Northern Venture Trust Regulatory News (NVT)

8 Jul 2020 16:25

8 July 2020

NORTHERN VENTURE TRUST PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2020

Northern Venture Trust PLC is a Venture Capital Trust (VCT) whose investment adviser is Mercia Fund Management Limited. The trust was one of the first VCTs launched on the London Stock Exchange in 1995. It invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.

Financial highlights (comparative figures as at 31 March 2019 and 30 September 2019)

*Excluding interim dividend not yet paid.*\* The annualised dividend yield is calculated by dividing the dividends in respect of the 12 month period ended on each reference date by the net asset value per share at the start of the period.

Enquiries:Simon John/James Bryce, NVM Private Equity LLP – 0191 244 6000Website: www.nvm.co.uk

Martin Glanfield, Chief Financial Officer, Mercia Asset Management PLC – 0330 223 1430

HALF-YEARLY MANAGEMENT REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2020

The past six months have been another extremely busy period for the company, with four new investments completed, a change in investment advisor announced in December 2019 and a successful share offer launched in January 2020. The latter part of the period was dominated by news of the evolving Coronavirus pandemic (COVID-19) which started to have a significant effect on the movement of people in the UK. Our share offer closed to new applications in February, raising £12.5 million and your company remains well capitalised to support its growing portfolio and to pursue further investment opportunities. 

Results and dividendThe unaudited net asset value (NAV) per share at 31 March 2020 was 58.2p, compared with the audited figure of 68.9p at 30 September 2019. The total return per share before dividends for the six months ended 31 March 2020 as shown in the income statement was minus 8.7p (six months ended 31 March 2019: positive return of 1.5p), equivalent to 12.6% of the NAV at the start of the period. The negative total return was driven by an unrealised reduction in the valuation of the investment portfolio related largely to COVID-19. Investment income of £0.4 million was lower than in the corresponding period last year (six months to 31 March 2019: £1.5 million) due to a combination of prior sales of investments and some investee companies deferring interest payments to preserve cash, but also the benefit in the prior year of a one-off receipt of interest arrears following an investment disposal.

We announced an NAV of 54.6p per share at 24 March prior to issuing shares under the offer. Whilst this was after lockdown had been announced, it was before the detailed guidance on certain government support initiatives had been released, most notably details of the Coronavirus Job Retention Scheme on 26 March. Together with more up to date trading information from investee companies as at 31 March 2020, this enabled us to reconsider the prospects of a number of companies in the portfolio and hence the NAV increased by 3.6p or 6.6% as at the balance sheet date.

In 2018 we revised our dividend policy in the light of the new rules for investment introduced in 2015 and 2017, which we expected to result in more volatile returns. We introduced a target dividend yield of 5% of opening NAV, which has been exceeded in each of the last two years. A negative return in any period clearly puts considerable pressure on the payment of a dividend. However we are aware of the importance to our shareholders of regular distributions and remain confident in the long term prospects of our portfolio. We have therefore decided to pay an interim dividend for the year ending 30 September 2020 of 1.5p and hope to continue to smooth out the returns of the underlying portfolio to our shareholders in this way.

Investment advisor updateAs announced previously, the Company consented to the novation of its existing investment advisory agreement with NVM Private Equity LLP (NVM) to Mercia Fund Management Limited (Mercia) which became effective on 23 December 2019. After careful consideration and extensive due diligence, your directors concluded that the change in advisory arrangements is a positive development for the Company and that it comes at the right time in the continuing evolution of the VCT sector. The NVM VCT team, led by partners Tim Levett and Charlie Winward, transferred to Mercia and now constitute the new VCT division within the wider Mercia group. We believe that the combination of NVM’s long established record as a successful investor and Mercia’s venture credentials has the potential to create one of the leading regionally based UK venture fund management groups. No material changes have been made to the terms of the investment advisory agreement. 

Venture capital investment activityFour new VCT-qualifying holdings were acquired during the period, for total consideration of £2.5 million. These have all been in innovative earlier stage companies, developing a variety of disruptive products and services and requiring capital to scale up. Most of the earlier stage businesses we are backing will require further capital to realise their growth potential fully and we will continue to channel a significant proportion of our investment capital into our existing portfolio. We supported nine of our existing portfolio companies with growth capital of £3.5 million in aggregate during the period.

Inevitably in a portfolio of this type there will be some early losses of which we incurred one during the year with the sale of Primal Food for a nominal sum. We also exited AIM listed Nasstar which was taken private as a result of an agreed takeover and Summit Therapeutics which had announced its intention to de-list from AIM.

Venture capital portfolio update Following the first reports of COVID-19 in Asia, the initial effects in the UK principally impacted businesses with complex supply chains or overseas customers in certain territories. As the spread of the virus has led to a global pandemic, the effect on the UK economy has become much more pronounced and measures taken to tackle COVID-19 have had a material impact on almost every business. The evolving situation has presented our portfolio company management teams with considerable challenges that are likely to persist for some time to come. Our investment adviser has always taken a hands-on approach to portfolio management and typically provides an investment executive to the board of each unquoted portfolio company. Mercia has been working extremely closely with all our investee management teams to support them with the numerous challenges faced.

The Company benefits from holding a diversified portfolio of investments, with no particular concentration to any one end-market sector. As is to be expected with a diverse generalist portfolio, the current situation has had varying effects on individual investments. When wide reaching restrictions on the movement of people were announced by the UK Government in March, some portfolio businesses faced the prospect of an immediate and significant drop in revenues. By contrast, some of our companies observed the early signs of an uptick in activity, particularly those that are involved in ecommerce. In all cases Mercia has been working closely with investees either to preserve cash until the immediate disruption subsides or to source additional working capital to support an increase in trading.

The worldwide impact of COVID-19 on the financial markets has been extreme and caused a great deal of volatility. Although the vast majority of our portfolio is represented by unquoted investments, investors look to the quoted markets as a benchmark and the valuation metrics for many of the sectors in which we invest reduced during the first quarter of 2019. We continue to follow the International Private Equity and Venture Capital Valuation (IPEV) guidelines, being the industry accepted best practice, when determining the fair value of our unquoted investments. As usual, the directors have undertaken a full valuation exercise of the entire portfolio as at 31 March 2020. 

Share offer and liquidityHaving considered the progress achieved to date and the likely further capital required to enable our investee companies to flourish, we announced in October 2019 our intention to launch a share offer in the 2019-20 tax year, which opened in January 2020. I am delighted to say that strong demand was again experienced and we closed the offer to new applications in February 2020. I would again like to thank shareholders, existing and new, for their ongoing support. The gross proceeds raised of £12.5 million were allotted on 3 April 2020 and are in addition to the cash held at 31 March 2020 of £14.5 million. The cash and liquid resources available to the Company put us in a strong position to continue to support our growing portfolio and to add to it selectively as market conditions permit.

Our dividend investment scheme, which enables shareholders to re-invest their dividends in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate.

We have maintained our policy of being willing to buy back the company’s shares in the market, when necessary in order to maintain liquidity, at a 5% discount to NAV. During the six months ended 31 March 2020 a total of 1,708,000 shares were repurchased by the company for cancellation, representing around 1.2% of the opening ordinary share capital.

VCT legislation and qualifying status

The VCT scheme rules have been subject to regular legislative changes in recent years and whilst there were no further amendments announced by the Chancellor in the recent Spring Budget statement, it is possible that further changes will be made in the future. We will continue to work closely with Mercia to maintain compliance with the scheme rules at all times.

The company has maintained its approved venture capital trust status with HM Revenue & Customs. The company’s compliance with the VCT qualifying conditions is closely monitored by the board and we receive regular reports from Mercia and from our VCT taxation advisers, Philip Hare & Associates LLP.

OutlookThe political and economic environment has been uncertain over the past few years. The clear result of the General Election held in December 2019 removed some of that uncertainty, only for it to be reinstated and increased considerably by the emergence of the COVID-19 global pandemic during the first quarter of the year. Many financial indices have staged a significant recovery from the lows experienced in March 2020, however making a definitive prediction about the future path of the economy in the current environment is not possible. We remain committed to supporting our investee companies through what are unprecedented challenges and have confidence in the overall diversity of the portfolio.

On behalf of the Board

Simon ConstantineChairman

Extracts from the unaudited half-yearly financial statements for the six months ended 31 March 2020 are set out below.

INCOME STATEMENT(unaudited) for the six months ended 31 March 2020

BALANCE SHEET(unaudited) as at 31 March 2020

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 31 March 2020

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 31 March 2019

STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2019

\* The revaluation reserve is generally non-distributable other than that part of the reserve relating to gains/losses on readily realisable quoted investments, which is distributable.

STATEMENT OF CASH FLOWS(unaudited) for the six months ended 31 March 2020

INVESTMENT PORTFOLIO SUMMARYas at 31 March 2020

RISK MANAGEMENT

The board carries out a regular and robust assessment of the risk environment in which the company operates. The principal risks and uncertainties identified by the board which might affect the company’s business model and future performance, and the steps taken with a view to their mitigation, are as follows:

Investment and liquidity risk: investment in smaller and unquoted companies, such as those in which the company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on key individuals. The securities of smaller companies in which the company invests are typically unlisted, making them illiquid, and this may cause difficulties in valuing and disposing of the securities. The company may invest in businesses whose shares are quoted on AIM – the fact that a share is quoted on AIM does not mean that it can be readily traded and the spread between the buying and selling prices of such shares may be wide. Mitigation: the directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector, within the rules of the VCT scheme. The board reviews the investment portfolio with the adviser on a regular basis.

Financial risk: most of the company’s investments involve a medium to long-term commitment and many are relatively illiquid. Mitigation: the directors consider that it is inappropriate to finance the company’s activities through borrowing except on an occasional short-term basis. Accordingly they seek to maintain a proportion of the company’s assets in cash or cash equivalents in order to be in a position to pursue new unquoted investment opportunities and to make follow-on investments in existing portfolio companies. The company has very little direct exposure to foreign currency risk and does not enter into derivative transactions.

Economic risk: events such as economic recession or general fluctuation in stock markets, exchange rates and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company’s own share price and discount to net asset value. The level of economic risk has been elevated by the COVID-19 pandemic which is widely predicted to cause a global recession after the balance sheet date. Mitigation: the company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where it is appropriate and in the interests of the company to do so. The adviser typically provides an investment executive to actively support the board of each unquoted investee company. At all times, and particularly during periods of heightened economic uncertainty, the investment executives share best practice from across the portfolio with investee management teams in order to mitigate economic risk.

Brexit risk: the implementation of the decision for the UK to withdraw from the European Union (EU) is a process which involves significant uncertainty. The impact on the future business environment in the UK is therefore difficult to predict. Mitigation: whilst we do not expect that Brexit will have a significant impact on the operations of Northern Venture Trust PLC itself, the board and the adviser follow Brexit developments closely with a view to identifying changes which might affect the company’s investment portfolio. The adviser works closely with investee companies in order to plan for a range of possible outcomes. 

Stock market risk: some of the company’s investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as terrorist activity or global health crises, such as the COVID-19 pandemic, can negatively impact stock markets worldwide. In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM. Mitigation: the company’s quoted investments are actively managed by specialist advisers, including Mercia in the case of the AIM-quoted investments, and the board keeps the portfolio and the actions taken under ongoing review. 

Credit risk: the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment. Mitigation: the directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.

Legislative and regulatory risk: in order to maintain its approval as a VCT, the company is required to comply with current VCT legislation in the UK, which reflects the European Commission’s State-aid rules. Changes to the UK legislation or the State-aid rules in the future could have an adverse effect on the company’s ability to achieve satisfactory investment returns whilst retaining its VCT approval. Mitigation: the board and the advisers monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.

Internal control risk: the company’s assets could be at risk in the absence of an appropriate internal control regime. Mitigation: the board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the adviser. These include controls designed to ensure that the company’s assets are safeguarded and that proper accounting records are maintained.

VCT qualifying status risk: while it is the intention of the directors that the company will be managed so as to continue to qualify as a VCT, there can be no guarantee that this status will be maintained. A failure to continue meeting the qualifying requirements could result in the loss of VCT tax relief, the company losing its exemption from corporation tax on capital gains, to shareholders being liable to pay income tax on dividends received from the company and, in certain circumstances, to shareholders being required to repay the initial income tax relief on their investment. Mitigation: the investment adviser keeps the company’s VCT qualifying status under continual review and its reports are reviewed by the board on a quarterly basis. The board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role.

OTHER MATTERS

The unaudited half-yearly financial statements for the six months ended 31 March 2020 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company’s independent auditor and have not been delivered to the Registrar of Companies. The comparative figures for the year ended 30 September 2019 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The auditor’s report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 30 September 2019.

Each of the directors confirms that to the best of their knowledge the half-yearly financial statements have been prepared in accordance with the Statement “Half-yearly financial reports” issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules 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 Rules 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.

The directors of the company at the date of this statement were Mr S J Constantine (Chairman), Mr N J Beer, Mr R J Green, Mr T R Levett, Mr D A Mayes and Mr H P Younger.

The calculation of return per share is based on the return on ordinary activities after tax for the six months ended 31 March 2020 and on 138,819,494 (2019: 131,929,348) ordinary shares, being the weighted average number of shares in issue during the period.

The calculation of the net asset value per share is based on the net assets at 31 March 2020 divided by the 137,862,512 (2019: 130,562,141) ordinary shares in issue at that date.

The interim dividend of 1.5p per share for the year ending 30 September 2020 will be paid on 28 August 2020 to shareholders on the register at the close of business on 7 August 2020.

A copy of the half-yearly financial report for the six months ended 31 March 2020 is expected to be posted to shareholders on or around 31 July 2020 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the company’s website.

Neither the contents of the NVM Private Equity LLP or the Mercia Asset Management PLC website, nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP or Mercia Asset Management PLC website (or any other website), are incorporated into, or forms part of, this announcement.