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RNS

Annual Financial Report y/e 30/09/2018

Released 07:00 23-Nov-2018

RNS Number : 2823I
Baronsmead Second Venture Trust PLC
23 November 2018
 

Baronsmead Second Venture Trust plc

 

Annual Financial Report for the year ended 30 September 2018

 

Financial Headlines

·      NAV total return of 330.6p to shareholders for every 100.0p invested at launch.

·      Net Asset Value per share increased 5.5 per cent to 95.1p in the year ended 30 September 2018, before deduction of 2018 dividend payments.

·      Dividends totalled 7.5p in the year to 30 September 2018, including the proposed final dividend of 4.5p to be paid on 8 March 2019.

·      £8.3m new investments made during the year.

 

Our Investment Objective

Baronsmead Second Venture Trust is a tax efficient listed company which aims to achieve long-term investment returns for private investors.

 

Investment Policy

·      To invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM.

·    Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value.

 

Dividend Policy

The board of Baronsmead Second Venture Trust has the objective to maintain a minimum annual dividend level of around 6.5p per ordinary share if possible, but this depends primarily on the level of realisations achieved and cannot be guaranteed.

 

CHAIRMAN'S STATEMENT

 

I am pleased to report a 5.5 per cent (5.0p) increase in the Company's NAV per share to 95.1p per share for the year to 30 September 2018, before dividend payments.

 

During the year to 30 September 2018 the Company has invested in 13 new and 3 follow-on investments, and I am delighted to report it has also successfully realised investments from both the unquoted and AIM-traded portfolio.

 

The Company paid an interim dividend of 3.0p in September 2018. In line with previous years and underpinned by the successful realisations this year, the Board has recommended a final dividend of 4.5p to be paid in March 2019, subject to shareholder approval.

 

Results

 

Pence per

ordinary

share

NAV as at 1 October 2017

(after final dividend)

90.1

Valuation uplift (5.5 per cent)

5.0

NAV as at 30 September 2018

before dividends

95.1

Less:

Interim dividend paid on

21 September 2018

(3.0)

Proposed final dividend of 4.5p payable, after shareholder approval, on 8 March 2019

(4.5)

Illustrative NAV as at 30 September 2018 after dividends

87.6

 

Portfolio Review

 

As at 30 September 2018, the portfolio comprised direct investments in a total of 75 unquoted and AIM-traded companies, providing shareholders with diverse exposure. LF Livingbridge UK Micro Cap Fund ("Micro Cap") consisted of 44 companies and there were 45 companies held by LF Livingbridge UK Multicap Income Fund ("Multi Cap"), in which the Company has invested, providing yet further diversification.

 

The underlying value of the unquoted investments increased by 14.6 per cent during the year to 30 September 2018 reflecting the continued positive performance of this portfolio. I am also pleased to report that the AIM-traded portfolio increased by 4.1 per cent, Micro Cap increased by 18.8 per cent and Multi Cap also increased by 14.0 per cent in value. Although the performance across both unquoted and listed businesses has been strong during the year, the current volatility in the markets and uncertainty over Brexit may impact this over the coming months. However, the portfolio remains diverse with investments in both established unquoted and AIM-traded companies, as well as earlier stage growth businesses all of which are spread widely across the sectors in which the Manager invests.

 

Investments and Divestments

 

In line with the more recent VCT regulation changes, the Manager has adapted its investment strategy to focus on the provision of development capital to earlier stage companies helping them to grow organically rather than through acquisition. The Board is therefore pleased to report that during the year the Company invested a total of £8.3m in 13 new and 3 follow-on unquoted and AIM-traded investments. The new investments in earlier stage opportunities may result in greater volatility in returns over time, albeit that the more mature, established portfolio of investments should continue to determine returns for shareholders for several years to come.

 

In addition to these new investments, I am pleased to report that the Company has realised 10 unquoted and AIM-traded investments during the year, as well as 3 loan repayments, realising total proceeds (including interest due at time of realisation) of £25.4m. This included the sale from the unquoted portfolio of Crew Clothing Holdings, one of the longest standing Baronsmead investments, for a 2.3x return; Eque2 for a 3.0x return; and Key Travel for a 3.2x return. The AIM-traded portfolio realisations included a 1.4x return from the sale of FreeAgent Holdings; 1.1x return from the sale of Escher Group Holdings, and EG Solutions which realised 1.4x return. Against these successes, losses were realised on In the Style Fashion, Ubisense Group and Plant Impact.

 

Details of the Company's investments and divestments during the year are set out in the tables below and further commentary on portfolio companies is provided in the Manager's Review below.

 

Fundraising

 

The Board is pleased to confirm its intention to raise new funds in the 2018/2019 tax year. As announced in August this year, the Company plans to launch a joint fundraising with Baronsmead Venture Trust plc in early January 2019 to raise £25m in aggregate which is principally to fund new investments in the short to medium term. We will send the Prospectus containing the full details of the offer to Shareholders as soon as it is available. Subscriptions to the fundraising will only be accepted on a first come, first served basis. However, this year for the first time, I can confirm that it will be possible to subscribe online as well as with the more traditional paper subscription form. We will include details of how to do this with the Prospectus.

 

Dividend Policy

 

The Company has for many years maintained a policy of paying a minimum annual dividend level of around 4.5p per ordinary share but the Board is very pleased to report that since 2007 a dividend of at least 7.5p has been paid to shareholders. With the large and diverse portfolio it is anticipated that there will be a continued flow of realisations from which to pay dividends and the Company also has considerable reserves to cover any year where there are fewer disposals. It would therefore seem appropriate to adopt a more realistic dividend policy, which I have set out below. The board of Baronsmead Second Venture Trust has the objective of maintaining a minimum annual dividend level of around 6.5p per ordinary share if possible, but this depends primarily on the level of realisations achieved and cannot be guaranteed.

 

Change of Management Arrangements

 

As I communicated in my letter to shareholders on 8 November 2018, the Investment Manager for the Company, Livingbridge VC LLP ("Livingbridge" or the "Manager"), will change to Gresham House plc ("Gresham House"), a specialist alternative asset manager listed on the London Stock Exchange, on or around 30 November 2018.

 

I can confirm that no changes are being made to the terms of the investment management and co-investment agreements for the Company.

 

As you would expect, the Board completed due diligence on Gresham House during the process and was satisfied that its management team appreciates the important heritage of the Baronsmead VCTs and is committed to maintaining the strong governance culture of the Company as well as its investment performance.

 

Since the Company was founded in 2001 there have been several changes in the ultimate ownership of the Manager. Throughout these changes the Board has focused on ensuring there has been continuity in the executive team who make and manage the investments and can confirm that the team that has been responsible for the investment management of the Company will all transfer from Livingbridge to Gresham House. The 16 transferring employees are led by a senior team of five people who have an average tenure of 12 years at Livingbridge working with the Baronsmead VCTs. The two key Partners, Andrew Garside and Sheenagh Egan, will continue as consultants to Gresham House for up to three years to provide continuity and support.

 

Additionally, an agreement has been put in place between Livingbridge and Gresham House to enable a smooth transition over a three-year period including passing on insight, best practice and networks for the future benefit of the Company and its Shareholders.

 

We are confident that this transaction will benefit both the Company and its shareholders as it will provide additional resources for the team going forward. This will enable them to maintain and develop the VCT business, specifically focussing on increasing the deployment of capital under the new VCT rules as well as managing the existing diverse portfolio. We believe that Gresham House is committed to working with the Board to deliver consistent performance over the long term for all our shareholders.

 

Board Succession

 

As I advised shareholders, I am Chairman of Gresham House and for this reason I took no part in the decision to appoint it as the new Investment Manager for the Company. John Davies, as senior non-executive director of the Company, led the Board discussions, due diligence and final decision on the matter.

 

Given my role at Gresham House, I have proposed that I stand down as Chairman of the Company following completion, but that I remain as a non-executive director to ensure Board continuity going forward. The Board has agreed that John Davies, previously the Chairman of Baronsmead VCT5 plc, will assume the role of Chairman on an interim basis while it considers the longer-term arrangements.

 

The Board has been discussing succession planning and diversity over the past year and will commence a search for a new Director in the New Year. We will be seeking shareholder approval for an increase to the Directors fee cap at the next AGM. This will enable the Board to accommodate up to five Directors, on a temporary basis only, to ensure continuity and minimise disruption, particularly in view of the change of Manager.

 

Annual General Meeting

 

We look forward to meeting as many shareholders as possible at the Annual General Meeting to be held at 11.00 am on 28 February 2019, at Saddlers' Hall, 40 Gutter Lane, London, EC2V 6BR. As usual the Company will present a review of the year and will be joined by both Livingbridge and Gresham House. We would be delighted if you would join us afterwards for lunch.

 

Outlook

 

It was expected that by now the UK would have had greater certainty on the timing and terms of its exit from the

European Union, however the outcome remains uncertain. Consequently, while the UK economy has remained largely resilient over the past year, volatility in global markets, the ongoing uncertainty in the UK and decreasing consumer confidence, have resulted in a degree of UK market volatility which we anticipate may remain a feature in the short term.

 

However, we continue to invest in the future of British businesses, supporting innovative growth companies which we believe are the driving force of the UK economy. Despite the macro-economic uncertainties we are experiencing, the Company's investment strategy remains consistent. The investment team continues to be disciplined when deploying capital, particularly in the earlier stage companies which carry more risk and we closely manage all investments once they are in the portfolio. Therefore, I continue to believe that our large and diverse investment portfolio should underpin the returns to our shareholders over the medium to long term.

 

Personal

 

It has been an honour and a privilege to be Chairman of this Company and I am sorry that the impending change of management obliges me to stand down; I will however remain on the board and continue to hold my investment in the Company. I am very pleased that all of the key members of the Livingbridge team will continue uninterrupted to manage the Company.

 

Anthony Townsend

Chairman

22 November 2018

 


MANAGER'S REVIEW

 

The year has seen another strong performance from the investment portfolio. We have begun to increase the investment rate following the changes to VCT legislation in 2015.

 

PORTFOLIO REVIEW

 

Overview

The net assets of £199m were invested as follows:

 

 

NAV

(£m)

% of

NAV*

Number of

investees

% return in
the year**

Unquoted

52

26

23

15

AIM-traded companies

90

45

52

4

CF Livingbridge UK Microcap Fund

24

12

44

19

CF Livingbridge UK Multi Cap Fund

3

2

45

14

Liquid Assets

30

15

N/A

 

Totals

199

100

164

 

 

* By value as at 30 September 2018.

** Return includes interest received on unquoted realisations during the year.

 

Each quarter the direction of general trading and profitability of all investee companies is assessed so that the Board can monitor the overall health and trajectory of the portfolio. At 30 September 2018, 87 per cent of the 75 companies directly held in the portfolio (excluding the investments held by Collective Investment Vehicles) were progressing steadily or better.

The tables below show the breakdown of new investments and realisations over the course of the year and below is commentary on some of the key highlights in both the unquoted and quoted portfolios.

Investment Activity - Unquoted and Quoted

 

Below are descriptions of some of the new investments made;

·    SecureCloud+ (unquoted) is an accredited provider of specialist managed IT services to the defence and security sector focussed on delivering service to upper tiers of security including official-sensitive, secret and top-secret environments.

 

·    Pointr (unquoted) is an Internet of Things smart indoor location positioning business looking to improve the location accuracy for consumers when indoors and provide meaningful data and insight to businesses looking to better understand consumer behaviours in physical locations.

 

·    Equipsme (Holdings) (unquoted) is an innovative provider of health insurance products to SMEs, allowing them to customise products for employees whilst delivering an affordable, simple, modular and accessible solution.

 

·    Your Welcome (unquoted) supplied tablets and software into vacation rental, Airbnb and corporate letting properties, with their proprietary software improving the guest experience through an information portal providing tips and recommendations on the local area and a guest communication tool.

 

·    Labrador (unquoted) is a technology business providing an automated energy switching service for consumers. This is a free consumer product which can be plugged into a home to deliver energy savings for life by monitoring energy usage and switching to the most appropriate and lowest cost tariffs.

 

·    Munnypot (unquoted) is a software business which delivers automated, regulated financial advice to its users ('robo-advisory'). The business provides its solution to financial institutions, employee benefits providers and IFA networks.

 

·    PCI-Pal (quoted) is a suite of secure card payment solutions designed to solve the Payment Card Industry's compliance issues faced by contract centres & the world's largest organisations including All Saints, Virgin, IKEA and MADE.COM.

 

·    IXICO (quoted) provides data analytics services for pharma companies and clinical research organisations with a particular focus on neurodegenerative diseases. IXICO's analytics solutions combine technology and specialist services for customers running clinical trials, as well as real world data applications.

 

Unquoted Portfolio

 

Performance

The unquoted portfolio has had a strong year of progress with a 15 per cent increase in value over the course of the year. The portfolio is valued by the Board using a consistent process every quarter. The majority of the value created by portfolio companies comes from trading and operational improvements including revenue and margin growth, rather than financial leverage.

Divestments

During the year the unquoted portfolio returned £19.3m in proceeds following the full realisation of Key Travel (3.2x cost), Crew Clothing Holdings (2.3x cost) and Eque2 (3.0x cost). This represents an excellent trio of realisations. Kirona and Create Health made loan note repayments within the year.

Alongside this strong performance, we had one significant disappointment in realising our investment in In The Style Fashion at nil proceeds. This business needed investment beyond the levels we anticipated and rather than invest further we were diluted and replaced by another funder. The 15 per cent unquoted portfolio returns includes the negative of this divestment.

After the year end, the Company realised it's investment in Symphony Ventures returning proceeds of £4.3m (2.4x cost).

Quoted Portfolio (AIM-traded investments)

Performance

The quoted portfolio has had a good overall performance during the year with an increase of 4 per cent. Stand out performers were: Ideagen, a provider of governance, risk and compliance ("GRC") software to highly regulated industries, following strong financial results and a successful oversubscribed placing to fund the acquisition of MK Insight; Netcall, a customer engagement software provider, which traded well through the period and completed the acquisition of low code platform provider MatsSoft; and Cerillion, a provider of carrier-grade enterprise CRM and billing software to telecoms companies, following in line trading updates and some good customer wins. These were partially offset by weaker share price performance from IDOX, a software and services provider to the local government sector, following a profit downgrade and change of CEO, and Dods (Group), a business to business media and information provider, which was de-rated on no specific news.

Divestments

Proceeds totalled £6.1m during the year following 5 full realisations. The two largest divestments were EG Solutions and Escher Group Holdings returning £2.7m and £1.5m respectively, generating returns of 1.4x cost and 1.1x cost.

Collective Investment Vehicles

Micro Cap had strong performance over the year increasing by 18.8 per cent (2017: 26.9 per cent). At 30 September 2018, Baronsmead Second Venture Trust's cumulative £6.2m investment was valued at £24.2m. As at 30 September 2018, Micro Cap held investments in 44 AIM-traded and listed companies.

The investment into Multi Cap has had a good performance over the year increasing by 14.0 per cent. At 30 September 2018, Baronsmead Second Venture Trust's investment was valued at £3.0m. As at 30 September 2018, Multi Cap held investments in 45 AIM-traded and listed companies.

Liquid assets (cash and near cash)

Baronsmead Second Venture Trust had cash of approximately £32m at the year-end. This asset class is conservatively managed to take minimal or no capital risk, a strategy outlined in prospectuses that have been issued in the past.

OUTLOOK

 

The majority of investee companies continue to perform well, providing good returns over the year and a firm foundation for future returns. The investment management team continues to adapt its deal origination and sourcing activities which have resulted in the Company adding 6 unquoted and 7 AIM-traded companies to the portfolio and the investment management team look forward to making further additions over the coming year.

 

Livingbridge VC LLP

Investment Manager

22 November 2018

 


Investments in the year

 

Company

Location

Sector

Activity

Book cost

£'000

Unquoted investments

New

 

 

 

 

SecureCloud+ Ltd

Berkshire

TMT

Defence and public sector IT systems

789

Pointr Ltd

London

TMT

AI/IOT Indoor Positioning Platform

526

Equipsme (Holdings) Ltd

London

Business Services

SME Health Insurance Plans Provider

421

Your Welcome Ltd

London

TMT

Supplier of tablets and software for vacation rental properties

368

Munnypot Ltd

West Sussex

TMT

Automated online investment platform

273

Labrador Ltd

London

TMT

 Smart energy switching technology

263

Follow on

 

 

 

 

Custom Materials Ltd

London

Consumer Markets

Retailer of customisable products

722

SilkFred Ltd

London

Consumer Markets

Online fashion market place

275

Total unquoted investments

 

3,637

AIM-traded Investments

New

 

 

 

 

IXICO Plc

London

Healthcare & Education

Provides technology enabled services to the biopharmaceutical industry worldwide

825

I-nexus Global plc

West Midlands

TMT

Strategy and continuous improvement             software

688

Access Intelligence plc

London

Business Services

Provider of corporate communications and reputation management software

633

Fusion Antibodies plc

Belfast

Healthcare & Education

Development of antibodies for both therapeutic and diagnostic applications

550

KRM22 plc

London

TMT

Software as a service platform buy & build in risk and compliance software

550

PCI-Pal plc

London

TMT

Secure payment services provider

495

Beeks Financial Cloud Group plc

Renfrewshire

TMT

Cloud hosting services for the financial trading sector

413

Follow on

 

 

 

 

CloudCall Group plc

Leicestershire

TMT

Cloud based telephony platform

549

Total AIM-traded investments

4,703

  Total investments in the year

  8,340

 

 

Realisations in the year

 

Company

 

First

investment

date

 

Proceeds‡

£'000

Overall multiple

return*

Unquoted realisations

 

 

 

 

Key Travel Ltd

Trade sale

Jul 13

6,430

3.2

Crew Clothing Holdings Ltd

Trade sale

Nov 16

5,362

2.3

Eque2 Ltd

Trade sale

Apr 13

5,129

3.0

Kirona Ltd

Loan repayment

Dec 14

1,201

1.2

IP Solutions Ltd

Loan repayment

Dec 14

642

0.3

Create Health Ltd

Loan repayment

Mar 13

550

1.0

In The Style Fashion ltd

Write Off

Apr 17

0

0.0

Xention Pharma Ltd

Write Off

Jul 05

0

0.0

Total unquoted realisations

19,314

 

AIM-traded realisations

 

 

 

 

EG Solutions plc

Scheme of arrangement

May 05

2,728

1.4

Escher Group Holdings plc

Take over

Aug 11

1,486

1.1

FreeAgent Holdings plc

Scheme of arrangement

Nov 16

1,375

1.4

Plant Impact plc

Scheme of arrangement

Feb 15

493

0.3

Ubisense Group plc

Market sale

Jun 11

29

0.2

Total AIM-traded realisations

6,111

 

Total realisations in the year

25,425

 


‡ Proceeds at time of realisation including interest.

* Includes interest/dividends received, loan note redemptions and partial realisations accounted for in prior periods.

Proceeds of £332,000 were received in respect of Optimisa which has been written off in a prior period. Deffered consideration of £115,000 was received in respect of Nexus Vehicle Holdings and £54,000 in respect of Knightsbridge Risk Solutions, both of which had been sold in a prior period.

 

Ten Largest Investments

 

The top ten investments by current value at 30 September 2018 illustrate the diversity of investee companies within the portfolio. For consistency across the top ten and based on guidance from the AIC, data extracted from the last set of published audited accounts is shown in the tables below. However, this may not always be representative of underlying financial performance for several reasons. Published accounts lodged at Companies House are out of date and the Manager works from up to date management accounts and has access to draft but unpublished annual audited accounts prepared by the companies. In addition, pre-tax profit in statutory accounts is often not a representative indicator of underlying profitability as it can be impacted by, for example, deductions of non-cash items such as amortisation that relates to investment structures rather than operating performance.

 

1.  Ideagen Plc - Nottinghamshire


All funds managed by Livingbridge

First investment: January 2013

Total original cost: £3,000,000

Total equity held: 5.1%

 

Baronsmead Second Venture Trust only

Original cost: £1,650,000

Valuation: £9,747,000

Valuation basis: Bid Price

% of equity held: 2.8%

 

Year ended 30 April

 

2018

2017

 

£ million

£ million

Sales:

36.1

27.1

Pre-tax profits:

1.4

0.7

Net Assets:

50.5

46.4

No. of Employees:

375

305

 

(Source: Ideagen plc, Annual Report & Accounts, 30 April 2018.)

 

2. Netcall Plc - Hertfordshire

 

All funds managed by Livingbridge

First investment: July 2010

Total original cost: £4,354,000

Total equity held: 17.3%

 

Baronsmead Second Venture Trust only

Original cost: £2,616,000

Valuation: £9,245,000

Valuation basis: Bid Price

% of equity held: 10.4%

 

Year ended 30 June

 

2018

2017

 

£ million

£ million

Sales:

21.9

16.2

Pre-tax profits:

0.0

1.7

Net Assets:

21.7

21.0

No. of Employees:

217

169

 

(Source: Netcall plc, Annual Report and Accounts, 30 June 2018.)

 

3. Bioventix Plc - Surrey

 

All funds managed by Livingbridge

First investment: June 2013

Total original cost: £1,008,000

Total equity held: 7.5%

 

Baronsmead Second Venture Trust only

Original cost: £555,000

Valuation: £6,621,000

Valuation basis: Bid Price

% of equity held: 4.1%

 

Year ended 30 June

 

2018

2017

 

£ million

£ million

Sales:

8.0

7.2

Pre-tax profits:

6.9

5.8

Net Assets:

11.0

10.1

No. of Employees:

15

16

 

(Source: Bioventix Plc, Annual Report and Financial Statements, 30 June 2018.)

 

4. Happy Days Consultancy Limited - Cornwall


All funds managed by Livingbridge

First investment: April 2012

Total original cost: £7,617,000

Total equity held: 65.0%

 

Baronsmead Second Venture Trust only

Original cost: £4,180,000

Valuation: £6,214,000

Valuation basis: Earnings Multiple

% of equity held: 31.5%

 

Year ended 31 December

 

2017

2016

 

£ million

£ million

Sales:

8.0

7.0

Pre-tax profits:

(2.2)

(1.8)

Net Assets:

(6.5)

(4.2)

No. of Employees:

398

309

 

(Source: H. Days Holdings Limited Annual Report and Financial Statements 31 December 2017.)

 

 

5. Carousel Logistics Ltd - Kent

 

All funds managed by Livingbridge

First investment: October 2013

Total original cost: £5,595,000

Total equity held: 40.0%

 

Baronsmead Second Venture Trust only

Original cost: £2,336,000

Valuation: £5,929,000

Valuation basis: Earnings Multiple

% of equity held: 14.7%

 

Year ended 31 December

 

2017

2016

 

£ million

£ million

Sales:

31.8

21.4

Pre-tax profits:

0.0

0.3

Net Assets:

1.8

3.0

No. of Employees:

128

92

 

(Source: Carousel Logistics Ltd Financial Statement 31 December 2017.)

 

6. Inspired Energy Plc - Lancashire
 

All funds managed by Livingbridge

First investment: November 2011

Total original cost: £1,437,000

Total equity held: 7.6%

 

Baronsmead Second Venture Trust only

Original cost: £861,000

Valuation: £5,748,000

Valuation basis: Bid Price

% of equity held: 4.6%

 

Year ended 31 December

 

2017

2016

 

£ million

£ million

Sales:

27.5

21.5

Pre-tax profits:

3.6

4.0

Net Assets:

25.1

14.9

No. of Employees:

266

200

 

(Source: Inspired Energy Plc Annual Report and Accounts 2017.)

 

7. Create Health Ltd - London
 

All funds managed by Livingbridge

First investment: March 2013

Total original cost: £1,235,000

Total equity held: 29.0%

 

Baronsmead Second Venture Trust only

Original cost: £680,000

Valuation: £5,722,000

Valuation basis: Earnings Multiple

% of equity held: 14.0%

 

Year ended 31 March

 

2017

2016

 

£ million

£ million

Sales:

13.7

11.5

Pre-tax profits:

1.1

1.5

Net Assets:

4.0

3.0

No. of Employees:

94

71

 

(Source: Create Health Holding Ltd Annual Report and Consolidated Financial Statements 31 March 2017.)

 

 

8. Pho Holdings Limited - London

 

All funds managed by Livingbridge

First investment: July 2012

Total original cost: £4,415,000

Total equity held: 28.0%

 

Baronsmead Second Venture Trust only

Original cost: £2,422,000

Valuation: £2,422,000

Valuation basis: Earnings Multiple

% of equity held: 13.6%

 

Year ended 28 February

 

2017*

2016**

 

£ million

£ million

Sales:

25.9

19.4

Pre-tax profits:

0.0

0.0

Net Assets:

4.5

4.5

No. of Employees:

540

399

 

(Source: Pho 2012 Ltd, Directors' Report and Financial Statements 26 February 2017.)

* 52 week Period ended 26 February 2017.

** 52 week Period ended 28 February 2016.

 

 

9. Cerillion Plc - London


All funds managed by Livingbridge

First investment: November 2015

Total original cost: £4,000,000

Total equity held: 17.8%

 

Baronsmead Second Venture Trust only

Original cost: £2,200,000

Valuation: £4,698,000

Valuation basis: Bid Price

% of equity held: 9.8%

 

Year ended 30 September

 

2017

2016*

 

£ million

£ million

Sales:

16.0

8.4

Pre-tax profits:

2.0

0.2

Net Assets:

13.8

13.0

No. of Employees:

171

162

 

(Source: Cerillion Plc Annual Report and Accounts 2017.)

*Revenue from acquisition, as the Group came into existence on 18 March 2016.

 

10. Anpario Plc - Nottinghamshire


All funds managed by Livingbridge

First investment: November 2006

Total original cost: £965,000

Total equity held: 6.0%

 

Baronsmead Second Venture Trust only

Original cost: £662,000

Valuation: £4,602,000

Valuation basis: Bid Price

% of equity held: 4.1%

 

Year ended 31 December

 

2017

2016

 

£ million

£ million

Sales:

29.2

24.3

Pre-tax profits:

3.4

2.7

Net Assets:

30.5

28.5

No. of Employees:

111

101

 

(Source: Anpario Plc Annual Report 2017.)

 

Excludes collective investment vehicles

 

 

Principal Risks & Uncertainties

 

The Board has included below details of the principal risks & uncertainties facing the Company and the appropriate measures taken in order to mitigate these risks as far as practicable.

 

Principal Risk

Context

Specific risks

Possible impact

Mitigation

Loss of approval as a Venture Capital Trust

The 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.

The loss of VCT status would result in shareholders who have not held their shares for the designated holding period having to repay the income tax relief they had already obtained and future dividends and gains would be subject to income tax and capital gains tax.

The Board maintains a safety margin on all VCT tests to ensure that breaches are very unlikely to be caused by unforeseen events or shocks. The Investment Manager monitors all of the VCT tests on an ongoing basis and the Board reviews the status of these tests on a quarterly basis. Specialist advisors audit the tests on a bi-annual basis and report to the Audit Committee on their findings.

Legislative

VCTs were established in 1995 to encourage private individuals

to invest in early stage companies that are considered to be risky and therefore have limited funding options. In return, the state provides these investors with tax reliefs which fall under the definition of state aid.

A change in government policy regarding the funding of small companies or changes made to VCT regulations to comply with EU State Aid rules could result in a cessation of

the tax reliefs for VCT investors or changes to the reliefs that make them less attractive to investors

The Company might not be able to maintain its asset base leading to its gradual decline and potentially an inability to maintain either its buy back or dividend policies.

The Board and the Investment Manager engage on a regular basis with HMT and industry representative bodies to demonstrate the cost benefit of VCTs to the economy in terms of employment generation and taxation revenue. In addition, the Board and the Investment Manager have considered the options available to the Company in the event of the loss of tax reliefs to ensure that it can continue to provide a strong investment proposition for its shareholders despite the loss of tax reliefs.

Investment performance

The Company invests in small, mainly UK based companies, both unquoted and quoted. Smaller companies often have

limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals and hence tend to be riskier than larger businesses.

Investment in poor quality companies with the resultant risk of a high level of failure in the portfolio.

Reduction in both the capital value of investors shareholdings and in the level of income distributed.

The Company has a diverse portfolio where the cost of any one investment is typically less than 5 per cent of NAV thereby limiting the impact of any one failed investment. The Investment Management team has a strong and consistent track record over a long period. The sixteen transferring employees are led by a senior team of five people who have an average tenure of twelve years working with the Baronsmead VCTS. The Investment Manager undertakes extensive due diligence procedures on every new investment and reviews the portfolio composition maintain a wide spread of holdings in terms of financing stage and industry sector.

Economic, political and other external factors

Whilst the Company invests in predominantly UK businesses,

it relies heavily on Europe as one of its largest trading partners. This, together with the increase in globalisation, means that economic unrest and shocks in other jurisdictions, as well as in the UK, can impact on UK companies, particularly smaller ones that are more vulnerable to changes in trading conditions. In addition the potential impact of leaving the European Union remains uncertain.

 

Events such as economic recession, movement in interest or currency rates, civil unrest, war or political uncertainty or pandemics can adversely affect the trading environment for underlying investments and impact on their results and valuations.

Reduction in the value of the Company's assets with a corresponding impact on its share price may result in the loss of investors through buybacks and may limit its ability to pay dividends.

The Company invests in a diversified portfolio of companies across a number of industry sectors which provides protection against shocks as the impact on individual sectors can vary depending upon the circumstances. In addition, the Manager uses a limited amount of bank gearing in its investments which enables its investments to continue trading through difficult economic conditions. The Company always maintains healthy cash balances so that it can support portfolio companies with further investment should the investment case support it. The Board reviews the make up and progress of the portfolio each quarter to ensure that it remains appropriately diversified and funded.

Regulatory & Compliance

The Company is authorised as a self-managed Alternative Investment Fund Manager ("AIFM") under the Alternative Investment Fund Managers Directive ("AIFMD") and is also subject to the Prospectus and Transparency Directives. It is required to comply with the Companies Act 2006 and the UKLA listing Rules.

Failure of the Company to comply with any of its regulatory or legal obligations could result in the suspension of its listing by the UKLA and/or financial penalties and sanction by the regulator or a qualified audit report.

The Company's performance could be impacted severely by financial penalties and a loss of reputation resulting in the alienation of shareholders, a significant demand to buy back shares and an inability to attract future investment. The suspension of its shares would result in the loss of its VCT taxation status and most likely the ultimate liquidation of the Company.

The Board and the Investment Manager employ the services of leading regulatory lawyers, sponsors, auditors and other advisers to ensure the Company complies with all of its regulatory obligations. The Board has strong systems in place to ensure that the Company complies with all of its regulatory responsibilities. The Investment Manager has a strong compliance culture and employs dedicated compliance specialists within its team who support the Board in ensuring that the Company is compliant.

Operational

The Company relies on a number of third parties, in particular the Investment Manager, to provide it with the necessary services such as registrar, sponsor, custodian, receiving agent, lawyers and tax advisers.

The risk of failure of the systems and controls of any of the Company's advisers leading to an inability to service shareholder needs adequately, to provide accurate reporting and accounting and to ensure adherence to all VCT legislation rules.

Errors in shareholders records or shareholdings, incorrect marketing literature, non compliance with listing rules, loss of assets, breach of legal duties and inability to provide accurate reporting and accounting all leading to reputational risk and the potential for litigation.

The Board has appointed an Audit Committee who, along with the external auditors, review the internal control (ISAE3402) and/or internal audit reports from all significant third party service providers, including the Investment Manager, on a bi-annual basis to ensure that they have strong systems and controls in place including Business Continuity Plans. The Board regularly reviews the performance of its service providers to ensure that they continue to have the necessary expertise and resources to provide a high class service and always where there has been any changes in key personnel or ownership.

 

The financial risks faced by the Company are covered within the notes to the Financial Statements below.

 

Extract from the Strategic Report

 

Applying the Business Model

 

This section of the Strategic Report sets out the practical steps that the Board has taken in order to apply the business model, achieve the investment objective and adhere to the investment policy. The investment policy, which is set out in full below, is designed to ensure that the Company continues to qualify and is approved as a VCT by HM Revenue and Customs.

 

Investing in the Right Companies

Investments are primarily made in companies which are substantially based in the UK, although many of these

investees may have some trade overseas. Investments are selected in the expectation that the application of private equity disciplines, including an active management style for unquoted companies, will enhance value and enable profits to be realised from planned exits.

 

The Board has delegated the management of the investment portfolio to Livingbridge. The Manager has adopted a 'top-down, sector-driven' approach to identifying and evaluating potential investment opportunities, by assessing a forward view of firstly the business environment, then the sector and finally the specific potential investment opportunity.

 

Based on its research, the Manager has selected a number of sectors that it believes will offer attractive growth prospects and investment opportunities. Diversification is also achieved by spreading investments across different asset classes and making investments for a variety of different periods.

 

The Manager's Review above provides a review of the investment portfolio and of market conditions during the year, including the main trends and factors likely to affect the future development, performance and position of the business.

 

Risk is spread by investing in a number of different businesses within different qualifying industry sectors using a mixture of securities. The maximum the Company will invest in a single company (including a collective investment vehicle) is 15 per cent of its investments by value of its investments calculated in accordance with Section 278 of the Income Tax Act 2007 (as amended) ("VCT Value"). The value of an individual investment is expected to increase over time as a result of trading progress and a continuous assessment is made of its suitability for sale.

 

The Company invests in a range of securities including, but not limited to, ordinary and preference shares, loan

stocks, convertible securities and permitted non qualifying investments as well as cash. Unquoted investments are usually structured as a combination of ordinary shares and loan stocks or preferred shares, while AIM-traded investments are primarily held in ordinary shares. Pending investment in VCT qualifying investments, the Company's cash and liquid funds are held in permitted non qualifying investments.

 

VCTs are required to comply with a number of different regulations and the Company has appointed PricewaterhouseCoopers LLP ("PwC") as VCT Tax Status Advisers to advise it on compliance with VCT requirements. PwC reviews new investment opportunities, as appropriate, and regularly reviews the investment portfolio of the Company. PwC works closely with the Manager but reports directly to the Board.

 

Environmental, Human Rights, Employee, Social and Community Issues

The Company seeks to conduct its affairs responsibly and the Manager is encouraged to consider environmental, human rights, social and community issues, where appropriate, with regard to investment decisions.

 

The Company is required, by company law, to provide details of environmental (including the impact of the Company's business on the environment), employee, human rights, social and community issues; including information about any policies it has in relation to these matters and the effectiveness of these policies. The Company does not have any employees and as a result does not maintain specific policies in relation to these matters.

 

Livingbridge has an Environmental, Social and Governance ("ESG") policy. As a responsible investor, Livingbridge fully incorporates ESG factors into its investment programme. The ESG policy focuses on environmental, social and corporate governance factors, including risks and opportunities, affecting both the Company and/or specific portfolio companies.

Livingbridge undertakes an in-house risk assessment questionnaire pre-investment to highlight any significant or material ESG issues. Should any such issues be identified, these are then addressed via specific due diligence pre-investment.

 

Upon completion of an investment the completed in-house questionnaires are assessed by an external consultant to corroborate risks identified, advise the company how to address any ESG issues and also to identify any potential upside opportunities (e.g. energy savings). Relevant ESG matters are then included in the portfolio company board meetings as appropriate and also in the standard Livingbridge portfolio progress reports allowing Livingbridge to assess the impact of any interventions or recommendations.

 

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of the Company, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013, including those within its underlying investment portfolio.

 

Gender Diversity

The Board of Directors of the Company comprises four male Directors. The Manager has an equal opportunity policy and currently employs 56 men and 40 women.

 

Appointment of the Manager

 

As announced on 8 November 2018, the Investment Manager for Baronsmead Second Venture Trust, Livingbridge, will change to Gresham House, a specialist alternative asset manager listed on the Stock Exchange, on or around 30 November 2018.

 

The Board expects the new Manager to continue to deliver a performance which meets the objective of achieving long-term investment returns, including tax free dividends. A review of the Company's performance during the financial year, the position of the Company at the year end and the outlook for the coming year is contained within the Chairman's Statement above. The Board assesses the performance of the Manager in meeting the Company's objective against the KPIs.

 

The management agreement

Under the management agreement, the Manager receives a fee of 2.5 per cent per annum of the net assets of the Company. In addition, the Manager is responsible for providing all secretarial, administrative and accounting services to the Company for an additional fee. The Manager has appointed Link Alternative Fund Administrators Limited to provide these services to the Company on its behalf. The Company is responsible for paying the fee charged by Link Alternative Fund Administrators Limited to the Manager in relation to the performance of these services.

 

Annual running costs are capped at 3.5 per cent of the net assets of the Company (excluding any performance fee payable to the Manager and irrecoverable VAT), any excess being refunded by the Manager by way of an adjustment to its management fee. The running cost as at 30 September 2018 was 2.7 per cent.

 

The management agreement may be terminated at any date by either party giving twelve months' notice of termination and, if terminated, the Manager is only entitled to the management fees paid to it and any interest due on unpaid fees.

 

Performance fees

A performance fee is payable to the Manager when the total return on net proceeds of the ordinary shares exceeds 8 per cent per annum (simple). To the extent that the total return exceeds the threshold over the relevant period then a performance fee of 10 per cent of the excess will be paid to the Manager. The amount of any performance fee which is paid in an accounting period is capped at 5 per cent of net assets.

 

No performance fee was payable for the year to 30 September 2018 (2017: £nil).

 

Management retention

The Board is keen to ensure that the Manager continues to have one of the best investment teams in the VCT and private equity sector. A VCT incentive scheme was introduced in November 2004 under which members of the Manager's investment team invest their own money into a proportion of the ordinary shares of each eligible unquoted investment made by the Baronsmead VCTs. The Board regularly monitors the VCT incentive scheme arrangements but considers the scheme to be essential in order to attract, retain and incentivise the best talent. The scheme is in line with current market practice in the private equity industry and the Board believes that it aligns the interests of the Manager with those of the Baronsmead VCTs.

Executives have to invest their own capital in every eligible unquoted transaction and cannot decide selectively which investments to participate in. In addition, the VCT incentive scheme only delivers a return after each VCT has realised a priority return built into the structure. The shares held by the members of the VCT incentive scheme in any portfolio company can only be sold at the same time as the investment held by the Baronsmead VCTs is sold. Any prior ranking financial instruments, such as loan stock, held by the Baronsmead VCTs have to be repaid in full together with the agreed priority annual return before any gain accrues to the ordinary shares. This ensures that the Baronsmead VCTs achieve a good priority return before profits accrue to the incentive scheme.

 

Prior to January 2017, executives participating in the VCT incentive scheme subscribed jointly for a proportion (12 per cent) of the ordinary shares (but not the prior ranking financial instruments) available to the Baronsmead VCTs in each eligible unquoted investment. The level of participation was increased from 5 per cent in 2007 when the Manager's performance fee was reduced from 20 per cent to its current level of 10 per cent. With effect from January 2017, an additional limb was added to the VCT incentive scheme to accommodate the increasing number of "permanent equity" investments being made by the Baronsmead VCTs (being investments in which the Baronsmead VCTs hold an insufficient number of prior ranking financial instruments (if any) relative to the number of ordinary shares they hold in order to yield a priority return for the Baronsmead VCTs before any gain accrues to the ordinary shares). Under the terms of the amended VCT incentive scheme, in circumstances where the Baronsmead VCTs hold a sufficient number of prior ranking financial instruments (a "Traditional Structure"), the terms are identical to those set out above. However, in circumstances where the Baronsmead VCTs make a "permanent equity" investment, the executives participating in the incentive scheme are required to coinvest alongside the Baronsmead VCTs for a proportion (currently 0.75 per cent) of the ordinary shares available to the Baronsmead VCTs and they also receive an option over a further proportion (currently 12 per cent) of the ordinary shares available to the Baronsmead VCTs. The ordinary shares can only be sold and the option can only be exercised by the scheme participants when the investment held by the Baronsmead VCTs is sold. The option exercise price has a built in hurdle rate to ensure that the options are only "in the money" if the Baronsmead VCTs achieve a good return (equivalent to the priority return they would have to achieve prior to any value accruing to the ordinary shares in a Traditional Structure).

 

Since the formation of the scheme in 2004, 74 executives have invested a total of £943,000 in 57 companies. At 30 September 2018, 37 of these investments have been realised generating proceeds of £306.9m for the Baronsmead VCTs and £15.5m for the VCT incentive scheme. For Baronsmead Second Venture Trust the average money multiple on these 37 realisations was 1.9 times cost. Had the VCT incentive scheme shares been held instead by the Baronsmead VCTs, the extra return to shareholders would have been the equivalent of 3.7p a share (based on the current number of shares in issue). The Board considers this small cost to retain quality people to be in the best interests of shareholders.

 

Advisory and Directors' Fees

During the year the Manager and an affiliate received £16,000 (2017: £48,000) advisory fees, £356,000 (2017: £448,000) directors' fees for services provided to companies in the investment portfolio and incurred £42,000 (2017: £14,000) abort fees with respect to investments attributable to BSVT.

 

Alternative Investment Fund Manager's Directive ("AIFMD")

The AIFMD regulates the management of alternative investment funds, including VCTs. On 22 July 2014 the Company was registered as a Small UK registered Alternative Investment Fund Manager under the AIFMD.

 

Viability Statement

In accordance with principle 21 of the AIC Code of Corporate Governance ("AIC Code"), the Directors have assessed the prospects of the Company over the three year period to 30 September 2021. This period is used by the Board during the strategic planning process and is considered reasonable for a business of our nature and size. The three year period is considered the most appropriate given the forecasts that we request from the Manager and the estimated time line for finding, assessing and completing investments.

 

In making this statement the Board carried out a robust assessment of the principal risks facing the Company, including those that might threaten its business model, future performance, solvency, or liquidity.

 

The Board also considered the ability of the Company to raise finance and deploy capital. Their assessment took account of the availability and likely effectiveness of the mitigating actions that could be taken to avoid or reduce the impact of the underlying risks, and the large listed portfolio that could be liquidated if necessary.

 

This review has considered the principal risks as outlined above. The Board concentrated its efforts on the major factors which affect the economic, regulatory and political environment. The Board also paid particular attention to the importance of its close working relationship with the Manager, Livingbridge.

 

The Directors have also considered the Company's income and expenditure projections and find these to be realistic and sensible.

 

Based on the Company's processes for monitoring costs, share price discount, the Manager's compliance with the investment objective, policies and business model, asset allocation and the portfolio risk profile, 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 30 September 2021.

 

Returns to Investors

 

Dividend policy

The Board of Baronsmead Second Venture Trust has the objective to maintain a minimum annual dividend level of around 6.5p per ordinary share if possible, but this depends primarily on the level of realisations achieved and cannot be guaranteed.

 

Since launch, the average annual tax free dividend paid to shareholders has been 7.3p per ordinary share.

 

Shareholder choice

The Board wishes to provide shareholders with a number of choices that enable them to utilise their investment in Baronsmead Second Venture Trust in ways that best suit their personal investment and tax planning and in a way that treats all shareholders equally.

 

·      Fund raising | From time to time the Company seeks to raise additional funds by issuing new shares at a premium to the latest published net asset value to account for costs. The Company has announced its intention to raise funds in early 2019.

·      Dividend Reinvestment Plan | The Company offers a Dividend Reinvestment Plan which enables shareholders to purchase additional shares through the market in lieu of cash dividends. Approximately 1,844,000 shares were bought in this way during the year to 30 September 2018.

·      Buy back of shares | From time to time the Company buys its own shares through the market in accordance with its share price discount policy. Subject to certain conditions, the Company seeks to maintain a mid-share price discount of approximately 5 per cent to net asset value where possible. However, shareholders should note this discount may widen during periods of market volatility.

·      Secondary market | The Company's shares are listed on the London Stock Exchange and can be bought using a stockbroker or authorised share dealing service in the same way as shares of any other listed company. Approximately 811,000 shares were bought by investors in the Company's existing shares in the year to 30 September 2018

 

On behalf of the Board

Anthony Townsend

Chairman

22 November 2018

 

 

Extract of the Directors Report

 

Shares and Shareholders

 

Share capital

 

During the year, the Company bought back a total of 5,005,000 ordinary shares to be held in Treasury, representing 2.15 per cent of the issued share capital as at 30 September 2018, with an aggregate nominal value of £500,500. The total amount paid for these shares was £4,410,184.5. The Company's remaining authority to buy back shares from the AGM held in 2018 is 29,791,984. During the year, there were 400,000 ordinary shares sold from Treasury.

 

As at the date of this report the Company's issued share capital was as follows:

 

Share

Total

% of
Shares in issue

Nominal Value

In issue

232,791,189

100.0

£23,279,118.90

Held in Treasury

16,298,214

7.0

£1,629,821.40

In circulation

216,492,975

93.0

£21,649,297.50

 

The maximum number of shares held in Treasury during the year was 16,298,214. Shares will not be sold out of Treasury at a discount wider than the discount at which the shares were initially bought back by the Company.

 

Shareholders

Each 10p ordinary share entitles the holder to attend and vote at general meetings of the Company, to participate in the profits of the Company, to receive a copy of the Annual Report & Financial Statements and to a final distribution upon the winding up of the Company.

 

There are no restrictions on voting rights, no securities carry special rights and the Company is not aware of any agreement between holders of securities that result in restrictions on the transfer of securities or on voting rights. There are no agreements to which the Company is party that may affect its control following a takeover bid.

 

In addition to the powers provided to the Directors under UK company law and the Company's Articles of Association, at each AGM the shareholders are asked to authorise certain powers in relation to the issuing and purchasing of the Company's own shares. Details of the powers granted at the AGM held in 2018, all of which remain valid, can be found in the previous Notice of AGM.

 

The Board is not, and has not been throughout the year, aware of any beneficial interests exceeding 3 per cent of the total voting rights.

 

Dividends

The Company paid the following dividends for the year to ended 30 September 2018:

 

Dividends

£'000

First interim dividend of 3.0p per ordinary

share paid on 21 September 2018

6,517

Final dividend of 4.5p per ordinary share to be paid on 8 March 2019

9,742*

Total dividends paid for the year

16,259

* Calculated on shares in issue as at 30 September 2018.

 

Subject to shareholder approval at the AGM, a final dividend of 4.5p per share will be paid to shareholders on the register at 8 February 2019.

 

Annual General Meeting

The notice of the AGM of the Company to be held at 11.00am on 28 February 2019 at Saddlers' Hall, 40 Gutter Lane, London EC2V 6BR will be sent to shareholders and will be available on the Company's website.

 

Directors

 

Appointments

The rules concerning the appointment and replacement of Directors are contained in the Company's Articles of

Association and the Companies Act 2006. Further details in relation to the appointed Directors and the governance arrangements of the Board can be found in the Corporate Governance Statement.

 

Directors are entitled to a payment in lieu of three months' notice by the Company for loss of office in the event of a takeover bid.

 

Directors' indemnity

Directors' and Officers' liability insurance cover is in place in respect of the Directors. The Company's Articles of Association provide, subject to the provisions of UK legislation, an indemnity for Directors in respect of costs which they may incur relating to the defence of any proceedings brought against them arising out of their positions as Directors, in which they are acquitted or judgement is given in their favour by the Court.

 

Save for such indemnity provisions in the Company's Articles of Association and in the Directors' letters of appointment, there are no qualifying third party indemnity provisions in force.

 

Conflicts of Interest

The Directors have declared any conflicts or potential conflicts of interest to the Board of Directors which has the authority to approve such situations. The Company Secretary maintains the Register of Directors' Conflicts of Interests which is reviewed quarterly by the Board, when changes are notified, and the Directors advise the Company Secretary and the Board as soon as they become aware of any conflicts of interest. Directors who have conflicts of interest do not take part in discussions which relate to any of their conflicts.

 

Responsibility for accounts and going concern

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.

 

After making enquires, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational eexistence for the foreseeable future. In arriving at this conclusion the Directors have considered the liquidity of the Company and its ability to meet obligations as they fall due for a period of at least twelve months from the date that these financial statements were approved. As at 30 September 2018, the Company held cash balances and investments in readily realisable securities with a value of £31.8m. Cash flow projections have been reviewed and show that the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of the share buyback programme and dividend policy. The Company has no external loan finance in place and therefore is not exposed to any gearing or covenants.

 

The Directors have chosen to include their report on global greenhouse emissions in the Strategic Report under the section on environmental, human rights, employee, social and community issues.

 

 

By Order of the Board

Livingbridge VC LLP

Secretary

100 Wood Street London EC2V 7AN

 

22 November 2018

 

Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements

 

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

 

Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

 

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements and 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;

·      assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

·      use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations or have no realistic alternative but to do so.

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Responsibility Statement of the directors in respect of the annual financial report

 

We confirm that to the best of our knowledge:

 

·      the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company taken as a whole; and

·      the strategic report/directors' report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

 

We consider the annual report and financial statements, 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.

 

On behalf of the Board

Anthony Townsend

Chairman

22 November 2018

 

NON-STATUTORY ACCOUNTS

 

The financial information set out below does not constitute the Company's statutory accounts for the periods ended 30 September 2017 and 2018 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies, and those for 2018 will be delivered in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.baronsmeadvcts.co.uk 

 


Income Statement

 

For the year ended 30 September 2018

 

 

Year ended

30 September 2018

Year ended

30 September 2017

 

 

Notes

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Gains on investments

2.3

-

10,601

10,601

-

13,238

13,238

Income

2.5

5,634

-

5,634

3,119

-

3,119

Investment management fee

2.6

(1,221)

(3,662)

(4,883)

(1,092)

(3,276)

(4,368)

Other expenses

2.6

(649)

-

(649)

(832)

-

(832)

Profit before taxation

 

3,764

6,939

10,703

1,195

9,962

11,157

Taxation

2.9

(240)

240

-

-

-

-

Profit for the year, being total comprehensive income for the year

 

3,524

7,179

10,703

1,195

9,962

11,157

Return per ordinary share:

 

 

 

 

 

 

 

Basic and diluted

2.2

1.63p

3.32p

4.95p

0.63p

5.20p

5.83p

 

 

All items in the above statement derive from continuing operations.

 

There are no recognised gains and losses other than those disclosed in the Income Statement.

 

The revenue column of the Income Statement includes all income and expenses. The capital column accounts for the realised and unrealised profit or loss on investments and the proportion of the management fee charged to capital.

 

The total column of this statement is the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS") 102. The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 and updated in January 2017 and February 2018 by the Association of Investment Companies ("AIC SORP").

 

Statement of Changes in Equity

 

For the year ended 30 September 2018

 

 

 

Non-distributable reserves

Distributable Reserves

 

Called-up share capital

£'000

Share

premium   £'000

Revaluation

Reserve

£'000

Capital

reserve £'000

Revenue

reserve

£'000

Total

£'000

At 1 October 2017

 

20,904

-

38,412

125,783

1,590

186,689

Profit after taxation

 

-

-

8,793

(1,614)

3,524

10,703

Share premium cancellation costs

 

-

-

-

3

-

3

Net Proceeds of share issues, share buybacks & sale of shares from treasury

 

2,375

20,080

-

(4,085)

-

18,370

Dividends paid

2.4

-

-

-

(14,844)

(1,531)

(16,375)

At 30 September 2018

23,279

20,080

47,205

105,243

3,583

199,390

 

For the year ended 30 September 2017

 

 

Notes

Non-distributable reserves

Distributable Reserves

 

Called-up

share capital

£'000

Share

premium

£'000

Revaluation

reserve

£'000

Capital

reserve

£'000

Revenue

reserve

£'000

 

Total

£'000

At 1 October 2016

 

16,196

81,466

24,357

18,394

495

140,908

Shares issued following the acquisition of Baronsmead VCT5 plc

 

4,708

38,245

-

-

-

42,953

Cancellation of share premium

 

-

(119,711)

-

119,711

-

-

Share premium cancellation costs

 

-

-

-

(29)

-

(29)

Profit/(loss) after taxation

 

-

-

14,055

(4,093)

1,195

11,157

Net cost of share buybacks

 

-

-

-

(2,313)

-

(2,313)

Dividends paid

2.4

-

-

-

(5,887)

(100)

(5,987)

At 30 September 2016

 

20,904

-

38,412

125,783

1,590

186,689

 


Balance Sheet

As at 30 September 2018

 

Notes

As at

30 September

2018

£'000

As at

30 September

2017

£'000

Fixed assets

 

 

 

Investments

2.3

199,392

187,364

 

 

 

 

Current assets

 

 

 

Debtors

2.7

322

260

Cash at bank

 

1,096

515

 

 

1,418

775

Creditors (amounts falling due within one year)

2.8

(1,420)

(1,450)

Net current liabilities

 

(2)

(675)

Net assets

 

199,390

186,689

Capital and reserves

 

 

 

Called-up share capital

3.1

23,279

20,904

Share premium

3.2

20,080

-

Capital reserve

3.2

105,243

125,783

Revaluation reserve

3.2

47,205

38,412

Revenue reserve

3.2

3,583

1,590

Equity shareholders' funds

2.1

199,390

186,689

NAV per share

 

 

 

- Basic and diluted

2.1

92.10p

94.60p

 

The financial statements were approved by the Board of Directors of Baronsmead Second Venture Trust on 22 November 2018 and were signed on its behalf by:

 

Anthony Townsend

Chairman

 

 

Statement of Cash Flows

For the year ended 30 September 2018

 

 

Year ended

30 September 2018

£'000

Year ended

30 September

2017

£'000

Cash flows from operating activities

 

 

Investment income received

5,568

3,068

Deposit interest received

6

7

Investment management fees paid

(4,803)

(4,249)

Other cash payments

(669)

(525)

Merger costs paid

(61)

(455)

Net cash inflow/(outflow from operating activities

41

(2,154)

Cash flows from investing activities

 

 

Purchases of investments

(38,005)

(43,015)

Disposals of investments

36,578

24,606

Net cash outflow from investing activities

(1,427)

(18,409)

Equity dividends paid

(16,375)

(5,987)

Net cash outflow before financing activities

(17,761)

(26,550)

Cash flows from financing activities

 

 

Net proceeds/(costs) of share issues, share buybacks & sale of shares from treasury

18,369

(1,048)

Net (costs)/proceeds from merger

(6)

4,008

Share premium cancellation costs

(21)

(5)

Net cash inflow from financing activities

18,342

2,955

Increase/ (decrease) in cash

581

(23,595)

 

 

 

Reconciliation of net cash flow to movement in net cash

 

 

Increase/ (decrease) in cash

581

(23,595)

Opening cash position

515

24,110

Closing cash at bank and on deposit

1,096

515

 

 

 

Reconciliation of profit before taxation to net cash inflow /(outflow) from operating activities

 

 

Profit before taxation

10,703

11,157

Gains on investments

(10,601)

(13,328)

Decrease in debtors

(62)

(57)

Increase in creditors

1

169

Written off expenses from merger

-

(185)

Net cash inflow/(outflow) from operating activities

41

(2,154)

 


Notes to the Financial Statements

 

We have grouped notes into sections under three key categories:

 

1. Basis of preparation

2. Investments, performance and shareholder returns

3. Other required disclosures

 

The key accounting policies have been incorporated throughout the Notes to the Financial Statements adjacent to the disclosure to which they relate. All accounting policies are included within an outlined box.

 

1.    Basis of Preparation

1.1  Basis of accounting

 

These Financial Statements have been prepared 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") in November 2014 and updated in January 2017 and February 2018 and on the assumptions that the Company maintains VCT status.

 

The application of the Company's accounting policies requires judgement, estimation and assumptions about the carrying amount of assets and liabilities. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The Financial Statements have been prepared on a going concern basis, under historical cost convention. The functional currency in which the Company operates is Sterling.

 

 

2.    Investments, Performance and Shareholder Returns

2.1 NAV per share

 

 

Number

of ordinary shares

Net asset value per share attributable

Net asset value
attributable

Ordinary shares (basic)

216,492,975

197,344,707

92.10

94.60

199,390

186,689

 

 

2.2  Return per share

 

Weighted average number of ordinary shares

Return per

ordinary share

Net profit after taxation

 

30 September 2018

Number

30 September 2017

number

30 September 2018

pence

30 September 2017

pence

30 September 2018

£'000

30 September 2017

£'000

Revenue

216,041,017

191,452,309

1.63

0.63

3,524

1,195

Capital

216,041,017

191,452,309

3.32

5.20

7,179

9,962

Total

 

 

4.95

5.83

10,703

11,157

 

2.3  Investments

 

The Company has fully adopted sections 11 and 12 of FRS 102.

 

Purchases or sales of investments are recognised at the date of transaction.

 

Investments are measured at fair value. For AIM-traded securities this is either bid price or the last traded price, depending on the convention of the exchange on which the investment is traded.

 

In respect of collective investment vehicles, which consists of investments in open ended investment companies authorised in the UK, this is the closing price.

 

In respect of unquoted investments, these are valued at fair value by the Directors using methodology which is consistent with the International Private Equity and Venture Capital Valuation guidelines ("IPEV").

 

Judgements

The key judgements in the fair valuation process are:

i)        The Manager's determination of the appropriate application of IPEV guidelines to each unquoted investment;

ii)       The Directors' consideration of whether each fair value is appropriate following detailed review and challenge. The judgement applied in the selection of the methodology used for determining the fair value of each unquoted investment can have a significant impact upon the valuation.

iii)     

Estimates

The key estimate in the Financial Statements is the determination of the fair value of the unquoted investments by the Managers for consideration by the Directors. This estimate is key as it significantly impacts the valuation of the unlisted investments at the balance sheet date. The fair valuation process involves estimates using inputs that are unobservable (for which market data is unavailable). Fair value estimates are cross-checked to alternative estimation methods where possible to improve the robustness of the estimate. As the valuation outcomes may differ from the fair value estimates a price sensitivity analysis is provided in Other Price Risk Sensitivity in note 3.3 on pages 58 and 59. The risk of an over or underestimation of fair values is greater when methodologies are applied using more subjective inputs.

 

Assumptions

The determination of fair value by the Managers involves key assumptions dependent upon the valuation methodology used. The primary methodologies applied are:

 

i)       Rebased Cost

ii)      Earnings Multiple

iii)      Offer Less 10%

 

The Earnings Multiple approach involves more subjective inputs than the Rebased Cost and Offer approaches and therefore presents a greater risk of over or under estimation.

 

The key assumption for the Rebased Cost valuation method is that the prices used remain a reasonable proxy for fair value typically for a period of up to six months from the date of the relevant transaction. All recent investment prices are compared to movements in relevant benchmarks and the wider market over the period since the date of the relevant transaction.

 

The key assumptions for the Multiples approach are that the selection of comparable companies (chosen on the basis of their business characteristics and growth patterns) and using either historic or forecast revenues (as considered most appropriate) provide a reasonable basis for identifying relationships between enterprise value and growth to apply in the determination of fair value. Other assumptions include the appropriateness of the discount magnitude applied for reduced liquidity and qualitative factors.

 

Gains and losses arising from changes in the fair value of the investments are included in the Income Statement for the year as a capital item. Transaction costs on acquisition are included within the initial recognition and the profit or loss on disposal is calculated net of transaction costs on disposal.

 

 

All investments are initially recognised and subsequently measured at fair value. Changes in fair value are recognised in the Income Statement. The details of which are set out above.

 

The methods of fair value measurement are classified into a hierarchy based on reliability of the information used to determine the valuation.

 

·      Level 1 - Fair value is measured based on quoted prices in an active market.

·      Level 2 - Fair value is measured based on directly observable current market prices or indirectly being derived from market prices.

·      Level 3 - Fair value is measured using a valuation technique that is not based on data from an observable market.

 

 

 

As at

30 September 2018

£'000

As at

30 September 2017

£'000

Level 1

 

 

Investments traded on AIM

89,504

86,120

Level 2

 

 

 

Collective investment vehicles

57,896

38,490

Level 3

 

 

 

Unquoted investments

51,992

61,163

Investments traded on AIM

-

1,591

 

199,392

187,364

 

 

 

Level 1

Level 2

Level 3

 

 

Traded on AIM

£'000

Collective investment vehicles £'000

Traded on AIM

 £'000

Unquoted £'000

Total

£'000

Opening book cost

67,670

28,325

3,429

49,528

148,952

Opening unrealised appreciation/ (depreciation)

18,450

10,165

(1,838)

11,635

38,412

Opening valuation

86,120

38,490

1,591

61,163

187,364

Movements in the year:

 

 

 

 

 

Transfers between levels

2,703

-

(3,429)

726

-

Purchases at cost

4,703

29,410

-

3,892

38,005

Sale - proceeds

(6,443)

(14,210)

-

(15,925)

(36,578)

- realised gains / (losses) on sales

(135)

-

-

(3,123)

(3,258)

Unrealised gains realised during the year

1,251

-

-

3,815

5,066

Increase in unrealised appreciation

1,305

4,206

1,838

1,444

8,793

Closing valuation

89,504

57,896

-

51,992

199,392

Closing book cost

69,749

43,525

-

38,913

152,187

Closing unrealised appreciation

19,755

14,371

-

13,079

47,205

Closing valuation

89,504

57,896

-

51,992

199,392

Equity shares

89,504

-

-

22,509

112,013

Loan notes

-

-

-

29,483

29,483

Collective Investment vehicles

-

57,896

-

-

57,896

Closing valuation

89,504

57,986

-

51,992

199,392

 

The gains and losses included in the above table have all been recognised in the Income Statement above.

 

InterQuest Group plc has changed to a level 3 investment due to it being delisted from AIM. TLA Worldwide plc has been changed to a level 1 investment due to a lift on the suspension of trading in place at 30 September 2017.

 

2.4  Dividends

 

In accordance with FRS 102, dividends are recognised as a liability in the period in which they are paid.

 

 

 

Year ended

30 September 2018

Year ended

30 September 2017

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

Amounts recognised as distributions to equity holders in the period:

 

 

 

 

 

 

For the year ended 30 September 2018

 

 

 

 

 

 

- Interim dividend of 3.0p per ordinary

share paid on 21 September 2018

326

6,191

6,517

-

-

-

For the year ended 30 September 2017

 

 

 

 

 

 

-First interim dividend of 4.5p per ordinary share paid on 2 February 2018

1,205

8,653

9,858

-

-

-

-Second interim dividend of 3.0p per ordinary share paid on 31 March 2018

-

-

-

100

5,887

5,987

 

1,531

14,844

16,375

100

5,887

5,987

 

2.5  Income

 

Interest income on loan notes and dividends on preference shares are accrued on a daily basis. Provision is made against this income where recovery is doubtful.

 

Where the terms of unquoted loan notes only require interest or a redemption premium to be paid on redemption, the interest and the redemption premium is recognised as income once redemption is reasonably certain. Until such date interest is accrued daily and included within the valuation of the investment. When a redemption premium is designed to protect the value of the instrument holder's investment rather than reflect a commercial rate of revenue return the redemption premium should be recognised as capital. The treatment of redemption premiums is analysed to consider if they are revenue or capital in nature on a company by company basis. A redemption premium of £332,000 was received in the year ended 30 September 2018.

 

Income from fixed interest securities and deposit interest is included on an effective interest rate basis.

 

Dividends on quoted shares are recognised as income when the related investments are marked ex-dividend and where no dividend date is quoted, when the Company's right to receive payment is established.

 

 

 

Year ended

30 September 2018

Year ended

30 September 2017

 

Quoted

securities

£'000

Unquoted

securities

£'000

Total

£'000

Quoted

securities

£'000

Unquoted

securities

£'000

Total

£'000

Income from investments†

 

 

 

 

 

 

Dividend income

1,250

-

1,250

1,479

-

1,479

Interest income

126

3,920

4,046

17

1,618

1,635

Redemption premium

-

332

332

-

-

-

 

1,376

4,252

5,628

1,496

1,618

3,114

Other income‡

 

 

 

 

 

 

Deposit interest

 

 

6

 

 

5

Total income

 

 

5,634

 

 

3,119

 

† All investments have been designated at fair value through profit or loss on initial recognition, therefore all investment income arises on investments at fair value through profit or loss.

‡ Other income on financial assets not included at fair value through profit or loss.

 

2.6  Investment management fee and other expenses

 

All expenses are recorded on an accruals basis.

 

Management fees are allocated 25 per cent income and 75 per cent capital derived in accordance with the board's expected split between long term income and capital returns. Performance fees are allocated 100 per cent to capital.

 

 

Year ended

30 September 2018

Year ended

30 September 2017

 

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Investment management fee

1,221

3,662

4,883

1,092

3,276

4,368

Performance fee

-

-

-

-

-

-

 

1,221

3,662

4,883

1,092

3,276

4,368

 

The management agreement may be terminated by either party giving 12 months notice of termination.

 

The Manager, Livingbridge, receives a fee of 2.5 per cent per annum of the net assets of the Company, calculated and payable on a quarterly basis. The collective investment vehicles, Micro Cap and Multi Cap, are also managed by Livingbridge. Arrangements are in place to avoid the double charging of fees.

 

The Manager is entitled to a performance fee when the total return on net proceeds of the ordinary shares exceeds 8 per cent per annum (on a simple basis). The Manager is entitled to 10 per cent of the excess. The amount of any performance fee which is paid in respect of a calculation period shall be capped at 5 per cent of the shareholders' funds at the end of the calculation period.

 

No performance fee is payable for the year ended 30 September 2018 (2017: £nil).

 

 

Other expenses

 

Year ended

Year ended

 

30 September

30 September

 

2018

2017

 

£'000

£'000

Directors' fees

118

100

Secretarial and accounting fees paid to the Manager

166

162

Remuneration of the auditors and their associates:

 

 

 - audit

34

33

 - other services supplied pursuant to legislation (interim review)

5

6

Merger costs

6

302

Other

320

230

 

649

832

 

Information on directors' remuneration is given in the Directors' emoluments in the full Annual Rweport and Financial Statements.

 

Charges for other services provided by the Auditors in the year ended 30 September 2018 were in relation to the interim review. The Audit Committee reviews the nature and extent of non-audit services to ensure that independence is maintained. The Directors consider that the Auditors were best placed to provide such services.

2.7  Debtors

 

 

As at

As at

 

30 September

30 September

 

2018

2017

 

£'000

£'000

Prepayments and accrued income

322

260

 

322

260

 

 

2.8  Creditors (amounts falling due within one year)

 

 

As at

As at

 

30 September

30 September

 

2018

2017

 

£'000

£'000

Management, secretarial and accounting fees due to the Manager

1,296

1,215

Merger costs

-

55

Share premium cancellation costs

-

24

Other creditors

124

156

 

1,420

1,450

 

2.9  Tax

 

UK corporation tax payable is provided on taxable profits at the current rate.

 

Provision is made for deferred taxation on the liability method, without discounting, on all timing differences calculated at the current rate of tax relevant to the benefit or liability.

 

The tax charge for the year is lower than the standard rate of corporation tax in the UK for a company. The differences are explained below:

 

Year ended

Year ended

 

30 September 2018

30 September 2017

 

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Profit before taxation

3,764

6,939

10,703

1,195

9,962

11,157

Corporation tax at 19.0 per cent

(2017: 19.5 per cent)*

715

1,319

2,034

233

1,943

2,176

Effect of:

 

 

 

 

 

 

Non-taxable gains

-

(2,014)

(2,014)

-

(2,581)

(2,581)

Non-taxable dividend income

(238)

-

(238)

(288)

-

(288)

Non-deductible expenses

1

-

1

59

-

59

Losses carried forward

(238)

455

217

(4)

638

634

Tax charge/(credit) for the period

240

(240)

-

-

-

-

 

* The corporation tax rate applied is based on the average tax rates for the financial year ended 30 September 2017. The actual rates were 20 per cent until 31 March 2017 and 19 per cent from 1 April 2017.

 

At 30 September 2018 the Company had surplus management expenses of £10,670,581 (2017: £9,609,937) which have not been recognised as a deferred tax asset. This is because the Company is not expected to generate taxable income in a future year in excess of the deductible expenses of that future year and, accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus expenses. Due to the Company's status as a VCT, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

 

3.    Other Required Disclosures

 

3.1  Called-up share capital

Allotted, called-up and fully paid:

 

 

 

Ordinary shares

£'000

209,037,921 ordinary shares of 10p each listed at 30 September 2017

20,904

23,753,268 ordinary shares of 10p each issued during the year

2,375

232,791,189 ordinary shares of 10p each listed at 30 September 2018

23,279

11,693,214 ordinary shares of 10p each held in treasury at 30 September 2017

(1,169)

5,005,000 ordinary shares of 10p each repurchased during the year and held in treasury

(501)

(400,000) ordinary shares of 10p each sold from treasury during the year

40

16,298,214 ordinary shares of 10p each held in treasury at 30 September 2018

(1,630)

216,492,975 ordinary shares of 10p each in circulation* at 30 September 2018

21,649

 

* Carrying one vote each.

 

The 23,753,268 ordinary shares were issued at an average price of 97.5p.

 

During the year, the Company bought back into treasury 5,005,000 ordinary shares, representing 2.4 per cent of the ordinary shares in issue at the beginning of the financial year. During the year, the Company also sold 400,000 shares from treasury.

 

Treasury shares

When the Company re-acquires its own shares, they are currently held as treasury shares and not cancelled.

 

Shareholders have authorised the board to re-issue treasury shares at a discount to the prevailing NAV subject to the following conditions:

·     It is in the best interests of the Company;

·     Demand for the Company's shares exceeds the shares available in the market;

·     A full prospectus must be produced if required; and

·     HMRC will not consider these 'new shares' for the purposes of the purchasers' entitlement to initial income tax relief.

 

3.2  Reserves

 

Gains and losses on realisation of investments of a capital nature are dealt with in the capital reserve. Purchases of the Company's own shares to be either held in treasury or cancelled are also funded from this reserve. 75 per cent of management fees are allocated to the capital reserve in accordance with the board's expected split between long term income and capital returns.

 

 

Distributable reserves

Capital

reserve

£'000

Revenue

reserve

£'000

Total

£'000

Share

premium

£'000

Revaluation

reserve*

£'000

Total

£'000

 

At 1 October 2017

125,783

1,590

127,373

-

38,412

38,412

 

 

 

 

 

 

 

 

 

 

Gross proceeds of share issues

-

-

-

20,775

-

20,775

Share premium cancellation costs

3

-

3

-

-

-

Purchase of shares for treasury

(4,410)

-

(4,410)

-

-

-

Sale of shares from treasury

347

-

347

-

-

-

Expenses of share issues and buybacks

(22)

-

(22)

(695)

-

(695)

Reallocation of prior year unrealised gains

 

5,066

-

5,066

-

(5,066)

(5,066)

Realised loss on disposal of investments

(3,258)

-

(3,258)

-

-

-

Net increase in value of investments#

-

-

-

-

13,859

13,859

Management fee charged to capital#

(3,662)

-

(3,662)

-

-

-

 

Taxation relief from capital expenses#

240

-

240

-

-

-

 

Profit after taxation#

-

3,524

3,524

-

-

-

 

Dividends paid in the period

(14,844)

(1,531)

(16,375)

-

-

-

 

At 30 September 2018

105,243

3,583

108,826

20,080

47,205

67,285

 

 

* Changes in fair value of investments are dealt with in this reserve.

# The total of these items is £10,703,000 which agrees to the total profit for the year.

 

Distributable reserves may also include any net unrealised gains on investments whose prices are quoted in an active market and deemed readily realisable in cash.

 

 

Share premium is recognised net of issue costs.

 

 

The Company does not have any externally imposed capital requirements.

 

3.3 Financial instruments risks

 

The Company's financial instruments comprise equity and fixed interest investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in accordance with its investment policy to invest in a diverse portfolio of UK growth businesses.

 

The Company's investing activities expose it to a range of financial risks. These key risks and the associated risk management policies to mitigate these risks are described below.

 

Market risk

Market risk includes price risk on investments and interest rate risk on investments and other financial assets and liabilities.

 

Price Risk

The investment portfolio is managed in accordance with the policies and procedures described in the Strategic Report.

 

Investments in unquoted stocks and AIM-traded companies involve a higher degree of risk than investments in the main market. The Company aims to reduce this risk by diversifying the portfolio across business sectors and asset classes.

 

Management performs continuing analysis on the fair value of investments and the Company's overall market positions are monitored by the board on a quarterly basis. Management are comfortable that a 5% movement in share price is a reasonable estimate of the upside and downside alternatives.

 

 

 

As at 30 September 2018

As at 30 September 2017

 

% of total

investment

5% increase

in share price

effect on

net assets

and profit

£'000

5% decrease

in share price

effect on

net assets

and profit

£'000

% of total

investment

5% increase

in share price

effect on

net assets

and profit

£'000

5% decrease

in share price

effect on

net assets

and profit

£'000

AIM & CIV

74

7,370

(7,370)

67

6,310

(6,310)

Unquoted

26

2,600

(2,600)

33

3,058

(3,058)

 

Valuation methodology includes the application of earnings multiples derived from either listed companies with similar characteristics or recent comparable transactions. Therefore, the value of the unquoted element of the portfolio may also indirectly be affected by price movements on the listed exchanges.

Price Sensitivity

The fair valuation of unquoted investments in influenced by the estimates, assumptions and judgements made in the fair valuation process (see note 2.3 above). A sensitivity analysis is provided below which recognises that the valuation methodologies employed involve different levels or subjectivity in their inputs. The sensitivity analysis below applied a wider range of input variable sensitivity to the earnings multiple method due to the increased subjectivity involved in the use of this method compared to the rebased cost method. No variable sensitivity has been applied to the offer method as the input for this calculation was the agreed sale price of the investment.

Valuation basis

Fair Value £'000

Sensitivity %

£'000

Impact % of Net Assets

Rebased Cost

6,865

+/-10

+/-687

+/-0.3

Earnings Multiple

41,119

+/-20

+/-8,224

+/-4.1

Offer less 10%

4,008

-

-

-

 

Interest rate risk

The Company has the following investments in fixed rate financial assets:

 

 

As at 30 September 2018

As at 30 September 2017

 

 

 

 

Total

investment

£'000

Weighted

average

interest

rate

%

Weighted

average

time for

which rate

is fixed years

 

 

Total

investment

£'000

Weighted

average

interest

rate

%

Weighted

average

time for

which rate

is fixed days

 

Fixed rate loan note securities

29,483

9.32

2.11

40,082

9.13

2.16

 

Fixed rate sterling liquidity funds

30,690

-

-

15,490

-

-

 

Cash at bank and on deposit

1,096

-

-

515

-

-

 

 

61,269

 

56,087

 

 

                 

 

Movements in interest rates would not significantly affect net assets attributable to the Company's Shareholders and total profits.

 

Credit risk

Credit risk refers to the risk that counterparty will default on its obligation resulting to a financial loss to the Company. The Investment Manager monitors credit risk on an ongoing basis.

 

At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:

 

 

As at

As at

 

30 September

31 September

 

2018

2017

 

£'000

£'000

Cash at bank and on deposit

1,096

           515

Interest, dividends and other receivables

322

           260

 

1,418

           775

 

Credit risk on unquoted loan stock held within unlisted investments is considered to be part of market risk as disclosed earlier in the note.

 

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

 

All the assets of the Company which are traded on a recognised exchange are held by JP Morgan Chase ("JPM"), the Company's custodian. The board monitors the Company's risk by reviewing the custodian's internal controls reports as described in the Corporate Governance section of the full Annual report and Financial Statements.

 

The cash held by the Company is held by JPM. The board monitors the Company's risk by reviewing regularly the internal control reports of these banks. Should the credit quality or the financial position of either bank deteriorate significantly the Investment Manager will seek to move the cash holdings to another bank.

 

There were no significant concentrations of credit risk to counterparties at 30 September 2018 or 2017. No individual investment in a portfolio company exceeded 4.9 per cent of the net assets attributable to the Company's shareholders at 30 September 2018 (2017: 3.8 per cent).

 

Liquidity risk

The Company's financial instruments include investments in unquoted companies which are not traded in an organised public market, as well as AIM-traded equity investments, all of which generally may be illiquid. As a result, the Company may not be able to liquidate quickly some of its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as deterioration in the creditworthiness of any particular issuer.

 

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.

 

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses. At 30 September 2018 these investments were valued at £31,786,000 (2017: £16,005,000).

 

3.4 Investments in Associates

 

The Company has chosen not to rebut the presumption that the following holdings are investments in associates, owing to the proportion of equity held and representation on the board representing significant influence over the operations of the company. The investments held are held as part of an investment portfolio, and are therefore measured at fair value through profit and loss, as detailed in note 2.3 rather than using the equity method, as permitted by Section 14 of FRS 102:

 

Name

Location

Sensitivity %

% of Equity

Profit (£m)

Net Assets (£m)

Results for year ended

Happy Days Consultancy

UK

A Ordinary

31.46

(2.2)

(6.5)

31 December 2017

Armstrong Craven

UK

A, B & C Ordinary

24.02

0.0

0.2

31 December 2017

 

 

 

 

 

 

 

3.5 Related parties

 

Related party transactions include Management, Secretarial, Accounting and Performance fees payable to the Manager, Livingbridge VC LLP, as disclosed in notes 2.6 and 2.8, and fees paid to the Directors along with their shareholdings as disclosed in note 2.6. In addition, the Manager operates a VCT incentive scheme, detailed in the Management retention section of the Strategic Report above, whereby employees of the Manager are entitled to participate in all eligible unquoted investments alongside the Company.

 

During the year, the Manager and an affiliate received £16,000 (2017: £48,000) advisory fees, £356,000 (2017: £448,000) directors' fees for services provided to companies in the investment portfolio and incurred £42,000 (2017: £14,000) abort fees with respect to investments attributable to BSVT.

 

A related party relationship exists between Baronsmead Second Venture Trust and Happy Days Consultancy, owing to the significant influence held over the operations of the company accrued for. During the year the company received £547,000 from Happy Days Consultancy relating to interest due on loan balances. As at 30 September 2018, the loan balance stood at £6,214,000, including £2,085,000 of capitalised interest.

 

A related party relationship exists between Baronsmead Second Venture Trust and Armstrong Craven Limited, owing to the significant influence held over the operations of the company. During the year the company received £24,000 and accrued a further £217,000 from Armstrong Craven relating to interest due on loan balances. As at 30 September 2018, the loan balance stood at £1,956,205, including £327,000 of capitalised interest.

 

3.6 Segmental reporting

 

The Company has one reportable segment being investing in primarily a portfolio of UK growth businesses, whether unquoted or traded on AIM.

 

 

 

3.7 Post balance sheet events

 

Change in Manager

On 8 November 2018, Livingbridge announced the sale of its fund and investment management business, including its Baronsmead VCT business, to a subsidiary of Gresham House, a specialist alternative asset manager listed on the London Stock Exchange. The core management, investment and operational teams involved with the Company will all be transferred to Gresham House in connection with this transaction.

 

The Company has consented to the novation of the existing investment management and co-investment agreements to Gresham House, which is expected to become effective around 30 November 2018. No changes are being made to the terms of the investment management and co-investment agreements.

 

Realisation

Following the balance sheet the Company realised its investment in Symphony Ventures returning proceeds totalling £4.3m and making a return of 2.4x cost.

 

National Storage Mechanism

A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: http://www.morningstar.co.uk/uk/NSM

 

END

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

 


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Annual Financial Report y/e 30/09/2018 - RNS