25 Apr 2019 16:38
Annual Financial Report
Downing TWO VCT plc FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018
FINANCIAL HIGHLIGHTS
| 31 Dec 2018 | 31 Dec 2017 | ||
| Pence | Pence | ||
| ‘F’ Share pool | |||
| Net asset value per ‘F’ Share | 28.7 | 69.6 | |
| Cumulative distributions per ‘F’ Share | 67.0 | 30.0 | |
| Total return per ‘F’ Share | 95.7 | 99.6 | |
| ‘G’ Share pool | |||
| Net asset value per ‘G’ Share | 60.9 | 82.1 | |
| Cumulative distributions per ‘G’ Share | 37.5 | 25.0 | |
| Total return per ‘G’ Share | 98.4 | 107.1 | |
| ‘K’ Share pool | |||
| Net asset value per ‘K’ Share | 91.3 | 97.7 | |
| Cumulative distributions per ‘K’ Share | - | - | |
| Total return per ‘K’ Share | 91.3 | 97.7 | |
CHAIRMAN’S STATEMENT
IntroductionIt is disappointing to have to report that there have been negative developments in a number of investee companies in the later part of the year ended 31 December 2018. This has resulted in falls in total return of each of the Company’s share pools across the year.
Three energy related investments in particular have suffered heavily, requiring substantial provisions. A brief summary of each share pool is provided below. More detailed reviews are provided in the Investment Manager’s Report and Review of Investments below.
‘F’ Share poolThe ‘F’ Share pool was launched in 2012 and now holds a portfolio of 10 investments with a total value of £3.1 million.
At 31 December 2018, the ‘F’ Share NAV stood at 28.7p, which represents a decrease of 5.6% over the year after adjusting for the dividends of 37.0p per share paid in the year. Dividends paid to date total 67.0p per share such that Total Return (NAV plus cumulative dividends to date) is now 95.7p, compared to the initial cost to original subscribers net of income tax relief of 70.0p. A large provision against the share pool’s investment in Apex Energy Limited has been required, accounting for most of the decrease in NAV.
The F Share pool is in the process of realising its investments and returning funds to investors. The Investment Manager is optimistic that this process will complete before the end of the year.
‘G’ Share poolThe ‘G’ Share pool was launched in 2013 and has now started to realise its investments to return funds to Shareholders during the year. At 31 December 2018, the pool held 14 investments with a total value of £14.2 million.
At 31 December 2018, the ‘G’ Share NAV stood at 60.9p, which represents a decrease over the year of 10.6% after adjusting for the dividends of 12.5p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 98.4p, compared to the initial NAV of 100.0p. Major provisions have been required against the share pool’s investments in Hermes Wood Pellets Limited, Apex Energy Limited, Zora Energy Renewables Limited and Quadrate Spa Limited, accounting for most of the fall in value.
The G Share pool has commenced the process of realising its investments and returning funds to investors. The Investment Manager expects that most of the remaining investments will be realised during the course of this year. The Board intends to pay further dividends as soon as a significant level of funds has been generated by further realisations.
‘K’ Share poolThe ‘K’ Share pool raised the majority of its £16.2 million of funds in the 2015/16 tax year.
At 31 December 2018, the pool held 17 investments with a total value of £10.6 million. The NAV and Total Return at 31 December 2018 stood at 91.3p per share which represents a decrease over the year of 6.6%.
Due to VCT regulations, the ‘K’ Share pool is effectively prohibited from paying dividends before 2020 and therefore expect regular dividends to be paid from 2020. The share pool is scheduled to start realising its investments to return funds to investors in 2021.
Share buybacksFor share classes where all investors are still within the initial five year period (currently the ‘K’ Share class only), the Company operates a general policy of buying in its own shares for cancellation when any become available in the market. During this period, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount). Any buybacks are subject to regulatory restrictions and availability of liquid funds.
The Company is now unlikely to make any further purchases of the ‘F’ Shares and the ‘G’ Shares as the process of returning funds to those Shareholders is now underway.
During the year to 31 December 2018, the Company repurchased and subsequently cancelled 47,000 ‘G’ Shares and 16,275 ‘K’ Shares for an aggregate consideration of £38,000 and £17,000 respectively, being an average price of 81.0p per ‘G’ Share and 97.5p per ‘K’ Share.
A resolution to renew the buyback authority for the Company to purchase its own shares will be proposed at the forthcoming Annual General Meeting.
Share premium account cancelationIn August 2018, the share premium account that arose on the issue of the K Share was cancelled and transferred to the special reserve, contributing an additional £16.2 million to distributable reserves.
Annual General Meeting (“AGM”)The Company’s twelfth AGM will be held at St. Magnus House, 3 Lower Thames Street, London, EC3R 6HD at 11.00 a.m. on 5 June 2019.
One item of special business will be proposed at the AGM. As mentioned above, the Company will seek to renew the authority for the Company to buy back shares.
OutlookDespite that fact that many of the businesses in which the Company has invested own substantial assets, the fact that the businesses are young (in line with the VCT regulations) and thus immature means there are still significant risks associated with them. This has been highlighted by the setbacks seen in several of the investee companies during the year. Close monitoring of the investee companies has always been a key part of the Investment Manager’s role and will continue to remain so. The Board is ensuring that the Manager takes all reasonable steps that it can to seek to recover as much value as possible from the investments that have faced difficulties.
With the backdrop of Brexit, the economic and political environment in the UK has remained uncertain over the past year and little clarity has been obtained as to the likely outcome of the ongoing negotiations between the UK and the EU. Although this could potentially have some impact on the process of disposing of investments, the Board feels that any impact will be relatively limited.
In the coming year, we expect to see the remaining ‘F’ Share portfolio realised in order to distribute the final funds to investors, with good progress also being made in relation to the ‘G’ Share pool. However, Shareholders should note that the timing of anticipated realisations is dependent on many external factors.
I will update Shareholders on progress in my statement with the Half Yearly Report to 30 June 2019. I will also communicate with ‘F’ Shareholders and ‘G’ Shareholders as and when there is news about further dividends.
Hugh GillespieChairman25 April 2019
INVESTMENT MANAGER’S REPORT- ‘F’ SHARE POOL
IntroductionThe ‘F’ Share pool holds 10 investments and is fully invested in a portfolio focussed on asset backed businesses and those with predictable revenue streams. The focus for this year has been on realisations with the ‘F’ Share pool making two significant distributions during the period.
Net asset value and resultsAt 31 December 2018, the ‘F’ Share NAV stood at 28.7p. This represents a net decrease of 3.9p per share over the year (after adjusting for dividends paid during the year of 37.0p per Share), equivalent to a decrease of 5.6%. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 95.7p.
The return on ordinary activities for the ‘F’ Share pool for the year was a loss of £424,000 (2017: £528,000) being a revenue profit of £6,000 (2017: £182,000) and a capital loss of £430,000 (2017: £346,000).
‘F’ Share pool - investment activityDuring the year, total proceeds of £2.0 million were received from three full exits and one partial exit, generating a total gain over opening value of £350,000.
Goonhilly Earth Station Limited, the operator of a satellite earth station in Cornwall, was sold during the summer and generated proceeds of £1.2 million for the Share pool. This represented an uplift over cost of £217,000.
Proceeds of £770,000 were received from the sale of Merlin Renewables Limited, the anaerobic digestion plant in Norfolk compared to a cost of £500,000.
In addition to the above, there was also a full exit of the Scottish licensed leisure company, Fubar Stirling Limited, which generated proceeds of £12,000 and a total gain over carrying value of £5,000.
There was also a partial loan note redemption in Fresh Green Power Limited, the domestic rooftop solar company, which was redeemed at par.
With the pool in the process of realising its investments following the passing of the five year anniversary of the close of the ‘F’ Share offer, no new investments were made in the period.
Plans are in place for the exit of the remaining portfolio companies and we anticipate this exercise will complete in full by the third quarter of 2019.
‘F’ Share pool – portfolio valuationThe majority of investments remain valued at or above cost, however there were a small number of substantial decreases in value in the portfolio that resulted in an unrealised loss over opening value of £780,000.
Pearce and Saunders Limited, the owner of three freehold pubs in south east London, has increased in value by £174,000 in line with expected exit proceeds.
Portfolio company, Atlantic Dogstar Limited was uplifted by £35,000, based on the minimum expected returns.
The most notable write down in the period related to Apex Energy Limited, who are the developer of a standby electricity generation plant in the East Midlands. The investment was reduced in value by £900,000 following several material shortcomings in the plant and equipment supplied that have severely impacted operations. Work is ongoing to establish what steps could result in some recovery of value, including legal action against the third party operator.
London City Shopping Centre Limited, which was seeking to develop a site near the Barbican, London, was unable to find a buyer for the site or secure additional funding to progress with the development. As a result, the business has entered administration and has now been fully provided against. This resulted in a valuation decrease of £66,000.
Outlook Focus for the ‘F’ Share pool remains on the realisation of its investments. Realisation plans are in place for the remaining investments in the portfolio with some expected to complete in the next few months in order to distribute the final funds to investors.
Downing LLP25 April 2019
REVIEW OF INVESTMENTS – ‘F’ SHARE POOL
Portfolio of investmentsThe following investments, all of which are incorporated in England and Wales, were held at 31 December 2018:
| ‘F’ Share pool | Cost | Valuation | Valuation movementin year | % ofportfolio |
| £’000 | £’000 | £’000 | ||
| VCT qualifying and partially qualifying investments | ||||
| Pearce and Saunders Limited | 497 | 671 | 174 | 21.5% |
| Downing Pub EIS One Limited | 490 | 620 | 32 | 19.9% |
| Lambridge Solar Limited | 500 | 605 | 10 | 19.4% |
| Atlantic Dogstar Limited | 200 | 270 | 35 | 8.7% |
| Fresh Green Power Limited | 189 | 210 | (19) | 6.8% |
| Apex Energy Limited | 1,000 | 100 | (900) | 3.2% |
| Green Energy Production UK Limited | 100 | 54 | (46) | 1.7% |
| 2,976 | 2,530 | (714) | 81.2% | |
| Non-qualifying investments | ||||
| Baron House Developments LLP | 481 | 481 | - | 15.4% |
| Pearce and Saunders DevCo Limited | 46 | 46 | - | 1.5% |
| London City Shopping Centre Limited | 66 | - | (66) | 0.0% |
| 593 | 527 | (66) | 16.9% | |
| 3,569 | 3,057 | (780) | 98.1% | |
| Cash at bank and in hand | 60 | 1.9% | ||
| Total investments | 3,117 | 100.0% |
Summary of investment movements
Disposals
| Cost | MV at 01/01/18 | Disposalproceeds | Gain/(loss)againstcost | Total realisedgain during the year | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| VCT qualifying and partially qualifying investments | |||||||||
| Goonhilly Earth Station Limited | 954 | 954 | 1,171 | 217 | 217 | ||||
| Merlin Renewables Limited | 500 | 642 | 770 | 270 | 128 | ||||
| Fubar Stirling Limited | 101 | 7 | 12 | (89) | 5 | ||||
| Fresh Green Power Limited | 11 | 11 | 11 | - | - | ||||
| Total ‘F’ Share pool | 1,566 | 1,614 | 1,964 | 398 | 350 | ||||
INVESTMENT MANAGER’S REPORT- ‘G’ SHARE POOL
IntroductionThe ‘G’ Share pool raised funds in 2013 and the task of realising its investments is now underway following the passing of the five year anniversary of the close of the ‘G’ Share offer. It is disappointing to have to report that, several portfolio companies suffered substantial setbacks which have required large provisions.
Net asset value and resultsAt 31 December 2018, the ‘G’ Share NAV stood at 60.9p. This represents a net decrease of 8.7p per Share over the year (after adjusting for dividends paid during the year of 12.5p per Share), equivalent to a decrease of 10.6%. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 98.4p.
The return on ordinary activities for the ‘G’ Share pool for the year was a loss of £2,180,000 (2017: £906,000) being a revenue profit of £631,000 (2017: £691,000) and a capital loss of £2.8 million (2017: £215,000).
‘G’ Share pool - investment activity
With the pool now being in the realisation phase, no new investments were made in the period. Two full exits completed during the period generating total proceeds £2.9 million.
Goonhilly Earth Station Limited, the operator of a satellite earth station in Cornwall, was sold during the summer and generated proceeds of £2.6 million for the Share pool. This represented an uplift over cost of £489,000.
In addition, proceeds of £257,000 were generated from the sale of Oak Grove Renewables Limited, the operator of an anaerobic digestion plant in Norfolk. This represented a loss over cost of £163,000.
‘G’ Share pool – portfolio valuationThe period to 31 December 2018 has seen a number of disappointing developments, resulting in an unrealised loss of £3.3 million.
The most notable write down in the period related to Apex Energy Limited, who are the developer of a standby electricity generation plant in the East Midlands. The investment was reduced in value by £1.2 million following several material shortcomings in the plant and equipment supplied that have severely impacted operations. Work is ongoing to establish what steps could result in some recovery of value, including legal action against the third party operator.
Hermes Wood Pellets Limited was planning to build, commission and operate a wood pelleting plant in Goole, Yorkshire. However, due to significant delays and cost overruns, the contractor was unable to procure a construction contractor which would deliver the project within budget. As a result, a significant shortfall has been created resulting in a valuation write down of £848,000. We are working with management to find a solution which can recover some equity value for Shareholders.
Zora Energy Renewables Limited is a wood pellet sales and distribution business. To date the business has been unable to develop at the rate originally planned and a provision of £672,000 has been required.
The investments in Quadrate Spa Limited and Quadrate Catering Limited, which own and operate a health club business and a top floor restaurant in The Cube complex in Birmingham were reduced in value by £781,000 and £254,000 respectively as a result of continued performance issues.
The unrealised losses were partially offset by gains in the period totalling £692,000.
The most significant gain related to Atlantic Dogstar Limited, which owns a group of London pubs. The investment was uplifted by £613,000 based on the minimum expected returns.
Outlook Following the passing of the five year anniversary of the close of the ‘G’ Share offer in November 2018, focus now shifts to realising the investments in order to return funds to investors. Plans are now being progressed for the disposal of all investments, including those that have faced challenges discussed above. We anticipate that the exercise will take some time to complete in full and expect to see good progress over the coming months.
Downing LLP25 April 2019
REVIEW OF INVESTMENTS – ‘G’ SHARE POOL
Portfolio of investmentsThe following investments, all of which are incorporated in England and Wales, were held at 31 December 2018:
| ‘G’ Share pool | Cost | Valuation | Valuation movementin year | % ofportfolio |
| £’000 | £’000 | £’000 | ||
| VCT qualifying and partially qualifying investments | ||||
| Atlantic Dogstar Limited | 3,500 | 4,725 | 613 | 32.5% |
| Antelope Pub Limited | 1,760 | 1,760 | - | 12.1% |
| Walworth House Pub Limited | 1,330 | 1,330 | - | 9.1% |
| Downing Pub EIS One Limited | 980 | 1,240 | 62 | 8.5% |
| Quadrate Catering Limited | 1,450 | 1,196 | (254) | 8.2% |
| Ormsborough Limited | 500 | 351 | (182) | 2.4% |
| Pearce and Saunders Limited | 193 | 193 | - | 1.3% |
| Hermes Wood Pellets Limited | 1,000 | 152 | (848) | 1.0% |
| Apex Energy Limited | 1,300 | 130 | (1,170) | 0.9% |
| Zora Energy Renewables Limited | 750 | 78 | (672) | 0.6% |
| 12,763 | 11,155 | (2,451) | 76.6% | |
| Non-qualifying investments | ||||
| Hedderwick Limited | 1,250 | 1,320 | 17 | 9.1% |
| Baron House Developments LLP | 1,093 | 1,093 | - | 7.5% |
| Quadrate Spa Limited | 1,450 | 669 | (781) | 4.6% |
| London City Shopping Centre Limited | 110 | - | (110) | 0.0% |
| 3,903 | 3,082 | (874) | 21.2% | |
| 16,666 | 14,237 | (3,325) | 97.8% | |
| Cash at bank and in hand | 324 | 2.2% | ||
| Total investments | 14,561 | 100.0% |
Summary of investment movements
Disposals
| Cost | MV at 01/01/18 | Disposalproceeds | Gain/(loss)againstcost | Total realisedgain during the year | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| VCT qualifying and partially qualifying investments | |||||||||
| Goonhilly Earth Station Limited | 2,146 | 2,146 | 2,635 | 489 | 489 | ||||
| Oak Grove Renewables Limited | 420 | 232 | 257 | (163) | 25 | ||||
| 2,566 | 2,378 | 2,892 | 326 | 514 | |||||
INVESTMENT MANAGER’S REPORT- ‘K’ SHARE POOL
IntroductionThe ‘K’ Share pool closed its fundraising period on 30 September 2016 having raised £16.2 million. The process of investing the funds is well underway with £10.6 million invested in qualifying or part qualifying investments.
‘K’ Share pool - Net asset value and resultsAt 31 December 2018, the ‘K’ Share NAV was 91.3p, a decrease of 6.4p on the initial price, equivalent to a decrease of 6.6%.
The return on ordinary activities for the ‘K’ Share pool for the year was a loss of £1.0 million (2017: £212,000) being a revenue loss of £271,000 (2017: £253,000) and a capital loss of £729,000 (2017: £41,000).
‘K’ Share pool - Investment activity
The pool became fully qualifying at the end of the period and no new qualifying investments were made in the period.
Funds had previously been invested in Managed Storage Services (1) Limited to explore business opportunities in the storage sector. The company was unable to find a suitable opportunity, therefore the £1.0 million of funds invested were returned to the Share pool in order to invest in qualifying investments.
In addition to the above, proceeds of £4,000 were generated from the partial sale of Mosaic Spa and Health Clubs Limited, a provider of gym and spa management services.
‘K’ Share pool – portfolio valuationWhilst the majority of the portfolio performed in line with expectations during the year, two investments faced difficulties resulting in a reduction in valuation in the period of £761,000.
Ormsborough Limited owns several pubs and restaurants in Yorkshire with some trading well and others under construction. The investment has been reduced in value by £493,000 as a result of the delays and cost overruns on one of the company’s pub developments and failure of the original operator. Management has now put in place a plan for the completion of these developments.
Zora Energy Renewables Limited is a wood pellet sales and distribution business. To date the business has been unable to develop at the rate originally planned and a provision of £314,000 has been required.
The unrealised losses were partially offset by gains in the period totalling £61,000.
The most notable gain related to SF Renewables (Solar) Limited, which operates a ground-mounted solar farm in Southern India. The investment was uplifted by £51,000 following performance to plan.
Outlook The task of building the ‘K’ Share portfolio is complete and our focus is now on monitoring and supporting the investments during the holding period ahead of their eventual disposal.
Since the end of the reporting period, in February 2019, a fire occurred at one of the portfolio companies, Yamuna Renewables Limited. The facility has been brought back to full operational capability and an insurance claim is being pursued, but the interruption in supply during the key season trading period has impacted customer confidence. A provision against the valuation may be required when the impact has been fully assessed.
It is disappointing that two investments have suffered some significant difficulties during the period, but we are taking action to recover as much value as possible. We believe that the majority of investments in the portfolio have good potential for growth over the planned life of the share pool and will be working closely with all of them to support their development.
Downing LLP25 April 2019
REVIEW OF INVESTMENTS – ‘K’ SHARE POOL
Portfolio of investmentsThe following investments, all of which are incorporated in England and Wales, were held at 31 December 2018:
| ‘K’ Share pool | Cost | Valuation | Valuation movementin year | % ofportfolio |
| £’000 | £’000 | £’000 | ||
| VCT qualifying and partially qualifying investments | ||||
| Jito Trading Limited | 1,500 | 1,500 | - | 10.5% |
| Apprise Pubs Limited | 1,300 | 1,300 | - | 9.1% |
| Garthcliff Shipping Limited | 1,300 | 1,300 | - | 9.1% |
| Yamuna Renewables Limited | 1,300 | 1,300 | - | 9.1% |
| Ormsborough Limited | 1,400 | 948 | (493) | 6.6% |
| Ironhide Generation Limited | 736 | 736 | - | 5.1% |
| Indigo Generation Limited | 736 | 736 | - | 5.1% |
| Rockhopper Renewables Limited | 591 | 591 | - | 4.2% |
| Walworth House Pub Limited | 500 | 500 | - | 3.5% |
| Exclusive Events Venues Limited | 500 | 500 | - | 3.5% |
| Pilgrim Trading Limited | 432 | 432 | - | 3.0% |
| SF Renewables (Solar) Limited | 337 | 388 | 51 | 2.7% |
| Zora Energy Renewables Limited | 350 | 36 | (314) | 0.3% |
| Mosaic Spa and Health Clubs Limited | 24 | 26 | 2 | 0.2% |
| 11,006 | 10,293 | (754) | 72.0% | |
| Non-qualifying investments | ||||
| Fenkle Street LLP | 287 | 295 | 8 | 2.1% |
| Snow Hill Developments Limited | 43 | 43 | - | 0.3% |
| London City Shopping Centre Limited | 15 | - | (15) | 0.0% |
| 345 | 338 | (7) | 2.4% | |
| 11,351 | 10,631 | (761) | 74.4% | |
| Cash at bank and in hand | 3,671 | 25.6% | ||
| Total investments | 14,302 | 100.0% |
Summary of investment movements
Disposals
| Cost | MV at 01/01/18 | Disposalproceeds | Gainagainstcost | Total realisedgain during the year | |||||
| £’000 | £’000 | £’000 | £’000 | £’000 | |||||
| VCT qualifying and partially qualifying investments | |||||||||
| Mosaic Spa and Health Clubs Limited | 3 | 3 | 4 | 1 | 1 | ||||
| Non-qualifying investments | |||||||||
| Managed Storage Services (1) Limited | 1,000 | 1,000 | 1,000 | - | - | ||||
| Total ‘K’ Share pool | 1,003 | 1,003 | 1,004 | 1 | 1 | ||||
Directors’ responsibilities statementThe Directors are responsible for preparing the Report of the Directors, the Directors’ Remuneration Report, the Strategic Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). 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 year.
In preparing these financial statements the Directors are required to:
- select suitable accounting policies and then apply them consistently;- make judgements and accounting 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, to disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s position and performance, business model and strategy.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.
Statement as to disclosure of information to AuditorThe Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.
INCOME STATEMENTfor the year ended 31 December 2018
| Year ended 31 December 2018 | Year ended 31 December 2017* | ||||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||||
| Income | 1,590 | 31 | 1,621 | 1,774 | 34 | 1,808 | |||
| (Loss)/gain on investments | - | (4,001) | (4,001) | - | 660 | 660 | |||
| 1,590 | (3,970) | (2,380) | 1,774 | 694 | 2,468 | ||||
| Investment management fees | (711) | - | (711) | (886) | - | (886) | |||
| Other expenses | (254) | - | (254) | (282) | - | (282) | |||
| (Loss)/return on ordinary activities before tax | 625 | (3,970) | (3,345) | 606 | 694 | 1,300 | |||
| Tax on total comprehensive income and ordinary activities | (259) | - | (259) | 12 | - | 12 | |||
| (Loss)/return for the year attributable to equity shareholders | 366 | (3,970) | (3,604) | 618 | 694 | 1,312 | |||
| Basic and diluted (loss)/return per: | |||||||||
| ‘D’ Share | - | - | - | - | 0.9p | 0.9p | |||
| ‘F’ Share | 0.1p | (4.0p) | (3.9p) | 1.7p | 3.2p | 4.9p | |||
| ‘G’ Share | 2.5p | (11.1p) | (8.6p) | 2.7p | 0.9p | 3.6p | |||
| ‘K’ Share | (1.7p) | (4.6p) | (6.3p) | (1.6p) | 0.3p | (1.3p) | |||
All Revenue and Capital items in the above statement are derived from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards (“FRS 102”). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 and updated January 2017 by the Association of Investment Companies (“AIC SORP”).
Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the return/loss as stated above and historical cost.
* The comparative Income Statement as at 31 December 2017 includes the ‘D’ Share pool which has subsequently been cancelled.
INCOME STATEMENT (ANALYSED BY SHARE POOL)for the year ended 31 December 2018
‘D’ Share pool
| Year ended 31 December 2018 | Year ended 31 December 2017 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | - | - | - | 12 | 34 | 46 | ||
| Gain on investments | - | - | - | - | 58 | 58 | ||
| - | - | - | 12 | 92 | 104 | |||
| Investment management fees | - | - | - | (32) | - | (32) | ||
| Other expenses | - | - | - | (25) | - | (25) | ||
| Return/(loss) on ordinary activities before tax | - | - | - | (45) | 92 | 47 | ||
| Tax on total comprehensive income and ordinary activities | - | - | - | 43 | - | 43 | ||
| Return/(loss) attributable to equity shareholders | - | - | - | (2) | 92 | 90 | ||
‘F’ Share pool
| Year ended 31 December 2018 | Year ended 31 December 2017 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 177 | - | 177 | 451 | - | 451 | ||
| (Loss)/gain on investments | - | (430) | (430) | - | 346 | 346 | ||
| 177 | (430) | (253) | 451 | 346 | 797 | |||
| Investment management fees | (97) | - | (97) | (137) | - | (137) | ||
| Other expenses | (43) | - | (43) | (77) | - | (77) | ||
| (Loss)/return on ordinary activities before tax | 37 | (430) | (393) | 237 | 346 | 583 | ||
| Tax on total comprehensive income and ordinary activities | (31) | - | (31) | (55) | - | (55) | ||
| (Loss)/return attributable to equity shareholders | 6 | (430) | (424) | 182 | 346 | 528 | ||
‘G’ Share pool
| Year ended 31 December 2018 | Year ended 31 December 2017 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 1,307 | - | 1,307 | 1,217 | - | 1,217 | ||
| (Loss)/gain on investments | - | (2,811) | (2,811) | - | 215 | 215 | ||
| 1,307 | (2,811) | (1,504) | 1,217 | 215 | 1,432 | |||
| Investment management fees | (369) | - | (369) | (415) | - | (415) | ||
| Other expenses | (129) | - | (129) | (108) | - | (108) | ||
| (Loss)/return on ordinary activities before tax | 809 | (2,811) | (2,002) | 694 | 215 | 909 | ||
| Tax on total comprehensive income and ordinary activities | (178) | - | (178) | (3) | - | (3) | ||
| (Loss)/return attributable to equity shareholders | 631 | (2,811) | (2,180) | 691 | 215 | 906 | ||
‘K’ Share pool
| Year ended 31 December 2018 | Year ended 31 December 2017 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| Income | 106 | 31 | 137 | 94 | - | 94 | ||
| (Loss)/gain on investments | - | (760) | (760) | - | 41 | 41 | ||
| 106 | (729) | (623) | 94 | 41 | 135 | |||
| Investment management fees | (245) | - | (245) | (302) | - | (302) | ||
| Other expenses | (82) | - | (82) | (72) | - | (72) | ||
| (Loss)/return on ordinary activities before tax | (221) | (729) | (950) | (280) | 41 | (239) | ||
| Tax on total comprehensive income and ordinary activities | (50) | - | (50) | 27 | - | 27 | ||
| (Loss)/return attributable to equity shareholders | (271) | (729) | (1,000) | (253) | 41 | (212) | ||
BALANCE SHEET
as at 31 December 2018
| 2018 | 2017 | |||
| £’000 | £’000 | |||
| Fixed assets | ||||
| Investments | 27,925 | 37,786 | ||
| Current assets | ||||
| Debtors | 1,328 | 767 | ||
| Cash at bank and in hand | 4,055 | 5,589 | ||
| 5,383 | 6,356 | |||
| Creditors: amounts falling due within one year | (448) | (457) | ||
| Net current assets | 4,935 | 5,899 | ||
| Net assets | 32,860 | 43,685 | ||
| Capital and reserves | ||||
| Called up share capital | 52 | 77 | ||
| Capital redemption reserve | 149 | 124 | ||
| Special reserve | 38,471 | 28,313 | ||
| Share premium reserve | - | 16,170 | ||
| Revaluation reserve | (3,911) | 815 | ||
| Capital reserve – realised | (2,250) | (2,252) | ||
| Revenue reserve | 349 | 438 | ||
| Total equity shareholders’ funds | 32,860 | 43,685 | ||
| Basic and diluted net asset value per Share: | ||||
| ‘F’ Share | 28.7p | 69.6p | ||
| ‘G’ Share | 60.9p | 82.1p | ||
| ‘K’ Share | 91.3p | 97.7p | ||
Hugh GillespieChairmanCompany number: 5334418
BALANCE SHEET (ANALYSED BY SHARE POOL)
as at 31 December 2018
‘D’ Shares
| 2018 | 2017 | |||
| £000 | £000 | |||
| Fixed assets | ||||
| Investments | - | - | ||
| Current assets | ||||
| Debtors | - | 1 | ||
| Cash at bank and in hand | - | 22 | ||
| - | 23 | |||
| Creditors: amounts falling due within one year | - | (22) | ||
| Net current assets | - | 1 | ||
| Net assets | - | 1 | ||
| Capital and reserves | ||||
| Called up share capital | - | 25 | ||
| Capital redemption reserve | - | 124 | ||
| Revaluation reserve | - | (249) | ||
| Revenue reserve | - | 101 | ||
| Total equity shareholders’ funds | - | 1 |
‘F’ Shares
| 2018 | 2017 | |||
| £000 | £000 | |||
| Fixed assets | ||||
| Investments | 3,057 | 5,451 | ||
| Current assets | ||||
| Debtors | 53 | 123 | ||
| Cash at bank and in hand | 60 | 2,079 | ||
| 113 | 2,202 | |||
| Creditors: amounts falling due within one year | (68) | (127) | ||
| Net current assets | 45 | 2,075 | ||
| Net assets | 3,102 | 7,526 | ||
| Capital and reserves | ||||
| Called up share capital | 11 | 11 | ||
| Capital redemption reserve | 149 | - | ||
| Special reserve | 4,274 | 7,876 | ||
| Share premium reserve | - | - | ||
| Revaluation reserve | (761) | 316 | ||
| Capital reserve – realised | (1,033) | (1,033) | ||
| Revenue reserve | 462 | 356 | ||
| Total equity shareholders’ funds | 3,102 | 7,526 |
‘G’ Shares
| 2018 | 2017 | |||
| £000 | £000 | |||
| Fixed assets | ||||
| Investments | 14,237 | 19,939 | ||
| Current assets | ||||
| Debtors | 1,162 | 598 | ||
| Cash at bank and in hand | 324 | 516 | ||
| 1,486 | 1,114 | |||
| Creditors: amounts falling due within one year | (317) | (263) | ||
| Net current assets | 1,169 | 851 | ||
| Net assets | 15,406 | 20,790 | ||
| Capital and reserves | ||||
| Called up share capital | 25 | 25 | ||
| Special reserve | 17,999 | 20,440 | ||
| Share premium reserve | - | - | ||
| Revaluation reserve | (2,429) | 707 | ||
| Capital reserve – realised | (1,221) | (1,221) | ||
| Revenue reserve | 1,032 | 839 | ||
| Total equity shareholders’ funds | 15,406 | 20,790 |
‘K’ Shares
| 2018 | 2017 | ||||
| £000 | £000 | ||||
| Fixed assets | |||||
| Investments | 10,631 | 12,396 | |||
| Current assets | |||||
| Debtors | 113 | 45 | |||
| Cash at bank and in hand | 3,671 | 2,972 | |||
| 3,784 | 3,017 | ||||
| Creditors: amounts falling due within one year | (63) | (45) | |||
| Net current assets | 3,721 | 2,972 | |||
| Net assets | 14,352 | 15,368 | |||
| Capital and reserves | |||||
| Called up share capital | 16 | 16 | |||
| Share premium reserve | - | 16,170 | |||
| Special reserve | 16,198 | (3) | |||
| Revaluation reserve | (721) | 41 | |||
| Revenue reserve | (1,145) | (858) | |||
| Capital reserve realised | 4 | 2 | |||
| Total equity shareholders’ funds | 14,352 | 15,368 | |||
STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2018
| Called up share capital | Capital redemption reserve | Special reserve | Share premium reserve | Revaluationreserve | Capitalreserve- realised | Revenue reserve | Total | ||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| At 1 January 2017 | 95 | 106 | 33,666 | 16,170 | (115) | (2,254) | 289 | 47,957 | |
| Total comprehensive income | - | - | - | - | 388 | 306 | 618 | 1,312 | |
| Transactions with owners | |||||||||
| Purchase of own shares | - | - | - | - | - | - | (24) | (24) | |
| Transfers between reserves* | - | - | (5,353) | - | 542 | 5,256 | (445) | - | |
| Dividend paid | - | - | - | - | - | (5,560) | - | (5,560) | |
| Cancellation of shares | (18) | 18 | - | - | - | - | - | - | |
| At 31 December 2017 | 77 | 124 | 28,313 | 16,170 | 815 | (2,252) | 438 | 43,685 | |
| Total comprehensive income | - | - | - | - | (4,866) | 896 | 366 | (3,604) | |
| Share premium cancellation | - | - | 16,170 | (16,170) | - | - | - | - | |
| Transactions with owners | |||||||||
| Purchase of own shares | - | - | - | - | - | - | (55) | (55) | |
| Transfers between reserves* | - | - | (6,012) | - | 140 | 5,872 | - | - | |
| Dividend paid | - | - | - | - | - | (6,766) | (400) | (7,166) | |
| Cancellation of shares | (25) | 25 | - | - | - | - | - | - | |
| At 31 December 2018 | 52 | 149 | 38,471 | - | (3,911) | (2,250) | 349 | 32,860 | |
* A transfer of £140,000 (2017: £542,000) representing previously recognised unrealised gains on disposal of investments during the year ended 31 December 2018 has been made from the Revaluation Reserve to the Capital Reserve realised. A transfer of £5.9 million (2017: £5.3 million) representing realised gains on disposal of investments, less capital expenses and capital dividends in the year was made from Capital Reserve – realised to Special reserve. In 2017 a transfer of £445,000 was made from Capital Reserve – realised to Revenue reserve to reconcile the D Share pool reserves.
CASH FLOW STATEMENT for the year ended 31 December 2018
| Year ended 31 December 2018 | ||||||
| ‘F’ Sharepool | ‘G’ Sharepool | ‘K’ Sharepool | Total | |||
| £’000 | £’000 | £’000 | £’000 | |||
| Net cash (outflow)/inflow from operating activities | (5) | 120 | (288) | (173) | ||
| Cash flows from investing activities | ||||||
| Sale of investments | 1,964 | 2,892 | 1,004 | 5,860 | ||
| Net cash inflow/(outflow) from investing activities | 1,964 | 2,892 | 1,004 | 5,860 | ||
| Net cash inflow/(outflow) before financing activities | 1,959 | 3,012 | 716 | 5,687 | ||
| Cash flows from financing activities | ||||||
| Equity dividends paid | (4,000) | (3,166) | - | (7,166) | ||
| Purchase of own shares | - | (38) | (17) | (55) | ||
| Net cash (outflow)/inflow from financing activities | (4,000) | (3,204) | (17) | (7,221) | ||
| (Decrease)/increase in cash | (2,041) | (192) | 699 | (1,534) | ||
| Cash and cash equivalents at start of year | 2,101 | 516 | 2,972 | 5,589 | ||
| Cash and cash equivalents at end of year | 60 | 324 | 3,671 | 4,055 | ||
| Cash and cash equivalents comprise | ||||||
| Cash at bank and in hand | 60 | 324 | 3,671 | 4,055 | ||
| Total cash and cash equivalents | 60 | 324 | 3,671 | 4,055 | ||
| Year ended 31 December 2017 | ||||||||
| ‘D’ Sharepool | ‘F’ Sharepool | ‘G’ Sharepool | ‘K’ Sharepool | Total | ||||
| £’000 | £’000 | £’000 | £’000 | £’000 | ||||
| Net cash inflow/(outflow) from operating activities | (34) | 141 | 381 | (320) | 168 | |||
| Cash flows from investing activities | ||||||||
| Purchase of investments | - | (684) | (1,416) | (6,804) | (8,904) | |||
| Sale of investments | 2,440 | 2,786 | 1,873 | 4,349 | 11,448 | |||
| Net cash inflow/(outflow) from investing activities | 2,440 | 2,102 | 457 | (2,455) | 2,544 | |||
| Net cash inflow/(outflow) before financing activities | 2,406 | 2,243 | 838 | (2,775) | 2,712 | |||
| Cash flows from financing activities | ||||||||
| Equity dividends paid | (3,753) | (541) | (1,266) | - | (5,560) | |||
| Purchase of own shares | - | - | (20) | (4) | (24) | |||
| Net cash (outflow)/inflow from financing activities | (3,753) | (541) | (1,286) | (4) | (5,584) | |||
| (Decrease)/increase in cash | (1,347) | 1,702 | (448) | (2,779) | (2,872) | |||
| Cash and cash equivalents at start of year | 1,369 | 377 | 964 | 5,751 | 8,461 | |||
| Cash and cash equivalents at end of year | 22 | 2,079 | 516 | 2,972 | 5,589 | |||
| Cash and cash equivalents comprise | ||||||||
| Cash at bank and in hand | 22 | 2,079 | 516 | 2,972 | 5,589 | |||
| Total cash and cash equivalents | 22 | 2,079 | 516 | 2,972 | 5,589 | |||
NOTES TO THE ACCOUNTSfor the year ended 31 December 2018
1. General information
Downing TWO 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. Its registered office is St. Magnus House, 3 Lower Thames Street, London EC3R 6HD.
2. Accounting policies
Basis of accountingThe Company has prepared its financial statements under FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and in accordance with the Statement of Recommended Practice (“SORP”) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (“AIC”) issued November 2014 and updated January 2017 as well as the Companies Act 2006.
The financial statements are presented in Sterling (£) and rounded to thousands.
Presentation of Income StatementIn order to better reflect the activities of a venture capital trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The return on ordinary activities is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.
Investments Venture capital investments are designated as “fair value through profit or loss” assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company’s documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines (“IPEV”) together with FRS 102 sections 11 and 12.
For unquoted investments, fair value is established using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:
- Price of recent investment;- Multiples;- Net assets;- Discounted cash flows or earnings (of underlying business);- Discounted cash flows (from the investment); and- Industry valuation benchmarks.
The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.
All investments are held at the price of recent investment for an appropriate period where there is considered to have been no change in fair value. Where this basis is no longer considered appropriate, the following factors will be considered:
- Where a value is demonstrated by a material arms-length transaction by an independent third party in the shares of a company, this value may be used;- In the absence of the above, depending on each of the subsequent trading performance and investment structure of an investee company, the valuation basis will likely move to either:i) an earnings multiple basis; orii) where a company’s underperformance against plan indicates a diminution in the value of the investment, provision against cost is made, as appropriate.- Premiums on loan stock investments are accrued at fair value when the Company receives the right to the premium and when considered recoverable;- Where an earnings multiple or cost less impairment basis is not appropriate and overriding factors apply, discounted cash flow, a net asset valuation, or industry specific valuation benchmarks may be applied.
Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership, liquidation or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.
It is not the Company’s policy to exercise significant influence over investee companies. Therefore, the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.
Income Dividend income from investments is recognised when the Shareholders’ rights to receive payment has been established, normally the ex-dividend date.
Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective rate applicable and only where there is reasonable certainty of collection in the foreseeable future.
Distributions from investments in limited liability partnerships (“LLPs”) are recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.
ExpensesAll expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:
- Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.- Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating Investment Manager’s fees 100% as revenue. - Expenses and liabilities not specific to a share class are generally allocated pro rata to the net assets.- Performance incentive fees arising from the disposal of investments are deducted as a capital item.
Dividends payableDividends payable are recognised as distributions in the financial statements when the Company’s liability to make payment has been established, normally the record date.
TaxationThe tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company’s effective rate of tax for the accounting year.
Due to the Company’s status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company’s investments which arise.
Deferred taxation which is not discounted is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in years different from those in which they are included in the financial statements. Deferred taxation is not discounted.
Other debtors and other creditorsOther debtors (including accrued income) and other creditors are included within the accounts at amortised cost.
Issue costsIssue costs in relation to the shares issued for each share class have been deducted from the revenue reserve account for the relevant share class.
Significant estimates and judgementsDisclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. The area involving a higher degree of judgement and estimates is the valuation of unquoted investments as explained in the investment accounting policy above.
3. Basic and diluted return per share
| ‘F’ Shares | ‘G’ Shares | ‘K’ Shares | |||
| Revenue return/(loss) (£’000) | 6 | 631 | (271) | ||
| Per share | 0.1p | 2.5p | (1.7p) | ||
| Net capital (loss) for the year (£’000) | (430) | (2,811) | (729) | ||
| Per share | (4.0p) | (11.1p) | (4.6p) | ||
| Total (loss) after taxation (£’000) | (424) | (2,180) | (1,000) | ||
| Per share | (3.9p) | (8.6p) | (6.3p) | ||
| Weighted average number of shares in issue | 10,810,859 | 25,228,418 | 15,699,892 | ||
As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share for any of the share classes. The return per share disclosed therefore represents both the basic and diluted return per share for all share classes.
4. Basic and diluted net asset value per share
| 2018 | 2017 | |||||||||
| Shares in issue | Net asset value | Net asset value | ||||||||
| 31 Dec 2018 | 31 Dec 2017 | per share | £’000 | per share | £’000 | |||||
| ‘D’ Shares | - | 10,000,000 | - | - | - | 1 | ||||
| ‘E’ Shares | - | 14,950,000 | - | - | - | - | ||||
| ‘F’ Shares | 10,810,859 | 10,810,859 | 28.7p | 3,102 | 69.6p | 7,526 | ||||
| ‘G’ Shares | 25,281,571 | 25,328,571 | 60.9p | 15,406 | 82.1p | 20,790 | ||||
| ‘‘K’ Shares | 15,718,154 | 15,734,429 | 91.3p | 14,352 | 97.7p | 15,368 | ||||
| 32,860 | 43,685 | |||||||||
The ‘D’ Share pool, ‘F’ Share pool, ‘G’ Share pool and ‘K’ Share pool are treated as separate investment pools. Within the ‘D’ Share pool the Directors allocate the assets and liabilities of the Company between the ‘D’ Shares and ‘E’ Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights.
5. Principal risksThe Company’s financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits and financial liabilities, being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company’s operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.
The fair value of investments is determined using the detailed accounting policy as shown above.
The fair value of cash deposits and short term debtors and creditors equates to their carrying value in the Balance Sheet.
Loans and receivables and other financial liabilities are stated at amortised cost which the Directors consider is equivalent to fair value.
The Company’s investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company’s operations are:
- Market risks- Credit risk - Liquidity risk
The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.
The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:
Market risks
As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information, and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.
The key investment risks to which the Company is exposed are:
- Investment price risk- Interest rate risk
Investment price risk
Investment price risk arises from uncertainty about the valuation of financial instruments held in accordance with the Company’s investment objectives in addition to the appropriateness of the valuation method used. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.
Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company’s investments is shown below.
There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:
- “Fixed rate” assets represent investments with predetermined yield targets and comprise certain loan note investments.- “Floating rate” assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments.- “No interest rate” assets do not attract interest and comprise equity investments and debtors.
The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors.
The Manager manages credit risk in respect of loan stock with a similar approach as described under “Market risks” above. In addition, the credit risk is mitigated for all investments in loan stocks by taking security, covering the full par value of the loan stock in the form of fixed and floating charges over the assets of the investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.
Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions. Consequently, the Directors consider that the credit risk associated with cash deposits is low.
There have been no changes in fair value during the year that are directly attributable to changes in credit risk.
Of the investments in loan stock above, as at 31 December 2018 £870,000 relates to the principal of loan notes where, although the principal remains within term, the investee company is not fully servicing the interest obligations under the loan note and is thus in arrears.
Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors, (£448,000, 2017: £457,000) and has no borrowings, the Board believes that the Company’s exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company’s exposure to liquidity risk is minimal.
The Company’s liquidity risk is managed by the Investment Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.
6. Events after the end of the reporting period After the end of the reporting period, in February 2019, a fire occurred at the plant owned by Yamuna Renewables Limited, which is an investment held by the 'K' Share pool. The facility has been brought back to full operational capability and an insurance claim is being pursued, but the interruption in supply during the key season trading period has impacted customer confidence which is likely to take time to rebuild. A provision against the valuation may be required when the impact has been fully assessed. By way of illustration, a provision of 25% against the previous carrying value would equate to a write down of £325,000, equivalent to 2.1 pence per share, in the 'K' Share pool.
ANNOUNCEMENT BASED ON AUDITED ACCOUNTS The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2018, but has been extracted from the statutory financial statements for the year ended 31 December 2018 which were approved by the Board of Directors on 25 April 2019 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.
The statutory accounts for the period ended 31 December 2017 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the year ended 31 December 2018 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at St. Magnus House, London, EC3R 6HD and will be available for download from www.downing.co.uk.