Full Year Results and Notice of AGM
*Hargreave** Hale AIM VCT plc*
*(the ‘Company’)*
*(LEI:* *213800LRYA19A69SIT31)*
*FULL YEAR RESULTS AND NOTICE OF AGM*
Hargreave Hale AIM VCT plc announces its results for the year ended 30 September 2021.
The Company also announces that its 2022 Annual General Meeting will be held at 10.30am on 3 February 2022 at 41 Lothbury, London EC2R 7AE.
The Company’s Annual Report and Financial Statements for the year ended 30 September 2021 and the formal Notice of the Annual General Meeting will be posted to shareholders who have elected to receive hard copies and in accordance with Listing Rule 9.6.1 copies of the documents have been submitted to the UK Listing Authority and will shortly be available to view on the Company's corporate website at https://www.hargreaveaimvcts.co.uk and have also been submitted to the UK Listing Authority and will be shortly available for inspection from the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
*Strategic report*
The report has been prepared by the Directors in accordance with the requirements of Section 414A of the Companies Act 2006.
*Summary financial data* *2021* *2020*
NAV (£m) 228.96 147.00
NAV per share (p) 100.39 73.66
NAV total return (%)(2) 42.26 11.42
Market capitalisation (£m) 212.11 131.7
Share price (p) 93.00 66.00
Share price discount to NAV per share (%)(2) 5.00(3) 10.40(4)
Share price 5 year average discount to NAV per share (%)(2) 6.31(3) 6.18
Share price total return (%)(2) 51.36 6.77
Gain per share for the year (p) 30.45 7.81
Dividends paid per share (p) 4.40 5.00
Ongoing charges ratio (%)(2) 2.12 2.35
*Financial highlights for the year ended 30 September 2021*
*Net asset value (NAV) per share* *NAV total return*
*Tax free dividends paid in the period* *Share price total return* *Ongoing charges ratio*
*100.39p*^*(1)* *42.26%*^*(2)* *4.40p* *51.36%*^*(2)* *2.12%*^*(2)*
(1) Cumulative of special dividend paid post year-end.
(2) Alternative performance measure definitions and illustrations can be found in the glossary section of this report.
(3) The company’s shares went ex-dividend on 30 September 2021. The FY21 year end discount to NAV and the 5 year average discount to NAV is a function of the year end ex-dividend NAV of 97.89 pence per share and the year end share price.
(4) The FY20 year end review resulted in favourable movements in the valuation of several private companies and a substantial increase in the NAV per share relative to the previously published NAV per share, leading to an unusually wide discount at the year-end.
• £15.9 million invested in Qualifying Companies in the year.
• 98.7% invested by VCT tax value in Qualifying Investments at 30 September 2021.
• Special dividend of 2.50 pence per share paid on 29 October 2021 and final dividend of 3.15 pence per share proposed for the year end.
• Offer for subscription to raise £20 million, together with an over-allotment facility to raise a further £10 million fully subscribed as announced by the Company on 15 February 2021.
• New Offer for subscription launched on 2 September 2021 to raise £20 million, together with an over-allotment facility to raise a further £20 million fully subscribed as announced by the Company on 22 October 2021.
*Financial calendar*
Record date for special dividend 1 October 2021
Payment of special dividend 29 October 2021
Record date for final dividend 7 January 2022
Payment of final dividend 10 February 2022
Annual General Meeting 3 February 2022
Announcement of half-yearly results for the six months ending 31 March 2022 June 2022
Payment of interim dividend (subject to Board approval) July 2022
*END*
For further information, please contact:
*JTC (UK) Limited*
Susan.Fadil
Ruth Wright HHV.CoSec@jtcgroup.com
+44 20 3893 1005
+44 203 893 1011
LEI: 213800LRYA19A69SIT31
*Chairman’s statement*
*Introduction*
I would like to welcome shareholders who have joined us as a result of the recent offers for subscription. The most recent offer was launched in early September 2021 and closed in just seven weeks having raised a gross total of £40 million. Thank you to all shareholders for your continuing support which is greatly appreciated.
Covid-19 of course is still with us and, as we have seen in recent weeks with the emergence of the Omicron variant, will likely continue to be for the foreseeable future. However, following the very successful vaccination program, the virus has perhaps become a little less threatening to the wider community, the economy, companies and therefore the prospects for your fund.
Maybe the same can’t be said with regard to inflation. In my last report to you I raised the real concern that inflation could accelerate and with it interest rates. Whilst most Central Banks still appear to be confident that current inflation numbers are relatively short term in nature, the markets and many commentators appear to take a more bearish view with expectations now for a gradual increase in rates into 2022.
Your manager has more detail below on NAV performance over the past year but it would be wrong for me not to highlight the exceptional returns your fund has produced over the last twelve months - well in excess of 40% whilst at the same time outperforming the comparative indices.
*Performance*
At 30 September 2021, the cum-dividend NAV per share was 100.39 pence which, after adjusting for the dividends paid in the year of 4.40 pence, gives a NAV total return for the year of 42.26%. The NAV total return (dividends reinvested) for the year was 43.04% compared with 30.79% in the FTSE AIM All-Share Index Total Return (also calculated on a dividends reinvested basis). The Directors consider this to be the most appropriate benchmark from a shareholder’s perspective, however, due to the investment restrictions placed on a VCT it is not wholly comparable. The NAV total return since inception is 164.94 pence (a gain of 64.94%).
The earnings per share total return for the year was a gain of 30.45 pence (comprising a revenue loss of 0.39 pence and a capital return of 30.84 pence). Revenue income increased by 22% to £0.89m as a result of an increase in dividends received from portfolio companies and interest accrued on convertible loan note instruments. Revenue expenses exceeded income and resulted in a revenue loss for the year of 0.39 pence per share.
The share price increased from 66.00 to 93.00 pence (ex-dividend) over the reporting period which, after adjusting for dividends paid, gives a share price total return of 51.36%.
*Investments*
The Investment Manager invested £15.9 million into 18 Qualifying Companies during the period. The fair value of Qualifying Investments at 30 September 2021 was £173.4 million (75.7% of NAV) invested in 68 AIM companies and 7 unquoted companies. £25.7 million (11.2% of NAV) was invested in non-qualifying equities, £3.7 million (1.6% of NAV) was invested in the Marlborough Special Situations Fund and £27.0 million (11.8% of NAV) was held in cash at the year end. Most of the non-qualifying equities are listed in the FTSE 350 and offer good levels of liquidity should the need arise.
The year end valuation review resulted in changes to the valuation of several of the investments in private companies, some higher and some lower, which in aggregate amounted to a net increase of 0.81 pence per share since the last review on 30 June 2021. Across the year as a whole, movements in the valuations of the private companies added 5.50 pence per share to the year end NAV per share, in part due to significant increases in value for SCA Investments Limited (trading as Gousto) and Oxford Genetics, which was sold to WuXi AppTec on 1 March 2021.
*Dividend*
The Directors continue to maintain their policy of targeting a tax free dividend yield equivalent to 5% of the year end NAV per share.
In the 12 month period to 30 September 2021, the Company paid dividends totalling 4.40 pence (2020: 5.00 pence). A final dividend of 2.65 pence in respect of the previous financial year was paid on 11 February 2021 (2019: 2.25 pence) and an interim dividend of 1.75 pence (2020: 1 penny) was paid on 30 July 2021.
A special dividend of 2.50 pence per share was announced on 23 September 2021 and paid on 29 October 2021 to shareholders on the register on 1 October 2021. A final dividend of 3.15 pence is proposed (2020: 2.65 pence) which, subject to shareholder approval at the Annual General Meeting, will be paid on 10 February 2022 to ordinary shareholders on the register on 7 January 2022.
*Dividend re-investment scheme*
Shareholders may elect to reinvest their dividend by subscribing for new shares in the Company.
On 11 February 2021, 276,440 ordinary shares were allotted at a price of 90.03 pence per share, being the last published ex-dividend NAV per share as at 22 January 2021, to shareholders who elected to receive shares under the DRIS as an alternative to the final dividend for the year ended 30 September 2020.
On 30 July 2021, 203,313 ordinary shares were allotted at a price of 99.23 pence per share, being the last published ex-dividend NAV per share as at 9 July 2021, to shareholders who elected to receive shares under the DRIS as an alternative to the interim dividend for the year ended 30 September 2021.
On 29 October 2021 (post period end), 327,293 ordinary shares were allotted at a price of 94.09 pence per share, being the last published ex-dividend NAV per share as at 8 October 2021, to shareholders who elected to receive shares under the DRIS as an alternative to the special dividend announced by the Company on 23 September 2021.
*Buybacks*
In total, 6,661,974 shares (nominal value £66,620) were repurchased during the year at a cost of £6,043,569 (average price: 90.72 pence per share). As at 16 December 2021, a further 401,981 shares have been repurchased post the year end at a cost of £365,958 (average price: 91.04 pence per share).
*Share price discount*
The Company aims to improve liquidity and to maintain a discount of approximately 5 per cent. to the last published NAV per share (as measured against the mid-price) by making secondary market purchases of its shares in accordance with parameters set by the Board.
We continued to operate the discount control and management of share liquidity policy effectively during the period. The Company has 1 and 5 year average share price discounts of 6.25% and 6.31% respectively.
On an ex-dividend basis, the Company’s share price discount as at 30 September 2021 was 5.00% compared to 10.40% at 30 September 2020.
As at 15 December 2021 the discount to NAV was 5.28% of the last published NAV per share.
*Offer for subscription*
The Directors of the Company announced on 2 September 2020 the launch of an offer for subscription for shares to raise up to £20 million, together with an over-allotment facility of up to a further £10 million. On 15 February 2021, the Company announced the offer for subscription was closed to further applications. The offer resulted in gross funds being received of £30 million and the issue of 34.8 million shares.
*New Offer for subscription*
The Directors of the Company announced on 2 September 2021 the launch of a new offer for subscription for shares to raise up to £20 million, together with an over-allotment facility of up to a further £20 million. The offer was approved by shareholders of the Company at a general meeting on 6 October 2021.
On 22 September 2021, the Company announced that it had received valid applications in excess of £17 million and, accordingly, the Directors of the Company confirmed they intended to utilise the available £20 million over-allotment facility.
On 22 October 2021, the Company announced it had received valid applications in respect of the full £20 million over-allotment facility and therefore the offer for subscription was closed to further applications.
As at 16 December 2021, 40.6 million shares have been allotted raising gross proceeds of £39.2 million. A further £0.8 million will be allotted in the 2022/23 tax year.
*Investment Manager VCT team*
As previously announced, Giles Hargreave stepped down as co-manager on 31 December 2020; he has not been involved in the management of the VCT portfolio since then. Looking forward, Giles is not expected to provide any input to the VCT’s portfolio, although he remains available to support the Investment Manager’s VCT team in his role as Life President of Canaccord Genuity Fund Management (the trading name of Hargreave Hale Ltd). The Board would like to thank Giles for his contribution to the VCT since it first launched in 2004.
Additionally, the Investment Manager’s VCT team has further expanded with the addition of Archie Stirling, a second investment analyst in September 2021, taking the Investment Manager’s VCT team to five. Archie joined the Investment Manager in September 2021 following 8 years at KPMG LLP, including 5 years working in transaction services.
*Cost efficiency*
Your Board reviews costs incurred by the Company on a regular basis and is focused on maintaining a competitive ongoing charges ratio. The year end ongoing charges ratio was 2.12% when calculated in accordance with the AIC’s “Ongoing Charges” methodology. This compares with the 30 September 2020 ratio of 2.35%.
*Board and committee composition*
Sir Aubrey Brocklebank retired from his role as non-executive director and Chairman of the Audit Committee at the Annual General Meeting in February 2021. Justin Ward was appointed to the Board on 1 November 2020 and assumed the role of Chairman of the Audit Committee on 4 February 2021, following the retirement of Sir Aubrey.
Ashton Bradbury will not be standing for re-election at the upcoming AGM in 2022. We are very sorry to see him go and thank him for his significant contribution. The process of recruiting a new non-executive director will commence in the New Year.
Following a review of board remuneration and taking into account peer group analysis and inflation, the Board has decided to increase its remuneration, effective 1 January 2022. The annual remuneration of the Chairman will increase to £37,000, the independent non-executive directors to £29,000 and the non-independent non-executive director, Oliver Bedford, to £26,500. An additional fee of £1,500 will continue to be paid to the Chairman of the Management and Service Provider Engagement Committee and the Chairman of the Audit Committee will continue to receive an additional fee of £3,000.
*Related party transactions*
The Company’s Investment Manager, Hargreave Hale Limited is a related party to the Company for the purposes of the Listing Rules. As noted above and announced on 14 December 2021, Oliver Bedford’s non-executive directorship fees (paid directly to the Investment Manager) will increase from £25,000 to £26,500 with effect from 1 January 2022. Once aggregated with previous related party transactions between the Company and the Investment Manager’s group in the last 12 months, this fee increase constitutes a smaller related party transaction under Listing Rule 11.1.10R.
*Appointment of new Company Secretary*
As announced on 12 January 2021, JTC (UK) Limited was appointed as company secretary, effective from 15 January 2021.
*Annual General Meeting *
Shareholders are invited to attend the Company’s Annual General Meeting (AGM) to be held at 10.30am on 3 February 2022 at 41 Lothbury, London EC2R 7AE.
Those shareholders who are unable to attend the AGM in person are encouraged to raise any questions in advance with the Company Secretary at HHV.CoSec@jtcgroup.com. Questions must be received by 5.00 p.m. on 31 January 2022 and answers will be published on the Company’s website on 1 February 2022.
In light of the continued relative uncertainty in relation to the Covid-19 pandemic, the Board will continue to monitor Government guidance and will update shareholders on any changes to the above arrangements through the Company’s website at: https://www.hargreaveaimvcts.co.uk and by announcement through a regulatory information service.
*Shareholder event*
Both your Board and the Investment Manager are keen to improve interaction with our shareholders. On 25 February 2021, a pre-recorded shareholder event was released. In the video, Lead Fund Manager Oliver Bedford reviewed the Company’s performance over 2020, investment activity, portfolio positioning and outlook for the year ahead. In addition to this, representatives from six portfolio companies shared their thoughts on the challenges, opportunities and the legacy of 2020.
The video is available to watch via the news and events page on the Company’s website at https://www.hargreaveaimvcts.co.uk.
I am pleased to report that on 24 November 2021, following strong interest from shareholders, the Company held an in-person shareholder event at Everyman Cinema, Broadgate, City of London. The event included presentations from the Investment Manager’s VCT team, several portfolio companies and concluded with the screening of a feature film. Recorded highlights will be made available to view through the Company’s website.
*Electronic communications*
As ever, we are respectfully asking shareholders to opt into electronic communications as we continue to look for savings in our printing and production costs and to reduce our environmental footprint. If interested in making the transition, please email us at aimvct@canaccord.com and we will arrange for the form of election to be sent to you by Equiniti, the Company’s registrar.
On a similar note, we would also be grateful if shareholders would consider updating their dividend payment preference from bank cheque to bank transfer, helping us to reduce costs and paper usage on more than c.1,500 dividend cheques annually.
*Electronic Voting*
Your Board is pleased to announce that electronic proxy voting is now available for shareholders to register the appointment of a proxy and voting instructions for any general meeting of the Company once notice has been given. This service will hopefully assist the Company to make further printing and production cost savings, reduce our environmental footprint and streamline the voting process for investors.
*Regulatory update*
There were no major changes to VCT legislation during the period under review.
*VCT status*
I am pleased to report that we continue to perform well against the requirements of the legislation and at the period end, the investment test was 98.7% (2020: 97.0%) against an 80% requirement when measured using HMRC’s methodology. The Company satisfied all other tests relevant to its status as a Venture Capital Trust.
*Key information document*
In accordance with the EU’s PRIIPs regulations the Company’s KID is published on the Company’s website at: https://www.hargreaveaimvcts.co.uk.
The KID has been prepared using the methodology prescribed in the PRIIPS regulation. Although well intended, there are concerns about the application of some aspects of the prescribed methodologies to VCTs. Specifically, the Board is concerned that the risk score may be understating the level of risk and would like shareholders to continue to classify the VCT as a high risk investment.
Investors’ attention is drawn to the consultation currently being undertaken by the FCA in relation to amendments to the Key Information Document produced by VCTs in accordance with UK PRIIPS Laws. In Consultation Paper CP21/23 (published on 1 July 2021), the FCA proposes to require that Key Information Documents issued by VCTs must be assigned a summary risk indicator (SRI) of no lower than 6. The FCA states that this change should ensure investors will be better informed of the nature of the risk of investing in VCTs. If this proposal is made into law, the Company’s SRI will increase as a result of the mandatory minimum SRI prescribed.
*Risk review*
Your Board has reviewed the risks facing the Company and further detail can be found in the principal and emerging risks and uncertainties section.
*Outlook*
Whilst there are many reasons for investors to be cautious, amongst them the Omicron variant, tax rises, government debt, inflation, interest rate rises, energy costs and access to skilled labour, there are similarly many reasons to be positive.
These include, exceptional growth in the economy with GDP forecast to continue to rise in the near term at a rate that has not been seen in the U.K. for many decades, low unemployment, rises in average earnings, high levels of household savings that consumers can call upon, early signs of increases in company investment and still buoyant financial markets.
One thing I can assure you is that your Fund Management team and board are focussed on delivering above average returns through the VCT’s large and diversified portfolio of innovative and high growth British companies.
I look forward to reporting to you further on the VCT’s performance in six months time.
*David Brock*
Chairman
16 December 2021
The Company and its business model
The Company was incorporated and registered in England and Wales on 16 August 2004 under the Companies Act 1985, registered number 05206425.
The Company has been approved as a Venture Capital Trust by HMRC under Section 259 of the Income Taxes Act 2007. The shares of the Company were first admitted to the Official List of the UK Listing Authority and trading on the London Stock Exchange on 29 October 2004 and can be found under the TIDM code “HHV”. The Company is premium listed.
In common with many other VCTs, the Company revoked its status as an investment company as defined in Section 266 of the Companies Act 1985 on 23 May 2006 to facilitate the payment of dividends out of capital profits.
The Company’s principal activity is to invest in a diversified portfolio of qualifying small UK based companies, primarily trading on AIM, with a view to generating capital returns and income from its portfolio and to make distributions from capital and income to shareholders whilst maintaining its status as a VCT.
The Company is registered as a small UK Alternative Investment Fund Manager (AIFM) with a Board comprising of five non-executive directors, four of whom are independent. Hargreave Hale Limited (trading as Canaccord Genuity Fund Management) acts as investment manager whilst Canaccord Genuity Wealth Limited (CGWL) acts as administrator and custodian. JTC (UK) Limited provide company secretarial services.
The Board has overall responsibility for the Company’s affairs including the determination of its investment policy, however, the Board exercises these responsibilities through delegation to the Investment Manager/Canaccord Genuity Wealth Limited and JTC (UK) Limited as it considers appropriate.
The Directors have managed and continue to manage the Company’s affairs in such a manner as to comply with Section 259 of the Income Taxes Act 2007.
Investment objectives, policy and strategy
*Investment objectives*
The investment objectives of the Company are to generate capital gains and income from its portfolio and to make distributions from capital or income to shareholders whilst maintaining its status as a Venture Capital Trust.
*Investment policy*
The Company intends to achieve its investment objectives by making Qualifying Investments in companies listed on AIM, private companies and companies listed on the AQSE Growth Market, as well as Non-Qualifying Investments as allowed by the VCT Rules.
*Qualifying Investments*
The Investment Manager will maintain a diversified portfolio of Qualifying Investments which may include equities and fixed interest securities as permitted by the VCT Rules. Investments will primarily be made in companies listed on AIM but may also include private companies that meet the Investment Manager’s criteria and companies listed on the AQSE Growth Market. These small companies will be UK based or have a UK presence and, whilst of high risk, will have the potential for significant capital appreciation.
To maintain its status as a VCT, the Company must have 80 per cent. of all funds raised from the issue of shares invested in Qualifying Investments throughout accounting periods of the VCT beginning no later than three years after the date on which those shares are issued. To provide some protection against an inadvertent breach of this rule, the Investment Manager targets a threshold of approximately 85 per cent.
*Non-Qualifying Investments*
The Non-Qualifying Investments must be permitted by the VCT Rules and may include equities and exchange traded funds listed on the main market of the London Stock Exchange, fixed income securities, bank deposits that are readily realisable and the Marlborough Special Situations Fund. Subject to the investment controls below, the allocation to each of these investment classes will vary to reflect the Investment Manager’s view of the market environment and the deployment of funds into Qualifying Companies. The market value of the Non-Qualifying Investments (excluding bank deposits) will vary between nil and 50 per cent. of the net assets of the Company. The value of funds held in bank deposits will vary between nil and 30 per cent. of the net assets of the Company.
*Investment controls*
The Company may make co-investments in investee companies alongside other funds, including other funds managed by the Investment Manager. Other than bank deposits, no individual investment shall exceed 10 per cent. of the Company’s net assets at the time of investment.
*Borrowings*
The Articles permit the Company to borrow up to 15 per cent. of its adjusted share capital and reserves (as defined in the Articles). However, it is not anticipated that the Company will have any borrowings in place and the Directors do not intend to utilise this authority.
To the extent that any future changes to the Company’s investment policy are considered to be material, shareholder consent to such changes will be sought. Such consent applies to the formal investment policy described above and not the investment process set out below.
*Investment process and strategy*
The Investment Manager follows a stock specific investment approach based on fundamental analysis of the investee company.
The Investment Manager’s fund management team has significant reach into the market and meets with large numbers of companies each week. These meetings provide insight into investee companies, their end markets, products and services, or the competition. Investments are monitored closely and the Investment Manager usually meets or engages with their senior leadership team at least twice each year. Where appropriate the Company may co-invest alongside other funds managed by the Investment Manager.
The key selection criteria used in deciding which investments to make include, inter alia:
· the strength and depth of the management team;
· the business strategy;
· a prudent approach to financial management and forecasting;
· a strong balance sheet;
· profit margins, cash flows and the working capital cycle;
· barriers to entry and the competitive landscape; and
· the balance of risk and reward over the medium and long term.
*Qualifying Investments*
Investments are made to support the growth and development of a Qualifying Company. The Investment Manager will maintain a diversified portfolio that balances opportunity with risk and liquidity. Qualifying Investments will primarily be made in companies listed on AIM but may also include private companies and companies listed on the AQSE Growth Market. Seed funding is rarely provided and only when the senior leadership team includes proven business leaders known to the Investment Manager.
Working with advisers, the Investment Manager will screen opportunities, often meeting management teams several times prior to investment to gain a detailed understanding of the company. Investments will be sized to reflect the risk and opportunity over the medium and long term. In many cases, the Investment Manager will provide further funding as the need arises and the investment matures. When investing in private companies, the Investment Manager will shape the investment to meet the investee company’s needs whilst balancing the potential for capital appreciation with risk management.
Investments will be held for the long term unless there is a material adverse change, evidence of structural weakness, or poor governance and leadership. Partial realisations may be made where necessary to balance the portfolio or, on occasion, to capitalise on significant mispricing within the stock market.
*Non-Qualifying Investments*
The Investment Manager’s VCT team works closely with the Investment Manager’s wider fund management team to deliver the investment strategy when making Non-Qualifying Investments, as permitted by the VCT Rules. The Investment Manager will vary the exposure to the available asset classes to reflect its view of the equity markets, balancing the potential for capital appreciation with risk management, liquidity and income.
The Non-Qualifying Investments will typically include a focused portfolio of direct investments in companies listed on the main market of the London Stock Exchange. The portfolio will mix long term structural growth with more tactical investment to exploit short term mispricing within the market. The use of the Marlborough Special Situations Fund enables the Company to maintain its exposure to small UK companies whilst the Investment Manager identifies opportunities to invest the proceeds of fundraisings into Qualifying Companies.
The Investment Manager may use certain exchange traded funds listed on the main market of the London Stock Exchange to gain exposure to asset classes not otherwise accessible to the Company.
*Environmental, social and governance (“ESG”) considerations*
The Investment Manager has strengthened its approach to environmental, social and governance (“ESG”) issues. It has integrated a review of ESG issues as part of its investment decision-making process for investments in Qualifying Companies that seeks to identify material issues in the following areas:
· role, structure and operation of the board;
· treatment of employees;
· robustness of accounting and internal controls; and
· environmental and/or social impacts of the business.
The Investment Manager will seek to engage and influence companies on any areas of improvement identified through due diligence and material ESG issues that arise during the term of the investment. The Investment Manager has published ESG, Engagement and Stewardship policies on its website which can be found on https://www.canaccordgenuity.com/fund-management-uk/.
*Risk management*
The structure of the Company’s investment portfolio and its investment strategy has been developed to mitigate risk where possible.
· The Company has a broad portfolio of investments to reduce stock specific risk.
· Flexible allocations to non-qualifying equities, exchange traded funds listed on the main market of the London Stock Exchange, fixed income securities, bank deposits that are readily realisable and the Marlborough Special Situations Fund, allow the Investment Manager to adjust portfolio risk without compromising liquidity.
· Regular meetings with investee companies aid the close monitoring of investments to identify potential risks and allow corrective action where possible.
· Regular board meetings and dialogue with the Directors, along with policies to control conflicts of interest and co-investment with the Marlborough fund mandates, support strong governance.
Key performance indicators
The Directors consider the following Key Performance Indicators (KPIs) to assess whether the Company is achieving its strategic objectives. The Directors believe these measures help shareholders assess how effectively the Company is applying its investment policy and are satisfied the results give a good indication of whether the Company is achieving its investment objectives and policy. The KPIs are established industry measures.
Further commentary on the performance of these KPIs has been discussed in the Chairman’s statement and Investment Manager’s report.
*1.** **NAV and share price total returns*
The Board monitors NAV and share price total return to assess how the Company is meeting its objective of generating capital gains and income from its portfolio and making distributions to shareholders. The Board is pleased to report a positive return for the year with the NAV per share increasing from 73.66 pence to 100.39 pence resulting in a gain to ordinary shareholders of 31.13 pence per share (42.26%) after adjusting for dividends paid in the year.
The Board considers peer group and benchmark comparative performance. Due to the very low number of AIM VCTs, the Board reviews performance against the generalist VCTs as well as the AIM VCTs to provide a broader peer group for comparison purposes. Performance is also measured against the Company’s closest benchmark the FTSE AIM All-Share Index total return. With 61.9% of the net assets invested in companies listed on AIM, the Directors consider this to be the most appropriate benchmark from a shareholder’s perspective. However, HMRC derived investment restrictions, along with Qualifying Investments in private companies and fixed income securities, and Non-Qualifying Investments in main market listed companies, predominantly in the FTSE 350, mean the index is not a wholly comparable benchmark for performance.
*Rolling Returns to end Sep 2021* *1Y* *3y* *5y* *10y*
NAV total return 42.26% 31.23% 61.91% 132.16%
Share price total return 51.36% 33.80% 67.45% 156.17%
NAV total return (dividends reinvested)(1) 43.04% 36.77% 76.36% 186.79%
Share price total return (dividends reinvested)(1) 52.46% 40.13% 83.89% 220.38%
FTSE AIM All-Share Index total return 30.79% 17.06% 61.25% 96.62%
Source: Hargreave Hale Ltd
(1) The NAV total return (dividends reinvested) and Share price total return (dividends reinvested) measures have been included to improve comparability with the FTSE AIM All-Share index Total Return which is also calculated on that basis. They are alternative performance measures.
The Company enjoyed strong NAV performance over the year. The NAV total return (dividends reinvested) for the year of 43.04% was ahead of the weighted average return for the AIM VCT peer group however, over longer time periods the Company’s NAV returns are below the weighted average of its AIM VCT peers. As the AIM VCT Sector consists of only a very small number of companies, the Directors also consider performance against the much broader Generalist VCT Sector. It is pleasing to note that the VCT has materially outperformed the weighted average NAV total return (dividends reinvested) for the Generalist Sector over 1, 3, 5 and 10 years. Additionally the VCT has outperformed its FTSE AIM All-Share benchmark over 1,3 and 5 years and is very significantly ahead over 10 years. Further detailed information on peer group performance is available through Morningstar (https://www.morningstar.co.uk) and the AIC (https://www.theaic.co.uk/aic/statistics)
*2.** **Share price discount to NAV per share*
The Company uses secondary market purchases of its shares to improve the liquidity in its shares and support the discount. The discount to NAV per share is an important influence on a selling shareholder’s eventual return. The Company aims to maintain a discount of approximately 5 per cent. to the last published NAV per share (as measured against the mid-price).
The Company’s shares went ex-dividend (2.50 pence per share) on 30 September 2021. The share price discount as 30 September 2021 was 5.00% (2020: 10.40%) when calculated with reference to the ex-dividend 30 September 2021 NAV per share. The 1 and 5 year average share price discounts are 6.25% and 6.31% respectively.
The Company’s shares are priced against the last published NAV per share with the market typically adjusting the price to reflect the NAV after its publication. In line with the Company’s valuation policy, the quarter end NAV per share is published 5 business days after the period end to allow time for the manager and board to review and agree the valuation of the private companies held within the investment portfolio.
As at 15 December 2021 the discount to NAV was 5.28% of the last published NAV per share.
*3.** **Ongoing charges ratio*
The ongoing charges of the Company were 2.12% (2020: 2.35%) of the average net assets of the Company during the financial year to September 2021. The decrease in the ongoing charges ratio reflects the increase in the Company’s net assets over the period and a substantial reduction in due diligence costs following the addition of a legal counsel to the Investment Manager’s VCT team. Material cost increases within the financial year included higher management fees from increased net assets, listing costs in relation to the dividend reinvestment scheme, directors’ remuneration increases effective from 1 January 2021, increased company secretarial fees following the appointment of JTC (UK) Ltd and higher registrar and printing costs as a result of the larger shareholder base.
The Company’s ongoing charges ratio remains competitive against the wider VCT industry and similar to other AIM VCTs. This ratio is calculated using the AIC’s “Ongoing Charges” methodology and, although based on historical information, it provides shareholders with an indication of the likely future cost of managing the fund.
Cost control and efficiency continues to be a key focus for your Board. The Board is satisfied with the result for the year which was in line with the Company’s budget.
*4.** **Dividends per share*
The Company’s policy is to target a tax free dividend yield equivalent to 5% of the year end NAV per share. The Board remains committed to maintaining a steady flow of dividend distributions to shareholders.
A total of 4.40 pence per share (2020: 5.00 pence – including the special dividend of 1.75 pence per share) of dividends was paid during the year, comprised of a final dividend of 2.65 pence in respect of the previous financial year (2019: 2.25 pence) paid on 11 February 2021 and an interim dividend of 1.75 pence (2020: 1 penny) paid on 30 July 2021. A special dividend of 2.50 pence was announced on 23 September 2021, with an ex-dividend date of 30 September 2021 and a payment date of 29 October 2021.
A final dividend of 3.15 pence per share will be proposed at the Annual General Meeting. If approved by shareholders, the payment of the interim and final dividends in respect of the financial year to 30 September 2021 would represent a distribution to shareholders of 4.9% of the 30 September 2021 NAV per share and 5.0% of the 30 September 2021 ex-dividend NAV per share. The payment of the special dividend, which was outside of the scope of the dividend policy, further increases the distribution to 7.4% of the 30 September 2021 cum-dividend NAV per share and 7.6% of the 30 September 2021 ex-dividend NAV per share.
The below table demonstrates how the Board has been able to consistently pay dividends in line with the 5% target and dividend policy.
*Dividend paid/payable by financial year*
*Year*
*Year end NAV* *Dividends* *Yield*
*Additional information*
*pence per share*
2010/11 61.14 4.00 6.5%
2011/12 61.35 3.25 5.3%
2012/13 71.87 3.75 5.2%
2013/14 80.31 4.25 5.3%
2014/15 74.64 4.00 5.4%
2015/16 75.93 4.00 5.3%
2016/17 80.82 4.00 4.9%
2017/18 87.59 5.40 6.2% Including special dividend of 1 penny.
2018/19 70.60 3.75 5.3%
2019/20 73.66 5.40 7.3% Including a special dividend of 1.75 pence.
2020/21 100.39 7.40 7.4% Including a special dividend of 2.50 pence and the proposed final dividend of 3.15 pence.
*5.** **Compliance with VCT regulations*
A VCT must be approved by HMRC at all times, and in order to retain its status, the Company must meet a number of tests as set out by the VCT legislation. Throughout the year ended 30 September 2021 the Company continued to meet these tests.
The investment test increased from 97.0% to 98.7% in the financial year, comfortably ahead of the 80% threshold that applied to the Company with effect from 1 October 2019 and the target of 85% as set out in the Company’s investment policy. The Company invested £15.9 million into 18 Qualifying Companies, 7 of which were investments into new Qualifying Companies. The Board is pleased with the level of new Qualifying Investment, which was ahead of expectations. Along with unrealised gains in the period, the new Qualifying Investments helped to increase the fair value of the qualifying portfolio from £112.4m to £173.3m. On 1 October 2021, when shares issued in the 2019 financial year fell into the test for the first time, the investment test dropped to 88.6%.
The Board believes that the Company will continue to meet the HMRC defined investment test and other qualifying criteria on an ongoing basis.
For further details please refer to the Investment Manager’s report.
Principal and emerging risks and uncertainties
The Directors acknowledge that they are responsible for the effectiveness of the Company’s risk management and internal controls and periodically review the principal risks faced by the Company at board meetings. The Board may fulfil these responsibilities through delegation to Hargreave Hale Limited and Canaccord Genuity Wealth Limited as it considers appropriate. The Board also considers emerging risks of which the most significant is the growing proximity to the date of the Sunset Clause. The principal risks facing the Company together with mitigating actions taken by the Board are set out below:
*Risk* *Potential consequence* *How the Board mitigates risk* *Changes During the Year*
*Venture Capital Trust approval risk* – the Company operates in a complex regulatory environment and faces a number of related risks. A breach of Section 259 of the Income Taxes Act 2007 or the Finance Act could result in the disqualification of the Company as a VCT. Loss of VCT approval could lead to the Company losing its exemption from corporation tax on capital gains, shareholders losing their tax reliefs and in certain circumstances being required to repay the initial tax relief on their investment. To reduce this risk, the Board has appointed the Investment Manager, who has significant experience in venture capital trust management and reports to the Board regularly throughout the year. In addition, to provide further formal assurance, the Board has appointed Philip Hare & Associates LLP to monitor compliance with regulations and provide half yearly compliance reports to the Board. No change.
*Investment risk* – Many of the Company’s investments are held in small, high risk companies which are either listed on AIM or privately held. Investment in poor quality companies could reduce the capital and income return to shareholders. Investments in small companies are often illiquid and may be difficult to realise. The Board has appointed an investment manager with significant experience of investing in small companies. The Investment Manager maintains a broad portfolio of investments, individual Qualifying Investments rarely exceed 5% of net assets, and holds regular company meetings to monitor investments and identify potential risk. The fund’s liquidity is monitored on a regular basis by the Investment Manager and reported to the Board quarterly and as necessary. No change.
*Compliance risk* – The Company is required to comply with the rules of the UK Listing Authority, the Companies Act, Accounting Standards, the General Data Protection Regulation and other legislation. The Company is also a small registered Alternative Investment Fund Manager (“AIFM”) and has to comply with the requirements of the AIFM Directive. Failure to comply with these regulations could result in a delisting of the Company’s shares, financial penalties, a qualified audit report or loss of shareholder trust. Board members have considerable experience of operating at senior levels within quoted businesses. They have access to a range of advisors including solicitors, accountants and other professional bodies and take advice when appropriate. No change.
*Operational risk and outsourcing* – Failure in the Investment Manager/Administrator or other appointed third party systems and controls or disruption to its business. Failures could put the assets of the Company at risk or result in reduced or inaccurate information being passed to the Board or shareholders.
Quality standards may be reduced through lack of understanding or loss of control. The Company has in place a risk matrix and a set of internal policies which are reviewed on a regular basis. It has written agreements in place with its third-party service providers. The Board, through the Management and Service Provider Engagement Committee, receives regular reports from the Investment Manager, Administrator and custodian to provide assurance that appropriate oversight is in place. Additionally, the Board receives a control report from the Company’s registrars on an annual basis. Where tasks are outsourced to other third parties, reputable firms are used and performance is reviewed periodically by the Management and Service Provider Engagement Committee. Decreased.
Following the successful vaccination programme in the UK, providers of the core outsourced functions of the Company, including investment management and administration have resumed working within an office based environment, albeit on a more flexible basis than was typically the case prior to the pandemic. The return to work within an office based environment allows for better communication and a more robust oversight and monitoring regime.
*Key personnel risk* – A change in the key personnel involved in the management of the portfolio. Potential impact on investment performance. The Board discusses key personnel risk and resourcing with the Investment Manager periodically. The VCT team within the Investment Manager has increased in size over the last two and a half years, which helps to mitigate this risk. Decreased.
The VCT team within the Investment Manager has increased with the introduction of Archie Stirling, who brings new skills and experience. The VCT team has expanded substantially since 2018. New members of the team have gained sufficient experience to provide credible mitigations to key personnel risk.
*Exogenous risks such as economic, political, financial, climate change and health* - Economic risks include recession and sharp changes in interest rates, political risks include the terms of the UK’s exit from the European Union or a change in government policy causing the VCT scheme to be brought to an end. A condition of the European Commission’s State Aid approval of the UK’s VCT and EIS schemes in 2015 was the introduction of a retirement date for the current schemes at midnight on 5 April 2025. If the relevant legislation is not renewed or replaced with similar or equivalent legislation, new investors will not be able to claim income tax relief for investments into new shares issued by VCTs after 5 April 2025 (the “Sunset Clause”). Instability or change arising from these risks could have an impact on stock markets and the value of the Company’s investments so reducing returns to shareholders. There remains considerable uncertainty
about the future path of the pandemic and the longterm impacts. New variants of the virus may emerge that could result in the introduction of new restrictions, depress economic activity and lead to falls in equity markets in the UK and elsewhere, all of which could have a material adverse impact on the future investment returns of the Company, the price of the Ordinary Shares and the ability of the Investment Manager to find and realise suitable investments. A failure to renew or replace the relevant sections of the Finance (No 2) Act 2015 with similar or equivalent legislation would make it more difficult for the Company to attract new capital whilst continuing to operate under its current investment policy. Regular dialogue with the manager provides the Board with assurance that the manager is following the investment policy agreed by the Board and appraises the Board of the portfolio’s current positioning in the light of prevailing market conditions. Communication between the Board and the Investment Manager has remained strong through the period of the Covid-19 pandemic. The Company’s investment portfolio is well diversified and the Company has no gearing.
When reviewing the valuations of the Company’s private company investments the independent non-executive directors have taken account of the impact of Covid-19 where appropriate.
The Board keeps abreast of current thinking through contact with industry associations and its advisors. No change.
Additional risks and further details of the above risks and how they are managed are explained in note 15 of the financial statements. Trends affecting future developments are discussed in the Chairman’s statement and the Investment Manager’s report.
Long term viability statement
In accordance with provision 28 of the UK Corporate Governance Code, the Directors have carried out a robust assessment of the Company’s emerging and principal risks, further details can be found in the principal and emerging risks and uncertainties section. This assessment has been carried out over a longer period than the 12 months required by the ‘Going Concern’ provision. The Board conducted this review for a period of five years, which was selected because it:
· is consistent with investors’ minimum holding period to retain tax relief;
· exceeds the time allowed to deploy funds raised under the current offer in accordance with VCT legislation; and
· because it is challenging to forecast beyond five years with sufficient accuracy to provide actionable insight.
The Board considers the viability of the Company as part of its continuing programme of monitoring risk. The Company has a detailed risk control framework, documented procedures and forecasting model in place to reduce the likelihood and impact of risk taking that exceeds the levels agreed by the Board. These controls are reviewed by the Board and Investment Manager on a regular basis.
The Board has considered the Company’s financial position and its ability to meet its liabilities as they fall due over the next five years taking into account the following factors in its assessment of the Company’s future viability:
· the Company maintains a highly diversified portfolio of Qualifying Investments;
· the Company is well invested against the HMRC investment test and the Board believes the Investment Manager will continue to have access to sufficient numbers of investment opportunities to maintain compliance with the HMRC investment test;
· the Company held £27.0 million in cash at the year end;
· the Company has a broad portfolio of Non-Qualifying Investments, most of which are listed in the FTSE 350 and offer good levels of liquidity should the need arise;
· the financial position of the Company at 30 September 2021 was strong with no debt or gearing;
· the offer for subscription launched on 2 September 2021 has provided further liquidity for deployment in line with the company’s policies or to meet future expenses;
· the ongoing charges ratio of the Company for the year end was 2.12%, which is competitive for the VCT sector; and
· the Company has sufficient procedures in place to identify, monitor and control risk and portfolio liquidity.
In assessing the Company’s future viability, the Board has assumed that investors will wish to continue to have exposure to the Company’s activities, that performance will be satisfactory and the Company will continue to have access to sufficient capital.
Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years.
Other matters
*Dividend policy*
The Company’s dividend policy is to target a tax free dividend yield equivalent to 5% of the year end NAV per share. The ability to pay dividends is dependent on the Company’s available distributable reserves and cash resources, the Act, the Listing Rules and the VCT Rules. The policy is non-binding and at the discretion of the Board. Dividend payments may vary from year to year in both quantum and timing. The level of dividend paid each year will depend on the performance of the Company’s portfolio. In years where there is strong investment performance, the Directors may consider a higher dividend payment, including the payment of special dividends. In years where investment performance is not as strong, the Directors may reduce or even pay no dividend.
*Discount control and management of share liquidity policy*
The Company aims to improve liquidity and to maintain a discount of approximately 5 per cent. to the last published NAV per share (as measured against the mid-price) by making secondary market purchases of its shares in accordance with parameters set by the Board.
This policy is non-binding and at the discretion of the Board. Its operation depends on a range of factors including the Company’s liquidity, shareholder permissions, market conditions and compliance with all laws and regulations. These factors may restrict the effective operation of the policy and prevent the Company from achieving its objectives.
*Diversity*
The Board comprises four male non-executive directors and one female non-executive director with a diverse range of experience, skills, length of service and backgrounds. The Board considers diversity when reviewing Board composition and has made a commitment to consider diversity when making future appointments. The Board will always appoint the best person for the job. It will not discriminate on the grounds of gender, race, ethnicity, religion, sexual orientation, age or physical ability.
*Environmental Social and Governance (ESG) Considerations*
The Board seeks to maintain high standards of conduct with respect to environmental, social and governance issues and to conduct the Company’s affairs responsibly.
The Company does not have any employees or offices and so the Board does not maintain any specific policies regarding employee, human rights, social and community issues but does expect the Investment Manager to consider them when fulfilling their role.
The management of the Company’s investment portfolio has been delegated to its Investment Manager - Hargreave Hale Ltd. The Company has not instructed the Investment Manager to include or exclude any specific types of investment on ESG grounds. However, it expects the Investment Manager to take account of ESG considerations in its investment process for the selection and ongoing monitoring of underlying investments. The Board has also given the Investment Manager discretion to exercise voting rights on resolutions proposed by investee companies.
The Investment Manager continues to strengthen its approach to ESG issues.
To minimise the direct impact of its activities the Company offers electronic communications where acceptable to reduce the volume of paper it uses and uses Carbon Balanced paper manufactured at a FSC accredited mill to print its financial reports. Vegetable based inks are used in the printing process where appropriate.
*Prospects*
The prospects and future development of the Company are discussed in detail in the outlook section of the Chairman’s statement.
The strategic report is approved, by order of the Board of Directors.
*David Brock*
Chairman
16 December 2021
Summary of VCT regulations
To maintain its status as a VCT, the Company must be approved by HMRC and comply with a number of conditions. A summary of the most important conditions are detailed below.
*VCTs’ obligations*
*VCTs must:*
· have 80 per cent. (by VCT tax value) of all funds raised from the issue of shares invested in Qualifying Investments throughout accounting periods of the VCT beginning no later than three years after the date on which those shares are issued;
· have at least 70 per cent. by VCT tax value of Qualifying Investments in Eligible Shares which carry no preferential rights (unless permitted under VCT rules);
· have at least 30 per cent. of all new funds raised by the Company invested in Qualifying Investments within 12 months of the end of the accounting period in which the Company issued the shares;
· have no more than 15 per cent. by VCT tax value of its investments in a single company (as valued in accordance with the VCT Rules at the date of investment);
· derive most of its income from shares and securities, and, must not retain more than 15 per cent. of its income derived from shares and securities in any accounting period; and
· have their shares listed on a European regulated Stock Exchange.
*VCTs must not:*
· make a Qualifying Investment in any company that:
· has (as a result of the investment or otherwise) received more than £5 million from State Aid investment sources in the 12 months prior to the investment (£10 million for Knowledge Intensive Companies);
· has (as a result of the investment or otherwise) received more than £12 million from State Aid investment sources in its lifetime (or £20 million for Knowledge Intensive Companies);
· in general has been generating commercial revenues for more than 7 years (or 10 years for Knowledge Intensive Companies); or
· will use the investment to fund an acquisition of another company (or its trade and assets).
· make any investment which is not a Qualifying Investment unless permitted by section 274 ITA; and/or
· return capital to shareholders before the third anniversary of the end of the accounting period during which the subscription for shares occurs.
*Qualifying Investments*
A Qualifying Investment consists of new shares or securities issued directly to the VCT by a Qualifying Company that at the point of investment:
· has gross assets not exceeding £15 million prior to investment and £16 million post investment;
· whose activities are regarded as a Qualifying Trade;
· is a private company or is listed on AIM or the AQSE Growth Market;
· has a permanent UK establishment;
· is not controlled by another company;
· will deploy the money raised for the purposes of the organic growth and development of a Qualifying Trade within 2 years;
· has fewer than 250 employees (or fewer than 500 employees in the case of certain Knowledge Intensive Companies);
· in general, has not been generating commercial sales for more than seven years (ten years for Knowledge Intensive Companies);
· has not received more than the permitted annual and lifetime limits of risk finance State aid investment; and
· has not been set up for the purpose of accessing tax reliefs or is in substance a financing business.
The Finance Act 2018 introduced a principles-based approach known as the risk to capital condition to establish whether the activities or investments of an investee company can qualify for VCT tax reliefs. This condition has two parts:
· whether the investee company has an objective to grow and develop over the long term; and
· whether there is a significant risk that there could be a loss of capital to the investor of an amount exceeding the net return.
Investment Manager’s report
*Introduction*
This report covers the 2020/21 financial year, 1 October 2020 to 30 September 2021. The Investment Manager’s report contains references to movements in the NAV per share and NAV total return per share. Movements in the NAV per share do not necessarily mirror the earnings per share reported in the accounts and elsewhere, which convey the profit after tax of the Company within the reported period as a function of the weighted average number of shares in issue for the period.
Investment performance measures contained in this report are calculated on a pence per share basis and include realised and unrealised gains and losses.
*Investment report*
The financial year started with three areas of significant concern: a contested US election result; a no deal departure from the European Union; and a winter resurgence of Covid-19. With the political risks resolved within the first quarter, much of our subsequent focus was on the pandemic, vaccination programmes and, increasingly, the challenges faced by companies as the global economy returned to growth.
Despite setbacks, the economy has recovered more quickly than many had anticipated. Household wealth is high as a consequence of Government support and employment is strong. Companies traded well, in many cases ahead of expectations.
Although the major indices continued to record new highs, there was a sense that investors were becoming cautious about the outlook as the fourth quarter unfolded. Economic indicators are signalling that companies will need to navigate a broad range of operational risks and rising input prices next year that might weigh on financial performance. Added to this is concern that distress within the Chinese property construction sector, a very significant driver of Chinese GDP, could depress economic activity next year. The UK debate on inflation mirrored the global discussion, with central bankers starting to row back from their prior statements that the spike in inflation would prove to be transitory and short lived. There is an abundance of evidence to suggest this may not be so.
*Performance*
The year to 30 September 2021 delivered an increase in the NAV per share from 73.66p to 100.39p. A final dividend of 2.65 pence in respect of the year ended 30 September 2020 was paid on 11 February 2021 and an interim dividend of 1.75 pence per share was paid on 30 July 2021, giving investors a NAV total return for the year of +31.13 pence per share or +42.26%. The NAV total return (dividends reinvested) for the year was +43.04% compared with the FTSE AIM All-Share Index total return of +30.79% and the FTSE All-Share Index total return of +27.90% (also calculated on a dividends reinvested basis).
The Qualifying Investments made a net contribution of +27.52 pence per share, whilst the non-qualifying investments made a contribution of +4.79 pence per share (including the Marlborough Special Situations Fund). The adjusting balance was the net of running costs, investment income and dividends. The contribution to NAV performance is split out in further detail below.
Note - The Closing NAV is cumulative of the special dividend paid to investors subsequent to year-end.
Gousto was the top performing Qualifying Investment (+52.7%, +2.46 pence per share), with t