Annual Financial Report

RNS Number : 3557I

Baronsmead Second Venture Trust PLC

02 December 2022

 

Baronsmead Second Venture Trust plc

Annual Report and Audited Financial Statements

for the year ended 30 September 2022

The Directors of Baronsmead Second Venture Trust plc are pleased to announce the Annual Financial Report for the year ended 30 September 2022. The Annual Report and Financial Statements can be obtained from the following website: www.baronsmeadvcts.co.uk

Financial Highlights

· Net Asset Value ("NAV") per share decreased 19.2 per cent to 68.1p, before the deduction of dividends, for the financial year ended 30 September 2022.

· NAV total return of 328.9p to shareholders for every 100.0p invested at launch (January 2001).

· Annual tax free dividend yield of 7.1 per cent based on 6.0p dividends paid (including proposed final dividend of 3.0p) and opening NAV of 84.3p.

· £23.1million of investments made into nine new and eleven follow-on opportunities during the year.

Our investment objective

Baronsmead Second Venture Trust plc (the "Company") is a tax efficient listed company which aims to achieve long-term investment returns for private investors, including tax free dividends.

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.

Dividend policy

· The Board will, where possible, seek to pay two dividends to shareholders in each calendar year, typically an interim dividend in September and a final dividend following the Annual General Meeting in February/March.

· The Board will use, as a guide, when setting the dividends for a financial year, a sum representing 7 per cent of the opening net asset value of that financial year.

Key elements of the business model

Access to an attractive, diverse portfolio

The Company gives shareholders access to a diverse portfolio of growth businesses.

The Company will make investments in growth businesses, whether unquoted or traded on AIM, which are substantially based in the UK in accordance with the prevailing VCT legislation. Investments are made selectively across a range of sectors.

The Manager's approach to investing

The Manager endeavours to select the best opportunities and applies a distinctive selection criteria based on:

· Primarily investing in parts of the economy which are experiencing long-term structural growth.

· Businesses that demonstrate, or have the potential for, market leadership in their niche.

· Management teams that can develop and deliver profitable and sustainable growth.

· Companies with the potential to become an attractive asset appealing to a range of buyers at the appropriate time to sell.

In order to ensure a strong pipeline of opportunities, the Manager invests in building deep sector knowledge and networks and undertakes significant proactive marketing to interesting target companies in preferred sectors. This approach generates a network of potentially suitable businesses with which the Manager maintains a relationship ahead of possible investment opportunities.

The Manager as an influential shareholder

The Manager is an engaged and supportive shareholder (on behalf of the Company) in both unquoted and significant quoted investments. For unquoted investments, representatives of the Manager often join the investee board.

The role of the Manager with investees is to ensure that strategy is clear, the business plan can be implemented and that the management resources are in place to deliver profitable growth. The intention is to build on the business model and grow the company into an attractive target able to be either sold or potentially floated in the medium term.

A more detailed explanation of how the investment policy and business model are applied, along with the full text of the investment policy, can be found in the Annual Report.

STRATEGIC REPORT

CHAIR'S STATEMENT

2022 has seen higher volatility and weakness in the markets, notably in Q3, with ongoing concerns around inflationary pressures, interest rate rises and the cost-of-living crisis exacerbated by the ongoing conflict in Ukraine. Against this backdrop, the Company's NAV per share decreased 19.2 per cent before dividend payments for the financial year.

Despite the drop in the value of the portfolio over the period, the Board continues to believe that, in aggregate, the fundamentals of the underlying portfolio companies remain robust and the growth prospects for the majority of investee companies continue to be positive.

In addition to this, the Board believes that the changes to the Manager's senior leadership of the investment team have enhanced the Manager's ability to identify and manage attractive early-stage unquoted investments.

Results

	Pence per ordinary share
NAV as at 1 October 2021 (after final dividend)	84.3
Valuation decrease (-19.2 per cent)	(16.2)
NAV as at 30 September 2022 before dividends	68.1
Less: Interim dividend paid on 9 September 2022	(3.0)
Proposed final dividend of 3.0p payable, after shareholder approval, on 3 March 2023	(3.0)
Illustrative NAV as at 30 September 2022 after proposed dividend	62.1

Portfolio review

At 30 September 2022, the Company's investment portfolio was valued at £128 million and comprised direct investments in a total of 85 companies of which 39 are unquoted and 46 are quoted companies. The Company's investments in the LF Gresham House UK Micro Cap Fund ("Micro Cap"), LF Gresham House UK Multi Cap Income Fund ("Multi Cap") and in the LF Gresham House UK Smaller Companies Fund ("Small Cap") were valued at £43 million at 30 September. These investments provide further diversity, giving investment exposure to an additional 75 AIM-traded and fully listed companies and thus spreading investment risk across some 160 portfolio companies.

During the 12 months to 30 September 2022, the underlying value of the unquoted portfolio decreased by 19 per cent and the portfolio of directly held AIM investments decreased by 20 per cent reflecting the difficult conditions experienced in the wider market. Both portfolio returns, whilst disappointing, compare favourably to the FTSE AIM All Share Index which decreased by 35 per cent for the period.

Our Micro Cap fund delivered a return of -32 per cent, and our Small Cap fund declined 18 per cent, compared to the IA UK Smaller Companies Sector which declined by 32 per cent. The Multi Cap fund declined by 9 per cent compared with the IA UK Equity Income Sector that declined by 8 per cent for the 12 months to 30 September 2022.

Investments and divestments

The Board is pleased to report that the Company has continued to make new investments during the year and has invested a total of £13 million in nine companies over the year. Further details of the new investments made are included in the Manager's review. The new investments in earlier stage opportunities may result in greater volatility in returns from the Company over time. However, the more mature, established portfolio of existing investments should assist in sustaining returns and dividends for shareholders as the new portfolio develops and grows. In addition to the number of holdings, the portfolio is well diversified by sector, with a tilt towards technology, healthcare, and to recurring revenue business models.

There have been several realisations in both the unquoted and quoted portfolio during the year, reflecting the Manager's continued focus on driving liquidity in the portfolio to create realised capital profits to fund current and future dividends for shareholders. For example, the sale of Carousel, in the unquoted portfolio, delivered total proceeds of £9.3 million for a gross money multiple of 5.0x cost.

The Manager also realised its investment in Ideagen, in the quoted portfolio, which delivered proceeds of £9.4 million for a total gross money multiple of 13.5x. The Investment Manager has once again made a select number of profitable partial realisations of Cerillion plc during the year, resulting in the receipt of proceeds of £1.5 million at an aggregate of 11.4x original invested cost in this listed company.

Sunset Clause

When State Aid approval of the UK's VCT and EIS schemes was given in 2015 a "sunset clause" was introduced for the schemes which means if the legislation is not renewed investors will no longer be able to claim initial tax relief on investments made after 5 April 2025 ("the Sunset Clause").

On Friday 23 September 2022 the Government announced as part of a "mini-budget" that "the government remains supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and sees the value of extending them in the future". Additionally, on 7 November 2022, as part of its Autumn Statement, the Government said "the Government remains supportive of the Enterprise Investment Scheme and Venture Capital Trusts and sees the value of extending them in the future". Given these statements, the general consensus in the VCT industry is that the Government will extend the provisions of the Sunset Clause. However, no further details have been provided as yet on the length of that extension, or any conditions or variations to the current VCT scheme that may be attached to any such extension.

The Board has engaged external legal advice to provide a strategic review on possible outcomes and will continue to monitor and report on any further Government announcements in future reports.

Dividends

The Board is pleased to declare a final dividend of 3.0p per share for the year to 30 September 2022, payable on 3 March 2023. This is in addition to the 3.0p interim dividend paid in September and means that the total dividends for the year are 6.0p. This is a 7.1 per cent yield based on the opening NAV of 84.3p and meets the target policy of 7 per cent of the NAV at the start of the year.

The Company has good levels of realised reserves to fund future dividends and the Manager continues to focus on selling investments and generating realised profits across the portfolio, which help to sustain the payment of dividends.

Environmental, Social & Governance ("ESG") matters

Environmental, social and governance analysis is embedded into the Company's investment processes by the Investment Manager in order to build and protect long-term value for investors. A framework based on 10 key ESG themes is used to structure analysis, monitor and report on ESG risks and opportunities across the lifecycle of investments. Further information in relation to the Investment Manager's integration of ESG factors in management of the Company's portfolio is set out in the full Strategic Report. Your Board is particularly pleased to note the focus of the Manager in this area.

Fundraising

In August 2022, the Board announced its intention to raise new funds to enhance the Company's resources available for new and follow-on investments over the next two to three years. The Company expects to launch the offer for subscription in January 2023.

Annual General Meeting ("AGM")

We look forward to holding our next AGM in person at 10.30 am on 1 February 2023 at Saddlers' Hall, 40 Gutter Lane, London, EC2V 6BR. As usual I will present my own review of the year and will then be joined by the Manager. We would be delighted if you would join us for light refreshments afterwards.

For any shareholders that do not wish to attend in person, we will be live streaming the AGM and Manager's presentation. Registration details for the live stream will be included in the Notice of AGM and on the Baronsmead website. In order to cover as many questions as possible, we encourage shareholders to submit any questions to the Board in advance of the meeting.

Outlook

The macroeconomic and equity market outlook continue to exhibit elevated levels of uncertainty as we appear to be at a paradigm shift from low inflation and low interest rates to higher inflation and higher interest rates and unwinding of Government stimulus as well as an equity rotation from growth to value that is well underway.

We anticipate this uncertainty will continue to drive periods of sentiment-driven volatility in equity markets well into next year. While we view this outlook with suitable caution, we also expect heightened volatility to drive attractive long-term investment opportunities and we remain vigilant for evidence of mispricing.

Despite the continuing potential economic headwinds, the Board continues to believe it is a good time to be investing in earlier stage, innovative and high-growth potential businesses looking to take advantage of changes in consumer behaviour and the disruption of traditional supply chains being catalysed by technology. The level of interesting investment opportunities being reviewed by the Investment Manager continues to be strong and the Board remains confident that the Investment Manager is suitably positioned to provide the necessary levels of support to the unquoted company portfolio through these difficult times. Despite the current economic outlook, where some portfolio companies are likely to face more difficulties than others, there continues to be an increase in existing high potential portfolio companies looking for follow on capital to support future growth.

Sarah Fromson

Chair

1 December 2022

MANAGER'S REVIEW

This year has seen a prolonged period of weakness in the public and private equity markets brought about by macroeconomic uncertainty and global events. Against this backdrop, the portfolio, whilst well diversified, with exposure to 160 quoted and unquoted companies, has delivered a decrease in net asset value total return of 19.2 per cent over the year.

PORTFOLIO REVIEW

Overview

The net assets of £213 million were invested as follows:

Asset class	NAV (£m)	% of NAV*	Number of investees**	% return in the year***
Unquoted	53	25	39	(19)
AIM-traded companies	75	35	46	(20)
LF Gresham House UK Micro Cap Fund	23	11	50	(32)
LF Gresham House UK Multi Cap Income Fund	14	7	41	(9)
LF Gresham House UK Smaller Companies Fund	6	3	38	(18)
Liquid assets ♯	42	19	N/A	-
Totals	213	100	214

*  By value as at 30 September 2022.

**  Includes investee companies with holdings by more than one fund. Total number of individual companies held is 160.

*** Return includes interest received on unquoted realisations during the year.

#  Represents cash, OEICs and net current assets

The tables below show the breakdown of new investments and realisations over the course of the year and below is a commentary on some of the key highlights in both the unquoted and quoted portfolios.

Investment activity - unquoted and quoted

The Company's investment strategy is primarily focused on companies operating in parts of the economy that we believe are benefiting from long-term structural growth trends and in sectors where we have deep expertise and network. The amount of capital invested in each business is matched to the scale, maturity and underlying risk profile of the company seeking investment.

During the year, £23.1 million was invested into 19 companies including nine new additions to the portfolio and eleven follow on investments in ten existing portfolio companies.

Six new unquoted investments were completed during the year into Popsa Holdings Ltd, Proximity Insight Holdings Ltd, Bidnamic, Fu3e Ltd, Focal Point Positioning Ltd and Orri Ltd. Below are descriptions of the new investments made:

· Popsa is a photobook mobile app which utilises proprietary machine learning ("ML") algorithms to dramatically shorten the time of creation

· Proximity Insight provides a cloud-based app for retail sales associates to engage and transact with customers in-store or online

· Bidnamic is a Google Shopping bid optimisation platform

· Fu3e is a collaborative project management and real time reporting platform focused for  real estate professionals

· Focal Point utilises proprietary ML algorithms to significantly improve satellite-based location sensitivity

· Orri is a clinically-led provider of eating disorder services.

Three new AIM quoted investments were made during the year into Skillcast, Aptamer Group and Oberon Investments:

· Skillcast is a vendor of financial risk and compliance software

· Aptamer is a developer of a platform technology with applications in the therapeutic and diagnostic areas of healthcare

· Oberon Investments is a wealth management and financial advisory firm

The Company made additional investments in ten existing portfolio companies, one quoted and nine unquoted, across the year. This is consistent with the investment strategy of continuing to back our high potential assets with further capital to support future growth. We anticipate the level of follow-on investment will continue to grow as the earlier stage portfolio continues to mature.

Unquoted portfolio

Performance

The unquoted portfolio decreased in value by 19 per cent during the year. Our portfolio companies have faced a challenging macroeconomic environment, including rising levels of inflation and interest rates and continued supply chain disruption relating to both the ongoing effects of the COVID-19 pandemic and the impact of conflict in Ukraine. In particular, this has started to impact the consumer facing businesses in the portfolio. However, we have seen robust performance from many of our technology, healthcare and services companies which continue to grow recurring or contracted revenues, albeit, in general, at a slower pace than has been forecast.

As Investment Manager we remain highly engaged with the management teams within the portfolio, sharing insight and best practice to help them manage both risk and spot opportunities in a quickly changing environment. We have continued to invest in our portfolio and in-house talent teams, which alongside our extensive network of earlier stage, high growth company experts, ensure we are well positioned to help the companies we invest in to navigate the challenges they face, whilst also continuing to develop and scale.

Divestments

The Company successfully realised its investment in Carousel Logistics in February 2022, delivering £9.3 million in proceeds and an initial investment return of 5.0x. Carousel is a pan-European logistics specialist, delivering high-value parts and products for performance and life-critical industries. The business grew significantly during the investment period, including expanding their international footprint both organically and through acquisition. In addition, the Company also successfully realised its investment in Happy Days in July 2022, delivering £3.2 million in proceeds and an initial investment return of 0.8x. Also, during the year, the Company fully divested its holding in Rainbird Technologies for no return on investment.

Quoted portfolio (AIM-traded investments)

Performance

The quoted portfolio decreased in value by 20 per cent during the year, giving up some of the strong gains made for shareholders in the prior year. This performance, should be viewed in the context of a challenging equity market environment globally, driven by macroeconomic and geopolitical uncertainty and headwinds which have resulted in losses across most asset classes. For reference the AIM market in the UK fell 35 per cent over the same period. Despite the adverse share price performances from many of the portfolio companies, the majority of the AIM portfolio remains in good financial health and is exposed to structural growth areas, providing some insulation from the deteriorating economic conditions.

The best performing investments all sit in the software sector with two benefitting from the elevated level of takeover activity in the UK public markets for much of the financial year. Cerillion, a provider of billing and charging software to the telecoms industry continued to deliver strong revenue and profit growth and upgraded expectations on the back of strong contract win momentum. Ideagen, a governance, risk and compliance software provider saw its share price increase by 10% over the year mainly due to a takeover approach from a vehicle backed by private equity firm Hg Capital, at a substantial premium. The takeover resulted in a full exit for Baronsmead funds at a multiple of 13.5 times original cost. Cloudcall, an internet telephony software company, also received a takeover approach from US private equity firm Xplorer Capital Management LLC resulting in a strong recovery in value following a period of operational underperformance, realising a return of 0.9 times original cost.

The largest detractors from performance were Netcall, a provider of cloud contact centre and business process automation software which was derated despite strong growth in revenue and profit during the period; TPXImpact which again was derated during the period although we note the business has subsequently downgraded its market estimates resulting in the CEO stepping down post year end; and Inspired, an energy procurement and optimisation consultancy which de-rated during the year despite delivering results in line with expectations and seeing strong increased demand for its services resulting from elevated energy prices following the conflict in Ukraine.

We closely monitor our AIM portfolio with a rolling programme of independent reviews of top AIM holdings and broadly continue to be positive on the long-term investment prospects of these companies. Many of the larger quoted investments have been long--term holdings. These companies are typically profitable, cash generative businesses with low levels of financial gearing and continue to have attractive long-term growth prospects.

Divestments

Proceeds totalled £13.7 million during the year following three full and one partial realisation. Ideagen was fully realised following a takeover by private equity firm Hg Capital, returning 13.5x cost in July 2022. The Company's investment in Cloudcall Group was also fully realised returning 0.9x cost. The opportunity to crystallise some more profits was taken for Cerillion plc; over the course of the year proceeds of £1.5 million were realised at 11.4x cost.

Collective Investment Vehicles

The Manager believes that the Company's investments in the LF Gresham House UK Micro Cap Fund ("Micro Cap"), LF Gresham House UK Multi Cap Income Fund ("Multi Cap"), and LF Gresham House UK Smaller Companies Fund ("Small Cap") are a core component of the Company's portfolio construction. These investments provide shareholders with additional diversification through exposure to an additional 75 underlying companies, as well as access to the potential returns available from a larger and more established group of companies that fall within the Manager's core area of expertise.

Over the year Micro Cap delivered a return of -32 per cent, Multi Cap delivered a return of -9 per cent and the Small Cap fund delivered -18 per cent.

Micro Cap and Multi Cap continue to be both highly rated by independent ratings agencies. Micro Cap's cumulative performance is currently top quartile within the IA UK Smaller Companies sector and is the fourth best performing fund over the past 10 years. Multi Cap's cumulative performance has been the top performing within the IA UK Equity Income sector over three years, five years and since launch in June 2017. Small Cap has also achieved top quartile cumulative performance since launch in 2019 and is the fourth best performing fund over the past three years and second best since launch.

Liquid assets (cash and near cash)

The Company had cash and liquidity OEICs of approximately £42 million at the year-end. This asset class is conservatively managed to take minimal or no capital risk.

ESG highlights

During the year we have conducted our second ESG survey of our unquoted portfolio companies, to identify how these companies think about ESG and which ESG data is already being reported and monitored. Further details on our ESG approach and policies can be found in the strategic report.

Outlook

Despite the current macroeconomic headwinds, the opportunity to invest and support growth in entrepreneurial earlier-stage businesses remains strong. Our focus on investing in parts of the economy which are experiencing structural growth and in sectors where we have extensive talent networks and domain expertise continues to identify attractive investment opportunities. With our support and guidance, many of our portfolio management teams continue to innovate to take advantage of the disruption in the market as a result of the economic downturn. We anticipate the rate of follow-on investment to increase across the portfolio as we support our successful companies to trade through the cycle and to continue to scale.

Several parts of the portfolio have faced challenges due to the macroeconomic environment, most notably our investments in companies that rely on consumer sentiment. Our investee companies are having to navigate the impact of wage inflation, rising energy prices and supply chain disruption. However, the portfolio continues to be highly diversified, and overall, is defensively positioned.

The Gresham House team, which consists of 21 investment professionals is well placed to take advantage of the opportunities that an uncertain economic environment will present. Our experienced portfolio and in-house talent teams continue to add value to our portfolio companies post investment. We remain confident in the ability of more agile, fast moving earlier stage companies to perform well in the current economic environment and in our ability to invest capital and deliver attractive long-term returns for the Company.

Gresham House Asset Management Ltd

Investment Manager

1 December 2022

Investments in the year

Company	Location	Sector	Activity	Book cost £'000
Unquoted investments New
Popsa Holdings Ltd	Surrey	Technology	Mobile-first photobook app provider	3,379
Fu3e Ltd	Sussex	Technology	Real-estate development project management platform	1,819
Proximity Insight Holdings Ltd	London	Technology	Platform for front-line sales associates of omni-channel retailers to engage with customers	1,152
Bidnamic	Yorkshire	Technology	Google shopping bid-optimisation software	921
Focal Point Positioning Ltd	Cambridgeshire	Technology	Research and development focused technology business focusing on global navigation and satellite systems	908
Orri Ltd	London	Healthcare & Education	Provider of intensive day care treatments for eating disorders	794
Follow-on
Panthera Biopartners Ltd	Yorkshire	Healthcare & Education	Recruitment services for clinical trials	2,598
Airfinity Ltd	London	Healthcare & Education	Provides real time life science intelligence as a subscription service	1,352
eConsult Health Ltd	Surrey	Healthcare & Education	Online consultation provider used by GP practices and hospitals	1,300
Yappy Ltd	Lancashire	Consumer Markets	Supplier of customisable pet products	1,059
Patchworks Integration Ltd	Nottinghamshire	Technology	Leading integration platform for fast-growing retail and ecommerce businesses	780
RevLifter Ltd	London	Technology	AI platform using advanced behavioural analytics to deliver tailored promotions to users	779
Custom Materials Ltd	London	Technology	Retailer of customisable products	655
Glisser Ltd	London	Business Services	Audience response software	330
Tribe Digital Holdings Pty Ltd	London	Technology	Influencer marketing platform	284
Total unquoted investments				18,110
AIM-traded investments New
Aptamer Group plc	Yorkshire	Healthcare & Education	Platform providing antibody alternatives to the pharma industry	2,390
Skillcast Group plc	London	Healthcare & Education	Compliance e-learning and regulatory technology services	817
Oberon Investments Group plc	London	Business Services	Corporate advisory business	742
Follow-on
Crossword Cybersecurity plc	London	Technology	Commercialisation of university research-based cyber security software and consulting	1,040
Total AIM-traded investments				4,989
Total investments in the year				23,099

Realisations in the year

Company		First Investment date	Original book cost* £'000	Proceeds‡ £'000	Overall multiple return
Unquoted realisations
Carousel Logistics Ltd	Full Trade Sale	Oct 13	2,336	9,333	5.0*
Happy Days Consultancy Ltd	Full Trade Sale	Apr 12	4,180	3,184	0.8
Rainbird Technologies Ltd	Full Trade Sale	Feb 19	789	0	0.0
Total unquoted realisations			7,305	12,517
AIM-traded realisations
Ideagen plc	Take over	Jan 13	720	9,358	13.5
CloudCall Group plc	Take over	Apr 14	3,214	2,900	0.9
Cerillion plc	Market sale	Jul 15	129	1,474	11.4
Mi-Pay Group plc	Liquidated	Nov 12	800	11	0.0
Total AIM-traded realisations			4,863	13,743
Total realisations in the year			12,168	26,260

#  Residual book cost at realisation date.

‡ Proceeds at time of realisation including interest.

*  Includes interest/dividends received, loan note redemptions and partial realisations accounted for in prior periods

Final Dividend

Subject to shareholder approval at the AGM on 1 February 2023, a final dividend of 3.0p per share will be paid on 3 March 2023 to shareholders on the register at 3 February 2023. The ex-dividend date will be 2 February 2023.

Annual General Meeting

The AGM will be held on 1 February 2023 at 10.30am at Saddlers' Hall, 40 Gutter Lane, London, EC2V 6BR. The Company intends to hold this AGM in person, however, we will also live stream the event for any shareholders who do not wish, or are unable, to attend in person. A separate Notice convening the AGM will be posted to shareholders. The Notice will include an explanation of the items to be considered at the AGM and will be uploaded to the Company's website in due course.

Further Information

The Annual Report and Accounts for the year ended 30 September 2022 will be available today on www.baronsmeadvcts.co.uk .

It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at  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.

LEI: 2138008D3WUMF6TW8C28

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N either 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.

 

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