Baronsmead Vt Regulatory News (BVT)

Baronsmead VCT 2 plc

Report and Accounts for the year ended 30th September 2015

Financial Headlines

· Net asset value ("NAV") per share increased 10.6 per cent to 109.06p in the year to 30th September 2015, before

deduction of dividends.

· 353.1p NAV total return to shareholders for every 100.0p invested at launch.

· Dividends totalled 6.5p in the year to 30th September 2015, after the second interim dividend of 4.0p paid on 18th

September 2015.

· Net annual dividend yield of 6.8 per cent and gross annual yield of 9.1 per cent.

Our Investment Objective

Baronsmead VCT 2 is a tax efficient listed company which aims to achieve long-term investment returns for private investors, including tax-free dividends.

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 VCT 2 aims to sustain a minimum annual dividend level at an average of 6.5p per ordinary share, mindful of the need to maintain net asset value. The ability to meet these twin objectives depends significantly on the level and timing of profitable realisations and cannot be guaranteed. There will be variations in the amount of dividends paid year on year.

Chairman's Statement

I am pleased to report that the Company had another excellent year.

Before payment of 6.5p a share in dividends the NAV increased 10.44p to 109.06p (10.6 per cent).

Tax free dividends totalling 6.5p were paid during the year.

Results

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

The value of the unquoted portfolio increased by 16.0 per cent over the year, after allowing for losses realised on some underperforming investments. The Company's investments in AIM traded companies and Wood Street Microcap also increased 16.3 per cent, despite the volatility in the markets for shares in quoted companies towards the end of the year.

Dividends

This year approximately two thirds of the increase in the NAV of 10.44p per share has been paid to shareholders: an interim dividend of 2.5p in June and a second interim in lieu of a final dividend of 4.0p in September 2015.

The level of future dividends will depend upon the continued achievement of profitable realisations as well as the need to meet the fiscal rules for VCTs. Consequently they will vary over time. In this respect it is important to note that over the last few years the significant dividends we have paid were made possible because mature investments were realised.

While the Board will endeavour to maintain an average dividend of 6.5p a share, the current investment portfolio is still immature and it will take time to deliver profitable realisations. Accordingly, dividends could be lower than in recent years.

Portfolio Review

Investment and Divestment Activity

This has been an active year for new investments. The Company invested £6.7 million in unquoted investments (5 new, 1 follow on and 2 acquisition vehicles); and £2.3 million in AIM-traded investments (8 new and 4 follow on).

A total of £10.1 million was realised from the full or partial sale of investments and from loan note redemptions. This included some notable successes such as the sale of the Company's investment in Luxury for Less and the repayment of loan notes in Nexus Vehicle Holdings. We also incurred losses on the stakes in Playforce Holdings, Surgi C and Impetus Automotive Solutions.

A number of profitable realisations were also made from the quoted portfolio, the most significant being from the full realisation of the Company's investment in Accumuli and the partial realisation of Jelf Group.

The tables below provide details of the Company's investments and divestments during the year.

VCT Legislation

This year's Summer Budget introduced legislation designed to ensure that VCTs comply with changes to the EU State aid rules as well as remaining effective in giving small and growing businesses access to finance. The rules introduced new criteria regarding the age of companies that will be eligible as investments. There is now a lifetime cap on the total amount of State aided investment a company can receive and a requirement that investment be used for growth and development only. These measures were approved when the Finance Act received Royal Assent on 18th November 2015.

The new rules will require the Manager to adapt its investment strategy to focus on the provision of development capital to younger companies to enable them to grow their businesses organically rather than through acquisition. Whilst the full implications of the new rules are still being assessed by the Manager and its advisers, it is clear that the scale and nature of our new investments will change and some elements of the developing portfolio will carry a higher risk.

The Board has reviewed the impact of the new rules with the Manager. We are of the view that the Manager has a long track record of successfully investing on behalf of the Baronsmead family. The plans presented by the Manager confirmed our confidence in its ability to identify an adequate supply of new and attractive investment opportunities which will continue to generate acceptable returns, and comply with the new VCT rules.

Merger Proposals and Fundraising Intentions

Changes to the limits on the amount of funding which investee companies can receive from VCTs have removed the commercial advantage of having multiple Baronsmead VCTs. In addition, the amount of stamp duty that would be payable as a result of a merger has reduced significantly over the past 18 months. As a consequence, the boards of directors of Baronsmead VCT plc & Baronsmead VCT 2 plc ("the Companies") announce that they have entered into discussions regarding a possible merger of the Companies (the "Merger"). It is intended that the Merger will be effected on a NAV for NAV basis by way of a scheme of reconstruction under the Insolvency Act 1986.

The boards of the Companies believe that the Merger would be in the best interests of the shareholders of both Companies for the following reasons.

· It would result in estimated annual costs savings for the merged company of around £300,000 per annum.

· It would remove the duplication of communication with the many shareholders that are common to both

Companies and the administrative burden for them of managing multiple holdings.

· It would create a larger merged company with net assets of approximately £170 million which would potentially

make it more attractive to private client wealth managers and should enhance the liquidity of the shares in the

secondary market.

In addition the Merger would significantly reduce the administration burden of managing two separate companies as a time when regulation is becoming increasingly complex.

It is proposed that the merger will be effected by way of a scheme of reconstruction and the winding up of Baronsmead VCT plc under section 110 of the Insolvency Act 1986 (the "Scheme"). Under terms of the Scheme the assets of Baronsmead VCT plc would be transferred to Baronsmead VCT 2 plc (the "Merged Company") in exchange for the issue of new shares in the Merged Company to the shareholders of Baronsmead VCT plc on a NAV for NAV basis.

The Boards expect to write to their respective shareholders with further details on the terms of the proposed merger in January 2016. It is currently intended that, subject to shareholder approval, the Merger will become effective in early February 2016.

Subject to shareholder approval of the Merger, it is proposed to launch an offer for subscription that would provide the Companies' existing shareholders with the opportunity, on a priority basis, to subscribe for new shares in the Merged Company in the 2015/2016 tax year.

Annual General Meeting

It is intended that the Notice of the Annual General Meeting ("AGM") for the year to 30th September 2015, will be posted to the Company's shareholders early in February 2016. This is because, we anticipate that the outcome of the proposed Merger will be known at that point and as a result the Notice can be sent to all of the shareholders on the Company's register at that time and there will be no need to include resolutions that would otherwise be contingent on the outcome of the proposed Merger. The Notice will confirm the time, date and location of the AGM which is likely to be held early in March 2016.

Outlook

The economic environment in the UK continues to improve, albeit concerns remain regarding the potential impact of continued slow growth in the EU and the downward growth trend in China and other emerging markets. The environment for young growing companies in this country remains positive while the sources of finance to assist them to achieve that growth remain limited. This is encouraging given the change in focus required by the new VCT rules described above and should provide many new investment opportunities for the Company.

In the meantime, shareholders should take comfort from the fact that the Company has an established and diverse portfolio of investments that continue to perform well and should therefore deliver strong and consistent returns over the medium term while the newer portfolio is established.

Clive Parritt

Chairman

24th November 2015

Manager's Review

The year has seen excellent performance from both the unquoted and quoted portfolios which are up 16 per cent and 17 per cent respectively. The quoted portfolio within Wood Street Microcap grew by 15 per cent. During the year, 5 new unquoted (excluding 2 acquisition vehicles) and 8 new quoted companies were added to the portfolio.

PORTFOLIO REVIEW

Overview

The net assets of £85.1 million were invested as follows:

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 30th September 2015, 86 per cent of the 73 companies directly held in the portfolio (i.e. excluding the investments held by Wood Street Microcap) were progressing steadily or better.

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

Unquoted Portfolio

The unquoted portfolio performance increased steadily to around 16 per cent over the course of the year. This included capitalised interest and redemption premium income received on the sale of investments as well as loan note redemptions. The portfolio is valued by the Board using a consistent process every quarter which is overseen by the Company's auditor, KPMG LLP. The majority of the value created by portfolio companies comes from trading and operational improvements (revenue and margin growth), rather than financial leverage.

Unquoted Investment Activity

During the year, we made 7 new investments, 5 in the companies described below and 2 in acquisition vehicles. The unquoted companies added to the unquoted portfolio are:

· Mortgages Made Easy ("MME") is one of the UK's leading providers of broking services for mortgages and

related financial products to freelance contractors (e.g. IT contractors and engineers).

· Kirona supplies software that enables field-based operatives to work much more efficiently for their

organisations. The software allows field based workers to get better scheduling and workflow management, as

well as enabling them to complete administrative tasks using their mobile devices. 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.

· Centre4 Testing is a specialist provider of software testing services that helps its clients to manage the

significant risks involved with software implementations, upgrades and integration. Centre4 Testing provides a

range of services from full-service consultancy through to fast and flexible contractors using a database of over

10,000 professional UK-based testers. Centre4 Testing has supported over 250 clients across the UK.

· 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, broadband and video conferencing to a single supplier rather than having to manage multiple suppliers. IP Solutions offers a cloud hosted solution combining best of breed partners for all these services and support to corporate users. 

· 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, the Gadget Show, the Cycle Show, the London Art Fair

and the Country Living Show. The investment will support Upper Street's continued growth by launching new

events to add to its strong established stable.

The remaining new unquoted investments (Kalyke Investments Ltd and Yeo Bridge Ltd) were in companies formed to enable investments into trading companies over the next two years.

Unquoted Divestment Activity

During the year there were four full realisations and four loan note redemptions which generated proceeds of approximately £6.1 million for Baronsmead VCT 2.

· Luxury For Less generated a return of 2.0 times its original cost when it was sold in March 2015 after a relatively

short investment period of only 20 months. Luxury for Less is an online bathroom products retailer, supplying

direct to consumers principally via its website www.bathempire.com.

· A refinancing at vehicle rental business Nexus Vehicle Holdings ("Nexus") resulted in a successful partial

realisation. Since the first investment in 2008, profits at Nexus have advanced strongly and the investment has

appreciated significantly in value. The business has also refinanced its bank debt. These developments have

enabled Nexus to return a total of £12.3m to the Baronsmead family in early loan note repayments and associated

interest (£3.1m for Baronsmead VCT 2). The equity investment is still retained.

· Following a period of strong realisations over the last three years, there have been three less successful exits to

report. Playforce Holdings (playgrounds for schools) has been sold to a trade buyer recovering only half the

original investment. Surgi C (spinal surgical implants) has also been partially realised recovering 20 per cent of

the original cost. Additionally the investment in Impetus Automotive Solutions, (a specialist consultant to the

automotive industry) resulted in a total loss.

Naturally it is disappointing to have three poor realisations in one financial period, nevertheless it is in the nature of private equity investment that some investments will fail to achieve their full potential. Over many years our track record of realisations remains strong.

Quoted Portfolio (AIM-traded investments)

This has been another strong year with an uplift in the quoted portfolio of 17 per cent building on the very significant gains over the last three years (2014: 32 per cent; 2013: 43 per cent; 2012: 19 per cent). The performance of the quoted portfolio is a reflection not just of market movements over this period but also 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 our work in the quoted arena will deliver future positive growth over the long term, the high annual growth rates achieved over the last four years have been helped by the fact we have emerged from a recession and should be considered as above average.

Quoted Investment Activity

The level of new quoted investment for Baronsmead VCT 2 of £2.3 million was made across 8 new and 4 follow on investments. Two of the larger investments were:

· A new investment of approximately £0.46 million in CentralNic Group which is a provider of internet domain

name and registry services. As an example of its services it has global exclusive rights to commercially exploit

the new top level domain .xyz recently endorsed by Google's Alphabet holding company which has the domain

abc.xyz.

· A follow on investment of £0.45 million in Ideagen plc, a provider of compliance document management services

to the healthcare, marketing, complex manufacturing and other industries.

Quoted Divestment Activity

Proceeds from realisations during the year from the quoted portfolio totalled £4.0 million and delivered an aggregate return of 2.9x cost. Notably within this is the full realisation of Accumuli (4.4x cost), the full realisation of Cohort (1.7x cost), the full realisation of GB Group (3.6x cost) and the partial realisations of investments in the market of Jelf Group (3.5x) and Anpario (4.3x cost).

Following several years of significant growth in the value of AIM-traded and other listed investments, the Livingbridge Quoted Team has recently pursued a deliberate policy of realising a higher than normal level of quoted investments to take advantage of strong pricing and improved liquidity and lock in the gains made on these investments.

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 30th September 2015, Baronsmead VCT 2's £3.5 million investment was valued at £8.8 million, following a gain of a further 15 per cent over the year (2014: 24 per cent; 2013: 47 per cent; 2012: 8 per cent). As at 30th September 2015, Wood Street held investments in 37 AIM-traded and listed companies.

Liquid assets (other net assets)

Baronsmead VCT 2 had cash and near cash resources of approximately £14.3 million 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

Livingbridge seeks to invest in businesses that have intrinsic growth potential and where value growth is not overly dependent on the economic cycle. Livingbridge also investing its own capabilities in order to support the development of the companies we back. We have continued to invest in our own business during this report period, increasing the size and skills of the investment team so we can continue to enhance the help we give to investees.

We are pleased with the overall trading performance of the companies within both our unquoted and quoted portfolios and we believe there is a good foundation for continued value growth within the portfolio driven by future profit growth. We are always aware of the potential volatility within quoted markets and the last two years have seen a significant level of realisations to turn a material part of the value growth of the quoted portfolio into cash for shareholders.

As the Chairman's Statement has covered, the VCT rule changes necessary to secure EU State Aid approval have caused us to implement some changes to our investment focus. We anticipate a greater proportion of our future portfolio will be in businesses which are slightly younger and at an earlier stage in their development but the focus remains on companies that are established, well managed, growing and profitable at the time of investment. This requires adaptation not reinvention by Livingbridge and we are confident that our team will continue to deliver creditable investment returns in the future.

Livingbridge VC LLP

Investment Manager

24th November 2015

Investments in the year

* Technology, Media & Telecommunications ("TMT").

# During the year, the EG Solutions plc Loan note and capitalised interest was converted into Ordinary shares.

^ Fulcrum Utility Services Ltd and Paragon Entertainment Ltd shares were received in exchange for Marwyn Value Investors Ltd shares following a Scheme of Arrangement.

Realisations in the year

‡ Proceeds at time of realisation including redemption premium and interest.

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

^ Fulcrum Utility Services Ltd and Paragon Entertainment Ltd shares were received in exchange for Marwyn Value Investors Ltd shares following a Scheme of Arrangement.

† Proceeds of £8,000 were received in respect of Bglobal plc which had been written off in a prior period. Deferred consideration of £195,000 was received in respect of MLS Ltd and £88,000 in respect of CSC (World) Ltd, both of which had been sold in a prior period.

Ten Largest Investments

The top ten investments by current value at 30 September 2015 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. Staffline Group plc - Nottinghamshire

All funds managed by Livingbridge

First investment: July 2000

Total cost: £174,000

Total equity held: 2.42%

Baronsmead VCT 2 only

Cost: £87,000

Valuation: £5,197,000

Valuation basis: Last Traded Price

% of equity held: 1.21%

Year ended 31st December

(Source: Staffline Group plc, Annual Report 31st December 2014)

2. Nexus Vehicle Holdings Ltd - West Yorkshire

All funds managed by Livingbridge

First investment: February 2008

Total cost: £977,000

Total equity held: 62.11%

Baronsmead VCT 2 only

Cost: £244,000

Valuation: £4,319,000

Valuation basis: Earnings multiple

% of equity held: 13.67%

Year ended 30th September

(Source: Nexus Vehicle Holdings Ltd, Report and Financial Statements 30th September 2014)

3. Netcall Plc - Hertfordshire

All funds managed by Livingbridge

First investment: July 2010

Total cost: £4,354,000

Total equity held: 18.02%

Baronsmead VCT 2 only

Cost: £869,000

Valuation: £2,624,000

Valuation basis: Bid Price

% of equity held: 3.61%

Year ended 30th June

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

4. IDOX Plc - Berkshire

All funds managed by Livingbridge

First investment: May 2002

Total cost: £1,641,000

Total equity held: 4.89%

Baronsmead VCT 2 only

Cost: £614,000

Valuation: £2,594,000

Valuation basis: Bid Price

% of equity held: 1.80%

Year ended 31st October

(Source: IDOX PLC Annual Report & Accounts 2014)

5. Crew Clothing Holdings Limited - London 

All funds managed by Livingbridge

First investment: November 2006

Total cost: £5,833,000

Total equity held: 28.10%

Baronsmead VCT 2 only

Cost: £1,453,000

Valuation: £2,437,000

Valuation basis: Earnings Multiple

% of equity held: 6.70%

Year ended 26th October

(Source: Crew Clothing Holdings Ltd, Report and Financial Statements 26th October 2014)

6. TLA Worldwide plc - London

All funds managed by Livingbridge

First investment: November 2011

Total cost: £3,604,000

Total equity held: 13.14%

Baronsmead VCT 2 only

Cost: £733,000

Valuation: £2,127,000

Valuation basis: Bid Price

% of equity held: 2.67%

Year ended 31st December

(Source: TLA Worldwide Plc, Annual Report and Financial Statement Year End 31st December 2014)

Values have been converted from GBP to USD 2013 = 1.64880 / 2014 = 1.55320

7. Tasty Plc - London 

All funds managed by Livingbridge

First investment: September 2006

Total cost: £3,223,000

Total equity held: 14.45%

Baronsmead VCT 2 only

Cost: £594,000

Valuation: £2,036,000

Valuation basis: Bid Price

% of equity held: 2.52%

Year ended 28th December

(Source: Tasty Plc, Report and Financial Statements 28th December 2014)

8. Create Health Ltd - London

All funds managed by Livingbridge

First investment: March 2013

Total cost: £4,235,000

Total equity held: 29.00%

Baronsmead VCT 2 only

Cost: £953,000

Valuation: £1,743,000

Valuation basis: Earnings Multiple

% of equity held: 5.74%

Year ended 31st March

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

# not disclosed

9. Pho Holdings Ltd - London 

All funds managed by Livingbridge

First investment: July 2012

Total cost: £4,402,000

Total equity held: 28.00%

Baronsmead VCT 2 only

Cost: £990,000

Valuation: £1,557,000

Valuation basis: Earnings Multiple

% of equity held: 5.54%

Year ended 1st March

(Source: Pho Holdings Ltd, Directors' Report and Financial Statements 1st March 2015 )

*53 week period ended 1st March 2015. The Company changed its year end from 23rd February to 1st March.

10. Kingsbridge Risk Solutions Ltd - Gloucestershire

All funds managed by Livingbridge

First investment: January 2014

Total cost: £4,433,000

Total equity held: 34.00%

Baronsmead VCT 2 only

Cost: £851,000

Valuation: £1,459,000

Valuation basis: Earnings Multiple

% of equity held: 5.72%

Year ended 31st January

(Source: Kingsbridge Risk Solutions Ltd, Abbreviated Accounts 31st January 2015)

# not disclosed

Principal Risks & Uncertainties

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

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

 Business Model

Baronsmead VCT 2 has maintained the appointment of Livingbridge as Investment Manager to help achieve the investment objective of the Company. The key elements of the investment strategy and business model and their application are outlined below.

Access to an attractive, diverse portfolio

Baronsmead VCT 2 plc gives shareholders access to a diverse portfolio of growth businesses, both unquoted and AIM-traded companies.

Before investment each business has already demonstrated profitable success from its business model and thus provides a degree of stability and a foundation from which to build. Each business is led by entrepreneurial management teams who aspire to achieve above average growth from attractive and differentiated market positions.

The Manager's approach to investing

The Manager, Livingbridge, endeavours 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 extends the database of businesses with which Livinbridge is keen to maintain a relationship ahead of possible investment opportunities.

Livingbridge as an influential shareholder

For unquoted investments, Livingbridge is an involved shareholder and representatives of the Manager (on behalf of the Baronsmead family of VCTs) 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. We aim 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.

The Board believes that the Investment Manager, Livingbridge is performing well and we have confirmed their continuing appointment.

Other Matters

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 in the full Annual Report and Accounts, 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 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.

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.

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 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 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.

VCTs are required to comply with a number of different regulations and the Company has appointed RobertsonHare LLP ("RobertsonHare") as its VCT Tax Status Advisers to advise it on compliance with VCT requirements. RobertsonHare reviews new investment opportunities, as appropriate, and reviews regularly the investment portfolio of the Company. RobertsonHare 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 as Investment Manager 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 two female and two male Directors. The Manager has an equal opportunity policy and currently employs 41 men and 25 women.

Appointment of the right investment manager

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 Key Performance Indicators ("KPIs").

The investment management agreement

Under the management agreement, the Manager receives a fee of 2.0 per cent per annum of the net assets of the Company. In addition, the Manager receives an annual secretarial and accounting fee of £36,380 (linked to the movement in the UK Retail Price Index ("RPI")), subject to annual review, plus a variable fee of 0.125 per cent of the net assets of the Company which exceed £5 million. The annual secretarial and accounting fee is subject to a maximum of £105,634 per annum (linked to the movement in RPI) subject to annual review.

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 30th September 2015 was 2.46 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 will not be payable to the Manager until the total return on shareholders' funds exceeds an annual threshold of the higher of 4 per cent or base rate plus 2 per cent calculated on a compound basis. 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 shall be capped at 5 per cent of shareholders' funds for that period.

During the financial year the threshold has been exceeded and a performance fee of £588,000 (2014: £553,000) is payable.

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 co-investment 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 unquoted investment made by the Baronsmead VCTs. The Board regularly monitors the co-investment 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 unquoted transaction and cannot decide selectively which investments to participate in. In addition the co-investment only delivers a return after each VCT has realised a priority return built into the structure. The shares held by the members of the co-investment 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 co-investment scheme.

The executives participating in the co-investment 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 £886k in 47 companies. At 30th September 2015 24 of these investments have been realised generating proceeds of £201m for the Baronsmead VCTs and £9.3m for the co-investment scheme. For Baronsmead VCT 2 the average money multiple on these 24 realisations was 2.0 times cost. Had the co-investment shares been held instead by the

Baronsmead VCTs, the extra return to shareholders would have been 2.8p 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 fees

During the year to 30th September 2015, the Manager received income of £152,000 (2014: £89,000) in connection with advisory fees and incurred abort fees of £9,000 (2014: £1,000), with respect to investments attributable to Baronsmead VCT 2.

Directors' fees of £206,000 (2014: £207,000) were received by the Manager in relation to services provided to companies in the investment portfolio, during the year, with respect to investments attributable to Baronsmead VCT 2.

Alternative Investment Fund Manager's Directive (AIFMD)

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

Viability Statement

In accordance with principle 21 of the AIC Code of Corporate Governance published by the AIC in February 2015, the Directors have assessed the prospects of the Company over the three year period to 30th September 2018. This period is used by the board during the strategic planning process and is considered reasonable for a business of our nature and size.

In making this statement the Board carried out a robust assessment of the principle 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.

This review has considered the principal risks which were identified by the Manager. 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.

As part of this process the Directors have also considered the viability of the merged company if the takeover of Baronsmead VCT plc proceeds. In view of the fact the merged entity will be much larger than the original firm they feel that this increased size will help to mitigate some of the business risks mentioned above.

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 30th September 2018.

Returns to investors

Dividend policy

The Board of Baronsmead VCT 2 aims to sustain a minimum annual dividend level at an average of 6.5p per ordinary share, mindful of the need to maintain net asset value. The ability to meet these twin objectives depends significantly on the level and timing of profitable realisations and cannot be guaranteed. There will be variations in the amount of dividends paid year on year.

Since launch, the average annual tax free dividend paid to shareholders has been 7.0p per ordinary share (equivalent to a pre-tax return of 9.3p per ordinary share for a higher rate taxpayer). For shareholders who received up front tax reliefs of 20 per cent, 30 per cent or 40 per cent, their returns would have been even higher.

Shareholder choice

The Board wishes to provide shareholders with a number of choices that enable them to utilise their investment in Baronsmead VCT 2 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. As the Company expects to publish a

prospectus with respect to a possible merger with Baronsmead VCT plc in January 2016, it would be cost

effective to undertake a fundraising at the same time. As a result the Directors are currently considering the

possibility of raising further funds in January 2016.

· 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 565,000

shares were bought in this way during the year to 30th September 2015.

· 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 the likely impact on shareholders as a whole and the funding

requirements of the Company and market conditions at the time, the Company seeks to maintain a mid share

price discount of approximately 5 per cent to net asset value.

· 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 428,000 shares were bought by investors in the Company's existing shares in the year to 30th

September 2015.

On behalf of the Board

Clive Parritt

Chairman

24 November 2015

Extract of the Directors Report

Shares and shareholders

Share capital

During the year the Company bought back a total of 1,595,000 ordinary shares to be held in Treasury, representing 1.68 per cent of the issued share capital as at 30th September 2015, with an aggregate nominal value of £159,500. The total amount paid for these shares was £1,489,525. The Company's remaining authority to buy back shares from the 2014 Annual General Meeting ("AGM") is 11,042,066. During the year the Company also sold 300,000 ordinary shares from Treasury. These shares were sold for a total amount of £286,500.

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

The maximum number of shares held in Treasury during the year was 12,263,819. 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 participate in 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 2014 AGM, all of which remain valid, can be found in the last 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.

Tax free dividends

The Company paid the following dividends for the year ended 30th September 2015:

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

Annual General Meeting

As mentioned in the Chairman's Statement, details regarding the Company's AGM will be provided to shareholders in February 2016.

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 30th September 2015, the Company held cash balances and investments in UK Treasury Bills with a combined value of £15,205,000. 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

24th November 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 judgments 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. Visitors to the website should be aware that 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 position, performance, business model and strategy.

On behalf of the Board

Clive Parritt

Chairman

24th November 2015

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 September 2014 and 2015 but is derived from those accounts. Statutory accounts for 2014 have been delivered to the Registrar of Companies, and those for 2015 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.baronsmeadvct2.co.uk 

Income Statement

For the year ended 30 September 2015

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"). The supplementary revenue return and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 by the Association of Investment Companies ("AIC SORP").

Statement of Changes in Equity

For the year ended 30th September 2015

For the year ended 30th September 2014

Balance Sheet

As at 30th September 2015

The financial statements were approved by the Board of Directors on 24th November 2015 and were signed on its behalf by:

Clive Parritt

Chairman

Statement of Cash Flows

For the year ended 30th September 2015

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 on the assumptions that the Company maintains VCT status. The early adoption of FRS 102 for this financial year was recommended by the Audit Committee as detailed in the Corporate Governance section of the Directors Report. There are no significant changes to the Company's accounting policies as a result of the adoption of FRS 102, which becomes mandatory for companies with a financial year beginning from 1st January 2015.

The Financial Statements have been prepared on a going concern basis.

2. Investments, performance and shareholder returns

2.1 Net asset value per share

The treasury net asset value per share as at 30th September 2015 included ordinary shares held in treasury valued at the mid share price of 95.38p at 30th September 2015 (2014: 93.25p).

2.2 Return per share

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 net asset value 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 a - Fair value is measured based on quoted prices in an active market.

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

from market prices.

· Level c - i) Fair value is measured using a valuation technique that is based on data from an observable market

or;

ii) 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 c (ii) 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 £1.7 million or 5.8 per cent lower. Using the upside alternatives the value would be increased by £2.1 million or 7.1 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. 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. Accordingly, the redemption premium received in the year ended 30th September 2015 has been classified as capital and has been included within gains on investments.

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 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 if at the end of any calculation period, the total return on shareholders' funds exceeds the threshold of UK base rate plus 2 per cent on shareholders' funds (calculated on a compound 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 shareholders' funds at the end of the period.

Amounts payable to the Manager at the year end are disclosed in note 2.8.

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 30th September 2015 were in relation to tax compliance work (including iXBRL). 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:

At 30th September 2015 the Company had surplus management expenses of £4,648,934 (2014: £3,304,577) 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 period in excess of the deductible expenses of that future period 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:

* Carrying one vote each.

During the year the Company bought back 1,595,000 ordinary shares and sold from treasury 300,000 ordinary shares, representing 1.4 per cent of the ordinary shares in issue at the beginning of the financial year.

There were no changes in share capital between the year end and when the financial statements were approved.

Treasury shares

When the Company reacquires its own shares, they are held as treasury shares and not cancelled.

Shareholders have authorised the Board to sell 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.

# The total of these items is £8,591,000, which agrees to the total profit on ordinary activities.

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

Distributable reserves include the net unrealised loss 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 & AIM quoted 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.

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.

Interest rate risk

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

# Due to the complexity of the instruments and uncertainty surrounding timing of realisation the weighted average time for which the rate is fixed has not been calculated.

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: