DRAPER ESPRIT VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2019
24 JULY 2019
| 31 Mar 2019
| 31 Mar 2018
|Net asset value per share (“NAV”)||56.7||57.5|
|Cumulative dividends paid since launch||102.0||99.0|
|Total Return (NAV plus cumulative dividends paid per share)||158.7||156.5|
|Dividends in respect of financial year ended 31 March 2019|
|Interim dividend paid per share||1.5||1.5|
|Final dividend per share (payable on 25 October 2019)||1.5||1.5|
A full dividend history for the Company can be found at www.downing.co.uk.
I am pleased to present the Company’s Annual Report for the year ended 31 March 2019.
A number of new investments were made during the year, as the arrangements with Draper Esprit plc have continued to provide new investment opportunities to the Company.
Partnership with Draper Esprit plc
Draper Esprit plc (“Draper Esprit”), a highly-regarded technology investment manager, has purchased 30% of Elderstreet Investments Limited (“Elderstreet”) with a view to acquiring the remaining 70% in the future. In order to reflect this and the close working relationship between Draper Esprit and Elderstreet, the name of the Company was changed on 10 January 2019.
The Board considers this to be a very positive step for the VCT, as it is now better aligned with Draper Esprit funds with which it is co-investing.
As at 31 March 2019, the co-investment arrangements with Draper Esprit had already contributed £12.4 million of VCT Qualifying technology investments to the portfolio. In addition, since the year end investments totalling £2.4 million have been made into four technology businesses, three of which are existing VCT portfolio companies. Also, at the date of this report a further £1.6 million has been committed to two new technology businesses.
Shareholders should anticipate that the trend of significant investment activity in new technology businesses will continue, and that the Company’s portfolio will become increasingly focused on technology businesses, a good proportion of which will have knowledge-intensive status. The technology businesses in which the Company will continue to invest will typically sit within the following subsectors:
- Consumer Technology: companies with exceptional growth opportunities in international markets that are underpinned by new consumer facing products, innovative business models and proven execution capabilities;
- Enterprise Technology: companies developing the software infrastructure, applications and services that drive productivity improvements, convenience and cost reduction for enterprises;
- Hardware and Deep Technology: companies developing different technologies that underpin advances in computing, consumer electronics and other industries; and
- Healthcare and Wellness: companies leveraging digital and other technologies to create new products and services for the health and wellness market.
In addition to a typical focus on four key technology subsectors, the businesses in which the VCT will continue invest will typically have the following characteristics:
- A strong, balanced and well-motivated management team;
- Investments where the Manager can typically be an active investor and have a board or observer position;
- products or services which have the potential to sustain a competitive advantage; and
- reasonable prospects of achieving a trade sale or stock market flotation.
The detailed Investment Policy of the Company is set out in the Strategic Report, on page 18 of the Annual Report.
As I have outlined, the close relationship with Draper Esprit has transformed the Company into being a very active investor in young technology businesses. The pipeline of deals from Draper Esprit continues to produce attractive new investment opportunities. The Board also remains mindful that existing portfolio companies will need to be properly supported to maturity.
For these reasons, the Board is planning to launch a new Offer for Subscription, seeking to raise approximately £20 million. The offer is expected to launch in the early autumn and will provide investors with exposure to the potential rewards of investing in young technology businesses, with all the tax benefits from the VCT wrapper.
Resolutions 10 and 11 will be proposed at the forthcoming AGM, to allow the Company to allot Shares and waive pre-emption rights as part of the above Offer.
During the year end 31 March 2019, the Company undertook a further fundraising Offer, which reached its full capacity of £7.0 million and closed on 10 May 2019.
Net asset value and results
As at 31 March 2019, the Company’s Net Asset Value per share (“NAV”) stood at 56.7p, representing an increase of 2.2p (3.8%) 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 158.7p, 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 on page 2 of the Annual Report.
The profit on ordinary activities after taxation for the year (2018: 15-month period) was £1.3 million (2018: loss of £1.65 million), comprising a revenue return of £171,000 (2018: £92,000) and a capital return of £1.2 million (2018: loss of £1.7 million).
Venture capital investments
During the year, the Company made one follow on investment and nine new investments totalling £6.9 million. A small number of realisations also occurred during the year, generating proceeds of £856,000 and a gain over opening value of £246,000.
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 33 Venture Capital investments valued at £28.7 million. The top ten investments, six of which are new investments alongside Draper Esprit funds, constituted 58.2% of the overall value of the portfolio as at 31 March 2019.
The split of the investment portfolio between new Draper Esprit partnered investments and legacy investments is shown below:
|Portfolio split as at 31 March 2019|
|Percentage of portfolio||31.7%||41.6%||26.7%||100.0%|
New investments constituted 31.7% of the portfolio as at 31 March 2019. The Board expects this percentage to increase over time as Draper Esprit’s pipeline continues to provide new investment opportunities for the VCT.
The Board has reviewed the investment valuations at the year end and some adjustments have been made accordingly.
The most significant valuation movement was in respect of Lyalvale Express Limited, a leading producer of shotgun ammunition in the UK. The VCT’s investment in the Company has been reduced in value by £1.3m as a result of declining sales volumes from what is proving to be a difficult market. The valuation decrease was partially offset by the dividend income of £218,000 received from the company during the year.
The largest valuation increase was in respect of Fords Packaging Topco Limited (trading as Fords Packaging Systems). The business is continuing to develop innovative packaging solutions and outperform budget expectations, resulting in a valuation uplift of £1.2 million.
Several of the Company’s investments are quoted on AIM and such investments have also been revalued at the year end to reflect their quoted prices. The most significant revaluation movement of the AIM investments was a £1.1 million uplift to Access Intelligence plc. The investee company published several positive updates in the year, causing the share price to increase. On the contrary, Fulcrum Utility Services Limited fell in value by £840,000.
StreetTeam Software Limited and Pod Point Holdings Limited have both completed further funding rounds at prices exceeding that at which the VCT originally invested, resulting in valuation uplifts of £678,000 and £885,000 respectively.
In view of the most recent changes to the VCT Regulations, the Company is no longer permitted to provide further funding to Baldwin & Francis Limited. The future of the business is therefore uncertain and the carrying value of the VCT’s investment has been reduced to zero as a result.
Overall, the unrealised valuation movements on the portfolio resulted in a net uplift of £1.6 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 on pages 7 to 15 of the Annual Report.
The Board is proposing a final dividend of 1.5p per share, to be paid on 25 October 2019 to Shareholders on the register at 27 September 2019. This will bring the total dividends paid in respect of the year to 3.0p.
Historically the Company has repurchased Shares at a discount of approximately 7.5% to NAV. In order to better align the Share Buyback Policy with the expectations of the market, the Board has taken the decision to amend the level of discount set. As such, the Company will now be buying in Shares at a discount of approximately 5% to the latest published NAV, subject to regulatory and liquidity constraints. This revised policy took effect from 1 April 2019.
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 1,325,000 shares at an average price of 55.7p per share. Resolution 12 will be proposed at the AGM, to renew the authority for the Company to purchase its own shares.
Annual General Meeting (“AGM”)
The forthcoming AGM of the Company will be held on 24 September 2019 at 20 Garrick Street, London, WC2E 9BT at 11:00 a.m.
Notice of the meeting is at the end of this document. Three items of Special Business are proposed; one ordinary resolution and two special resolutions in relation to the allotment of Shares and Share Buybacks.
The focus for the Board and Manager will be on continuing to work alongside Draper Esprit to deploy the proceeds of the recent fundraising. Shareholders should therefore expect to see a similar level of new investment activity over the coming year.
I look forward to meeting Shareholders at the AGM and to updating them in the next Half-Year Report to 30 September 2019, 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 legacy portfolio assembled before the Draper Esprit arrangement and a new technology portfolio invested alongside other Draper Esprit funds.
It has been a busy year for the management team, with a total of nine new investments having been completed alongside one follow-on, one partial exit and one full exit. £6.9 million was invested into nine new technology companies and one existing legacy portfolio company. A further £2.4 million, comprising one new and three follow-on investments, was invested after the year end date. The full exit and partial exit were completed from the legacy portfolio.
Over the year the Company recorded a 2.2p increase in the total return (net asset value including cumulative dividends), from 156.5p to 158.7p. The NAV per share fell by 0.8p to 56.7p after paying dividends of 3.0p during the year.
Within the legacy portfolio Fords Packaging Topco Limited (‘Fords’), an exporter of capping and sealing technology products, continues to perform well and we expect the company to report its highest turnover and order book (for ten years) in its final results to 30 June 2019. The year end valuation has been increased by £1.2 million to reflect this. We believe that Fords still has the potential to provide further upside.
Alongside other investors, we continued to support AIM quoted Access Intelligence plc (‘Access’) in its growth path and invested a further £0.6 million during the year. Access is at a transformational stage following a series of successful acquisitions that have accelerated product development to produce the leading reputation management platform for PR, public affairs and influencer marketing under the Vuelio brand. At the November 2018 year end revenue had increased by 10.2% year-on-year to £8.89 million and the Annual Contract Value base increased by 45% to £12.4 million.
Lyalvale Express Limited has seen year on year sales drop by 4% but the drop in profits has exceeded this as sales of higher margin products have suffered. The valuation has been reduced at the year end.
A continued difficult international trading environment for Baldwin & Francis has resulted in poor performance. As the VCT is not permitted to provide further funding to the business a 100% provision has been made against the investment.
In July 2018 we realised c.23% of our original shareholding in AIM quoted Fulcrum Utility Services plc. At this time the share price was trading well, meaning that the proceeds from the partial exit exceeded the cost of the entire original shareholding. Since then the share price has continued to decline on the back of external market headwinds affecting the award and build out of larger electrical projects. The company expects these to remain and continue into 2020, however the company remains profitable and pays an annual dividend.
SparesFinder Limited was also sold in the year and we received the remaining escrow from the sale of Concorde Limited in 2017. Total proceeds from all of these exits were £0.9 million.
Within the Draper Esprit portfolio nine new investments, alongside the Draper Esprit group funds, were made into the following companies:
Cancer detection and tracing technology
| Pod Point
Installation of electric vehicle charging points
Complaints resolution software
DNA synthesis and synthetic biology technology
| IXL Premfina
Insurance broker credit software platform
| Form3 (Back Office Technology)
Cloud native payments connectivity and settlement
B2B hotel booking portal
Legal spend software
Equity fundraising platform
Together, the investments above total £6.3 million into nine separate companies. 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.
Whilst we have only invested into these new companies in the last year, several are already showing good sales momentum, namely Pod Point, Crowdcube and Resolver. The highlights from the existing Draper Esprit portfolio are StreetTeam and Endomag, both of which are progressing well against their respective plans.
The Manager remains confident that the new funds raised over the past fundraising seasons can be invested within the qualifying timeframe. Alongside new technology investments, we expect there to be substantial follow-on investments into the Draper Esprit businesses currently in the portfolio.
After the year end the VCT allotted the full £7.0 million of Shares permitted under the 2018 non-prospectus Offer, which closed in May 2019. The Board is also planning to launch a further Offer later this year, with the intention of raising around £20 million.
In summary, it has been a busy period for the Company which has seen a significant level of new investment 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.
The current trajectory across the portfolio is generally positive and while external factors such as Brexit provide an unpredictable backdrop, we remain cautiously optimistic that the portfolio has potential for future growth.
Elderstreet Investments Limited
REVIEW OF INVESTMENTS
Portfolio of investments
The following investments were held at 31 March 2019. 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||6,979||1,213||17.8%|
|Access Intelligence plc *||2,886||4,705||1,141||12.0%|
|Lyalvale Express Limited||1,915||2,570||(1,333)||6.6%|
|StreetTeam Software Limited||1,286||1,964||678||5.0%|
|Pod Point Holding Limited||860||1,745||885||4.6%|
|IESO Digital Health Limited||1,500||1,500||–||3.9%|
|Fulcrum Utility Services Limited *||386||1,110||(839)||2.8%|
|Other venture capital investments|
|IXL PremFina Limited||756||756||–||1.9%|
|Push Dr Limited||724||724||–||1.9%|
|Back Office Technology Limited||700||700||–||1.8%|
|Roomex UK Limited||616||616||–||1.6%|
|Light Blue Optics Limited||311||311||–||0.8%|
|Servoca plc *||333||120||(108)||0.3%|
|Location Sciences Group plc* (formerly Proxama plc)||860||7||1||–|
|Kellan Group plc*||657||2||(5)||–|
|Baldwin & Francis Limited||1,534||–||(422)||–|
|Uvenco UK plc*||1,326||–||(36)||–|
|The National Solicitors Network Limited||501||–||–||–|
|The QSS Group Limited||268||–||–||–|
|RB Sport & Leisure Holdings plc||188||–||–||–|
|Infoserve Group plc||128||–||–||–|
|EDO Consulting Limited (formerly Sift Digital Limited)||125||–||(48)||–|
|Cash at bank and in hand||10,455||26.7%|
All venture capital investments are unquoted unless otherwise stated
* Quoted on AIM
Investment movements for the year ended 31 March 2019
|Venture capital investments|
|Pod Point Holding Limited||860|
|IXL PremFina Limited||756|
|Back Office Technology Limited||700|
|Roomex UK Limited||616|
|Access Intelligence plc *||553|
|Cost||Value 01/04/18||Proceeds||Profit vs cost||Realised gain|
|Fulcrum Utility Services Limited *||114||576||633||519||57|
|Venture Capital Investments|
|Lyalvale Property Limited||300||–||–||(300)||–|
* 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).
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.
The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein.
By order of the Board
for the year ended 31 March 2019
|Year ended 31 March 2019||Period ended 31 March 2018|
|Gains/(losses) on investments||–||1,817||1,817||–||(1,074)||(1,074)|
|Investment management fees||(196)||(588)||(784)||(198)||(596)||(794)|
|Return/(loss) on ordinary activities before tax||171||1,154||1,325||92||(1,744)||(1,652)|
|Tax on return/(loss)||–||–||–||–||–||–|
|Return/(loss) attributable to equity shareholders, being total comprehensive income for the period||171||1,154||1,325||92||(1,744)||(1,652)|
|Basic and diluted return/(loss) per share||0.2p||1.7p||1.9p||0.2p||(3.1p)||(2.9p)|
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 February 2018 by the Association of Investment Companies (“AIC SORP”).
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2019
|For the 15 month period ended 31 March 2018|
|At 1 January 2017||1,852||485||5,452||1,828||2,058||3,161||8,088||336||23,260|
|Total comprehensive income||–||–||–||–||–||(1,831)||87||92||(1,652)|
|Transfer between reserves*||–||–||–||–||(572)||4,185||(3,613)||–||–|
|Transactions with owners|
|Issue of new shares||1,390||–||16,602||–||–||–||–||–||17,992|
|Share issue costs||–||–||–||–||(498)||–||–||–||(498)|
|Purchase of own shares||(48)||48||–||–||(536)||–||–||–||(536)|
|At 31 March 2018||3,194||533||22,054||1,828||452||5,515||3,331||(187)||36,720|
|For the year ended 31 March 2019|
|At 1 April 2018|
|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|
*A transfer of £1,317,000 (2018: £4,185,000), representing impairment losses during the year, as well as cumulative unrealised gains on investments which were disposed of during the year (2018: period), has been made from the Capital reserve – unrealised to the Capital Reserve – realised. A transfer of £1,194,000 (2018: £572,000), 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 £25,625,000 (2018: £nil), from the cancellation of the Share premium, has been made from Share premium to the Special reserve.
at 31 March 2019
|31 Mar 2019||31 Mar 2018|
|Cash at bank and in hand||10,455||15,987|
|Creditors: amounts falling due within one year||(212)||(179)|
|Net current assets||10,291||15,892|
|Capital and reserves|
|Called up share capital||3,436||3,194|
|Capital redemption reserve||599||533|
|Share premium account||–||22,054|
|Capital reserve – unrealised||8,403||5,515|
|Capital reserve – realised||2,174||3,331|
|Total equity shareholders’ funds||38,969||36,720|
|Basic and diluted net asset value per share||56.7p||57.5p|
STATEMENT OF CASH FLOWS
for the year ended 31 March 2019
|31 Mar 2019||31 Mar 2018|
|Cash flow from operating activities|
|Profit/(loss) on ordinary activities before taxation||1,325||(1,652)|
|(Gains)/losses on investments||(1,817)||1,074|
|Decrease in debtors||71||258|
|Decrease in creditors||(5)||26|
|Net cash outflow from operating activities||(426)||(294)|
|Cash flow from investing activities|
|Purchase of investments||(6,889)||(5,572)|
|Proceeds from disposal of investments||856||4,439|
|Net cash outflow from investing activities||(6,033)||(1,133)|
|Cash flow from financing activities|
|Equity dividends paid||(2,072)||(1,846)|
|Proceeds from share issue||3,879||17,992|
|Share issue costs||(173)||(498)|
|Purchase of own shares||(707)||(536)|
|Net cash inflow from financing activities||927||15,112|
|Net (decrease)/increase in cash||(5,532)||13,685|
|Cash and cash equivalents at start of year||15,987||2,302|
|Cash and cash equivalents at end of year||10,455||15,987|
|Cash and cash equivalents comprise|
|Cash at bank and in hand||10,455||15,987|
|Total cash and cash equivalents||10,455||15,987|
NOTES TO THE ACCOUNTS
for the year ended 31 March 2019
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 February 2018 (“SORP”) and with the Companies Act 2006.
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. As shown in note 9 of the Annual Report, the carrying value of investments designated as fair value through profit or loss was £28,678,000 as at 31 March 2019.
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:
Price of recent investment;
- Net assets;
- Discounted cash flows or earnings (of underlying business);
- Discounted cash flows (from the investment); and
- Industry valuation benchmarks.
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 and addressed further in note 9 of the Annual Report.
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. Sensitivity to valuation inputs is considered in note 15 of the Annual Report.
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.
Basic and diluted return per share
|Year to 31 Mar 2019||15 month period to 31 Mar 2018|
|Return per share based on:|
|Net revenue return for the financial year (£’000)||171||92|
|Net capital gains/(losses) for the financial year (£’000)||1,154||(1,744)|
|Total Return for the financial year (£’000)||1,325||(1,652)|
|Weighted average number of shares in issue||69,241,683||57,026,412|
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.
Basic and diluted net asset value per share
|31 March 2019||31 March 2018|
|Shares in issue||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.
The Company’s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company’s operations are:
- Market risks;
- Credit risk; and
- Liquidity risk.
The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.
The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year-end are provided 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 increased from 0.5% per annum to 0.75% per annum in 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 market risks above. 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 and ultimately part-owned by the UK Government. Consequently, the Directors consider that the risk profile associated with cash deposits is low.
There have been no changes in fair value during the year that 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 2019: £212,000, 31 March 2018: £179,000) 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.
Related party transactions
Michael Jackson is a Director of Elderstreet Investments Limited which provides investment management services to the Company. During the year, £784,000 (2018: £794,000 for the 15-month period) was due in respect of these services. No performance incentive fees were due to Elderstreet Investments Limited in respect of the year under review (2018: £nil for the period). At the year end £nil (2018 £nil) was outstanding and payable.
Nicholas Lewis is a partner of Downing LLP, which provides administration services to the Company. During the year, £50,000 (2018: £62,500 for the 15-month period) was due to Downing LLP in respect of these services. At the year end £nil (2018 £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. During the year the market value of those shares decreased to nil and accordingly the debtor due from the Investment Manager was reduced by £74,447 to nil.
Events after the end of the reporting period
Since the year end, the Company allotted 11,902,047 Ordinary Shares of 5p each at an average price of 58.67p per Ordinary Share under the terms of the Offer for Subscription dated January 2019. The aggregate consideration for the shares was £7.0 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 2019, but has been extracted from the statutory financial statements for the period ended 31 March 2019, which were approved by the Board of Directors on 23 July 2019 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 2019 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 2019 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.