Half-year Report

VPC Specialty Lending Invest. PLC

20 September 2024

 

20 September 2024

VPC SPECIALTY LENDING INVESTMENTS PLC

(the "Company" or "Parent Company" with its subsidiaries (together) the "Group")

Half-Year Report and Unaudited Financial Statements

For the Six-Month Period Ended 30 June 2024

The Board of Directors (the "Board") of VPC Specialty Lending Investments PLC (ticker: VSL) present the Company's Half-Year Report and Unaudited Financial Statements for the period ended 30 June 2024.

A copy of the Company's Half Year Report is available to view and download from the Company's website, https://vpcspecialtylending.com/documents/. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.

A copy of the Half-Year Financial Report will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism, in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

All page numbers below refer to the Half-Year Report on the Company's website.

Further information on VPC Specialty Lending Investments PLC is available at https://vpcspecialtylending.com.

Enquiries

For further information, please contact:

VPC Specialty Lending Investments PLC Graeme Proudfoot	via Jefferies or Winterflood (below)
Victory Park Capital Gordon Watson Sora Monachino	via Jefferies or Winterflood (below) [e-mail]
Jefferies International Limited	Tel: [phone]
Stuart Klein
Gaudi le Roux
Winterflood Securities Limited	Tel: [phone]
Joe Winkley
Neil Morgan Montfort Communications Matthew Jervois	Tel: [phone] [e-mail]
Link Company Matters Limited (Company Secretary)	Tel: [phone] Email: [e-mail]

LEI: 549300UPEXC5DQB81P34

INTRODUCTION TO THE COMPANY AND THE GROUP

VPC Specialty Lending Investments PLC (the "Company" or "VSL") provides asset-backed lending solutions to emerging and established businesses ("Portfolio Companies") with the goal of building long-term, sustainable income generation. VSL focuses on providing capital to vital segments of the economy, which for regulatory and structural reasons are underserved by the traditional banking industry. Among others, these segments include small business lending, working capital products, consumer finance and real estate. VSL offers owners of shares of the Company ("Shareholders") access to a diversified portfolio of opportunistic credit investments originated by non-bank lenders with a focus on the rapidly developing technology-enabled lending sector.

The Company's investing activities are undertaken by Victory Park Capital Advisors, LLC (the "Investment Manager" or "VPC"). VPC is an established private capital manager headquartered in the United States ("U.S.") with a global presence. VPC identifies and finances emerging and established businesses globally and seeks to provide the Company with attractive yields on its portfolio of credit investments. VPC offers a differentiated private lending approach by financing Portfolio Companies through asset-backed delayed draw term loans, which is referred to as "Asset Backed Lending," designed to limit downside risk while providing Shareholders with strong income returns. Through rigorous due diligence and credit monitoring by the Investment Manager, the Company seeks to generate stable income with significant downside protection.

This half year report for the period to 30 June 2024 includes the results of the Company (also referred to as the "Parent Company") and its consolidated subsidiaries (together the "Group"). The Company (No. 9385218) was admitted to the premium listing segment of the Official List of the Financial Conduct Authority ("FCA") (the "Official List") and to trading on the London Stock Exchange's main market for listed securities (the "Main Market") on 17 March 2015, raising £200 million by completing a placing and offer for subscription (the "Issue"). The Company raised a further £183 million via a C Share issue on 2 October 2015. The C Shares were converted into Ordinary Shares and were admitted to the Official List and to trading on the Main Market on 4 March 2016.

INVESTMENT OBJECTIVE

The Company's investment objective is to conduct an orderly realisation of the assets of the Company, to be effected in a manner that seeks to achieve a balance between returning cash to Shareholders promptly and maximising value.

INVESTMENT POLICY

The Company's investments will be realised in an orderly manner, that is, with a view to achieving a balance between returning cash to Shareholders promptly and maximising value.

Until 30 June 2023, the Company was able to make new investments directly (in aggregate) up to 5%. of its Gross Assets (at the time of the investment) in consumer loans, SME loans, advances against corporate trade receivables and/or purchases of corporate trade receivables originated by portfolio companies ("Debt Instruments").

Following this period, the Company may not make any new investments save that: (a) investments may be made to honour existing documented contractual commitments to existing portfolio companies as a majority of the Company's investments are delayed draw term loans; (b) further investment may be made into the Company's existing investments without redemption rights in order to preserve the value of such investments; and (c) realised cash may be invested in cash or cash equivalents, government or public securities (as defined in the rules of the UK Financial Conduct Authority), money market instruments, bonds, commercial paper or other debt obligations with banks or other counterparties having a "single A" (or equivalent) or higher credit rating as determined by any internationally recognised rating agency selected by the directors of the Company (which may or may not be registered in the European Union) ("Cash Instruments") pending its return to Shareholders in accordance with the Company's investment objective.

Any return of proceeds to the Shareholders will be subject to compliance with existing gearing facilities and hedging arrangements, payment of expenses and reserves for potential liabilities.

The Company will continue to comply with the restrictions imposed by the Listing Rules.

FINANCIAL HIGHLIGHTS

SUMMARY AND HIGHLIGHTS FOR THE HALF-YEAR PERIOD

The financial and business highlights for the six months to 30 June 2024 are as follows:

v February 2024: One of the Company's SPAC investments, ZeroFox, Inc. (NASDAQ: ZFOX), announced that it had entered into a definitive agreement to be acquired by Haveli Investments. As a result, the Company's convertible-note investment (L&F Acquisition Holdings Fund, L.P.) was repaid, and the common shares (JAR Sponsor, LLC) were redeemed which resulted in total proceeds of $7.7 million.

v Sunbit Inc., one of the Company's investments, was named No. 30 on its fourth annual Inc. 5000 Regionals: Pacific list, the most prestigious ranking of the fastest-growing private companies based in California, Oregon, Washington, Hawaii or Alaska.

v March 2024: Two of the Company's eCommerce investments, Razor Group and PerchHQ, LLC, closed a transaction in which Razor acquired Perch in an all-stock deal.

v The Company made a follow-on investment of £0.4 million in WeFox to preserve the value of the investment.

v April 2024: The Company announced an initial ~£11.9 million distribution through the B-share Scheme, representing approximately 5% of the Company's 31 January 2024 NAV.

v May 2024: The Company distributed the initial B-Share redemption to Shareholders, which represented a 4.26p return.

v The Company received proceeds of $6.6 million related to its convertible-note investment in L&F Acquisition Holdings Fund, LLC. This represents a full exit of the position and a realised gain of $1.1 million.

v The Company received proceeds of $0.8 million related to the partial return of capital of its investment in Keller Lenkner LLC.

v June 2024: The Company declared a dividend of 1.89p. This represents a 2.00p equivalent dividend after adjusting for the reduction to NAV as a consequence of the B Shares redeemed in May.

v The Company completed a restructuring of its investment in Integra Credit Holdings, LLC. As a result of the amendment, a portion of the accrued interest will be capitalised into a new non-interest-bearing note. The maturity date has been extended to 31 December 2025.

v The Investment Manager announced that it had facilitated transactions that resulted in a merger of four leading Amazon aggregators: Juvo Plus, Cap Hill Brands, Dragonfly and Moonshot Brands. The resultant company, Infinite Commerce, is one of the world's largest developers and sellers of consumer products on eCommerce marketplaces.

v The Investment Manager received a partial repayment of $1.6 million on the Company's investment in Caribbean Financial Group, with full repayment of the facility expected at the stated maturity date of 31 December 2024.

SUBSEQUENT EVENTS

v July 2024: The Company received proceeds from Sunbit Inc. equity, resulting in $3.9 million being returned to the Company, which is the valuation mark as at 30 June 2024.

v The Company fully exited its investment in Covalto Ltd., ahead of the scheduled maturity date of 22 November 2024, resulting in $0.2 million being returned to the Company. This represents a full return of principal capital as well as interest on the full life of the investment.

RETURN SUMMARY AS AT 30 JUNE 2024

	30 June 2024	Comparative
Net Asset Value ("NAV" per Ordinary Share	68.79p	80.91p - 31 December 2023
Ordinary Share Price	42.50p	66.20p - 31 December 2023
Discount to NAV	38.22%	18.18% - 31 December 2023
NAV (Cum Income) Return1	-4.76%	-9.45% - 31 December 2023
Total Shareholder Return (based on share price)2	-23.32%	-14.32% - 30 June 2023
Dividends per Ordinary Share3	4.26p	8.00p - 31 December 2023
Total Net Return	-£11.03 million	-£5.55 million - 30 June 2023
Revenue Return	+£12.71 million	+£21.79 million - 30 June 2023

¹           Comparative for the full year 2023.

²           Net of issue costs.

³           Dividends declared which relate to the period.

TOP TEN POSITIONS

The tables below provide a summary of the top ten exposures of the Group, net of gearing, as at 30 June 2024 by asset backed lending, equity investment and fund investment.

ASSET BACKED LENDING INVESTMENT	COUNTRY	EXPOSURE (£)
Deinde Group, LLC (d/b/a, Integra Credit)	United States	48,732,641
Razor Group GmbH	Germany	21,558,906
FinAccel Pte Ltd	Singapore	17,763,774
Heyday Technologies, Inc.	United States	11,908,261
Infinite Commerce Holdings, LLC	United States	11,820,784
Counsel Financial Holdings, LLC	United States	8,332,141
Dave, Inc.	United States	3,796,426
Caribbean Financial Group Holdings, L.P.	Latin America	2,935,153
Kueski, Inc.	Latin America	2,033,743
SellerX Germany GMBH & Co. KG	Germany	1,808,837
EQUITY INVESTMENT	COUNTRY	EXPOSURE (£)
Razor Group GmbH	Germany	11,897,421
Wefox Holding AG	Switzerland	8,499,298
Caribbean Financial Group Holdings, L.P.	Latin America	4,860,128
FinAccel Pte Ltd	Singapore	4,301,803
Sunbit, Inc.	United States	3,090,866
Keller Lenkner LLC	United States	2,759,082
West Creek Financial, Inc.	United States	2,612,663
Calumet Capital Partners, LLC	United States	2,164,674
Statera Capital Partners, LLC	United States	2,038,185
Kueski, Inc.	Latin America	1,982,586
FUND INVESTMENT	COUNTRY	EXPOSURE (£)
VPC Synthesis, L.P.	United States	15,979,174
VPC Offshore Unleveraged Private Debt Fund Feeder, L.P.	United States	673,475

CHAIRMAN'S STATEMENT

I present to you the half-year results for the Company for the period to 30 June 2024. Many of the themes that made 2023 so testing persisted in the first half of 2024. Prominent among them were stubborn levels of inflation, high interest rates in most developed economies, and war in Eastern Europe and the Middle East. These factors have been compounded by an unusual degree of political uncertainty as an unprecedented number of countries are holding elections in 2024.

Against this turbulent backdrop, the Company faced a challenging period. Net returns from the portfolio were negative, with unrealised negative capital returns offsetting positive revenue returns. Market conditions and stock-specific issues both played a part in this, as you can read in the Investment Manager's report. Nevertheless, the Investment Manager has continued to make some progress towards the Company's winding down, and the Company has been able both to maintain its dividend and to make an initial B-share distribution to Shareholders. As noted in the announcement on 29 August 2024, the dividend is likely to be materially lower in the future. The Board and the Manager would like to accelerate the wind-down, but, as you will see, market conditions coupled with impacts on certain portfolio positions have resulted in the extension of some maturity dates, as well as write-downs. For ease of reference the maturity profile as at 30 June 2024 can be found on page 9 below.

2024 FIRST-HALF HIGHLIGHTS

v Gross revenue return of 5.46% offset by a gross capital return of -7.82%;

v Total net asset value (NAV) return of -4.76% for the six-month period and 43.51% from inception to date;

v Total Shareholder return of -23.32% for the six-month period and 14.35% from inception to date;

v Robust performance of the asset-backed loan investments;

v A first distribution of ~£11.9 million through the B-share scheme, representing 5.12% of the Company's NAV at 31 January 2024; and

v A 25th consecutive quarterly dividend of 1.89p per share for the period from 1 January 2024 to 31 March 2024, which represents a 2.00p equivalent dividend after adjusting for the reduction to NAV resulting from the B-share distribution.

THE COMPANY'S BUSINESS

In line with the wind-down policy approved by Shareholders in June 2023, the Investment Manager has continued to realise value through debt repayments and the sale of equity securities. In the first half of this year, proceeds of approximately $45 million were generated from the sale or redemption of Company investments. These proceeds have either been distributed to Shareholders or used to reduce the level of gearing in the portfolio. While it is too early to predict when the gearing will be eliminated entirely, the Company intends to continue to reduce the gearing as progress towards full wind-down continues.

In May, the Company made an initial distribution to Shareholders of $15 million, equivalent to approximately £11.9 million as at the date it was announced, through the issue and redemption of B Shares. The capital returned represented 5.12% of the Company's net asset value on 31 January 2024.

With the changes to the portfolio brought about by the wind-down, we anticipate impacts on both dividends and hedging. As we have previously indicated, the dividend paid by the Company has started to be reduced proportionately with the distribution of capital from the portfolio. For the three-month period to 31 March, the Company paid an interim dividend of 1.89 pence per share on 18 July. This was equivalent to the preceding dividends of 2.00 pence per share when the reduction in the Company's net asset value caused by the B-share distribution was taken into account, and we have announced a further dividend of 1.89p in respect of the period to 30 June 2024. We expect that the dividend will be reduced further as the portfolio's income falls during the progression towards wind-down.

Additionally, the Board intends to significantly reduce the extent to which the portfolio is hedged by the end of 2024. While unhedged earnings and valuation will reflect volatility in foreign exchange rates, the Board believes that the impact will be in part offset by the release of capital and the reduced costs of maintaining the hedging positions.

After reviewing the reporting of a comparable peer group for the Company, as provided by the brokers, the Board has approved the shift from a monthly newsletter / NAV to a quarterly shareholder presentation / NAV, following publication of the September 2024 NAV.

BOARD COMPOSITION

I would like to note that two new directors, Nick Campsie and Martin Rigby, joined the Board on 12 June. Both bring considerable expertise to the Board, as detailed in their biographies on the Company website: https://vpcspecialtylending.com/the-board/. Nick and Martin have already made a significant contribution to the work of the Board as a whole and as members of the Company's Audit and Valuation and Management Engagement Committees. We look forward to that continuing as we work towards wind-down.

OUTLOOK

Despite the difficult period that the Company has had to weather, the Board is hopeful that the investment environment will improve as markets tend to be cyclical. Macroeconomic conditions are still uncertain but are becoming more benign as inflation gradually abates. Meanwhile, corporate earnings have been reasonably robust.

We are disappointed by the performance of the Company's unrealised equity portfolio. The core investments in asset-backed securities, the Investment Manager's credit expertise and the implementation of judicious risk-management measures have meanwhile all helped the Company to continue to generate income in a further challenging period.

With the realisation process now underway, the Board continues to meet regularly to review the liquidity of unrealised holdings and progress towards the Company's revised investment objective. The Board and the Investment Manager are proceeding on a case-by-case and cost-conscious basis, with the due flexibility and patience required by the illiquidity of the Company's assets. Throughout, we will balance the need to maximise Shareholder value with the time sensitivities of our Shareholders. We will make every effort to keep Shareholders informed of progress and developments as they arise.

Your Board and I would like to thank you once again for your continued support as we work towards the successful realisation of the Company's assets.

Graeme Proudfoot

Chairman

19 September 2024

INVESTMENT MANAGER'S REPORT

REVIEW OF PERFORMANCE IN THE FIRST HALF OF 2024

Over the first six months of 2024, VPC continued to work towards the Company's wind-down. As in 2022 and 2023, the strong performance of the Company's asset backed lending investments was outweighed by weakness in the equity portion of the portfolio. By the end of the period, the Company's asset backed lending investments represented approximately 73% of the total investment portfolio. The remainder of the investment portfolio consists of the Company's equity interests and cash.

The most significant driver of the movement in the equity portion of the portfolio was the unlisted investment in digital insurance platform wefox Holding AG ("WeFox"). Regulatory challenges forced the business to seek further funding, including an additional investment of €0.5 million from the Company in March as part of total funds raised of €15 million. In light of the new funding agreements that WeFox reached, VPC updated the valuation of the Company's WeFox positions. This led to an unrealised loss of £11.0 million (-3.95p). The Investment Manager continues to monitor the discussions between WeFox and its shareholders.

Further negative contributions came in the form of unrealised losses on two of the Company's unlisted equity investments (Caribbean Financial Group Holdings, L.P. and Pattern Brands, LLC), incremental losses on the Company's publicly traded investment in Bakkt Holdings Inc. (NYSE: BKKT; "Bakkt") through VPC Impact Acquisition Holdings and incremental expected credit loss reserves taken within the eCommerce portfolio, specifically on the Company's investment in SellerX Germany GMBH & Co. KG. The Company has now substantially exited the position in Bakkt.

The Investment Manager has continued to work with its eCommerce Portfolio Companies as they strengthen their balance sheets and evaluate additional strategic combinations in an effort to maximise Shareholder value. In June, the Investment Manager announced the completion of a merger of four leading Amazon aggregators: Juvo Plus, Cap Hill Brands, Dragonfly and Moonshot Brands. The Company holds its respective share of debt as well as equity in the newly formed company, Infinite Commerce Holdings, LLC, as a result of this merger. Infinite Commerce is now one of the world's largest developers and sellers of consumer products on eCommerce marketplaces.

Earlier in the period, Razor Group GmbH and PerchHQ, LLC, closed a transaction in which Razor acquired Perch in an all-stock deal. As part of the transaction, Razor secured an incremental €34.5 million in new equity financing that is subordinate to both the Razor asset backed investment and the Class A Preferred Units.  During the period, the Company has recognised an unrealised loss of £1.5 million (-0.54p) across all Perch/Razor positions.

INVESTMENTS

Under the terms agreed for the wind-down, the Investment Manager is not permitted to make any new investments save that (i) investments may be made to honour existing documented contractual commitments to existing Portfolio Companies (as a majority of the Company's investments are delayed-draw term loans); (ii) further investment may be made into the Company's existing investments without redemption rights in order to preserve the value of such investments; and (iii) realised cash may be invested in cash or cash equivalents, government or public securities (as defined in the rules of the UK Financial Conduct Authority), money market instruments, bonds, commercial paper or other debt obligations with banks or other counterparties having a "single A" (or equivalent) or higher credit rating as determined by any internationally recognised rating agency selected by the Directors of the Company (which may or may not be registered in the European Union) pending its return to Shareholders in accordance with the Company's investment objective.

In the first six months of 2024, the Company made follow-on investments totalling $1.1 million. The Company will continue to honour existing documented contractual commitments to Portfolio Companies as they arise.

During the period, certain asset backed lending investment maturities were extended to reflect changes in the circumstances of the particular investment or the prevailing market conditions. In each case, these extensions were made to preserve value for the Shareholders. Although maturity dates may be extended on certain investments, the Investment Manager and the Company will continue to look for ways to exit the investments before the stated maturity date, where possible, realising the Company's assets in an orderly manner that achieves a balance between maximising the value received from investments and making timely returns of cash to Shareholders.

During the realisation process, VPC will continue to draw on its longstanding reputation and relationships with management teams, industry professionals and experts to determine the most cost-effective distribution mechanisms for maximising Shareholder value.

At the end of the six-month period, the expected credit loss ("ECL") reserve as a percentage of total loans at amortised cost was 1.6%, indicating strength in the underlying debt investments.

OUTLOOK

Many of the themes that had characterised 2023 persisted in the first half of 2024: sustained high interest rates, economic uncertainty and ongoing conflict in Ukraine and the Middle East. The US Federal Reserve maintained the federal funds rate at 5.25%-5.5%, with expectations as to the timing and extent of rate cuts fluctuating over the six months.

With financing options constrained by high interest rates, venture capital ("VC") markets continued to be subdued, with VC investors still cautious. As the excitement over generative artificial intelligence persisted, the funding available for other technology-focused companies remained limited.

Although interest rates are still at elevated levels, central banks in Europe and the UK have already begun to reduce rates, and the market is signalling that further rate cuts may occur later this year. The Company's Portfolio Companies are typically high-growth businesses that have historically raised their funding through venture capital or private equity, so a loosening of monetary policy would be positive for improving fundraising opportunities. Much economic and geopolitical uncertainty remains, however, and there is still the possibility that market expectations may be disappointed as to the timing and extent of any rate cuts.

In working towards the continued realisation of the Company's assets, the Investment Manager will take full account of market circumstances. But as the main challenges in the portfolio have been specific to individual holdings, most of VPC's efforts have been directed towards resolving these at the Portfolio Company level. The Investment Manager is hopeful that the remedial actions taken to date will have the desired effect in time. In some cases, providing Portfolio Companies additional time to repay asset-backed lending investments in full will be in the best interests of Portfolio Companies and Shareholders alike. Though maturity dates may be extended on certain investments, VPC and the Company will look for ways to potentially exit the investments before the stated maturity date, where possible. VPC will remain focused on mitigating exogenous credit risks and managing downside protection in the investment portfolio to ensure a timely return of capital to Shareholders and manage an orderly realisation process.

Victory Park Capital Advisors, LLC

Investment Manager

19 September 2024

 

END