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18 Dec 2020 12:45
Half-Yearly ReportDowning FOUR VCT plc
LEI: 21380035MV1VRYEXPR95
Half-Yearly Report for the six months ended 30 September 2020
Financial Highlights
| Unaudited | Audited | Unaudited | |
| 30 September2020 | 31 March2020 | 30 September2019 | |
| pence | pence | pence | |
| Generalist Share pool | |||
| Net Asset Value per Generalist Share | 61.2 | 61.7 | 77.6 |
| Cumulative distributions | 2.5 | - | - |
| Total Return per Generalist Share | 63.7 | 61.7 | 77.6 |
| Healthcare Share pool | |||
| Net Asset Value per Healthcare Share | 65.2 | 68.1 | 77.7 |
| Cumulative distributions | 2.5 | - | - |
| Total Return per Healthcare Share | 67.7 | 68.1 | 77.7 |
| DSO D Share pool | |||
| Net Asset Value per DSO D Share | 10.7 | 12.0 | 28.9 |
| Cumulative distributions | 94.5 | 94.5 | 76.5 |
| Adjusted for Performance Incentive estimate* | (1.2) | (4.3) | (4.1) |
| Total Return per DSO D Share | 104.0 | 102.2 | 101.3 |
| DP67 Share pool | |||
| Net Asset Value per DP67 Share | 18.4 | 18.8 | 47.4 |
| Cumulative distributions (since original launch) | 67.8 | 67.8 | 49.8 |
| Total Return per DP67 Share | 86.2 | 86.6 | 97.2 |
*Based on Total Return to Shareholders at 30 September 2020, a Performance Incentive is expected to become due to management. The Performance Incentive has been estimated at 1.2p per DSO D Share. No provision has been included in the accounts as the conditions of the Performance Incentive fee have not yet been met.
Chairman’s StatementIntroductionI present the Company’s Half-Yearly Report for the six months ended 30 September 2020.
When the Company last reported to Shareholders in July, the economy was continuing to suffer from the severe disruption caused by the coronavirus pandemic, although it appeared that the world was starting to take the first steps back to normality. We now know that the path back to something approaching normal is longer than we had envisaged at that time.
Despite the disruption, I am pleased to report that the Company has recommenced new investment activity in recent months and both the Generalist and Healthcare Share pools have continued to build their portfolios. This has been supported by some significant enhancements to the Manager’s team during the period, which has helped to generate new deal flow.
The news is less positive for the planned exit share pools, where the disruption has been a hindrance to the exit processes, compounded by the two portfolios holding assets in sectors which have fared particularly poorly as a result of the pandemic restrictions.
Share pool reviewAt 30 September 2020, the Company had four active share pools; the largest two being evergreen share pools and the others being planned exit share pools in the process of returning funds to Shareholders.
Evergreen Share poolsGeneralist Share pool
At the period end, the Generalist Share net asset value per share (“NAV”) stood at 61.2p. During the period, the share pool paid its first dividend of 2.5p per Share. Total Return (NAV plus dividends paid) at 30 September 2020 stood at 63.7p per Share, an increase of 2.0p from 31 March 2020.
During the period, the Manager invested £4.0 million across six new VCT Qualifying businesses. A further £2.2 million was also invested in five existing companies in the Generalist Venture Capital portfolio, including a reorganisation in which loan notes were converted into equity.
There has been mixed performance across the Venture Capital portfolio over the period. Businesses such as E-Fundamentals (Group) Limited and Virtual Class Limited operate in sectors that have benefitted from the pandemic (Ecommerce and Online Education), which has helped support valuation increases of £1.1m and £703,000 respectively. Conversely, modified timber manufactured, Lignia Wood Company Limited, has been badly impacted by the pandemic and is struggling to raise new funds to support its requirements. It is expected that no value will be recovered from the business and the Generalist Share pool’s investment has therefore been valued at £nil.
The portfolio of non-qualifying liquidity funds, comprise two OEICs and one investment trust managed by Downing LLP, made some recovery over the period, increasing in value by £751,000.
A more detailed review of the Generalist Share pool is included in the Investment Manager’s Report.
Healthcare Share pool
At the period end, the Healthcare Share net asset value per Share (“NAV”) stood at 65.2p. During the period, the share pool paid its first dividend of 2.5p per Share. Total Return (NAV plus dividends paid) at 30 September 2020 stood at 67.7p per Share, compared to 68.1p at 31 March 2020.
During the period, £1.1m was invested in two new VCT Qualifying businesses, whilst a further £539,000 was invested in two of the existing businesses in the Healthcare Venture Capital portfolio.
The Healthcare Venture Capital portfolio produced unrealised losses of £194,000 for the period, the largest movement being a reduction in the value of ADC Biotechnology Limited, as a result of disappointing progress made by the company to date.
As with the Generalist Share pool, the portfolio of non-qualifying liquidity funds recovered some ground over the period, resulting in a valuation uplift of £204,000.
A more detailed review of the Healthcare Share pool is included in the Investment Manager’s Report.
Planned Exit Share poolsDSO D Share pool
The DSO D Share portfolio holds five remaining investments. At the period end, the net asset value per share (“NAV”), net of the estimated performance incentive fee, stood at 9.5p. Total Return at 30 September 2020 stood at 104.0p per share, an increase of 1.8p since 31 March 2020.
The process of exiting from the remaining investments has been significantly disrupted by the coronavirus pandemic. Plans to sell the two solar businesses (Fresh Green Power Limited and Green Energy Production Limited) were delayed as onsite inspections of the assets by the buyer could not take place as planned.
These plans are now being progressed again and we are hopeful this will lead to an exit in the coming months. The share pool’s pub investment, Pearce and Saunders Limited, is more challenging with the original sale plans now having fallen through. The Manager is now developing new plans to exit, although it is clear that this may take some time.
A more detailed review of the DSO D Share pool is included in the Investment Manager’s Report.
DP67 Share pool
The DSO D Share portfolio holds four remaining investments. At the period end, the net asset value (“NAV”) per Share stood at 18.4p. Total Return at 30 September 2020 stood at 86.2p per share, a fall of 0.4p per share since 31 March 2020.
The share pool’s remaining investments all operate in the hospitality sector and, unsurprisingly, the exit plans for each have been heavily impacted by the pandemic. The Manager is continuing to work closely with these businesses to support their operations, to allow new exit plans to be formulated as restrictions are lifted. It is expected that these plans will take some time to come to fruition.
A more detailed review of the DP67 Share pool is included in the Investment Manager’s Report.
FundraisingDuring the period, the Company had open offers for subscription in respect of its Generalist and Healthcare Share pools, primarily to allow Shares to be allotted to existing Shareholders continuing their regular monthly applications. During the period, 1,121,210 Generalist shares and 421,679 Healthcare shares were issued at average prices of 62.9p and 69.9p respectively.
The current offers will close on 31 January 2021 and are open for new applications for the current tax year (2020/21). Members of the management team and Directors of the Company have indicated their intention to invest under the current offers. Full details can be found on the following webpage:
www.downing.co.uk/d4
DividendsThe Company will not pay any interim dividends for the period ended 30 September 2020 in respect of its Generalist and Healthcare Share classes. It is expected that the next Generalist and Healthcare dividends will be declared alongside announcement of the annual results for the year ended 31March 2021 and paid, after being approved by Shareholders at the AGM, in September 2021.
With respect to the DSO D and DP67 Share classes, the next dividends will be declared once further realisations have taken place.
Share buybacksThe Company operates a general policy of buying in its own Shares from the Generalist and Healthcare Share pools that become available in the market, subject to regulatory and liquidity factors. Any such purchases are undertaken at a price approximately equal to NAV (i.e. at a nil discount).
As the planned exit share classes are in the process of returning funds to Shareholders, the Company no longer operates a share buyback policy in respect of the DSO D and DP67 Share classes.
No Shares were repurchased in the six-month period ended 30 September 2020.
Panmure Gordon now acts as the Company’s corporate broker and provides assistance in operating the share buyback process, ensuring that the quoted spread on the Company’s evergreen Shares remains at a reasonable level. If you wish to sell or buy Shares in the Company, Panmure Gordon can supply details of closed periods etc. Contact details can be found on the Shareholder Information page of the Half-Yearly Report.
OutlookWith the first vaccinations having been administered in the UK, we can now perhaps start to look ahead to a world where coronavirus will eventually be brought under control and businesses may be able to return to normal functioning. This will, of course, not happen overnight and some businesses will be able to recover more successfully than others.
The Generalist and Healthcare Share pools mostly hold investments in young businesses. The respective Venture Capital portfolios may have already suffered most of the damage that will arise from the coronavirus pandemic. Some of the weaker businesses may not be able to recover from the crisis and ultimately go on to produce the returns that we had hoped for, however we believe that the portfolios contain a number of investments which have good prospects, particularly those recent new investments where the potential impact of the pandemic was already considered at the time of investment.
The planned exit share pools still face some significant challenges due to their exposure to sectors heavily impacted by the pandemic. The task of working towards exits from their remaining investments will continue, although it may be some time before these can be achieved at acceptable prices.
I look forward to updating all Shareholders in my statement with the Annual Report, which we expect to be published in July 2021.
Sir Aubrey Brocklebank Bt.Chairman
Investment Manager’s Report - Generalist Share Pool
i) OverviewIntroductionWe present a review of the investment portfolio and activity for the Generalist Share pool over the six-month period to 30 September 2020.
This Investment Manager’s Report is split into three sections comprising this overview, a review of Venture Capital Portfolio and a report on the portfolio of Liquidity Investments.
Net Asset Value and resultsAs at 30 September 2020, the NAV of a Generalist share stood at 61.2p, an increase of 2.0p from 31 March 2020, after adding back the dividend of 2.5p which was paid during the period.
The profit on ordinary activities for the Generalist Share pool for the period was £939,000, comprising a revenue profit of £172,000 and a capital profit of £767,000.
Whilst there has been some recovery in the NAV since 31 March 2020, the Total Return to Shareholders as at 30 September 2020, of 64.2p, continues to be considered an underperformance against our expectations for the Generalist Share pool.
Portfolio OverviewAs at 30 September 2020, the Generalist Share Pool held a portfolio of 39 Venture Capital investments and three Liquidity investments, with a combined value of £31.0 million.
The period to 30 September 2020 has been one of significant challenge to the livelihoods of businesses in the UK and the rest of the World. During this period, we have been working closely with portfolio companies to provide guidance and, where appropriate, additional funding to support these businesses in navigating the challenges brought about by the coronavirus pandemic.
As is to be expected, as the Generalist Share pool holds investments in a range of different businesses, the pandemic has impacted certain portfolio companies more severely than others. The valuation movements during the period are discussed in more detail in the following sections of this Investment Manager’s Report.
Portfolio PerformanceOverall, the valuation reductions in the Venture Capital Portfolio were largely offset by several valuation uplifts during the period, resulting in a net valuation reduction on this portfolio of £198,000.
The carrying values of the Liquidity Investments have been adjusted to reflect their quoted prices as at 30 September 2020. This resulted in a valuation uplift of £751,000 for the period.
ii) Venture Capital PortfolioInvestment activityDuring the period, a total of £6.2 million was invested in eleven businesses, six of which are new VCT Qualifying investments, with five being existing portfolio companies.
New Venture Capital investmentsA description of each of the new VCT Qualifying investments made during the period is shown below.
Cornelis Networks, Inc. (£1.4 million) has developed purpose-built high-performance fabrics used within commercial, scientific, academic and government organisations.
Parsable, Inc. (£766,000) has developed mobile-centric applications and web admin system software to improve operational efficiency within the corporate and manufacturing industry.
Ayar Labs, Inc. (£764,000) has developed components for high performance computing and data centre applications.
Carbice Corporation (£656,000) has developed a suite of products based on carbon nanotube with their products primarily used as thermal management solutions.
Trinny London Limited (£219,000) is an e-commerce-based beauty and cosmetics brand launched by Trinny Woodall.
MIP Diagnostics Limited (£200,000) is a manufacturer of polymer based synthetic antibodies which are used across a variety of sectors including diagnostics, sensors, food testing and reagent purification.
Follow-on Venture Capital investmentsA description of each of the follow-on investments made into existing businesses in the Venture Capital Portfolio is shown below.
During the period, the existing loan note investments in Empiribox Holdings Limited, a provider of equipment and training to primary schools across the UK, converted into equity as part of a restructuring. At this point, all outstanding loan note interest was also converted into equity. The Generalist Share pool also made a further equity investment of £250,000 during the period.
A further £525,000 was invested in FundingXchange Limited, bringing the Generalist Share pool’s total investment to date to £1.1 million. The business is an SME funding platform and B2B technology provider which enables online lending.
£434,000 was invested in Congenica Limited, a company which has developed a genomics-based diagnostic decision support platform which helps doctors identify rare diseases in patients.
A further £125,000 was invested in Virtual Class Limited, trading as Third Space Learning. The company has developed an online educational platform that provides mathematics tuition to pupils studying for their Key Stage 2 exams.
£62,000 was invested in ADC Biotechnology Limited, a company creating innovative new technology which aims to speed up, simplify and lower the costs of the processes involved in the production of new Antibody Drug Conjugates (ADCs).
Portfolio valuationDuring the period, Venture Capital portfolio of the Generalist Share pool was reduced in value by a total of £198,000. Whilst there have been several positive developments within the Venture Capital portfolio, a number of companies were reduced in value due to them not progressing as we had hoped.
Lignia Wood Company Limited has experienced material reductions in demand over the previous six months as the restrictions on the movement of goods have impacted the supply chain significantly. Given the impact of coronavirus on the business’ performance to date, coupled with the ongoing uncertainty caused by the pandemic, the business has not been able to raise further funds. As a result, we believe there is a significant risk that the business may now ultimately fail and the value of the Generalist Share pool’s investment has therefore been reduced to £nil.
As noted previously, Empiribox Holdings Limited was restructured during the period. The valuation of the Generalist Share pool’s investment in the business was reduced by £403,000 during the period. This unrealised valuation reduction was partially offset by a realised gain of £325,000 on the conversion of the Generalist Share pool’s loan notes, giving a net loss of £83,000 for the period, in respect of this investment.
ADC Biotechnology Limited is significantly behind on its plans and has been written down by a further £309,000 as a result. The recent follow-on investment was made with the aim of supporting the business in the short-term.
The transformation of Upp Technologies Group is yet to result in the achievement of the revenue targets set out at the time of the most recent investment. The coronavirus pandemic has created further challenges in this regard and the investment has been reduced in value by £298,000 as a result.
Exonar Limited has been reduced in value by £204,000, to reflect the valuation set at the company’s most recent funding round.
Whilst it is disappointing to report these valuation reductions for the period, there were several positive developments in the portfolio.
E-Fundamentals (Group) Limited has progressed well both in the UK and in the US, with recurring revenues continuing to grow. This good performance has resulted in a valuation uplift of £1.1 million as at 30 September 2020.
Virtual Class Limited, which received further funding from the Generalist Share pool during the period, was uplifted in value by £703,000 as at 30 September 2020. The business has seen an increase in demand for its online educational platform.
Rated People Limited has also progressed well, and the valuation of the Generalist Share pool’s investment in the business was uplifted by £302,000 as at 30 September 2020
Other smaller valuation movements in the Venture Capital Portfolio amounted to a net uplift of £195,000 for the period.
OutlookIt is frustrating to report further valuation reductions in the Generalist Venture Capital Portfolio. The far reaching and continuing impacts of coronavirus have intensified the challenges faced by young growth companies. However, we are encouraged that many of these companies have been able to adapt their operations and continue with their plans during these difficult and uncertain times. This is demonstrated by some of the recent investments made by the Generalist Share pool and the valuation uplifts at the half-year date.
Our focus for the Venture Capital Portfolio is on working with management teams to help these businesses achieve their milestones, whilst adding new investments to the portfolio where we feel the opportunity is appropriate.
ii) Liquidity InvestmentsThe carrying values of the Liquidity Investments have been adjusted to reflect their quoted prices as at 30 September 2020. This resulted in a total uplift of £751,000 for the period.
Downing Strategic Micro-Cap Investment Trust plcThe value of the Generalist Share pool’s holding in Downing Strategic Micro-Cap Investment Trust plc (“DSM”) was increased in value by £44,000 during the period. The Managers of DSM believe that the discount, and the underlying share prices, materially undervalue the prospects of the company and its investments. The Managers are also confident that the company has a strong portfolio of fundamentally good companies with strong balance sheets and the crucial ‘survivability’ factor. DSM intends to add to those positions that it is currently building, and perhaps introduce one or two other investments over time. The Managers’ focus is also on driving the catalysts for value in DSM’s more mature portfolio.
Downing Monthly Income FundThe value of the Generalist Share pool’s investment in Downing Monthly Income Fund (“DMI”) increased by £331,000, or 12.2% during the period. This compares to 7.44% returned by the IA UK Equity Income Sector. The period was very challenging as markets sold off indiscriminately as coronavirus caused chaos globally. Over the summer there were some signs of normality as lockdown restrictions were eased and markets began to recover. However, volatility has been a constant theme throughout the period as fears over a second wave of the pandemic, and latterly Brexit and the US elections, impacted on both investor and market sentiment.
The Managers of DMI have positioned the portfolio defensively and have focused on improving the quality of the portfolio, concentrating on companies with resilient earnings and strong capital positions. The Managers believe that the fund is well positioned for the more protracted economic headwinds that the UK economy undoubtably faces over the coming months.
Downing Micro-Cap Growth FundThe value of the Generalist Share pool’s investment in Downing Micro-Cap Growth Fund (“DMCG”) increased by £376,000 or 16.6% over the six-month period to 30 September 2020. Over the period under review, DMCG outperformed the NSCI Small Value segment by 9.14% which the Managers believe reflects successful stock picking under the new mandate, which allows the managers to invest in up to 40 companies with a market cap of under £350 million at initial investment.
Since the period end the ACD (Associated Corporate Director), and Downing LLP have taken the decision to suspend DMCG (meaning that shares cannot be purchased or sold), on the grounds of the funds ongoing viability due to its small size. Options are being explored for the fund which include an orderly winding up and a return of capital to shareholders.
OutlookThe coronavirus crisis has hit all parts of the UK market but large cap companies have held up slightly better than their smaller company peers as they are considered more exposed to the UK domestic economy. The Managers are encouraged by the actions management teams have taken and believe that the portfolio companies are now structurally in a better position than they were pre-coronavirus, and that they are now more resilient to a second wave of the pandemic. The Managers report that these companies have strong balance sheets, more resilient earnings, better returns on capital and less debt, but on considerably more attractive valuations than the broader market.
The Managers believe that markets will continue to be volatile given the ongoing challenges caused both by coronavirus and the political uncertainties due to the Brexit transition and the US elections. While it is difficult to be positive in the short term, the Managers believe the portfolios are well positioned to continue to grow over the medium to longer term.
Downing LLP
Review of Investments – Generalist Share PoolThe following investments were held at 30 September 2020:
| Cost | Valuation | Valuation Movementin period | % ofportfolio | |||
| Portfolio of investments | £’000 | £’000 | £’000 | |||
| Venture Capital investments | ||||||
| E-Fundamentals (Group) Limited | 1,342 | 2,408 | 1,066 | 7.8% | ||
| Rated People Limited | 1,282 | 1,584 | 302 | 5.1% | ||
| Cornelis Networks, Inc. | 1,402 | 1,402 | - | 4.5% | ||
| Virtual Class Limited (Third Space Learning) | 928 | 1,374 | 703 | 4.4% | ||
| Trouva Limited | 1,050 | 1,101 | - | 3.5% | ||
| FundingXchange Limited | 1,050 | 1,050 | - | 3.4% | ||
| Firefly Learning Limited | 1,047 | 1,047 | - | 3.4% | ||
| Imagen Limited | 1,000 | 1,000 | - | 3.2% | ||
| Ecstase Limited | 1,000 | 1,000 | - | 3.2% | ||
| Limitless Technology Limited | 757 | 803 | - | 2.6% | ||
| Hackajob Limited | 784 | 784 | - | 2.5% | ||
| Parsable, Inc. | 766 | 766 | - | 2.5% | ||
| Ayar Labs, Inc. | 764 | 764 | - | 2.5% | ||
| Congenica Limited | 734 | 746 | 12 | 2.4% | ||
| Masters of Pie Limited | 667 | 667 | - | 2.1% | ||
| Carbice Corporation | 656 | 656 | - | 2.1% | ||
| Empiribox Holdings Limited | 1,888 | 607 | (403) | 2.0% | ||
| JRNI Limited | 525 | 525 | - | 1.7% | ||
| Upp Technologies Group Limited (previously Volo Commerce) | 1,077 | 510 | (298) | 1.6% | ||
| Hummingbird Technologies Limited | 500 | 503 | 85 | 1.6% | ||
| Maverick Pubs (Holdings) Limited | 1,000 | 500 | - | 1.6% | ||
| BridgeU Corporation | 810 | 462 | 48 | 1.5% | ||
| Lineten Limited | 400 | 400 | - | 1.3% | ||
| Fenkle Street LLP* | 301 | 385 | (15) | 1.2% | ||
| Cambridge Touch Technologies Limited | 459 | 361 | - | 1.2% | ||
| Channel Mum Limited | 500 | 300 | - | 1.0% | ||
| Arecor Limited | 300 | 300 | - | 1.0% | ||
| Exonar Limited | 500 | 296 | (204) | 1.0% | ||
| FVRVS Limited | 250 | 250 | - | 0.8% | ||
| ADC Biotechnology Limited | 877 | 231 | (309) | 0.7% | ||
| Trinny London Limited | 219 | 219 | - | 0.7% | ||
| MIP Diagnostics Limited | 200 | 200 | - | 0.6% | ||
| Destiny Pharma plc^ | 500 | 169 | 65 | 0.5% | ||
| Lignia Wood Company Limited | 1,778 | - | (1,250) | 0.0% | ||
| Live Better With Limited | 1,211 | - | - | 0.0% | ||
| Xupes Limited | 933 | - | - | 0.0% | ||
| Ormsborough Limited | 900 | - | - | 0.0% | ||
| Glownet Limited | 741 | - | - | 0.0% | ||
| 31,128 | 23,370 | (198) | 75.2% | |||
| Liquidity investments | ||||||
| MI Downing Monthly Income Fund* | 3,950 | 3,043 | 331 | 9.8% | ||
| MI Downing UK Micro-Cap Growth Fund* | 4,025 | 2,646 | 376 | 8.5% | ||
| Downing Strategic Micro-Cap Investment Trust plc*^ | 4,269 | 1,917 | 44 | 6.2% | ||
| 12,244 | 7,606 | 751 | 24.5% | |||
| 43,372 | 30,976 | 553 | 99.7% | |||
| Cash at bank and in hand | 79 | 0.3% | ||||
| Total investments | 31,055 | 100.0% | ||||
All Venture Capital investments are incorporated in England and Wales.*non-qualifying investment**partially qualifying investment ^listed and traded on the London Stock Exchange
Investment movements for the period ended 30 September 2020
| Cost | |
| Additions | £’000 |
| Venture Capital investments | |
| Cornelis Networks, Inc. | 1,402 |
| Empiribox Holdings Limited | 1,010 |
| Parsable, Inc. | 766 |
| Ayar Labs, Inc. | 764 |
| Carbice Corporation | 656 |
| FundingXchange Limited | 525 |
| Congenica Limited | 434 |
| Trinny London Limited | 219 |
| MIP Diagnostics Limited | 200 |
| Virtual Class Limited (Third Space Learning) | 125 |
| ADC Biotechnology Limited | 62 |
| 6,163 |
| Cost | Valuation at 01/04/20 | Proceeds | Profit/(loss)vs. cost | Realisedgain | |
| Disposals | £’000 | £’000 | £’000 | £’000 | £’000 |
| Venture Capital investments | |||||
| Empiribox Holdings Limited | 650 | 325 | 650 | - | 325 |
| 650 | 325 | 650 | - | 325 | |
Investment Manager’s Report- Healthcare Share Pool
i) OverviewIntroductionWe present a review of the investment portfolio and activity for the Healthcare Share pool over the six-month period to 30 September 2020.
This Investment Manager’s Report is split into three sections comprising this overview, a review of Venture Capital Portfolio and a report on the portfolio of Liquidity Investments.
Net Asset Value and resultsAs at 30 September 2020, the NAV of a Healthcare share stood at 65.2p, a decrease of 0.4p from 31 March 2020, after adding back the dividend of 2.5p which was paid during the period.
The loss on ordinary activities for the Healthcare Share pool for the period was £85,000, comprising a revenue loss of £21,000 and a capital loss of £64,000.
The Total Return to Healthcare Shareholders, as at 30 September 2020, was 67.7p. This underperformance against our expectations for the Healthcare Share pool is disappointing to report.
Portfolio OverviewAs at 30 September 2020, the Healthcare Share Pool held a portfolio of 12 Venture Capital investments and three Liquidity investments, with a combined value of £9.7 million.
The period to 30 September 2020 saw the impact of the coronavirus pandemic extend through all sectors of the UK economy. Whilst some Healthcare businesses have been positively impacted by the efforts to contain the virus, reduce the burden on the NHS and develop a vaccine, others have been negatively impacted by the delays in both elective surgeries and the trials of certain pharmaceuticals.
The valuation movements during the period are discussed in more detail in the following sections of this Investment Manager’s Report.
Portfolio PerformanceThere were several valuation movements in the Venture Capital Portfolio during the period, resulting in a net valuation reduction of £196,000.
The carrying values of the Liquidity Investments have been adjusted to reflect their quoted prices as at 30 September 2020. This resulted in a valuation uplift of £204,000 for the period.
ii) Venture Capital PortfolioInvestment activityDuring the period, a total of £1.6 million was invested in four businesses, two of which are new VCT Qualifying investments and the remaining two being existing portfolio companies.
New Venture Capital investmentsA description of each of the two new VCT Qualifying investments made during the period is shown below.
Genincode UK Limited, trading as GEN inCode (£900,000), develops products and technology that helps patients and healthcare practitioners to assess and predict the onset of cardiovascular disease, thrombosis, and the diagnosis of Familial Hypercholesterolemia.
MIP Diagnostics Limited (£200,000) is a manufacturer of polymer based synthetic antibodies which are used across a variety of sectors including diagnostics, sensors, food testing and reagent purification.
Follow-on Venture Capital investmentsA further £434,000 was invested in Congenica Limited, a business which has developed a genomics-based diagnostic decision support platform which helps doctors identify rare diseases in patients.
£105,000 was also invested in ADC Biotechnology Limited, a company creating innovative new technology which aims to speed up, simplify and lower the costs of the processes involved in the production of new Antibody Drug Conjugates (ADCs).
Portfolio valuationDuring the period, Venture Capital portfolio of the Healthcare Share pool was reduced in value by a total of £196,000.
Whilst the majority of the businesses in the Healthcare Share pool’s Venture Capital portfolio were able to progress with their plans over the period, we are disappointed to report that ADC Biotechnology Limited is significantly behind on its plans and has been written down by a further £267,000 as a result. The recent follow-on investment noted above was made with the aim of supporting the business in the short-term.
The Electrospinning Company Limited is a supplier and manufacturer of clinical-grade biomaterials, which can be used to act as a synthetic scaffold for implantation within body tissue to promote repair post trauma or surgery. The carrying value of the Healthcare Share pool’s investment was reduced by £58,000 as at 30 September 2020, to reflect the valuation set at the latest funding round.
Destiny Pharma plc (“Destiny Pharma”), which is listed on London’s Alternative Investment Market (AIM), was uplifted by £98,000 as at 30 September 2020, in line with the prevailing quoted price at that date. There has been some recovery in the share price since the market correction in March 2020, however the company’s latest clinical trial in respect of its XF-73 drug, which seeks to reduce the incidence of post-surgical infections, has been delayed because of the coronavirus pandemic. The company recently reported that trial recruitment has resumed, and it expects the results of this trial to be reported in Q1 2021. In November, the company also announced an £11.5 million funding round to facilitate the acquisition of the global rights to NTCD-M3, a drug combating C. difficile.
Congenica Limited was uplifted in value by £31,000 as at 30 September 2020. This slight uplift reflects the share price set under the most recent funding round, in which the Healthcare Share pool partook.
It is disappointing to report that we continue to anticipate no recovery of value from Live Better With Limited, a developer of a healthcare website aiming to help people with long term medical conditions.
OutlookThe building of the Venture Capital portfolio of the Healthcare Share pool has progressed well during the period. The focus for the Manager is on working with the existing portfolio companies to help these businesses achieve their plans, whilst also continuing to add appropriate VCT Qualifying investments to the Healthcare Share pool’s portfolio.
Whilst is it disappointing to report an early loss in the portfolio, it is typically the case with young growth companies that the weaker investments will come to the forefront first, before the performance of stronger investments has the opportunity to materialise. We are, however, pleased with how the majority of the Venture Capital portfolio has coped with the challenges brought about by the coronavirus pandemic and remain optimistic about the future prospects of these businesses.
iii) Liquidity InvestmentsThe carrying values of the Liquidity Investments have been adjusted to reflect their quoted prices as at 30 September 2020. This resulted in a total uplift of £204,000 for the period. Downing Strategic Micro-Cap Investment Trust plcThe value of the Healthcare Share pool’s holding in Downing Strategic Micro-Cap Investment Trust plc (“DSM”) was increased in value by £7,000 during the period. The Managers of DSM believe that the discount, and the underlying share prices, materially undervalue the prospects of the company and its investments. The Managers are also confident that the company has a strong portfolio of fundamentally good companies with strong balance sheets and the crucial ‘survivability’ factor. DSM intends to add to those positions that it is currently building, and perhaps introduce one or two other investments over time. The Managers’ focus is also on driving the catalysts for value in DSM’s more mature portfolio.
Downing Monthly Income FundThe value of the Healthcare Share pool’s investment in Downing Monthly Income Fund (“DMI”) increased by £92,000, or 12.2% during the period. This compares to 7.44% returned by the IA UK Equity Income Sector. The period was very challenging as markets sold off indiscriminately as coronavirus caused chaos globally. Over the summer there were some signs of normality as lockdown restrictions were eased and markets began to recover. However, volatility has been a constant theme throughout the period as fears over a second wave of the pandemic, and latterly Brexit and the US elections, impacted on both investor and market sentiment.
The Managers of DMI have positioned the portfolio defensively and have focused on improving the quality of the portfolio, concentrating on companies with resilient earnings and strong capital positions. The Managers believe that the fund is well positioned for the more protracted economic headwinds that the UK economy undoubtably faces over the coming months.
Downing Micro-Cap Growth FundThe value of the Healthcare Share pool’s investment in Downing Micro-Cap Growth Fund (“DMCG”) increased by £105,000 or 16.6% over the six-month period to 30 September 2020. Over the period under review, DMCG outperformed the NSCI Small Value segment by 9.14% which the Managers believe reflects successful stock picking under the new mandate which allows the managers to invest in up to 40 companies with a market cap of under £350 million at initial investment.
Since the period end the ACD (Associated Corporate Director), and Downing LLP have taken the decision to suspend DMCG (meaning that shares cannot be purchased or sold), on the grounds of the funds ongoing viability due to its small size. Options are being explored for the fund which include an orderly winding up and a return of capital to shareholders.
OutlookThe coronavirus crisis has hit all parts of the UK market but large cap companies have held up slightly better than their smaller company peers as they are considered more exposed to the UK domestic economy. The Managers are encouraged by the actions management teams have taken and believe that the portfolio companies are now structurally in a better position than they were pre-coronavirus, and that they are now more resilient to a second wave of the pandemic. The Managers report that these companies have strong balance sheets, more resilient earnings, better returns on capital and less debt, but on considerably more attractive valuations than the broader market.
The Managers believe that markets will continue to be volatile given the ongoing challenges caused both by coronavirus and the political uncertainties due to the Brexit transition and the US elections. While it is difficult to be positive in the short term, the Managers believe the portfolios are well positioned to continue to grow over the medium to longer term.
Downing LLP
Review of Investments – Healthcare Share PoolThe following investments were held at 30 September 2020:
| Cost | Valuation | Valuation Movementin period | % ofportfolio | ||
| Portfolio of investments | £’000 | £’000 | £’000 | ||
| Venture Capital investments | |||||
| Congenica Limited | 1,184 | 1,215 | 31 | 12.5% | |
| Arecor Limited | 1,100 | 1,100 | - | 11.3% | |
| Open Bionics Limited | 1,000 | 1,000 | - | 10.3% | |
| Genincode UK Limited | 900 | 900 | - | 9.3% | |
| MyRecovery Limited | 528 | 556 | - | 5.7% | |
| Adaptix Limited | 556 | 556 | - | 5.7% | |
| FVRVS Limited | 500 | 500 | - | 5.2% | |
| ADC Biotechnology Limited | 1,497 | 393 | (267) | 4.0% | |
| Destiny Pharma plc^ | 750 | 253 | 98 | 2.6% | |
| The Electrospinning Company Limited | 278 | 220 | (58) | 2.3% | |
| MIP Diagnostics Limited | 200 | 200 | - | 2.1% | |
| Live Better With | 1,106 | - | - | 0.0% | |
| 9,599 | 6,893 | (196) | 71.0% | ||
| Liquidity Investments | |||||
| MI Downing Monthly Income Fund* | 1,100 | 849 | 92 | 8.8% | |
| MI Downing UK Micro-Cap Growth Fund* | 1,125 | 737 | 105 | 7.6% | |
| Downing Strategic Micro-Cap Investment Trust plc*^ | 729 | 327 | 7 | 3.4% | |
| 2,954 | 1,913 | 204 | 19.8% | ||
| 10,914 | 8,806 | 8 | 90.8% | ||
| Cash at bank and in hand | 890 | 9.2% | |||
| Total investments | 9,696 | 100.0% | |||
*non-qualifying investment^listed and traded on the London Stock Exchange
Investment movements for the period ended 30 September 2020
| Cost | |
| Additions | £’000 |
| Venture Capital investments | |
| Genincode UK Limited | 900 |
| Congenica Limited | 434 |
| MIP Diagnostics Limited | 200 |
| ADC Biotechnology Limited | 105 |
| 1,639 |
Investment Manager’s Report DSO D Share Pool
IntroductionThe process of realising the investments and returning funds to Shareholders remains the focus of the DSO D Share pool, although this has been subject to significant delays as a result of the coronavirus pandemic.
Net Asset Value and resultsThe Net Asset Value (“NAV”) per DSO D Share at 30 September 2020, net of the estimated performance incentive fee, stood at 10.7p, an increase of 1.8p over the period. Whilst the reported NAV (prior to the deduction of the performance fee estimate) reduced by 1.3p during the period, the estimated performance incentive fee, which is expected to become due to partners and staff of Downing LLP, also reduced during the period.
Total Return, net of the estimated performance fee, stands at 104.0p per share compared to initial cost to Shareholders, net of income tax relief, of 70.0p per Share. We consider this to be satisfactory performance when compared to the initial NAV of 100p.
The loss on ordinary activities after taxation for the period was £104,000, comprising a revenue loss of £3,000 and a capital loss of £101,000.
Whilst it is unfortunate to report further delays in the realisation process, the NAV of the DSO Share pool has, to date, been materially unaffected by the widespread implications of the coronavirus pandemic. We believe that there continue to be opportunities to exit from the remaining investments, however we expect this process will take some time to complete.
Venture Capital investments As at 31 March 2020, the DSO D Share Pool held five Venture Capital investments with a total value of £458,000.
Portfolio activityPearce and Saunders Limited, the owner of freehold pubs in south east London, repaid loan note principal of £25,000 during the period, along with a redemption premium of £75,000.
Pearce and Saunders Devco Limited also repaid loan note principal of £1,000.
Portfolio valuationDuring the year, the carrying value of the portfolio of Venture Capital investments held by the DSO D Share pool was reduced by £97,000.
Pearce and Saunders Limited has been heavily impacted by the restrictions and forced closures brought about by the coronavirus pandemic. Accordingly, the valuation has been reduced by £149,000 as at 30 September 2020.
There were two small increases in value the period, the larger being an uplift of £42,000 on Fresh Green Power Limited, the owner of solar panels on the rooftops of domestic properties in the UK, which has been revalued as part of a potential sale.
Green Energy Production UK Limited owns a portfolio of commercial solar panels on the rooftops of Chicken sheds in Lincolnshire. The company is valued on a discounted cash flow basis and has been increased in value by £10,000, in accordance with the unwinding of the discount inherent in the valuation.
Outlook The focus for the DSO D Share pool continues to be on realising the remaining investments. The coronavirus pandemic has further delayed these exit processes, which we had originally hoped to complete by the end of this year. We now anticipate that these processes will be completed by the end of 2021. During this period, we will continue to support the companies in the portfolio and seek to maximise value for DSO D Shareholders. Further distributions will be once the final realisations have taken place.
Downing LLP
Review of investments - DSO D Share PoolThe following investments were held at 30 September 2020:
| Cost | Valuation | Valuation Movementin period | % ofportfolio | |
| Portfolio of investments | £’000 | £’000 | £’000 | |
| Venture Capital investments | ||||
| Fresh Green Power Limited | 189 | 273 | 42 | 35.5% |
| Pearce and Saunders Limited | 275 | 95 | (149) | 12.3% |
| Green Energy Production UK Limited | 100 | 64 | 10 | 8.3% |
| Pearce and Saunders DevCo Limited* | 19 | 19 | - | 2.5% |
| Apex Energy Limited | 400 | 7 | - | 0.9% |
| 983 | 458 | (97) | 59.5% | |
| Cash at bank and in hand | 312 | 40.5% | ||
| Total investments | 770 | 100.0% |
* non-qualifying investment
All Venture Capital investments are incorporated in England and Wales.
Investment movements for the period ended 30 September 2020
| Cost | Valuationat 01/04/20 | Proceeds | Profitvs. cost | Realisedgain | |
| Disposals | £’000 | £’000 | £’000 | £’000 | £’000 |
| Venture Capital investments | |||||
| Pearce and Saunders Limited | 25 | 100 | 100 | 75 | - |
| Pearce and Saunders DevCo Limited* | 1 | 1 | 1 | - | - |
| 26 | 101 | 101 | 75 | - |
* non-qualifying investment
Investment Manager’s Report - DP67 Share Pool
IntroductionThe process of realising the investments and returning funds to DP67 Shareholders remains the focus for this Share pool, although, as Shareholders will be aware, this has been subject to substantial delays as a result of the coronavirus pandemic.
Net Asset Value and resultsThe Net Asset Value (“NAV”) per DP67 Share at 31 March 2020 stood at 18.4p, a decrease of 0.4p over the period. Total Return stands at 86.2p per DP67 Share, compared to initial cost to Shareholders, net of income tax relief, of 70.0p per Share. Compared to the initial NAV of 100p, we consider the Total Return of 86.2p to be underperformance against the original expectations for the DP67 Share pool.
The loss on ordinary activities after taxation for the period was £39,000, comprising a revenue loss of £5,000 and a capital loss of £34,000.
As we set out in the last Annual Report, the DP67 portfolio has a high level of exposure to the leisure and hospitality sector, which has been severely impacted by the restrictions and forced closures accompanying the coronavirus pandemic. It is difficult to progress with exits from these types of investments at a time when the underlying businesses are unable to operate at full capacity. We continue to seek the best realisation outcomes for DP67 Shareholders but anticipate that it will take some time for these to be achieved.
Venture Capital investments As at 31 March 2020, the DP67 Share pool held a portfolio of five Venture Capital investments, with a total value of £2.1 million.
Portfolio activityIt is disappointing to report that there were no realisations during the period.
Portfolio valuationThe DP67 portfolio was reduced in value by a total of £27,000 during the period. This reduction was wholly attributable to Fenkle Street LLP. The business is valued on a discounted cash flow basis and the timeline of the expected cash recovery has been set back in view of the coronavirus pandemic.
The valuations of the remaining Venture Capital investments are unchanged from those stated in the Annual Report to 31 March 2020.
OutlookThe focus for the DP67 Share pool continues to be on realising the remaining investments. The delays in the exit processes are frustrating, however we are hopeful that these might now complete by Q4 2021. In the interim, we will continue to work with management teams in order to maximise the proceeds for the DP67 Share pool. Further dividends will be paid once the final realisations have taken place.
Downing LLP
Review of Investments – DP67 Share PoolThe following investments were held at 30 September 2020:
| Cost | Valuation | Valuation Movementin period | % ofportfolio | ||
| Portfolio of investments | £’000 | £’000 | £’000 | ||
| Venture Capital investments | |||||
| Cadbury House Holdings Limited | 1,409 | 791 | - | 38.2% | |
| Fenkle Street LLP* | 405 | 723 | (27) | 34.9% | |
| Gatewales Limited** | 343 | 527 | - | 25.5% | |
| Yamuna Renewables Limited | 400 | - | - | 0.0% | |
| London City Shopping Centre Limited* | 99 | - | - | 0.0% | |
| 2,656 | 2,041 | (27) | 98.6% | ||
| Cash at bank and in hand | 28 | 1.4% | |||
| Total investments | 2,069 | 100.0% | |||
*non-qualifying investment**partially qualifying investmentAll Venture Capital investments are incorporated in England and Wales.
There were no investment disposals during the period.
UNAUDITED INCOME STATEMENTfor the six months ended 30 September 2020
| Six months ended30 Sep 2020 | Six months ended30 Sep 2019 | Year ended31 Mar 2020 | |||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Total | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| Income | 234 | 2 | 236 | 156 | 59 | 215 | 341 | ||||
| Gains/(losses) on investments | - | 762 | 762 | - | (2,717) | (2,717) | (11,837) | ||||
| 234 | 764 | 998 | 156 | (2,658) | (2,502) | (11,496) | |||||
| Investment management fees | (196) | (196) | (392) | (286) | (286) | (572) | (1,123) | ||||
| Other expenses | 105 | - | 105 | (279) | - | (279) | (711) | ||||
| Profit/(loss) on ordinary activities before tax | 143 | 568 | 711 | (409) | (2,944) | (3,353) | (13,330) | ||||
| Tax on total comprehensive income and ordinary activities | - | - | - | (306) | - | (306) | (300) | ||||
| Profit/(loss) attributable to equity Shareholders, being total comprehensive income for the period | 143 | 568 | 711 | (715) | (2,944) | (3,659) | (13,630) | ||||
| Basic and diluted return per share: | |||||||||||
| Generalist Share | 0.4p | 1.6p | 2.0p | (0.7p) | (5.8p) | (6.5p) | (24.0p) | ||||
| Healthcare Share | (0.1p) | (0.3p) | (0.4p) | (0.7p) | (5.1p) | (5.8p) | (15.0p) | ||||
| DSO D Share | - | (1.3p) | (1.3p) | - | - | 1.2p | 2.2p | ||||
| DP67 Share | (0.1p) | (0.3p) | (0.4p) | (2.2p) | 1.1p | (1.1p) | (11.8p) | ||||
A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement as noted above.
Unaudited Income StatementAnalysed by Share poolfor the six months ended 30 September 2020
| Six months ended30 Sep 2020 | Six months ended30 Sep 2019 | Year ended31 Mar 2020 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Total | |||
| Generalist Share pool | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Income | 195 | 2 | 197 | 21 | 59 | 80 | 133 | ||
| Net loss on investments | - | 878 | 878 | - | (2,283) | (2,283) | (8,952) | ||
| 195 | 880 | 1,075 | 21 | (2,224) | (2,203) | (8,819) | |||
| Investment management fees | (113) | (113) | (226) | (166) | (166) | (332) | (668) | ||
| Other expenses | 90 | - | 90 | (161) | - | (161) | (316) | ||
| Profit/(loss) on ordinary activities before tax | 172 | 767 | 939 | (306) | (2,390) | (2,696) | (9,803) | ||
| Tax on total comprehensive income and ordinary activities | - | - | - | - | - | - | 4 | ||
| Profit/(loss) attributable to equity Shareholders, being total comprehensive income for the period | 172 | 767 | 939 | (306) | (2,390) | (2,696) | (9,799) | ||
| Six months ended30 Sep 2020 | Six months ended30 Sep 2019 | Year ended31 Mar 2020 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Total | |||
| Healthcare Share pool | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Income | 22 | - | 22 | 22 | - | 22 | 43 | ||
| Net loss on investments | - | 8 | 8 | - | (812) | (812) | (2,363) | ||
| 22 | 8 | 30 | 22 | (812) | (790) | (2,320) | |||
| Investment management fees | (72) | (72) | (144) | (77) | (77) | (154) | (326) | ||
| Other expenses | 29 | - | 29 | (64) | - | (64) | (120) | ||
| Loss on ordinary activities before tax | (21) | (64) | (85) | (119) | (889) | (1,008) | (2,766) | ||
| Tax on total comprehensive income and ordinary activities | - | - | - | - | - | - | - | ||
| Loss attributable to equity Shareholders, being total comprehensive income for the period | (21) | (64) | (85) | (119) | (889) | (1,008) | (2,766) | ||
| Six months ended30 Sep 2020 | Six months ended30 Sep 2019 | Year ended31 Mar 2020 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Total | |||
| DSO D Share pool | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Income | 7 | - | 7 | 6 | - | 6 | 142 | ||
| Net loss on investments | - | (97) | (97) | - | 104 | 104 | 69 | ||
| 7 | (97) | (90) | 6 | 104 | 110 | 211 | |||
| Investment management fees | (4) | (4) | (8) | (8) | (8) | (16) | (30) | ||
| Other expenses | (6) | - | (6) | (11) | - | (11) | (16) | ||
| Loss on ordinary activities before tax | (3) | (101) | (104) | (13) | 96 | (83) | 165 | ||
| Tax on total comprehensive income and ordinary activities | - | - | - | - | - | - | 10 | ||
| Loss attributable to equity Shareholders, being total comprehensive income for the period | (3) | (101) | (104) | (3) | 96 | (93) | 175 | ||
| Six months ended30 Sep 2020 | Six months ended30 Sep 2019 | Year ended31 Mar 2020 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Total | |||
| DP67 Share pool | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Income | 10 | - | 10 | 107 | - | 107 | 20 | ||
| Net loss on investments | - | (27) | (27) | - | 143 | 143 | (722) | ||
| 10 | (27) | (17) | 107 | 143 | 250 | (702) | |||
| Investment management fees | (7) | (7) | (14) | (18) | (18) | (36) | (72) | ||
| Other expenses | (8) | - | (8) | (23) | - | (23) | (229) | ||
| Loss on ordinary activities before tax | (5) | (34) | (39) | 66 | 125 | 191 | (1,003) | ||
| Tax on total comprehensive income and ordinary activities | - | - | - | (316) | - | (316) | (314) | ||
| Loss attributable to equity Shareholders, being total comprehensive income for the period | (5) | (34) | (39) | (250) | 125 | (125) | (1,317) | ||
Unaudited Balance Sheet as at 30 September 2020
| As at 30 September2020 | As at 30 September2019 | As at 31 March2020 | |||||
| £’000 | £’000 | £’000 | |||||
| Fixed assets | |||||||
| Investments | 42,281 | 37,135 | 34,464 | ||||
| Current assets | |||||||
| Debtors | 375 | 558 | 548 | ||||
| Cash at bank and in hand | 1,309 | 18,437 | 9,614 | ||||
| 1,684 | 18,995 | 10,162 | |||||
| Creditors: amounts falling due within one year | (556) | (481) | (801) | ||||
| Net current assets | 1,128 | 18,514 | 9,361 | ||||
| Net assets | 43,409 | 55,649 | 43,825 | ||||
| 8BCapital and reserves | |||||||
| Called up Share capital | 100 | 149 | 98 | ||||
| Capital redemption reserve | 58 | - | 58 | ||||
| Special reserve | 37,377 | 45,762 | 39,433 | ||||
| Share premium account | 18,930 | 17,102 | 17,971 | ||||
| Funds held in respect of Shares not yet allotted | 68 | 167 | 535 | ||||
| Revaluation reserve | (12,610) | (8,395) | (13,302) | ||||
| Capital reserve – realised | 2,803 | 3,733 | 2,483 | ||||
| Revenue reserve | (3,317) | (2,869) | (3,451) | ||||
| Total equity Shareholders’ funds | 43,409 | 55,649 | 43,825 | ||||
| Basic and diluted Net Asset Value per Share: | |||||||
| Generalist Share | 61.2p | 77.6p | 61.7p | ||||
| Healthcare Share | 65.2p | 77.7p | 68.1p | ||||
| DSO D Share | 10.7p | 28.9p | 12.0p | ||||
| DP67 Share | 18.4p | 47.4p | 18.7p | ||||
Unaudited Balance SheetAnalysed by Share pool
as at 30 September 2020
| As at 30 September2020 | As at 30 September2019 | As at 31 March2020 | |||
| Generalist Share pool | £’000 | £’000 | £’000 | ||
| Fixed assets | |||||
| Investments | 30,976 | 26,504 | 24,584 | ||
| Current assets | |||||
| Debtors | 240 | 201 | 442 | ||
| Cash at bank and in hand | 79 | 7,594 | 3,350 | ||
| 319 | 7,795 | 3,792 | |||
| Creditors: amounts falling due within one year | (3,070) | (218) | (266) | ||
| Net current assets | (2,751) | 7,577 | 3,526 | ||
| Net assets | 28,225 | 34,081 | 28,110 | ||
| Capital and reserves | |||||
| Called up share capital | 57 | 51 | 56 | ||
| Capital redemption reserve | 58 | - | 58 | ||
| Special reserve | 26,082 | 30,711 | 27,666 | ||
| Share premium account | 13,180 | 11,889 | 12,505 | ||
| Funds held in respect of shares not yet allotted | 61 | 144 | 410 | ||
| Revaluation reserve | (9,322) | (6,606) | (10,201) | ||
| Capital reserve – realised | 426 | 101 | 101 | ||
| Revenue reserve | (2,317) | (2,209) | (2,485) | ||
| Total equity Shareholders’ funds | 28,225 | 34,081 | 28,110 |
| As at 30 September2020 | As at 30 September2019 | As at 31 March2020 | |||
| Healthcare Share pool | £’000 | £’000 | £’000 | ||
| Fixed assets | |||||
| Investments | 8,806 | 7,008 | 7,157 | ||
| Current assets | |||||
| Debtors | 2,882 | 6 | 7 | ||
| Cash at bank and in hand | 890 | 7,099 | 5,930 | ||
| 3,772 | 7,105 | 5,937 | |||
| Creditors: amounts falling due within one year | (291) | (126) | (419) | ||
| Net current assets | 3,481 | 6,979 | 5,518 | ||
| Net assets | 12,287 | 13,987 | 12,675 | ||
| Capital and reserves | |||||
| Called up share capital | 24 | 21 | 23 | ||
| Special reserve | 10,323 | 11,970 | 10,867 | ||
| Share premium account | 5,750 | 5,213 | 5,466 | ||
| Funds held in respect of shares not yet allotted | 7 | 23 | 125 | ||
| Revaluation reserve | (2,640) | (2,206) | (2,651) | ||
| Capital reserve – realised | - | - | - | ||
| Revenue reserve | (1,177) | (1,034) | (1,155) | ||
| Total equity Shareholders’ funds | 12,287 | 13,987 | 12,675 |
| As at 30 September2020 | As at 30 September2019 | As at 31 March2020 | |||
| DSO D Share pool | £’000 | £’000 | £’000 | ||
| Fixed assets | |||||
| Investments | 458 | 690 | 655 | ||
| Current assets | |||||
| Debtors | 82 | 18 | 50 | ||
| Cash at bank and in hand | 312 | 1,591 | 272 | ||
| 394 | 1,609 | 322 | |||
| Creditors: amounts falling due within one year | (12) | (21) | (33) | ||
| Net current assets | 382 | 1,588 | 289 | ||
| Net assets | 840 | 2,278 | 944 | ||
| Capital and reserves | |||||
| Called up share capital | 8 | 8 | 8 | ||
| Special reserve | 972 | 2,356 | 900 | ||
| Revaluation reserve | (132) | 41 | 39 | ||
| Capital reserve – realised | (37) | (37) | (37) | ||
| Revenue reserve | 29 | (90) | 34 | ||
| Total equity Shareholders’ funds | 840 | 2,278 | 944 |
| As at 30 September2020 | As at 30 September2019 | As at 31 March2020 | |||
| DP67 Share pool | £’000 | £’000 | £’000 | ||
| Fixed assets | |||||
| Investments | 2,041 | 2,933 | 2,068 | ||
| Current assets | |||||
| Debtors | 53 | 333 | 49 | ||
| Cash at bank and in hand | 28 | 2,120 | 62 | ||
| 81 | 2,453 | 111 | |||
| Creditors: amounts falling due within one year | (65) | (83) | (83) | ||
| Net current assets | 16 | 2,370 | 28 | ||
| Net assets | 2,057 | 5,303 | 2,096 | ||
| Capital and reserves | |||||
| Called up share capital | 11 | 11 | 11 | ||
| Special reserve | - | 783 | - | ||
| Revaluation reserve | (516) | 376 | (489) | ||
| Capital reserve – realised | 2,414 | 3,669 | 2,419 | ||
| Revenue reserve | 148 | 464 | 155 | ||
| Total equity Shareholders’ funds | 2,057 | 5,303 | 2,096 |
Statement of Changes in Equityfor the six months ended 30 September 2020
| CalledupSharecapital | CapitalRedemptionreserve | Specialreserve | Sharepremiumaccount | Funds held in respect of Shares not yet allotted | RevaluationReserve | Capitalreserve- realised | Revenuereserve | Total | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| At 31 March 2019 | 138 | - | 47,040 | 7,172 | 4,772 | (4,158) | 4,940 | (1,752) | 58,152 | ||||
| Total comprehensiveincome | - | - | - | - | - | (12,227) | (103) | (1,300) | (13,630) | ||||
| Transfer between reserves* | - | - | (7,530) | - | - | 3,083 | 4,843 | (399) | - | ||||
| Unallotted Shares | - | - | - | - | 535 | - | - | - | 535 | ||||
| Transactions with owners | |||||||||||||
| Dividend paid | - | - | - | - | - | - | (7,200) | - | (7,200) | ||||
| Cancellation of shares | (58) | 58 | |||||||||||
| Purchase of own shares | - | - | (77) | - | - | - | - | - | (77) | ||||
| Issue of shares | 18 | - | - | 11,178 | (4,772) | - | - | - | 6,424 | ||||
| Share issue costs | - | - | - | (379) | - | - | - | - | (379) | ||||
| At 31 March 2020 | 98 | 58 | 39,433 | 17,971 | 535 | (13,302) | 2,483 | (3,451) | 43,825 | ||||
| Total comprehensive income | - | - | - | - | - | 437 | 131 | 143 | 711 | ||||
| Transfer between reserves* | - | - | (2,056) | - | - | 255 | 1,810 | (9) | - | ||||
| Unallotted Shares | - | - | - | - | 533 | - | - | - | 533 | ||||
| Transactions with owners | |||||||||||||
| Dividend paid | - | - | - | - | - | - | (1,621) | - | (1,621) | ||||
| Cancellation of Shares | - | - | - | - | - | - | - | - | - | ||||
| Purchase of own shares | - | - | - | - | - | - | - | - | - | ||||
| Issue of shares | 2 | - | - | 998 | (1,000) | - | - | - | - | ||||
| Share issue costs | - | - | - | (39) | - | - | - | - | (39) | ||||
| At 30 Sept 2020 | 100 | 58 | 37,377 | 18,930 | 68 | (12,610) | 2,803 | (3,317) | 43,409 | ||||
*A transfer of £255,000 (2019: £3,083,000) representing previously recognised realised gains and losses on disposal of investments during the period has been made between the Revaluation Reserve and the Capital reserve - realised. A transfer of £2,065,000 (2019: £7,929,000) representing realised gains on disposal of investments, less capital expenses and capital dividends in the period has been made between the Capital Reserve - realised and the Special reserve. A transfer of £9,000 (2019: £399,000), representing the balance on the Revenue reserve relating to previously cancelled share classes, has been made from the revenue reserve to the Special reserve.
Unaudited Statement of Cash Flowsfor the six months ended 30 September 2020
| DSO DSharepool | DP67Sharepool | GeneralistSharepool | HealthcareSharepool | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | |
| Cash flows from operating activities | |||||
| Return on ordinary activities before taxation | (104) | (39) | 939 | (85) | 711 |
| Losses/(gains) on investments | 97 | 27 | (878) | (8) | (762) |
| (Decrease)/increase in creditors | (22) | (18) | 2,804 | (128) | 2,636 |
| (Increase)/decrease in debtors | (32) | (4) | 202 | (2,875) | (2,709) |
| Net cash (outflow)/inflow from operating activities | (61) | (34) | 3,067 | (3,096) | (124) |
| Corporation tax paid | - | - | - | - | - |
| Net cash generated from operating activities | (61) | (34) | 3,067 | (3,096) | (124) |
| Cash flow from investing activities | |||||
| Purchase of investments | - | - | (6,163) | (1,639) | (7,802) |
| Proceeds from disposal of investments | 101 | - | 650 | - | 751 |
| Net cash inflow/(outflow) from investing activities | 101 | - | (5,513) | (1,639) | (7,051) |
| Net cash inflow/(outflow) before financing | 40 | (34) | (2,446) | (4,735) | (7,175) |
| Cash flows from financing activities | |||||
| Issue of share capital | - | - | 705 | 295 | 1,000 |
| Cost of issue of share capital | - | - | (29) | (10) | (39) |
| Funds held in respect of shares not yet allotted | - | - | (351) | (119) | (470) |
| Equity dividends paid | - | - | (1,150) | (471) | (1,621) |
| Net cash (outflow)/inflow from financing activities | - | - | (825) | (305) | (1,130) |
| Net change in cash | 40 | (34) | (3,271) | (5,040) | (8,305) |
| Cash and cash equivalents at start of the year | 272 | 62 | 3,350 | 5,930 | 9,614 |
| Cash and cash equivalents at end of the year | 312 | 28 | 79 | 890 | 1,309 |
| Cash and cash equivalents comprise | |||||
| Cash at bank and in hand | 312 | 28 | 79 | 890 | 1,309 |
| Total cash and cash equivalents | 312 | 28 | 79 | 890 | 1,309 |
Unaudited Statement of Cash Flowsfor the six months ended 30 September 2019
| DSO DSharepool | DP67Sharepool | DP2011 GeneralSharepool | DP2011 StructuredSharepool | GeneralistShare pool | Healthcare Share pool | Total | ||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Cash flows from operating activities | ||||||||
| Return on ordinary activities before taxation | 83 | 191 | 45 | 32 | (2,697) | (1,008) | (3,354) | |
| (Gains)/losses on investments | (104) | (143) | (75) | (56) | 2,284 | 812 | 2,718 | |
| Increase/(decrease) in creditors | 3 | (347) | (12) | (1) | (1) | 5 | (353) | |
| Decrease/(increase) in debtors | (17) | 220 | 1 | 3 | (79) | (3) | 125 | |
| Net cash (outflow)/inflow from operating activities | (35) | (79) | (41) | (22) | (493) | (194) | (704) | |
| Corporation tax paid | - | 160 | - | - | - | - | - | |
| Net cash generated from operating activities | (35) | 81 | (41) | (22) | (493) | (194) | (704) | |
| Cash flow from investing activities | 83 | 191 | 45 | 32 | (2,697) | (1,008) | (3,354) | |
| Purchase of investments | - | - | - | - | (5,657) | (445) | (6,102) | |
| Proceeds from disposal of investments | 716 | 788 | 1,970 | 735 | 1,435 | - | 5,644 | |
| Net cash inflow/(outflow) from investing activities | 716 | 788 | 1,970 | 735 | (4,222) | (445) | (458) | |
| Net cash inflow/(outflow) before financing | 681 | 869 | 1,929 | 713 | (4,715) | (639) | (1,162) | |
| Cash flows from financing activities | ||||||||
| Repurchase of shares | - | - | - | - | (60) | (16) | (76) | |
| Issue of share capital | - | - | - | - | 7,205 | 2,736 | 9,941 | |
| Share issue costs | - | - | - | - | (246) | (89) | (335) | |
| Funds held in respect of shares not yet allotted | - | - | - | - | (3,251) | (1,354) | (4,605) | |
| Equity dividends paid | (2,504) | (1,265) | - | - | (3,769) | |||
| Net cash (outflow)/inflow from financing activities | - | - | (2,504) | (1,265) | 3,648 | 1,277 | 1,156 | |
| Net change in cash | 681 | 869 | (575) | (552) | (1,067) | 638 | (6) | |
| Cash and cash equivalents at start of the year | 910 | 1,251 | 594 | 566 | 8,661 | 6,461 | 18,443 | |
| Cash and cash equivalents at end of the period | 1,591 | 2,120 | 19 | 14 | 7,594 | 7,099 | 18,437 | |
| Cash and cash equivalents comprise | ||||||||
| Cash at bank and in hand | 1,591 | 2,120 | 19 | 14 | 7,594 | 7,099 | 18,437 | |
| Total cash and cash equivalents | 1,591 | 2,120 | 19 | 14 | 7,594 | 7,099 | 18,437 | |
Notes to the Unaudited Financial Statements1. General Information
Downing FOUR VCT plc (“the Company”) is a Venture Capital Trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales.
2. Basis of accounting
The unaudited half-yearly financial results cover the six months to 30 September 2020 and have been prepared in accordance with the accounting policies set out in the statutory accounts for the year ended 31 March 2020, which were prepared in accordance with the Financial Reporting Standard 102 (“FRS 102”) and the Statement of Recommended Practice “Financial Statements of Investment Trust Companies” issued in October 2019 (“SORP”).
3. The Company has only one class of business and derives its income from investments made in shares, securities and bank deposits.
4. The comparative figures are in respect of the six months ended 30 September 2019 and the year ended 31 March 2020 respectively.
5. Net Asset Value per share at the period end has been calculated on the number of shares in issue at the period end as follows:
| Generalist Shares* | 45,986,777 |
| Healthcare Shares* | 18,843,568 |
| DSO D Shares | 7,867,247 |
| DP67 Shares | 11,192,136 |
*Excludes Management Shares
6. Return per share for the period has been calculated on the average number of shares in issue in the period as follows:
| Generalist Shares* | 45,582,230 |
| Healthcare Shares* | 18,641,672 |
| DSO D Shares | 7,867,247 |
| DP67 Shares | 11,192,136 |
*Excludes Management Shares
7. The unaudited financial statements set out herein do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 and have not been delivered to the Registrar of Companies.
8. Dividends
| Six months ended 30 September 2020 | |||||
| Pence per Share | Revenue | Capital£’000 | Total£’000 | ||
| Generalist Shares | |||||
| Paid | |||||
| Interim (year ended 31 March 2020) | 2.5 | - | 1,122 | 1,122 | |
| Healthcare Shares | |||||
| Paid | |||||
| Interim (year ended 31 March 2020) | 2.5 | - | 461 | 461 | |
9. Reserves
| 30 Sep 2020 | 30 Sep 2019 | 31 Mar 2020 | |||
| £’000 | £’000 | £’000 | |||
| Capital redemption reserve | 58 | - | 58 | ||
| Special reserve | 37,377 | 45,762 | 39,433 | ||
| Share premium account | 18,930 | 17,102 | 17,971 | ||
| Revaluation reserve | (12,610) | (8,395) | (13,302) | ||
| Capital reserve – realised | 2,803 | 3,733 | 2,483 | ||
| Revenue reserve | (3,317) | (2,869) | (3,451) | ||
| Funds held in respect of shares not yet allotted | 68 | 167 | 535 | ||
| 43,309 | 55,500 | 43,727 |
The Revenue reserve, Special reserve and Capital reserve - realised are distributable reserves and are reduced by revaluation losses of £16.0 million. Distributable reserves at 30 September 2020 were £20.8 million.
10. Fixed assets – investments
| Liquidityinvestments | Quoted VC investments | Unquoted VC investments | Total | |||||
| £’000 | £’000 | £’000 | £’000 | |||||
| Opening cost at 1 April 2020 | 15,198 | 1,250 | 36,466 | 52,914 | ||||
| Unrealised losses at 1 April 2020 | (6,634) | (991) | (5,677) | (13,302) | ||||
| Impairment losses at 1 April 2020 | - | - | (5,148) | (5,148) | ||||
| Opening fair value at 1 April 2020 | 8,564 | 259 | 25,641 | 34,464 | ||||
| Movements in the year: | ||||||||
| Purchased at cost | - | - | 7,802 | 7,802 | ||||
| Disposals - proceeds | - | - | (751) | (751) | ||||
| - realised gains on disposals | - | - | 325 | 325 | ||||
| Unrealised foreign exchange losses | - | - | (35) | (35) | ||||
| Unrealised losses in the Income Statement | 955 | 163 | (642) | 476 | ||||
| Closing value at 30 Sept 2020 | 9,519 | 422 | 32,340 | 42,281 | ||||
| Closing cost at 30 Sept 2020 | 15,198 | 1,250 | 43,592 | 60,040 | ||||
| Unrealised losses at 30 Sept 2020 | (5,679) | (828) | (6,068) | (12,575) | ||||
| Unrealised foreign exchange losses at 30 Sept 2020 | - | - | (35) | (35) | ||||
| Impairment losses at 30 Sept 2020 | - | - | (5,149) | (5,149) | ||||
| Closing value at 30 Sept 2020 | 9,519 | 422 | 32,340 | 42,281 | ||||
The fair value of investments is determined using the detailed accounting policy as shown in the audited financial statements for the year ended 31 March 2020. The Company has categorised its financial instruments using the fair value hierarchy as follows:
Level 1: Reflects financial instruments quoted in an active market (quoted companies, investment funds and fixed interest bonds);Level 2: Reflects financial instruments that have prices that are observable either directly or indirectly; andLevel 3: Reflects financial instruments that use valuation techniques that are not based on observable market data (investments in unquoted shares and loan note investments).
| Level 1 | Level 2 | Level 3 | 30 Sept 2020 | Level 1 | Level 2 | Level 3 | 31 Mar 2020 | ||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Liquidity investments | 9,519 | - | - | 9,519 | 8,564 | - | - | 8,564 | |
| Quoted equity | 422 | - | - | 422 | 259 | - | - | 259 | |
| Unquoted loan notes | - | - | 2,864 | 2,864 | - | - | 3,319 | 3,319 | |
| Unquoted equity | - | - | 29,476 | 29,476 | - | - | 22,322 | 22,322 | |
| 9,941 | - | 32,340 | 42,281 | 8,823 | - | 25,641 | 34,464 |
11. Risk and uncertainties
Under the Disclosure and Transparency Directive, the Board is required in the Company’s half-year results to report on the principal risks and uncertainties facing the Company over the remainder of the financial year.
The Board has concluded that the key risks facing the Company over the remainder of the financial period are as follows:
(i) compliance risk of failure to maintain approval as a VCT;(ii) market, liquidity and counterparty risk associated with Public Equity investments; and(iii) investment risk associated with investing in small and immature businesses.
The Company’s compliance with the VCT regulations is continually monitored by the Manager, who reports regularly to the Board on the current position. The Company also retains Philip Hare & Associates LLP (“Philip Hare”) to provide regular reviews and advice in this area. Philip Hare has confirmed that all relevant tests have been complied with for the period under review. The Board considers that this approach reduces the risk of a breach of the VCT regulations.
With this approach, the Board believes that these risks are reduced.
In order to make VCT qualifying investments, the Company has to invest in small businesses which are often immature. It also has a limited period in which it must invest the majority of its funds into VCT qualifying investments. The Manager follows a rigorous process in vetting and carefully structuring new investments, including taking a charge over the assets of the business wherever possible and, after an investment is made, closely monitoring the business.
12. Going concern
The Directors have reviewed the Company’s financial resources at the period end and conclude that the Company is well placed to manage its business risks.
The Board confirms that it is satisfied that the Company has adequate resources to continue in business for the foreseeable future. For this reason, the Board believes that the Company continues to be a going concern and that it is appropriate to apply the going concern basis in preparing the financial statements.
13. The Directors confirm that, to the best of their knowledge, the Half-Yearly Report has been prepared in accordance with the “Statement: Half-Yearly Financial Reports” issued by the UK Accounting Standards Board as well as in accordance with FRS 104 Interim Financial Reporting and the half-yearly financial report includes a fair review of the information required by:
a. DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and
b. DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.
14. Copies of the Half-Yearly Report will be sent to Shareholders shortly. Further copies can be obtained from the Company’s Registered Office and will be available for download from www.downing.co.uk/d4.
Performance Incentive ArrangementsPerformance Incentive arrangements are in place for each Share Pool except the DP67 pool. The various schemes are summarised as follows:
DSO D Shares
The Performance Incentive in respect of the DSO D Shares is structured as a simple fee when the hurdle is met. A fee is payable when:(i) Shareholders receive total proceeds of at least 100.0p per DSO D Share (excluding income tax relief); and (ii) Shareholders achieve a tax-free compound return of at least 7% per annum (after allowing for income tax relief on investment).
If the hurdle is met, the fee will be 3.0p per DSO D Share plus 20% of shareholder proceeds above 100.0p per DSO D Share. The Performance Incentive is restricted to a maximum of 7.0p per DSO D Share.
As at 30 September 2020, the estimated performance fee is 1.2p per DSO D Share.
Generalist and Healthcare Share Pools
A Performance Incentive scheme is in place in respect of the Generalist and Healthcare Management Shares, which will represent 20% of the total number of Generalist and Healthcare Shares in issue. As part of the arrangement, in order to prevent dilution to the Shareholders of the Generalist and Healthcare Shares, the management team will waive their voting rights granted by these Management Shares at any general meeting of the Company and income or capital distributions otherwise payable on these Management Shares will be waived unless the share class has achieved a Total Return (based on audited year end results) in excess of £1 per share for the years ended 31 March 2018, 31 March 2019 and 31 March 2020. For subsequent years, the Total Return hurdle increases by 3.0p per annum such that for the year ended 31 March 2021 the hurdle is £1.03, and for the year ended 31 March 2022 the hurdle is £1.06.
The existing Performance Incentive scheme, in respect of the Generalist and Healthcare Share Pools, will also apply to the Shares issued.