DOWNING TWO VCT PLC
Report & Accounts for the year ended 31 December 2019
FINANCIAL HIGHLIGHTS
| Unaudited 31 Mar 2020 | Audited 31 Dec 2019 | Audited 31 Dec 2018 | |||
| Pence | Pence | Pence | |||
| ‘F’ Share pool | |||||
| Net asset value per ‘F’ Share | 21.6 | 24.7 | 28.7 | ||
| Cumulative distributions per ‘F’ Share | 72.0 | 72.0 | 67.0 | ||
| Total Return per ‘F’ Share | 93.6 | 96.7 | 95.7 | ||
| ‘G’ Share pool | |||||
| Net asset value per ‘G’ Share | 36.0 | 48.1 | 60.9 | ||
| Cumulative distributions per ‘G’ Share | 51.5 | 51.5 | 37.5 | ||
| Total Return per ‘G’ Share | 87.5 | 99.6 | 98.4 | ||
| ‘K’ Share pool | |||||
| Net asset value per ‘K’ Share | 50.3 | 58.2 | 91.3 | ||
| Cumulative distributions per ‘K’ Share | - | - | - | ||
| Total Return per ‘K’ Share | 50.3 | 58.2 | 91.3 | ||
Proposed dividends
| ‘G’ Shares – Interim dividend in respect of the year ended 31 Dec 2019 | Payable 19 May 2020 | 2.0p |
| ‘K’ Shares – Interim dividend in respect of the year ended 31 Dec 2019 | Payable 19 May 2020 | 7.5p |
CHAIRMAN’S STATEMENT
I write this statement during a time when the world is experiencing unprecedented conditions as a result of the coronavirus pandemic. At this time, it is not clear exactly what the full extent of the impact on the UK and global economies will be, although it is inevitable that it will be substantial.
In line with its strategy, your Company has built investment portfolios focused around a number of sectors including leisure and hospitality. It is clear that many of the businesses in these sectors will be badly affected by the Coronavirus pandemic lockdown in the UK. Unfortunately, this will result in reduced investment valuations and increased challenges in exiting from these investments.
This report includes the audited results for the year ended 31 December 2019, a period prior to the coronavirus pandemic. In order to provide Shareholders with a more up to date picture, the Company has also prepared unaudited investment valuations to 31 March 2020, based of the best information the Board and Manager have at the current time.
A brief summary of each share pool is provided below. More detailed reviews are provided in the Investment Manager’s Report and Review of Investments.
‘F’ Share pool
The ‘F’ Share pool was launched in 2012 and now holds a portfolio of nine investments with a total value of £2.4 million.
At 31 December 2019, the ‘F’ Share NAV stood at 24.7p, which represents an increase of 3.5% over the year after adjusting for the dividends of 5.0p per share paid in the year. Dividends paid to date total 72.0p per share such that Total Return (NAV plus cumulative dividends to date) is now 96.7p, compared to the initial cost to original subscribers net of income tax relief of 70.0p.
At 31 March 2020, the unaudited net asset value has fallen to 21.6p per share, resulting in a Total Return of 93.6p per share. The ‘F’ Share pool has commenced the process of realising its investments and returning funds to investors. Plans for further realisation have however been severely disrupted by the pandemic. The Company will update ‘F’ Shareholders when there is firm news to report.
‘G’ Share pool
The ‘G’ Share pool was launched in 2013 and has now started to realise its investments, in order to return funds to Shareholders. At 31 December 2019, the pool held 12 investments with a total value of £10.9 million.
At 31 December 2019, the ‘G’ Share NAV stood at 48.1p, which represents an increase over the year of 2.0% after adjusting for the dividends of 14.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) was 99.6p per share, compared to the initial NAV, before income tax relief, of 100.0p (or original cost, net of income tax relief, which was typically between 70.0p and 75.0p, depending on costs).
With this share class heavily exposed to the pub and hospitality sector, the effects of the coronavirus pandemic after the year end have been significant. And provisions have been made against many of the remaining investments. At 31 March 2020, the unaudited net asset value was 36.0p per share, resulting in a Total Return of 87.5p per share.
The ‘G’ Share pool has also commenced the process of realising its investments and returning funds to investors. Plans for further realisations have however been severely disrupted by the pandemic. The disposal of a pub investment was completed prior to the lockdown. These proceeds are being distributed by way of a dividend of 2.0p per share which will be paid to ‘G’ Shareholders on 19 May 2020 who are on the register at 24 April 2020. This will be paid as an interim dividend in respect of the year ended 31 December 2019.
The Company will update ‘G’ Shareholders when there is firm news to report of further disposals.
‘K’ Share pool
The ‘K’ Share pool raised the majority of its funds in the 2015/16 tax year. At 31 December 2019, the pool held 15 investments with a total value of £5.5 million.
The ‘K’ Share pool suffered from some major problems in a number of portfolio companies towards the end of 2019 resulting in the NAV and Total Return falling to 58.2p per share at 31 December 2019, compared to the initial NAV before income tax relief, of 100.0p (or original cost, net of income tax relief, which was typically between 70.0p and 75.0p, depending on costs).
Much of the share pool’s value is now held in businesses in the hospitality sector and a children’s nursery. The pandemic has created significant uncertainty for these businesses. At 31 March 2020, the unaudited NAV and Total Return was 50.3p per share.
The VCT regulations have effectively prevented the ‘K’ Share pool from paying any dividends in its initial three years. This period has now expired and so the ‘K’ Share pool will pay its first dividend of 7.5p per ‘K’ Share on 19 May 2020 to shareholders on the register at 24 April 2020. This will be paid as an interim dividend in respect of the year ended 31 December 2019.
Share buybacks
As announced in June 2019, the Company is now unlikely to make any further purchases of any of its shares as the process of returning funds to all groups of shareholders is progressing.
No share buybacks in respect of any share class were undertaken during the period. A resolution to renew the buyback authority will however be proposed at the next Annual General Meeting to ensure the Company has flexibility.
Annual General Meeting (“AGM”)
As Shareholders will be aware, there are currently major challenges to holding physical Annual General Meetings under the effective lockdown conditions. The Board is aware that this topic is being discussed by the various relevant authorities and believes that practical solutions will become clear in due course. The Board will monitor developments and will make arrangements to hold this year’s AGM once it is practical to do so. The Company will send a notice of the AGM to all Shareholders at that time.
Future of the Company
As a planned exit VCT, the Board notes that the existing share classes are working towards returning funds to Shareholders and there are no plans for the Company to raise new funds or create any new share classes. The Board is therefore reviewing the future plans of the Company and may consider taking advantage of the VCT Winding Up Regulations, which involve the Company going into voluntary liquidation. This would allow the Company to reduce running costs while it works on exiting from investments. Any developments to this end will be communicated with Shareholders in due course and would require Shareholder approval.
Outlook
As with so many businesses, the coronavirus pandemic has created major challenges and uncertainty for many of our portfolio companies, especially as the Company typically invests in sectors which are particularly heavily exposed to the effects of the lockdown. The Investment Manager is working to support and assist all the businesses to ensure that they all take advantage of Government support that has been made available and make sensible business decisions in this stressful time. We aim to have the businesses as well placed as they can be to survive these extreme conditions and recover when the effects of the pandemic start to subside.
There is however downside risk in many of the investment valuations, and the timing of exits from any investments cannot be reliably estimated at this time.
I will update Shareholders on progress in my statement with the Half Yearly Report to 30 June 2020.
Hugh Gillespie
Chairman
30 April 2020
INVESTMENT MANAGER’S REPORT- ‘F’ SHARE POOL
Introduction
The ‘F’ Share pool holds nine investments and is fully invested in a portfolio focussed on asset backed businesses and those with predictable revenue streams. The focus for the year continues to be on realisations and maximising Shareholder returns.
Net asset value and results
At 31 December 2019, the ‘F’ Share NAV stood at 24.7p. This represents a net increase of 1.0p per share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 3.5%. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 96.7p.
The gain on ordinary activities for the ‘F’ Share pool for the year was £110,000 (2018: loss of £424,000), being a revenue gain of £10,000 (2018: £6,000) and a capital gain of £100,000 (2018: loss of £430,000).
‘F’ Share pool - Investment activity
During the year, total proceeds of £716,000 were received from one full exit in Lambridge Solar Limited, the owner of commercial solar arrays in Lincolnshire. The exit generated a total gain over opening value of £111,000. As the pool is in its realisation phase, there were no new investments made during the period.
Plans were in place for the exit of the remaining portfolio companies. However, Shareholders should note that due to current market conditions and the global pandemic, this may now take longer than originally anticipated.
‘F’ Share pool – Portfolio valuation
The majority of investments remain valued at or above cost and there were several valuation movements in the period. This generated a small decrease in valuation over opening value of £11,000.
The most notable increase in the period related to Baron House Developments LLP, a company created to fund the purchase of a property outside Newcastle station, which qualifies under the BPRA scheme. At the period end, the investment value was uplifted by £192,000 following improved trading and an uplift in the value of the hotel site.
There were a number of small write downs at the period end that contributed to the valuation decrease during the period.
The largest decreases in valuation related to the Antic portfolio of investments, including, Pearce and Saunders Limited, Pearce and Saunders DevCo Limited and Atlantic Dogstar Limited.
Pearce and Saunders Limited, the owner of freehold pubs in south east London, and Pearce and Saunders DevCo Limited, the owner of development land at the rear of one of the freehold pub sites owned by Pearce and Saunders Limited, were decreased by £121,000 and £44,000 respectively, in line with expected exit proceeds.
Apex Energy Limited, the developer of a standby electricity generation plant in the East Midlands, was further reduced in value by £83,000 in line with preliminary exit proceeds.
Outlook
Focus for the ‘F’ Share pool remains on the realisation of its investments, with plans for the exit of the final investments now being delayed due to the coronavirus pandemic. Shareholders should note, as a result of the current global economy and effective lockdown in the UK, valuations post year end have been impacted and a number of provisions have been made. At 31 March 2020, the unaudited net asset value has fallen to 21.6p, resulting in a total return of 93.6p. We shall look to provide as much support as possible during this time to all investee companies and suggest, where possible, the extensive government schemes that are available.
Downing LLP
30 April 2020
REVIEW OF INVESTMENTS – ‘F’ SHARE POOL
Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2019:
| ‘F’ Share pool | Cost | Valuation | Valuation movement in year | % of portfolio |
| £’000 | £’000 | £’000 | ||
| VCT qualifying and partially qualifying investments | ||||
| Downing Pub EIS One Limited | 490 | 656 | 36 | 24.8% |
| Pearce and Saunders Limited | 497 | 550 | (121) | 20.8% |
| Atlantic Dogstar Limited | 200 | 258 | (12) | 9.8% |
| Fresh Green Power Limited | 189 | 231 | 21 | 8.7% |
| Green Energy Production UK Limited | 100 | 54 | - | 2.0% |
| Apex Energy Limited | 1,000 | 17 | (83) | 0.6% |
| 2,476 | 1,766 | (159) | 66.7% | |
| Non-qualifying investments | ||||
| Baron House Developments LLP | 481 | 673 | 192 | 25.4% |
| Pearce and Saunders DevCo Limited | 46 | 2 | (44) | 0.1% |
| London City Shopping Centre Limited | 66 | - | - | 0.0% |
| 593 | 675 | 148 | 25.5% | |
| 3,069 | 2,441 | (11) | 92.2% | |
| Cash at bank and in hand | 206 | 7.8% | ||
| Total investments | 2,647 | 100.0% |
Summary of investment movements
Disposals
| Cost | MV at 01/01/19 | Disposal proceeds | Gain against cost | Total realised gain during the year | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| VCT qualifying investments | |||||||||
| Lambridge Solar Limited | 500 | 605 | 716 | 216 | 111 | ||||
| Total ‘F’ Share pool | 500 | 605 | 716 | 216 | 111 | ||||
INVESTMENT MANAGER’S REPORT- ‘G’ SHARE POOL
Introduction
The ‘G’ Share pool raised funds in 2013 and the task of realising its investments continues following the passing of the five-year anniversary of the close of the ‘G’ Share offer, with one significant distribution during the period of 14.0p.
Net asset value and results
At 31 December 2019, the ‘G’ Share NAV stood at 48.1p. This represents a net increase of 1.2p per Share over the year (after adjusting for dividends paid during the year of 14.0p per Share), equivalent to an increase of 2.0%. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 99.6p.
The gain on ordinary activities for the ‘G’ Share pool for the year was £303,000 (2018: loss of £2,180,000), being a revenue profit of £449,000 (2018: £631,000) and a capital loss of £146,000 (2018: £2.8 million).
‘G’ Share pool - Investment activity
With the pool being in the realisation phase, no new investments were made in the period. Two full exits completed during the period generating total proceeds £3.2 million.
Proceeds of £1.8 million were generated from the sale of Antelope Pub Limited, which owns a pub of the same name in Tooting, London. This represented a gain over cost of £51,000.
In addition, Hedderwick Limited, the owner of two freehold pubs located in Royston, Hertfordshire and Olney, Milton Keynes, was successfully exited during the year and generated proceeds of £1.4 million. This represented a gain over cost of £144,000.
‘G’ Share pool – Portfolio valuation
The period to 31 December 2019 has seen a number of
valuation movements, resulting in an unrealised loss of £270,000.
The most notable write down in the period related to Ormsborough Limited, the owner of several pubs and restaurants in Yorkshire, which was written down by £350,000 to nil at the period end. The investment has been further reduced in value following the sale of the company that resulted in nil value for equity shareholders. The company has since gone into liquidation and as a result a full provision has been made.
Atlantic Dogstar Limited and Walworth House Pub Limited both form part of the Antic portfolio of investments.
Atlantic Dogstar Limited, which owns a group of London pubs, and Walworth House Pub Limited which owns a freehold pub in South London, were decreased in value by £204,000 and £106,000 respectively in line with expected exit proceeds.
The unrealised losses were partially offset by unrealised gains in the period totalling £508,000.
The most significant increase in the period related to Baron House Developments LLP, a company created to fund the purchase of a property outside Newcastle station, which qualifies under the BPRA scheme. At the period end, the investment value was uplifted by £437,000 following improved trading and an uplift in the value of the hotel site.
Outlook
Focus for the ‘G’ Share pool remains on the realisation of its investments with good progress being made prior to the global Coronavirus pandemic. Regrettably, the Coronavirus pandemic has hit valuations after the year end. Following a review of the portfolio, it is clear that adjustments have been required to the valuations of the pub and hospitality related investments. As at 31 March 2020, the unaudited net asset value has fallen to 36.0p per share, resulting in a total return of 50.3p per share. In addition, the plans for exiting the investments have been impacted and it is unclear currently when further exits will be achieved. We are providing as much support as possible to all investee companies during this difficult time, seeking to position them as well as we can to facilitate exits when conditions improve.
Downing LLP
30 April 2020
REVIEW OF INVESTMENTS – ‘G’ SHARE POOL
Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2019:
| ‘G’ Share pool | Cost | Valuation | Valuation movement in year | % of portfolio |
| £’000 | £’000 | £’000 | ||
| VCT qualifying and partially qualifying investments | ||||
| Atlantic Dogstar Limited | 3,500 | 4,521 | (204) | 40.2% |
| Walworth House Pub Limited | 1,330 | 1,224 | (106) | 10.9% |
| Downing Pub EIS One Limited | 980 | 1,311 | 71 | 11.7% |
| Quadrate Catering Limited | 1,450 | 1,196 | - | 10.6% |
| Pearce and Saunders Limited | 193 | 193 | - | 1.7% |
| Hermes Wood Pellets Limited | 1,000 | 152 | - | 1.4% |
| Apex Energy Limited | 1,300 | 22 | (108) | 0.2% |
| Zora Energy Renewables Limited | 750 | 67 | (10) | 0.6% |
| Ormsborough Limited | 500 | - | (350) | 0.0% |
| 11,003 | 8,686 | (707) | 77.3% | |
| Non-qualifying investments | ||||
| Baron House Developments LLP | 1,093 | 1,530 | 437 | 13.6% |
| Quadrate Spa Limited | 1,450 | 669 | - | 5.9% |
| London City Shopping Centre Limited | 110 | - | - | 0.0% |
| 2,653 | 2,199 | 437 | 19.5% | |
| 13,656 | 10,885 | (270) | 96.8% | |
| Cash at bank and in hand | 361 | 3.2% | ||
| Total investments | 11,246 | 100.0% |
Summary of investment movements
Disposals
| Cost | MV at 01/01/19 | Disposal proceeds | Gain/ against cost | Total realised gain during the year | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| VCT qualifying investments | |||||||||
| Antelope Pub Limited | 1,760 | 1,760 | 1,811 | 51 | 51 | ||||
| Non-qualifying investments | |||||||||
| Hedderwick Limited | 1,250 | 1,321 | 1,394 | 144 | 73 | ||||
| 3,010 | 3,081 | 3,205 | 195 | 124 | |||||
INVESTMENT MANAGER’S REPORT- ‘K’ SHARE POOL
Introduction
The ‘K’ Share pool closed its fundraising on 30 September 2016 having raised £16.2 million. At the period end, the ‘K’ Share pool held 15 investments across a range of industries. It is disappointing to have to report that, several portfolio companies suffered substantial setbacks which have required significant provisions.
‘K’ Share pool - Net asset value and results
At 31 December 2019, the ‘K’ Share NAV and Total Return (NAV plus cumulative dividends to date) was 58.2p, a decrease of 33.1p per Share over the year, equivalent to a decrease of 36.3%.
The loss on ordinary activities for the ‘K’ Share pool for the year was £5.2 million (2018: £1.0 million), being a revenue loss of £122,000 (2018: £271,000) and a capital loss of £5.1 million (2018: loss of £729,000).
‘K’ Share pool - Investment activity
With the pool entering the VCT qualification test at the start of the period, no new investments were made in the period.
Proceeds of £61,000 were received from the exit of Snow Hill Developments LLP, representing a gain over opening value of £18,000. In addition, the residual holding in Mosaic Spa and Health Clubs Limited, the provider of gym and spa management services, was exited at the end of the summer, generating a minor loss over opening value of £13,000.
‘K’ Share pool – Portfolio valuation
The period to 31 December 2019 has seen a number of disappointing developments, resulting in an unrealised loss of £5.1 million.
A significant portion of the unrealised loss for the year related to five investments. Further details on each is noted below.
The most notable decreases related to Jito Trading Limited and Yamuna Renewables Limited, which were written down by £1.5 million and £1.3 million respectively. As noted in the half year accounts, Yamuna Renewables Limited, a wood pelleting plant in Gars am Kamp, Austria was reduced due to a number of factors. Consumer demand at the site substantially reduced following warmer than expected weather, in addition to two serious fires at the facility which resulted in a halt to production. As the company has some borrowings, it is difficult to recover any value and as a result the investment has been fully provided against.
The problems encountered at Yamuna have resulted in consequential problems with Jito Trading Limited, the operator of another wood pelleting plant in Weitra, Austria, who share the same management team. As a result, an advisor has been appointed to sell the business. However, as the company has borrowings, it is not expected that a sale based on the current offers would recover any value for the equity shareholders, including the ‘K’ Share pool.
Ormsborough Limited, the owner of several pubs and restaurants in Yorkshire, has been written down by £948,000 to nil at the period end following the sale of the company that resulted in nil value for equity shareholders. The company has since gone into liquidation and as a result a full provision has been made.
Indigo Generation Limited and Ironhide Generation Limited are both developing solar farms on adjacent land in India. Due to a combination of factors, each investment has been reduced in value at the period end. One of the main factors affecting the sites is the private Power Purchase Agreement (“PPA”) market in this region of India that has been particularly affected by reductions in long term PPA terms, as a result of high inflation levels. Construction of the first phase of each site has now been completed at the year end and grid connections have been secured. However, the second phase of the build programme is currently behind schedule. As a result, a provision of £478,000 has been required against each investment.
Outlook
The falls in value experienced by the ‘K’ Share pool during the year are extremely disappointing. We have dedicated substantial resources to address the issues of each of the affected companies.
Since the year end, the Coronavirus pandemic has further impacted the portfolio. Businesses in the hospitality sector and children’s nurseries are clearly businesses that are suffering heavily from the lockdown and provisions have been made accordingly.
The unaudited net asset value and Total Return as at 31 March 2020 was 50.3p per share.
The process of realising all of the investments to return funds to investors is scheduled to commence towards the end of 2021. In the meantime, we will be working to support all portfolio companies, enduring that they benefit from Government aid that is available and take sensible decisions as they deal with these unprecedented conditions.
Downing LLP
30 April 2020
REVIEW OF INVESTMENTS – ‘K’ SHARE POOL
Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2019:
| ‘K’ Share pool | Cost | Valuation | Valuation movement in year | % of portfolio |
| £’000 | £’000 | £’000 | ||
| VCT qualifying and partially qualifying investments | ||||
| Apprise Pubs Limited | 1,300 | 1,300 | - | 14.4% |
| Garthcliff Shipping Limited | 1,300 | 1,300 | - | 14.4% |
| Exclusive Events Venues Limited | 500 | 500 | - | 5.5% |
| Walworth House Pub Limited | 500 | 460 | (40) | 5.1% |
| Pilgrim Trading Limited | 432 | 432 | - | 4.8% |
| SF Renewables (Solar) Limited | 337 | 303 | (85) | 3.4% |
| Rockhopper Renewables Limited | 591 | 295 | (296) | 3.3% |
| Ironhide Generation Limited | 736 | 258 | (478) | 2.9% |
| Indigo Generation Limited | 736 | 258 | (478) | 2.9% |
| Zora Energy Renewables Limited | 350 | 32 | (5) | 0.3% |
| Yamuna Renewables Limited | 1,300 | - | (1,300) | 0.0% |
| Jito Trading Limited | 1,500 | - | (1,500) | 0.0% |
| Ormsborough Limited | 1,400 | - | (948) | 0.0% |
| 10,982 | 5,138 | (5,130) | 57.0% | |
| Non-qualifying investments | ||||
| Fenkle Street LLP | 287 | 317 | 23 | 3.5% |
| London City Shopping Centre Limited | 15 | - | - | 0.0% |
| 302 | 317 | 23 | 3.5% | |
| 11,284 | 5,455 | (5,107) | 60.5% | |
| Cash at bank and in hand | 3,569 | 39.5% | ||
| Total investments | 9,024 | 100.0% |
Summary of investment movements
Disposals
| Cost | MV at 01/01/19 | Disposal proceeds | Gain against cost | Total realised gain during the year | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| VCT qualifying investments | |||||||||
| Mosaic Spa and Health Clubs Limited | 24 | 26 | 13 | (11) | (13) | ||||
| Non-qualifying investments | |||||||||
| Snow Hill Developments LLP | 43 | 43 | 61 | 18 | 18 | ||||
| Total ‘K’ Share pool | 67 | 69 | 74 | 7 | 5 | ||||
Directors’ responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the Directors’ Remuneration Report, the Strategic 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 year.
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; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions, to disclose with reasonable accuracy at any time the financial position of the company and to 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.
In addition, 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 position and 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.
Statement as to disclosure of information to Auditor
The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.
INCOME STATEMENT
for the year ended 31 December 2019
| Year ended 31 December 2019 | Year ended 31 December 2018 | ||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||||
| Income | 1,182 | 16 | 1,198 | 1,590 | 31 | 1,621 | |||
| (Loss)/gain on investments | - | (5,148) | (5,148) | - | (4,001) | (4,001) | |||
| 1,182 | (5,132) | (3,950) | 1,590 | (3,970) | (2,380) | ||||
| Investment management fees | (551) | - | (551) | (711) | - | (711) | |||
| Other expenses | (244) | - | (244) | (254) | - | (254) | |||
| (Loss)/return on ordinary activities before tax | 387 | (5,132) | (4,745) | 625 | (3,970) | (3,345) | |||
| Tax on total comprehensive income and ordinary activities | (50) | - | (50) | (259) | - | (259) | |||
| (Loss)/return for the year attributable to equity shareholders | 337 | (5,132) | (4,795) | 366 | (3,970) | (3,604) | |||
| Basic and diluted (loss)/return per: | |||||||||
| ‘F’ Share | 0.1p | 0.9p | 1.0p | 0.1p | (4.0p) | (3.9p) | |||
| ‘G’ Share | 1.8p | (0.6p) | 1.2p | 2.5p | (11.1p) | (8.6p) | |||
| ‘K’ Share | (0.8p) | (32.4p) | (33.2p) | (1.7p) | (4.6p) | (6.3p) | |||
All Revenue and Capital items in the above statement are derived 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 November 2014 and updated February 2018 by the Association of Investment Companies (“AIC SORP”).
Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the return/loss as stated above and historical cost.
INCOME STATEMENT (ANALYSED BY SHARE POOL)
for the year ended 31 December 2019
‘F’ Share pool
| Year ended 31 December 2019 | Year ended 31 December 2018 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 105 | - | 105 | 177 | - | 177 | ||
| (Loss)/gain on investments | - | 100 | 100 | - | (430) | (430) | ||
| 105 | 100 | 205 | 177 | (430) | (253) | |||
| Investment management fees | (49) | - | (49) | (97) | - | (97) | ||
| Other expenses | (39) | - | (39) | (43) | - | (43) | ||
| (Loss)/return on ordinary activities before tax | 17 | 100 | 117 | 37 | (430) | (393) | ||
| Tax on total comprehensive income and ordinary activities | (7) | - | (7) | (31) | - | (31) | ||
| (Loss)/return attributable to equity shareholders | | 10 | 100 | 110 | 6 | (430) | (424) | |
‘G’ Share pool
| Year ended 31 December 2019 | Year ended 31 December 2018 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 941 | - | 941 | 1,307 | - | 1,307 | ||
| (Loss)/gain on investments | - | (146) | (146) | - | (2,811) | (2,811) | ||
| 941 | (146) | 795 | 1,307 | (2,811) | (1,504) | |||
| Investment management fees | (288) | - | (288) | (369) | - | (369) | ||
| Other expenses | (110) | - | (110) | (129) | - | (129) | ||
| (Loss)/return on ordinary activities before tax | 543 | (146) | 397 | 809 | (2,811) | (2,002) | ||
| Tax on total comprehensive income and ordinary activities | (94) | - | (94) | (178) | - | (178) | ||
| (Loss)/return attributable to equity shareholders | | 449 | (146) | 303 | 631 | (2,811) | (2,180) | |
‘K’ Share pool
| Year ended 31 December 2019 | Year ended 31 December 2018 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 136 | 16 | 152 | 106 | 31 | 137 | ||
| (Loss)/gain on investments | - | (5,102) | (5,102) | - | (760) | (760) | ||
| 136 | (5,086) | (4,950) | 106 | (729) | (623) | |||
| Investment management fees | (214) | - | (214) | (245) | - | (245) | ||
| Other expenses | (95) | - | (95) | (82) | - | (82) | ||
| (Loss)/return on ordinary activities before tax | (173) | (5,086) | (5,259) | (221) | (729) | (950) | ||
| Tax on total comprehensive income and ordinary activities | 51 | - | 51 | (50) | - | (50) | ||
| (Loss)/return attributable to equity shareholders | | (122) | (5,086) | (5,208) | (271) | (729) | (1,000) | |
BALANCE SHEET
as at 31 December 2019
| 2019 | 2018 | |||
| £’000 | £’000 | |||
| Fixed assets | ||||
| Investments | 18,781 | 27,925 | ||
| Current assets | ||||
| Debtors | 1,374 | 1,328 | ||
| Cash at bank and in hand | 4,136 | 4,055 | ||
| 5,510 | 5,383 | |||
| Creditors: amounts falling due within one year | (306) | (448) | ||
| Net current assets | 5,204 | 4,935 | ||
| Net assets | 23,985 | 32,860 | ||
| Capital and reserves | ||||
| Called up share capital | 52 | 52 | ||
| Capital redemption reserve | 149 | 149 | ||
| Special reserve | 34,938 | 38,471 | ||
| Revaluation reserve | (4,585) | (3,911) | ||
| Capital reserve – realised | (7,105) | (2,250) | ||
| Revenue reserve | 536 | 349 | ||
| Total equity shareholders’ funds | 23,985 | 32,860 | ||
| Basic and diluted net asset value per Share: | ||||
| ‘F’ Share | 24.7p | 28.7p | ||
| ‘G’ Share | 48.1p | 60.9p | ||
| ‘K’ Share | 58.2p | 91.3p | ||
Hugh Gillespie
Chairman
Company number: 5334418
BALANCE SHEET (ANALYSED BY SHARE POOL)
as at 31 December 2019
‘F’ Shares
| 2019 | 2018 | ||||
| £000 | £000 | ||||
| Fixed assets | |||||
| Investments | 2,441 | 3,057 | |||
| Current assets | |||||
| Debtors | 69 | 53 | |||
| Cash at bank and in hand | 206 | 60 | |||
| 275 | 113 | ||||
| Creditors: amounts falling due within one year | (43) | (68) | |||
| Net current assets | 232 | 45 | |||
| Net assets | 2,673 | 3,102 | |||
| Capital and reserves | |||||
| Called up share capital | 11 | 11 | |||
| Capital redemption reserve | 149 | 149 | |||
| Special reserve | 3,949 | 4,274 | |||
| Revaluation reserve | (810) | (761) | |||
| Capital reserve – realised | (1,099) | (1,033) | |||
| Revenue reserve | 473 | 462 | |||
| Total equity shareholders’ funds | 2,673 | 3,102 | |||
‘G’ Shares
| 2019 | 2018 | ||||
| £000 | £000 | ||||
| Fixed assets | |||||
| Investments | 10,885 | 14,237 | |||
| Current assets | |||||
| Debtors | 1,140 | 1,162 | |||
| Cash at bank and in hand | 361 | 324 | |||
| 1,501 | 1,486 | ||||
| Creditors: amounts falling due within one year | (218) | (317) | |||
| Net current assets | 1,283 | 1,169 | |||
| Net assets | 12,168 | 15,406 | |||
| Capital and reserves | |||||
| Called up share capital | 25 | 25 | |||
| Special reserve | 14,804 | 17,999 | |||
| Revaluation reserve | (2,161) | (2,429) | |||
| Capital reserve – realised | (1,831) | (1,221) | |||
| Revenue reserve | 1,331 | 1,032 | |||
| Total equity shareholders’ funds | 12,168 | 15,406 | |||
‘K’ Shares
| 2019 | 2018 | ||||
| £000 | £000 | ||||
| Fixed assets | |||||
| Investments | 5,455 | 10,631 | |||
| Current assets | |||||
| Debtors | 165 | 113 | |||
| Cash at bank and in hand | 3,569 | 3,671 | |||
| 3,734 | 3,784 | ||||
| Creditors: amounts falling due within one year | (45) | (63) | |||
| Net current assets | 3,689 | 3,721 | |||
| Net assets | 9,144 | 14,352 | |||
| Capital and reserves | |||||
| Called up share capital | 16 | 16 | |||
| Special reserve | 16,185 | 16,198 | |||
| Revaluation reserve | (1,614) | (721) | |||
| Revenue reserve | (1,268) | (1,145) | |||
| Capital reserve realised | (4,175) | 4 | |||
| Total equity shareholders’ funds | 9,144 | 14,352 | |||
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2019
| | Called up share capital | Capital redemption reserve | Special reserve | Share premium reserve | Revaluation reserve | Capital reserve - realised | Revenue reserve | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| At 31 December 2017 | 77 | 124 | 28,313 | 16,170 | 815 | (2,252) | 438 | 43,685 | |
| Total comprehensive income | - | - | - | - | (4,866) | 896 | 366 | (3,604) | |
| Share premium cancellation | | - | - | 16,170 | (16,170) | - | - | - | - |
| Transactions with owners | |||||||||
| Purchase of own shares | - | - | - | - | - | - | (55) | (55) | |
| Transfers between reserves* | - | - | (6,012) | - | 140 | 5,872 | - | - | |
| Dividends paid | - | - | - | - | - | (6,766) | (400) | (7,166) | |
| Cancellation of shares | (25) | 25 | - | - | - | - | - | - | |
| At 31 December 2018 | 52 | 149 | 38,471 | - | (3,911) | (2,250) | 349 | 32,860 | |
| Total comprehensive income | - | - | - | - | (5,388) | 256 | 337 | (4,795) | |
| Realisation of impaired valuations | - | - | - | - | 4,891 | (4,891) | - | - | |
| Transactions with owners | - | - | - | - | - | - | - | - | |
| Purchase of own shares | - | - | - | - | - | - | - | - | |
| Transfers between reserves* | - | - | (3,533) | - | (177) | 3,710 | - | - | |
| Dividends paid | - | - | - | - | - | (3,930) | (150) | (4,080) | |
| Cancellation of shares | - | - | - | - | - | - | - | - | |
| At 31 December 2019 | 52 | 149 | 34,938 | - | (4,585) | (7,105) | 536 | 23,985 | |
* A transfer of £177,000 (2018: £140,000) representing previously recognised unrealised gains/losses on disposal of investments during the year ended 31 December 2019 has been made from the Revaluation Reserve to the Capital Reserve-realised. A transfer of £3.7 million (2018: £5.9 million) representing realised gains on disposal of investments, less capital expenses and capital dividends in the year was made from Capital Reserve – realised to Special reserve.
CASH FLOW STATEMENT
for the year ended 31 December 2019
| Year ended 31 December 2019 | ||||||
| | ‘F’ Share pool | ‘G’ Share pool | ‘K’ Share pool | Total | ||
| £’000 | £’000 | £’000 | £’000 | |||
| Net cash (outflow)/inflow from operating activities | (29) | 371 | (176) | 166 | ||
| Cash flows from investing activities | ||||||
| Proceeds from sale of investments | 716 | 3,205 | 74 | 3,995 | ||
| Net cash inflow from investing activities | 716 | 3,205 | 74 | 3,995 | ||
| Net cash inflow/(outflow) before financing activities | 687 | 3,576 | (102) | 4,161 | ||
| Cash flows from financing activities | ||||||
| Equity dividends paid | (541) | (3,539) | - | (4,080) | ||
| Net cash (outflow) from financing activities | (541) | (3,539) | - | (4,080) | ||
| (Decrease)/increase in cash | 146 | 37 | (102) | 81 | ||
| Cash and cash equivalents at start of year | 60 | 324 | 3,671 | 4,055 | ||
| Cash and cash equivalents at end of year | 206 | 361 | 3,569 | 4,136 | ||
| Cash and cash equivalents comprise | ||||||
| Cash at bank and in hand | 206 | 361 | 3,569 | 4,136 | ||
| Total cash and cash equivalents | 206 | 361 | 3,569 | 4,136 | ||
| Year ended 31 December 2018 | ||||||
| | ‘F’ Share pool | ‘G’ Share pool | ‘K’ Share pool | Total | ||
| £’000 | £’000 | £’000 | £’000 | |||
| Net cash (outflow)/inflow from operating activities | (5) | 120 | (288) | (173) | ||
| Cash flows from investing activities | ||||||
| Proceeds from sale of investments | 1,964 | 2,892 | 1,004 | 5,860 | ||
| Net cash inflow from investing activities | 1,964 | 2,892 | 1,004 | 5,860 | ||
| Net cash inflow before financing activities | 1,959 | 3,012 | 716 | 5,687 | ||
| Cash flows from financing activities | ||||||
| Equity dividends paid | (4,000) | (3,166) | - | (7,166) | ||
| Purchase of own shares | - | (38) | (17) | (55) | ||
| Net cash (outflow) from financing activities | (4,000) | (3,204) | (17) | (7,221) | ||
| (Decrease)/increase in cash | (2,041) | (192) | 699 | (1,534) | ||
| Cash and cash equivalents at start of year | 2,101 | 516 | 2,972 | 5,589 | ||
| Cash and cash equivalents at end of year | 60 | 324 | 3,671 | 4,055 | ||
| Cash and cash equivalents comprise | ||||||
| Cash at bank and in hand | 60 | 324 | 3,671 | 4,055 | ||
| Total cash and cash equivalents | 60 | 324 | 3,671 | 4,055 | ||
NOTES TO THE ACCOUNTS
for the year ended 31 December 2019
1. General information
Downing TWO 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. Its registered office is St. Magnus House, 3 Lower Thames Street, London EC3R 6HD.
2. Accounting policies
Basis of accounting
The Company has prepared its financial statements under FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and in accordance with the Statement of Recommended Practice (“SORP”) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (“AIC”) in November 2014 and updated February 2018 as well as the Companies Act 2006.
The financial statements are presented in Sterling (£) and rounded to thousands.
Going concern
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. As such, the Board confirms that the Company has adequate resources to continue 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 return on ordinary activities 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.
Investments
Venture capital investments are designated as “fair value through profit or loss” assets 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 on a fair value basis, with a view to selling after a period of time, in accordance with the Company’s documented investment policy. 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.
For unquoted investments, fair value is established using the IPEV guidelines. 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;
- Multiples;
- 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.
All investments are held at the price of recent investment for an appropriate period where there is considered to have been no change in fair value. Where this basis is no longer considered appropriate, the following factors will be considered:
- Where a value is demonstrated by a material arms-length transaction by an independent third party in the shares of a company, this value may be used;
- In the absence of the above, depending on each of the subsequent trading performance and investment structure of an investee company, the valuation basis will likely move to either:
i) an earnings multiple basis; or
ii) where a company’s underperformance against plan indicates a diminution in the value of the investment, provision against cost is made, as appropriate.
- Premiums on loan stock investments are accrued at fair value when the Company receives the right to the premium and when considered recoverable;
- Where an earnings multiple or cost less impairment basis is not appropriate and overriding factors apply, discounted cash flow, a net asset valuation, or industry specific valuation benchmarks may be applied.
Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. 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.
It is not the Company’s policy to exercise significant influence over investee companies. Therefore, the results of these companies are not incorporated into 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 does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.
Income
Dividend income from investments is recognised when the Shareholders’ rights to receive payment has been established, normally the ex-dividend date.
Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective rate applicable and only where there is reasonable certainty of collection in the foreseeable future.
Distributions from investments in limited liability partnerships (“LLPs”) are recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.
Expenses
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 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 100% as revenue.
- Expenses and liabilities not specific to a share class are generally allocated pro rata to the net assets.
- Performance incentive fees arising from the disposal of investments are deducted as a capital item.
Dividends payable
Dividends payable are recognised as distributions in the financial statements when the Company’s liability to make payment has been established, normally the record date.
Taxation
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 year.
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 which is not discounted 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 years different from those in which they are included in the financial statements. Deferred taxation is not discounted.
Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.
Issue costs
Issue costs in relation to the shares issued for each share class have been deducted from the revenue reserve account for the relevant share class.
Significant estimates and judgements
Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. The area involving a higher degree of judgement and estimates is the valuation of unquoted investments as explained in the investment accounting policy.
3. Basic and diluted return per share
| ‘F’ Shares | ‘G’ Shares | ‘K’ Shares | |||
| Revenue return/(loss) (£’000) | 10 | 449 | (122) | ||
| Per share (pence) | 0.1p | 1.8p | (0.8p) | ||
| Net capital gain/(loss) for the year (£’000) | 100 | (146) | (5,086) | ||
| Per share (pence) | 0.9p | (0.6p) | (32.4p) | ||
| Total gain/(loss) after taxation (£’000) | 110 | 303 | (5,208) | ||
| Per share (pence) | 1.0p | 1.2p | (33.2p) | ||
| Weighted average number of shares in issue | 10,810,859 | 25,281,571 | 15,718,154 | ||
As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share for any of the share classes. The return per share disclosed therefore represents both the basic and diluted return per share for all share classes.
4. Basic and diluted net asset value per share
| 2019 | 2018 | |||||||||
| Shares in issue | Net asset value | Net asset value | ||||||||
| 31 Dec 2019 | 31 Dec 2018 | per share | £’000 | per share | £’000 | |||||
| ‘F’ Shares | 10,810,859 | 10,810,859 | 24.7p | 2,673 | 28.7p | 3,102 | ||||
| ‘G’ Shares | 25,281,571 | 25,281,571 | 48.1p | 12,168 | 60.9p | 15,406 | ||||
| ‘‘K’ Shares | 15,718,154 | 15,718,154 | 58.2p | 9,144 | 91.3p | 14,352 | ||||
| 23,985 | 32,860 | |||||||||
The ‘F’ Share pool, ‘G’ Share pool and ‘K’ Share pool are treated as separate investment pools.
5. Principal risks
The Company’s financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits and financial liabilities, being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company’s operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.
The fair value of investments is determined using the detailed accounting policy.
The fair value of cash deposits and short term debtors and creditors equates to their carrying value in the Balance Sheet.
Loans and receivables and other financial liabilities are stated at amortised cost which the Directors consider is equivalent to fair value.
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 emerging and principal financial risks arising from the Company’s operations are:
- Market risks
- Credit risk
- 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 emerging and principal financial risks and a review of the financial instruments held at the year end are provided below:
Market risks
As a VCT, the Company is exposed to investment risks in the form of potential losses and gains 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 the 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
- Interest rate risk
Investment price risk
Investment price risk arises from uncertainty about the valuation of financial instruments held in accordance with the Company’s investment objectives in addition to the appropriateness of the valuation method used. It represents the potential loss that the Company might suffer through 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. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company’s investments is shown below.
There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:
- “Fixed rate” assets represent investments with predetermined yield targets and comprise certain loan note investments.
- “Floating rate” assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments.
- “No interest rate” assets do not attract interest and comprise equity investments and debtors.
The Company monitors the level of income received from fixed and floating 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.
Credit risk
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 stock in investee companies, cash deposits and debtors.
The Manager manages credit risk in respect of loan stock with a similar approach as described under “Market risks” above. In addition, the credit risk is mitigated for all investments in loan stocks by taking security, covering the full par value of the loan stock in the form of fixed and floating charges over the assets of the 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. Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.
Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions. Consequently, the Directors consider that the credit risk associated with cash deposits is low.
There have been no changes in fair value during the year that are directly attributable to changes in credit risk.
Of the loan stock classified as “past due” above, as at the balance sheet date, £1,269,000, falling within the banding of one to two years and £150,000, falling within the banding of two to three years related to the principal of loan notes where, although the principal remained within term, the investee company was not fully servicing the interest obligations under the loan note and is thus in arrears. Of the £3,762,000, the remaining £2,343,000 related to the principal of loan notes where the note has passed the maturity date. Notwithstanding the arrears of interest, the Directors do not consider that the maturity of the principal has altered.
Liquidity 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. As the Company has a relatively low level of creditors, (£306,000, 2018: £448,000) and has no borrowings, the Board believes that the Company’s exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash 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.
6. Events after the end of the reporting period
After the end of the reporting period, on 11 March 2020, the World Health Organisation declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic which has resulted in subsequent major developments and an impact on post year end valuations. Although the full impact of the pandemic is not yet known, there is a significant risk that the pandemic will negatively impact the prospects of many businesses within the portfolio, particularly those in the hospitality and children’s nursery sectors which are held across all Share classes. Investment executives are carrying out an active and ongoing role in supporting all portfolio companies at this unprecedented time and are implementing any measures required to ensure each business suffers the least possible disruption. Provisions have been required against a number of the portfolio companies as at 31 March 2020. As a result, the unaudited NAVs and Total Return as at 31 March 2020 are as follows:
| Unaudited 31 Mar 2020 | Audited 31 Dec 2019 | ||
| Pence | Pence | ||
| ‘F’ Share pool | |||
| Net asset value per ‘F’ Share | 21.6 | 24.7 | |
| Cumulative distributions per ‘F’ Share | 72.0 | 72.0 | |
| Total Return per ‘F’ Share | 93.6 | 96.7 | |
| ‘G’ Share pool | |||
| Net asset value per ‘G’ Share | 36.0 | 48.1 | |
| Cumulative distributions per ‘G’ Share | 51.5 | 51.5 | |
| Total Return per ‘G’ Share | 87.5 | 99.6 | |
| ‘K’ Share pool | |||
| Net asset value per ‘K’ Share | 50.3 | 58.2 | |
| Cumulative distributions per ‘K’ Share | - | - | |
| Total Return per ‘K’ Share | 50.3 | 58.2 |
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 year ended 31 December 2019, but has been extracted from the statutory financial statements for the year ended 31 December 2019 which were approved by the Board of Directors on 30 April 2020 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.
The statutory accounts for the period ended 31 December 2018 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 year ended 31 December 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 St. Magnus House, London, EC3R 6HD and will be available for download from www.downing.co.uk.