Baronsmead 2vt Regulatory News (BMD)

Baronsmead VCT 3 plc

Annual Financial Report for the year ended 31 December 2014

Financial Headlines

· Net asset value ("NAV") per share increased 4.7 per cent to 118.72p in the year ended 31 December 2014, before deduction of dividends.

· NAV total return to shareholders for every 100.0p invested at launch in 2001 equals 257.2p

· Dividends totalled 17.0p for the year ended 31 December 2014.

· Net annual dividend yield of 17.9 per cent. and gross annual dividend yield of 23.9 per cent.

Our Investment Objective

Baronsmead VCT 3 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 trade on AIM

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

Further details on how this is achieved are contained in the 'Other Matters' section of the Strategic Report below.

The full investment policy can be found in the full Annual Report and Accounts.

Dividend Policy

The board of Baronsmead VCT 3 has the objective to maintain a minimum annual dividend level of around 4.5p per ordinary share if possible, but this depends primarily on the level of realisations achieved and cannot be guaranteed.

Chairman's Statement

A series of profitable realisations enabled the Directors to pay dividends totalling 17.0p per share during the year, significantly higher than dividends of 7.5p per share paid in each of the previous seven financial years. Over the year to 31 December 2014 the Net Asset Value ("NAV") was modestly up, increasing by 5.32p per share to 118.72p per share, before payment of dividends.

Results

The increase in the NAV and the dividends paid over the year can be summarised as follows:

The value of the unquoted portfolio rose by 8.1 per cent over the year (including income received on the sale of investments) and, as I stated last year, many of the current investments are still relatively immature. The value of the quoted portfolio was up by 8.0 per cent. over the year, despite the re-emergence of volatility in quoted markets during the latter part of the year.

During the year the Company realised substantial profits from some of the older unquoted investments as well as a number of quoted investments. As a result of these strong results and to comply with VCT rules the Company paid a much higher dividend this year. Interim dividends of 8.0p in March 2014, 4.5p in September 2014 and a further 4.5p in December 2014 resulted in a total of 17.0p paid during the year. The 17.0p per share dividend equates to an annual yield of 17.9 per cent. based on the 31 December 2014 mid price of 95.0p per share. For higher rate taxpayers this is the equivalent of 23.9 per cent. The level of future dividends will depend upon further profitable realisations which can vary from year to year. As a result, the level of dividends paid during the year to 31 December 2014 should be regarded as exceptional.

Long Term Investment Performance

The Company's investment and dividend policies are aimed at producing consistent returns over the long-term. The NAV total returns for each 100p invested in Baronsmead VCT 3 over five and ten years and since launch to 31 December 2014 were 160.8p, 204.7p and 257.2p respectively. Cumulative tax free dividends per share over five and ten years and since launch to 31 December 2014 have totalled 47.0p, 81.5p and 95.3p respectively.

The chart in the full Annual Report and Accounts shows the cash returned to investors in the original and subsequent fundraisings based on the subscription price and the income tax rebate available on subscription. The full record of performance is set out in the appendices of the full Annual Report as well as on our website, www.baronsmeadvct3.co.uk .

Portfolio

This has been the second successive year of strong portfolio realisations. In the year to 31 December 2014, the Company realised gross proceeds of approximately £18.1m (2013: £19.8m). There was a particular focus on generating proceeds from the quoted portfolio to crystallise some of the gains made over the last few years whilst market liquidity was available. Sales from the quoted portfolio totalled £7.1m (2013: £3.4m). Realisations in the year to 31 December 2014 equate to approximately 36 per cent of the value of the investment portfolio at the beginning of the year (2013: 35 per cent).

During the year under review, the Company invested approximately £6.2m in 10 new and 8 follow-on investments in existing portfolio companies. As a result, at the year end, there were sixty-six companies in the unquoted and quoted portfolios and exposure to another thirty-seven investments through the Company's investment in Wood Street Microcap. Realisations of the unquoted investments over the last two years in particular have had a significant impact on the portfolio mix as shown above. The proportion of the Company's assets in unquoted investments is considered to be at a cyclical low and over the medium term it is expected that this should rise as the growth in value of the newer unquoted investments occurs.

The Company raised £9.7 million net of expenses earlier in the year and realised approximately £18.1 million from the sale of investments. As a result, the Company did not seek to raise new funds in the 2014/15 tax year, preferring to continue investing from its cash resources.

The Company has a diverse investment portfolio in terms of the absolute number of companies in which it has an investment exposure, the business sectors in which investee companies operate, their geographical location, the length of time they have been held as investments and the type of assets the Company has invested in. Having a diverse portfolio helps to smooth returns year on year and reduces investment exposure to any one particular investee company, business sector and asset class. The charts above summarise some of the characteristics of the diversity of our portfolio.

The Manager's Review above provides a commentary on new investment and some of the most significant realisations during the year which is summarised in the tables. We continue to be very satisfied with the performance of the Manager. They have created a valuable portfolio of investments which has enabled us to pay good dividends in previous years and an exceptional dividend this year. Shareholders may have noticed that the Manager has changed its name from ISIS to Livingbridge, which explains the references to that name in this Annual Report.

Annual General Meeting

I look forward to meeting as many shareholders as possible at our fourteenth Annual General Meeting to be held on Thursday, 16 April 2015 at the Saddlers' Hall, 40 Gutter Lane, London, EC2V 6BR at 10.15am. As well as my own review of the year, there will be presentations from the Manager.

Outlook

The improved prospects for the UK economy evident throughout most of 2014, abated somewhat in the last quarter of the year and have been replaced by a more uncertain outlook for 2015. Concerns over currency fluctuations, a lack of growth in Europe, China and the emerging economies, political instability in various regions and the prospects for the outcome of the forthcoming General Election have contributed to the volatility in quoted markets that has continued into the beginning of the current financial year.

The investment portfolio continues to evolve following recent sales and new investments. As our more recent unquoted investee companies are only now beginning to deploy our investment increases in the value of our investments are expected to be more modest in the short term. However, the Manager has begun to crystallise profits from the quoted portfolio and will, subject to market conditions, continue to do so as and when opportunities arise.

Anthony Townsend

Chairman

17 February 2015

Manager's Review

The year has seen a second successive period of strong divestment, with a greater proportion than normal being realised from the quoted portfolio following good valuation uplifts over the last few years. The total level of new investment was somewhat lower than the prior year but five new unquoted and five new quoted investee companies have been added to the portfolio.

We have seen a solid performance from the unquoted and quoted portfolios which are both up 8% with Wood Street Microcap also up by 9%. This performance was achieved despite the volatility seen in the quoted markets during the last quarter of the year.

PORTFOLIO REVIEW

Overview

The net assets of £76.6 million were invested as follows:

Each quarter the direction of general trading and profitability of all investee companies is recorded so that the Board can monitor the overall health and trajectory of the portfolio. At 31 December 2014, 74 per cent of the 66 companies in the portfolio (excluding Wood Street Microcap) were progressing steadily or better.

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

Investments in the year

Realisations in the year

Unquoted Portfolio

The unquoted portfolio performance has increased steadily by around 8 per cent over the course of this year including capitalised interest and redemption premium income received on the sale of investments. This reflects the fact that many of the older investments where the Manager has been able to complete the planned investment strategy have been successfully divested. Hence, a greater portion of the current portfolio is skewed towards newer investments which are still in their development phase.

The unquoted portion of the portfolio is valued using a consistent process every three months which the Board oversees and approves. The majority of the value creation in unquoted investments comes from operational improvements (revenue and margin growth), rather than financial leverage.

Unquoted Investment Activity

During the year, £5.0m was invested in 9 unquoted companies including 5 new additions to the portfolio. The new unquoted investments were;

· Kingsbridge is a top 100 independent insurance broker. It has a specialist business to business (B2B) advisory business focusing on the water industry, environmental risks and professional services. It also has a fast growing division called KPSol which provides business insurance services to contractors, freelancers and self employed professionals in professions such as engineering and IT. The Livingbridge investment will support the growth of the KPSol division including new product development and management team development.

· CR7 Services has a UK operating division called Optomany. CR7 is led by an experienced team of executives who have achieved success before in the international field of card payment processing. Optomany has developed a new advanced payment processing platform for merchants accepting card payments which is new to the UK market. The investment by Livingbridge has enabled CR7 to make an acquisition of another company, 123 Send, which will form a second division for the group. 123 Send is a major UK provider of point of sale card terminals and services, with an estate of 15,000 terminals placed in 11,000 merchants.

· IP Solutions is a value added reseller of unified communications. There is a growing trend for companies to outsource their procurement of telecom services such as mobile; landlines or VOIP; broadband and video conference to a single supplier rather than having to manage multiple suppliers in increasingly technical areas. IP Solutions offers a cloud hosted solution combining best of breed partners for all these services and support to corporate users. Livingbridge will support future growth at the company in this developing market.

· Kirona supplies software that enables field-based operatives to work much more efficiently for their organisations. Field based workers via their mobile devices benefit from better scheduling, workflow management and completing admin on the move. Over 25,000 workers use Kirona applications in areas such as local government, social housing, healthcare and utilities. The business can continue to grow as more companies see the efficiency benefits from using Kirona solutions.

· Upper Street Events is one of the UK's leading owners and operators of consumer facing events with a wide range of events including the Knitting & Stitching Show, Gadget Show, Cycle Show, London Art Fair and the Country Living Shows. Livingbridge will support Upper Street to continue growing by launching new events and selected acquisitions to add to its strong established stable.

Unquoted Divestment Activity

Along with the dissolution of four acquisition vehicles there were three full realisations, four loan note redemptions and one write-off which yielded proceeds of approximately £11.0 million for Baronsmead VCT 3.

· The investment in Inspired Thinking Group ("ITG") has been realised via a secondary MBO supported by a larger private equity fund. ITG was originally backed in 2010 to fund an acquisition of a workflow software solution that the company was using extensively in its clients. ITG supplies the workflow software and related services to the marketing departments of consumer brands and high street retailers. During the investment period sales grew from £14m to £43m by 2013 and the exit delivered a return on cost of 3.4x.

· Livingbridge has completed a refinancing at vehicle rental business Nexus resulting in a successful partial realisation. Since Livingbridge invested in 2008, Nexus has grown profits strongly and the investment had grown in value. The business has taken on a sensible bank debt package that has enabled it to return a total of £12.3m to the Baronsmead family in early loan note repayment and associated yield (£3.1m for Baronsmead VCT 3). The equity investment is still retained and Livingbridge will continue to support the future growth of the business.

· Following a period of strong realisations, there have been two less successful exits to report. Playforce (playgrounds for schools) has been sold to a trade buyer recovering 0.5x times the original investment. Empire World Trade (importing and distribution of top fruit) has been sold to a larger trade buyer with nominal recovery. Additionally Surgi C (spinal surgical implants) has also been partially realised recovering 0.2x the original cost.

It is disappointing to have two poor realisations in one financial period. The last financial year to December 2013 was a strong year of exit results. If we aggregate the realisations over the last two financial years, the overall realisations generated £19.3m for this VCT at an average multiple of 2.3x cost.

Quoted Portfolio (AIM traded and other listed investments)

This has been another positive year with an uplift in the quoted portfolio of 8 per cent building on the very strong positive movements over the last two years. The performance of the quoted portfolio also reflects the changes introduced by the Livingbridge Quoted Investment Team since 2009. As outlined in last year's report a number of more significant holdings have now been built where the team has a closer, more influential relationship and can utilise some of the good practice from Private Equity experience and the results from this approach are starting to come through.

Whilst it is expected that work in the quoted arena will deliver future positive growth over the long term, the high annual growth rates achieved over the last three years have been helped by the fact we have emerged from a recession.

Quoted Investment Activity

The level of new quoted investment for Baronsmead VCT 3 of £1.2 million was made across five new and four follow on investments.

The level of new investment was relatively subdued compared to previous years as the focus of activity was directed towards realising profits from the quoted portfolio. Investment activity was mainly in two categories: relatively small new investments where the Manager is seeking to build a relationship with management and potentially add to the holding over time; and follow on investments into existing investee companies to support growth initiatives. Both types of investment reflect the Manager's progressive investment strategy for the quoted portfolio.

Quoted Divestment Activity

Proceeds from realisations during the year from the quoted portfolio totalled £7.1 million and delivered an aggregate return of 2.4x cost. Notably within this is the full realisation of Vectura Group (2.9x cost) which had been held by Baronsmead VCT 3 as both an unquoted and quoted investment, the full realisation of Murgitroyd Group (4.8x cost), the full realisation of Jelf Group (3.5x cost) and GB Group (at 3.6x cost) and the partial sale in the market of Anpario (4.1x cost).

The Investment Manager has pursued a deliberate policy of realising a higher than normal level of quoted investments to take advantage of strong pricing and improved liquidity during the course of 2014 which can often be a constraint when looking to divest stakes in smaller quoted companies.

Wood Street

Wood Street Microcap Investment Fund ("Wood Street") was established by Livingbridge in May 2009 to provide flexibility for the Baronsmead VCTs to invest in larger and more liquid non VCT qualifying AIM and Small Cap opportunities. It represents another innovation introduced by the Livingbridge Quoted team to seek performance improvement. At 31 December 2014, Baronsmead VCT 3 had invested £3.5 million through Wood Street into a portfolio of 37 companies, now valued at £7.7 million. Wood Street generated a positive return of 9 per cent over the year.

Liquid assets (cash and near cash)

Baronsmead VCT 3 had cash and near cash resources of approximately £19.8 million at the year end. This higher than normal level reflects both the proceeds from the fund raising in early 2014 and proceeds from high levels of divestment in both the quoted and unquoted portfolios. 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

Following a period of gradual recovery and improving confidence in the UK economy we believe there are more settled conditions for finding and growing good businesses. However, we remain cautious due to the potential impact of global events and the uncertainty likely to be caused by a UK general election in 2015 which may slow the recovery. We have already seen increased volatility in quoted markets either side of the year end and continue to monitor the external environment carefully although this may also provide opportunities for investment.

Livingbridge seeks to invest in businesses that have strong potential for growth but that are also resilient if conditions become more challenging. We work closely with these businesses to help them develop their strategy and operational infrastructure to prepare for such external challenges. Hence, we believe that Baronsmead VCT 3's diversified portfolio is well positioned to continue its progress in the current market.

Livingbridge VC LLP

Investment Manager

17 February 2015

Summary Investment Portfolio

Investment Classification at 31 December 2014

Ten Largest Investments

The top ten investments by current value at 31 December 2014 illustrate the diversity and size of investee companies within the portfolio. This financial information is taken from publicly available information, which has been audited by the auditors of the investee companies.

1. Netcall plc - Hemel Hempstead

(Source: Netcall plc, Annual Report and Accounts, 30 June 2014)‌‌

(Source: IDOX Plc Annual Report and Accounts 2014)‌‌

3. Nexus Vehicle Holdings Ltd - Leeds

Unquoted

All funds managed by LivingbridgeFirst investment: February 2008Total cost: £1,013,000Total equity held: 62.11%

Baronsmead VCT 3 onlyCost: £245,000Valuation: £2,502,000Valuation basis: Earnings Multiple% of equity held: 13.67%

Year ended 30 September

(Source: Nexus Vehicle Holdings Ltd, Report & Financial Statements 30 September 2013)‌‌

4. Crew Clothing Holdings Ltd - London

Unquoted

All funds managed by LivingbridgeFirst investment: November 2006Total cost: £5,833,000Total equity held: 25.51%

Baronsmead VCT 3 onlyCost: £1,453,000Valuation: £2,464,000Valuation basis: Earnings Multiple% of equity held: 6.08%

Year ended 28 October

(Source: Crew Clothing Holdings Ltd, Report and Financial Statements 28 October 2013)‌‌

5. Accumuli plc - Salford

Quoted

All funds managed by LivingbridgeFirst investment: November 2010Total cost: £2,707,000Total equity held: 23.10%

Baronsmead VCT 3 onlyCost: £505,000Valuation: £1,829,000Valuation basis: Bid Price% of equity held: 4.20%

Year ended 31 March

(Source: Accumuli plc, Annual Report and Accounts 2014)‌‌

6. Create Health Ltd - London

Unquoted

All funds managed by LivingbridgeFirst investment: March 2013Total cost: £4,750,000Total equity held: 29.00%

Baronsmead VCT 3 onlyCost: £1,065,000Valuation: £1,775,000Valuation basis: Earnings Multiple% of equity held: 5.74%

Year ended 31 March

(Source: Create Health Ltd Abbreviated Accounts 31 March 2014)‌‌

# not disclosed

7. Luxury for Less Ltd - Warwickshire

Unquoted

All funds managed by LivingbridgeFirst investment: July 2013Total cost: £8,458,000Total equity held: 40.00%

Baronsmead VCT 3 onlyCost: 955,000Valuation: £1,621,000Valuation basis: Earnings Multiple% of equity held: 3.96%

Year ended 31 December

(Source: Annual Report and Financial Statement 31 December 2013)‌‌

9 month accounting period 31 March 2013 - 31 December 2013

# No comparable information available

8. Tasty plc - London

Quoted

All funds managed by LivingbridgeFirst investment: September 2006Total cost: £3,223,000Total equity held: 14.52%

Baronsmead VCT 3 onlyCost: £594,000Valuation: £1,500,000Valuation basis: Bid Price% of equity held: 2.53%

Year ended 29 December

(Source: Tasty Plc Report and Financial Statements 29 December 2013)‌‌

9. Pho Holdings Ltd - London

All funds managed by LivingbridgeFirst investment: July 2012Total cost: £4,415,000Total equity held: 28.00%

Baronsmead VCT 3 onlyCost: £991,000Valuation: £1,375,000Valuation basis: Earnings Multiple% of equity held: 5.54%

Year ended 23 February

(Source: Directors' Report and Financial Statements 23 February 2014)‌‌

10. Independent Community Care Management Ltd - Kettering

Unquoted

All funds managed by LivingbridgeFirst investment: October 2011Total cost: £6,070,000Total equity held: 70.00%

Baronsmead VCT 3 onlyCost: £1,358,000Valuation: £1,344,000Valuation basis: Earnings Multiple% of equity held: 13.86%

Year ended 31 March

(Source: ICCM Ltd, Directors' report and financial statements 31 March 2014)‌‌

Risk Matrix

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

The Manager's approach to investing

The Manager, Livingbridge, aspires to select the best opportunities and has a distinctive selection criteria based on;

· Businesses that demonstrate elements of market leadership in their niche

· Management teams that can develop and deliver profitable and sustained growth

· The Company being able to be an attractive asset appealing to a range of buyers at the appropriate time to exit

In order to ensure there is a strong pipeline of opportunities, Livingbridge invests in sector knowledge and networks. It then undertakes significant pro-active marketing to interesting unquoted targets in preferred sectors. This is building a database of businesses that are keen to maintain a relationship with Livingbridge ahead of possible investment opportunities.

Livingbridge as an influential shareholder

For unquoted investments, Livingbridge is an involved shareholder (on behalf of the Baronsmead family of VCTs) and representatives of the Manager join the investee board. The role of Livingbridge is to ensure that strategy is clear, the business plan is well thought through and the management resources are in place to deliver profitable growth. The intention is to build on the initial platform and grow the business so that it can become an attractive target able to be either sold or floated in the medium term.

The investment strategy for AIM-traded companies has increasingly focused on taking more influential stakes through the collective shareholdings of the Baronsmead family of VCTs.

A more detailed explanation of how the business model is applied is provided in the Other Matters section of the Strategic Report below.

The Board has delegated the management of the investment portfolio to Livingbridge VC LLP ("Livingbridge" or the "Manager").

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.

On 22 July 2014 the Company was registered as a Small UK registered Alternative Investment Fund Manager ("AIFM") under the Alternative Investment Fund Managers Directive ("AIFMD"). In preparation for this the investment management agreement between the Company and Livingbridge EP LLP (previously named ISIS EP LLP) dated 20 December 2006 was novated to Livingbridge VC LLP (previously named ISIS VC LLP), a Markets in Financial Instruments Directive ("MiFID") authorised company with the same controlling members as Livingbridge EP LLP. The terms of the agreement and the personnel involved in providing management and investment management services to the Company have not changed as a result of the implementation of these arrangements.

The Manager also provides or procures the provision of company secretarial, accounting, administrative and custodian services to the Company.

Investing in the right companies

Investment securities

The Company invests in a range of securities including, but not limited to, ordinary and preference shares, loan stocks, convertible securities and fixed interest bearing securities as well as cash. Unquoted investments are usually structured as a combination of ordinary shares and loan stocks, while AIM-traded investments are primarily held in ordinary shares. Pending investment in VCT qualifying and non-VCT qualifying unquoted, AIM-traded and other quoted securities (which may be held directly or indirectly through collective investment vehicles), cash is primarily held in interest bearing accounts, money market open ended investment companies ("OEICs"), UK gilts and treasury bills.

UK companies

Investments are primarily made in companies which are substantially based in the UK, although many of these investees may have some trade overseas.

VCT regulation

The investment policy is designed to ensure that the Company continues to qualify and is approved as a VCT by HM Revenue and Customs. Amongst other conditions, the Company may not invest more than 15 per cent. by value of its investments calculated in accordance with Section 278 of the ITA 2007 (as amended) ("VCT Value") in a single company or group of companies and must have at least 70 per cent. of its investments by VCT Value throughout the period in shares and securities comprised of qualifying holdings. At least 70 per cent. by VCT Value of qualifying holdings must be in "eligible shares", which are ordinary shares which have no preferential rights to assets on a winding up and no rights to be redeemed, but may have certain preferential rights to dividends. For funds raised before 6 April 2011, at least 30 per cent. by VCT Value of qualifying holdings must be in "eligible shares" which are ordinary shares which do not carry any rights to be redeemed or preferential rights to dividends or to assets on a winding up. At least 10 per cent. of each qualifying investment must be in "eligible shares".

The companies in which investments are made must have no more than £15 million of gross assets at the time of investment to be classed as a VCT qualifying holding.

The Company has retained PricewaterhouseCoopers LLP ("PwC") as its VCT Tax Status Advisers to advise it on compliance with VCT requirements. PwC reviews new investment opportunities, as appropriate, and reviews regularly the investment portfolio of the Company. PwC works closely with the Manager but reports directly to the Board.

Asset mix

The Company aims to be at least 90 per cent. invested, directly or indirectly, in VCT qualifying and non-qualifying growth businesses subject always to the quality of investment opportunities and the timing of realisations. It is intended that at least 75 per cent. of any funds raised by the Company will be invested in VCT qualifying investments. Non-VCT qualifying investments held in unquoted, AIM-traded and other quoted companies may be held directly or indirectly through collective investment vehicles.

Borrowing powers

The Company's policy is to use borrowing for short term liquidity purposes only up to a maximum of 25 per cent. of the Company's gross assets, as permitted by the Company's articles. The Company currently has no borrowings.

Risk diversification and maximum exposures

Risk is spread by investing in a number of different businesses within different qualifying industry sectors using a mixture of securities. Generally no more than £2.5 million, at cost, is invested in the same company. The maximum the Company will invest in a single company (including a collective investment vehicle) is 15 per cent. of its investments by 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.

Investment style

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.

Co-investment with other Baronsmead VCTs

The Company aims to invest in larger more mature unquoted and AIM-traded companies and to achieve this it invests alongside the other Baronsmead VCTs.

Incentivising and remunerating the Manager

Performance and Key Performance Indicators ("KPIs")

The Board expects the Manager 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 primary KPIs highlighted above.

The investment management agreement

Under the Investment 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 receives an annual secretarial and accounting fee that was initially fixed at £33,816 in 2006, and is revised annually to reflect the movement in RPI, plus a variable fee of 0.125 per cent. of the net assets of the Company which exceed £5 million. Annual running costs are capped at 3.5 per cent of the average net assets of the Company during the period (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 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 due 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, a performance fee (plus VAT) will be paid to the Manager of an amount equal 10 per cent. of the excess. The performance fee payable in any one year is capped at 5 per cent. of net assets.

No performance fee was paid In 2013 and there is no performance fee payable for the year ended 31 December 2014.

Management retention

The Co-investment Scheme (the "Scheme") was introduced in November 2004. Members of the Manager's investment team invest their own capital into a proportion of the ordinary shares of each and every unquoted investment made by the Baronsmead VCTs. The shares held by the members of the Scheme in any portfolio company can only be sold at the same time as the investment held by the Baronsmead VCTs is sold. In addition, 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 Scheme.

The Board is keen to ensure that the Manager continues to have one of the best investment teams in the VCT and private equity market place and 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 since executives have to invest their own capital in every unquoted transaction and cannot decide selectively In which investments to participate. In addition the Co-investment only delivers a return after each VCT has realised a priority return built into the structure.

The executives participating in the Scheme subscribe jointly for a proportion (currently 12 per cent.) of the ordinary shares available to the Baronsmead VCTs in each 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.

Since the formation of the Scheme in 2004, 58 executives have invested a total of £869k in 43 companies. At 31 December 2014, 21 of these investments have been realised generating proceeds of £177m for the Baronsmead VCTs and £8.9m for the Scheme. For Baronsmead VCT 3 the average money multiple on these twenty-one realisations was 2.0 times cost. Had the Scheme Shares been held instead by the Baronsmead VCTs that money multiple would have been 2.1 times cost. Over the period of ten years (based upon the current number of shares in issue) this equates to approximately 2.6p per share.

The board regularly monitors the Scheme arrangements.

Advisory Fees

During the year ended 31 December 2014, the Manager received net income of £166,900 (2013: £174,000) in connection with advisory fees and incurred abort fees of £13,301 (2013: £nil) with respect to investment attributable to Baronsmead VCT 3 plc.

Directors' fees of £200,000 (2013: £211,000) were received in relation to services provided to companies in the investment portfolio during the year.

Environmental, Human Rights, Employee, Social and Community Issues

The Company is required, by company law, to provide details of the environmental matters (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 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. Information that is relevant to these matters has been set out below:

Responsible Investment

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.

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 one female and three male Directors. The Manager has an equal opportunity policy and currently employs 34 men and 24 women.

Returns to Investors

Dividend policy

The Board of Baronsmead VCT 3 plc has the objective to maintain a minimum annual dividend level of around 4.5p per ordinary share if possible, but this depends primarily on the level of realisations achieved and it cannot be guaranteed.

Since 2007, the average annual tax free dividend paid to shareholders has been 8.7p per share (equivalent to a pre-tax return of 11.6p per share for a higher rate taxpayer). For shareholders who received up front tax reliefs, their returns will have been higher.

Shareholder choice

The Board wishes to provide shareholders with a number of choices that enable them to utilise their investment in Baronsmead VCT 3 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 NAV to account for issue costs. The Company's offer for subscription launched in January 2014 to raise £10 million (£9.7 million after costs) was fully subscribed.

· 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 1,514,000 shares were bought in this way during the year ended 31 December 2014.

· 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 NAV.

· 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. Investors bought approximately 385,000 shares of the Company's existing shares in the year ended 31 December 2014.

On behalf of the Board

Anthony Townsend

Chairman

17 February 2015

Extract of the Directors Report

Shares and Shareholders

Share capital

The Company issued an offer for subscription for new ordinary shares of the Company in January 2014. The offer was fully subscribed and 8,896,261 new ordinary shares (nominal value £889,626.10) were allotted on 14 March 2014 at a price of 112.40p per share, representing 10.5 per cent. of the issued share capital following allotment. The terms of issue were set out in the prospectus dated 22 January 2014 and the offer price was set on 14 March 2014.

Prior to the sales from Treasury described below, the number of shares held in Treasury was 9,699,214 which was the maximum held during the year. On 19 September 2014, the Company sold 190,000 ordinary shares from Treasury at a price of 100.5p per share and 200,000 ordinary shares were sold from Treasury on 18 December 2014 at a price of 94.75p per share. No shares were bought back by the Company during the year.

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

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 & Accounts 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 Annual General Meeting ("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 2014 AGM, all of which remain valid, can be found in the previous Annual Report & Accounts.

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 ended 31 December 2014:

*the third interim dividend was paid in lieu of a final dividend.

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 existence 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 31 December 2014, the Company held cash balances and investments in UK Treasury Bills with a combined value of £19,817,000. 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 its report on global greenhouse emissions in its 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

17 February 2015

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 and applicable law (UK Generally Accepted Accounting Practice).

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; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They 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.

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;

· the Annual 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; and

· the report and accounts, taken as a whole, are fair, balanced, and understandable and provide the necessary information for shareholders to assess the Company's performance, business model and strategy.

On behalf of the Board

Anthony Townsend

Chairman

17 February 2015

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2014 and 2013 but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies, and those for 2014 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.baronsmeadvct3.co.uk 

Income Statement

For the year ended 31 December 2014

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.

Reconciliation of Movements in Shareholders' Funds

Balance Sheet

As at 31 December 2014

The financial statements were approved by the board of Directors on 17 February 2015 and were signed on its behalf by:

Anthony Townsend

Chairman

Cash Flow Statement

For the year ended 31 December 2014

Notes to the accounts

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.

1. Basis of Preparation

1.1 Basis of accounting

These financial statements have been prepared under UK Generally Accepted Accounting Practice ("UK GAAP") 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 January 2009 and on the assumption that the Company maintains VCT status.

2. Investments, Performance and Shareholder Returns

2.1 NAV per share

The treasury NAV per share as at 31 December 2014 has been calculated by assuming that all shares held in treasury were sold to the market at the mid-share price of 95.00p at 31 December 2014 (2013: 106.25p).

2.2 Return per share

2. Investments, Performance and Shareholder Returns (continued)‌‌

2.3 Investments

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 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"). This means investments are valued using an earnings multiple, which has a discount or premium applied which adjusts for points of difference to appropriate stock market or comparable transaction multiples. Alternative methods of valuation will include application of an arm's length third party valuation, a provision on cost or a NAV basis.

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 in the box 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.

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

For Level 3 unquoted investments, the effect on fair value of changing one or more assumptions to reasonably possible alternatives has been considered. The portfolio has been reviewed and both downside and upside reasonable possible alternatives have been identified and applied to the valuation of each of the investments. The inputs flexed in determining the reasonably possible alternative assumptions include the earnings stream and marketability discount.

Applying the downside alternatives the value of the unquoted investments would be £1.6 million or 6.5 per cent. lower. Using the upside alternatives the value of the unquoted investments would be increased by £1.7 million or 7.0 per cent.

2.4 Dividends

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 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.

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.

† 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 designated 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: 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. capital.

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

The Manager, Livingbridge VC LLP, 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 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 31 December 2014 (2013: £nil).

Other expenses

Information on Directors' remuneration is given in the Directors' remuneration table in the full Annual Report and Accounts.

Charges for other services provided by the Auditors in the year ended 31 December 2014 were in relation to the interim reviews, tax compliance work (including iXBRL) and financial statements' reorganisation. 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

2.8 Creditors (amounts falling due within one year)‌‌

2.9 Tax

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

Provision is made for deferred taxation 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: