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Downing Two VCT  -  DP2F   

Downing TWO VCT plc : Final Results

Released 18:27 26-Apr-2017

Downing TWO VCT plc : Final Results

Downing TWO VCT plc
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2016

 
FINANCIAL HIGHLIGHTS
   31 Dec
2016
   31 Dec
 2015
  Pence   Pence
'C' Share pool      
Net asset value per 'C' Share -   53.9
Net asset value per 'A' Share -   0.1
Cumulative distributions per 'C' Share 120.8   75.0
Adjusted for performance fee estimate -   (7.6)
Total return per 'C' Share and 'A' Share 120.8   121.40
       
'D' Share pool      
Net asset value per 'D' Share 36.6   51.8
Net asset value per 'E' Share 0.1   0.1
Cumulative distributions per 'D' Share 66.5   49.5
Total return per 'D' Share and 'E' Share 103.2   101.4
       
'F' Share pool      
Net asset value per 'F' Share 69.7   71.9
Cumulative distributions per 'F' Share 25.0   20.0
Total return per 'F' Share 94.7   91.9
       
'G' Share pool      
Net asset value per 'G' Share 83.5   86.3
Cumulative distributions per 'G' Share 20.0   15.0
Total return per 'G' Share 103.5   101.3
       
'K' Share pool      
Net asset value per 'K' Share 99.0   n/a
Cumulative distributions per 'K' Share -   n/a
Total return per 'K' Share 99.0   n/a
       
 
CHAIRMAN'S STATEMENT

Introduction
I am pleased to present the Annual Report for the year ended 31 December 2016. As the Company now has a number of planned exit share pools in different stages of their life, the Manager has had to focus on progressing investment realisations in some pools while also working on building new investment portfolios for the more recent pools. Overall, progress has been satisfactory.

A brief summary of each share pool is provided below.

'C' Share pool
The final distribution to 'C' Shareholders was made in March 2016. Total Return to those investors was 120.83p per Share compared to the original cost net of income tax relief of 70.0p. The Board congratulates the Manager on delivering a very successful outcome for investors. Since the year end, the 'C' and 'A' Shares, which had negligible residual value, were cancelled.

'D' Share pool
The 'D' Shares were originally issued in 2010 and at the year end held a portfolio of seven live investments with a total value of £2.4 million.

At 31 December 2016, the NAV of a combined holding of one 'D' Share and one 'E' Share stood at 36.7p, which represents an increase of 3.5% over the year after adjusting for the dividends of 17.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 103.2p, compared to the initial cost to original subscribers net of income tax relief of 70p.

'F' Share pool
The 'F' Share pool was launched in 2012 and now holds a portfolio of 23 investments with a total value of £7.2 million.

At 31 December 2016, the 'F' Share NAV stood at 69.7p, which represents an increase of 3.9% over the year after adjusting for the dividends of 5.0p per share paid in the year. Dividends paid to date total 25.0p per share such that Total Return (NAV plus cumulative dividends to date) is now 94.7p, compared to the initial cost to original subscribers net of income tax relief of 70p.

In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per 'F' Share on 30 June 2017 to Shareholders on the register at the close of business on 26 May 2017.

'G' Share pool
The 'G' Share pool was launched in 2013 and completed its initial investment phase this year. At 31 December 2016, the pool held 19 investments with a total value of £20.1 million.

At 31 December 2016, the 'G' Share NAV stood at 83.5p, which represents an increase over the year of 2.5% after adjusting for the dividends of 5.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 103.5p, compared to the initial NAV of 100.0p.

In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per 'G' Share on 30 June 2017 to Shareholders on the register at the close of business on 26 May 2017.

'K' Share pool
The 'K' Share Offer for Subscription was launched on 15 December 2015 and closed on 30 September 2016. Having raised gross proceeds £16.2 million. The process of build the 'K' Share portfolio is now well underway.

At 31 December 2016, the pool held 11 investments with a total value of £9.9 million. The NAV at 31 December 2017 stood at 99.0p per share.

Share buybacks
For share classes where all investors are still within the initial five year period (currently the 'G' Share and 'K' Share classes), the Company operates a general policy of buying in its own shares for cancellation when any become available in the market. During this period, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount). Any buybacks are subject to regulatory restrictions and other factors such as the availability of liquid funds.

The Company is now unlikely to make any further purchases of 'D' Shares, 'E' Shares and 'F' Shares as the process of returning funds to those Shareholders is now underway in the case of the 'D' and 'E' Shares and is due to start early next year in the case of the 'F' Shares.

During the year to 31 December 2016, the Company repurchased and subsequently cancelled 11,295 'F' Shares and 33,975 'G' Shares for an aggregate consideration of £7,511 and £28,370 respectively, being an average price of 66.5p per 'F' Share and 83.5p per 'G' Share.

A resolution to renew the buyback authority for the Company to purchase its own shares will be proposed at the forthcoming Annual General Meeting.

Annual General Meeting ("AGM")
The Company's tenth AGM will be held at Ergon House, Horseferry Road, London, SW1P 2AL at 10:45 a.m. on 20 June 2017.

Two items of special business will be proposed at the AGM. As mentioned above, the Company will seek to renew the authority for the Company to buy back shares.

Also, the Company is seeking Shareholder approval to amend the Company's Articles of Association to simplify the process of cancelling share classes once they have come to the end of their planned exit life. The proposed changes will eliminate the requirement for a Shareholder Circular to be issued in order to cancel a share class once it has reduced to a negligible residual value. This will result in some costs savings for the Company.

Outlook
Although the long term implications of Brexit may not yet be clear, the impact on the Company is not expected to be significant. The majority of the share pools are already fully invested and progressing satisfactorily. The 'K' Share is still making new investments as it builds its portfolio and faces greater challenges from new VCT rules than it is likely to from factors connected with Britain leaving the EU. VCT rules brought in over the last year or so have reduced the scope of investments that can be made, however the Manager is confident that a reasonable portfolio can be built which can deliver shareholders the targeted results.

We expect to see significant headway made in realising most of the remaining investments in the 'D' Share pool over the next few months. The Manager will also be developing plans during the course of this year for realisation of investments from the 'F' Share pool, ahead of the commencement of the return of funds to those investors early next year.

I look forward to updating Shareholders on progress in my statement with the Half Yearly Report to 30 June 2017.

Hugh Gillespie
Chairman
26 April 2017

INVESTMENT MANAGER'S REPORT- 'D' SHARE POOL

Introduction
The 'D' Share pool holds investments in seven companies and is fully invested. The focus this year has been on realisations and ten full or partial exits have completed in the period. We have realisation plans in place for the remainder of the portfolio.

Net asset value and results
At 31 December 2016, the 'D' Share NAV stood at 36.6p and the 'E' Share NAV at 0.1p, giving a combined NAV of 36.7p. Total Return (NAV plus cumulative dividends to date) was 103.2p for a combined holding of one 'D' and one 'E' Share. This represents a net increase of 1.8p over the year (after adjusting for dividends paid during the year of 17.0p per 'D' Share), equivalent to an increase of 3.5%.

The return on ordinary activities for the 'D' Shares for the period was a gain of £176,000 (2015: £723,000) being a revenue loss of £58,000 (2015: profit £339,000) and a capital gain of £234,000 (2015: £384,000).

'D' Share pool - divestment activity
Ten full or partial exits have completed in the period generating total proceeds of £2.2 million.

The most significant of these were Quadrate Catering Limited and Quadrate Spa Limited which generated proceeds of £581,000 and £520,000 and uplifts over cost of £140,000 and £168,000 respectively.

Other significant realisations included, Kidspace Adventures (Holdings) Limited which generated proceeds of £470,000, an uplift over cost of £95,000 and Future Biogas (SF) Limited which returned £203,000 over a cost of £169,000.

'D' Share pool - portfolio valuation
The majority of the 'D' Share portfolio performed in line with expectations during the year. There were a few small valuation movements in the period that resulted in an unrealised gain of £27,000.

Fenkle Street LLP, is a property development company based in Newcastle. The hotel is trading well and the valuation has increased by £50,000 to reflect the expected future cash flows of the company.

Avon Solar Limited, the owner of residential rooftop solar assets in the UK, was uplifted by £22,000 due to continued good performance.

Unfortunately these gains were partially offset by a reduction in value on Mosaic Spa and Health Clubs Limited which has continued to have minor performance issues and has resulted in an unrealised loss of £45,000.

Outlook
Realisation plans are in place for the remaining investments in the portfolio with some expected to complete in the next few months in order to make a final distribution to investors.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'D' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'D' Share pool

   

 

Cost
 

 

Valuation
Valuation
 movement
in year
 

% of
portfolio
   £'000  £'000 £'000  
         
VCT qualifying and partially qualifying investments        
Mosaic Spa and Health Clubs Limited* 520 300 (45) 8.1%
Westcountry Solar Solutions Limited 250 250 - 6.7%
Avon Solar Limited 210 240 22 6.4%
Quadrate Spa Limited 144 - - 0.0%
  1,124 790 (23) 21.2%
Non-qualifying investments        
Gara Rock Resort Limited 1,322 1,322 - 35.5%
Fenkle Street LLP 122 270 50 7.2%
Future Biogas (Reepham Road) Limited 320 - - 0.0%
  1,764 1,592 50 42.7%
         
  2,888 2,382 27 63.9%
         
Cash at bank and in hand   1,345   36.1%
         
Total investments   3,727   100.0%

*              Part-qualifying investment

Summary of investment movements

Disposals

   

 

 

Cost
 

 

MV at  01/01/16*
   

 

Disposal
proceeds
  Gain/
(loss)
against
cost
  Total
 realised
gain during
 the year
 
  £'000   £'000   £'000   £'000   £'000  
VCT qualifying and partially qualifying
investments
                   
Future Biogas (Reepham Road) Limited 261   196   261   -   65  
Quadrate Catering Limited 441   539   581   140   42  
Liverpool Nurseries (Holdings) Limited -   -   12   12   12  
Kidspace Adventures Holdings Limited 375   465   470   95   5  
Quadrate Spa Limited 352   520   520   168   -  
Camandale Limited 422   2   2   (420)   -  
                     
Non-qualifying investments                    
Future Biogas (SF) Limited 169   169   203   34   34  
Kilmarnock Monkey Bar Limited -   -   6   6   6  
Redmed Limited 27   24   28   1   4  
Commercial Street Hotel Limited 100   100   100   -   -  
                     
Total 'D' Share pool 2,147   2,015   2,183   36   168  

*              Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'F' SHARE POOL

Introduction
The 'F' Share pool holds 23 investments and is fully invested in a portfolio focussed on asset backed businesses and those with predictable revenue streams.

Net asset value and results
At 31 December 2016, the 'F' Share NAV stood at 69.7p. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 94.7p. This represents a net increase of 2.8p per share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 3.9%.

The return on ordinary activities for the 'F' Share pool for the year was a gain of £302,000 (2015: £118,000) being a revenue loss of £113,000 (2015: profit £175,000) and a capital gain of £415,000 (2015: loss £57,000).

'F' Share pool - investment activity
Four new investments were made in the period totalling £700,000. £300,000 was invested into Vectis Alpha Limited which is seeking to build and develop renewable energy plants; £150,000 was invested into Brownfields Trading Limited which is seeking to develop small-scale waste disposal projects; £125,000 was invested into both Rhodes Solutions Limited and Morava Limited which are both exploring opportunities in the wood refinery sector.

Three full exits were completed in the period generating total proceeds of £1.3 million.

Grasshoppper 2007 Limited, the company that owns The Grasshopper Inn, a public house near Westerham, Kent was sold and generated proceeds equivalent to the original cost of £378,000.

The divestment of Kidspace Adventures Holdings Limited, the owner of three well established children's play areas in Croydon, Romford and Epsom, realised £313,000 which was £63,000 more than the investment cost.  

The final repayment on Redmed Limited, the owner and operator of a bar in Lincoln, was made which completed the exit of the investment and generated proceeds of £16,000.

One notable partial divestment took place in the period being the part repayment of a non-qualifying loan to Gara Rock Resort Limited, formerly Aminghurst Limited, which generated proceeds of £581,000.

F' Share pool - portfolio valuation
The majority of investments remain valued at or above cost and there were several valuation movements in the period that resulted in an unrealised gain of £410,000.

Pearce and Saunders Limited, the owner of three freehold pubs in south east London, has previously been written down in value due to poor performance of the underlying pub companies, however rising property prices have benefitted the investment and the valuation has been increased by £248,000 and is now held at original cost.

The valuation of anaerobic digestion plant, Merlin Renewables Limited has increased by £75,000 as the plant continues to perform ahead of expectations.

Four smaller movements have also been recognised in the period. Atlantic Dogstar Limited, which owns a group of London pubs, are performing to plan and the valuation has been increased by £27,000.

Lambridge Solar Limited, Augusta Pub Company Limited and Pabulum Pubs Limited are all performing well and have been increased in value by £26,000, £25,000 and £9,000 respectively.

Outlook
The focus now for the 'F' Share portfolio is on close monitoring and support of the portfolio companies to ensure that prospects for growth are optimised in the period until the realisation process commences in early 2018.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'F' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'F' Share pool  

 

Cost
 

 

Valuation
Valuation
 movement
in year
 

% of
portfolio
   £'000  £'000 £'000  
         
VCT qualifying and partially qualifying investments        
Apex Energy Limited 1,000 1,000 - 13.2%
Vulcan Renewables Limited 653 779 - 10.3%
Goonhilly Earth Station Limited 760 760 - 10.0%
Merlin Renewables Limited 500 575 75 7.6%
Lambridge Solar Limited 500 569 26 7.5%
Pearce and Saunders Limited 497 497 248 6.6%
Augusta Pub Company Limited 290 349 25 4.6%
Vectis Alpha Limited 300 300 - 4.0%
Pabulum Pubs Limited 200 237 9 3.2%
Atlantic Dogstar Limited 200 227 27 3.0%
Fresh Green Power Limited 200 200 - 2.6%
City Falkirk Limited 422 177 - 2.3%
Fubar Stirling Limited 268 169 - 2.2%
Brownfields Trading Limited 150 150 - 2.0%
Rhodes Solutions Limited 125 125 - 1.6%
Morava Limited 125 125 - 1.6%
Green Energy Production UK Limited 100 100 - 1.3%
Cheers Dumbarton 48 17 - 0.2%
Lochrise Limited 13 - - 0.0%
  6,351 6,356 410 83.8%
Non-qualifying investments        
Baron House Developments LLP 481 481 - 6.3%
Gara Rock Resort Limited 258 258 - 3.4%
London City Shopping Centre Limited 66 66 - 0.9%
Pearce and Saunders DevCo Limited 46 46 - 0.6%
  851 851 - 11.2%
         
  7,202 7,207 410 95.0%
         
Cash at bank and in hand   377   5.0%
         
Total investments   7,584   100.0%

Summary of investment movements

Additions

  Cost
  £'000
VCT qualifying and partially qualifying investments  
Vectis Alpha Limited 300
Brownfields Trading Limited 150
Morava Limited 125
Rhodes Solutions Limited 125
   
Total 'F' Share pool 700

Disposals

   

 

 

Cost
 

 

MV at  01/01/16*
   

 

Disposal
proceeds
  Gain/
(loss)
against
cost
  Total realised
gain during  the year
  £'000 £'000   £'000   £'000   £'000
VCT qualifying and partially qualifying
   investments
 
Kidspace Adventures Holdings Limited 250   310   313   63   3
Redmed Limited 18   14   16   (2)   2
Grasshopper 2007 Limited 378   378   378   -   -
                   
                   
Non-qualifying investments                  
Gara Rock Resort Limited 581   581   581   -   -
Southampton Hotel Developments Limited 298   -   -   (298)   -
                   
Total 'F' Share pool 1,525   1,283   1,288   (237)   5

*              Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'G' SHARE POOL


Introduction
Over the course of the year, the 'G' Share pool has continued to build its initial VCT qualifying portfolio and focus now turns to investee monitoring.

Net asset value and results
At 31 December 2016, the 'G' Share NAV stood at 83.5p. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 103.5p. This represents a net increase of 2.2p per Share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 2.5%.

The return on ordinary activities for the 'G' Share pool for the year was a gain of £550,000 (2015: £286,000) being a revenue profit of £74,000 (2015: £257,000) and a capital gain of £476,000 (2015: £29,000).

'G' Share pool - investment activity
Five new qualifying investments were made in the period totalling £5.0 million. £1.45 million was invested into Quadrate Catering Limited which operates a restaurant in the Cube Complex in Birmingham.

£1.3 million was invested in Walworth House Pub Limited to purchase a freehold property in south London and convert it into a public house.

£1.0 million was invested into Hermes Renewables Limited which is preparing to build and operate a wood pelleting plant.
£750,000 was invested in Zora Energy Renewables Limited, a new wood pellet sales and distribution business.

One non-qualifying investment was made in Quadrate Spa Limited for £1.45 million which owns and operates a health club business in The Cube complex in Birmingham. 

In the period, total proceeds of £5.6 million were received. Kidspace Adventures Holdings Limited was sold and generated proceeds equivalent to cost of £2.0 million.

Grasshoppper 2007 Limited, the company that owns The Grasshopper Inn, a public house near Westerham, Kent was sold and generated proceeds of £1.1 million.

Three non-qualifying loans were repaid in full in the period. £1.3 million was repaid on Hobblers Heath Limited, the children's adventure playground development in Hounslow, West London.

Pub People Limited, the public house operator in the East Midlands, repaid £873,000 and Ludlow Taverns Limited repaid £388,000. 

'G' Share pool - portfolio valuation
The majority of investments remain valued at or above cost and there were several valuation movements in the period totalling an unrealised gain of £471,000.

Atlantic Dogstar Limited owns a group of London pubs which are performing well and the valuation has been increased by £480,000.

Augusta Pub Company Limited, the owner of three freehold pubs in London, has been increased in value by £49,000 following independent valuations of the sites.

Two small increases on Pabulum Pubs Limited and Ormsborough Limited of £17,000 and £9,000 respectively were also made.

Unfortunately these gains were partially offset by an £84,000 reduction in the value of Oak Grove Renewables Limited due to performance issues at this anaerobic digestion plant.

Outlook
The 'G' Share pool is fully qualifying and therefore our focus has now shifted to close monitoring and support of the portfolio companies in order to nurture growth before the ultimate exit date.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'G' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'G' Share pool  

 

Cost
 

 

Valuation
Valuation
 movement
in year
 

% of
portfolio
   £'000  £'000 £'000  
         
VCT qualifying and partially qualifying investments        
Atlantic Dogstar Limited 3,500 3,980 480 18.8%
Antelope Pub Limited 1,760 1,760 - 8.3%
Goonhilly Earth Station Limited 1,710 1,710 - 8.1%
Quadrate Catering Limited 1,450 1,450 - 6.9%
Walworth House Pub Limited 1,330 1,330 - 6.3%
Apex Energy Limited 1,300 1,300 - 6.2%
Hermes Renewables Limited 1,000 1,000 - 4.7%
Zora Energy Renewables Limited 750 750 - 3.5%
Augusta Pub Company Limited 580 697 49 3.3%
Ormsborough Limited 500 509 9 2.4%
Pabulum Pubs Limited 400 475 17 2.2%
Oak Grove Renewables Limited 420 231 (84) 1.1%
  14,700 15,192 471 71.8%
Non-qualifying investments        
Quadrate Spa Limited 1,450 1,450 - 6.9%
Hedderwick Limited 1,250 1,250 - 5.9%
Baron House Developments LLP 1,093 1,093 - 5.2%
Gara Rock Resort Limited 801 801 - 3.8%
Pearce and Saunders Limited 193 193 - 0.9%
London City Shopping Centre Limited 110 110 - 0.5%
Craft Beer Pub Co Limited 92 92 - 0.4%
  4,989 4,989 - 23.6%
         
  19,689 20,181 471 95.4%
         
Cash at bank and in hand   964   4.6%
         
Total investments   21,145   100.0%

Summary of investment movements

Additions

  Cost
  £'000
VCT qualifying and partially qualifying investments  
Quadrate Catering Limited 1,450
Walworth House Pub Limited 1,330
Hermes Renewables Limited 1,000
Zora Energy Renewables Limited 750
Ormsborough Limited 500
   
   
Non-qualifying investments  
Quadrate Spa Limited 1,450
   
Total 'G' Share pool 6,480

Disposals

   

 

 

Cost
 

 

MV at 01/01/16*
   

 

Disposal
proceeds
   

Gain
against
cost
  Total
 realised
gain during
the year
  £'000   £'000   £'000   £'000   £'000
VCT qualifying and partially qualifying
   investments
                 
Redmed Limited 37   27   32   (5)   5
Kidspace Adventures Holdings Limited 1,977   1,977   1,977   -   -
Grasshopper 2007 Limited 1,050   1,050   1,050   -   -
                   
Non-qualifying investments                  
Hobblers Heath Limited 1,325   1,325   1,325   -   -
Pub People Limited 873   873   873   -   -
Ludlow Taverns Limited 388   388   388   -   -
                   
  5,650   5,840   5,645   (5)   5

* Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'K' SHARE POOL

Introduction
The 'K' Share pool closed its fundraising period on 30 September 2016 having raised £16.2 million. The process of investing the funds is well under way with £9.9 million invested in qualifying or part qualifying investments.

'K' Share pool - Net asset value and results
At 31 December 2016, the 'K' Share NAV stood was 99.0p, a decrease of 1.0p on the initial price resulting from the initial "cash drag" from holding uninvested funds.

The return on ordinary activities for the 'K' Share pool for the year was a loss of £154,000 being wholly related to revenue.

'K' Share pool - Investment activity
11 initial qualifying investments have been made during the period totalling £9.9 million as we start to build the qualifying portfolio of the 'K' Share pool.

The qualifying investments include a £1.3 million investment in Yamuna Renewables Limited which is planning to build a wood pellet plant in Austria.

£1 million was invested in both Vectis Alpha Limited, which is seeking to build and develop renewable energy plants, and Brownfields Trading Limited, which is seeking to develop small-scale waste disposal projects.

£736,000 was invested into both Ironhide Generation Limited and Indigo Generation Limited. £591,000 was invested in  Rockhopper Renewables Limited and £337,000 in SF Renewables (Solar) Limited which are all in the process of acquiring land in India to build and operate ground mounted solar arrays.

Jito Trading Limited, Rhodes Solutions Limited and Morava Limited are all exploring opportunities in the wood refinery sector following investments of £1.5 million, £1.25 million and £1.1 million respectively.

£350,000 was invested in Zora Energy Renewables Limited, a new wood pellet sales and distribution business.

No valuation adjustments have been made in the period with all investments remaining at cost.

Outlook
The task of building the 'K' Share portfolio has very recently begun. We will continue to seek investment opportunities and develop the current investment portfolio over the remainder of the planned life of the share pool.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'K' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'K' Share pool  

 

Cost
 

 

Valuation
Valuation
 movement
in year
 

% of
portfolio
   £'000  £'000 £'000  
         
VCT qualifying and partially qualifying investments        
Jito Trading Limited 1,500 1,500 - 9.6%
Yamuna Renewables Limited 1,300 1,300 - 8.3%
Rhodes Solutions Limited 1,250 1,250 - 8.0%
Morava Limited 1,100 1,100 - 7.0%
Brownfields Trading Limited 1,000 1,000 - 6.4%
Vectis Alpha Limited 1,000 1,000 - 6.4%
Ironhide Generation Limited 736 736 - 4.7%
Indigo Generation Limited 736 736 - 4.7%
Rockhopper Renewables Limited 591 591 - 3.8%
Zora Energy Renewables Limited 350 350 - 2.2%
SF Renewables (Solar) Limited 337 337 - 2.2%
  9,900 9,900 - 63.3%
         
  9,900 9,900 - 63.3%
         
Cash at bank and in hand   5,751   36.7%
         
Total investments   15,651   100.0%

*              Part-qualifying investment

REVIEW OF INVESTMENTS - 'K' SHARE POOL (continued)

Summary of investment movements

Additions

  Cost
  £'000
VCT qualifying investments  
Jito Trading Limited 1,500
Yamuna Renewables Limited 1,300
Rhodes Solutions Limited 1,250
Morava Limited 1,100
Brownfields Trading Limited 1,000
Vectis Alpha Limited 1,000
Ironhide Generation Limited 736
Indigo Generation Limited 736
Rockhopper Renewables Limited 591
Zora Energy Renewables Limited 350
SF Renewables (Solar) Limited 337
   
Total 'K' Share pool 9,900

Directors' responsibilities statement
The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report, the Strategic Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that year.

In preparing these financial statements the Directors are required to:

*select suitable accounting policies and then apply them consistently;
*make judgements and accounting estimates that are reasonable and prudent;
*state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
*prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions, to disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

Statement as to disclosure of information to Auditor
The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

INCOME STATEMENT
for the year ended 31 December 2016


 
  Year ended 31 December 2016

 

Year ended 31 December 2015
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total
Note £'000 £'000 £'000   £'000 £'000 £'000
                 
Income   1,006 40 1,046   2,663 - 2,663

 

               
Gain on investments   - 1,085 1,085   - 41 41
    1,006 1,125 2,131   2,663 41 2,704
                 
Investment management fees   (861) - (861)   (753) - (753)
                 
Other expenses   (308) - (308)   (251) - (251)
                 
Return on ordinary activities before tax
(163)

1,125

962
 
1,659

41

1,700
                 
Tax on total comprehensive income and ordinary activities  
(117)
 

-

(117)
   

(201)
 

-
 

(201)
                 
Return for the year and total comprehensive income
(280)

1,125

845
 
1,458

41

1,499
                 
Basic and diluted return/(loss) per:              
'C' Share   (0.4p) - (0.4p)   9.6p (4.4p) 5.2p
'A' Share   - - -   - - -
'D' Share   (0.6p) 2.3p 1.7p   3.4p 3.8p 7.2p
'E' Share   - - -   - - -
'F' Share   (1.0p) 3.8p 2.8p   1.6p (0.5p) 1.1p
'G' Share   0.3p 1.9p 2.2p   1.0p 0.1p 1.1p
'K' Share   (1.4p) - (1.4p)   - - -

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS 102"). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 by the Association of Investment Companies ("AIC SORP").

Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the return/loss as stated above and at historical cost.

INCOME STATEMENT (ANALYSED BY SHARE POOL)
for the year ended 31 December 2016

'C' Share pool


 
  Year ended 31 December 2016

 

Year ended 31 December 2015
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total

Note

£'000 £'000 £'000   £'000 £'000 £'000
                 
Income   7 - 7   818 - 818
Loss on investments   - - -   -   (315) (315)
    7 - 7   818 (315) 503
Investment management fees   (9) - (9)   (57) - (57)
Other expenses   (33) - (33)   (35)   (35)
Return/(loss) on ordinary activities     before tax
(35)

-

(35)
 
726

(315)

411
Tax on total comprehensive income and ordinary activities    

6
 

-
 

6
   

(39)
 

-
 

(39)
Return/(loss) attributable to equity shareholders  

 

(29)

-

(29)
   

687
 

(315)
 

372

'D' Share pool


 
  Year ended 31 December 2016

 

Year ended 31 December 2015
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total
Note £'000 £'000 £'000   £'000 £'000 £'000
                 
Income   50 40 90   560 - 560
Gain on investments   - 194 194   - 384 384
    50 234 284   560 384 944
Investment management fees   (50) - (50)   (97) - (97)
Other expenses   (34) - (34)   (44) - (44)
Return/(loss) on ordinary activities
  before tax
(34)
234

    200
 
419

384

803
Tax on total comprehensive income and ordinary activities   (24)  

-
(24)    

(80)
 

-
 

(80)
Return/(loss) attributable to equity shareholders  

 
(58)
234

176
 
339

384

723

'F' Share pool


 
  Year ended 31 December 2016

 

Year ended 31 December 2015
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total
Note £'000 £'000 £'000   £'000 £'000 £'000
                 
Income   98 - 98   409 - 409
Gain/(loss) on investments   - 415 415   - (57) (57)
    98 415 513   409 (57) 352
Investment management fees   (138) - (138)   (144) - (144)
Other expenses   (78) - (78)   (74) - (74)
Return/(loss) on ordinary activities
 before tax

(118)

415

297
 
191

(57)

134
Tax on total comprehensive income and ordinary activities    

5
 

-

5
   

(16)
 

-
 

(16)
Return/(loss) attributable to equity shareholders  

 

(113)

415

302
 
175

(57)

118

 'G' Share pool


 
  Year ended 31 December 2016

 

Year ended 31 December 2015
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total
Note £'000 £'000 £'000   £'000 £'000 £'000
                 
Income   780 - 780   876 - 876
Gain on investments   - 476 476   - 29 29
    780 476 1,256   876 29 905
Investment management fees   (436) - (436)   (455) - (455)
Other expenses   (127) - (127)   (98) - (98)
Return on ordinary activities
 before tax

217

476

693
   

323
 

29
 

352
Tax on total comprehensive income and ordinary activities    

(143)
 

-
 

(143)
   

(66)
 

-
 

(66)
Return attributable to equity shareholders  

 

74

476

550
   

257
 

29
 

286

'K' Share pool


 
  Year ended 31 December 2016

 

Year ended 31 December 2015
     

 

 

 

 

Revenue Capital Total   Revenue Capital Total
Note £'000 £'000 £'000   £'000 £'000 £'000
                 
Income   71 - 71   - - -
Loss on investments   - - -   - - -
    71 - 71   - - -
Investment management fees   (228) - (228)   - - -
Other expenses   (36) - (36)   - - -
Return/(loss) on ordinary activities
 before tax

(193)

-

(193)
 
-

-

-
Tax on total comprehensive income and ordinary activities    

39
 

-
 

39
   

-
 

-
 

-
Return/(loss) attributable to equity shareholders  

 

(154)

-

(154)
 
-

-

-

BALANCE SHEET
as at 31 December 2016


 
  2016

 

2015
  £'000   £'000

 

       
Fixed assets        
Investments   39,670   31,365
         
Current assets        
Debtors   312   879
Cash at bank and in hand   8,461   7,021
    8,773   7,900
         
Creditors: amounts falling due within one year   (486)   (532)
         
Net current assets 8,287   7,368
         
Net assets   47,957   38,733
         

Capital and reserves

       
Called up share capital   95   79
Capital redemption reserve   106   106
Special reserve   33,666   40,086
Share premium reserve   16,170   -
Revaluation reserve   (115)   (1,248)
Capital reserve - realised   (2,254)   (2,252)
Revenue reserve   289   1,962
         
 

Total equity shareholders' funds
 
47,957
 
38,733
       
Basic and diluted net asset value per Share:      
'C' Share   -   53.9p
'A' Share   -   0.1p
'D' Share   36.6p   51.8p
'E' Share   0.1p   0.1p
'F' Share   69.7p   71.9p
'G' Share   83.5p   86.3p
'K' Share   99.0p   -

BALANCE SHEET (ANALYSED BY SHARE POOL)
as at 31 December 2016

'C' Shares


 
  2016

 

2015
    £000

 

£000
Fixed assets        
Investments   -   748
Current assets        
Debtors   -   175
Cash at bank and in hand   24   2,995
    24   3,170
Creditors: amounts falling due within one year   (23)   (75)
Net current assets   1   3,095
Net assets   1   3,843
         

Capital and reserves

       
Called up share capital   18   18
Capital redemption reserve   106   106
Special reserve   -   2,743
Share premium reserve   -   -
Revaluation reserve   (105)   55
Capital reserve - realised   -   -
Revenue reserve   (18)   921
Total equity shareholders' funds   1   3,843

'D' Shares


 
  2016

 

2015
    £000

 

£000
Fixed assets        
Investments   2,382   4,369
Current assets        
Debtors   3   283
Cash at bank and in hand   1,345   667
    1,348   950
Creditors: amounts falling due within one year   (68)   (133)
Net current assets   1,280   817
Net assets   3,662   5,186
         

Capital and reserves

       
Called up share capital   25   25
Capital redemption reserve   -   -
Special reserve   3,579   5,205
Share premium reserve   -   -
Revaluation reserve   (508)   (667)
Capital reserve - realised   -   -
Revenue reserve   566   623
Total equity shareholders' funds   3,662   5,186

'F' Shares


 
  2016

 

2015
    £000

 

£000
Fixed assets        
Investments   7,207   7,379
Current assets        
Debtors   25   131
Cash at bank and in hand   377   392
    402   523
Creditors: amounts falling due within one year   (71)   (119)
Net current assets   331   404
Net assets   7,538   7,783
         

Capital and reserves

       
Called up share capital   11   11
Capital redemption reserve   -   -
Special reserve   8,380   9,158
Share premium reserve   -   -
Revaluation reserve   6   (647)
Capital reserve - realised   (1,032)   (1,032)
Revenue reserve   173   293
Total equity shareholders' funds   7,538   7,783

'G' Shares


 
  2016

 

2015
    £000

 

£000
Fixed assets        
Investments   20,181   18,869
Current assets        
Debtors   282   290
Cash at bank and in hand   964   2,967
    1,246   3,257
Creditors: amounts falling due within one year   (257)   (205)
Net current assets   989   3,052
Net assets   21,170   21,921
         

Capital and reserves

       
Called up share capital   25   25
Capital redemption reserve   -   -
Special reserve   21,707   22,980
Share premium reserve   -   -
Revaluation reserve   492   11
Capital reserve - realised   (1,222)   (1,220)
Revenue reserve   168   125
Total equity shareholders' funds   21,170   21,921

'K' Shares


 
  2016

 

2015
    £000

 

£000
Fixed assets        
Investments   9,900   -
Current assets        
Debtors   2   -
Cash at bank and in hand   5,751   -
    5,753   -
Creditors: amounts falling due within one year   (67)   -
Net current assets   5,686   -
Net assets   15,586   -
         

Capital and reserves

       
Called up share capital   16   -
Share premium reserve   16,170   -
Revenue reserve   (600)   -
Total equity shareholders' funds   15,586   -

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2016

  Called up share capital Capital redemption reserve Special reserve Share premium reserve Revaluation
reserve
Capital
reserve
- realised
Revenue reserve Total
  £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
                 
At 1 January 2015 79 106 47,161 - (289) (2,255) 548 45,350
Total comprehensive income - - - - (8) 49 1,458  

1,499
Transactions with owners                
Purchase of own shares - - - - - - (44) (44)
Transfer between reserves - - (7,075) - (951) 8,026 - -
Dividend paid - - - - - (8,072) - (8,072)
At 31 December 2015 79 106 40,086 - (1,248) (2,252) 1,962 38,733
Total comprehensive income - - - - 908 217 (280)  

845
Transaction with owners                
Issue of new shares 16 - - 16,170 - - - 16,186
Share issue costs - - - - - - (448) (448)
Transfer between reserves - - (6,420) - 225 7,104 (909) -
Purchase of own shares - - - - - - (36) (36)
Dividend paid   - - - - (7,323) - (7,323)
At 31 December 2016 95 106 33,666 16,170 (115) (2,254) 289 47,957
                 

CASH FLOW STATEMENT
for the year ended 31 December 2016


 
  Year ended 31 December 2016
 

 

 
'C'
Share
pool
'D'
Share
pool
'F'
Share
pool
'G'
Share
pool
'K'
Share
pool
 

 

Total
  £'000 £'000 £'000 £'000 £'000 £'000

Net cash inflow from operating activities

 
95

196

(54)

131

(87)

281

 

             

Cash flows from investing activities

             

Purchase of investments

- - (700) (6,480) (9,900) (17,080)

Sale of investments

748 2,182 1,287 5,643 - 9,860
Net cash inflow/(outflow) from investing activities
748

2,182

587

(837)

(9,900)

(7,220)

 

             
Net cash inflow/(outflow) before financing activities  

843
 

2,378
 

533
 

(706)
 

(9,987)
 

(6,939)

 

             

Cash flows from financing activities

             

Equity dividends paid

  (3,814) (1,700) (540) (1,269) - (7,323)

Purchase of own shares

  - - (8) (28) - (36)

Proceeds from share issue

  - - - - 16,186 16,186

Share issue costs

  - - - - (448) (448)
             
Net cash outflow from financing activities (3,814) (1,700) (548) (1,297) 15,738 8,379

 

             
Increase/(decrease) in cash   (2,971) 678 (15) (2,003) 5,751 1,440
Cash and cash equivalents at start of year   2,995 667 392 2,967 - 7,021
Cash and cash equivalents at end of year   24 1,345 377 964 5,751 8,461
               
Cash and cash equivalents comprise              
Cash at bank and in hand   24 1,345 377 964 5,751 8,641
Total cash and cash equivalents   24 1,345 377 964 5,751 8,461
               


 
  Year ended 31 December 2015
 

 

 
'C'
Share
pool
'D'
Share
pool
'F'
Share
pool
'G'
Share
pool
 

 

Total
  £'000 £'000 £'000 £'000 £'000

Net cash inflow from operating activities

 

 

530

154

171

323

1,178

 

           

Cash flows from investing activities

           

Purchase of investments

(158) (417) (1,725) (11,743) (14,043)

Sale of investments

5,671 3,550 1,665 7,069 17,955
Net cash inflow/(outflow) from investing activities
5,513

3,133

(60)

(4,674)

3,912

 

           
Net cash inflow/(outflow) before financing activities  

6,043
 

3,287
 

111
 

(4,351)
 

(5,090)

 

           

Cash flows from financing activities

           

Equity dividends paid

  (3,562) (2,700) (540) (1,270) (8,072)

Purchase of own shares

  - - - (44) (44)
           
Net cash outflow from financing activities (3,562) (2,700) (540) (1,314) (8,116)

 

           
Increase/(decrease) in cash   2,481 587 (429) (5,665) (3,026)
Cash and cash equivalents at start of year   514 81 822 8,630 10,047
Cash and cash equivalents at end of year   2,995 667 392 2,967 7,021
             
Cash and cash equivalents comprise            
Cash at bank and in hand   2,995 667 392 2,967 7,021
Total cash and cash equivalents   2,995 667 392 2,967 7,021
             

NOTES TO THE ACCOUNTS
for the year ended 31 December 2016

1. General information
Downing TWO VCT plc ("The Company") is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales and its registered office is Ergon House, Horseferry Road, London SW1P 2AL.

2. Accounting policies
Basis of accounting
The Company has prepared its financial statements under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and in accordance with the Statement of Recommended Practice ("SORP") for investment trust companies and venture capital trusts issued by the Association of Investment Companies ("AIC") revised November 2014 as well as the Companies Act 2006.

The Company implements new Financial Reporting Standards ("FRS") issued by the Financial Reporting Council when required.

The financial statements are presented in Sterling (£).

Presentation of Income Statement
In order to better reflect the activities of a venture capital trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The return on ordinary activities is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Venture capital investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 102 sections 11 and 12.

For unquoted investments, fair value is established using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

*Price of recent investment;
*Multiples;
*Net assets;
*Discounted cash flows or earnings (of underlying business);
*Discounted cash flows (from the investment); and
*Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership, liquidation or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.

It is not the Company's policy to exercise significant influence over investee companies. Therefore the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.

Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment has been established, normally the ex-dividend date.

Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective rate applicable and only where there is reasonable certainty of collection in the foreseeable future.

Distributions from partnership companies are recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

*Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
*Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating Investment Manager's fees 100% as revenue.
*Expenses and liabilities not specific to a share class are generally allocated pro rata to the net assets.
*Performance incentive fees arising from the disposal of investments are deducted as a capital item.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting year.
               
Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arise.

Deferred taxation which is not discounted is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in years different from those in which they are included in the accounts. Deferred taxation is not discounted.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costs
Issue costs in relation to the shares issued for each share class have been deducted from the revenue reserve account for the relevant share class.

Significant estimates and judgements
Disclosure is required of judgements and estimates made my management in applying the accounting policies that have a significant effect on the financial statements. The area involving a higher degree of judgement and estimates is the valuation of unquoted investments as explained in the investment accounting policy above.

3. Basic and diluted return per share

  'C' Shares 'A' Shares 'D' Shares 'E' Shares 'F' Shares 'G' Shares 'K' Shares
               
               
Revenue return (£'000)  

(29)
 

-
 

(58)
 

-
 

(113)
 

74
 

(154)
               
Net capital return for the year (£'000)  

 

-
 

 

-
 

 

234
 

 

-
 

 

415
 

 

476
 

 

-
               
Total return/ (loss) after taxation (£'000)  

 

(29)
 

 

-
 

 

176
 

 

-
 

 

302
 

 

550
 

 

(154)
               
Weighted average
 number of
shares in issue
 

 

7,126,194
 

 

10,724,029
 

 

10,000,000
 

 

14,950,000
 

 

10,816,537
 

 

25,369,651
 

 

10,667,839

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share for any of the share classes. The return per share disclosed therefore represents both the basic and diluted return per share for all share classes.

4. Basic and diluted net asset value per share          

 

  2016 2015
  Shares in issue Net asset value Net asset Value
  31 Dec 2016 31 Dec 2015 per share £'000 per share £'000

 

                   

25B'C' Shares

7,126,194 7,126,194   -   1   53.9p   3,832

26B'A' Shares

10,724,029 10,724,029   -   -   0.1p   11

27B'D' Shares

10,000,000 10,000,000   36.6p   3,647   51.8p   5,171

28B'E' Shares

14,950,000 14,950,000   0.1p   15   0.1p   15

29B'F' Shares

10,810,859 10,822,154   69.7p   7,538   71.9p   7,783

30B'G' Shares

25,352,571 25,386,546   83.5p   21,170   86.3p   21,921

''K' Shares

15,739,341 -   99.0p   15,586   -   -

 

          47,957       38,733

The 'C' Share pool, 'D' Share pool, 'F' Share pool, 'G' Share pool and 'K' Share pool are treated as separate investment pools. Within the 'C' Share pool the Directors allocate the assets and liabilities of the Company between the 'C' Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights. Within the 'D' Share pool the Directors allocate the assets and liabilities of the Company between the 'D' Shares and 'E' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights.

5. Principal risks
The Company's financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits and financial liabilities, being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.

The fair value of investments is determined using the detailed accounting policy.

The fair value of cash deposits and short term debtors and creditors equates to their carrying value in the Balance Sheet.

Loans and receivables and other financial liabilities are stated at amortised cost which the Directors consider is equivalent to fair value.

The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

*Market risks
*Credit risk
*Liquidity risk

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:

 
Market risks

As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

*Investment price risk
*Interest rate risk

 
Investment price risk

Investment price risk arises from uncertainty about the valuation of financial instruments held in accordance with the Company's investment objectives in addition to the appropriateness of the valuation method used. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.

Interest rate risk

The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:

*"Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments.
*"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments.
*"No interest rate" assets do not attract interest and comprise equity investments and debtors.

The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors.

The Manager manages credit risk in respect of loan stock with a similar approach as described under "Market risks" above. In addition the credit risk is mitigated for all investments in loan stocks by taking security, covering the full par value of the loan stock, in the form of fixed and floating charges over the assets of the investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. Similarly the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions and both also ultimately part-owned by the UK Government. Consequently, the Directors consider that the credit risk associated with cash deposits is low.

There have been no changes in fair value during the year that are directly attributable to changes in credit risk.

Of the investments in loan stock above, as at 31 December 2016 £2,876,000 relates to the principal of loan notes where, although the principal remains within term, the investee company is not fully servicing the interest obligations under the loan note and is thus in arrears.

Liquidity risk

Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors, (£486,000, 2015: £532,000) and has no borrowings, the Board believes that the Company's exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.

The Company's liquidity risk is managed by the Investment Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2016, but has been extracted from the statutory financial statements for the year ended 31 December 2016 which were approved by the Board of Directors on 26 April 2017 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the period ended 31 December 2015 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 December 2016 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Ergon House, London, SW1P 2AL and will be available for download from www.downing.co.uk.




This announcement is distributed by Nasdaq Corporate Solutions on behalf of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Downing TWO VCT plc via Globenewswire


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Downing TWO VCT plc : Final Results - RNS