Baronsmead Vt Regulatory News (BVT)

Baronsmead VCT 2 plc

Report and Accounts for the year ended 30th September 2014

Financial Headlines

· Net asset value ("NAV") per share increased 10.4 per cent to 111.12p in the 12 months to 30th September 2014, before deduction of dividends.

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

· Dividends totalled 12.5p in the year to 30th September 2014, after the second interim dividend of 4.5p paid on 19th September 2014.

· Net annual dividend yield of 13.4 per cent and gross annual yield of 17.9 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

We have had an excellent year. Net Asset Value ("NAV") grew by 10.49p a share (10.4 per cent.) to 111.12p a share before dividends. A series of profitable realisations has enabled us to pay tax free dividends of 8.0p in March and 4.5p in September 2014.

This brings the total tax free dividend for the year to 12.5p. As shareholders will know the Board seeks to maintain average annual dividends of 6.5p a share, so the additional payment arising from the realisations should be viewed as an exceptional, albeit welcome, extra.

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 modestly during the year as many of the current investments are still relatively immature and have yet to realise their potential. However, increases of 32 per cent in the value of the investments in the AIM portfolio and a 24 per cent gain in the Wood Street Microcap fund ensured a good growth in NAV.

Dividends

The Company's dividend policy is to try to maintain annual average dividends of 6.5p per ordinary share mindful of the need to maintain NAV. To achieve this, the Directors have sought to spread the distribution of realised capital profits from years when more gains are realised to years when fewer gains are realised. As a result of the strong results and to comply with VCT rules we have paid a much higher dividend this year.

The 12.5p per share dividend equates to an annual yield of 13.4 per cent. based on the 30th September 2014 mid-price of 93.25p. For higher rate taxpayers this is the equivalent of 17.9 per cent.

Future dividends are, of course, subject to our ability to achieve profitable realisations as well as any fiscal considerations that may have an impact. They will therefore vary from time to time although we will strive to deliver the average dividend in accordance with our policy.

Long term investment performance

The Company's investment policy aims to produce consistent returns over the long-term. For founder shareholders, their original subscription of 100p a share has returned 318.8p in terms of NAV total return. This is stated before taking account of the upfront VCT income tax relief on subscription and the additional benefit of receiving 115.4p a share in tax free dividends. The Annual Report shows the cash returned to investors in each of the original and subsequent fundraisings, based on the subscription price and the income tax available on subscription. The full record of performance is set out in the Annual Report as well as on our website, www.baronsmeadvct2.co.uk.

The strong performance this year has continued the cumulative progress achieved since the onset of the financial crisis of 2008. The cumulative NAV Total Return was once again above the level at which the Manager is due to receive a performance fee and a performance fee of £0.55 million (the equivalent of 0.66p per share) is payable.

In assessing performance the directors focus primarily on the NAV total return. Our challenge to the Manager is to deliver an overall positive return which, taking one year with another, is in the top quartile for generalist VCTs and, allowing for the restricted asset classes in which we can invest, compares favourably with the market as a whole. Costs are a part of that assessment but the key factor is that the results are stated net of all running costs including the performance fees earned by the Manager, so NAV total return is paramount. Details of costs including the performance incentive and the other fees and charges received by the Manager are set out in the Annual Report.

Portfolio

This has been a particularly active year for portfolio realisations. In the year to 30th September 2014, the Company achieved gross proceeds of approximately £21.2 million plus £4 million from the liquidation of acquisition vehicles. Gains of approximately £9.3 million were realised. The Manager's Review provides a commentary on some of the most significant realisations and the table below sets out the proceeds received and the return achieved from each realisation. This was an exceptional level of divestment in a single year and it equates to approximately 35% of the value of the investment portfolio at the beginning of the year.

During the year the Company invested approximately £5.9 million in 10 new investments and £0.9 million in 10 follow-on investments in existing portfolio companies. The table in the Manager's Review provides details of these new and follow-on investments. As a result, at the year end, there were sixty-six companies in the unquoted and quoted portfolio and we had exposure to another forty investments through the Company's investment in Wood Street Microcap. Realisations of the unquoted investments in particular and the increase in value of the quoted portfolio have together had a significant impact on the portfolio mix as shown in the Annual Report. The Board does not believe that it is appropriate to set specific parameters for the proportion of the Company's assets invested in unquoted investments as compared with quoted investments. Nevertheless it does consider the proportion of unquoted investments to be at a cyclical low at present and over the medium term it expects this should rise as the newer unquoted investments develop, mature and grow in value.

Fundraising Update

The Company raised £9.7 million net of expenses earlier in the year and realised approximately £25.2 million from the sale of investments in the year to 30th September 2014. As a result, it is unlikely that the Company will seek to raise significant new funds in the current tax year, preferring to continue investing from the currently available cash resources.

Annual General Meeting

I look forward to meeting as many shareholders as possible at our seventeenth Annual General Meeting to be held on Wednesday, 17th December 2014 at the Plaisterers' Hall, One London Wall, London EC2Y 5JU at 12.30 pm. As well as my own review of the year, there will be presentations from the Manager, a light lunch and a shareholder workshop.

Outlook

I commented on the improved outlook for the UK economy in the half-yearly report earlier in the year. We are hopeful that this improvement in the economic environment in which your portfolio companies operate will be sustained, but this cannot be guaranteed. Concerns over growth in Europe, China and the emerging economies as well as political instability in various regions have led to volatility in quoted markets and heightened concerns about the robustness of the underlying UK economy. However, the Company's portfolio diversity and asset mix should help to deliver consistent returns over the medium to long term.

The investment portfolio continues to evolve following recent sales and new investments. Increases in the value of the newer unquoted investments might be expected to be more modest during the initial period of ownership. These companies are only now beginning to deploy our investment to grow and adopt strategic changes that will help them to deliver increasing profits, employment and consequently future profitable realisations. The quoted portfolio though is more mature and the Manager has made a good start in taking profits.

Clive Parritt

Chairman

14th November 2014

Manager's Review

The year has been notable for a very strong level of divestment, particularly in unquoted investments. In addition investment levels are also up on the prior year with four new unquoted and six new quoted investee companies that have been added to the portfolio.

Strong upward performance has once again been delivered by the quoted portfolio. The unquoted portfolio performance overall has increased more steadily over the year and has also contributed a high level of successful realisations, from some longstanding holdings.

PORTFOLIO REVIEW

Overview

The net assets of £83.1 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 30th September 2014, 76 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

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

Realisations in the year

Unquoted Portfolio

The unquoted portfolio performance has increased steadily by around 6 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, £4.4 million was invested in 9 unquoted companies including 4 new additions to the portfolio, one of which represented a rollover investment following the successful exit from the original CableCom investment. The other new unquoted investments were;

· Carousel Logistics ("Carousel") is a "next generation" provider of logistic solutions to its industrial and commercial clients. Carousel has a proprietary IT system that clients use to manage their logistics demands. Carousel then manages the provision of downstream logistics through multiple outsourced providers of transport with its IT system selecting the best carrier for each sub category of work. This allows Carousel to develop tailored solutions for clients with complex transport demands in areas such as automotive or luxury goods. The business has strong growth momentum and ISIS will support the company to invest further in its innovative IT and expand its offering across Europe.

· 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 ISIS investment will support the growth of the KPSol division including new product development and management team development.

· CR7 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 ISIS 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.

Unquoted Divestment Activity

The year saw an exceptional level of divestment. Excluding the dissolution of four acquisition vehicles there were five realisations and one write-off which yielded proceeds of close to £14 million for Baronsmead VCT 2.

· CableCom Networking Holdings Ltd has been in the portfolio since 2007 and manages internet services to high density accommodation such as student accommodation. The business was sold in October 2013 via a secondary management buy-out and the realisation delivered 4.8 times the original cost. In addition, a £5 million investment (£1.25 million for Baronsmead VCT 2) was negotiated in the new transaction on the same terms as the lead private equity buyer as ISIS believes there is an opportunity for further growth.

· CSC (World), which provides software packages for structural engineers, has been in the Baronsmead portfolio since 2008. During the investment period, CSC with ISIS support has remained as a UK market leader through a difficult economic period for the UK construction sector. The business has also been successful in growing sales across six continents. The company was sold in November 2013 to Trimble, a US business listed on NASDAQ, delivering 2.4x return.

· Kafevend Holdings is a leading provider of workplace vending supplying hot drinks, coffee vending machines, water and snack vending to 10,000 company sites across the UK. ISIS first invested in 2005 and since then sales have grown to £20m in 2013 and staff numbers grown to 100. A successful exit was achieved to international trade buyer Eden Springs in December 2013, delivering 2.5x return on cost of investment.

· 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.

· The investment in Empire World Trade has also been realised in the year but this was not a successful investment for the fund. Empire World Trade is a well respected and leading importer and distributor of apples and pears from growers around the world to the large UK retailers. ISIS invested in 2006 and since then the market has become increasingly competitive supplying the large retailers. The valuation of this investment had already been fully provided previously. After considerable work by the management team and ISIS, it was ultimately concluded that the business would be better as part of a large group and the business was acquired by Univeg UK. There was only a modest return of £100,000 on the investment across the Baronsmead VCTs, (£25,000 for Baronsmead VCT 2).

Quoted Portfolio (AIM traded and other listed investments)

This has been another year with a significant uplift in the quoted portfolio of 32 per cent building on the strong positive re-rating of the small cap sector last year. The performance of the quoted portfolio also reflects the changes introduced by the ISIS 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 in the last two 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 2 of £2.5 million was made across six new and five follow on investments. Two of the larger new investments were:

· Scholium Group ("Scholium") is a niche high end art and collectibles retail and trading business that provides exposure to the growing high net worth segment of the consumer market. Scholium has an experienced management team who intend to use the additional capital raised at IPO to grow the inventory they are able to offer and also work with a network of dealer experts to trade selected products.

· Everyman Media Group ("Everyman") offers a differentiated proposition in the independent UK cinema market. It provides a premium product with a greater emphasis on comfort as well as high quality food and drink offering for the cinema visitor. Everyman has potential to grow through improving spend per customer at the current sites and through rolling out new sites across the UK. The management team are known to ISIS through their involvement in successful investments in Tasty and Prezzo.

Quoted Divestment Activity

Realisations during the year from the quoted portfolio totalled £7.5 million and delivered an aggregate return of 2.3 x cost. Notably within this is the full realisation of Vectura Group (2.9x cost) which had been held by Baronsmead VCT 2 as both an unquoted and quoted investment, the full realisation of Murgitroyd (5.5x cost) and the partial sales in the market of Staffline Group (at 9.0x cost) and 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 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 ISIS 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 ISIS Quoted team to seek performance improvement. At 30th September 2014, Baronsmead VCT 2 had invested £3.5 million through Wood Street into a portfolio of 40 companies, now valued at £7.6 million. Wood Street generated a positive return of 24 per cent over the year.

Liquid assets (cash and near cash)

Baronsmead VCT 2 had cash and near cash resources of approximately £21.1 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.

CHANGE OF NAME

The Manager has previously announced that it intends to change its name and it is expected that the new name will be announced shortly.

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.

ISIS 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 2's diversified portfolio is well positioned to continue its progress in the current market.

ISIS VC LLP

Investment Manager

14th November 2014

Ten Largest Investments

The top ten investments by current value at 30 September 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. Nexus Vehicle Holdings Limited - Leeds

Unquoted

All funds managed by ISIS First investment: February 2008Total cost: £9,535,000Total equity held: 62.11%

Baronsmead VCT 2 onlyCost: £2,375,000Valuation: £5,369,000Valuation basis: Earnings Multiple% of equity held: 13.67%

Year ended 30th September

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

2. Netcall plc - Hemel Hempstead

Quoted

All funds managed by ISIS First investment: July 2010Total cost: £4,354,000Total equity held: 18.00%

Baronsmead VCT 2 onlyCost: £869,000Valuation: £3,021,000Valuation basis: Bid Price% of equity held: 3.62%

Year ended 30th June

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

3. Staffline Group plc - Nottingham

Quoted

All funds managed by ISISFirst investment: July 2000Total cost: £174,000Total equity held: 2.40%

Baronsmead VCT 2 onlyCost: £87,000Valuation: £2,986,000Valuation basis: Last Traded Price% of equity held: 1.20%

Year ended 31st December

(Source: Staffline Recruitment Limited, Annual Report 31st December 2013)

4. IDOX Plc - London

Quoted

All funds managed by ISISFirst investment: May 2002Total cost: £1,641,000Total equity held: 4.90%

Baronsmead VCT 2 onlyCost: £614,000Valuation: £2,642,000Valuation basis: Bid Price% of equity held: 1.8%

Year ended 31st October

(Source: IDOX Plc Annual Report and Accounts 2013)

5. Crew Clothing Holdings Limited - London

Unquoted

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

Baronsmead VCT 2 onlyCost: £1,453,000Valuation: £2,446,000Valuation basis: Earnings Multiple% of equity held: 6.08%

Year ended 28th October

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

6. Accumuli plc - Salford

Quoted

All funds managed by ISIS First investment: November 2010Total cost: £2,707,000Total equity held: 23.20%

Baronsmead VCT 2 onlyCost: £504,000Valuation: £1,678,000Valuation basis: Bid Price% of equity held: 4.20%

Year ended 31st March

(Source: Accumuli plc, Annual Report and Accounts 2013)

7. Independent Community Care Management Limited - Kettering

Unquoted

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

Baronsmead VCT 2 onlyCost: £1,358,000Valuation: £1,554,000Valuation basis: Earnings Multiple% of equity held: 13.9%

Year ended 31st March

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

8. Jelf Group Plc - Bristol

Quoted

All funds managed by ISISFirst investment: October 2004Total cost: £2,942,000Total equity held: 5.60%

Baronsmead VCT 2 onlyCost: £761,000Valuation: £1,353,000Valuation basis: Bid Price% of equity held: 1.40%

Year ended 30th September

(Source: Jelf Group Plc Annual Report and Accounts for Year End 30th September 2013)

9. Create Health Limited - London

Unquoted

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

Baronsmead VCT 2 onlyCost: £1,065,000Valuation: £1,520,000Valuation basis: Earnings Multiple% of equity held: 5.74%

Year ended 31st March

(Source: Create Health Ltd Abbreviated Accounts 31st March 2013)

# not disclosed

10. Tasty plc - London

Quoted

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

Baronsmead VCT 2 onlyCost: £594,000Valuation: £1,473,000Valuation basis: Bid Price% of equity held: 2.53%

Year ended 29th December

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

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 ISIS as Investment Manager to help achieve the investment objective of the Company. The key elements of the investment strategy and its 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.

Each business has already demonstrated profitable success from its business model before investment to provide a degree of stability and a foundation from which to build. Each business is led by entrepreneurial management teams that are aspiring to achieve above average growth from attractive and differentiated market positions.

The Manager's approach to investing

The Manager, ISIS, 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, ISIS 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 ISIS is keen to maintain a relationship ahead of possible investment opportunities.

ISIS as an influential shareholder

For unquoted investments, ISIS is an involved shareholder and representatives of the Manager (on behalf of the Baronsmead family of VCTs) join the investee board. The role of ISIS 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.

Other Matters

Applying the Business Model

The Company's investment objective and investment policy are set out earlier. This section of the Strategic Report sets out the practical steps that the Board has taken in order to achieve the investment objective and adhere to the investment policy.

Appointment of the right investment manager

The Board has delegated the management of the investment portfolio to ISIS VC LLP ("ISIS" 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.

The Manager's Review on 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 22nd July 2014 the Company was registered as a Small UK registered AIFM (Alternative Investment Fund Manager) under the Alternative Investment Fund Managers Directive ("AIFMD"). In preparation for this the investment management agreement between the Company and ISIS EP LLP dated 20th December 2006 was novated to ISIS VC LLP (previously named FPPE LLP), a MiFID (Markets in Financial Instruments Directive) authorised company with the same controlling members as ISIS 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 Board have also engaged the Manager to provide or procure company secretarial, accounting and administrative 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 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 Income Tax Act 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 comprising in 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 6th 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

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 and Growth Fund.

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 NAV total return which is in the top quartile of generalist VCTs. 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. The Board assesses the performance of the Manager in meeting the Company's objective against the primary KPIs highlighted in the Annual Report.

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 2014 was 2.39 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 £553,000 (2013: £1,436,000) is payable.

Management retention

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 and every unquoted investment made by the Baronsmead VCTs. 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. 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 co-investment 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 sector 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 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 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 £838k in 40 companies. At 30th September 2014 twenty of these investments have been realised generating proceeds of £175m for the Baronsmead VCTs and £8.9m for the co-investment scheme. For Baronsmead VCT 2 the average money multiple on these twenty realisations was 2.1 times cost. Had the co-investment shares been held instead by the Baronsmead VCTs that money multiple would have been 2.2 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.

Advisory Fees

During the year to 30th September 2014, the Manager received income of £89,000 (2013: £146,000) in connection with advisory fees and incurred abort fees of £1,000 (2013: £1,000), with respect to investments attributable to Baronsmead VCT 2.

Directors' fees of £207,000 (2013: £203,000) were received during the year in relation to services provided to companies in the investment portfolio, with respect to investments attributable to Baronsmead VCT 2.

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 two female and two 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 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 7p 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 issue costs. In March 2014, the Company's offer for subscription 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 1,041,000 shares were bought in this way during the year to 30th September 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 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 629,000 shares were bought by investors in the Company's existing shares in the year to 30th September 2014.

On behalf of the Board

Clive Parritt

Chairman

14th November 2014

Extract of the Directors Report

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 9,633,363 new ordinary shares (nominal value £963,336.30) were allotted on 14th March 2014 at a price of 103.80p per share, representing 10.14 per cent of the issued share capital following allotment. The terms of issue were set out in the prospectus dated 22nd January 2014 and the offer price was set on 14th March 2014.

During the year the Company bought back a total of 645,000 ordinary shares to be held in Treasury, representing 0.7 per cent of the issued share capital as at 30th September 2014, with an aggregate nominal value of £64,500. The total amount paid for these shares was £617,725. The Company's remaining authority to buy back shares from the 2013 AGM is 10,744,711.

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

The number of shares held in Treasury at the date of the report was the maximum held during the year. 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.

Tax free dividends

The Company paid the following dividends for the year ended 30th September 2014:

*the second 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 30th September 2014, the Company held cash balances and investments in UK Treasury Bills with a combined value of £21,135,000. 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

ISIS VC LLP

Secretary

100 Wood Street London EC2V 7AN

14th November 2014

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 performance, business model and strategy.

On behalf of the Board

Clive Parritt

Chairman

14th November 2014

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 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.baronsmeadvct2.co.uk 

Income Statement

For the year ended 30 September 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

For the year ended 30th September 2014

Balance Sheet

As at 30th September 2014

The financial statements were approved by the Board of Directors on 14th November 2014 and were signed on its behalf by:

Clive Parritt

Chairman

Cash Flow Statement

For the year ended 30th September 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. 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 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 Net asset value per share

The treasury net asset value per share as at 30th September 2014 included ordinary shares held in treasury valued at the mid share price of 93.25p at 30th September 2014 (2013: 94.25p).

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, ISDX and listed 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 period 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 £1.2 million or 5.0 per cent lower. Using the upside alternatives the value would be increased by £1.7 million or 6.7 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, ISIS 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 Annual Report.

Charges for other services provided by the auditors in the year were in relation to tax compliance work (including iXBRL) and a project relating to reorganisation of the financial statements. 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 2014 the Company had surplus management expenses of £3,304,577 (2013: £2,349,443) 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