DOWNING ONE VCT PLC
Report & Accounts for the year ended 31 March 2020
Financial Summary
| Unaudited | Audited | Audited | |||
| 30 Jun | 31 Mar | 31 Mar | |||
| 2020 | 2020 | 2019 | |||
| Pence | Pence | Pence | |||
| Net asset value per share (“NAV”) | 59.1 | 57.6 | 78.3 | ||
| Cumulative dividends paid since 12 November 2013 | 35.5 | 35.5 | 31.5 | ||
| Total Return (net asset value plus cumulative dividends paid per share) | 94.6 | 93.1 | 109.8 | ||
| Dividends in respect of financial year | |||||
| Interim dividend per share | 2.0 | 3.0 | |||
| Proposed final dividend per share | 2.0 | 2.0 | |||
| 4.0 | 5.0 |
Chairman’s Statement
I write this statement during an unprecedented period for the world. The coronavirus pandemic has affected everybody. The full extent of the impact on the UK and global economies is not yet clear, although it is certain that it will be substantial and long lasting.
With the Company’s financial year end falling on 31 March 2020, these results incorporate investment valuations which we believe take account of the potential impact of the pandemic and the resulting lockdown. This has produced a disappointing result for the year. With significant exposure to the leisure and hospitability sector, as well as care homes and children’s nurseries, unsurprisingly, there have been some reductions in valuations. The Company also holds a portfolio of quoted stocks which, in line with markets, experienced falls in share prices at the year end (although there has since been some recovery). As a result of some significant changes to the VCT regulations in the last few years, the other element to the portfolio is the young unquoted growth businesses which is now the main focus of new investing activity. These investments are in a wide variety of sectors but are mostly still immature, and in some cases, may be vulnerable to this period of economic turmoil. The Board has sought to take a cautious approach in assessing the prospects of these businesses at the current time.
All of the above has combined to produce a set of results which show a substantial fall in net asset value over the year.
Net asset value and results
As at 31 March 2020, the net asset value per share (“NAV”) stood at 57.6p, a decrease of 16.7p (21.3%) after adding back dividends of 4.0p per share which were paid during the year.
The Income Statement shows a loss attributable to equity shareholders for the year of £23.8 million comprising a revenue loss of £2.1 million and a capital loss of £21.7 million.
Investment portfolio
At the year end, the Company held a portfolio of 86 active investments. Of these, 28 are either quoted on AIM or the NEX Exchange Growth Market and have a value of £17.7 million (27.9% of the portfolio). The 30 unquoted growth investments have a value of £18.5 million and represent 29.1% of the portfolio and the 28 unquoted yield focused investments have a value of £27.4 million and represent 43.0% of the portfolio.
The year under review saw an unrealised loss of £20.8 million across the portfolio, with the unrealised losses in the unquoted portfolio totalling £13.8 million and the unrealised losses in the quoted portfolio totalling £7.0 million.
In respect of the quoted portfolio, continuing uncertainty created by the pandemic and the ongoing Brexit negotiations has created a challenging market for almost all companies. The Investment Adviser’s approach with the quoted portfolio is to hold stakes of a size that allow the Adviser to work closely with those businesses and support management where required. This has provided the Adviser with some comfort that the majority of companies have taken appropriate responses to the pandemic. As a result, the Adviser believes these companies are reasonably well positioned to weather the storm and capitalise when better conditions arrive.
In the unquoted growth portfolio, as expected, some of the weaker businesses have started to show signs that they may be unlikely to ultimately achieve their business plan. It is typical in a portfolio of this type that these come to light before the stronger businesses prove themselves. The pandemic has, in some cases, accelerated this situation so the Board has made a number of write downs. The Adviser continues to work closely with all portfolio companies, including the weaker ones to ensure that value can be recovered where possible.
The unquoted yield-focused portfolio is where the pandemic has created most disruption and a number of the businesses in this portfolio are currently closed. The Investment Adviser has ensured that they have all taken advantage of what government and other support is available and will look to resume operations when lockdown restrictions allow. The impact of this on the long-term value of these businesses is not clear, however, as a minimum they are losing revenue and a number of valuation write downs have been made accordingly.
Further details on the investment activity are included in the Investment Adviser’s Reports below.
Dividends
The Company has a policy of seeking to pay annual dividends of at least 4% of net assets per annum.
The Company has enough liquid funds to be able to continue with the payment of its regular dividend at the year end, of which we believe Shareholders are supportive.
The Board is therefore proposing to pay a final dividend of 2.0p per share on 18 September 2020, subject to Shareholder approval at the forthcoming AGM, to Shareholders on the register at 28 August 2020. This will bring total dividends in respect of the year ended 31 March 2020 to 4.0p per share (2019: 5.0p), which represents a yield based on opening NAV of 5.1% p.a.
Shareholders are reminded that the Company operates a Dividend Reinvestment Scheme for those investors that wish to reinvest their dividends and obtain further income tax relief on the reinvested dividend. A Dividend Reinvestment Form is available on Downing’s website or further information can be obtained by contacting Downing.
Share buybacks
The Company continues to operate a policy of buying in its own shares that become available in the market at a 5% discount to NAV (subject to liquidity and regulatory restrictions).
During the year, the Company purchased and subsequently cancelled 1,760,680 shares at an average price of 72.9p per share.
The Company retains Panmure Gordon as its corporate broker to assist in operating the share buyback process and ensuring that the quoted spread on the Company’s shares remains at a reasonable level.
Annual General Meeting (“AGM”)
With the social distancing restrictions still in place as a result of the pandemic, it Is difficult to make plans to hold an AGM as we would normally do. The government has recognised this problem and has made legislative changes to allow companies more flexibility in the way AGMs are held.
In line with what many companies are currently doing, we are therefore planning to hold a “closed AGM” which Shareholders will not be allowed to attend. The meeting will still comply with the minimum legal requirements for an AGM.
The closed AGM will take place on 15 September 2020 at 10:30am. Shareholders are encouraged to vote by proxy, as they will not be able to do so in person. We always welcome questions from our Shareholders at the AGM but this year, given the restrictions in place, please submit any questions for the Board or the Investment Adviser via email to d1agm@downing.co.uk by 5:00pm on 11 September 2020. The Board will seek to address topics raised in any submitted questions by publishing a statement with the AGM results. Full details are included within the notice of AGM at the back of this report.
Three items of special business are proposed at the AGM:
- one in respect of the authority to buy back shares as noted above; and
- two in respect of the authority to allot shares.
The authority to allot shares ensures the Company will be able to allot shares to monthly investors and also give the Board the opportunity to consider further fundraising options without having to necessarily incur the expense of seeking separate approval via a shareholder circular.
Any decision on future fundraising will, of course, give consideration to the level of uninvested funds already held by the Company and the rate of investment.
Fundraising
The Company launched a new offer for subscription on 19 September 2019, seeking to raise up to £15 million, with the option to raise up to a further £25 million. With a large proportion of the funds usually raised by VCTs in the last few weeks of the tax year, the fundraising was disrupted by the coronavirus lockdown, however, to date, the offer has raised £15.3 million and has now been extended to 31 August 2020.
With the new funds from the fundraising, the Company has sufficient cash reserves to support existing portfolio companies and take advantage of new opportunities.
Outlook
The overall performance for the year has been disappointing and has been compounded by the impact of the pandemic. The Investment Adviser has acted swiftly to ensure that portfolio companies are supported and have taken quick and decisive action in respect of the ongoing situation to safeguard their long-term survival.
Since the 31 March 2020 year end there has been some recovery of ground by the quoted stocks. At 30 June 2020, the estimated unaudited NAV was 59.1p per share, an increase of 1.5p since 31 March 2020.The next year, will no doubt, be a challenging one for many of our portfolio companies, as it will for businesses everywhere. We will look to the Investment Adviser to provide as much support as it can to guide the portfolio companies through these difficult times.
Inevitably, some may not be able to recover to the level we might hope, however we believe some continue to have the potential to deliver the outcomes that we were targeting when we first invested and some companies may even benefit from the current conditions by having to adapt their business models in a way that can ultimately deliver improved outcomes.
The Company has funds to invest and history suggests that one of the most profitable times for investing is at the bottom of the economic cycle. One of the challenges for the Investment Adviser over the next year is to continue generating high quality deal flow, within the restrictions of the VCT regulations, that can drive growth for the Company over the coming years.
Chris Kay
Chairman
Investment Adviser’s Report - Overview
Introduction
We present a review of the investment portfolio and activity over the last financial year. Our review is split into three parts comprising:
- this overview,
- a detailed report on the unquoted investments, and
- a report on the quoted investments.
Portfolio Overview
At 31 March 2020, the Company held a portfolio with a value of £63.6 million comprising 86 quoted and unquoted companies, across a diverse range of sectors in both the growth and yield-focused categories. Investment valuations at the year end have been significantly impacted by the coronavirus pandemic and lockdown. Further detail is included below.
The portfolio shows the continuing shift of from yield-focused to growth investments, in line with strategy which is consistent with the current VCT regulations. There has been a 14% increase in the proportion of the funds in growth investments between 2018 and 2020.
During the period to 31 March 2020, all of the 20 new investments made were growth investments, with three being quoted and the remaining 17 unquoted. This is illustrated in the portfolio which shows the unquoted growth investments increasing year on year. We expect the proportion of growth investments in the portfolio to continue to increase over the coming years.
Several portfolio companies suffered setbacks, exacerbated by the coronavirus pandemic towards the year end, resulting in significant write downs against a number. At the year end, approximately one third of the portfolio is valued at less than cost, with half of the portfolio above cost and the remainder equal to cost. Some detail on individual investments is provided on the following below.
Portfolio Performance
The performance of the portfolio over the year has produced an unrealised loss of £20.8 million (2019: £6.3 million), with the unquoted portfolio generating an unrealised loss of £13.8 million and the quoted portfolio generating an unrealised loss of £7.0 million.
The losses over the period are split relatively evenly across each of the three investment portfolios, quoted growth, unquoted growth and unquoted yield-focused. Each of the portfolios has been impacted by the coronavirus pandemic and effective lockdown. The unquoted yield-focused investment portfolio also suffered from some issues with specific investments earlier in the year, resulting in several valuation write-downs.
It is not unexpected to suffer some losses at a relatively early stage in a portfolio of young growth companies as the weaker businesses tend to become apparent before the stronger businesses prove themselves as such. This effect has been responsible for a proportion of the losses seen in the unquoted growth portfolio during the year.
The net unrealised losses in the quoted portfolio totalled £7.0 million. The largest unrealised losses in the quoted portfolio related to Downing Strategic Micro-Cap Investment Trust plc (£1.5 million), Bonhill Group plc (£1.0 million) and Universe Group plc (£652,000). An analysis of the unrealised gains and losses are detailed further below.
The unrealised losses in the unquoted portfolio totalled £13.8 million. Within the unquoted portfolio, the largest unrealised losses were in respect of growth investment, Xupes Limited (£2.25 million), and yield-focused investments, Jito Trading Limited (£1.9 million), Cadbury House Holdings Limited (£1.3 million) and Quadrate Catering Limited (£1.2 million). These losses were partially offset by unrealised gains on Harrogate Street LLP (£657,000) and Baron House Developments LLP (£539,000).
Realised losses (over carrying value brought forward) in the period totalled £303,000, with the two most notable contributors being quoted growth company Craneware plc (loss of £455,000), and unquoted yield-focused company, Leytonstone Pub Limited (loss of £364,000), however this was a gain over cost of £1.4 million. These losses were offset by a small number of gains which are detailed below.
Further details on these and other movements can be found within the quoted and unquoted Investment Adviser Reports.
Income generation
As noted above, as the portfolio is gradually shifting away from yield-focused investments to more growth, and accordingly the income generated has reduced.
Almost half of all disposals in the year were yield-focused companies that were exited in line with standing exit plans. As a result, income has fallen from £4.7 million to £2.2 million across the period. Despite this, a steady income flow is expected from the remaining yield-focused investments held as well as some quoted growth company dividends.
Portfolio Composition
The diversification of the investment portfolio continues with new unquoted growth investments made into a number of new sectors. The main sectors in which the Company has invested are alternative energy and software and computer services, albeit the maximum exposure to any sector is 14%.
Exposure in sectors such as leisure, which include pub companies has decreased from 14% to 10%, whilst sectors such as retail has almost doubled to 5% following investments into this area with Ecstase Limited, trading as ADAY (£1.0 million), and Streethub Limited, trading as Trouva (£1.3 million).
Following the 2019/20 fundraising and some significant realisations, 27% of the investment portfolio is currently held in cash. Focus for the coming year is on deploying these funds into new investments coming from our pipeline.
Net asset value and results
The net asset value per Share (“NAV”) at 31 March 2020 stood at 57.6p, compared to the NAV at 31 March 2019 of 78.3p. Total Return (NAV plus cumulative dividends paid since the merger in 2013) is 93.1p, compared to the Total Return at 31 March 2019 of 109.8p.
The loss on ordinary activities after taxation for the year was £23.8 million (2019: profit of £4.3 million), comprising a revenue loss of £2.1 million (2019: profit of £2.6 million) and a capital loss of £21.7 million (2019: £6.9 million).
Outlook
Following investment additions during the period of £11.2 million, we expect to see a similar level of activity going forward. Despite the disruption of the pandemic, we still have a developing pipeline of opportunities.
There have been some disappointing performers in the portfolio over the last year. We have dedicated substantial resources in seeking to address the issues of each of the affected companies. Businesses in the hospitality and leisure sector are suffering heavily in the coronavirus lockdown and will require significant management time to help them get through and restore operations in due course.
The fall in the share prices of the quoted growth companies mainly result from market sentiment arising from uncertainly created by the pandemic and, to some extent, also Brexit. We continue to stay close to all these businesses to ensure we provide support where we can.
Close monitoring and support of the entire portfolio is paramount in these uncertain times. As Investment Adviser, we shall ensure that all companies benefit from government aid that is available and take sensible decisions as they deal with these unprecedented conditions as we look to deliver improved returns over the long term.
Downing LLP
Investment Adviser’s Report – Unquoted Portfolio
We present a review of the unquoted investment portfolio for the year ended 31 March 2020.
At 31 March 2020, the unquoted portfolio of 58 investments was valued at £45.9 million. 28 of these with a value of £18.5 million are unquoted growth companies and 30 are unquoted yield focused companies with a value of £27.4m.
Unquoted Growth
Investment activity
During the period, the Company invested a total of £10.2 million in unquoted growth companies, comprising nine new opportunities and eight follow-on investments.
The nine new investments were as follows: -
StreetHub Limited (£1.3 million) trading as Trouva, is an online marketplace for a curated range of homeware and lifestyle products.
Ecstase Limited (£1.0 million) trading as ADAY, is a direct to consumer women’s clothing brand founded in 2014 that creates versatile and season-less garments with a low environmental footprint.
Lineten Limited (£750,000) is a software platform that connects retailers to a range of on-demand and same-day delivery fleets to facilitate customer deliveries.
FundingXchange Limited (£525,000) is an SME funding platform and B2B technology provider which enables online lending.
JRNI Limited (£525,000) is a business to business (B2B) software platform that enables companies to offer online appointment and event bookings to their customers and staff.
Hummingbird Technologies Limited (£500,000) is an advanced crop analytics platform that is powered by machine learning and aerial imagery to assess and predict crop health.
Cambridge Touch Technologies Limited (£459,000) is developing cost effective pressure sensitive multi touch technology for the screens of handheld devices.
ADC Biotechnology Limited (£421,000) is creating innovative new technology, which aims to speed up, simplify and significantly lower the costs of the processes involved in the production of new Antibody Drug Conjugates (ADCs).
FVRVS Limited (£250,000) trading as Fundamental VR, provides surgery simulation software for enterprise clients.
Follow on investments totalling £4.5 million were made into eight companies, most notably Avid Technology Group Limited (£736,000), E-Fundamentals Limited (£675,000), Lignia Wood Company Limited (£666,000) and Limitless Technology Limited (£583,000).
Details of the investment realisations during the year are set out below. Total proceeds of £817,000 were generated from unquoted growth companies, producing profits over holding value of £33,000.
Ludorum plc, the owner of the intellectual property rights to various children’s entertainment brands, received a liquidation distribution during the year, generating a loss against cost of £1.5 million, but a gain over opening value of £33,000.
Street Hub Limited, E-Fundamentals (Group) Limited and Avid Technologies Group Limited all converted their existing loan notes during the period into further qualifying equity.
Portfolio valuation
The unquoted growth portfolio faced a number of disappointing developments and as a result was reduced in value by £7.5 million during the year. The most significant provisions are as follows:
Xupes Limited, an online retailer of pre-owned luxury goods including designer watches and handbags has been written down to nil following uncertainty over its future as a result of operational issues and likelihood of existing investors refusing to further support the business. As the company has some borrowings, it is difficult to recover any value and as a result the investment has been fully provided against.
Avid Technologies Group Limited, a manufacturer of electrified ancillaries for internal combustion engines, is currently in the early stages of a sales process. The investment value was written down by £1.1 million in line with economic uncertainty.
Empiribox Holdings Limited, the provider of equipment and training to primary schools across the UK was reduced in value by £1.1 million as a result of a number of factors, including operational issues experienced in the company and cash restrictions within primary schools in the UK, which intensified further as a result of the effective closure of UK schools from March.
Live Better With Limited, a developer of a healthcare website aiming to help people with long-term medical conditions, has been reduced in value to nil as a result of significant underperformance and the current economic environment.
Lignia Wood Company Limited, a producer of modified sustainable wood based in Barry, Wales, was written down by £617,000 as a result of expected material reductions in customer demand.
Unquoted Yield Focused
Investment activity
During the period, the Company made no new investments into this portfolio, however it generated total proceeds of £6.5 million from disposals, producing a gain of £931,000 over cost and a loss of £122,000 over holding value. Details of the realisations in the year are set out below.
The largest realisation related to Leytonstone Pub Limited and Leytonstone Pub No1 Limited, the owner of The Red Lion pub located in Leytonstone, London which exited in full, generating combined proceeds of £3.6 million and a gain over cost of £1.6 million.
Wickham Solar Limited, the owner of a 5.6MW ground mounted solar farm in Bourne, Lincolnshire was exited in full, realising a gain over cost of £244,000 and a gain over holding value of £56,000.
Portfolio valuation
The unquoted yield focused portfolio also encountered several disappointing developments and as a result was reduced in value by £6.3 million during the year. The most significant movements are as follows:
Jito Trading Limited was developing a wood pellet manufacturing plant in Weitra, Austria. The plant is not yet operational due to delays and issues encountered in the construction phase. We are now of the view that management will be unable to operate the plant profitably. As a result, it has been decided not to commission the plant and to seek to sell it as a turn-key project. An advisor has been appointed to sell the business and discussions with potential buyers are underway. Offers have been received, but as the company has borrowings, it is not expected that a sale would recover any value for the equity shareholders.
The investments in Quadrate Spa Limited and Quadrate Catering Limited, which own and operate a health club business and a top floor restaurant in The Cube complex in Birmingham were written down to nil, generating a combined unrealised loss of £1.9 million. A sale and leaseback transaction was due to complete in February 2020, however as a result of the coronavirus pandemic, both companies are not operational due to government-imposed lockdown measures and the offer has been withdrawn. We are monitoring the fluid situation and are assisting management where possible.
Cadbury House Holdings Limited, owns and operates a health club, restaurant and conference centre at Cadbury House, near Bristol.
The company has suffered a fall in value of £1.3 million as a result of the continuing economic uncertainty as well as a result of the government-imposed lockdown measures in March 2020, which has caused the site to close.
The period to 31 March 2020 has also seen a number of unrealised gains in the portfolio totalling £1.3 million. The most notable of these gains related to Harrogate Street LLP and Baron House Developments LLP, which increased in value by £657,000 and £539,000 respectively.
Harrogate Street LLP, a property developer was uplifted during the year by £657,000 following positive performance. Baron House Development LLP, a company created to fund the purchase of a property outside Newcastle station was uplifted by £539,000 during the year following improved trading.
Conclusion and outlook
The falls experienced by both parts of the unquoted portfolios over the year are disappointing. Some provisions in the growth investments are not unexpected in a portfolio in this sector and the pandemic has also had a significant impact. The failure of Jito, which is not related to these factors is the most disappointing. In that case, the management team we backed was unable to deliver what originally appeared to us to be an achievable business plan.
We have ensured that the portfolio companies have taken quick and decisive action in respect of the coronavirus pandemic, securing immediate survival and working to align themselves to the new normal. Some businesses will emerge leaner and stronger as a result and some will be forced to accelerate systemic changes already anticipated which may have a positive outcome.
Our role over the next year will be to provide support to all portfolio companies in a variety of ways to ensure they are as well positioned as can be to weather the current situation and have the best chance of thriving when conditions allow.
Downing LLP
Investment Adviser’s Report - Quoted Growth Portfolio
Investment activity
At 31 March 2020 the quoted portfolio was valued at £17.7 million comprising 28 active investments.
The Covid-19 pandemic negatively affected share prices during the reporting period, since that time share prices have improved modestly in line with the market. The Advisers have been focusing on the ability of investments to survive the pandemic and trying to estimate how the portfolio will emerge post Covid-19. It is worth noting that the majority of companies in the quoted portfolio hold net-cash and where there is debt, there is strong asset backing in the majority of cases. There is only one company where we feel there is the likelihood of a fundraise for Covid-19 reasons.
Over 48% of the quoted portfolio is accounted for in the top 10 holdings, reflecting the Adviser’s focused investment strategy. The quoted portfolio saw relatively little change in the year. During the period there were two corporate actions, the takeover of Sanderson Group plc at 140p, representing a £365,000 gain over the original cost of £336,000, and a £240,000 gain on the value before the takeover. There was also a takeover of Brady plc at 18p, representing a £201,000 loss over the original cost of £272,000 and a loss of £154,000 over the value before the takeover. There were partial sales in Craneware plc and an outright sale in Finsbury Food Group plc.
The Company made a new investment of £300,000 into Immotion Group plc, a VCT qualifying investment. There were also follow-on investments into existing non-qualifying holdings of £197,000 into Downing Strategic Micro-Cap Investment Trust plc, and £500,000 into Impact Healthcare REIT plc.
Overall, the quoted portfolio produced unrealised losses of £7.0 million. The most notable movements in the portfolio over the period are discussed below.
Portfolio Movements
The main positive contributor to performance was Cohort plc, an independent technology group, and one of the top 10 holdings. The group issued a trading update and Covid-19 update post period end. Management stated that Cohort's performance was tracking broadly in line with expectations prior to the imposition of Covid-19 restrictions in the last two months of its financial year to 30 April 2020, typically its busiest period. The restrictions have affected its ability to carry out work on customer premises and customers' ability to witness acceptance tests and to place new orders. This had some impact on FY20 revenue and trading profit, although these still showed positive growth compared to FY19.
With the benefit of a lower tax charge the group anticipate FY20 earnings per share to be in line with market expectations. The board reported that the group has a robust financial position, a strong order book underpinning 60% of expected current year revenues, and an encouraging pipeline of order opportunities across the business. The valuation of Cohort increased by 25% over the period, contributing £176,000 of unrealised gains to the portfolio.
Pressure Technologies plc, a specialist engineering group, provided an update on trading for the 26 weeks to 28 March 2020 and on the impact of Covid-19 on its operations post reporting period end. Chesterfield Special Cylinders (CSC) performed in line with management expectations for the half year and progress with key energy and defence orders has continued in line with project plans. Precision Machined Components (PMC) achieved strong order intake over the past six months across a broadening customer base. However, despite this progress, a significant delay to the output of new large complex components, the onboarding of new customers and the late commissioning of new machining centres adversely impacted gross margins in the first quarter. Management stated that while Covid-19 and a very low oil price presented an uncertain outlook, it is confident that the management and operational changes already made over the past year will help the business to navigate through this challenging period and return to cash generative growth. The valuation of Pressure Technologies increased by 3.5% over the period, contributing £2,000 of unrealised gains to the portfolio.
Negative contributors included the Downing Strategic Micro-Cap Investment Trust (DSM), which reduced the value of the portfolio by £1.5 million, reflecting the impact of the discount that DSM experienced at the start of the Covid-19 crisis. This was in-line with other investment trusts in the sector. The net asset value (NAV) of DSM did not experience a similar decline. DSM takes strategic stakes of between 3%-25% of the underlying equity and uses its influential position in portfolio companies by applying strategic mechanisms such as helping with restructuring, refinancing, and M&A in order to unlock shareholder value. It is a focused portfolio of between 12-18 positions and an investment horizon of 3-7 years.
DSM has endured a challenging three years since its launch in 2017. The economic backdrop and Brexit uncertainty resulted in significant negative sentiment towards both the UK micro-cap sector and the value orientated investment approach applied by the Manager.
As the political and economic situation improved at the end of 2019 and into 2020, share prices began to rally and to reflect the intrinsic value in portfolio companies. DSM had used its strategic influence to drive the necessary changes in most positions, improving the appropriate management teams and putting finance in place to execute on catalysts which should generate returns over its planned investment horizon. The NAV discount had been well managed throughout that period at c.3% discount (up until the start of the pandemic). As the Covid-19 crisis unfolded, the strategy quickly became a fundamental engagement with investees to ensure company survivability. In the annual report, issued post period end, the Managers stated that most portfolio positions are well capitalised to survive the pandemic, considering downside scenarios. They remain confident that DSM is well positioned, with more than 15% of NAV held in cash, allowing flexibility to support existing positions if appropriate, and to take advantage of market weakness in potential new positions that have been in diligence for some time.
Bonhill Group plc was also a negative contributor, reducing the value of the portfolio by £1.0 million. Bonhill is a leading B2B media business specialising in three key areas: Business Insight, Events and Data & Analytics. The group provided an update on the impact of Covid-19 in March.
Management stated that the pandemic is causing significant disruption to the financial services, technology and diversity communities in the UK, Europe, North America and Asia. The company started 2020 well, with particularly strong forward bookings in the UK and US. However, as the impact of coronavirus has increased, the vast majority of its UK, US, European and Asian events have been postponed resulting in an expected reduction in revenue and gross profit for the first half of the group’s financial year. The board has taken swift action to protect shareholder value by conserving cash, improving liquidity and reducing costs through headcount reductions.
Bonhill’s brands serve communities and play an important role in connecting people and enabling business. It is using all appropriate methods to continue this vital engagement and help its clients to stay close to their communities. Management believe that the business is well-positioned to respond quickly when the end is in sight, and anticipates greater business need for events, forums and networking than when the global crisis is over. Bonhill raised £2.5 million in April 2020 to ensure its survivability during the crisis.
Outlook
As fears of the potential impact of Covid-19 intensified, we conducted a thorough review of all portfolio positions to make certain that all possible risks had been identified and removed. We continue to concentrate on businesses that have strong balance sheets to ensure survivability and are targeting businesses that have high quality revenue streams that are unlikely to be affected by the pandemic.
Continuing uncertainty over the full global economic and social impact of Covid-19 and ongoing Brexit negotiations have created an extraordinarily challenging environment for all companies, particularly the smaller growth companies in which the portfolio invests. The Investment Adviser is working closely with management teams to ensure that they are supported and assisted where possible during these worrying times.
While there will doubtlessly be further challenges ahead, we are optimistic that as long-term investors their prudent approach in this time of volatility should allow the quoted portfolio to deliver long-term performance.
Downing LLP
Review of Investments
Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 March 2020:
| | Cost | Valuation | Valuation movement in year | % of portfolio by value | Total invested by funds also managed by Downing LLP 1 | |
| £’000 | £’000 | £’000 | £’000 | |||
| Top ten venture capital investments | ||||||
| Doneloans Limited | 5,000 | 5,491 | (135) | 6.3% | - | |
| Tracsis plc* | 1,443 | 4,508 | (347) | 5.2% | 2,417 | |
| Downing Care Homes Holdings Limited | 3,880 | 4,117 | (379) | 4.7% | - | |
| Baron House Developments LLP | 2,695 | 3,234 | 539 | 3.7% | 2,055 | |
| Downing Strategic Micro-Cap Investment Trust plc*** | 5,197 | 2,226 | (1,521) | 2.6% | 4,998 | |
| Pilgrim Trading Limited | 2,593 | 2,120 | (473) | 2.4% | 3,722 | |
| Harrogate Street LLP | 1,400 | 2,057 | 657 | 2.4% | - | |
| Anpario plc* | 1,448 | 1,917 | (62) | 2.2% | 1,583 | |
| Cadbury House Holdings Limited | 3,081 | 1,749 | (1,326) | 2.0% | 1,979 | |
| Pearce and Saunders Limited | 1,320 | 1,507 | (145) | 1.7% | 1,680 | |
| 28,057 | 28,926 | (3,192) | 33.2% | 18,434 | ||
| Other quoted growth investments | ||||||
| Craneware plc* | 353 | 1,391 | (426) | 1.6% | 114 | |
| Impact Healthcare REIT plc*** | 1,518 | 1,302 | (248) | 1.5% | 258 | |
| Inland Homes plc* | 1,526 | 1,282 | (519) | 1.5% | 2,926 | |
| Cohort plc* | 394 | 865 | 176 | 1.0% | - | |
| Vianet Group plc* | 952 | 733 | (438) | 0.8% | - | |
| Universe Group plc* | 1,506 | 709 | (652) | 0.8% | 1,794 | |
| Science in Sport plc* | 1,239 | 611 | (394) | 0.7% | 3,145 | |
| Pittards plc* | 1,350 | 506 | (191) | 0.6% | 1,217 | |
| Angle plc* | 678 | 466 | (57) | 0.5% | - | |
| Brooks Macdonald Group plc* | 257 | 252 | (39) | 0.3% | 2,770 | |
| SysGroup plc* | 377 | 169 | (69) | 0.2% | 1,518 | |
| Pennant International Group plc* | 335 | 165 | (376) | 0.2% | 304 | |
| Norman Broadbent plc* | 906 | 151 | (166) | 0.2% | 1,332 | |
| Frontier IP Group plc* | 30 | 137 | (43) | 0.2% | - | |
| Immotion Group plc* | 300 | 77 | (223) | 0.1% | - | |
| Bonhill Group plc* | 1,000 | 75 | (1,025) | 0.1% | 3,198 | |
| Dillistone Group plc* | 411 | 60 | (71) | 0.1% | - | |
| Pressure Technologies plc* | 249 | 58 | 2 | 0.1% | 304 | |
| Fireangel Safety Technology Group plc* | 545 | 44 | (28) | 0.1% | 9,772 | |
| MI Downing UK Micro-Cap Growth Fund*** | 50 | 29 | (14) | 0.0% | 5,150 | |
| AIQ Limited | - | 7 | 4 | 0.0% | - | |
| Flowgroup plc* | 385 | - | - | 0.0% | - | |
| ACHP plc* | 61 | - | (65) | 0.0% | - | |
| Redhall Group plc* | 500 | - | (170) | 0.0% | - | |
| Wheelsure Holdings plc** | 48 | - | (18) | 0.0% | - | |
| 14,970 | 9,089 | (5,050) | 10.6% | 33,802 | ||
| Other unquoted growth investments | ||||||
| E-Fundamentals (Group) Limited | 1,342 | 1,342 | - | 1.5% | 1,897 | |
| Rated People Limited | 1,282 | 1,282 | - | 1.5% | 2,949 | |
| Lignia Wood Company Limited | 1,777 | 1,250 | (617) | 1.4% | 3,614 | |
| Streethub Limited | 1,050 | 1,101 | 51 | 1.3% | 2,993 | |
| Firefly Learning Limited | 1,047 | 1,047 | - | 1.2% | 2,271 | |
| Avid Technologies Group Limited | 1,833 | 1,037 | (1,104) | 1.2% | - | |
| Imagen Limited | 1,000 | 1,000 | - | 1.1% | 2,086 | |
| Ecstase Limited | 1,000 | 1,000 | - | 1.1% | 2,081 | |
| Curo Compensation Limited | 1,418 | 898 | (298) | 1.0% | 705 | |
| Upp Technologies Group Limited | 1,077 | 808 | (269) | 0.9% | 1,077 | |
| Limitless Technology Limited | 757 | 803 | - | 0.9% | 2,283 | |
| Hackajob Limited | 784 | 784 | - | 0.9% | 1,324 | |
| Lineten Limited | 750 | 750 | - | 0.9% | 789 | |
| Virtual Class Limited | 914 | 681 | 19 | 0.8% | 1,469 | |
| Masters of Pie Limited | 667 | 667 | - | 0.8% | 2,304 | |
| FundingXchange Limited | 525 | 525 | - | 0.6% | 1,286 | |
| JRNI Limited | 525 | 525 | - | 0.6% | 2,815 | |
| Exonar Limited | 500 | 500 | - | 0.6% | 1,035 | |
| ADC Biotechnology Limited | 421 | 421 | - | 0.5% | 2,527 | |
| Hummingbird Technologies Limited | 500 | 418 | (82) | 0.5% | 1,500 | |
| BridgeU Corporation | 810 | 414 | (396) | 0.5% | 810 | |
| Cambridge Touch Technologies Limited | 459 | 361 | (98) | 0.4% | 1,397 | |
| Empiribox Holdings Limited | 1,528 | 325 | (1,072) | 0.4% | 2,924 | |
| Channel Mum Limited | 500 | 300 | (200) | 0.3% | 1,851 | |
| FVRVS Limited | 250 | 250 | - | 0.3% | 1,814 | |
| Ludorum plc | 177 | 7 | 3 | 0.0% | - | |
| Glownet Limited | 741 | - | (185) | 0.0% | 1,569 | |
| Live Better With Limited | 991 | - | (991) | 0.0% | 3,970 | |
| Tawa Associates Limited | - | - | (16) | 0.0% | - | |
| Resource Reserve Recovery Limited | 6 | - | - | 0.0% | - | |
| Xupes Limited | 2,250 | - | (2,250) | 0.0% | 1,551 | |
| 26,881 | 18,496 | (7,505) | 21.2% | 52,891 | ||
| Other unquoted yield focused investments | ||||||
| Data Centre Response Limited | 557 | 1,308 | 41 | 1.5% | - | |
| Nomansland Biogas Limited | 1,300 | 1,300 | - | 1.5% | 5,260 | |
| Fenkle Street LLP | 346 | 900 | 64 | 1.0% | 1,280 | |
| Kimbolton Lodge Limited | 664 | 815 | (91) | 0.9% | - | |
| Downing Pub EIS ONE Limited | 490 | 545 | (78) | 0.6% | 5,862 | |
| Fresh Green Power Limited | 378 | 462 | 42 | 0.6% | 566 | |
| SF Renewables (Solar) Limited | 422 | 342 | (105) | 0.4% | 6,778 | |
| Rockhopper Renewables Limited | 738 | 332 | (310) | 0.4% | 6,470 | |
| FCT No.1 Limited | 228 | 299 | (100) | 0.3% | - | |
| Indigo Generation Limited | 920 | 290 | (354) | 0.3% | 8,291 | |
| Ironhide Generation Limited | 920 | 290 | (354) | 0.3% | 8,405 | |
| Green Energy Production UK Limited | 200 | 108 | 6 | 0.1% | 300 | |
| Pearce and Saunders DevCo Limited | 88 | 88 | - | 0.1% | 112 | |
| Jito Trading Limited | 2,500 | - | (1,875) | 0.0% | 7,200 | |
| London City Shopping Centre Limited | 110 | - | - | 0.0% | - | |
| Quadrate Catering Limited | 1,500 | - | (1,237) | 0.0% | 2,300 | |
| Quadrate Spa Limited | 1,872 | - | (692) | 0.0% | 3,258 | |
| The Thames Club Limited | 175 | - | - | 0.0% | 2,800 | |
| Top Ten Holdings plc | 399 | - | - | 0.0% | - | |
| Yamuna Renewables Limited | 2,500 | - | - | 0.0% | 4,510 | |
| 16,307 | 7,079 | (5,043) | 8.0% | 63,392 | ||
| Total investments | 86,215 | 63,590 | (20,790) | 73.0% | 168,519 | |
| Cash at bank and in hand | 23,471 | 27.0% | ||||
| 87,061 | 100.0% | |||||
The Company also invested into Golden Rock Global plc and Mining, Minerals & Metals plc. These investments were acquired at negligible value and continued to be valued at the same level.
All venture capital investments are unquoted unless otherwise stated.
* Quoted on AIM
** Quoted on the NEX Exchange Growth Market
*** Quoted on the Main Market of the London Stock Exchange
(1) Other self-managed and discretionary managed funds also managed by Downing LLP as Investment Manager or Adviser as at 31 March 2020:
- Downing TWO VCT plc
- Downing THREE VCT plc
- Downing FOUR VCT plc
- MI Downing UK Micro-Cap Growth Fund
- MI Downing Monthly Income Fund
- Downing Strategic Micro-Cap Investment Trust plc
- Downing AIM Estate Planning Service and Downing AIM NISA
- VT Downing Unique Opportunities Fund
- Downing Renewables EIS
- Downing Indian Solar EIS
- Downing Ventures EIS
- Downing Pub EIS
- Downing EIS
Investment movements for the year ended 31 March 2020
Additions
| £’000 | |
| Quoted growth investments | |
| Impact Healthcare REIT plc | 500 |
| Immotion Group plc | 300 |
| Downing Strategic Micro-Cap Investment Trust plc | 197 |
| 997 | |
| Unquoted growth investments | |
| Streethub Limited | 1,300 |
| Ecstase Limited | 1,000 |
| Lineten Limited | 750 |
| Avid Technologies Group Limited | 736 |
| E-Fundamentals (Group) Limited | 675 |
| Lignia Wood Company Limited | 666 |
| Limitless Technology Limited | 583 |
| FundingXchange Limited | 525 |
| JRNI Limited | 525 |
| Upp Technologies Limited (formerly Volo Commerce Limited) | 510 |
| Empiribox Holdings Limited | 500 |
| Hummingbird Technologies Limited | 500 |
| Masters of Pie Limited | 500 |
| Cambridge Touch Technologies Limited | 459 |
| ADC Biotechnology Limited | 421 |
| Channel Mum Limited | 300 |
| FVRVS Limited | 250 |
| 10,200 | |
| 11,197 |
Disposals
| Profit/ | Realised | ||||
| Value at | (loss) vs | gain/ | |||
| Cost | 01/04/19* | Proceeds | cost | (loss) | |
| £’000 | £’000 | £’000 | £’000 | £’000 | |
| Quoted growth investments | |||||
| Sanderson Group plc | 336 | 461 | 701 | 365 | 240 |
| Finsbury Food Group plc | 655 | 688 | 843 | 188 | 155 |
| Brady plc | 272 | 225 | 71 | (201) | (154) |
| Craneware plc | 497 | 2,550 | 2,095 | 1,598 | (455) |
| 1,760 | 3,924 | 3,710 | 1,950 | (214) | |
| Unquoted growth investments (including loan note redemptions) | |||||
| Ludorum plc | 1,592 | 31 | 64 | (1,528) | 33 |
| Streethub Limited | 250 | 250 | 250 | - | - |
| E-Fundamentals (Group) Limited | 250 | 250 | 250 | - | - |
| Avid Technologies Group Limited | 253 | 253 | 253 | - | - |
| 2,345 | 784 | 817 | (1,528) | 33 | |
| Unquoted yield focused investments (including loan note redemptions) | |||||
| Leytonstone Pub No1 Limited | 81 | 81 | 258 | 177 | 177 |
| Wickham Solar Limited | 472 | 660 | 716 | 244 | 56 |
| Pantheon Trading Limited | 1,500 | 1,500 | 1,509 | 9 | 9 |
| Tramps Nightclub Limited | 262 | - | - | (262) | - |
| Mosaic Spa and Health clubs Limited | 706 | 58 | 58 | (648) | - |
| Pabulum Pubs Limited | 607 | 607 | 607 | - | - |
| Leytonstone Pub Limited | 1,911 | 3,686 | 3,322 | 1,411 | (364) |
| 5,539 | 6,592 | 6,470 | 931 | (122) | |
| 9,644 | 11,300 | 10,997 | 1,353 | (303) | |
* Adjusted for purchases in the year where applicable
Directors’ responsibilities statement
The Directors are responsible for preparing the Strategic Report, the Report of the Directors, the Directors’ Remuneration Report, the separate Corporate Governance Statement and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether the financial statements have been prepared in accordance with applicable UK Accounting Standards, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions, and to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements and the Directors Remuneration Report 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 to assess the Company’s position, performance, business model and strategy.
Income Statement
for the year ended 31 March 2020
| Year ended 31 March 2020 | Year ended 31 March 2019 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 2,118 | 100 | 2,218 | 4,593 | 134 | 4,727 | ||
| Losses on investments | - | (21,094) | (21,094) | - | (6,317) | (6,317) | ||
| 2,118 | (20,994) | (18,876) | 4,593 | (6,183) | (1,590) | |||
| Investment management fees | (970) | (970) | (1,940) | (975) | (975) | (1,950) | ||
| Other expenses | (3,000) | - | (3,000) | (732) | - | (732) | ||
| Return/(loss) on ordinary activities before tax | (1,852) | (21,964) | (23,816) | 2,886 | (7,158) | (4,272) | ||
| Tax on total comprehensive income and ordinary activities | (257) | 257 | - | (252) | 252 | - | ||
| Return/(loss) attributable to equity shareholders | (2,109) | (21,707) | (23,816) | 2,634 | (6,906) | (4,272) | ||
| Basic and diluted return per share | (1.6) | (16.1) | (17.7) | 2.0p | (5.2p) | (3.2p) | ||
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”). There are no other items of comprehensive income. The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 and updated in February 2018 by the Association of Investment Companies (“AIC SORP”).
Statement of Changes in Equity
for the year ended 31 March 2020
| | Called up Share Capital | Capital redemption reserve | Share premium account | Funds held in respect of shares not yet allotted | Special reserve | Capital reserve realised | Revaluation reserve | Revenue reserve | Total |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| For the year ended 31 March 2019 | |||||||||
| At 1 April 2018 | 1,200 | 1,574 | 31,661 | 12,876 | 64,859 | - | 4,909 | 828 | 117,907 |
| Total comprehensive income | - | - | - | - | - | (618) | (6,287) | 2,634 | (4,271) |
| Realisation of revaluations from previous years* | - | - | - | - | - | (1,598) | 1,598 | - | - |
| Realisation of impaired valuations | - | - | - | - | - | (1,123) | 1,123 | - | - |
| Transfer between reserves* | - | - | - | - | (10,018) | 10,018 | - | - | - |
| Transactions with owners | |||||||||
| Dividends paid | - | - | - | - | - | (6,679) | - | (1,341) | (8,020) |
| Unallotted shares | - | - | - | (12,762) | - | - | - | - | (12,762) |
| Issue of new shares | 157 | - | 13,854 | - | - | - | - | - | 14,011 |
| Share issue costs | - | - | - | - | (470) | - | - | - | (470) |
| Purchase of own shares** | (23) | 23 | - | - | (1,845) | - | - | - | (1,845) |
| At 31 March 2019 | 1,334 | 1,597 | 45,515 | 114 | 52,526 | - | 1,343 | 2,121 | 104,550 |
| For the year ended 31 March 2020 | |||||||||
| At 1 April 2019 | 1,334 | 1,597 | 45,515 | 114 | 52,526 | - | 1,343 | 2,121 | 104,550 |
| Total comprehensive income | - | - | - | - | - | (917) | (20,790) | (2,109) | (23,816) |
| Realisation of revaluations from previous years* | - | - | - | - | - | 2,488 | (2,488) | - | - |
| Realisation of impaired valuations | - | - | - | - | - | (13,431) | 13,431 | - | - |
| Transfer between reserves* | - | - | - | - | (16,499) | 16,499 | - | - | - |
| Transactions with owners | |||||||||
| Dividends paid | - | - | - | - | - | (4,639) | - | (886) | (5,525) |
| Utilised in share issue | - | - | - | (114) | - | - | - | - | (114) |
| Unallotted shares | - | - | - | 5,775 | - | - | - | - | 5,775 |
| Issue of new shares | 124 | - | 9,188 | - | - | - | - | - | 9,312 |
| Share issue costs | - | - | - | - | (151) | - | - | - | (151) |
| Purchase of own shares** | (18) | 18 | - | - | (1,289) | - | - | - | (1,289) |
| At 31 March 2020 | 1,440 | 1,615 | 54,703 | 5,775 | 34,587 | - | (8,504) | (874) | 88,742 |
* A transfer of £2,488,000 representing previously recognised unrealised losses on disposal of investments during the year ended 31 March 2020 (2019: £1,598,000) has been made from the Revaluation reserve to the Capital Reserve-realised. A transfer of £16.5 million representing realised gains on disposal of investments, less net investment impairments and the excess of capital expenses over capital income and capital dividends in the year (2019: £7.3 million) has been made from the Special reserve to the Capital Reserve – realised.
** These shares were subsequently cancelled.
Balance Sheet
as at 31 March 2020
| 2020 | 2019 | ||||
| £’000 | £’000 | ||||
| Fixed assets | |||||
| Investments | 63,590 | 84,483 | |||
| Current assets | |||||
| Debtors | 1,944 | 3,228 | |||
| Cash at bank and in hand | 23,471 | 17,222 | |||
| 25,415 | 20,450 | ||||
| Creditors: amounts falling due within one year | (263) | (383) | |||
| Net current assets | 25,152 | 20,067 | |||
| Net assets | 88,742 | 104,550 | |||
| Capital and reserves | |||||
| Called up share capital | 1,440 | 1,334 | |||
| Capital redemption reserve | 1,615 | 1,597 | |||
| Share premium account | 54,703 | 45,515 | |||
| Funds held in respect of shares not yet allotted | 5,775 | 114 | |||
| Special reserve | 34,587 | 52,526 | |||
| Revaluation reserve | (8,504) | 1,343 | |||
| Revenue reserve | (874) | 2,121 | |||
| Total equity shareholders’ funds | 88,742 | 104,550 | |||
| Basic and diluted net asset value per share | 57.6p | 78.3p |
The financial statements were approved and authorised for issue by the Board of Directors on 30 July 2020 and were signed on its behalf by:
Chris Kay
Chairman
Company number: 3150868
Cash Flow Statement
for the year ended 31 March 2020
| 2020 | 2019 | |||
| £’000 | £’000 | |||
| Cash flow from operating activities | ||||
| (Loss)/profit on ordinary activities after taxation | (23,816) | (4,272) | ||
| Loss/(gains) on investments | 21,094 | 6,317 | ||
| Decrease/(increase) in debtors | 1,284 | (1,654) | ||
| (Decrease)/increase in creditors | (28) | (76) | ||
| Net cash generated from operating activities | (1,466) | 315 | ||
| Cash flow from investing activities | ||||
| Purchase of investments | (11,197) | (12,501) | ||
| Proceeds from disposal of investments | 10,997 | 3,289 | ||
| Net cash (outflow)/inflow from investing activities | (200) | (9,212) | ||
| Cash flows from financing activities | ||||
| Proceeds from share issue | 9,312 | 14,011 | ||
| Funds held in respect of shares not yet allotted | 5,661 | (12,762) | ||
| Share issue costs | (151) | (470) | ||
| Purchase of own shares | (1,382) | (2,096) | ||
| Equity dividends paid | (5,525) | (8,020) | ||
| Net cash (outflow)/inflow from financing activities | 7,915 | (9,337) | ||
| (Decrease)/increase in cash | 6,249 | (18,234) | ||
| Net movement in cash | ||||
| Beginning of year | 17,222 | 35,456 | ||
| Net cash (outflow)/inflow | 6,249 | (18,234) | ||
| End of year | 23,471 | 17,222 |
Notes to the Accounts
for the year ended 31 March 2020
1. General information
Downing ONE 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, and 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 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” issued November 2014 and updated February 2018 (“SORP”).
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. The impact of COVID-19 has been considered, more detail on these considerations can be found within the Corporate Governance report. As such, the Board confirms that the Company has adequate resources to continues in operational existence for at least 12 months from the date of approval of the financial statements. The Company therefore continues to adopt the going concern basis in preparing its financial statements.
Presentation of income statement
In order to better reflect the activities of a Venture Capital Trust and in accordance with guidance issued by the Association of Investment Companies (“AIC”), 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.
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.
Judgements in applying accounting policies and key sources of estimation uncertainty
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 FRS 102 sections 11 and 12, together with the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”).
Investments quoted on recognised stock markets are measured using bid prices.
The valuation methodologies for unquoted instruments (comprising equity and loan notes), used by the IPEV to ascertain the fair value of an investment, are as follows:
- Calibration to the price of recent investment;
- Multiples;
- Net assets;
- Discounted cash flows or earnings (of the 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. Where an investee company has gone into receivership, liquidation or administration and there is little likelihood of a recovery, the loss on the investment, although not physically disposed of, is treated as being realised.
Gains and losses arising from changes in fair value are included in the income statement as a capital item.
It is not the Company’s policy to exercise significant influence or joint control 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 do not require portfolio investments to be accounted for using the equity method of accounting.
Calibration to price of recent investment requires a level of judgment to be applied in assessing and reviewing any additional information available since the last investment date. The manager considers a range of factors in order to determine if there is any indication of decline in value or evidence of increase in value since the recent investment date. If no such indications are noted the price of the recent investment will be used as the fair value for the investment.
Examples of signals which could indicate a movement in value are: -
- Changes in results against budget or in expectations of achievement of technical milestones (patents/testing/ regulatory approvals)
- Significant changes in the market of the products or in the economic environment in which it operates
- Significant changes in the performance of comparable companies
- Internal matters such as fraud, litigation or management structure.
In respect of disclosures required by the SORP for the 10 largest investments held by the Company, the most recent publicly available accounts information, either as filed at Companies House, or announced to the London Stock Exchange, is disclosed. In the case of unlisted investments, this may be abbreviated information only.
Income
Dividend income from investments is recognised when the Shareholders’ right to receive payment has been established, normally the ex-dividend date.
Loan stock interest is accrued on a time apportioned basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.
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 acquisition of an investment are deducted from the Capital Account.
- 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. Investment management fees are allocated 50% to revenue and 50% to capital, in order to reflect the Directors’ expected long-term view of the nature of the investment returns of the Company.
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 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.
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 the obligations or rights crystallise based on tax rates and law enacted or substantively enacted at the balance sheet date. 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. Deferred tax assets are only recognised if it is expected that future taxable profits will be available to utilise such assets and are recognised on a non-discounted basis.
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.
Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.
Share issue costs
Share issue costs have been deducted from the special reserve account.
Segmental reporting
The Company only has one class of business and one market.
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.
Funds held in respect of shares not yet allotted
Cash received in respect of applications for new shares that have not yet been allotted is shown as “Funds held in respect of shares not yet allotted” and recorded on the Balance Sheet and Statement of Changes in Equity.
3. Basic and diluted return per share
| 2020 | 2019 | ||
| £’000 | £’000 | ||
| Return per share based on: | |||
| Net revenue (loss)/return for the financial year | (2,109) | 2,634 | |
| Net capital (loss) for the financial year | (21,707) | (6,906) | |
| Total (loss) for the financial year | (23,816) | (4,272) | |
| Weighted average number of shares in issue | 134,726,743 | 133,474,895 |
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 the basic and diluted return per share.
4. Principal Risks
The Company’s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company’s operations are:
- Investment 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 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 Adviser and overseen by the Board. The Investment Adviser 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 Investment Adviser 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 also changes in the fair value of unquoted investments that it holds.
Interest 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 and fixed interest securities attract interest predominately at fixed rates. A summary of the interest rate profile of the Company’s investments is shown below.
Interest rate 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 the Bank of England base rate and comprise cash at bank.
- “No interest rate” assets do not attract interest and comprise equity investments, non-interest bearing convertible loan notes, 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.
In March 2020, The Bank of England base rate decreased from 0.75% per annum to 0.1% per annum. Any potential change in the base rate at the current level wouldn’t have a material impact on the net assets and total return of the Company.
Credit risk
Credit risk is the risk that the 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, investments in fixed interest securities, cash deposits and debtors.
The Investment Adviser manages credit risk in respect of loan notes with a similar approach as described under investment risks above. In addition, with the exception of new investments, credit risk is mitigated by registering floating charges, 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. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.
Cash is mainly held at Bank of Scotland plc, with a balance also maintained at Royal Bank of Scotland plc, both of which are A-rated financial institutions. Consequently, the Directors consider that the credit risk associated with cash deposits is low.
There has been limited changes in fair value during the year that can be directly attributable to changes in credit risk.
As at 31 March 2020, of the loan stock classified as “past due”, £1,103,000 relates to the principal of loan notes where, although the principal remains within the term, the investee company is not fully servicing the interest obligations under the loan note and is in arrears. Notwithstanding the arrears of interest, the Directors do not consider that the loan note itself has been impaired or the maturity of the principal has altered.
As at 31 March 2020, of the loan stock classified as “past due”, £7,420,000 relates to the principal of loan notes where the principal has passed its maturity date. As at the balance sheet date, the extent to which the principal is past its maturity date, £5.5 million falls within the banding of nil to 2 years past due and £1.9 million is 3 to 5 years past due. Notwithstanding this information, the Directors do not consider the loan notes to be impaired at the current time or that maturity dates of the principal have altered.
As at 31 March 2019, of the loan stock classified as “past due”, £2,695,000 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 was in arrears. Notwithstanding the arrears of interest, the Directors did not consider that the loan note itself had been impaired or the maturity of the principal had altered.
As at 31 March 2019, of the loan stock classified as “past due”, £2,134,000 related to the principal of loan notes where the principal had passed its maturity date. As at 31 March 2019, the extent to which the principal is past its maturity date, £2.1 million falls within the banding of nil to 2 years past due and £58,000 is 3 to 4 years past due. Notwithstanding this information, the Directors did not consider the loan notes to be impaired at 31 March 2019 or that maturity dates of the principal had 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. The Company normally has a relatively low level of creditors (2020: £263,000, 2019: £383,000) and has no borrowings. Most of the quoted investments held by the Company are considered to be readily realisable. 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 Adviser in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.
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 March 2020, but has been extracted from the statutory financial statements for the year ended 31 March 2020 which were approved by the Board of Directors on 30 July 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 year 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 year ended 31 March 2020 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at St. Magnus House, 3 Lower Thames Street, London EC3R 6HD and will be available for download from and www.downing.co.uk