Annual Financial Report
Baronsmead VCT 2 plc
Annual report & accounts for the year ended 30 September 2013
Financial Headlines
â— Net asset value ("NAV") per share increased 14.6 per cent to 110.13p in the
year ended 30 September 2013, before deduction of dividends.
â— 288.2p NAV total return to shareholders for every 100.00p invested at launch.
â— Dividends totalled 9.5p in the twelve months to 30 September 2013, including
the second interim dividend of 6.5p paid on 20 September 2013.
â— Net annual dividend yield of 10.1 per cent and gross annual yield of 13.4 per
cent.
Extract of the Strategic Report
The Strategic Report included in the Annual Report and Accounts for the year to
30 September 2013 has been prepared in accordance with the requirements of
Section 414 of the Companies Act 2006 and best practice. Its purpose is to
inform the members of the Company and help them to assess how the Directors
have performed their duty to promote the success of the company, in accordance
with Section 172 of the Companies Act 2006.
The Company is registered in England as a Public Limited Company (Registration
number 03504214). The Directors have managed,and intend to continue to manage,
the Company's affairs in such a manner as to comply with Section 274 of the
Income Tax Act 2007 which grants approval as a VCT.
Investment Objective
The investment objective of the Company is to achieve long-term investment
returns for private investors, including tax-free dividends.
Investment Policy
â— To invest primarily in a diverse portfolio of UK growth businesses, whether
unquoted or traded on AIM.
â— Investments are made selectively across a range of sectors in companies that
have the potential to grow and enhance their value.
Further details on how this is achieved are set out below
Chairman's Statement
I am pleased to report that the Company had a very satisfactory year. Net Asset
Value ("NAV") before payment of dividends increased by 14.03p a share (14.6 per
cent).
The total dividend for the year was 9.5p all of which has been paid out of the
profits from successful investment realisations in recent years.
Pence
per
ordinary
share
NAV as at 1 October 2012 96.10
(after deducting the final dividend of 5.0p for the year to 30
September 2012)
Valuation uplift (14.6 per cent) 14.03
NAV as at 30 September 2013 before dividends 110.13
Less:
Interim dividend paid on 14 June 2013 (3.00)
Second interim dividend paid on 20 September 2013 (6.50)
NAV as at 30 September 2013 after paying dividends
100.63
This year approximately two thirds of the increase in NAV has been paid to
shareholders as dividends. While this is pleasing, the level of future
dividends (which the Board aims to keep at a minimum of 6.5p a year) will, of
course, depend upon continued profitable realisations. Shareholders have
expressed a preference to receive consistent tax free income while also
achieving capital growth and so the increase in NAV per share to 100.63p, after
dividends, is a positive step.
Our portfolio is diverse and this has helped to smooth investor returns, from
year to year. The unquoted portfolio has seen several years of strong growth
but, last year the return was more modest, principally because many of the
current investments are relatively new and, as immature companies they are only
just starting to deliver their full potential. We remain focused primarily on
unquoted investments and the Manager is now working to help these newer
investments achieve outstanding results in future years.
In contrast, the quoted portfolio experienced significant growth of 47 per cent
in the year. Undoubtedly this performance was due partly to strong markets and
a welcome return of investor appetite for smaller quoted companies. However it
is also a vindication of the proactive strategies that the Manager has deployed
in the quoted arena since 2008. The Wood Street Microcap fund was set up in May
2009 as a way of holding a number of more liquid stakes in larger non VCT
qualifying companies. Additionally the Manager has built a small number of
significant shareholdings in selected AIM companies in order to become a more
influential longer term partner and to contribute its private equity experience
to these investees.
During the market turbulence of recent years, the Manager has taken a long term
view of solid, core investments based on the fundamentals of the investee
rather than over reacting to weak and cyclical market sentiment. This approach
and these decisions are now paying dividends and have contributed to the quoted
performance.
The portfolio (apart from Wood Street Microcap) has increased to 65
investments. New and follow-on investments totalled £5.7 million across 8
unquoted and 11 AIM companies. Sales of investments realised £9.2 million and
delivered net gains of £5.7 million. The portfolio as a whole, remains in good
health with 85 per cent of investees reporting steady or improving performance
against their business plans.
LONG TERM PERFORMANCE
The Company's investment and dividend policies which are aimed at producing
consistent returns over the long-term continue to be met. Following the payment
of the second interim dividend, total tax-free dividends of 102.9p a share have
been paid since launch. This exceeds the initial subscription price of 100p per
share and, additionally the NAV at the year end is also over 100p. Accordingly
founder shareholders have received back in tax-free dividends more than their
initial subscription and that initial gross subscription (before taking account
of upfront income tax relief) is wholly represented in the NAV of 100.63p a
share at the year end.
Statistics produced by the Association of Investment Companies
(www.theaic.co.uk) show that over the past ten years, the share price total
return of 243.60p (before VCT tax benefits) for every 100p invested compares to
240.24p for the FTSE All-Share Index during the same period.
In the past ten years, annual tax-free dividends have averaged 7.66p a share
(6.64p since launch). For the higher rate taxpayer, the gross equivalent
represents 10.21p a share per annum. The full record of performance since
launch is set out in the Annual Report as well as on our website,
www.baronsmeadvct2.co.uk.
The strong performance this year has continued the cumulative progress achieved
since the onset of the financial crisis in 2008. During the financial year the
cumulative NAV Total Return above which the Manager is due a performance fee
was exceeded and a performance fee of £1.4 million (the equivalent of 1.9p per
share) became payable to the Manager (see Performance Incentive section of the
Strategic Report for further information). A performance fee was last paid in
2007. The results for the year are stated net of all running costs as well as
the performance fee earned by the Manager.
SHAREHOLDER MATTERS
Fundraising
An offer for subscription is currently expected to be launched in early 2014 to
raise gross proceeds of up to £10 million. The securities note which will
contain the subscription form and the full terms and conditions, will be sent
to existing shareholders as soon as it is published.
Share price discount policy
In November 2012 the Company announced that it would seek to maintain a mid
share price discount of 5 per cent to NAV instead of the previous policy of a
10 per cent discount to NAV. I am pleased to report that significant progress
has been made in meeting this target. The mid share price discount to NAV
averaged 6.3 per cent in the twelve months to 30 September 2013. During the
year the Company bought in to Treasury 1,005,000 shares at an average discount
of 6.3 per cent and sold 200,000 shares out of Treasury at a discount of 4.97
per cent to NAV. The net number of shares bought back during the year
represents approximately 1.1 per cent of the shares in issue (excluding shares
held in treasury) at the beginning of the financial year.
In view of this experience, the Company will continue to try and maintain a mid
share price discount to NAV of 5 per cent. However, the share price discount
policy will be kept under continuous review and may be subject to revision.
Shares will be bought back depending on market conditions at the time and only
where the Directors believe such a transaction to be in the best interests of
all shareholders.
VCT legislation
A recent Treasury consultation regarding the use of "Enhanced Share Buy Backs"
has no direct impact on your Company as we have never used such structures and
have preferred to create an orderly market for all shareholders by striving to
keep the discount rate low. However, the Company's Manager has participated in
discussions regarding proposed legislation with the aim of identifying and
reducing the impact of any unintended adverse consequences that might arise.
In addition, the European Commission is currently undertaking a review of the
state aid regulations including the risk capital guidelines under which VCTs
are approved at the European level. The aim of the review is to set out a clear
framework to allow member states to grant aid without the need for the European
Commission to be involved. Our trade association, the Association of Investment
Companies ("AIC") is engaged in the discussion and the Manager has provided
data and case studies to assist the construction of a suitable response.
Management Arrangements
The Board has considered the impact on your Company of EU driven legislation
regulating Alternative Investment Fund Managers, into which category we fall,
along with most other investment funds in the UK. To minimise the regulatory
cost of compliance with this directive we have decided that the Company will
register directly under the rules. This will not affect the arrangements with
the Manager (ISIS) who will continue to manage the investment process on a day
to day basis reporting to the Board.
Annual General Meeting
I look forward to meeting as many shareholders as possible at our sixteenth
Annual General Meeting to be held on Wednesday, 18 December 2013 at the
Plaisterers' Hall, One London Wall, London, EC2Y 5JU at 10:30 a.m. This will be
followed by presentations from the Manager, a light lunch and a shareholder
workshop.
OUTLOOK
There is a growing consensus that the outlook for the UK economy is recovering
and there is a greater degree of optimism than has existed for many years. The
Company's portfolio has demonstrated a high degree of resilience since 2008.
This is testament to the expertise and skill of the Manager who has helped
steer portfolio companies through the difficult times, enabling them to
increase profits and employment.
The overall portfolio remains widely diversified, well resourced and adequately
funded. There are also encouraging signs that the number of available
investment opportunities is increasing with eight unquoted investments
completed in the year together with some notable successful exits. We believe
that the Company is well placed to take advantage of the recovery as it gathers
momentum. We will continue to focus on delivering a consistent yield for
shareholders while protecting the asset base.
Clive Parritt
Chairman
18 November 2013
Manager's Review
The year has been characterised by a stronger period of new investment,
particularly in unquoted investments. Five new unquoted investee companies have
been added to the portfolio and a further one has been added since the date of
these Accounts.
In addition, strong upward performance had been delivered by the quoted
portfolio which is a welcome reward for patience through an uncertain market
over the recent past. The unquoted portfolio has remained robust and delivered
two successful realisations of longstanding investments.
Portfolio Review
Overview
The net assets of £75.8 million were invested as follows:
Asset class NAV % of Number of Annual return
£m NAV investees %
Unquoted £36.5 48 26 5
Quoted £27.2 36 47 43
Wood Street Microcap £6.1 8 34 47
Cash and near cash £6.0 8 - -
During the year there were:
◠New investments of £4.2 million in 9 new companies and £1.4 million in 10
follow ons;
◠Divestments of £9.2 million from 4 full exits and 5 partial realisations.
Each quarter the director of general trading and profitability of all investee
companies is recorded so that the Board can monitor the overall health and
trajectory of the portfolio. At 30 September 2013, 78 per cent of the 73
companies in the portfolio (excluding Wood Street Microcap) were progressing
steadily or better.
Unquoted Private Equity Portfolio
After a strong year of growth last year of 8 per cent, the unquoted portfolio
showed more modest growth this year of 5 per cent including income. The
unquoted portion of the portfolio is valued using a consistent process every
three months which the Board oversees and approves. Almost all of the value
creation in unquoted investments comes from operational improvements (revenue
and margin growth), rather than financial leverage
A very pleasing result during the period was the successful realisation of two
longstanding investments. Independent Living Services Ltd, the care business
based in Scotland, has been in the portfolio since 2005 and was sold to Mears
Group plc generating a profit multiple of 2.5x cost. MLS Ltd, the school
library software business, was an investment from 2006 that realised 2.8x cost
on its sale to Capita plc. These represent strong realised returns.
Since the period end, there has been a further significant realisation.
CableCom has been in the portfolio since 2007 and manages internet services to
high density accommodation such as student accommodation. The business has been
sold via a secondary management buy-out and the realisation has delivered 4.8x
the original cost of investment which is an excellent result. In addition, a £5
million investment (£1.25 million for Baronsmead VCT 2) has been negotiated in
the new transaction on the same terms as the lead private equity buyer as ISIS
believes there is an opportunity for further growth.
Quoted Portfolio (AIM traded and other listed investments)
There has been a significant uplift in the quoted portfolio of 43 per cent
reflecting a positive re-rating of the small cap sector in the year. This
recovery has been welcome following recent years of headwinds from a
challenging AIM market environment and weak share prices.
The performance of the quoted portfolio also reflected the changes introduced
by the ISIS Quoted Investment team since 2009. The Quoted team is now more
likely to build progressive stakes. An investment in a new smaller company
might start at an initial low level. As the team become more comfortable with
performance and where it is possible within the constraints of VCT qualifying
investing, the holding will be increased. Several more significant holdings of
over 20 per cent have now been built where the team has a closer, more
influential relationship and can utilise some of the good practice from Private
Equity experience. In addition, during the weaker AIM market, the team
endeavoured to focus on the fundamentals of the investees and demonstrated
patient support when market sentiment depressed share prices of sound
companies. The ISIS team believes the benefits of this work are now being
reflected in improved Quoted performance.
Realisations during the year from the quoted portfolio totalled £4.9 million at
an average multiple of 3.9x cost which is an excellent result. Notably within
this is the full realisation due to a takeover of FFastFill plc (2.8x cost) and
the partial sales in the market of IDOX plc (at 5.5x cost) and Staffline Group
plc (at 6.0x).
Whilst it is expected that work in the Quoted arena will deliver future
positive growth, the high annual growth achieved in this period should be
considered as exceptional.
Wood Street
Wood Street Microcap Investment Fund ("Wood Street") was established by ISIS in
May 2009 to provide flexibility for the Baronsmead VCTs to invest in larger and
more liquid non VCT qualifying AIM and Small Cap opportunities. It represents
another innovation introduced by the ISIS Quoted team to seek performance
improvement. At 30 September 2013, Baronsmead VCT 2 had invested £3.5 million
through Wood Street into a portfolio of 34 companies, now valued at £6.1
million. Wood Street generated a positive return of 47 per cent over the year.
Liquid assts (cash and near cash)
Baronsmead VCT 2 had cash and near cash resources of approximately £6.0 million
at the year-end. This asset class is conservatively managed to take minimal or
no capital risk, a strategy outlined in prospectuses that have been issued in
the past.
In addition, investments within the Wood Street fund are expected to be
relatively more liquid than other investments as explained in the section
above. This gives the Manager the possibility of realising cash from Wood
Street should this ever be required to supplement liquid assets.
Unquoted investments
During the year, £4.0 million was invested in 8 unquoted companies including 5
new additions to the unquoted portfolio, one of which utilised an existing
acquisition vehicle. The new unquoted investments were:
â— Create Health is an internationally renowned fertility clinic which is the
UK's leading specialist in natural and mild IVF techniques. Natural and mild
IVF uses lower levels of drugs and is viewed as more ethical and healthier - it
is used widely in advanced overseas fertility markets and is growing in
popularity in the UK. The investment will fund the opening of a new flagship
site in London.
â— Eque2 is a software business that was previously owned by Sage plc and known
as Sage Construction. It provides enterprise wide software systems that cater
for firms of all sizes in the construction industry, helping them to control
and manage all types of construction projects.
â— Armstrong Craven is an HR consultancy and provider of specialist executive
search services to many large global and national clients. It has offices in
Manchester and London. The ISIS support helped the original founder and
management team acquire the business from its parent plc in a Management Buy
Out.
â— Luxury for Less is a fast growing online bathroom products retailer which
operates the transactional website www.bathempire.com. In 2012, the business
was recognised as the Small Online Business of the Year. ISIS will help the
business expand its range and help fund new facilities to support growth. The
investment was made by using an already established acquisition vehicle and
therefore is not listed as a new investment in the following tables.
â— Key Travel is a leading travel management company dedicated to serving the
travel requirements of the not-for-profit, academic and faith sectors from its
bases in the UK, Europe and the US. Major clients include Oxfam, Save the
Children and Cambridge University. Travel arranged for clients will break
through the £100m mark this year. The investment will help support the
continued growth of the business.
After the period end, Baronsmead VCT2 invested £1.0 million in an unquoted
investment, Carousel Logistics Limited, a provider of bespoke logistics and
supply chain solutions.
Top Ten Investments
The average investment value of the top ten companies held by Baronsmead VCT 2
is £2.9 million per company. Because these investments are normally held by the
other Baronsmead VCTs, the total managed by ISIS in each investee is
significantly larger than this, which enables ISIS to dedicate significant
resource to manage each investment and their progress. The top ten investees
employ some 2,277 people, which is an increase of 24 per cent over the last
year. Their turnover has also grown by some 21 per cent. In this year's Annual
Report, each of the top ten companies is described in more detail.
Investment Management
ISIS continues to invest in its skills and capacity with over 40 of its total
team of 60 devoted to investment management activities across all its
investment management activities. Its focus is on generating strong investment
returns from its portfolio through a mixture of intelligent investment
selection and hands on portfolio management. Its ability to select good
investments owes much to its in depth sector research and specialisation and to
its strong origination team that help the team to generate proprietary deal
flow.
Its investments are supported from the outset by an experienced internal value
enhancement team together with a panel of proven Operating Partners who work
exclusively with ISIS to assist management teams to deliver both strategic
development and operational efficiencies. Both have enabled ISIS to build a
strong track record of producing consistent returns from its unquoted
investments.
ISIS has pursued a strategy of sector specialisation over many years and in
that time its executives have developed in-depth knowledge of these sectors and
valuable networks of contacts which have enabled it to capitalise on
opportunities that have presented themselves in an ever changing environment.
Its key sectors are:
â— Business services
â— Financial services
â— Consumer markets
â— Healthcare & Education
â— Technology, Media and Telecommunications
Outlook
A number of commentators believe that the UK economy is unlikely to experience
significant GDP growth in the medium term. This is debatable but it is a fair
working assumption for investors and may mean investment returns are not going
to be easy to capture.
However, many of our portfolio companies and their management teams are now
more experienced at handling the economic uncertainties, including managing
their growth and operations in a tougher environment than in previous decades.
Low bank borrowings within the portfolio give them robust financial structures.
ISIS is an active investment manager who partners with our investees to help
them to grow revenue and earnings and build resilient, well invested
businesses, able to maintain standards, whilst growing. Our intention is to
seek out the best opportunities where growth in driven by innovation and
gaining market share through differentiation rather than relying on favourable
economic growth. We continue to be confident that good levels of performance
can be maintained through the ongoing challenging environment.
ISIS EP LLP
Investment Managers
18 November 2013
Dividend policy
The Board of Baronsmead VCT 2 aim to sustain a minimum annual dividend level at
an average of 6.5p per ordinary share, mindful of the need to maintain net
asset value. The ability to meet these twin objectives depends significantly
on the level and timing of profitable realisations and cannot be guaranteed.
There will be variations in the amounts of dividends paid year on year.
Since launch, the average annual tax free dividend paid to shareholders has
been 6.64p per share (equivalent to a pre-tax return of 8.85p per ordinary
share for a higher rate taxpayer). For shareholders who claimed tax reliefs of
20 per cent, 30 per cent or 40 percent, their returns would have been higher.
Share price discount policy
The Company buys back shares if, in the opinion of the Board, a repurchase
would be in the best interests of the Company's shareholders as a whole.
Shares are bought back through the market rather than directly from
shareholders. This minimises the number of shares bought back by the Company
while maximising the opportunity for investors to invest in the Company's
existing shares.
Strategy for achieving objectives
Baronsmead VCT 2 plc is a tax efficient Company listed on the London Stock
Exchange's main market for listed securities.
Investment Policy
To invest primarily in a diverse portfolio of UK growth businesses, whether
unquoted or traded on AIM;
Investments are made selectively across a range of sectors in companies that
have the potential to grow and enhance their value.
Investment securities
The Company invests in a range of securities including, but not limited to,
ordinary and preference shares, loan stocks, convertible securities and
interest bearing securities as well as cash. Unquoted investments are usually
structured as a combination of ordinary shares and loan stocks, while
AIM-traded investments are primarily held in ordinary shares. Pending
investment in VCT qualifying and non-VCT qualifying unquoted, AIM-traded and
other quoted securities (which may be held directly or indirectly through
collective investment vehicles), cash is primarily held in interest bearing
accounts, money market open ended investment companies ("OEICs"), UK gilts and
treasury bills.
UK companies
Investments are primarily made in companies which are substantially based in
the UK, although many of these investees may have some trade overseas.
VCT regulation
The investment policy is designed to ensure that the Company continues to
qualify and is approved as a VCT by HM Revenue and Customs. Amongst other
conditions, the Company may not invest more than 15 per cent by value of its
investments calculated in accordance with Section 278 of the Income Tax Act
2007 (as amended) ("VCT Value") in a single company or group of companies and
must have at least 70 per cent of its investments by VCT Value throughout the
period in shares and securities comprised in qualifying holdings. At least 70
per cent by VCT Value of qualifying holdings must be in "eligible shares",
which are ordinary shares which have no preferential rights to assets on a
winding up and no rights to be redeemed, but may have certain preferential
rights to dividends. For funds raised before 6 April 2011, at least 30 per
cent by VCT Value of qualifying holdings must be in "eligible shares" which are
ordinary shares which do not carry any rights to be redeemed or preferential
rights to dividends or to assets on a winding up. At least 10 per cent of each
qualifying investment must be in "eligible shares".
The companies in which investments are made must have no more than £15 million
of gross assets at the time of investment to be classed as a VCT qualifying
holding.
Asset mix
The Company aims to be at least 90 per cent invested, directly or indirectly,
in VCT qualifying and non-qualifying growth businesses subject always to the
quality of investment opportunities and the timing of realisations. It is
intended that at least 75 per cent of any funds raised by the Company will be
invested in VCT qualifying investments. Non-VCT qualifying investments held in
unquoted, AIM-traded and other quoted companies may be held directly or
indirectly through collective investment vehicles.
Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses within
different qualifying industry sectors using a mixture of securities. Generally
no more than £2.5 million, at cost, is invested in the same company. The
maximum the Company will invest in a single company (including a collective
investment vehicle) is 15 per cent of its investments by VCT Value. The value
of an individual investment is expected to increase over time as a result of
trading progress and a continuous assessment is made of its suitability for
sale.
Investment style
Investments are selected in the expectation that the application of private
equity disciplines, including an active management style for unquoted
companies, will enhance value and enable profits to be realised from planned
exits.
Co-investment
The Company aims to invest in larger more mature unquoted and AIM-traded
companies and to achieve this it invests alongside the other Baronsmead VCTs
and ISIS Growth Fund 1.
Management retention
The Manager's members and staff invest in unquoted investments alongside the
Company. This scheme is in line with current practice of private equity houses
and its objective is to attract, recruit, retain and incentivise the Manager's
team and is made on terms which align the interests of shareholders and the
Manager.
Borrowing powers
The Company's policy is to use borrowing for short term liquidity purposes only
up to a maximum of 25 per cent of the Company's gross assets, as permitted by
the Company's articles. The Company currently has no borrowings.
Management
The Board has delegated the management of the investment portfolio to the
Manager. The Manager also provides or procures the provision of company
secretarial, administrative, accounting and custodian services to the Company.
The Manager has adopted a 'top-down, sector-driven' approach to identifying and
evaluating potential investment opportunities, by assessing a forward view of
firstly the business environment, then the sector and finally the specific
potential investment opportunity. Based on its research, the Manager has
selected a number of sectors that it believes will offer attractive growth
prospects and investment opportunities. Diversification is also achieved by
spreading investments across different asset classes and making investments for
a variety of different periods.
The Manager's Review above provides a review of the investment portfolio and of
market conditions during the year, including the main trends and factors likely
to affect the future development, performance and position of the business.
Principal risks, risk management and regulatory environment
The Board believes that the principal risks faced by the Company are:
- Economic risk - events such as an economic recession and movement in interest
rates could affect smaller companies' valuations.
- Loss of approval as a Venture Capital Trust - the Company must comply with
Section 274 of the Income Tax Act 2007. Any breach of these rules may lead to
the Company losing its approval as a VCT, qualifying shareholders who have not
held their shares for the designated holding period having to repay the income
tax relief they obtained and future dividends paid by the Company becoming
subject to tax. The Company would also lose its exemption from corporation tax
on capital gains.
- Investment and strategic - an inappropriate strategy, poor asset allocation
or consistent weak stock selection might lead to under performance and poor
returns to shareholders. Therefore the Company's investment strategy is
periodically reviewed by the Board which considers at each meeting the
performance of the investment portfolio.
- Regulatory - the Company is required to comply with the Companies Act 2006,
the rules of the UK Listing Authority and United Kingdom Accounting Standards.
Breach of any of these might lead to suspension of the Company's Stock Exchange
listing, financial penalties or a qualified audit report. General changes in
legislation, regulations or government policy could significantly influence the
decisions of investors or impact upon the markets in which the Company invests.
- Reputational - inadequate or failed controls might result in breaches of
regulations or loss of shareholder trust.
- Operational - failure of the Manager's and administrator's accounting systems
or disruption to its business might lead to an inability to provide accurate
reporting and monitoring.
- Financial - the Board has identified the Company's principal financial risks
which are set out in the notes to the accounts below. Inadequate controls might
lead to misappropriation of assets. Inappropriate accounting policies might
lead to misreporting or breaches of regulations.
- Market risk - investment in AIM traded and unquoted companies by nature
involve a higher degree of risk than investment in companies traded on the main
market. In particular, smaller companies often have limited product lines,
markets or financial resources and may be dependent for their management on a
smaller number of key individuals. In addition, the market for stock in smaller
companies is often less liquid than that for stock in larger companies,
bringing with it potential difficulties in acquiring, valuing and disposing of
such stock.
- Liquidity risk - the Company's investments may be difficult to realise. The
fact that a share is traded on AIM does not guarantee its liquidity. The spread
between the buying and selling price of such shares may be wide and thus the
price used for valuation may not be achievable.
- Competitive risk - retention of key personnel of the Manager is vital to the
success of the Company. Appropriate incentives are in place to ensure retention
of such personnel.
The Board seeks to mitigate the internal risks by setting policy, regular
review of performance, enforcement of contractual obligations and monitoring
progress and compliance. In the mitigation and management of these risks, the
Board applies rigorously the principles detailed in the FRC's "Internal
Controls: Guidance to Directors".
Details of the Company's internal controls are contained in the Corporate
Governance section of the full Annual Report.
Performance and key performance indicators ("KPIs")
The Board expects the Manager to deliver a performance which meets the
objective of achieving NAV total return which is in the top quartile of
generalist VCTs. A review of the Company's performance during the financial
period, the position of the Company at the year end and the outlook for the
coming year is contained within the Chairman's statement above. The Board
assess the performance of the Manager in meeting the Company's objectives
against the primary KPIs as outlined in the Annual Report.
Performance Incentive
A performance fee will not be payable to the Manager until the total return on
shareholders' funds exceeds an annual threshold of the higher of 4 per cent or
base rate plus 2 per cent calculated on a compound basis. To the extent that
the total return exceeds the threshold over the relevant period then a
performance fee of a blended rate of 16.66 per cent of such excess to 31 March
2008, 13.33 per cent to 31 March 2009 and 10 per cent thereafter will be paid
to the Manager. The amount of any performance fee which is paid in an
accounting period shall be capped at 5 per cent of shareholders' funds for that
period.
During the financial year the threshold has been exceeded and a performance fee
of £1,436,000 is payable.
Environmental, Human Rights, Employee, Social and Community Issues
The Board recognises the requirement under Section 414 of the Act to detail
information about environmental matters (including the impact of the Company's
business on the environment), employee, human rights, social and community
issues; including information about any policies it has in relation to these
matters and effectiveness of these policies. As the Company has no employees
or policies in these matters this requirement does not apply.
Gender Diversity
The Board has an equal representation of male and female Directors, with the
current Board of Directors comprising two female and two male Directors.
The Manager has an equal opportunities policy and currently employs 34 men and
24 women.
Shareholder choice
The Board wishes to provide shareholders with a number of choices that enable
them to utilise their investment in Baronsmead VCT 2 in ways that best suit
their personal investment and tax planning and in a way that treats all
shareholders equally.
• Fund raising | From time to time the Company seeks to raise additional funds
by issuing new shares at a premium to the latest published net asset value to
account for issue costs. In December 2012, the Company's offer for
subscription to raise £5 million before costs was fully subscribed.
• Dividend Reinvestment Plan | The Company offers a Dividend Reinvestment Plan
which enables shareholders to purchase additional shares through the market in
lieu of cash dividends. Approximately 1,198,000 shares were bought in this way
during the year to 30 September 2013.
• Buy back of shares | From time to time the Company buys its own shares
through the market in accordance with its share price discount policy. The
Board has undertaken a review of this policy and will, subject to certain
conditions, seek to maintain a mid share price discount of approximately 5 per
cent to net asset value. This constitutes a revision to the Company's existing
policy of buying back shares through the market at an approximate 10 per cent
discount to the latest published net asset value. Further details are provided
in the Chairman's Statement. In the year to 30 September 2013, 1,005,000
shares were bought back representing 1.4 per cent of the shares in issue at 30
September 212 at an average price which represented a 3.9 per cent discount to
the latest published net asset value.
• Secondary market | The Company's shares are listed on the London Stock
Exchange and can be bought using a stockbroker or authorised share dealing
service in the same way as shares of any other listed company. Approximately
622,000 shares were bought by investors in the Company's existing shares in the
year to 30 September 2013.
On behalf of the Board
Clive Parritt,
Chairman
18 November 2013
Summary Investment Portfolio
Investment Classification at 30 September 2013
Sector by value Percentage
Business Services 40%
Consumer Markets 15%
Financial Services 2%
Healthcare & Education 12%
Technology, Media & Telecommunications
("TMT") 31%
Total Assets by value Percentage
Unquoted - loan note 34%
Unquoted - equity 14%
AIM, listed, PLUS & collective investment vehicles 44%
Listed interest bearing securities 4%
Net current assets principally cash 4%
Time Investments Held by value Percentage
Less than 1 year 7%
Between 1 and 3 years 27%
Between 3 and 5 years 7%
Greater than 5 years 59%
Table of Investments and Realisations
Investments in the year
Book
cost
Company Location Sector Activity £'000
Unquoted
investments
New
Create Health London Healthcare Provider of fertility 1,065
Limited & services
Education
Key Travel London Business Travel management company, 954
Limited Services focused on the non-profit
sector
Eque2 Limited Manchester TMT* Enterprise resource planning 877
(ERP) solutions provider to
the construction industry
Armstrong Manchester Business Provider of executive search 673
Craven Limited Services and business intelligence
services
Follow on
Impetus London Business Automotive consultancy and
Holdings Services outsourced service provider
Limited 230
Playforce Melksham Business Design and installation of 163
Holdings Services playground equipment
Limited
Valldata Group Melksham Business Payment processing to the 55
Limited Services charity sector
4,017
Total unquoted investments â€
AIM-traded &PLUS investments
New
Bioventix plc Farnham, Surrey Healthcare Develops sheep monoclonal 227
& antibodies
Education
Ideagen plc Matlock TMT* Compliance software solutions 225
Pinnacle Stirlingshire TMT* B2B telecoms and IT reseller
Technology
Group plc 169
One Media iP Buckinghamshire TMT* Content acquisition and 56
Group plc distribution
Follow on
Hangar8 plc Oxford Business Business jet management
Services 344
Tangent London Business Digital direct marketing
Communications Services
plc 254
TLA Worldwide London Business Baseball sports management
plc Services and marketing business 113
Accumuli plc Salford TMT* Managed IT security 95
EG Solutions Staffordshire TMT* Back office optimisation
plc software company 78
Green Business
Compliance plc Worcester Services Small business compliance 50
Paragon
Entertainment Consumer
Limited London Markets Visitor attraction business 45
Total AIM-traded & PLUS
investments 1,656
Total investments in the year 5,673
*Technology, Media and Telecommunications ("TMT").
†In addition, Consumer Investment Partners, an existing portfolio company
established in 2012 to seek investments in the Consumer Markets sector,
invested £0.96 million in Luxury for Less, an online bathroom products
retailing business.
Realisations in the year
30 September
First 2012 Overall
investment valuation Proceeds╪ multiple*
Company date £'000 £'000 return
Unquoted realisations
Full
Independent Living trade
Services Limited sale Sep 05 2,705 3,426 2.5
Kidsunlimited Group Loan
Limited repayment Jun 01 113 176 â€
Full
trade
MLS Limited sale Jul 06 1,036 984 2.8
Loan
Valldata Group Limited repayment Jan 11 450 540 1.2
Consumer Investment Loan
Partners Limited repayment Apr 12 45 45 1.0
Total Unquoted realisations 4,349 5,171
AIM-traded & listed realisations
Market
IDOX plc sale Jan 09 1,721 2,347 5.5
Market
Staffline Group plc sale Jul 00 889 1,575 6.0
Full Jun 07 557 874 2.8
trade
FFastFill plc sale
Full
trade
Active Risk Group plc sale May 10 90 126 0.8
Total AIM-traded & listed realisations 3,257 4,922
Total realisations in the year 7,606 10,093#
╪ Proceeds at time of realisation including redemption premium and interest.
* Includes interest / dividends received, loan note redemptions and partial
realisations accounted for in prior periods.
†Kidsunlimited Group Limited was realised in April 2008. As part of the
consideration, Baronsmead VCT 2 received £113,000 in loan stock, which was
redeemed in April 2013. The overall multiple return for the investment in
Kidsunlimited was 4.9 times original cost. #Proceeds of £2,000 were also
received in respect of Adventis Group plc and £2,000 in respect of Conclusive
Logic Limited, both of which were written off in a prior period.
Ten Largest Investments
The top ten investments by current value at 30 September 2013 illustrate the
diversity and size of investee companies within the portfolio. This financial
information is taken from publicly available information, which has been
audited by the auditors of the investee companies.
1. CABLECOM NETWORKING HOLDINGS LIMITED - Clevedon
All ISIS EP LLP managed funds
First investment: May 2007
Total cost: £5,600,000
Total equity held: 48.00%
Baronsmead VCT 2 only
Cost: £1,381,000
Valuation: £5,447,000
Valuation basis: Exit value
% of equity held: 10.56%
Year ended 30 September 2012 2011
£ million £ million
Sales: 15.2 12.2
EBITA: 1.9 1.4
Net Assets 0.3 0.3
No. of Employees: 68 61
(Source: CableCom Networking Holdings Limited, Report and Financial Statement
30 September 2012)
Note: This investment was sold after the year end.
2. NEXUS VEHICLE HOLDINGS LIMITED - Leeds
All ISIS EP LLP managed funds
First investment: February 2008
Total cost: £9,500,000
Total equity held: 56.00%
Baronsmead VCT 2 only
Cost: £2,367,000
Valuation: £4,748,000
Valuation basis: Earnings multiple
% of equity held: 12.32%
Year ended 30 September 2012 2011
£ million £ million
Sales: 36.5 38.3
EBITA: 3.3 4.3
Net Assets: 1.8 1.7
No. of Employees: 113 90
(Source: Nexus Vehicle Holdings Limited, Report & Financial Statements 30
September 2012).
3. STAFFLINE GROUP PLC - Nottingham
All ISIS EP LLP managed funds
First investment: July 2000
Total cost: £290,000
Total equity held: 4.42%
Baronsmead VCT 2 only
Cost: £145,000
Valuation: £3,213,000
Valuation basis: Last Traded Price
% of equity held: 2.21%
Year ended 31 December 2012 2011
£ million £ million
Sales: 367.0 288.3
EBITA: 10.7 10.3
Net Assets: 39.8 34.9
No. of Employees: 693 498
(Source: Staffline Group Plc, Report and Financial Statements 31 December
2012)
4. CSC (WORLD) LIMITED - Pudsey, Leeds
All ISIS EP LLP managed funds
First investment: January 2008
Total cost: £6,450,000
Total equity held: 40.03%
Baronsmead VCT 2 only
Cost: £1,606,000
Valuation: £2,838,000
Valuation basis: Exit value
% of equity held: 8.81%
Year ended 31 March 2012 2011
£ million £ million
Sales: 7.9 7.3
EBITA: 2.4 2.3
Net Liabilities: (2.0) (1.3)
No. of Employees: 59 58
(Source: Cobco 867 Limited, Financial Statements 31 March 2012)
5. KAFEVEND HOLDINGS LIMITED - Crawley
All ISIS EP LLP managed funds
First investment: October 2005
Total cost: £5,024,000
Total equity held: 66.50%
Baronsmead VCT 2 only
Cost: £1,252,000
Valuation: £2,569,000
Valuation basis: Discounted Offer
% of equity held: 15.79%
Year ended 30 September 2012 2011
£ million £ million
Sales: 19.1 18.4
EBITA: 2.5 1.9
Net Assets 2.2 1.5
No. of Employees: 97 105
(Source: Kafevend Holdings Limited, Directors Report and Financial Statements
30 September 2012)
6. IDOX PLC - London
All ISIS EP LLP managed funds
First investment: May 2002
Total cost: £1,641,000
Total equity held: 5.01%
Baronsmead VCT 2 only
Cost: £614,000
Valuation: £2,498,000
Valuation basis: Last traded price
% of equity held: 1.84%
Year ended 31 October 2012 2011
£ million £ million
Sales: 57.9 38.6
EBITA: 12.8 9.5
Net Assets: 38.9 34.4
No. of Employees: 467 363
(Source: IDOX Plc, Directors' Report and Financial Statements 31 October 2012).
7. CREW CLOTHING HOLDINGS LIMITED - London
All ISIS EP LLP managed funds
First investment: November 2006
Total cost: £5,395,000
Total equity held: 25.51%
Baronsmead VCT 2 only
Cost: £1,344,000
Valuation: £1,999,000
Valuation basis: Earnings Multiple
% of equity held: 6.08%
Year ended 28 October 2012 2011
£ million £ million
Sales: 48.5 40.7
EBITA: 3.5 3.3
Net Assets: 6.0 5.7
No. of Employees: 363 311
(Source: Crew Clothing Holdings Limited, Report and Financial Statements 28
October 2012)
8. NETCALL PLC - Hemel Hempstead
All ISIS EP LLP managed funds
First investment: July 2010
Total cost: £4,354,000
Total equity held: 20.50%
Baronsmead VCT 2 only
Cost: £869,000
Valuation: £1,968,000
Valuation basis: Bid price
% of equity held: 4.08%
Year ended 30 September 2013 2012
£ million £ million
Sales: 16.1 14.6
EBITA: 3.4 3.1
Net Assets: 16.9 15.5
No. of Employees: 141 123
(Source: Netcall plc, Annual Report and Accounts 30 June 2013)
9. INSPIRED THINKING GROUP LIMITED - Birmingham
All ISIS EP LLP managed funds
First investment: May 2010
Total cost: £3,200,000
Total equity held: 22.50%
Baronsmead VCT 2 only
Cost: £796,000
Valuation: £1,837,000
Valuation basis: Earnings Multiple
% of equity held: 4.95%
Year ended 31 August 2012 2011
£ million £ million
Sales: 32.7 21.5
EBITA: 1.6 1.4
Net Assets: 2.0 0.1
No. of Employees: 158 117
(Source: Inspired Thinking Group Holdings Limited, Report and Financial
Statements 31 August 2012)
10. FISHER OUTDOOR LEISURE HOLDINGS LIMITED - St Albans
All ISIS EP LLP managed funds
First investment: June 2006
Total cost: £5,700,000
Total equity held: 44.00%
Baronsmead VCT only
Cost: £1,423,000
Valuation: £1,682,000
Valuation basis: Earnings Multiple
% of equity held: 10.45%
Year ended 31 July 2012 2011*
£ million £ million
Sales: 32.7 43.6
EBITA: 0.1 2.7
Net (Liabilities)/assets: (0.8) 1.2
No. of Employees: 118 110
(Source: Fisher Outdoor Leisure Holdings Limited, Directors Report and
Financial Statements 31 July 2012)
*18 month period ended 31 July 2011. The Company changed its year end from 31
January to 31 July
EBITA: Earnings before interest, tax and amortisation
Extract from the Report of the Directors
The Chairman's Statement and the Corporate Governance statement in the Annual
Report form part of the Report of the Directors.
Results and Dividends
The Directors present the sixteenth Report and audited financial statements of
the Company for the year ended 30 September 2013.
Ordinary shares £'000
Profit on ordinary activities after taxation 10,325
Final dividend for 2012 of 5.0p per ordinary share (3,772)
paid on 18 January 2013
First interim dividend of 3.0p per ordinary share (2,254)
paid on 14 June 2013
Second interim dividend of 6.5p per ordinary share (4,882)
paid on 20 September 2013
Total dividends paid during the year (10,908)
Issue and Buy-Back of Shares
As a result of a top-up offer on 21 December 2012 the Company allotted
4,471,998 ordinary shares at a price of 111.80p representing 5.2 per cent of
the then issued share capital with an aggregate nominal value of £447,199.80
raising £5,000,000 of new funds in total. The terms of issue were set out in
the Offer document dated 20 November 2012 and the offer price was set on 21
December 2012
The Company also bought back 1,005,000 ordinary shares with a nominal value of
10p each to be held in treasury, representing an aggregate cost of £964,575.
200,000 ordinary shares were sold from treasury during the period. Shares will
not be sold from treasury at a discount wider than the discount prevailing at
the time the shares were initially bought back by the Company. The Company
holds 10,023,819 ordinary shares in treasury representing 11.75 per cent of the
issued share capital as at 18 November 2013. This was the maximum number of
shares held in treasury during the year.
Management
ISIS EP LLP manages the investments for the Company. The liquid assets within
the portfolio (being cash, gilts and other assets, which are not categorised as
venture capital investments for the purpose of the FCA's rules) have been
managed by FPPE LLP. This is a limited liability partnership, which is
authorised and regulated by the FCA and which has the same controlling members
as the Manager. The Manager has continued to act as the Manager of the Company
and as the Investment Manager of the Company's illiquid assets (being all
AIM-traded and other venture capital investments).
The Manager also provides or procures the provision of secretarial,
administrative and custodian services to the Company. The management agreement
may be terminated at any date by either party giving twelve months' notice of
termination. Under the management agreement, the Manager receives a fee of 2.0
per cent per annum of the net assets of the Company. If the management
agreement is terminated, the Manager is only entitled to the management fees
paid to it and any interest due on unpaid fees.
In addition, the Manager receives an annual secretarial and accounting fee of £
36,380 (linked to the movement in the UK Retail Price Index ("RPI")), subject
to annual review, plus a variable fee of 0.125 per cent of the net assets of
the Company which exceed £5 million. The annual secretarial and accounting fee
is subject to a maximum of £105,634 per annum (linked to the movement in RPI)
subject to annual review.
Annual running costs are capped at 3.5 per cent of the net assets of the
Company (excluding any performance fee payable to the Manager and irrecoverable
VAT), any excess being refunded by the Manager by way of an adjustment to its
management fee. The running cost as at 30 September 2013 was 2.49 per cent.
It is the Board's opinion that the continuing appointment of ISIS EP LLP on the
terms agreed is in the best interests of shareholders as a whole. The Board
believes that the knowledge and experience accumulated by the Manager in the
period since the launch of the first Baronsmead VCT in 1995 is reflected in
processes which are designed to find, manage and realise good quality growth
businesses.
Co-investment Scheme
The Co-investment Scheme was introduced in November 2004. Members of the
Manager's investment team invest their own capital into a proportion of the
ordinary shares of each and every unquoted investment made by the Baronsmead
VCTs. The shares held by the members of the Co-investment Scheme in any
portfolio company can only be sold at the same time as the investment held by
the Baronsmead VCTs is sold. In addition, any prior ranking financial
instruments, such as loan stock, held by the Baronsmead VCTs have to be repaid
in full together with any agreed priority annual return before any gain accrues
to the ordinary shares. This ensures that the Baronsmead VCTs achieve a good
priority return before profits accrue to the Co-investment Scheme.
The Board is keen to ensure that the Manager continues to have one of the best
investment teams in the VCT and private equity market place and considers the
scheme to be essential in order to attract, retain and incentivise the best
talent. The scheme is in line with current market practice in the private
equity industry and the Board believes that it aligns the interests of the
Manager with those of the Baronsmead VCTs since executives have to invest their
own capital in every unquoted transaction and cannot decide selectively in
which investments to participate. In addition the co-investment only delivers
a return after each VCT has realised a priority return built into the
structure.
The executives participating in the Co-investment Scheme subscribe jointly for
a portion (currently 12 per cent) of the ordinary shares available to the
Baronsmead VCTs in each unquoted investment. The level of participation was
increased from 5 per cent in 2007 when the Manager's performance fee was
reduced from 20 per cent to its current level of 10 per cent.
Since the formation of the scheme in 2004, 52 executives have invested a total
of £781k in 39 companies. At 30 September 2013 eleven of these investments
have been realised generating proceeds of £103m for the Baronsmead VCTs and £
5.1m for the Co-investment Scheme. For Baronsmead VCT 2 the average money
multiple on these eleven realisations was 2.5 times cost. Had the
co-investment shares been held instead by the Baronsmead VCTs that money
multiple would have been 2.7 times cost. Over the period of nine years (based
upon the current number of shares in issue) this equates to approximately 1.7p
per share.
The Board reviews the operation of the Co-investment Scheme at each quarterly
valuation meeting. The Co-investment Scheme was also independently reviewed
during the period by Singer Capital Markets who confirmed that the investments
were compliant with the Co-investment Scheme rules.
ISISEquity Partners - Advisory Fees
During the year to 30 September 2013, ISIS EP LLP received income of £146,000
(2012: £130,000) from investee companies in connection with advisory fees and
incurred abort fees of £1,000 (2012:£59,000), with respect to investments
attributable to Baronsmead VCT2.
Directors' fees of £203, 000 were received in relation to services provided to
companies in the investment portfolio during the year.
VCT Status Adviser
The Company has retained PricewaterhouseCoopers LLP ("PwC) as their VCT Tax
Status Advisors to advise it on compliance with VCT requirements. PwC review
new investment opportunities, as appropriate, and review regularly the
investment portfolio of the Company. PwC work closely with the Manager but
report directly to the Board.
Environment
The Company seeks to conduct its affairs responsibly and environmental factors
are, where appropriate, taken into consideration with regard to investment
decisions.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from the operations of
the Company, nor does it have responsibility for any other emissions producing
sources under the Companies Act 2006 (Strategic Report and Directors' Reports)
Regulations 2013, including those within our underlying investment portfolio.
Substantial Interests in Share Capital
At 18 November 2013 the Company was not aware of any beneficial interests
exceeding three per cent of the ordinary share capital in circulation.
Going Concern
After making enquiries, and bearing in mind the nature of the Company's
business and assets, the Directors consider that the Company has adequate
resources to continue in operational existence for the foreseeable future. In
arriving at this conclusion the Directors have considered the liquidity of the
Company and its ability to meet obligations as they fall due for a period of at
least twelve months from the date that these financial statements were
approved. As at 30 September 2013 the Company held cash balances & investments
in UK Gilts with a combined value of £5,874,000. Cash flow projections have
been reviewed and show that the Company has sufficient funds to meet both its
contracted expenditure and its discretionary cash outflows in the form of the
share buyback programme and dividend policy. The Company has no external loan
finance in place and therefore is not exposed to any gearing covenants.
Statement of Directors' Responsibilities in respect of the Annual Report and
the Financial Statements
The Directors are responsible for preparing the Annual Report and the Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK Accounting Standards and applicable law ("UK
GAAP").
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 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 and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration Report
and Corporate Governance Statement that complies with that law and those
regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website. Visitors
to the website should be aware that legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility Statement of the Directors in respect of the Annual Financial
Report
We confirm that to the best of our knowledge:
• the Financial Statements, prepared in accordance with UK Accounting
Standards, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company; and
• the Annual Report includes 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 they face.
• the report and accounts, taken as a whole, are fair, balanced, and
understandable and provide the necessary information for shareholders to assess
the company's performance, business model and strategy.
On behalf of the Board
Clive Parritt
Chairman
18 November 2013
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the years ended 30 September 2013 and 2012 but is
derived from those accounts. Statutory accounts for 2012 have been delivered to
the Registrar of Companies, and those for 2013 will be delivered in due course.
The Auditors have reported on those accounts; their report was (i) unqualified,
(ii) did not include a reference to any matters to which the Auditors drew
attention by way of emphasis without qualifying their report and (iii) did not
contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The
text of the Auditors' report can be found in the Company's full Annual Report
and Accounts at www.baronsmeadvct.co.uk
Income Statement
For the year ended 30 September 2013
2013 2012
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Unrealised gains on
movements in fair
value of investments 2.3 - 8,678 8,678 - 5,842 5,842
Realised gains on
disposal of
investments 2.3 - 1,535 1,535 - 750 750
Income 2.5 3,456 - 3,456 1,101 - 1,101
Investment management
fee 2.6 (368) (2,541) (2,909) (337) (1,011) (1,348)
Other expenses 2.6 (435) - (435) (381) - (381)
Profit on ordinary
activities before
taxation 2,653 7,672 10,325 383 5,581 5,964
Taxation on ordinary
activities 2.9 (505) 505 - (16) 16 -
Profit on ordinary
activities after
taxation 2,148 8,177 10,325 367 5,597 5,964
Return per ordinary
share:
Basic 2.2 2.89p 10.99p 13.88p 0.52p 7.93p 8.45p
All items in the above statement derive from continuing operations.
There are no recognised gains and losses other than those disclosed in the
Income Statement
The revenue column of the Income Statement includes all income and expenses.
The capital column accounts for the realised and unrealised profit or loss on
investments and the proportion of the management fee charged to capital.
Reconciliation of Movements in Shareholders' Funds
For the year ended 30 September 2013
2013 2012
Notes £'000 £'000
Opening shareholders' funds 72,433 64,999
Profit on ordinary activities after taxation 10,325 5,964
Net proceeds of share issues & buy-backs 3,944 3,284
Other costs charged to capital 3.2 (5) (10)
Dividends paid 2.4 (10,908) (1,804)
Closing shareholders' funds 75,789 72,433
Balance Sheet
As at 30 September 2013
2013 2012
Notes £'000 £'000
Fixed assets
Investments 2.3 72,865 69,118
Current assets
Debtors 2.7 1,965 310
Cash at bank and on deposit 2,875 3,465
4,840 3,775
Creditors (amounts falling due within one year) 2.8 (1,916) (460)
Net current assets 2,924 3,315
Net assets 75,789 72,433
Capital and reserves
Called-up share capital 3.1 8,534 8,087
Share premium account 3.2 7,809 3,531
Capital reserve 3.2 41,921 47,452
Revaluation reserve 3.2 17,274 12,742
Revenue reserve 3.2 251 621
Equity shareholders' funds 75,789 72,433
Net asset value per share
- Basic 2.1 100.63p 101.10p
- Treasury 2.1 99.88p 99.83p
The financial statements were approved by the Board of Directors on 18 November
2013 and were signed on its behalf by:
Clive Parritt Chairman)
Cash Flow Statement
For the year ended 30 September 2013
2013 2012
£'000 £'000
Operating activities
Investment income received 2,738 1,343
Deposit interest received 20 6
Investment management fees paid (1,449) (1,311)
Other cash payments (441) (375)
Net cash inflow/(outflow) from operating activities 868 (337)
Financial investment
Purchases of investments (36,620) (99,024)
Disposals of investments 42,131 100,857
Net cash inflow from financial investment 5,511 1,833
Equity dividends paid (10,908) (1,804)
Net cash outflow before financing (4,529) (308)
Financing
Net proceeds of share issues & buybacks 3,944 3,241
Other costs charged to capital (5) (10)
Net cash inflow from financing 3,939 3,231
(Decrease)/increase in cash (590) 2,923
Reconciliation of net cash flow to movement in net cash
(Decrease)/increase in cash (590) 2,923
Opening cash position 3,465 542
Closing cash at bank and on deposit 2,875 3,465
Reconciliation of profit on ordinary activities before
taxation to net cash inflow/(outflow) from operating
activities
Profit on ordinary activities before taxation 10,325 5,964
Gains on investments (10,213) (6,592)
(Increase)/decrease in debtors (700) 276
Increase in creditors 1,456 44
Income reinvested - (29)
Net cash inflow/(outflow) from operating activities 868 (337)
Notes to the Accounts
In preparing the 2013 financial statements, Baronsmead VCT 2 has made a number
of changes in structure, layout and wording in order to make the financial
statements less complex and more relevant for shareholders and other users.
We have grouped notes into sections under three key categories:
1. Basis of preparation
2. Investments, performance and shareholder returns
3. Other required disclosures
1. Basis of Preparation
Basis of accounting
These financial statements have been prepared under UK Generally Accepted
Accounting Practice ("UK GAAP") and in accordance with the Statement of
Recommended Practice ("SORP") for investment trust companies and venture
capital trusts issued by the Association of Investment Companies ("AIC") in
January 2009 and on the assumption that the Company maintains VCT status.
2. Investments, performance and shareholder returns
2.1 Net asset value per share
Number of shares Net asset value
per Net asset
share value
attributable attributable
2013 2012 2013 2012 2013 2012
number number pence pence £'000 £'000
Ordinary shares (basic) 75,314,950 71,647,952 100.63 101.10 75,789 72,433
Ordinary shares (including 85,338,769 80,866,771 99.88 99.83 85,236 80,730
treasury)
The treasury net asset value per share as at 30 September 2013 included
ordinary shares held in Treasury valued at the mid share price of 94.25p at 30
September 2013 (2012: 90.00p).
2.2 Return per share
Weighted average
number of Return per Net profit on ordinary
ordinary shares ordinary share activities after taxation
2013 2012 2013 2013 2013 2012
number number pence pence £'000 £'000
Revenue 74,397,698 70,544,594 2.89 0.52 2,148 367
Capital 74,397,698 70,544,594 10.99 7.93 8,177 5,597
Total 13.88 8.45 10,325 5,964
2.3 Investments
Purchases or sales of investments are recognised at the date of transaction.
Investments are measured at fair value. For AIM-traded and listed securities
this is either bid price or the last traded price, depending on the convention
of the exchange on which the investment is traded.
In respect of unquoted investments, these are valued at fair value by the
Directors using methodology which is consistent with the International Private
Equity and Venture Capital Valuation guidelines ("IPEV"). This means
investments are valued using an earnings multiple, which has a discount or
premium applied which adjusts for points of difference to appropriate stock
market or comparable transaction multiples. Alternative methods of valuation
will include application of an arm's length third party valuation, a provision
on cost or a net asset value basis.
Gains and losses arising from changes in the fair value of the investments are
included in the Income Statement for the period as a capital item. Transaction
costs on acquisition are included within the initial recognition and the profit
or loss on disposal is calculated net of transaction costs on disposal.
All investments are initially recognised and subsequently measured at fair
value. Changes in fair value are recognised in the income statement.
The methods of fair value measurement are classified into a hierarchy based on
reliability of the information used to determine the valuation.
• Level 1 - Fair value is measured based on quoted prices in an active market.
• Level 2 - Fair value is measured based on directly observable current market
prices or indirectly being derived from market prices.
• Level 3 - Fair value is measured using a valuation technique that is not
based on data from an observable market.
2013 2012
£'000 £'000
Level 1
Listed interest bearing securities 2,999 5,939
Investments traded on AIM 24,994 20,750
Investments listed on PLUS 346 -
Investments listed on LSE 1,901 1,526
30,240 28,215
Level 2
Collective investment vehicle (Wood Street Microcap Investment 6,140 4,183
Fund)
Level 3
Unquoted investments 36,485 36,720
72,865 69,118
Level 1 Level 2 Level 3
Interest Traded Collective
bearing Traded on Listed investment
securities on AIM PLUS on LSE vehicle Unquoted Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening book cost 5,939 17,338 - 1,536 3,525 28,038 56,376
Opening unrealised - 3,412 - (10) 658 8,682 12,742
appreciation/
(depreciation)
Opening valuation 5,939 20,750 - 1,526 4,183 36,720 69,118
Movements in the
year:
Purchases at cost 29,992 1,429 227 - - 4,017 35,665
Sales - proceeds (32,932) (4,926) - - - (4,273) (42,131)
-
realised gains/
(losses) on sales - 1,611 - - - (76) 1,535
Unrealised gains
realised during the
year - 2,215 - - - 1,931 4,146
Increase/(decrease)
in unrealised
appreciation - 3,915 119 375 1,957 (1,834) 4,532
Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865
Closing book cost 2,999 17,667 227 1,536 3,525 29,637 55,591
Closing unrealised
appreciation - 7,327 119 365 2,615 6,848 17,274
Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865
Equity shares - 24,994 346 1,901 6,140 10,907 44,288
Loan notes - - - - - 25,578 25,578
Fixed income 2,999 - - - - - 2,999
securities
Closing valuation 2,999 24,994 346 1,901 6,140 36,485 72,865
The gains and losses included in the above table have all been recognised in
the Income Statement above.
For Level 3 unquoted investments, the effect on fair value of changing one or
more assumptions to reasonably possible alternatives has been considered. The
portfolio has been reviewed and both downside and upside reasonable possible
alternatives have been identified and applied to the valuation of each of the
investments. The inputs flexed in determining the reasonably possible
alternative assumptions include the earnings stream and marketability
discount.
Applying the downside alternatives the value of the unquoted investments would
be £2.1 million or 5.8% lower. Using the upside alternatives the value would be
increased by £2.6 million or 7%.
2.4 Dividends
2013 2012
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Amounts recognised as
distributions to equity holders in
the year:
For the year ended 30 September
2013
- First interim dividend of 3.0p
per ordinary share paid on 14 June
2013 451 1,803 2,254 - - -
- Second interim dividend of 6.5p
per ordinary share paid on 20
September 2013 1,690 3,192 4,882 - - -
For the year ended 30 September
2012
- First interim dividend of 2.5p
per ordinary share paid on 15 June
2012 - - - - 1,804 1,804
- Final dividend of 5.0p per
ordinary share paid on 18 January
2013 377 3,395 3,772 - - -
2,518 8,390 10,908 - 1,804 1,804
2.5 Income
Interest income on loan notes and dividends on preference shares are accrued on
a daily basis. Provision is made against this income where recovery is
doubtful.
Where the terms of unquoted loan notes only require interest or a redemption
premium to be paid on redemption, the interest and redemption premium is
recognised as income once redemption is reasonably certain. Until such date
interest is accrued daily and included within the valuation of the investment.
Income from fixed interest securities and deposit interest is included on an
effective interest rate basis.
Dividends on quoted shares are recognised as income when the related
investments are marked ex-dividend and where no dividend date is quoted, when
the Company's right to receive payment is established.
2013 2012
Quoted Unquoted Quoted Unquoted
securities securities Total securities securities Total
£'000 £'000 £'000 £'000 £'000 £'000
Income from investmentsâ€
UK franked 505 - 505 323 - 323
UK unfranked 8 2,468 2,476 21 689 710
UK unfranked - - - -
reinvested - 29 29
Redemption premium - 455 455 - 33 33
513 2,923 3,436 344 751 1,095
Other income╪
Deposit income 14 6
Other income 6 -
Total income 3,456 1,101
Total income comprises:
Dividends 505 323
Interest 2,951 778
3,456 1,101
†All investments have been designated at fair value through profit or loss on
initial recognition, therefore all investment income arises on investments at
fair value through profit or loss.
╪ Other income on financial assets not designated fair value through profit or
loss.
2.6. Investment management fee and other expenses
All expenses are recorded on an accruals basis.
2013 2012
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 368 1,105 1,473 337 1,011 1,348
Performance fee - 1,436 1,436 - - -
368 2,541 2,909 337 1,011 1,348
Management fees are allocated 25 per cent income: 75 per cent capital derived
in accordance with the Board's expected split between long term income and
capital returns. Performance fees are allocated 100 per cent to capital.
The management agreement may be terminated by either party giving twelve months
notice of termination.
The Manager, ISIS EP LLP, receives a fee of 2 per cent per annum of the net
assets of the Company, calculated and payable on a quarterly basis.
The Manager is entitled to a performance fee if at the end of any calculation
period, the total return on shareholders' funds exceeds the threshold of UK
base rate plus 2 per cent (calculated on a compound basis). The Manager is
entitled to 10 per cent of the excess. The amount of any performance fee which
is paid in respect of a calculation period shall be capped at 5 per cent of
shareholders' funds at the end of the period.
Amounts payable to the Manager at the year end are disclosed in note 2.8.
Other expenses
2013 2012
£ £
'000 '000
Directors' fees 81 78
Secretarial and accounting fees paid to the Manager 134 125
Remuneration of the auditors and their associates:
- audit 22 22
- other services supplied pursuant to legislation (interim review) - 5
- other services supplied relating to taxation 6 11
- other services supplied relating to financial statements' 6 -
reorganisation
Other 186 140
435 381
Information on directors' remuneration is given in the directors' remuneration
table in the full Annual Report.
Charges for other services provided by the auditors in the year ended 30
September 2012 were in relation to the interim reviews and tax compliance work
(including iXBRL). The Audit Committee reviews the nature and extent of
non-audit services to ensure that independence is maintained. The Directors
consider that the auditors were best placed to provide such services.
2.7 Debtors
2013 2012
£'000 £'000
Prepayments and accrued income 1,010 310
Amounts paid future settlement 955 -
1,965 310
2.8 Creditors (amounts falling due within one year)
2012
2013 £
£'000 '000
Management, performance, secretarial and accounting fees due to the 1,859 397
Manager
Other creditors 57 63
1,916 460
2.9 Tax
UK corporation tax payable is provided on taxable profits at the current rate.
Provision is made for deferred taxation on all timing differences calculated at
the current rate of tax relevant to the benefit or liability.
The tax charge for the year is lower than the standard rate of corporation tax
in the UK for a company.
The differences are explained below:
2013 2012
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit on ordinary
activities before taxation 2,653 7,672 10,325 383 5,581 5,964
Corporation tax at 23.5% 624 1,803 2,427 100 1,451 1,551
(2012: 26 per cent)
Effect of:
Non-taxable gains - (2,400) (2,400) - (1,714) (1,714)
Non-taxable dividend (119) - (119) (84) - (84)
income
Other movements - 92 92 - 247 247
Tax charge/(credit) for the
year 505 (505) - 16 (16) -
At 30 September 2013 the Company had surplus management expenses of £2,349,443
(2012: £1,785,618) which have not been recognised as a deferred tax asset. This
is because the Company is not expected to generate taxable income in a future
period in excess of the deductible expenses of that future period and,
accordingly, the Company is unlikely to be able to reduce future tax
liabilities through the use of existing surplus expenses. Due to the Company's
status as a VCT, and the intention to continue meeting the conditions required
to obtain approval in the foreseeable future, the Company has not provided
deferred tax on any capital gains and losses arising on the revaluation or
disposal of investments.
3. Other Required Disclosures
3.1 Called-up share capital
Allotted, called-up and fully paid:
Ordinary shares £'000
80,866,771 ordinary shares of 10p each listed at 30 September 2012 8,087
4,471,998 ordinary shares of 10p each issued during the year 447
85,338,769 ordinary shares of 10p each listed at 30 September 2013 8,534
9,218,819 ordinary shares of 10p each held in Treasury at 30 September (922)
2012
(200,000) ordinary shares of 10p each sold during the year previously 20
held in treasury
1,005,000 ordinary shares of 10p each repurchased during the year and (101)
held in treasury
10,023,819 ordinary shares of 10p each held in treasury at 30 September (1,003)
2013
75,314,950 ordinary shares of 10p each in circulation* at 30 September 7,531
2013
* Carrying one vote each.
During the year the Company bought back 1,005,000 ordinary shares and sold from
treasury 200,000 ordinary shares representing 1.0 per cent of the ordinary
shares in issue at the beginning of the financial year.
There were no changes in share capital between the year end and when the
financial statements were approved.
Treasury shares
When the Company reacquires its own shares, they are held as treasury shares
and not cancelled.
Shareholders have authorised the Board to re-issue treasury shares at a
discount to the prevailing NAV subject to the following conditions:
- It is in the best interests of the Company;
- Demand for the Company's shares exceeds the shares available in the market;
- A full prospectus must be produced if funds raised are greater than €5m; and
- HMRC will not consider these 'new shares' for the purposes of the
purchasers' entitlement to initial income tax relief.
3.2 Reserves
Gains and losses on realisation of investments of a capital nature are dealt
with in the capital reserve. Purchases of the Company's own shares to be either
held in treasury or cancelled are also funded from this reserve. 75 per cent.
of management fees are allocated to the capital reserve in accordance with the
Board's expected split between long term income and capital returns.
Distributable reserves Non-distributable reserves
Capital Revenue Total Share Revaluation Total
reserve reserve premium reserve*
£'000 £'000 £'000 £'000 £'000 £'000
At 1 October 2012 47,452 621 48,073 3,531 12,742 16,273
Gross proceeds of
share issues - - - 4,553 - 4,553
Purchase of shares for
Treasury (964) - (964) - - -
Sale of shares from
Treasury - cost 190 - 190 - - -
Sale of shares from
Treasury - loss
(2) - (2) - - -
Expenses of share
issue and buybacks (5) - (5) (275) - (275)
Other costs charged to
capital (5) - (5) - - -
Reallocation of prior
year unrealised gains 4,146 - 4,146 - (4,146) (4,146)
Realised gain on
disposal of
investments # 1,535 - 1,535 - - -
Net increase in value
of investments # - - - - 8,678 8,678
Management fee
capitalised # (2,541) - (2,541) - - -
Taxation relief from
capital expenses # 505 - 505 - - -
Revenue return on
ordinary activities
after taxation # - 2,148 2,148 - - -
Dividends paid in the
year (8,390) (2,518) (10,908) - - -
At 30 September 2013 41,921 251 42,172 7,809 17,274 25,083
# The total of these items is £10,325,000 which agrees to the total profit on
ordinary activities.
* Changes in fair value of investments are dealt with in this reserve.
Distributable reserves include the net unrealised loss on investments whose
prices are quoted in an active market and deemed readily realisable in cash.
Share premium is recognised net of issue costs.
The Company does not have any externally imposed capital requirements.
3.3 Financial instruments risks
The Company's financial instruments comprise equity and fixed interest
investments, cash balances and liquid resources including debtors and
creditors. The Company holds financial assets in accordance with its investment
policy to invest in a diverse portfolio of UK growth businesses.
The Company's investing activities expose it to a range of financial risks.
These key risks and the associated risk management policies to mitigate these
risks are described below.
Market risk
Market risk includes price risk on investments and interest rate risk on
investments and other financial assets and liabilities.
Price risk
The investment portfolio is managed in accordance with the policies and
procedures described in the full Annual Report and Accounts.
Investments in unquoted stocks, AIM & PLUS quoted companies involve a higher
degree of risk than investments in the main market. The Company aims to reduce
this risk by diversifying the portfolio across business sectors and asset
classes.
Management performs continuing analysis on the fair value of investments and
the Company's overall market positions are monitored by the Board on a
quarterly basis.
2013 2012
5% 5% decrease
increase 5% increase 5% decrease
in share in share in share in share
price price price price
effect on effect on effect on effect on
% of total net assets net assets % of total net assets net assets
investment and profit and profit investment and profit and profit
£'000 £'000 £'000 £'000
LSE, AIM & 37 1,362 (1,362) 38 1,323 (1,323)
PLUS
Unquoted 50 1,824 (1,824) 53 1,836 (1,836)
Valuation methodology includes the application of earnings multiples derived
from either listed companies with similar characteristics or recent comparable
transactions. Therefore the value of the unquoted element of the portfolio may
also indirectly be affected by price movements on the listed exchanges.
Interest rate risk
The Company has the following investments in fixed and floating rate financial
assets:
2013 2012
Weighted Weighted
average average
Weighted time for Weighted time for
average which average which
Total interest rate Total interest rate
investment rate is fixed investment rate is fixed
£'000 % days £'000 % days
Fixed rate loan note 25,578 9.27 # 25,947 9.41 #
securities
Fixed interest instruments 2,999 0.23 14 4,699 0.18 10
Floating rate instrument - - - 1,240 - -
("OEIC")
Cash at bank & on deposit 2,875 - - 3,465 - -
31,452 35,351
# Due to the complexity of the instruments and uncertainty surrounding timing
of realisation the weighted average time for which the rate is fixed has not
been calculated.
Credit risk
Credit risk refers to the risk that counterparty will default on its obligation
resulting to a financial loss to the Company. The Investment Manager monitors
credit risk on an ongoing basis.
At the reporting date, the Company's financial assets exposed to credit risk
amounted to the following:
2013 2012
£'000 £'000
Investments in fixed rate instruments 2,999 4,699
Investments in floating rate instruments - 1,240
Cash at bank & on deposit 2,875 3,465
Interest, dividends and other receivables 1,965 310
7,839 9,714
Credit risk arising on fixed interest instruments is mitigated by investing in
UK Government Stock.
Credit risk on unquoted loan stock held within unlisted investments is
considered to be part of market risk as disclosed earlier in the note.
Credit risk arising on transactions with brokers relates to transactions
awaiting settlement. Risk relating to unsettled transactions is considered to
be small due to the short settlement period involved and the high credit
quality of the brokers used. The Board monitors the quality of service provided
by the brokers used to further mitigate this risk.
All the assets of the Company which are traded on a recognised exchange are
held by JP Morgan Chase ("JPM"), the Company's custodian. The Board monitors
the Company's risk by reviewing the custodian's internal controls reports as
described in the Corporate Governance section of this report.
The cash held by the Company is held by JPM and Lloyds TSB. The Board monitors
the Company's risk by reviewing regularly the internal control reports of these
banks. Should the credit quality or the financial position of either bank
deteriorate significantly the Investment Manager will seek to move the cash
holdings to another bank.
There were no significant concentrations of credit risk to counterparties at 30
September 2013 or 30 September 2012. No individual investment exceeded 7.2 per
cent. of the net assets attributable to the Company's shareholders at 30
September 2013 (2012: 6.5 per cent.)
Liquidity risk
The Company's financial instruments include investments in unquoted companies
which are not traded in an organised public market, as well as AIM and PLUS
traded equity investments, all of which generally may be illiquid. As a result,
the Company may not be able to liquidate quickly some of its investments in
these instruments at an amount close to their fair value in order to meet its
liquidity requirements, or to respond to specific events such as deterioration
in the creditworthiness of any particular issuer.
The Company's liquidity risk is managed on an ongoing basis by the Investment
Manager in accordance with policies and procedures in place as described in the
Extract from the Report of the Directors above. The Company's overall liquidity
risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable
securities to pay accounts payable and accrued expenses. At 30 September 2013
these investments were valued at £5,874,000 (2012: £9,404,000).
3.4 Related parties
Related party transactions include Management, Secretarial, Accounting and
Performance fees payable to the Manager, ISIS EP LLP, as disclosed in notes 2.6
and 2.8, and fees paid to the Directors as disclosed in note 2.6. In addition,
the Manager operates a Co-investment Scheme, detailed in the Extract from the
Report of the Directors above, whereby employees of the Manager are entitled to
participate in all unquoted investments alongside the Company.
3.5 Post balance sheet event
The Company's investment in CableCom Networking Holdings Limited was sold to a
financial buyer on 25 October 2013 for proceeds of £5,684,000 of which £
1,250,000 was rolled over into a new investment in CableCom alongside the
financial buyer and £740,000 into a bridging loan note that is expected to be
refinanced within twelve months.
A new investment of £955,000 was made in Carousel Logistics Limited, a provider
of bespoke logistics and supply chain solutions, on 2 October 2013.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for inspection
at the NSM, which is situated at: http://www.morningstar.co.uk/uk/NSM
Annual General Meeting
The Company's Annual General Meeting will be held on 18 December 2013 at
12.30pm at the Plaisterers' Hall, One London Wall, London, EC2Y 5JU.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.