |
| Smart Information Systems GmbH (t/a Smart Assistant) | 2,719 | 2,719 | - | 2.6% |
| Sealskinz Holdings Limited** | 3,116 | 2,715 | (475) | 2.6% |
| Chargemaster plc** | 1,079 | 2,498 | 1,096 | 2.4% |
| InContext Solutions, Inc. | 2,363 | 2,171 | 252 | 2.1% |
| Disposable Cubicle Curtains Limited** | 2,999 | 2,148 | (1,660) | 2.0% |
| Watchfinder.co.uk Limited | 551 | 2,145 | 389 | 2.0% |
| Response Tap Limited | 1,440 | 2,142 | 702 | 2.0% |
| Thread, Inc. | 1,864 | 1,975 | 111 | 1.9% |
| Blis Media Limited** | 1,083 | 1,893 | (2,666) | 1.8% |
| Whistle Sports, Inc. | 1,696 | 1,886 | 190 | 1.8% |
| Monica Vinader Limited** | 204 | 1,790 | 385 | 1.7% |
| Rapid Charge Grid Limited* | 1,888 | 1,691 | 291 | 1.6% |
| Been There Done That Global Limited | 1,448 | 1,448 | - | 1.4% |
| ContactEngine Limited | 687 | 1,436 | 749 | 1.4% |
| Litchfield Media Limited* | 1,420 | 1,380 | 36 | 1.3% |
| Donatantonio Group Limited | 1,003 | 1,309 | (485) | 1.2% |
| Simplestream Limited** | 690 | 1,293 | 316 | 1.2% |
| Cogora Group Limited** | 1,320 | 1,145 | (339) | 1.1% |
| Honeycomb.TV Limited | 1,100 | 1,100 | - | 1.0% |
| TVPlayer Limited | 831 | 1,053 | (24) | 1.0% |
| Written Byte Ltd (t/a DeepCrawl) | 1,012 | 1,012 | - | 1.0% |
| Inskin Media Limited | 1,435 | 718 | (717) | 0.7% |
| Firefly Learning Limited | 667 | 667 | - | 0.6% |
| MPB Group Limited | 658 | 658 | - | 0.6% |
| Omni Dental Sciences Limited | - | 242 | 242 | 0.2% |
| Netcall plc | 324 | 240 | (83) | 0.2% |
| Perfect Channel Limited | 462 | 82 | (621) | 0.1% |
| Senselogix Limited | 376 | 71 | 15 | 0.1% |
| 48,148 | 60,630 | 4,487 | 57.7% | |
| Other venture capital investments | 9,025 | 365 | (3,006) | 0.4% |
| Total venture capital investments | 57,173 | 60,995 | 1,481 | 58.1% |
| Cash at bank and in hand | 44,062 | 41.9% | ||
| Total investments | 105,057 |
Other venture capital investments at 28 February 2018 comprise:
7digital Group plc **, Amura Holdings Limited*, Buckingham Gate Financial Services Limited, Charterhouse Leisure Limited**, Conversity Limited, Deltadot Limited, Duncannon Holdings Limited***, Lantum Limited (formerly Network Locum Limited), MEL Topco Limited (t/a Maplin Electronics)*, Skills Matter Limited**, Steribottle Global Limited*, Utility Exchange Online Limited (t/a SwitchmyBusiness.com) 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 Amura Holdings Limited, Deltadot Limited, Dryden Holdings Limited, Duncannon Holdings Limited and Omni Dental Sciences Limited were also held by ProVen VCT plc, of which Beringea LLP is the Investment Manager.
Blis Media Limited is also held by ProVen Planned Exit VCT plc, of which Beringea LLP was the Investment Manager until 31 March 2016 when ProVen Planned Exit VCT plc was placed into Members Volutary Liquidation. The liquidator has agreed that Beringea LLP will continue to manage the investment in Blis Media Limited on behalf of ProVen Planned Exit VCT plc until it is sold.
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 Smart Information Systems GmbH, which is registered in Austria.
Strategic Report
The Directors present the Strategic Report for the year ended 28 February 2018. 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 2018 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 £68.6 million of venture capital investments and ended with £61.0 million spread over a portfolio of 46 companies. 38 of these investments with a value of £53.2 million were VCT qualifying (or part qualifying).
The profit on ordinary activities after taxation for the year was £5.0 million comprising a revenue loss of £590,000 and a capital profit of £5.6 million. The Ongoing Charges ratio (excluding performance fees) in respect of the year ended 28 February 2018, based on average net assets during the year, was 2.6% (2017: 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 Board is recommending a revised Investment Policy to Shareholders to take account of the new VCT rules introduced by the Finance Act 2018. The text of the proposed wording is shown below. An explanation of the changes is set out in the Chairman's Statement.
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 announcement. This investment policy is in line with Chapter 15 of the Listing Rules and Part 6 Income Tax Act 2007.
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 2018 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 30 per cent. (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 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 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 x. The funds invested by the Company in another company since 18 November 2015 have not been used to make a prohibited acquisition | Complied 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 2018, was equal to £103.9 million (2017: £112.3 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 £3,262,000 (2017: £4,159,000), comprising a management fee of £2,124,000 (2017: £1,525,000) and performance incentive fees as described below of £1,138,000 (2017: £2,634,000). At the year-end, an amount of £1,301,000 (2017: £3,041,000) 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 2018 Beringea also provided administration services to the Company. In the year, total administration fees amount to £52,000 (2017: £51,000). An amount of £13,000 (2017: £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 £256,000 (2017: £278,000) and monitoring fees of £637,000 (2017: £700,000). 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
As reported in last year's Annual Report, the Company's performance incentive arrangements were amended such that from the year ended 28 February 2017, the performance targets and restrictions approved by Shareholders in 2014 and originally applied to the Ordinary Shares as a whole are now applied to each major fundraising (a "Respective Offer").
Under the performance fee arrangements, the Investment Manager is entitled to receive a performance fee in relation to each 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 2018 amounted to £1.1 million (2017: £2.6 million), of which £1.1 million (2017: £2.6 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 indicatorsAt 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) as summarised in 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 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 2021. It is not considered appropriate or meaningful to look forward for a period of more than three years
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 2021, 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 2021.
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. No changes are being proposed to the Directors' remuneration policy, however, as the policy was last approved at the Annual General Meeting of the Company on 22 July 2015, an ordinary resolution will be proposed at the Company's Annual General Meeting to approve the Directors' remuneration 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.
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 2018
Year ended 28 February 2018 | Year ended 28 February 2017 | ||||||||||||
Revenue | Capital | Total | Revenue | Capital | Total | ||||||||
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||||||||
| Income | 531 | - | 531 | 900 | - | 900 | |||||||
| Realised gains on investments | - | 6,880 | 6,880 | - | 4,310 | 4,310 | |||||||
| Unrealised gains on investments | - | 1,481 | 1,481 | - | 7,524 | 7,524 | |||||||
| 531 | 8,361 | 8,892 | 900 | 11,834 | 12,734 | ||||||||
| Investment management fees | (531) | (1,593) | (2,124) | (381) | (1,144) | (1,525) | |||||||
| Performance incentive fees | - | (1,138) | (1,138) | - | (2,634) | (2,634) | |||||||
| Other expenses | (590) | (31) | (621) | (433) | (15) | (448) | |||||||
| (Loss)/ return on ordinary activities before tax | (590) | 5,599 | 5,009 | 86 | 8,041 | 8,127 | |||||||
| Tax on ordinary activities | - | - | - | - | - | - | |||||||
| (Loss)/ return attributable to equity shareholders | (590) | 5,599 | 5,009 | 86 | 8,041 | 8,127 | |||||||
| | |||||||||||||
| Basic and diluted (loss)/ return per share | (0.4p) | 4.0p | 3.6p | 0.1p | 8.7p | 8.8p | |||||||
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. 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 2018
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 |
Year ended 28 February 2017
| 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 2016 | 1,454 | 1,121 | 35,956 | 25,631 | - | 3,062 | 4,821 | (174) | 71,871 |
| Issue of new shares | 167 | - | - | 8,232 | - | - | - | - | 8,399 |
| Share buybacks and cancellation | (27) | 27 | (1,262) | - | - | - | - | - | (1,262) |
| Share issue costs | - | - | (155) | - | - | - | - | - | (155) |
| Total comprehensive income | - | - | - | - | - | 7,524 | 517 | 86 | 8,127 |
| Transfer of previously unrealised losses now realised | - | - | - | - | - | 19 | (19) | - | - |
| Dividends paid | - | - | (5,188) | - | - | - | - | (358) | (5,546) |
| Unallotted share capital | 30,910 | 30,910 | |||||||
| At 28 February 2017 | 1,594 | 1,148 | 29,351 | 33,863 | 30,910 | 10,605 | 5,319 | (446) | 112,344 |
The special reserve, capital reserve - realised and revenue reserve are all distributable reserves. Reserves available for distribution therefore amount to £20,377,000 (2017: £34,224,000).
During the year the Company repurchased 1,215,963 shares (2017: 1,673,962) with a nominal value of £20,000 (2017: £27,000). 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 2018
28 February 2018 | | 28 February 2017 | |||
| Fixed assets | £'000 | £'000 | |||
| Investments | 60,995 | 68,624 | |||
| | |||||
| Current assets | |||||
| Debtors | 508 | 553 | |||
| Cash at bank and in hand | 44,062 | 46,450 | |||
| | 44,570 | 47,003 | |||
| Creditors: amounts falling due within one year | (1,675) | (3,283) | |||
| | |||||
| Net current assets | 42,895 | 43,720 | |||
| | |||||
| Total assets less current liabilities | 103,890 | 112,344 | |||
| | |||||
| Capital and reserves | |||||
| Called up share capital | 2,330 | 1,594 | |||
| Capital redemption reserve | 1,168 | 1,148 | |||
| Special reserve | 9,970 | 29,351 | |||
| Share premium | 69,935 | 33,863 | |||
| Share capital to be issued | - | 30,910 | |||
| Revaluation reserve | 10,080 | 10,605 | |||
| Capital reserve - realised | 11,443 | 5,319 | |||
| Revenue reserve | (1,036) | (446) | |||
| | |||||
| Total equity shareholders' funds | 103,890 | 112,344 | |||
| Basic and diluted net asset value per share | 72.1p | 82.7p |
Statement of Cash Flows
for the year ended 28 February 2018
| Year ended 28 February 2018 | Year ended 28 February 2017 | ||||
£'000 | £'000 | ||||
| Net cash used in operating activities | (4,889) | (1,314) | |||
| Cash flows from investing activities | |||||
| Purchase of investments | (8,808) | (9,166) | |||
| Sale of investments | 24,736 | 14,540 | |||
| Net cash from investing activities | 15,928 | 5,374 | |||
| Cash flows from financing activities | |||||
| Proceeds from share issue | 34,509 | 7,754 | |||
| Share issue costs | (1,018) | (155) | |||
| Purchase of own shares | (850) | (1,328) | |||
| Share capital to be issued | (30,910) | 30,910 | |||
| Equity dividends paid | (15,158) | (4,901) | |||
| Net cash (used in)/ from financing | (13,427) | 32,280 | |||
| (Decrease)/ increase in cash and cash equivalents | (2,388) | 36,340 |
'Net cash used in operating activities' includes interest received of £462,000 (2017: £594,000) and dividends received of £186,000 (2017: £nil). No interest was paid during the year.
Notes to the Announcement
for the year ended 28 February 2018
- Accounting policies
Basis of accounting
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 January 2017.
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 2018 | Year ended 28 February 2017 | ||
| Revenue (loss)/ return per share based on: | |||
| Net revenue (loss)/ return after taxation (£'000) | (590) | 86 | |
| Weighted average number of shares in issue | 138,441,901 | 92,376,448 | |
| Pence per share | (0.4p) | 0.1p | |
| Capital return per share based on: | |||
| Net capital return for the financial year (£'000) | 5,599 | 8,041 | |
| Weighted average number of shares in issue | 138,441,901 | 92,376,448 | |
| Pence per share | 4.0p | 8.7p | |
| Total return per share based on: | |||
| Total return for the financial year (£'000) | 5,009 | 8,127 | |
| Weighted average number of shares in issue | 138,441,901 | 92,376,448 | |
| Pence per share | 3.6p | 8.8p |
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
2018 | 2017 | |||||||||||
Shares in issue | Net asset value | Net asset value | ||||||||||
2018 | 2017 | Pence per share | £'000 | Pence per share | £'000 | |||||||
Ordinary Shares | 144,004,855 | 98,501,050 | 72.1p | 103,890 | 82.7p | 81,434 | ||||||
Ordinary share capital to be issued | - | 30,910 | ||||||||||
| 103,890 | 112,344 | |||||||||||
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 2018, the AIM-quoted portfolio was valued at £248,000 (2017: £665,000).
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 | 2018 | 2017 | ||||
Impact onnet assets | Impact on NAV per share | Impact onnet assets | Impact on NAV per share | |||
£'000 | Pence | £'000 | Pence | |||
| AIM-quoted investments | 25 | 0.0p | 67 | 0.1p |
At 28 February 2018, the unquoted portfolio was valued at £60,747,000 (2017: £67,959,000)
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 | 2018 | 2017 | ||||
Impact onnet assets | Impact on NAV per share | Impact onnet assets | Impact onNAV per share | |||
£'000 | Pence | £'000 | Pence | |||
| Unquoted investments | 6,075 | 4.2p | 6,796 | 6.9p | ||
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 predominately 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 | 2018 | 2017 | ||||
interest rate | until maturity | £'000 | £'000 | ||||
| Fixed rate | 7.9% | 813 days | 15,475 | 24,718 | |||
| Floating rate | 0.3% | 2 days | 44,284 | 46,672 | |||
| No interest rate | 44,131 | 40,954 | |||||
| 103,890 | 112,344 |
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 £443,000 (2017: £467,000). 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 holdings of loan stock in investee companies, 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:
2018 | 2017 | |||
£'000 | £'000 | |||
| Investments in loan stocks | 15,697 | 24,940 | ||
| Cash and cash equivalents | 44,062 | 46,450 | ||
| Interest, dividends and other receivables | 352 | 491 | ||
60,111 | 71,881 |
The Investment Manager manages credit risk in respect of loan stock with a similar approach as described under Investment risks above. In addition the credit risk is partially mitigated by registering floating charges over the assets of the respective investee companies. The strength of this security in each case is dependent on the nature of the investee companies' business and its identifiable assets. Similarly, 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 BBB+ 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 (£1,675,000 at 28 February 2018) 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 2018 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 | ||
| years | years | years | years | 5 years | Total | |
| As at 28 February 2018 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| 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 | |
| As at 28 February 2017 | ||||||
| Fully performing loan stock | 1,137 | 3,334 | 4,467 | 14,444 | - | 23,382 |
| Past due loan stock | 605 | - | 953 | - | - | 1,558 |
| 1,742 | 3,334 | 5,420 | 14,444 | - | 24,940 |
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. 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.
2018 | 2017 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |||||||
| AIM quoted | 248 | - | - | 248 | 665 | - | - | 665 | |||||
| Loan notes | - | - | 15,697 | 15,697 | - | - | 24,940 | 24,940 | |||||
| Unquoted equity | - | - | 30,784 | 30,784 | - | - | 35,510 | 35,510 | |||||
| Preference shares | - | - | 14,266 | 14,266 | - | - | 7,509 | 7,509 | |||||
| 248 | - | 60,747 | 60,995 | 665 | - | 67,959 | 68,624 | ||||||
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 2017 | 24,940 | 43,019 | 67,959 | ||
| Movements in the income statement: | |||||
| (Losses)/ gains in the income statement | (4,092) | 12,207 | 8,115 | ||
| Purchases at cost | 177 | 8,630 | 8,807 | ||
| Sales proceeds | (5,328) | (18,806) | (24,134) | ||
| Balance at 28 February 2018 | 15,697 | 45,050 | 60,747 |
Valuations are subject to the fluctuations in market conditions.
5 Post balance sheet eventsIn May 2018, the Company invested £1.3 million in Mycs, a Berlin based online retailer for customisable furniture. The investment will be used to expand the company's presence in Europe.
There were further investments in POQ Studio (£1.1 million), My 1st Years (£924,000) and Perfect Channel (£132,000).
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.
In May 2018, the Company realised its investments in Charterhouse Leisure and Conversity. Both of these investments had been substantially written down at the year-end and the realisations completed at amounts slightly above their respective carrying values at 28 February 2018.
On 1 June 2018, Richemont Holdings UK Limited, a subsidiary of the Swiss luxury group Compagnie Financiere Richemont SA, agreed to acquire 100% of the share capital of Watchfinder. The transaction is subject to legal and regulatory approval and is expected to close in the summer of 2018. Based on the expected completion proceeds, less a discount to reflect the risk of non-completion, the estimated uplift on the net asset value at 28 February 2018 is expected to be 1.6p per share.
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 2018, but has been extracted from the statutory financial statements for the year ended 28 February 2018, which were approved by the Board of Directors on 5 June 2018 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 2017 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 2018 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
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Proven Growth & Income VCT plc via Globenewswire
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