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Albion Development VCT PLC   -  AADV   

Albion Development VCT PLC - Ordinary Shares : Annual Financial Report

Released 13:34 25-Mar-2019

Albion Development VCT PLC - Ordinary Shares : Annual Financial Report

Albion Development VCT PLC

LEI Code 213800FDDMBD9QLHLB38

As required by the UK Listing Authority's Disclosure Guidance and Transparency Rules 4.1 and 6.3, Albion Development VCT PLC today makes public its information relating to the Annual Report and Financial Statements for the year ended 31 December 2018.

This announcement was approved for release by the Board of Directors on 25 March 2019.

This announcement has not been audited.

The Annual Report and Financial Statements for the year ended 31 December 2018 (which have been audited), will shortly be sent to shareholders. Copies of the full Annual Report and Financial Statements will be shown via the Albion Capital Group LLP website by clicking www.albion.capital/funds/AADV/31Dec18.pdf. The information contained in the Annual Report and Financial Statements will include information as required by the Disclosure Guidance and Transparency Rules, including Rule 4.1.

Investment policy

Investment policy
The Company will invest in a broad portfolio of higher growth businesses with a stronger focus on technology companies across a variety of sectors of the UK economy. Allocation of assets will be determined by the investment opportunities which become available but efforts will be made to ensure that the portfolio is diversified in terms of sector and stage of maturity of company.

Funds held pending investment or for liquidity purposes will be held as cash on deposit or up to 8 per cent. of its assets, at the time of investment, in liquid open-ended equity funds providing income and capital equity exposure (where it is considered economic to do so).

Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses within venture capital trust qualifying industry sectors using a mixture of securities. The maximum amount which the Company will invest in a single portfolio company is 15 per cent. of the Company's assets at cost thus ensuring a spread of investment risk. The value of an individual investment may increase over time as a result of trading progress and it is possible that it may grow in value to a point where it represents a significantly higher proportion of total assets prior to a realisation opportunity being available.

The Company's maximum exposure in relation to gearing is restricted to 10 per cent. of the adjusted share capital and reserves.

Background to the Company

The Company is a venture capital trust which raised a total of £33.3 million through the issue of shares between 1999 and 2004. The C shares merged with the Ordinary shares in 2007.

A further £6.3 million was raised through an issue of new D shares in 2009/2010. The D shares converted to Ordinary shares on 31 March 2015. D shareholders received 1.4975 Ordinary shares for each D share they owned.

An additional £29.7 million has been raised for the Ordinary shares through the Albion VCTs Top Up Offers since January 2011.

Financial calendar

Record date for first dividend3 May 2019
  
Annual General Meeting 12 noon on 30 May 2019
  
Payment of first dividend31 May 2019
  
Announcement of half-yearly results for the six months ending 30 June 2019September 2019
  
Payment of second dividend (subject to Board approval)30 September 2019

Financial highlights

180.5p 

Total shareholder return per Ordinary share from launch to 31 December 2018
  
20.3% Total return on opening net asset value for the year ended 31 December 2018
  
4.5p   

Target tax-free dividend per Ordinary share for the year ahead (4.0p paid per Ordinary share during the year ended 31 December 2018)
  
84.7p  

Net asset value per Ordinary share as at 31 December 2018

Financial highlights

  Ordinary shares
   31 December 2018
(pence per share)
31 December 2017
(pence per share)
     
Opening net asset value  73.8 70.7 
Revenue return  0.2 0.2 
Capital return  14.8 7.0 
Total return  15.0 7.2 
Impact of fundraising  (0.1)(0.1)
Dividends paid  (4.0)(4.0)
Net asset value  84.7 73.8 

Total shareholder return to 31 December 2018:

 Ordinary
shares
 (pence per share) (ii)
C shares
 (pence per share) (ii) (iv)
 

D shares
 (pence per share)(ii) (v)
    
Total dividends paid during the year ended:   31 December 1999(i)1.0--
  31 December 20002.9--
  31 December 20014.0--
  31 December 20024.2--
  31 December 2003(iii)4.50.7-
  31 December 20044.02.0-
  31 December 20055.25.9-
  31 December 20063.04.5-
31 December 2007(iv)5.05.3-
31 December 200812.012.8-
31 December 20094.04.3-
31 December 20108.08.61.0
31 December 20115.05.42.5
31 December 20125.05.43.5
31 December 20135.05.45.0
31 December 20145.05.45.0
31 December 2015(v)5.05.47.5
31 December 20165.05.47.5
31 December 20174.04.36.0
31 December 20184.04.36.0
Total dividends paid to 31 December 201895.885.144.0
Net asset value as at 31 December 201884.790.8126.8
Total shareholder return to 31 December 2018180.5175.9170.8

In addition to the dividends paid above, the Board has declared a first dividend for the year ending 31 December 2019 of 2.25 pence per Ordinary share payable on 31 May 2019 to shareholders on the register on 3 May 2019.

Notes
(i) Assuming subscription for Ordinary shares by the First Closing on 26 January 1999.
(ii) Excludes tax benefits upon subscription. Total shareholder return for every 100 pence invested on initial allotment.
(iii) Those subscribing for C shares after 30 June 2003 were not entitled to the interim dividend.
(iv) The C shares were converted into Ordinary shares on 31 March 2007, with a conversion ratio of 1.0715 Ordinary shares for each C share. The net asset value per share and all dividends paid subsequent to the conversion of the C shares to the Ordinary shares are multiplied by the conversion factor of 1.0715 in respect of the C shares return, in order to give an accurate picture of the shareholder value since launch relating to the C shares.
(v) The D shares were converted into Ordinary shares on 31 March 2015, with a conversion ratio of 1.4975 Ordinary shares for each D share. The net asset value per share and all dividends paid subsequent to the conversion of the D shares to the Ordinary shares are multiplied by the conversion factor of 1.4975 in respect of the D shares return, in order to give an accurate picture of the shareholder value since launch relating to the D shares.

Chairman’s statement

Introduction
The results for Albion Development VCT PLC for the year to 31 December 2018 showed a pleasing total return of 15.0 pence per Ordinary share (20.3% on opening net asset value), compared to 7.2 pence per Ordinary share for 2017. This is the ninth consecutive year the Company has delivered a positive total return to shareholders and gives us the confidence to increase our annual dividend target from 4.0 pence per share to 4.5 pence per share as is explained further below.

Investment performance and progress
The results for the year showed net gains on investments of £12.3 million, against £5.5 million for the previous year. The key element within this includes the uplift on the successful sale of Grapeshot, a digital marketing business, which was sold for around ten times original cost; in addition there were sharp uplifts in the values of Egress, Quantexa, G. Network and Mirada, all of whose businesses have all been revalued following new investment rounds. Radnor House (Sevenoaks), has continued to mature and delivered a considerable uplift following a third party valuation during the year. Against this, there were more modest write-downs against Abcodia, Aridhia, MyMeds&Me and Oviva where trading showed underperformance against expectations.

We had a number of realisations during the year totalling £8.5 million (2017: £4.6 million), of which Grapeshot accounted for £7.6 million. We also realised our holdings in Infinite Ventures (Goathill) and CSS Group.  Further details on realisations can be found in the realisations table on page 21 of the full Annual Report and Financial Statements.

Meanwhile, £1.6 million was invested in seven new portfolio companies, all of which are targeted to require further investment as the companies prove themselves and grow: 

A further £4.1 million was invested in existing portfolio companies, including £910,000 into Egress Software Technologies to support its growth and US expansion, £899,000 into Sandcroft Avenue (trading as PayAsUGym) to support its growth, £440,000 into Locum’s Nest to expand its sales team and develop the software platform, £412,000 into Quantexa which continues to grow at a tremendous rate, and £309,000 in Panaseer to support its growth.

For a review of business and future prospects please see the Strategic report below.

Dividends and results
The Company paid dividends totalling 4.0 pence per share during the year ended 31 December 2018 (2017: 4.0 pence per share). For two years now, the total return has comfortably covered the dividend target, and more so the NAV has risen comfortably above 80 pence per share, to 84.7 pence per share as at 31 December 2018 compared to 73.8 pence per share as at 31 December 2017. The total return after tax was £11.2 million compared to £4.9 million in the year to 31 December 2017.
                                             
In light of the recent performance, the annual dividend target will be raised by 12.5% to 4.5 pence per Ordinary share. The Company will pay a first dividend for the financial year to 31 December 2019 of 2.25 pence per Ordinary share payable on 31 May 2019 to shareholders on the register on 3 May 2019.

Management performance incentive fee
The Board is pleased to announce that, due to its exceptionally strong performance, £420,000 is expected to be paid in respect of the D Share performance incentive to 31 December 2018 (which accounts for 20 per cent. of the performance of the Company as a whole). The total shareholder return for the D shares since launch is 170.8 pence per share, which represents an annualised return of 7.9 per cent.. Further details can be found in the Strategic report below.

New management performance incentive and reduction of total expenses cap
Accompanying this Annual Report and Financial Statements is a Circular to shareholders proposing two changes to the management agreement with Albion Capital Group LLP. The first is for the introduction of a new management performance incentive, in order to recognise the changes that have taken place in the financial and regulatory environment over recent years. The second is to reduce the Company’s operating expenses by lowering the total expenses cap, above which any additional expenses are borne by the Manager. These changes will be implemented by way of a deed of variation of the Company’s existing management agreement and full details of the changes are set out in the Circular. These proposals will be voted on by shareholders under an ordinary resolution at a General Meeting which will follow the forthcoming Annual General Meeting.

Risks and uncertainties

Other than investment performance, the key risks facing the Company are from the broader economy, including changes to VCT rules. The outlook for the UK and global economies, and the implications of the withdrawal of the UK from the European Union continue to be the biggest risks for the Company. An assessment has been done on a portfolio company level to assess exposure to Europe, and appropriate actions, where possible, have been implemented. The Manager continues to believe that there is merit in focussing efforts to allocate resources to those sectors and opportunities where growth can be both resilient and sustainable in order to mitigate these risks.

A detailed analysis of the other risks and uncertainties facing the business is shown in the Strategic report below.

Share buy-backs

It remains the Board’s primary objective to maintain sufficient resources for investment in existing and new portfolio companies and for the continued payment of dividends to shareholders. Therefore, the Board’s policy is to buy back shares in the market, subject to the overall constraint that such purchases are in the Company’s interest. It is the Board’s intention for such buy-backs to be in the region of a 5 per cent. discount to net asset value, so far as market conditions and liquidity permit.

During the year, the Company purchased 1,253,456 Ordinary shares to be held in treasury at a cost of £921,000 (2017: £855,000), representing 1.6 per cent. of the opening shares in issue.

Transactions with the Manager
Details of transactions that took place with the Manager during the year can be found in note 5 and principally relate to the management fee. Albion agreed to reduce that proportion of its management fee relating to the investment in the SVS Albion OLIM UK Equity Income Fund (“OUEIF”) by 0.75 per cent. per annum, which represents the management fee charged by OLIM. This avoids double counting of fees and resulted in a reduction of the management fee of £3,000. Further details on the investments in the OUEIF can be found in note 20.

Albion VCTs Prospectus Top Up Offers
Your Board, in conjunction with the boards of other VCTs managed by Albion Capital Group LLP, launched a prospectus top up offer of new Ordinary shares on 7 January 2019. A Securities Note, which forms part of the prospectus, has been sent to shareholders. The proceeds will be used to provide further resources at a time when a number of attractive investment opportunities are being seen. The first allotment of shares under the Offer will be on 1 April 2019.

The funds raised by each Company pursuant to its Offer will be added to the liquid resources available for investment, putting each Company into a position to take advantage of investment opportunities over the next two to three years. The proceeds of the Offers are being applied in accordance with the respective Companies’ investment policies. The Company continues to participate in the Top Up Offers and also benefits from receipts from dividend reinvestment, the net proceeds of which are invested in new investment opportunities and to provide additional working capital in the Company. It is important that the Company continues to have cash available for future investments and the Top Up Offers and dividend reinvestments are important sources of that capital.

Outlook and prospects

2018 has been an excellent year for the portfolio, with strong growth across most sectors and one particularly successful realisation.

Current dealflow is strong, with a number of investments being made in promising businesses in fast growing markets, while the existing portfolio includes companies, where we continue to fund further growth, that are starting to achieve real scale. Although we are not expecting the results for the current year to be as strong as those achieved for 2018, we continue to look at the longer-term future with confidence.

Geoffrey Vero
Chairman
25 March 2019

Strategic report

Investment policy
The Company will invest in a broad portfolio of higher growth businesses with a stronger focus on technology companies across a variety of sectors of the UK economy. Allocation of assets will be determined by the investment opportunities which become available but efforts will be made to ensure that the portfolio is diversified in terms of sector and stage of maturity of company.

Funds held pending investment or for liquidity purposes will be held as cash on deposit or up to 8 per cent. of its assets, at the time of investment, in liquid open-ended equity funds providing income and capital equity exposure (where it is considered economic to do so).

Risk diversification and maximum exposures
Risk is spread by investing in a number of different businesses within venture capital trust qualifying industry sectors using a mixture of securities. The maximum amount which the Company will invest in a single portfolio company is 15 per cent. of the Company's assets at cost, thus ensuring a spread of investment risk. The value of an individual investment may increase over time as a result of trading progress and it is possible that it may grow in value to a point where it represents a significantly higher proportion of total assets prior to a realisation opportunity being available.

The Company's maximum exposure in relation to gearing is restricted to 10 per cent. of the adjusted share capital and reserves.

Current portfolio sector allocation

The pie chart at the end of this annoucement shows the split of the portfolio valuation by industrial or commercial sector as at 31 December 2018. Details of the principal investments made by the Company are shown in the Portfolio of investments on pages 19 to 21 of the full Annual Report and Financial Statements.

Direction of portfolio

Following a change to the company’s investment policy at the 2018 Annual General Meeting, a greater focus has been given to growth and technology investments, which will result in a decrease of asset-based investment as a percentage of the portfolio over time.

The current portfolio is well balanced in terms of sector, with renewable energy at 16 per cent., healthcare at 16 per cent., education accounting for 11 per cent., and leisure at 4 per cent. Cash and net current assets have decreased to 17 per cent. of the portfolio and it is anticipated that investments will be deployed into a number of new growth opportunities in line with the amended investment policy.

Results and dividend policy

   Ordinary shares
   £’000
    
Net revenue return for the year  181 
Net capital gain for the year  11,037 
Total return for the year ended 31 December 2018  11,218 
Dividend of 2.0 pence per share paid on 31 May 2018  (1,505) 
Dividend of 2.0 pence per share paid on 28 September 2018  (1,503) 
Unclaimed dividends  3 
    
Transferred to reserves  8,213 
 

Net assets as at 31 December 2018
  63,378 
 

Net asset value per share as at 31 December 2018 (pence)
  84.7 

The Company paid dividends totalling 4.0 pence per Ordinary share (2017: 4.0 pence per Ordinary share). The annual dividend target has now increased by 12.5 per cent. to 4.5 pence per share.

As described in the Chairman’s statement, the Board has declared a first dividend for the year ending 31 December 2019 of 2.25 pence per Ordinary share payable on 31 May 2019 to shareholders on the register on 3 May 2019.

As shown in the Income statement, the total investment income increased to £881,000 (2017: £689,000). This is substantially due to the resumption of loan stock interest payments from our solar renewable portfolio companies part way during the year. The revenue return to equity holders has increased marginally to £181,000 (2017: £171,000).

The total capital return for the year was £11,037,000 (2017: £4,720,000). This is mainly attributable to the successful sale of Grapeshot, where proceeds received resulted in a return of circa ten times cost, the sharp uplifts due to new investment rounds in Egress Software Technologies, Quantexa, G. Network Communications and Mirada, coupled with the upwards valuation of Radnor House School (Holdings) following a third party revaluation. This was offset by the reductions in Abcodia, Aridhia Informatics, Oviva and MyMeds&Me, however the results for the year have been very encouraging when looking at the portfolio as a whole.

The total return was 15.0 pence per share (2017: 7.2 pence per share). The Balance sheet shows that the net asset value has increased over the year to 84.7 pence per share (2017: 73.8 pence per share) due to the realisations and increased valuations as mentioned above. The increase in net asset value can be attributed to the total return of 15.0 pence per share, offset by payment of the 4.0 pence per Ordinary share of dividends.

There was a net cash outflow for the year mainly as a number of new investments made, including into the SVS Albion OLIM UK Equity Income Fund, and dividends paid during the year, offset by the disposal of Grapeshot and the issue of Ordinary shares under the Top Up Offers.

Review of business and future changes
The results for the year to 31 December 2018 show total shareholder return of 180.5 pence per Ordinary share since launch (2017: 165.6 pence per share). We believe there should be further progress in the current year, with selected disposals and new investments, and focus on our core area of IT/Software alongside new growth opportunities.

Following changes to the VCT regulations in 2017, asset-based investments will decrease over time as a proportion of the portfolio as a greater emphasis continues to be given to growth and technology investments.

A detailed review of the Company’s business during the year is contained in the Chairman’s statement.

Details of significant events which have occurred since the end of the financial year are listed in note 19. Details of transactions with the Manager are shown in note 5.

Future prospects

The Company is well positioned to seek out and capitalise on new opportunities, and the very encouraging return in 2018 gives the Board confidence that we can continue to deliver value to shareholders.

Key performance indicators
The Directors believe that the following key performance indicators, which are typical for venture capital trusts, used in its own assessment of the Company, will provide shareholders with sufficient information to assess how effectively the Company is applying its investment policy to meet its objectives. The Directors are satisfied that the results shown in the following key performance indicators give a good indication that the Company is achieving its investment objective and policy. These are:

  1. Total shareholder return relative to FTSE All-Share Index total return

The graph on page 4 of the full Annual Report and Financial Statements shows the total shareholder return against the FTSE All-Share Index total return, in both instances with dividends reinvested. Details on the performance of the net asset value and return per share for the year are shown in the Chairman’s statement.

  1. Net asset value per share and total shareholder return

Total return to shareholders increased by 20.3 per cent. on opening net asset value to 180.5 pence per Ordinary share for the year ended 31 December 2018 as a result of the positive total return of 15.0 pence per share.

  1. Dividend distributions

Dividends paid in respect of the year ended 31 December 2018 were 4.0 pence per share (2017: 4.0 pence per share). Cumulative dividends paid since inception are 95.8 pence per share. The annual dividend target for the 2019 financial year has increased to 4.5 pence per Ordinary share as outlined in the Chairman’s statement.

  1. Ongoing charges

The ongoing charges ratio for the year to 31 December 2018 was 2.6 per cent. (2017: 2.7 per cent.). The ongoing charges ratio has been calculated using The Association of Investment Companies’ (AIC) recommended methodology. This figure shows shareholders the total recurring annual running expenses (including investment management fees charged to capital reserve) as a percentage of the average net assets attributable to shareholders. From 1 January 2019, subject to the passing of the resolution at the forthcoming General Meeting, the ongoing charges cap will reduce from 3.0 per cent. to 2.5 per cent.. Further details are included in the Circular that has been sent to shareholders as well as the Chairman’s Statement.

  1. VCT regulation

The investment policy is designed to ensure that the Company continues to qualify and is approved as a VCT by HMRC. In order to maintain its status under Venture Capital Trust legislation, a VCT must comply on a continuing basis with the provisions of Section 274 of the Income Tax Act 2007, details of which are provided in the Directors’ report on page 28 of the full Annual Report and Financial Statements.

The relevant tests to measure compliance have been carried out and independently reviewed for the year ended 31 December 2018. These showed that the Company has complied with all tests and continues to do so.

Operational arrangements
The Company has delegated the investment management of the portfolio to Albion Capital Group LLP, which is authorised and regulated by the Financial Conduct Authority. Albion Capital Group LLP also provides company secretarial and other accounting and administrative support to the Company.

Management agreement
Under the Management agreement, the Manager provides investment management, secretarial and administrative services to the Company. The Management agreement may be terminated by either party on 12 months’ notice and is subject to earlier termination in the event of certain breaches or on the insolvency of either party. The Manager is paid an annual fee equal to 2.25 per cent. of the net asset value of the Company paid quarterly in arrears.

Additionally, Albion agreed to reduce that proportion of its management fee relating to the investment in the SVS Albion OLIM UK Equity Income Fund (“OUEIF”) by 0.75 per cent. per annum, which represents the OUEIF management fee charged by OLIM to avoid any double charging for the investment exposure.

Total annual expenses, including the management fee, are currently limited to 3.0 per cent. of the net asset value, and subject to the passing of the resolution at the General Meeting, Albion have agreed to reduce the ongoing charges cap from 3.0 per cent. to 2.5 per cent..

The Manager is also entitled to an arrangement fee, payable by each portfolio company, of approximately 2 per cent. on each investment made and also monitoring fees where the Manager has a representative on the portfolio company’s board.

Management performance incentive

The Company’s current management performance incentive structure sets a minimum target level whereby no performance fee is payable to the Manager until the total return exceeds 6.5 pence per share per annum from a base on 1 January 2007 of 98.7 pence for the Ordinary shares and 100 pence for the D shares from 6 April 2010. If the target return is not achieved in a period, the cumulative shortfall is carried forward to the next accounting period and has to be made up before an incentive fee becomes payable. To the extent that the total return exceeds the threshold over the relevant period, a performance fee will be paid to the Manager of an amount equal to 20 per cent. of the excess. 

Any performance fee payable will be calculated based on the above hurdles, escalating at 6.5p per annum, and in respect of the relevant proportion of that share class’ share of the Company’s net assets as at 31 December 2014.

As at 31 December 2018, the total return since 6 April 2010 for the former D Shares was 170.8 pence, and the hurdle was 156.8 pence, resulting in an excess of 14.0 pence per share. As a result, a performance incentive fee is payable to the Manager of £420,000 (2017: £nil).

New management performance incentive fee
For the previous two years, the Company’s return has exceeded dividends paid, with a return of 15.0 pence per share (20.3% of opening NAV) in the year to 31 December 2018. However, the total return for Ordinary shares has fallen short of the hurdle by 25.0 pence per share. In light of this, the Board have agreed with the Manager that the two existing current management performance incentive arrangements for the Ordinary shares and the former D shares will be merged into one all-encompassing arrangement so that the Manager is both properly incentivised and its objectives are aligned with those of the Company.

Accompanying these accounts is a Circular to shareholders containing details of the new management performance incentive which, subject to approval by shareholders at the forthcoming General Meeting by way of an ordinary resolution, will replace the existing incentive arrangements.

Investment and co-investment
The Company co-invests with other Albion Capital Group LLP managed venture capital trusts and funds. Allocation of investments is on the basis of an allocation agreement which is based, inter alia, on the ratio of funds available for investment.

Evaluation of the Manager
The Board has evaluated the performance of the Manager based on the returns generated by the Company, the continuing achievement of the 70 per cent. (to be 80 per cent. in respect of accounting periods starting on or after 6 April 2019) qualifying holdings investment requirement for venture capital trust status, the long term prospects of the current portfolio of investments, a review of the Management agreement and the services provided therein, and benchmarking the performance of the Manager to other service providers including the performance of other VCTs that the Manager is responsible for managing. The Board believes that it is in the interests of shareholders as a whole, and of the Company, to continue the appointment of the Manager for the forthcoming year.

Alternative Investment Fund Managers Directive (“AIFMD”)
The Board appointed Albion Capital Group LLP as the Company’s AIFM in June 2014 as required by the AIFMD. The Manager became a full-scope Alternative Investment Fund Manager under the AIFMD on 1 October 2018. As a result, from that date, Ocorian (UK) Limited was appointed as Depository to oversee the custody and cash arrangements and provide other AIFMD duties with respect to the Company.

Social and community issues, employees and human rights

The Board recognises the requirement under section 414C of the Act to detail information about social and community issues, employees and human rights; including any policies it has in relation to these matters and effectiveness of these policies. As an externally managed investment company with no employees, the Company has no policies in these matters and as such these requirements do not apply.

General Data Protection Regulation

The General Data Protection Regulation came into effect on 25 May 2018 with the objective of unifying data privacy requirements across the European Union. The Manager, Albion Capital Group LLP, has taken action to ensure that the Manager and the Company are compliant with the regulation.

Further policies
The Company has adopted a number of further policies relating to:

and these are set out in the Directors’ report on pages 28 and 29 of the full Annual Report and Financial Statements.

Share buy-back policy
It remains the Board’s primary objective to maintain sufficient resources for investment in existing and new portfolio companies and for the continued payment of dividends to shareholders. The Board’s policy is to buy back shares in the market, subject to the overall constraint that such purchases are in the Company’s interest.

It is the Board’s intention for such buy-backs to be in the region of a 5 per cent. discount to net asset value, so far as market conditions and liquidity permit.

Further details of shares bought back during the year ended 31 December 2018 can be found in note 15.

Risk management
The Board carries out a regular review of the risk environment in which the Company operates. The principal risks and uncertainties of the Company as identified by the Board and how they are managed are as follows:

RiskPossible consequence  Risk management
Investment, performance and performance riskThe risk of investment in poor quality assets, which could reduce the capital and income returns to shareholders, and could negatively impact on the Company’s current and future valuations.

 

By nature, smaller unquoted businesses, such as those that qualify for venture capital trust purposes, are more volatile than larger, long established businesses.

The Company’s investment valuation methodology is reliant on the accuracy and completeness of information that is issued by portfolio companies. In particular, the Directors may not be aware of or take into account certain events or circumstances which occur after the information issued by such companies is reported.
To reduce this risk, the Board places reliance upon the skills and expertise of the Manager and its track record over many years of making successful investments in this segment of the market. In addition, the Manager operates a formal and structured investment appraisal and review process, which includes an Investment Committee, comprising investment professionals from the Manager and at least one external investment professional. The Manager also invites and takes account of comments from non-executive Directors of the Company on matters discussed at the Investment Committee meetings. Investments are actively and regularly monitored by the Manager (investment managers normally sit on portfolio company boards), including the level of diversification in the portfolio, and the Board receives detailed reports on each investment as part of the Manager’s report at quarterly board meetings.
The unquoted investments held by the Company are designated at fair value through profit or loss and valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. These guidelines set out recommendations, intended to represent current best practice on the valuation of venture capital investments. The valuation takes into account all known material facts up to the date of approval of the Financial Statements by the Board.
VCT approval riskThe Company must comply with section 274 of the Income Tax Act 2007 which enables its investors to take advantage of tax relief on their investment and on future returns. Breach of any of the rules enabling the Company to hold VCT status could result in the loss of that status.

 
To reduce this risk, the Board has appointed the Manager, which has a team with significant experience in venture capital trust management, used to operating within the requirements of the venture capital trust legislation. In addition, to provide further formal reassurance, the Board has appointed Philip Hare & Associates LLP as its taxation adviser, who report quarterly to the Board to independently confirm compliance with the venture capital trust legislation, to highlight areas of risk and to inform on changes in legislation. Each investment in a new portfolio company is also pre-cleared with our professional advisers or H.M. Revenue & Customs.
Regulatory and compliance riskThe Company is listed on The London Stock Exchange and is required to comply with the rules of the UK Listing Authority, as well as with the Companies Act, Accounting Standards and other legislation. Failure to comply with these regulations could result in a delisting of the Company’s shares, or other penalties under the Companies Act or from financial reporting oversight bodies.

 
Board members and the Manager have experience of operating at senior levels within or advising quoted companies. In addition, the Board and the Manager receive regular updates on new regulation from its auditor, lawyers and other professional bodies. The Company is subject to compliance checks through the Manager’s compliance officer. The Manager reports monthly to its Board on any issues arising from compliance or regulation. These controls are also reviewed as part of the quarterly Board meetings, and also as part of the review work undertaken by the Manager’s compliance officer. The report on controls is also evaluated by the internal auditors.
Operational and internal control riskThe Company relies on a number of third parties, in particular the Manager, for the provision of investment management and administrative functions. Failures in key systems and controls within the Manager’s business could put assets of the Company at risk or result in reduced or inaccurate information being passed to the Board or to shareholders.The Company and its operations are subject to a series of rigorous internal controls and review procedures exercised throughout the year.

The Audit Committee reviews the Internal Audit Reports prepared by the Manager’s internal auditors, PKF Littlejohn LLP and has access to the internal audit partner of PKF Littlejohn LLP to provide an opportunity to ask specific detailed questions in order to satisfy itself that the Manager has strong systems and controls in place including those in relation to business continuity. 

From 1 October 2018, Ocorian (UK) Limited were appointed as Depository to oversee the custody and cash arrangements and provide other AIFMD duties. The Board reviews the quarterly reports prepared by Ocorian (UK) Limited to ensure that Albion Capital is adhering to its policies and procedures as required by the AIFMD.

In addition, the Board regularly reviews the performance of its key service providers, particularly the Manager, to ensure they continue to have the necessary expertise and resources to deliver the Company’s investment objective and policies. The Manager and other service providers have also demonstrated to the Board that there is no undue reliance placed upon any one individual.
Economic and political riskChanges in economic conditions, including, for example, interest rates, rates of inflation, industry conditions, competition, political and diplomatic events and other factors could substantially and adversely affect the Company’s prospects in a number of ways.

 
The Company invests in a diversified portfolio of companies across a number of industry sectors and in addition often invests a mixture of instruments in portfolio companies and has a policy of not normally permitting any external bank borrowings within portfolio companies.

 

At any given time, the Company has sufficient cash resources to meet its operating requirements, including share buy-backs and follow on investments.
Market value of Ordinary sharesThe market value of Ordinary shares can fluctuate. The market value of an Ordinary share, as well as being affected by its net asset value and prospective net asset value, also takes into account its dividend yield and prevailing interest rates. As such, the market value of an Ordinary share may vary considerably from its underlying net asset value. The market prices of shares in quoted investment companies can, therefore, be at a discount or premium to the net asset value at different times, depending on supply and demand, market conditions, general investor sentiment and other factors. Accordingly the market price of the Ordinary shares may not fully reflect their underlying net asset value.The Company operates a share buy-back policy, which is designed to limit the discount at which the Ordinary shares trade to around 5 per cent to net asset value, by providing a purchaser through the Company in absence of market purchasers.  From time to time buy-backs cannot be applied, for example when the Company is subject to a close period, or if it were to exhaust any buy-back authorities.

New Ordinary shares are issued at sufficient premium to net asset value to cover the costs of issue and to avoid asset value dilution to existing investors.
Reputational riskThe Company relies on the judgement and reputation of the Manager which is itself subject to the risk of loss.The Board regularly questions the Manager on its ethics, procedures, safeguards and investment philosophy, which should consequently result in the risk to reputation being minimised.

Viability statement
In accordance with the FRC UK Corporate Governance Code published in 2016 and principle 21 of the AIC Code of Corporate Governance, the Directors have assessed the prospects of the Company over three years to 31 December 2021. The Directors believe that three years is a reasonable period in which they can assess the future of the Company to continue to operate and meet its liabilities as they fall due and is also the period used by the Board in the strategic planning process and is considered reasonable for a business of our nature and size. The three year period is also considered the most appropriate given the forecasts that the Board require from the Manager, and the estimated timelines for finding, assessing and completing investments.

The Directors have carried out a robust assessment of the principal risks facing the Company as explained above, including those that could threaten its business model, future performance, solvency or liquidity. The Board also considered the risk management processes in place to avoid or reduce the impact of the underlying risks. The Board focused on the major factors which affect the economic, regulatory and political environment. The Board deliberated over the importance of the Manager and the processes that they have in place for dealing with the principal risks.

The Board assessed the ability of the Company to raise finance and deploy capital. The portfolio is well balanced and geared towards long term growth, delivering dividends and capital growth to shareholders. In assessing the prospects of the Company, the Directors have considered the cash flow by looking at the Company’s income and expenditure projections and funding pipeline over the assessment period of three years and they appear realistic.

Taking into account the processes for mitigating risks, monitoring costs, share price discount, the Manager’s compliance with the investment objective, policies and business model and the balance of the portfolio the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 December 2021.

This Strategic report of the Company for the year ended 31 December 2018 has been prepared in accordance with the requirements of section 414A of the Companies Act 2006 (the “Act”). The purpose of this report is to provide shareholders with sufficient information to enable them to assess the extent to which the Directors have performed their duty to promote the success of the Company in accordance with section 172 of the Act.

On behalf of the Board,

Geoffrey Vero
Chairman
25 March 2019

Responsibility statement

In preparing these Financial Statements for the year to 31 December 2018, the Directors of the Company, being Geoffrey Vero, Lyn Goleby, Ben Larkin and Patrick Reeve, confirm that to the best of their knowledge:

- summary financial information contained in this announcement and the full Annual Report and Financial Statements for the year ended 31 December 2018 for the Company has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK Accounting Standards and applicable law) and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

 -the Chairman's statement and Strategic report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces.

We consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced, and understandable and provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.

A detailed "Statement of Directors' responsibilities” is contained on page 32 within the full audited Annual Report and Financial Statements.

On behalf of the Board,

Geoffrey Vero
Chairman
25 March 2019

Income statement

    
  Year ended 31 December 2018Year ended 31 December 2017
  RevenueCapitalTotalRevenueCapitalTotal
 Note£’000£’000£’000£’000£’000£’000
Gains on investments3- 12,326 12,326 - 5,514 5,514 
Investment income4881 - 881 689 - 689 
Investment management fees5(334)(1,004)(1,338)(273)(818)(1,091)
Performance incentive fee5(105)(315)(420)- - - 
Other expenses6(231)- (231)(221)- (221)
Profit on ordinary activities before tax 211 11,007 11,218 195 4,696 4,891 
Tax (charge)/credit on ordinary activities8(30)30 - (24)24 - 
Profit and total comprehensive income attributable to shareholders  181 11,037 11,218 171 4,720 4,891 
Basic and diluted return per share (pence)*100.2 14.8 15.0 0.2 7.0 7.2 

* excluding treasury shares                            

The accompanying notes form an integral part of these Financial Statements.

The total column of this Income statement represents the profit and loss account of the Company. The supplementary revenue and capital columns have been prepared in accordance with The Association of Investment Companies’ Statement of Recommended Practice.

Balance sheet  

   

31 December 2018
31 December 2017
 Note£’000£’000
    
Fixed asset investments1152,663 42,291 
    
Current assets   
Current asset investments131,243 - 
Trade and other receivables less than one year131,128 477 
Cash and cash equivalents 9,189 10,955 
  11,560 11,432 
    
Total assets 64,223 53,723 
    
Payables: amounts falling due within one year   
Trade and other payables less than one year14(845)(377)
    
Total assets less current liabilities  63,378 53,346 
    
Equity attributable to equityholders   
Called up share capital15839 801 
Share premium 28,406 25,704 
Capital redemption reserve 12 12 
Unrealised capital reserve 16,234 10,892 
Realised capital reserve 11,539 5,844 
Other distributable reserve 6,348 10,093 
Total equity shareholders’ funds 63,378 53,346 
    
Basic and diluted net asset value per share (pence)*1684.7 73.8 

* excluding treasury shares

The accompanying notes form an integral part of these Financial Statements.

These Financial Statements were approved by the Board of Directors, and authorised for issue on 25 March 2019 and were signed on its behalf by

Geoffrey Vero
Chairman
Company number: 03654040

Statement of changes in equity

 Called up share
capital
Share premiumCapital redemption reserveUnrealised capital reserveRealised capital reserve*Other distributable reserve*Total
 £’000£’000£’000£’000£’000£’000£’000
As at 1 January 201880125,704 1210,892 5,84410,093 53,346 
Profit and total comprehensive income for the period-- -8,560 2,477181 11,218 
Transfer of unrealised gains on disposal of investments -- -(3,218)3,218- - 
Purchase of shares for treasury-- -- -(921)(921)
Issue of equity382,761 -- -- 2,799 
Cost of issue of equity-(59)-- -- (59)
Dividends paid-- -- -(3,005)(3,005)
As at 31 December 201883928,406 1216,234 11,5396,348 63,378 
As at 1 January 201768917,886 127,253 4,76313,482 44,085 
Profit and total comprehensive income for the period-- -4,691 29171 4,891 
Transfer of unrealised gains  on disposal or write off of investments -- -(1,052)1,052- - 
Purchase of shares for treasury-- -- -(855)(855)
Issue of equity1128,005 -- -- 8,117 
Cost of issue of equity-(187)-- -- (187)
Dividends paid-- -- -(2,705)(2,705)
As at 31 December 201780125,704 1210,892 5,84410,093 53,346 

* These reserves amount to £17,887,000 (2017: £15,937,000) which is considered distributable.

Statement of cash flows

  

Year ended
31 December 2018
£’000
Year ended
31 December 2017
£’000
Cash flow from operating activities  
Loan stock income received809 647 
Deposit interest received38 7 
Dividend income received56 72 
Investment management fees paid(1,284)(1,039)
Other cash payments(227)(217)
Corporation tax received- 3 
Net cash flow from operating activities(608)(527)
   
Cash flow from investing activities  
Purchase of current asset investments(1,400)- 
Purchase of fixed asset investments(5,722)(6,787)
Disposal of fixed asset investments7,154 3,746 
Net cash flow from investing activities32 (3,041)
   
Cash flow from financing activities  
Issue of share capital2,244 7,503 
Cost of issue of shares(3)(3)
Equity dividends paid(2,510)(2,275)
Purchase of own shares (including costs)(921)(855)
Net cash flow from financing activities(1,190)4,370 
   
(Decrease)/increase in cash and cash equivalents(1,766)802 
Cash and cash equivalents at start of period10,955 10,153 
Cash and cash equivalents at end of period9,189 10,955 
   
Cash and cash equivalents comprise:  
Cash at bank and in hand9,189 10,955 
Cash equivalents- - 
Total cash and cash equivalents9,189 10,955 

Notes to the Financial Statements

1. Basis of preparation
The Financial Statements have been prepared in accordance with applicable United Kingdom law and accounting standards, including Financial Reporting Standard 102 (“FRS 102”), and with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (“SORP”) issued by The Association of Investment Companies (“AIC”).

The preparation of the Financial Statements requires management to make judgements and estimates that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The most critical estimates and judgements relate to the determination of carrying value of investments at Fair Value Through Profit and Loss (“FVTPL”). The Company values investments by following the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”) Guidelines and further detail on the valuation techniques used are in note 2 below.

Company information is shown on page 2 of the full Annual Report and Financial Statements.

2. Accounting policies
Fixed and current asset investments
The Company’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment policy, and information about the portfolio is provided internally on that basis to the Board.

In accordance with the requirements of FRS 102, those undertakings in which the Company holds more than 20 per cent. of the equity as part of an investment portfolio are not accounted for using the equity method. In these circumstances the investment is measured at FVTPL.

Upon initial recognition (using trade date accounting) investments, including loan stock, are classified by the Company as FVTPL and are included at their initial fair value, which is cost (excluding expenses incidental to the acquisition which are written off to the Income statement).

Subsequently, the investments are valued at ‘fair value’, which is measured as follows:

Investments are recognised as financial assets on legal completion of the investment contract and are de-recognised on legal completion of the sale of an investment.

Dividend income is not recognised as part of the fair value movement of an investment, but is recognised separately as investment income through the other distributable reserve when a share becomes ex-dividend.

Receivables, payables and cash are carried at amortised cost, in accordance with FRS 102. There are no financial liabilities other than payables.

Investment income
Equity income
Dividend income is included in revenue when the investment is quoted ex-dividend.

Unquoted loan stock income
Fixed returns on non-equity shares and debt securities are recognised when the Company’s right to receive payment and expect settlement is established. Where interest is rolled up and/or payable at redemption then it is recognised as income unless there is reasonable doubt as to its receipt.

Bank interest income
Interest income is recognised on an accruals basis using the rate of interest agreed with the bank.

Investment management fees, performance incentive fees and expenses
All expenses have been accounted for on an accruals basis. Expenses are charged through the other distributable reserve except the following which are charged through the realised capital reserve:

Taxation
Taxation is applied on a current basis in accordance with FRS 102. Current tax is tax payable (refundable) in respect of the taxable profit (tax loss) for the current period or past reporting periods using the tax rates and laws that have been enacted or substantively enacted at the financial reporting date. Taxation associated with capital expenses is applied in accordance with the SORP.

Deferred tax is provided in full on all timing differences at the reporting date. Timing differences are differences between taxable profits and total comprehensive income as stated in the Financial Statements that arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the Financial Statements. As a VCT the Company has an exemption from tax on capital gains. The Company intends to continue meeting the conditions required to obtain approval as a VCT in the foreseeable future. The Company therefore, should have no material deferred tax timing differences arising in respect of the revaluation or disposal of investments and the Company has not provided for any deferred tax.

Reserves
Share premium
This reserve accounts for the difference between the price paid for the Company’s shares and the nominal value of those shares, less issue costs and transfers to the other distributable reserve.

Capital redemption reserve
This reserve accounts for amounts by which the issued share capital is diminished through the repurchase and cancellation of the Company’s own shares.

Unrealised capital reserve
Increases and decreases in the valuation of investments held at the year end against cost are included in this reserve.

Realised capital reserve
The following are disclosed in this reserve:

Other distributable reserve
The special reserve, treasury share reserve and the revenue reserve were combined in 2012 to form a single reserve named other distributable reserve.

This reserve accounts for movements from the revenue column of the Income statement, the payment of dividends, the buy-back of shares and other non-capital realised movements.

Dividends
Dividends by the Company are accounted for in the period in which the dividend is paid or approved at the Annual General Meeting.

Segmental reporting
The Directors are of the opinion that the Company is engaged in a single operating segment of business, being investment in equity and debt in smaller companies principally based in the UK.

3. Gains on investments

 Year ended
31 December 2018
£’000
Year ended
 31 December 2017
£’000
Unrealised gains on fixed asset investments8,717 4,691
Unrealised losses on current asset investments(157)-
Realised gains on fixed asset investments3,766 823
 12,326 5,514

4. Investment income

   
 Year ended
31 December 2018
£’000
Year ended
 31 December 2017
£’000
Loan stock interest and other fixed returns787611
UK dividend income5672
Bank deposit interest386
 881689

5. Investment management fees

  

Year ended
31 December 2018
£’000
Year ended
 31 December 2017
£’000
Investment management fee charged to revenue334273
Investment management fee charged to capital1,004818
Performance incentive fee charged to revenue105-
Performance incentive fee charged to capital315-
 1,7581,091

Further details of the Management agreement under which the investment management fee is paid are given in the Strategic report.

During the year, services of a total value of £1,338,000 (2017: £1,091,000) were purchased by the Company from Albion Capital Group LLP in respect of management fees. In addition, a performance incentive fee with a value of £420,000 (2017: £nil) has been disclosed in the Income statement. At the financial year end, the amount due to Albion Capital Group LLP in respect of these services disclosed as accruals was £775,000 (2017: £300,000).

During the year, the Company was not charged by Albion Capital Group LLP in respect of Patrick Reeve’s services as a Director (2017: £nil).

Albion Capital Group LLP, its partners and staff hold 484,207 Ordinary shares in the Company.

Albion Capital Group LLP is, from time to time, eligible to receive arrangement fees and monitoring fees from portfolio companies. During the year ended 31 December 2018, fees of £190,000 attributable to the investments of the Company were received by Albion Capital Group LLP pursuant to these arrangements (2017: £222,000).

Additionally, following approval at the 2018 Annual General Meeting of the investment policy which permitted investment of working capital in open-ended funds to obtain equity returns, an amount of £1,400,000 was invested in the SVS Albion OLIM UK Equity Income Fund (“OUEIF”) as part of the Company’s management of surplus liquid funds. To avoid double charging, Albion agreed to reduce its management fee relating to the investment in the OUEIF by 0.75 per cent. per annum, which represents the OUEIF management fee charged by OLIM. This resulted in a reduction of the management fee of £3,000 (2017: £nil).

6. Other expenses

  

Year ended
31 December 2018
£’000
 

Year ended
 31 December 2017
£’000
 

Directors’ fees (including NIC)
7482
Auditor’s remuneration for statutory audit services (excluding VAT)2828
Other administrative expenses129111
 231221

7. Directors’ fees
The amounts paid to the Directors during the year are as follows:

 Year ended
31 December 2018
£’000
Year ended
 31 December 2017
£’000
 

Directors’ fees
6874
National insurance68
 7482

The Company’s key management personnel are the Directors. Further information regarding Directors’ remuneration can be found in the Directors’ remuneration report on pages 38 to 40 of the full Annual Report and Financial Statements.

8. Tax on ordinary activities

   
  Year ended
31 December 2018
£’000
Year ended
 31 December 2017
£’000
 

UK corporation tax charge in respect of current year
--
 --

 

   
Factors affecting the tax charge:Year ended
31 December 2018
£’000
Year ended
 31 December 2017
£’000
 

Return on ordinary activities before taxation
  11,218 4,891 
   
Tax charge on profit at the average companies rate of 19 per cent.
(2017: 19.25 per cent.)
2,131 942 
   
Factors affecting the charge:  
Non-taxable gains(2,342)(1,061)
Income not taxable(11)(14)
Excess management expenses carried forward222 133 
 - - 

The tax charge for the year shown in the Income statement is lower than the average companies rate of corporation tax in the UK of 19 per cent. (2017: 19.25 per cent.). The differences are explained above.

Notes

(i)            Venture Capital Trusts are not subject to corporation tax on capital gains.
(ii)           Tax relief on expenses charged to capital has been determined by allocating tax relief to expenses by reference to the applicable corporation tax rate and allocating the relief between revenue and capital in accordance with the SORP.

(iii)          The Company has excess management expenses of £1,983,000 (2017: £814,000) that are available for offset against future profits. A deferred tax asset of £337,000 (2017: £138,000) has not been recognised in respect of these losses as they will be recoverable only to the extent that the Company has sufficient future taxable profits.

9. Dividends

 Year ended
31 December 2018
Year ended
31 December 2017
 £’000£’000
Dividend of 2.0p per Ordinary share paid on 31 May 2017- 1,357 
Dividend of 2.0p per Ordinary share paid on 29 September 2017- 1,355 
Dividend of 2.0p per Ordinary share paid on 31 May 20181,505 - 
Dividend of 2.0p per Ordinary share paid on 28 September 20181,503 - 
Unclaimed dividends(3)(7)
 3,005 2,705 

In addition to the dividends summarised above, the Board has declared a first dividend of 2.25 pence per Ordinary share for the year ending 31 December 2019, payable on 31 May 2019 to shareholders on the register on 3 May 2019. The total dividend will be approximately £1,683,000.

10. Basic and diluted return per share

   Year ended 31 December 2018Year ended 31 December 2017
 RevenueCapitalTotalRevenueCapitalTotal
       
Profit attributable to equity shares (£’000)18111,03711,2181714,7204,891
Weighted average shares in issue (excluding treasury shares)  

74,732,976
 67,848,906
Return attributable per equity share (pence)0.214.815.00.27.07.2

The weighted average number of Ordinary shares is calculated excluding the treasury shares of 9,072,156 (2017: 7,818,700).

There are no convertible instruments, derivatives or contingent share agreements in issue so basic and diluted return per share are the same.

11. Fixed asset investments

 31 December 2018
£’000
31 December 2017
£’000
Investments held at fair value through profit or loss  
Unquoted equity and preference shares34,32723,491
Unquoted loan stock18,20518,618
Quoted equity131182
 52,66342,291

 

 31 December 2018
£’000
31 December 2017
£’000
Opening valuation 42,291 33,798 
Purchases at cost6,518 7,655 
Disposal proceeds(8,556)(4,609)
Realised gains3,766 823 
Movement in loan stock accrued income(73)(67)
Unrealised gains8,717 4,691 
Closing valuation 52,663 42,291 
   
Movement in loan stock accrued income  
Opening accumulated movement in loan stock accrued income357 424 
Movement in loan stock accrued income(73)(67)
Closing accumulated movement in loan stock accrued income284 357 
   
Movement in unrealised gains  
Opening accumulated unrealised gains10,716 7,077 
Transfer of previously unrealised gains to realised reserve on disposal of investments(3,218)(1,235)
Transfer of previously unrealised losses to realised reserves on investments written off but still held- 183 
Movement in unrealised gains8,717 4,691 
Closing accumulated unrealised gains16,215 10,716 
   
Historic cost basis  
Opening book cost31,218 26,297 
Purchases at cost6,518 7,655 
Sales at cost(1,572)(2,551)
Cost of investments written off but still held- (183)
Closing book cost36,164 31,218 

Purchases and disposals detailed above do not agree to the Statement of cash flows due to restructuring of investments, conversion of convertible loan stock and settlement debtors and creditors.

The Company does not hold any assets as the result of the enforcement of security during the period, and believes that the carrying values for both those valued below cost and past due assets are covered by the value of security held for these loan stock investments.

Unquoted fixed asset investments are valued at fair value in accordance with the IPEV guidelines as follows:

Valuation methodology31 December 2018
£’000
31 December 2017
£’000
Cost and price of recent investment (reviewed for impairment or uplift)27,71715,337
Third party valuation – discounted cash flow8,9519,636
Third party valuation - earnings multiple8,2447,460
Revenue multiple3,2727,136
Net assets2,2932,268
Contracted sale price1,384-
Earnings multiple671272
 52,53242,109

Fair value investments had the following movements between valuation methodologies between 31 December 2017 and 31 December 2018:

Change in valuation methodology (2017 to 2018)Value as at
31 December 2018
£’000
Explanatory note
   
Revenue multiple to price of recent investment2,011Recent external funding round
Third party valuation – discounted cash flow to contracted sales price1,384Third party offer accepted
Cost reviewed for impairment or uplift to earnings multiple534More relevant valuation methodology
   

The valuation will be the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the IPEV Guidelines. The Directors believe that, within these parameters, there are no other possible methods of valuation which would be reasonable as at 31 December 2018.

FRS 102 and the SORP requires the Company to disclose the inputs to the valuation methods applied to its investments measured at fair value through profit or loss in a fair value hierarchy. The table below sets out fair value hierarchy definitions using FRS102 s.11.27.

Fair value hierarchyDefinition
Level 1Unadjusted quoted prices in an active market
Level 2

 
Inputs to valuations are from observable sources and are directly or indirectly derived from prices
Level 3

 
Inputs to valuations not based on observable market data

Quoted investments are valued according to Level 1 valuation methods. Unquoted equity, preference shares and loan stock are all valued according to Level 3 valuation methods.

Investments held at fair value through profit or loss (Level 3) had the following movements in the year to 31 December 2018:

 31 December 201831 December 2017
 £’000£’000
Opening balance42,109 33,494 
Additions6,518 7,655 
Disposals(8,556)(4,609)
Accrued loan stock interest(73)(67)
Realised gains3,766 823 
Unrealised gains8,768 4,813 
Closing balance52,532 42,109 
   

FRS 102 requires the Directors to consider the impact of changing one or more of the inputs used as part of the valuation process to reasonable possible alternative assumptions.  78 per cent. of the portfolio of investments is based on cost, recent investment price, net assets, contracted sale price or is loan stock, and as such the Board considers that the assumptions used for their valuations are the most reasonable. The Directors believe that changes to reasonable possible alternative assumptions (by adjusting the revenue and earnings multiples) for the valuations of the remainder of the portfolio companies could result in an increase in the valuation of investments by £486,000 or a decrease in the valuation of investments by £478,000. For valuations based on earnings and revenue multiples, the Board considers that the most significant input is the price/earnings ratio; for valuations based on third party valuations, the Board considers that the most significant inputs are price/earnings ratio, discount factors and market values for buildings; which have been adjusted to drive the above sensitivities.

12. Significant interests
The principal activity of the Company is to select and hold a portfolio of investments in unquoted securities. Although the Company, through the Manager, will, in some cases, be represented on the board of the portfolio company, it will not take a controlling interest or become involved in the management. The size and structure of the companies with unquoted securities may result in certain holdings in the portfolio representing a participating interest without there being any partnership, joint venture or management consortium agreement. The investment listed below is held as part of an investment portfolio and therefore, as permitted by FRS 102 section 9.9B, it is measured at fair value through profit and loss and not consolidated as a subsidiary.

The Company has interests of greater than 20 per cent. of the nominal value of any class of the allotted shares in the portfolio companies as at 31 December 2018 as described below:

CompanyRegistered address and country of incorporationPrincipal activity Aggregate capital and reserves £’000% class and share type % total voting rights held by the CompanyProfit/(loss) before tax £’000
Albion Investment Properties LimitedEC2R 7AF, UKFormer owner of residential property(762)68.2% A Ordinary68.2%n/a*
       

* The company files filleted accounts which does not disclose this information.

13. Current assets

Current asset investments31 December 201831 December 2017
 £’000£’000
SVS Albion OLIM UK Equity Income Fund1,243-

Current asset investments at 31 December 2018 consist of cash invested in SVS Albion OLIM UK Equity Income Fund and is capable
of realisation within 7 days. These fall into the level 1 fair value hierarchy as defined in note 11.

Trade and other receivables less than one year31 December 201831 December 2017
 £’000£’000
Prepayments and accrued income1616
Other receivables1,112461
 1,128477

The Directors consider that the carrying amount of receivables is not materially different to their fair value.

14. Payables: amounts falling due within one year

  31 December 201831 December 2017
 £’000£’000
Accruals and deferred income836369
Trade payables98
 845377

The Directors consider that the carrying amount of payables is not materially different to their fair value.

15. Called up share capital

   
Allotted, called up and fully paid shares: £’000 
80,135,559 Ordinary shares of 1 penny each at 31 December 2017801  
3,724,910 Ordinary shares of 1 penny each issued during the year38  
83,860,469 Ordinary shares of 1 penny each at 31 December 2018839  
7,818,700 Ordinary shares of 1 penny each held in treasury at 31 December 2017(78) 
1,253,456 Ordinary shares of 1 penny each purchased during the year to be held in treasury(13) 
9,072,156 Ordinary shares of 1 penny each held in treasury at 31 December 2018(91) 
Voting rights of 74,788,313 Ordinary shares of 1 penny each at 31 December 2018748  

The Company purchased 1,253,456 Ordinary shares (2017: 1,262,000) at a cost of £921,000 including stamp duty (2017: £855,000) to be held in treasury during the year to 31 December 2018. Total share buy backs in 2018 represents 1.5 per cent. (2017: 1.6 per cent.) of called-up share capital as at 31 December 2018.

The Company holds a total of 9,072,156 shares (2017: 7,818,700) in treasury representing 10.8 per cent. (2017: 9.8 per cent.) of the issued Ordinary share capital at 31 December 2018.

Under the terms of the Dividend Reinvestment Scheme, the following new Ordinary shares of nominal value 1 penny each were allotted during the year:


Date of allotment
Number of shares allottedAggregate nominal value of shares (£’000)Issue price (pence per share)Net invested (£’000)Opening market price on allotment date (pence per share)
31 May 2018324,995376.224672.5
28 September 2018316,891378.925077.0
 641,8866 496 

Under the terms of the Albion VCTs Prospectus Top Up Offers 2017/18, the following new Ordinary shares of nominal value 1 penny each, were allotted during the year:

Date of allotmentNumber of shares allottedAggregate nominal value of shares (£’000)Issue price (pence per share)Net consideration received (£’000)Opening market price on allotment date (pence per share)
31 January 20181,903,5101974.01,37368.5
5 April 2018964,8621075.771268.5
11 April 201876,930175.05767.0
11 April 20187,692-75.4667.0
11 April 2018130,030175.79667.0
 3,083,02431 2,244 

16. Basic and diluted net asset value per share

  31 December 2018 (pence per share)31 December 2017 (pence per share)
Basic and diluted net asset value per Ordinary share 84.773.8

The basic and diluted net asset values per share at the year end are calculated in accordance with the Articles of Association and are based upon total shares in issue (less treasury shares) of 74,788,313 Ordinary shares as at 31 December 2018 (2017: 72,316,859).

17. Capital and financial instruments risk management
The Company’s capital comprises Ordinary shares as described in note 15. The Company is permitted to buy back its own shares for cancellation or treasury purposes, and this is described in more detail on page 27 of the full Annual Report and Financial Statements.

The Company’s financial instruments comprise equity and loan stock investments in quoted and unquoted companies, cash balances and receivables and payables which arise 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 payables. The Company does not use any derivatives for the management of its Balance sheet.

The principal risks arising from the Company’s operations are:

The Board regularly reviews and agrees policies for managing each of these risks. There have been no changes in the nature of the risks that the Company has faced during the past year, and apart from where noted below, there have been no changes in the objectives, policies or processes for managing risks during the past year. The key risks are summarised below.

Investment risk
As a venture capital trust, it is the Company’s specific nature to evaluate and control the investment risk of its portfolio in quoted and unquoted investments, details of which are shown on pages 19 to 21 of full Annual Report and Financial Statements. Investment risk is the exposure of the Company to the revaluation and devaluation of investments. The main driver of investment risk is the operational and financial performance of the portfolio company and the dynamics of market quoted comparators. The Manager receives management accounts from portfolio companies and members of the investment management team often sit on the boards of unquoted portfolio companies; this enables the close identification, monitoring and management of investment risk.

The Manager and the Board formally review investment risk (which includes market price risk), both at the time of initial investment and at quarterly Board meetings.

The Board monitors the prices at which sales of investments are made to ensure that profits to the Company are maximised, and that valuations of investments retained within the portfolio appear sufficiently prudent and realistic compared to prices being achieved in the market for sales of unquoted investments.

The maximum investment risk as at the Balance sheet date is the value of the fixed and current asset investment portfolio which is £53,906,000 (2017: £42,291,000). Fixed asset and current asset investments form 85 per cent. of net asset value as at 31 December 2018 (2017: 79 per cent.).

More details regarding the classification of fixed asset investments are shown in note 11.

Investment price risk
Investment price risk is the risk that the fair value of future investment cash flows will fluctuate due to factors specific to an investment instrument or to a market in similar instruments. The management of risk within the venture capital portfolio is addressed through careful investment selection, by diversification across different industry segments, by maintaining a wide spread of holdings in terms of financing stage and by limitation of the size of individual holdings. The Directors monitor the Manager’s compliance with the investment policy, review and agree policies for managing this risk and monitor the overall level of risk on the investment portfolio on a regular basis.

Valuations are based on the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the IPEV Guidelines. Details of the industries in which investments have been made are contained in the Portfolio of investments section on pages 19 to 21 of full Annual Report and Financial Statements and in the Strategic report.

Valuations are based on the most appropriate valuation methodology for an investment within its market, with regard to the financial health of the investment and the IPEV Guidelines.

As required under FRS 102 section 34.29, the Board is required to illustrate by way of a sensitivity analysis the degree of exposure to market risk. The Board considers that the value of the fixed asset investment portfolio is sensitive to a 10 per cent. change based on the current economic climate. The impact of a 10 per cent. change has been selected as this is considered reasonable given the current level of volatility observed both on a historical basis and future expectations.

The sensitivity of a 10 per cent. (2017: 10 per cent.) increase or decrease in the valuation of the fixed asset investments (keeping all other variables constant) would increase or decrease the net asset value and return for the year by £5,390,600 (2017: £4,229,100).

Interest rate risk
The Company is exposed to fixed and floating rate interest rate risk on its financial assets through the effect of interest rate changes. On the basis of the Company’s analysis, it is estimated that a rise of 1 per cent. in all interest rates would have increased total return before tax for the year by approximately £139,000 (2017: £101,000).  Furthermore, it is considered that a fall of interest rates below current levels during the year would have been very unlikely.

The weighted average effective interest rate applied to the Company’s fixed rate assets during the year was approximately 5.3 per cent. (2017: 4.3 per cent.). The weighted average period to maturity for the fixed rate assets is approximately 5.1 years (2017: 5.1 years).

The Company’s financial assets and liabilities, all denominated in pounds sterling, consist of the following:

   
 31 December 201831 December 2017
  

Fixed rate £’000
Floating rate
£’000
Non-interest bearing
£’000
Total
£’000
 

Fixed rate £’000
Floating rate
£’000
Non-interest bearing
£’000
Total
£’000
 

Unquoted equity
--34,327 34,327 --23,491 23,491 
Quoted equity--131 131 --182 182 
Unquoted loan stock17,542201462 18,205 17,576210832 18,618 
Current asset investments--1,243 1,243 --- - 
Receivables*--1,114 1,114 --462 462 
Current liabilities--(845)(845)--(377)(377)
Cash-9,189- 9,189 -10,955- 10,955 
Total 17,5429,39036,432  63,364 17,57611,16524,590 53,331 

*The receivables do not reconcile to the Balance sheet as prepayments are not included in the above table.

Credit risk
Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Company is exposed to credit risk through its receivables, investment in unquoted loan stock, and through the holding of cash on deposit with banks.

The Manager evaluates credit risk on loan stock and other similar instruments prior to investment, and as part of its ongoing monitoring of investments. In doing this, it takes into account the extent and quality of any security held. For loan stock investments made prior to 6 April 2018, which account for 98.7 per cent. of loan stock by value, typically loan stock instruments have a first fixed charge or a fixed and floating charge over the assets of the portfolio company in order to mitigate the gross credit risk. The Manager receives management accounts from portfolio companies, and members of the investment management team often sit on the boards of unquoted portfolio companies; this enables the close identification, monitoring and management of investment-specific credit risk.

The Manager and the Board formally review credit risk (including receivables) and other risks, both at the time of initial investment and at quarterly Board meetings.

The Company’s total gross credit risk at 31 December 2018 was limited to £18,205,000 (2017: £18,618,000) of unquoted loan stock instruments, £9,189,000 (2017: £10,955,000) of cash deposits with banks and £1,128,000 (2017: £477,000) of other receivables.

As at the Balance sheet date, the cash held by the Company is held with Lloyds Bank plc, Scottish Widows Bank plc (part of Lloyds Banking Group), Barclays Bank plc and National Westminster Bank plc. Credit risk on cash transactions is mitigated by transacting with counterparties that are regulated entities subject to prudential supervision, with high credit ratings assigned by international credit-rating agencies.

The Company has an informal policy of limiting counterparty banking exposure to a maximum of 20 per cent. of net asset value for any one counterparty.

The credit profile of unquoted loan stock is described under liquidity risk shown below.

Liquidity risk
Liquid assets are held as cash on current account, cash on deposit or short term money market account. Under the terms of its Articles, the Company has the ability to borrow up to 10 per cent. of its adjusted capital and reserves of the latest published audited Balance sheet, which amounts to £6,169,000 as at 31 December 2018 (2017: £5,186,000).

The Company had no committed borrowing facilities as at 31 December 2018 (2017: nil) and the Company had cash and fixed term deposit balances of £9,189,000 (2017: £10,955,000). The main cash outflows are for new investments, buy-back of shares and dividend payments, which are within the control of the Company. The Manager formally reviews the cash requirements of the Company on a monthly basis, and the Board on a quarterly basis, as part of its review of management accounts and forecasts. All of the Company’s financial liabilities are short term in nature and total £845,000 (2017: £377,000).

The carrying value of loan stock investments, analysed by expected maturity dates is as follows:

 31 December 201831 December 2017
Redemption dateFully performing
£’000
Valued below cost
£’000
Past due
£’000
Total
£’000
Fully performing
£’000
Valued below cost
£’000
Past due
£’000
Total
£’000
Less than one year1,9969111,3114,2183,3438431,3665,552
1-2 years2,704171 1,4844,3596158305021,947
2-3 years6771121169051,835764672,378
3-5 years2,645222-2,8673,351--3,351
5 + years5,741-1155,8564,379-1,0115,390
Total13,7631,4163,02618,20513,5231,7493,34618,618

Loan stock can be past due as a result of interest or capital not being paid in accordance with contractual terms.

The cost of loan stock investments valued below cost is £1,746,000 (2017: £1,846,000).

In view of the availability of adequate cash balances and the repayment profile of loan stock investments, the Board considers that the Company is subject to low liquidity risk.

Fair values of financial assets and financial liabilities
All the Company’s financial assets and liabilities as at 31 December 2018 are stated at fair value as determined by the Directors, with the exception of receivables and payables and cash which are carried at amortised cost, in accordance with FRS 102. There are no financial liabilities other than payables. The Company’s financial liabilities are all non-interest bearing. It is the Directors’ opinion that the book value of the financial liabilities is not materially different to the fair value and all are payable within one year.

18. Contingencies and commitments                         

As at 31 December 2018, the Company had no financial commitments (2017: £nil).

There were no contingent liabilities or guarantees given by the Company as at 31 December 2018 (2017: £nil).

19. Post balance sheet events
Since the year end, the Company had the following material investment transactions:         

On 7 January 2019 the Company announced the publication of a prospectus in relation to an offer for subscription for new Ordinary shares. A Securities Note, which forms part of the prospectus, has been sent to shareholders.

20. Related party transactions
In November 2016, Albion acquired OLIM Investment Managers (“OLIM”), a specialist fund manager of UK quoted equities. During the year, a total of £1,400,000 (2017: £nil) was invested into the SVS Albion OLIM UK Equity Income Fund (“OUEIF”) following shareholder approval at the 2018 Annual General Meeting, with a further £600,000 invested after the year end.

Albion agreed to reduce that proportion of its management fee relating to the investment in the OUEIF by 0.75 per cent. per annum, which represents the OUEIF management fee charged by OLIM; this resulted in a reduction of the management fee of £3,000 (2017: £nil).

Other than transactions with the Manager as disclosed in note 5 and that discussed above, there are no other related party transactions or balances requiring disclosure.

21. Other Information
The information set out in this announcement does not constitute the Company's statutory accounts within the terms of section 434 of the Companies Act 2006 for the years ended 31 December 2018 and 31 December 2017, and is derived from the statutory accounts for those financial years, which have been, or in the case of the accounts for the year ended 31 December 2018, which will be, delivered to the Registrar of Companies. The Auditor reported on those accounts; the reports were unqualified and did not contain a statement under s498 (2) or (3) of the Companies Act 2006.

22. Publication
The full audited Annual Report and Financial Statements are being sent to shareholders and copies will be made available to the public at the registered office of the Company, Companies House, the National Storage Mechanism and also electronically at www.albion.capital/funds/AADV, where the Report can be accessed as a PDF document via a link in the 'Financial Reports and Circulars' section.

 

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Albion Development VCT PLC - Ordinary Shares : Annual Financial Report - RNS