DRAPER ESPRIT VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2020
31 July 2020
|31 Mar 2020
|31 Mar 2019
|Net asset value per share (“NAV”)^||46.0||56.7|
|Cumulative dividends paid since launch*||105.0||102.0|
|Total Return (NAV plus cumulative dividends paid per share)^||151.0||158.7|
|*Key Performance Indicator ^Alternative Performance Measure|
|Dividends in respect of financial year ended 31 March 2020|
|Interim dividend paid per share||1.5||1.5|
|Final dividend per share (payable on 23 October 2020)||1.5||1.5|
A full dividend history for the Company can be found at www.downing.co.uk.
I write this statement during an unprecedented period. The coronavirus pandemic has affected everybody and its full impact on the UK and global economies and society as a whole will not be clear for some time.
The Company’s focus has been to invest in knowledge-intensive growth technology businesses since the investment arrangements with Draper Esprit were put in place several years ago. These businesses are typically young and require significant support as they develop, but whereas the pandemic has created challenges for some portfolio companies, some of the businesses are well funded and positioned to take advantage of the changes that may arise from the pandemic. Economics are going to change. Draper Esprit’s probing for new investments may well meet those changes.
With the Company’s financial year end falling on 31 March 2020, these results incorporate investment valuations which take account of our estimate of the impact of the pandemic but benefit from the knowledge of events which have taken place after the year end where, for example, some portfolio companies have completed further funding rounds which has provided reassurance for their future prospects.
Net asset value and results
As at 31 March 2020, the Company’s Net Asset Value per share (“NAV”) stood at 46.0p, representing a decrease of 7.7p (13.6%) over the year after adding back dividends paid.
The Total Return to Shareholders who invested at the launch of the Company in 1998 (NAV plus cumulative dividends) now stands at 151.0p, compared to the original cost (net of income tax relief) of 80.0p per share. A summary of the position for Shareholders who invested in the Company’s various other fundraisings is included within the Annual Report.
The loss on ordinary activities after taxation for the year was £6.3 million (2019: £1.3 million profit), comprising a revenue return of £7,000 (2019: £171,000) and a capital loss of £6.3 million (2019: £1.2 million profit).
Venture capital investments
During the year, the Company made five new investments and four follow-on investments totalling £5.2 million. A small number of realisations also occurred during the year. These included a successful exit from Podpoint Holdings Limited at 2.2 times original cost. In total, realisations generated proceeds of £2.2 million and a gain for the year of £120,000.
Further details on the investment activity can be found in the Investment Manager’s report.
At the year end, the Company held a portfolio of 24 active investments valued at £26.0 million.
The split of the investment portfolio between growth technology investments introduced by Draper Esprit and the older legacy investments is shown below:
|Portfolio split as at 31 March 2020|
|Percentage of portfolio||40.2%||35.4%||24.4%||100.0%|
The newer growth technology investments are now the largest part of the portfolio. This proportion will continue to grow as further funds are raised and invested, and when there are further realisations from the legacy portfolio.
The Board has reviewed the investment valuations at the year end and, in drawing its conclusions, has given consideration to the impact of the pandemic and its likely aftermath.
The largest adjustments to the valuations are highlighted as follows:
Endomagnetics Limited (trading as Endomag), a business which has developed a magnetic tracking system for cancer tumours. was increased in value by £1.6 million as the business has continued to make good progress.
Back Office Technology Limited (trading as Form3), a cloud payment system provider, was increased in value by £990,000 as the business has continued to develop well and attract attention from potential investors.
Freetrade Limited, the online investing app, has increased in value by £660,000, as the business continues to progress and successfully completed a new funding round in May.
StreetTeam Software Limited (trading as Pollen) operates a social ticketing system for travel, festivals and nightlife. The pandemic has unsurprisingly had a major impact on this business, although it has been able recently to complete a funding round that will help it through to when more normal times might return. The valuation has been reduced by £3.0 million.
Fords Packaging Topco Limited (trading as Fords Packaging Systems) makes capping and sealing systems primarily for the food and beverage industry. The business has performed well, but the pandemic has caused a significant disruption with new contract activity having to be delayed. Prospects of the business resuming at its previous levels of trading when more normal conditions return are good, however a provision of £1.4 million has been made at the year end in view of the current dip in profits.
Lyalvale Express Limited, a leading producer of shotgun ammunition, has reduced in value by £1.1 million due to unclear sales figures during this uncertain period.
Several of the Company’s investments are quoted on AIM and are valued at their share prices at 31 March 2020. The valuation of the investment in Access Intelligence plc fell by £663,000 over the year and Fulcrum Utility Services Limited by £595,000.
Overall, the unrealised valuation movements on the portfolio resulted in a net decrease of £5.7 million for the year.
Further commentary on the portfolio, together with a schedule of additions, disposals and details of the ten largest investments can be found within the Investment Manager’s Report and Review of Investments.
Although the valuation of the portfolio has been impacted by the pandemic, the Company still has sufficient liquid funds for its requirements, and which allows it to pay a final dividend. A dividend of 1.5p per share is being proposed to be paid on 23 October 2020 to Shareholders on the register at 25 September 2020. This will bring the total dividends paid in respect of the year to 3.0p.
The Company launched a new offer for subscription in October 2019. To date the offer has raised and allotted £11.0 million which provides the Company with additional funds to support existing portfolio companies and take advantage of new opportunities. All shares in connection with the offer were allotted after the year end.
The Company also undertook an offer for subscription which closed in May 2019 having raised £7m and was fully subscribed.
The Company has a policy of purchasing its own shares that become available in the market at a discount of approximately 5% to the latest published NAV, subject to regulatory and liquidity constraints.
Any Shareholders who are considering selling their shares will need to use a stockbroker. Such Shareholders should ask their stockbroker to register their interest in selling their shares with Shore Capital.
During the year the Company purchased a total of 686,994 shares at an average price of 53.34p per share. Resolution 12 will be proposed at the AGM, to renew the authority for the Company to purchase its own shares.
After 15 years of service, Barry Dean has decided to retire as a non-executive director of the Company and will step down and not seek re-election at the forthcoming AGM. On behalf of the Board, I would like to thank Barry for the substantial contribution he has made throughout a period which has seen many changes to the Company. I and my colleagues will miss his consistently insightful input and wish him well for the future.
The Board has no immediate plans to appoint a replacement but will keep this under review.
Annual General Meeting (“AGM”)
With social distancing still expected to be a significant issue for some time, and considering the safety and wellbeing of our Shareholders, the board is planning to take advantage of the government’s legislation regarding AGMs. Therefore, this years’ AGM will be a closed meeting and Shareholders will not be able to attend.
The closed AGM will take place on 22 September 2020 at 11 am.
Three items of special business are proposed at the AGM:
-one in respect of the authority to buy back shares as noted above; and
-two in respect of the authority to allot shares.
Full details of the business to be conducted at the AGM is included in the Notice of the AGM at the back of this Report. Shareholders are encouraged to submit their votes using the Form of Proxy which can be scanned and emailed to [email protected] Furthermore, the Board continues to welcome questions from Shareholders which can be sent to the same email address. The Board and Manager will address the questions that arise in an AGM statement that the Company will release after the meeting.
The coronavirus pandemic has produced challenging conditions for most businesses and individuals everywhere. Businesses in some sectors will be badly impacted and it is clear that some will not survive the disruption and economic turmoil. However, businesses in some areas, particularly technology, are better placed to cope with this situation and may even be able to take advantage of the changes to the world that we might see.
The general economic uncertainty will be a threat to all businesses but the Draper Esprit team and Elderstreet will continue to work closely with all portfolio companies to ensure they are supported as much as they can be.
As a result of the recent offer for subscription, the Company has a reasonable level of liquid funds which will allow it to support existing portfolio businesses where there is a compelling case. Economic downturns can often ultimately be some of the most successful times for investing and the VCT currently has £15.7 million of cash. Over the next year we expect to develop our portfolio by employing further funds in new investment opportunities alongside Draper Esprit plc. Not all of these investments will be successful, and some will take time to prove their worth, but we believe, in the long term, the Company will have the potential to deliver attractive returns.
The next update for Shareholders will be Half-Yearly Report to 30 September 2020, which we expect to be published in December.
INVESTMENT MANAGER’S REPORT
The co-investment arrangements with Draper Esprit plc, to share deal flow, management experience and investment opportunities, continue to be positive from both an investment and a fundraising perspective. We now define the Company as having two portfolios; a new technology portfolio invested alongside other Draper Esprit funds and a legacy portfolio assembled before the Draper Esprit arrangement.
It has been a busy year for the management team, with a total of five new investments having been completed alongside four follow-on investments, and one disposal. £2.4 million was invested into the five new companies, and £2.8 million into the four follow-on investments. Two of those follow on investments were led by third party new investors at higher valuations than the VCT invested. No further investment was made into the legacy portfolio.
In the period Podpoint was sold to EDF realising proceeds of £1.9 million. This disposal realised a 2.2x return and represented an IRR of over 60% on an investment made in July 2018. This is the first disposal made from the Draper technology portfolio.
Post the year end two new investments have been made into the fin-tech sector totalling £3.5 million, and three further follow-ons totalling £1.8 million have been made. One of the new fin-tech investments, Thought Machine, has been highlighted in a recent review by CB Insights, a tech market intelligence company, as a future ‘Unicorn’ i.e. a company with the potential to be valued at a billion pounds. Two of the follow-ons were led either by third party institutional venture capital and/or strategic investors at higher valuations than the VCT originally invested.
As Managers of the VCT we were confident of the upward trend in the portfolio valuations until the advent of the Covid crisis. In line with the general market, we have seen mixed results in trading across our portfolio companies.
As a result, the Company recorded a 7.7p decrease in the Total Return (net asset value including cumulative dividends), from 158.7p to 151.0p. The NAV per share fell to 46.0p after paying dividends of 3.0p during the year. This fall in NAV of 13.6% broadly reflects the drop in equity markets generally, although is less sharp partly because of the proportion of the funds held in cash.
Within the Draper Esprit portfolio five new investments, alongside the Draper Esprit group funds, were made into the following companies:
Cloud native mass distribution computing platform
Zero commission stock trading platform
Home Smart devices support platform
|United Authors Publishing (t/a Unbound)
Digital book publisher
Emotion AI recognition technology
These investments were all made alongside Draper Esprit funds and often included other corporate and venture capitalists. This corroborates the strategy of investing alongside a strong syndicate of investors. In all of these new investments, a member of the Draper Esprit group is a representative on the portfolio company board. At the year end the total Draper technology portfolio consisted of 18 companies, (having exited PodPoint in the period), and a further two new Fintech deals have completed as at the end of June. As we flagged in last year’s report we expect there to be substantial follow-on investments into the Draper Esprit businesses currently in the portfolio.
A highlight of the 19/20 investment vintage is Freetrade. the zero commission stock trading platform, which has raised a further £6m from new investors and grown Assets under Administration by over 350%.
From the 2018/19 vintage investments two have attracted good follow on investors. Back Office Technology (t/a Form 3), the cloud native fintech payments processor, has raised a substantial round including large tier 1 corporate investors who are keen to use the technology within their enterprise.
Evonetix, developing DNA gene synthesis technology, raised a further round led by US venture investors Foresite Capital. Existing investors, Draper Esprit, DCVC (Data Collective), the Morningside group, Providence Investment Company, Cambridge Consultants Ltd, Rising Tide Fund, and Civilization Ventures, also all participated in the round. The managers believe the breadth of the syndicate investors in this and other Draper investments is a unique and positive aspect of the Draper Esprit VCT.
On the downside, a large provision has been taken for StreetTeam (t/a Pollen). While the company raised a further round from incumbent investors in May 2020 at a valuation that is higher than the year end carrying value would reflect, the business has a large exposure to the travel and entertainment market, and a cautious approach has been taken when valuing this company. The Managers are hopeful that this is a temporary reduction in value and that an early recovery from the Covid slowdown will lead to a mark-up in valuation in the near future.
Within the legacy portfolio, Fords Packaging Topco Limited (‘Fords’), an exporter of capping and sealing technology products, continues to perform well albeit the Covid crisis has resulted in a temporary stalling of orders as engineers have not been able to travel globally. The order book remains healthy and we believe that Fords still has the potential to provide further upside.
There are two meaningful AIM companies in the legacy portfolio; Access Intelligence and Fulcrum. Over the year these saw a decrease of 22% (adjusted for the receipt of £300k in repaid loans). However, at the end of June 2020 we have seen a further 28% recovery in their value, an increase of £1.1 million.
Lyalvale Express Limited, the shotgun cartridge manufacturer, has seen an 8% year on year sales drop. While good management has ensured the profit has remained stable the Covid crisis has resulted in little visibility on the coming years shooting market. The valuation has therefore been reduced at the year end.
After the year end the VCT allotted £11.0 million of Shares under the 2019 prospectus Offer. This Offer remains open until the end of July unless extended by the Board. The Manager remains confident that the new funds raised over the past fundraising seasons can be invested within the qualifying timeframe. The Board is also planning to launch a further Offer later this year.
In summary, it has been a busy period for the Company which has seen a significant level of new investment and follow on activity. Whilst the new Draper Esprit investments offer some exciting prospects for the future, a number of these businesses are still at an early stage and it is too soon to judge whether they will ultimately be successful, although several are showing good promise.
While the Covid pandemic and forthcoming Brexit negotiations provide substantial headwinds to the global economy, investments into technology retain their ability to scale quickly and harness good gross margins. We remain cautiously optimistic for the portfolio and restate our belief that technology retains the attributes of good potential for future growth.
Elderstreet Investments Limited
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 31 March 2020. All companies are registered in England and Wales, with the exception of Fulcrum Utility Services Limited, which is registered in the Cayman Islands.
|% of portfolio
|Ten largest venture capital investments (by value)|
|Fords Packaging Topco Limited||2,433||5,626||(1,353)||16.3%|
|Access Intelligence plc*||2,586||3,742||(663)||10.9%|
|IESO Digital Health Limited||1,900||1,900||–||5.5%|
|Back Office Technology Limited||700||1,690||990||4.9%|
|Lyalvale Express Limited||1,915||1,428||(1,143)||4.1%|
|Sweepr Technologies Limited||515||526||11||1.5%|
|Other venture capital investments|
|Fulcrum Utility Services Limited*||386||514||(595)||1.5%|
|Push Dr Limited||1,756||501||(1,255)||1.5%|
|Roomex UK Limited||616||463||(153)||1.3%|
|United Authors Publishing Limited||442||442||–||1.3%|
|RealEyes Holding Limited||430||430||–||1.3%|
|Hadean Supercomputing Limited||400||400||–||1.2%|
|IXL PremFina Limited||756||378||(378)||1.1%|
|Light Blue Optics Limited||483||327||(155)||0.9%|
|StreetTeam Software Limited||2,503||140||(3,042)||0.4%|
|Ocelot Realisations Limited (formerly Baldwin & Francis Ltd)||1,534||–||–||–|
|Uvenco UK plc*||1,326||–||–||–|
|Location Sciences Group plc*||860||–||(7)||–|
|Kellan Group plc*||657||–||(2)||–|
|The National Solicitors Network Limited||501||–||–||–|
|The QSS Group Limited||268||–||–||–|
|RB Sport & Leisure Holdings plc||188||–||–||–|
|Infoserve Group plc||128||–||–||–|
|EDO Consulting Limited||125||–||–||–|
|Cash at bank and in hand||8,422||24.4%|
All venture capital investments are unquoted unless otherwise stated
*Quoted on AIM
Investment movements for the year ended 31 March 2020
|Venture capital investments||£’000|
|StreetTeam Software Limited||1,218|
|Push Dr Limited||1,032|
|Sweepr Technologies Limited||515|
|United Authors Publishing Limited||442|
|RealEyes Holding Limited||430|
|IESO Digital Health Limited||400|
|Hadean Supercomputing Limited||400|
|Light Blue Optics Limited||171|
1 April 2019
|Proceeds||Profit/(loss) vs cost||Realised gain|
|Access Intelligence plc*||300||300||300||–||–|
|Venture Capital Investments|
|Pod Point Holdings Limited||860||1,745||1,865||1,005||120|
*Quoted on AIM
Directors’ responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the Strategic Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102).
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 judgements and accounting estimates that are reasonable and prudent;
-state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;
-prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
-prepare a director’s report, a strategic report and director’s remuneration report which comply with the requirements of the Companies Act 2006.
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 are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.
for the year ended 31 March 2020
|Year ended 31 March 2020||Year ended 31 March 2019|
|Gains/(losses) on investments||–||(5,626)||(5,626)||–||1,817||1,817|
|Investment management fees||(212)||(636)||(848)||(196)||(588)||(784)|
|Return/(loss) on ordinary activities before tax||7||(6,262)||(6,255)||171||1,154||1,325|
|Tax on return/(loss)||–||–||–||–||–||–|
|Return/(loss) attributable to equity shareholders, being total comprehensive income for the period||7||(6,262)||(6,255)||171||1,154||1,325|
|Basic and diluted return/(loss)
All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards (“FRS 102”). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in October 2019 by the Association of Investment Companies (“AIC SORP”).
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2020
reserve – realised
|For the year ended 31 March 2019|
|At 1 April 2018||3,194||533||22,054||1,828||452||5,515||3,331||(187)||36,720|
|Total comprehensive income||–||–||–||–||–||1,571||(417)||171||1,325|
|Transfer between reserves*||–||–||–||–||(2,649)||1,317||1,194||138||–|
|Cancellation of Share Premium||–||–||(25,625)||–||25,625||–||–||–||–|
|Transactions with owners|
|Issue of new shares||308||–||3,571||–||–||–||–||–||3,879|
|Share issue costs||–||–||–||–||(153)||–||–||–||(153)|
|Purchase of own shares||(66)||66||–||–||(730)||–||–||–||(730)|
|At 31 March 2019||3,436||599||–||1,828||22,545||8,403||2,174||(16)||38,969|
|For the year ended 31 March 2020|
|At 1 April 2019|
|Total comprehensive income||–||–||–||–||–||(5,746)||(516)||7||(6,255)|
|Transfer between reserves*||–||–||–||–||(3,281)||1,760||1,521||–||–|
|Transactions with owners|
|Issue of new shares||595||–||6,388||–||–||–||–||–||6,983|
|Share issue costs||–||–||–||–||(185)||–||–||–||(185)|
|Purchase of own shares||(34)||34||–||–||(366)||–||–||–||(366)|
|At 31 March 2020||3,997||633||6,388||1,828||18,713||4,417||776||(9)||36,743|
*A transfer of £1,760,000 (2019: £1,317,000), representing impairment losses during the year, as well as cumulative unrealised gains on investments which were disposed of during the year has been made from the Capital reserve – unrealised to the Capital Reserve – realised. A transfer of £1,521,000 (2019: £1,194,000), representing realised gains on investment disposals plus capital expenses in the year, has been made from Capital Reserve – realised to the Special reserve. A transfer of £nil (2019: £25,625,000), from the cancellation of Share premium, has been made from the Share Premium account to the Special reserve.
at 31 March 2020
|Cash at bank and in hand||8,422||10,455|
|Creditors: amounts falling due within one year||(190)||(212)|
|Net current assets||10,648||10,291|
|Capital and reserves|
|Called up share capital||3,997||3,436|
|Capital redemption reserve||633||599|
|Share premium account||6,388||–|
|Capital reserve – unrealised||4,417||8,403|
|Capital reserve – realised||776||2,174|
|Total equity shareholders’ funds||36,743||38,969|
|Basic and diluted net asset value per share||46.0p||56.7p|
STATEMENT OF CASH FLOWS
for the year ended 31 March 2020
|Cash flow from operating activities|
|(Loss)/profit on ordinary activities before taxation||(6,255)||1,325|
|Losses/(gains) on investments||5,626||(1,817)|
|Increase in debtors||(2,403)||71|
|Increase in creditors||16||(5)|
|Net cash outflow from operating activities||(3,016)||(426)|
|Cash flow from investing activities|
|Purchase of investments||(5,208)||(6,889)|
|Proceeds from disposal of investments||2,165||856|
|Net cash outflow from investing activities||(3,043)||(6,033)|
|Cash flow from financing activities|
|Equity dividends paid||(2,403)||(2,072)|
|Proceeds from share issue||6,983||3,879|
|Share issue costs||(165)||(173)|
|Purchase of own shares||(389)||(707)|
|Net cash inflow from financing activities||4,026||927|
|Net decrease in cash||(2,033)||(5,532)|
|Cash and cash equivalents at start of year||10,455||15,987|
|Cash and cash equivalents at end of year||8,422||10,455|
|Cash and cash equivalents comprise|
|Cash at bank and in hand||8,422||10,455|
|Total cash and cash equivalents||8,422||10,455|
NOTES TO THE ACCOUNTS
for the year ended 31 March 2020
1. Accounting policies
Draper Esprit VCT plc (“the Company”) is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales. The Company is a premium listed entity on the London Stock Exchange.
Basis of accounting
The Company has prepared its financial statements in accordance with the Financial Reporting Standard 102 (“FRS 102”) and in accordance with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” issued in October 2019 (“SORP”) and with the Companies Act 2006.
After reviewing the Company’s forecasts and projections, the Directors have a reasonable expectation that the major cash outflows of the Company (most notably investments, share buybacks and dividends) are within the Company’s control and therefore the Company has sufficient cash to meet its expenses and liabilities when they fall due. The impact of COVID-19 has been considered, more detail on these considerations can be found within the Corporate Governance report. As such, the Board confirms that the Company has adequate resources to continues in operational existence for at least 12 months from the date of approval of the financial statements. The Company therefore continues to adopt the going concern basis in preparing its financial statements.
Presentation of Income Statement
In order to better reflect the activities of a venture capital trust, and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.
Judgement in applying accounting policies and key sources of estimation uncertainty
Investments are designated as “fair value through profit or loss” assets, upon acquisition, due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed, with a view to selling after a period of time, in accordance with the Company’s documented Investment Policy.
Of the Company’s assets measured at fair value, it is possible to determine their fair values within a reasonable range of estimates. The fair value of an investment upon acquisition is deemed to be cost. Thereafter, investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”) together with FRS 102 sections 11 and 12.
Listed fixed income investments and investments quoted on AIM and the Main Market are measured using bid prices in accordance with the IPEV.
For unquoted instruments, fair value is established using the IPEV. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:
-Industry valuation benchmarks;
-Discounted cash flows or earnings (of underlying business);
-Discounted cash flows (from the investment);
-Net assets; and
-Calibrating to the price of a recent investment.
The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value as explained in the investment accounting policy above.
Where an investee company has gone into receivership, liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised. Permanent impairments in the value of investments are deemed to be realised losses and held within the Capital Reserve – Realised.
Gains and losses arising from changes in fair value are included in the Income Statement for the period as a capital item and transaction costs on acquisition or disposal of the investment expensed.
It is not the Company’s policy to exercise significant influence over investee companies. Therefore, the results of these companies are not incorporated in the Income Statement, except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that do not require portfolio investments to be accounted for using the equity method of accounting.
The key source of estimation uncertainty is the selection of a multiple to be applied when valuing unquoted companies. Whilst there is a degree of subjectivity in the process of selecting a multiple, the Manager undertakes a rigorous internal valuations process which involves challenging all relevant valuation inputs. The Board then challenges the proposed valuations once this process is complete.
Dividend income from investments is recognised when the Shareholders’ rights to receive payment have been established, normally the ex-dividend date.
Interest income is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection. Where previously accrued income is considered unrecoverable a corresponding bad debt expense is recognised.
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:
-Expenses which are incidental to the acquisition of an investment are deducted as a capital item.
-Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
-Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating investment manager’s fees, 75% to capital and 25% to revenue as permitted by the SORP. The allocation is in line with the Board’s expectation of long term returns from the Company’s investments in the form of capital gains and income respectively.
-Performance incentive fees arising are treated as a capital item.
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company’s effective rate of tax for the accounting period.
Due to the Company’s status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company’s investments which arise.
Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.
A deferred tax asset is only recognised to the extent that it is probable there will be taxable profits in the future against which the asset can be offset.
Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at call with banks with an original maturity of three months or less.
Dividends payable are recognised as distributions in the financial statements when the company’s liability to make payment has been established, typically once declared by the Board or approved by Shareholders at the AGM.
Issue costs in relation to the shares issued are deducted from the special reserve.
The Company has one reportable segment as the sole activity of the Company is to operate as a VCT and all of the Company’s resources are allocated to this activity.
2. Basic and diluted return per share
|Basic and diluted (loss)/return per share||(7.8p)||1.9p|
|Return per share based on:|
|Net revenue return for the financial year (£’000)||7||171|
|Net capital gains/(losses) for the financial year (£’000)||(6,262)||1,154|
|Total Return/(loss) for the financial year (£’000)||(6,255)||1,325|
|Weighted average number of shares in issue||80,113,600||69,241,683|
As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share. The return per share disclosed, therefore, represents both basic and diluted return per share.
3. Basic and diluted net asset value per share
|31 March 2020||31 March 2019|
|Number in issue as at 31 March||Net asset value||Net asset value|
As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset value per share. The net asset value per share disclosed therefore represents both basic and diluted net asset value per share.
4. Principal Risks
The Company’s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company’s operations are:
-Credit risk; and
The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.
The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year-end are provided in the Annual Report.
As a VCT, the Company is exposed to investment risks in the form of potential losses that may arise on the investments it holds in accordance with its Investment Policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.
The key investment risks to which the Company is exposed are:
-Investment price risk; and
-Interest rate risk.
The Company has undertaken sensitivity analysis on its financial instruments, split into the relevant component parts, taking into consideration the economic climate at the time of review in order to ascertain the appropriate risk allocation.
Investment price risk
Investment price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company’s investment objectives. It represents the potential loss that the Company might suffer through investment price movements in respect of quoted investments, and changes in the fair value of unquoted investments that it holds.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers and on liquidity funds at rates based on the underlying investments. Investments in loan notes and fixed interest investments attract interest predominately at fixed rates. A summary of the interest rate profile of the Company’s investments is shown below.
Interest rate risk profile of financial assets and financial liabilities
There are three levels of interest which are attributable to the financial instruments as follows:
-“Fixed rate” assets represent investments with predetermined yield targets and comprise fixed interest and loan note investments.
-“Floating rate” assets predominantly bear interest at rates linked to Bank of England base rate and comprise cash at bank and Cash Trust investments.
-“No interest rate” assets do not attract interest and comprise equity investments, loans and receivables (excluding cash at bank) and other financial liabilities.
The Company monitors the level of income received from fixed, floating and non-interest rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.
The Bank of England base rate has been 0.75% per annum since August 2018. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and Total Return of the Company.
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan notes in investee companies, investments in fixed income securities, cash deposits and debtors.
The Manager manages credit risk in respect of loan notes with a similar approach as described under interest rate risk on the previous page. In addition, the credit risk is partially mitigated by registering floating charges over the assets of certain investee companies. The strength of this security in each case is dependent on the nature of the investee company’s business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.
Cash is mainly held at Bank of Scotland plc, with a balance also maintained at Royal Bank of Scotland plc, both of which are A-rated financial institutions. Consequently, the Directors consider that the risk profile associated with cash deposits is low.
There have been no changes in fair value during the year that can be directly attributable to changes in credit risk.
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company normally has a relatively low level of creditors (31 March 2020: £190,000, 31 March 2019: £212,000) and has no borrowings. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company’s exposure to liquidity risk is minimal.
The Company’s liquidity risk is managed by the Investment Manager, in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.
5. Related party transactions
Michael Jackson is a Director of Elderstreet Investments Limited which provides investment management services to the Company. During the year, £848,000 (2019: £784,000) was due in respect of these services. No performance incentive fees were due to Elderstreet Investments Limited in respect of the year under review (2019: £nil). As at 31 March 2020, £nil (2019: £nil) was outstanding and payable.
Nicholas Lewis is a partner of Downing LLP, which provides administration services to the Company. During the year, £57,500 (2019: £50,000) was due to Downing LLP in respect of these services. As at 31 March 2020, £7,500 (2019: £nil) was outstanding and payable.
During 2015, as a result of changes to the VCT rules, the Company was unable to convert its existing loans in Uvenco UK plc (formerly SnackTime plc). Following advice from specialist VCT advisors, the Company sold the loans to the Investment Manager, who converted the loans into equity. Under the terms of the transaction, the Company is due sums equal to 75% of any disposal proceeds that the Investment manager may receive on the shares. The market value of those shares is nil and accordingly the debtor due from the Investment Manager is nil.
6. Events after the end of the reporting period
Since the year end, the Company allotted 25,854,564 Ordinary Shares of 5p each at an average price of 42.23p per Ordinary Share under the terms of the Offer for Subscription dated October 2019. The aggregate consideration for the shares was £11.0 million.
ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company’s statutory financial statements in accordance with section 434 Companies Act 2006 for the period ended 31 March 2020, but has been extracted from the statutory financial statements for the period ended 31 March 2020, which were approved by the Board of Directors on 31 July 2020 and will be delivered to the Registrar of Companies following the Company’s Annual General Meeting. The Independent Auditor’s Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s498(2) and (3) of the Companies Act 2006.
The statutory accounts for the period ended 31 March 2020 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the period ended 31 March 2020 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 6th Floor, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD, and will be available for download from www.downing.co.uk.