Full year Results and Notice of AGM
19 December 2023
*HARGREAVE HALE AIM VCT PLC*
(the “*Company*” or the “*VCT*”)
*Full Year Results and Notice of AGM*
Hargreave Hale AIM VCT plc announces its results for the year ended 30 September 2023.
The Company also announces that its 2024 Annual General Meeting will be held at 4:45pm on 8 February 2024 at 88 Wood Street, London, EC2V 7QR.
The Company’s Annual Report and Financial Statements for the year ended 30 September 2023 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.
*Financial highlights for the year ended 30 September 2023*
Net asset value (NAV) per share NAV total return Tax free dividends paid in the period Share price total return Ongoing charges ratio
46.34p -14.70%^(1) 5.00p -23.51%^(1) 2.24%^(1)
*•* £13.6 million invested in Qualifying Companies in the year.
• 91.65% invested by VCT tax value in Qualifying Investments at 30 September 2023.
• Final dividend of 1.50 pence per share proposed for the year end.
• Offer for subscription closed to further applications on 10 February 2023, having raised £40 million.
• New Offer for subscription launched on 7 September 2023 to raise £20 million, together with an over‑allotment facility to raise up to a further £20 million.*Summary financial data* *2023* *2022*
NAV (£m) *151.92* 160.51
NAV per share (p) *46.34* 60.19
NAV total return (%)^(1) *-14.70* -33.42
Market capitalisation (£m) *140.96* 167.32
Share price (p) *43.00* 62.75
Share price discount/premium to NAV per share (%)^(1) *-7.21* +4.25^(2)
Share price 5 year average discount to NAV per share (%)^(1) *-5.64* -5.65
Share price total return (%)^(1) *-23.51* -28.06
(Loss)/gain per share for the year (p) *-9.32* -33.42
Dividends paid per share (p) *5.00* 6.65
Ongoing charges ratio (%)^(1) *2.24* 2.06
(1) Alternative performance measure definitions and illustrations can be found in this report.
(2) The FY22 year end premium to NAV is a function of the year end NAV of 60.19 pence per share and the year end share price.
*Financial Calendar*
Financial calendar
Record date for final dividend 5 January 2024
Payment of final dividend 15 February 2024
Annual General Meeting 8 February 2024
Announcement of half-yearly results for the six months ending 31 March 2024 June 2024
Payment of interim dividend (subject to Board approval) July 2024
*Chair’s statement*
*Introduction*
I would like to welcome shareholders who joined us as a result of the recent offers for subscription. As always, we are grateful to new and existing shareholders who continue to support the VCT, despite the difficult times we continue to live through.
The financial year started with some significant headwinds, including high inflation, a dislocation in the UK Government bond market and a forecast by the Bank of England that the United Kingdom would endure the longest recession of the last 100 years. Whilst we would not wish to downplay the hardship that followed, the economy was stronger than predicted, in part due to Government intervention in the energy market over the winter. UK consumer confidence staged a partial recovery off historic lows, employment remained strong and, towards the end of the period under review, UK real wage growth turned positive.
As I noted in our interim report, uncertainty is a theme that we have all learned to live with these past few years. To this list, we must now add the implications of the terrible events that continue to unfold in Israel and Gaza.
Whilst we are encouraged that much of the deep pessimism that permeated markets at the start of the financial year did not manifest, we remain mindful of the macro-economic backdrop, both here and abroad. The cost of borrowing has changed dramatically within the year, impacting the financial sector and companies with high levels of debt. Last year, this manifested itself within the UK pension industry. This year, stress emerged in parts of the US and European banking system. Remote as this might seem, it affected companies closer to home, particularly pre-clinical and clinical stage companies within the life sciences industry that were reliant upon funding from Silicon Valley Bank (SVB). Those exposed to SVB became more cautious with their budgets, which in turn reduced demand for the products and services sold into them. Several of our portfolio companies have seen weaker trading as a consequence of this.
When launching the 2022 offer for subscription, we were cautious about the short-term outlook but spoke about the opportunity for value creation over the medium term. Our experience over the period under review is consistent with that view. Generating short-term performance has been very difficult with the market applying asymmetrical responses to news flow: positive updates are not getting full recognition whilst those that disappoint are often treated harshly. Stock market liquidity is a major contributory factor. With many active managers now deep into their third year of outflows, there are few institutional buyers of shares in small UK companies. Taken together, this has left the sector in deep value territory.
The malaise that continues to hang over markets in the UK and elsewhere has heavily impacted the primary markets in which companies raise new capital through the sale of new shares. With valuations so depressed and very little capital available for investment (away from VCTs), very few companies have undertaken an initial public offering (IPO). On AIM there were just 3 VCT qualifying initial public offerings within the year. Despite this, we are pleased to report that we deployed capital into VCT qualifying companies ahead of budget, highlighting the importance of having a defined pool of capital, a diversified portfolio and a flexible investment policy.
*Performance*
As described in more detail in the Investment Manager’s report, this has been a second consecutive difficult year for performance. In contrast to last year, when we suffered a substantial (unrealised) loss of value across investments in public and private companies, this year the material declines were confined to the portfolio of investments in public companies. The value of the investments in private companies were protected by the difficult decisions made last year and, in some cases, better trading. Although the markets demand a cautious approach, we are hopeful that we might start to see some value recovery within the private companies in the current year. It is worth reiterating at this point that the predominant factor that drove down the valuations in our investments in private companies last year was the broad based (and deep) de-rating of publicly listed companies.
Whilst higher interest rates are a source of concern for many and likely to weigh on economic activity, they have also made a significant positive impact on the income generated from within the VCT, either from cash held on deposit or from recently acquired short-dated fixed income investments. Investment grade fixed income assets were a feature of the investment portfolio for a number of years during and after the financial crisis until negative real yields (and therefore high prices) forced us to exit those positions. We have been able to use the sell off in the bond market this year to rebuild positions that will continue to generate substantial income for the VCT for several years.
At 30 September 2023, the NAV per share was 46.34 pence which, after adjusting for the dividends paid in the year of 5 pence, gives a NAV total return for the year of -14.70%^(1). The NAV total return (dividends reinvested) for the year was -15.93%^(1) compared with -8.28% in the FTSE AIM All-Share Index Total Return (also calculated on a dividends Index reinvested basis). The Directors consider this to be the most appropriate benchmark from a shareholder’s perspective, however, due to the range of assets held within the investment portfolio and the investment restrictions placed on a VCT it is not wholly comparable.
The earnings per share total return for the year was a loss of 9.32 pence (comprising a revenue profit of 0.27 pence and a capital loss of 9.59 pence). Revenue income increased by 168% to £2.6m as a result of an increase in dividends received from non-qualifying equity, non-qualifying fixed income investments and bank interest. Interest accrued on loan note instruments increased after the Investment Manager made two follow on (qualifying) investments into Kidly Ltd. For the first time, income received into the revenue account exceeded expenses, resulting in a revenue profit for the year of 0.27 pence per share (FY22: -0.36 pence per share).
The share price decreased from 62.75 pence to 43.00 pence over the reporting period which, after adjusting for dividends paid, gives a share price total return of -23.51%^1, the fall amplified by the normalisation of the share price, having briefly traded at a premium at the close of the last financial year.
*Investments*
The Investment Manager invested £13.6 million into 10 Qualifying Companies during the period. The fair value of Qualifying Investments at 30 September 2023 was £89.1 million (58.7% of NAV) invested in 63 AIM companies and 5^(2) unquoted companies. At the year end, the fair value of non-qualifying equities and the Marlborough Special Situations Fund was £15.4 million (10.1% of NAV) and £8.3 million (5.4% of NAV) respectively, with most of the non-qualifying equities listed within the FTSE 350 and offering good levels of liquidity should the need arise. £17.4 million (11.4% of NAV) was held in short-dated investment grade corporate bonds, £2.0 million (1.3% of NAV) was invested in a UK Government bond exchange traded fund and £19.2 million (12.7% of NAV) held in cash at the period end. Further information can be found in the Investment Manager’s report.
*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 2023, the Company paid dividends totalling 5 pence (2022: 6.65 pence). A special dividend of 2 pence and a final dividend of 2 pence (2021: 3.15 pence) in respect of the 2022 financial year was paid on 10 February 2023 and an interim dividend of 1.00 penny (2022: 1 penny) was paid on 28 July 2023.
A final dividend of 1.50 pence is proposed (2022: 2 pence) which, subject to shareholder approval at the Annual General Meeting, will be paid on 15 February 2024 to ordinary shareholders on the register on 5 January 2024.
*Dividend re-investment scheme*
Shareholders may elect to reinvest their dividend by subscribing for new shares in the Company. Further information can be found in the shareholder information section.
On 10 February 2023, 1,836,516 ordinary shares were allotted at a price of 54.95 pence per share, which was calculated in accordance with the terms and conditions of the dividend reinvestment scheme (DRIS), on the basis of the last reported NAV per share as at 20 January 2023, to shareholders who elected to receive shares under the DRIS as an alternative to the final dividend for the year ended 30 September 2022 and special dividend announced on 19 December 2022.
On 28 July 2023, 591,318 ordinary shares were allotted at a price of 49.29 pence per share, which was calculated in accordance with the terms and conditions of the DRIS, on the basis of the last reported NAV per share as at 7 July 2023, to shareholders who elected to receive shares under the DRIS as an alternative to the interim dividend for the year ended 30 September 2023.
*Share Buybacks*
To maintain compliance with the discount control and management of share liquidity policy, the Company purchased through share buybacks 7,183,338 ordinary shares (nominal value £71,833) during the 2023 financial year at a cost of £3,636,841 (average price: 50.63 pence per share).
As at 18 December 2023, a further 2,039,414 shares have been repurchased post the year end at a cost of £873,229 (average price: 42.82 pence per share).
(1) Alternative performance measure definitions and illustrations can be found in the glossary of terms.
(2) Excluding companies in administration or at risk of administration with zero value.
*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. As at 30 September 2023, the Company had 1 and 5 year average share price discounts of 6.06% and 5.64% respectively.
The Company’s share price was trading at a discount of 7.21%^(1) as at 30 September 2023 compared to a premium of +4.25%^(1) as at 30 September 2022, this being calculated using the closing mid-price of the Company’s shares on 30 September 2023 as a percentage of the year end net asset value per share, as published on 5 October 2023.
As at 15 December 2023, the discount to NAV was 6.71% of the last published NAV per share.
*Offer for subscription*
The Directors of the Company announced on 5 September 2022 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 £30 million. On 10 February 2023, the Company announced it had received valid applications of approximately £40 million. The Board decided not to utilise any further sums under the over-allotment facility and therefore the offer for subscription was closed to further applications. The offer resulted in gross funds being received of £40 million and the issue of 66 million shares.
*New Offer for subscription*
The Directors of the Company announced on 7 September 2023 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 11 October 2023.
On 18 December 2023, the Company had allotted 17.6 million shares raising gross proceeds of £8.1 million. The Company has received valid applications for a further £0.5 million. Future decisions by the Board about the potential use of the over-allotment facility, in part or in full, will be made with advice from the Investment Manager and subject to investor demand and the deployment of capital into VCT qualifying companies.
*Cancellation of share premium*
At the general meeting of the Company held on 7 October 2022, a special resolution was passed approving the cancellation of the Company’s share premium account to expand the size of the Company’s distributable reserves.
We are pleased to confirm the cancellation of the share premium account of the Company was approved by the High Court of Justice in England and Wales and, accordingly, the amount standing to the credit of the share premium account (£133.2m) of the Company as at 9 May 2023 was cancelled.
*Cost efficiency*
The Board reviews costs incurred by the Company on a regular basis and is focused on maintaining a competitive ongoing charges ratio (OCR). The year end ongoing charges ratio was 2.24%^(1) (FY22: 2.06%^(1)) when calculated in accordance with the AIC’s “Ongoing Charges” methodology. The increase in the OCR is principally driven by the fall in the average net assets across the year that followed the drop in the NAV per share. Other factors included an increase in the number of independent non-executive directors to five and below inflation increases in remuneration. The Company also made modest investments to improve shareholder communication through investments into the Company’s website, video updates and an increased number of shareholder events. The Ongoing Charges methodology divides ongoing expenses by average net assets.
*Board remuneration*
Following a review of Board remuneration, and taking into account peer group analysis and inflation, the Board has agreed to increase its remuneration by 5%, effective from 1 October 2023. The annual remuneration of the Chair will increase to £41,000, the independent non-executive directors to £32,000 and the non-independent non-executive director, Oliver Bedford, to £29,500.
An additional fee of £1,500 will continue to be paid to the Chair of the Management and Service Provider Engagement Committee. The Chair of the Audit Committee will continue to receive an additional fee of £3,000.
*Investment Manager*
On 2 November 2022, the Company’s Investment Manager changed its name from Hargreave Hale Limited (trading as Canaccord Genuity Fund Management) to Canaccord Genuity Asset Management Limited (CGAM).
(1) Alternative performance measure definitions and illustrations can be found in the glossary of terms.
*Annual General Meeting*
Shareholders are invited to attend the Company’s Annual General Meeting (AGM) to be held at 4.45 pm on 8 February 2024 at 88 Wood Street, London, EC2V 7QR. The AGM will be followed by a presentation from the Investment Manager and a drinks reception.
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. The deadline for the advance submission of questions is 5.00 p.m. on 1 February 2024. Answers will be published on the Company’s website on 8 February 2024.
*Shareholder Engagement*
Shareholder engagement is given a high priority by the Board. Following a recent review, the Board agreed to significantly improve the website and develop new content (including video content) for shareholders to provide more information about the Company’s activities and performance. The new website is live at www.hargreaveaimvcts.co.uk.
The Company is working hard to make new, better and more accessible content and hope that shareholders will find the output useful. The website also introduces new functionality to allow shareholders to request by email updates on shareholder events, the performance of the Company (interim management statements, fact sheets and video updates) and information on the Company’s fundraising activities.
In addition to this, the Board wants to provide shareholders with more opportunities to meet directly with the Directors and the CGAM VCT management team. As a result, the number of in‑person events has been increased with the introduction of three new in-person quarterly updates in February, May and August to sit alongside the AGM in February and the annual shareholder event in November. The Board will look to run an event outside of London in the current financial year to improve access for those unable to attend London based events. The Board is aware that increased engagement carries a cost; we therefore hope shareholders will be able to attend at least one of these events. Further information on future events and recordings of previous updates can be found on the Company’s website.
Whilst the Board strongly encourages shareholders to make use of everything the website has to offer, the Directors recognise that it is not for everyone. Should you prefer, you can of course continue to communicate with the Chair, any other member of the Board or the Investment Manager by writing to the Company, for the attention of the Company Secretary.
Within the 2023 financial year, the Investment Manager gave three presentations covering the 12 months to 30 September 2022 on 23 November 2022, the 6 months to 31 March 2023 on 21 June 2023 and the 3 months to 30 June 2023 on 16 August 2023.
Subsequent to the year end, the Investment Manager gave a presentation covering the 12 months to 30 September 2023 on 29 November 2023. The well attended shareholder event was once again held at Everyman Cinema, Broadgate, City of London. It included presentations and a pre-recorded interview with several guest speakers and contributions from a number of portfolio companies, including a panel discussion and a presentation from the Investment Manager’s VCT team. The event concluded with the screening of a feature film. Summary recordings of the Investment Manager’s presentations are available to view on the Company’s website https://www.hargreaveaimvcts.co.uk.
The next shareholder event will be held at the Investment Manager’s offices at 88 Wood Street, London EC2V 7QR following the conclusion of the AGM to be held at 4.45 pm on 8 February 2024. The presentation will cover the 3 months to 31 December 2023. Shareholders are asked to register their interest in attending the shareholder event through the Company’s website (www.hargreaveaimvcts.co.uk) or by emailing aimvct@canaccord.com.
*Electronic communications*
As ever, we are respectfully asking shareholders to opt into electronic communications and update their dividend payment preference from cheque to bank transfer. Switching to the digital delivery of shareholder communications and dividend distributions is more cost efficient and more secure whilst also helping to reduce our environmental footprint.
The Company no longer prints and distributes interim reports to shareholders. The interim results continue to be available for download on the Company’s website (www.hargreaveaimvcts.co.uk) and a summary of the results are published via a Regulatory Information Service on the London Stock Exchange. Where necessary, the Administrator can produce and send out a hard copy.
To support the digital experience, the Company has invested in an upgraded website to improve the experience and include more regular updates to the content, including recorded updates from the manager and portfolio companies. Much of the new content will be available for distribution by email. You can register your interest in (and opt out of) email updates through the Company’s website.
Shareholders are also encouraged to make use of Equiniti’s shareview portal, which can be used to monitor their investment, review their transaction history, see information on dividend payments and update their communication preferences.
*Electronic Voting*
Electronic proxy voting is 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 assists 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.
On 23 September 2022, the Government announced that it intended to extend the sunset clause that, if not otherwise repealed or extended, would result in the withdrawal of the upfront 30% income tax relief for new investment into VCTs from 6 April 2025.
The sunset clause, introduced as part of the 2015 EU State aid review, does not affect the Capital Gains Tax relief or tax free dividend payments, nor does it affect investors’ income tax relief on VCT investments made before 6 April 2025.
On 22 November 2023, the Chancellor of the Exchequer announced as part of the Autumn Statement the intention to extend the VCT and EIS schemes to 5 April 2035. The Government will introduce new legislation as part of a future finance bill.
*Consumer Duty*
The Financial Conduct Authority (FCA) introduced the Consumer Duty on 31 July 2023 to improve the standard of care provided by firms that are involved in the manufacture or supply of products and services to retail clients.
Consumer Duty comprises a new principle and suite of other rules and guidance to be followed by firms involved in the manufacture and distribution of a product to put consumers in a better position to take responsibility for meeting their financial needs and objectives. For consumers, this should:
• give confidence that firms are acting in good faith, in line with their interests;
• allow them to make informed choices about products and services that are fit for purpose and designed to meet a designated target market;
• improve the information available to assist with the review of the products and services most likely to meet their needs;
• support the correct delivery of benefits that consumers should reasonably expect from the product and services they subscribe to;
• improve the standard of customer service; and
• help them obtain fair value from financial products and services.
As the Company is not regulated by the FCA, it falls outside of the FCA’s new Consumer Duty regulation. However, CGAM and Canaccord Genuity Wealth Limited (CGWL) are regulated companies and in scope, respectively as the designated manufacturer and distributor of the Company. In its capacity as manufacturer, CGAM has conducted a fair value assessment and a target market assessment. Having reviewed both reports, the Board is satisfied that CGAM and CGWL have complied with their obligations.
Two of the four pillars that underpin Consumer Duty relate to consumer understanding and consumer support.
Although the Board is satisfied that these obligations are met in full, the Company’s website has been upgraded to enhance the services and benefits derived from an investment in the Company. As noted above, the Board and Investment Manager have jointly agreed to host more shareholder events to support the delivery of the consumer understanding outcome, one of the key outcomes described under the Consumer Duty.
*VCT status*
I am pleased to report that the Company continues to perform well against the requirements of the legislation and at the period end, the investment test was 91.65% (2022: 84.85%) against an 80% requirement when measured using HMRC’s methodology. The increase in the investment test percentage reflects progress made in deploying capital raised through the 2022 offer and the return of capital to shareholders through the payment of a 2 pence per share special dividend on 10 February 2023 following the successful exit from Ideagen plc. The Company satisfied all other tests relevant to its status as a Venture Capital Trust.
*Key information document*
In accordance with the Packaged Retail Investment and Insurance Products (“*PRIIPs*”) regulations, the Company’s Key Information Document (“*KID*”) is published on the Company’s website at
www.hargreaveaimvcts.co.uk/document-library/.
*Risk review*
The Board has reviewed the risks facing the Company. Further detail can be found in the principal and emerging risks and uncertainties section.
*Outlook*
Whilst we continue to navigate an uncertain economic and geopolitical outlook, recent news suggests that monetary policy is likely to become more accommodating as we progress through the year, helping to lay the foundations for a sustainable recovery in value.
When it finally emerges, a change of sentiment in public markets will benefit our investments in both public and private companies. Until then, we draw comfort from a number of factors: first, the majority of portfolio companies continue to provide updates that are in line with expectations; second, there is a substantial amount of growth on offer from within the portfolio, even in these more difficult times; third, a review of valuation metrics within the qualifying portfolio highlights the deep value on offer; and finally, a significant majority of qualifying companies are well funded and commercially robust.
*David Brock*
Chair
18 December 2023
*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 six non-executive directors, five of whom are independent. Canaccord Genuity Asset Management Limited acts as investment manager whilst Canaccord Genuity Wealth Limited (CGWL) acts as administrator and custodian. JTC (UK) Limited provides 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 Canaccord Genuity Asset Management Limited, 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 income 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 have a permanent establishment in the UK 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. by value as measured by the VCT Rules of all of its investments 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, the Marlborough Special Situations Fund and the Marlborough UK Micro-Cap Growth 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, and 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 and the Marlborough UK Micro-Cap 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 considerations*
*Approach*
The Company regards the development of a clearly defined and integrated ESG management system as an important pillar for the long-term success of its business, as well as for its investee companies.
The Investment Manager believes that companies with strong governance, sustainable business models and balanced workforces are more likely to create value over the long term whilst reducing investment risk, benefiting the wider UK economy and society and generating positive shareholder returns.
*ESG in the investment process*
Holding meaningful stakes in investee companies provides the Investment Manager with the opportunity and responsibility to positively influence investee company behaviour, both at the point of investment and during the time in which the Company is a shareholder.
*Due diligence*
The Investment Manager assesses ESG factors across the portfolio. For Qualifying Companies, the Investment Manager will use the information provided to develop an individualised ESG risk map to identify issues and track behavioural themes. The Investment Manager regularly engages with senior management teams and boards to identify and raise issues of note, provide a forum for positive feedback and promote change where necessary.
*Engagement, exclusions and divestment policies*
As part of its investment strategy, the Company has adopted policies covering exclusions and divestment to describe behaviours that fall outside of the Company’s expectations of investee companies. The Investment Manager has adopted an engagement policy to create a clear framework that defines how it will interact with investee companies.
*The Investment Manager*
The Investment Manager adheres to its own ESG investment and stewardship policies. These include an ESG Policy, an Engagement Policy, a Conflicts of Interest Policy and a Stewardship Policy that, together with the investment mandate and the Company’s ESG approach, inform the Company’s approach.
CGAM is a signatory of the United Nations Principles of Responsible Investment (UN PRI) and HM Treasury’s Women in Finance Charter.
*Risk management*
The structure of the Company’s investment portfolio and its investment strategy, has been developed to mitigate risk where possible. Key risk mitigation strategies are as follows:
• 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, the Marlborough Special Situations Fund and the Marlborough UK Micro-Cap 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.
Further information can be found in this report.
*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 fair 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 Chair’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 NAV per share decreased from 60.19 pence to 46.34 pence resulting in a loss to ordinary shareholders of -8.85 pence per share (-14.70%)^(1) 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 FTSE AIM All-Share Index Total Return. With 91% of the portfolio of Qualifying Investments in companies listed on AIM, the Directors consider this to be the most appropriate benchmark. However, HMRC derived investment restrictions and investments in private companies, main market listed companies and bonds mean that the index is not a wholly comparable benchmark for performance.
*Rolling Returns to end Sep 2023* *1Y* *3y* *5y* *10y*
NAV total return -14.70% -15.30% -17.18% 29.11%
Share price total return -23.51% -10.53% -15.87% 35.53%
NAV total return (dividends reinvested) ^(1) -15.93% -22.40% -25.80% 18.49%
Share price total return (dividends reinvested) ^(1) -24.80% -18.58% -25.16% 23.65%
FTSE AIM All-Share Index Total Return -8.28% -21.23% -29.50% 4.21%
Source: Canaccord Genuity Asset Management 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.
Reflecting the difficult market conditions that continued to dominate through the financial year, and in common with the AIM VCT peer group, the Company reported a significant reduction in the NAV per share. The NAV total return fell behind the benchmark over the year; however, it remains ahead of the benchmark over three, five and ten years but behind the average of the AIM VCT peer group over the same time horizons. The steep falls in valuations of companies listed on AIM, which have heavily impacted the performance of the Company and its AIM VCT peers, have not been mirrored in the Generalist VCT sector, which has reported a very modest average decline of –0.05% over the period under review (source: Morningstar). The divergence of performance across the two peer groups is particularly notable across the two years since the start of the bear market with the AIM VCT sector returning an average loss of 42.1% against the average loss within the Generalist VCT sector of -1.1%. AIM has fallen by 42.0% over the same two-year period. It is difficult to account for the strongly divergent performance although the possible use of investment structures not accessible to investors in public companies may account for some of the difference.
(1) Alternative performance measure definitions and illustrations can be found in the glossary of terms.
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 traded at a discount of 7.21%^(1) as at 30 September 2023 (2022: 4.25%^(1) premium) when calculated with reference to the 30 September 2023 NAV per share. The 1 and 5 year average share price discounts were 6.06%^(1) and 5.64%^(1) 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 Company aims to publish the quarter end NAV per share within 5 business days of the period end to allow time for the Investment Manager and Board to review and agree the valuation of the private companies held within the investment portfolio.
The Company’s share price on 30 September 2023 reflected the last published NAV per share prior to the year end, which was released on 26 September 2023. The 30 September 2023 NAV was reported on 5 October 2023, following the review of the valuations of the private companies.
As at 15 December 2023, the discount to NAV was 6.71% of the last published NAV per share.
*3.** **Ongoing charges ratio*
The ongoing charges of the Company were 2.24%^(1) (2022: 2.06%^(1)) of the average net assets of the Company during the financial year to 30 September 2023.
The increase in the OCR is principally driven by the fall in the average net assets across the year that followed the drop in the NAV per share. Other factors included below inflation increases in board remuneration and an increase in the number of non-executive directors from five to six. There were also modest investments made to improve shareholder communication through investments into the Company’s website, video updates and an increased number of shareholder events. The Ongoing Charges methodology divides ongoing expenses by average net assets.
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 the Board. Although the OCR increased within the year, the Board is pleased to report that the Company’s expenses incurred within the year were below budget.
(1) Alternative performance measure definitions and illustrations can be found in the glossary of terms.
*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 5.00 pence per share (2022: 6.65 pence) of dividends was paid during the year, comprised of a special dividend of 2.00 pence per share paid on 10 February 2023, a final dividend of 2.00 pence in respect of the previous financial year (2021: 3.15 pence) paid on 10 February 2023 and an interim dividend of 1.00 penny (2022: 1.00 penny) paid on 28 July 2023.
A final dividend of 1.50 pence per share will be proposed at the Annual General Meeting. If approved by shareholders, the payment of the interim, final and special dividends in respect of the financial year to 30 September 2023 would represent a distribution to shareholders of 9.7% of the 30 September 2023 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.
*Dividends 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.
2021/22 60.19 3.00 5.0%
2022/23 46.34 4.50 9.7% Including a special dividend of 2.00 pence and proposed final dividend of 1.50 pence.
(1) Alternative performance measure definitions and illustrations can be found in the glossary of terms.
*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 2023 the Company continued to meet these tests.
The investment test increased from 84.85% to 91.65% in the financial year. The increase in the investment test percentage reflects progress made in deploying capital raised through the 2022 offer and the return of capital to shareholders through the payment of a 2 pence per share special dividend on 10 February 2023 following the successful exit from Ideagen plc. The investment test remains comfortably ahead of the 80% threshold that applies to the Company and ahead of the target of 85% as set out in the Company’s investment policy.
The Company invested £13.6 million into 10 Qualifying Companies, 4 of which were investments into new Qualifying Companies. The Board is pleased with the level of new Qualifying Investment, which was ahead of expectations.
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 Canaccord Genuity Asset Management Limited and Canaccord Genuity Wealth Limited as it considers appropriate. 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 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 an investment manager with significant experience in the management of venture capital trusts. The Investment Manager regularly provides the Board with written and verbal reports. The Board also 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 across a wide range of industries and sectors. Individual Qualifying Investments rarely exceed 5% of net assets. The Investment Manager holds regular company meetings to monitor investments and identify potential risk. The VCT’s liquidity is monitored on a regular basis by the Investment Manager and reported to the Board quarterly and as necessary. No change.
Changes in monetary or fiscal policy have undermined consumer, business and investor confidence with negative impacts on profitability, investment and stock market performance.
The higher cost of borrowing is starting to impact the cost of debt for companies and consumers. Whilst still subdued, UK consumer and business confidence has recovered off lows as energy prices, inflation and supply chain frictions all eased. Whilst the economy has outperformed expectations for this year, the outlook remains weak.
*Compliance risk.* The Company is required to comply with the FCA Listing Rules and the Disclosure Guidance and Transparency Rules, 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.
CGWL provides compliance oversight to both the Administrator and the Investment Manager and reports to the Board on a quarterly basis. No change.
*Operational risk and outsourcing.* Failure in the Investment Manager, Administrator, Custodian, Company Secretary or other appointed third party systems and controls or disruption to its business as a result of operational failure, environmental hazards or cyber security attacks. 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 they operate appropriate control and oversight systems and have in place training and other defence measures to mitigate the risk of cyber attack. 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 No change.
*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 comprises two fund managers and two investment analysts, which helps mitigate this risk. No change.
*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 (the ‘Sunset Clause’). 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.
Climate change presents environmental, geopolitical, regulatory and economic risks. In the long term, some companies may have restrictions imposed on their operational model that reduce revenues and profit margins and increases their cost of capital. Instability or changes arising from these risks could have an impact on stock markets and the value of the Company’s investments so reducing returns to shareholders. 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.
Companies may face restrictions on emissions, water consumption and increased risk of environmental hazards. Regular dialogue with the manager provides the Board with assurance that the Investment 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. The Company’s investment portfolio is well diversified and the Company has no gearing.
The Board regularly reviews investment test forecasts and liquidity analysis, including under stress scenarios, to monitor current and anticipate future performance against HMRC legislation and to ensure the Company has, and will continue to have, access to sufficient liquidity and distributable reserves to maintain compliance with its key policies.
The Board keeps abreast of current thinking through contact with industry associations and its advisors.
The Investment Manager undertakes a review of ESG factors as part of the investment process. Climate change, or the need to limit its impact, will result in technological innovation as young companies seek to develop solutions and create opportunities for value creation for existing or new Qualifying Companies. No change.
The Bank of England increased base rates by 300bps to 5.25% during the financial year, significantly increasing the cost of debt for companies and and households with floating rate debt. Companies and households with savings benefitted. The full impact of this is yet to be felt.
In the Autumn Statement 2023, the Government confirmed its intention to extend the sunset clause by 10 years to 5 April 2035. Legislation is expected to be introduced through the next Finance Bill and passed into law in early 2024.
The wars in Ukraine and the Middle East present a range of risks that may have profound economic and social consequences if they impact access to certain commodities or much higher prices.
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 Chair’s statement and the Investment Manager’s report.
*Long term viability statement*
—In accordance with provision 36 of the AIC Code of Corporate Governance, the Directors have carried out a robust assessment of the Company’s current position and its emerging and principal risks. 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 the 30% income tax relief;
• exceeds the time allowed to deploy funds raised under the current offer in accordance with VCT legislation; and
• 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. Forecasts and stress tests have been used to support their assessment and the following factors have been considered in relation to 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 (91.65% at 30 September 2023) 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 £19.2 million in cash at the year end;
• the Company has distributable reserves of £134.4 million at 30 September 2023, equivalent to 41 pence per share;
• the Company has a 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 2023 was strong with no debt or gearing;
• the offer for subscription launched on 7 September 2023 has provided further liquidity for deployment in line with the Company’s policies and to meet future expenses;
• the ongoing charges ratio of the Company at the year end was 2.24%;
• the Company has procedures and forecast models in place to identify, monitor and control risk, portfolio liquidity and other factors relevant to the Company’s status as a VCT; and
• the Investment Manager and the Company’s other key service providers have contingency plans in place to manage operational disruptions.
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 w