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10 Aug 2023 16:20
Half-Yearly ResultsOctopus AIM VCT 2 plc
Half-Yearly Results
Octopus AIM VCT 2 plc (the ‘Company’) is a venture capital trust (VCT) which aims to provide shareholders with attractive tax-free dividends and long-term capital growth by investing in a diverse portfolio of predominantly AIM-traded companies. The Company is managed by Octopus Investments Limited (‘Octopus’ or the ‘Investment Manager’).
Today the Company announces the half-yearly results for the six months ended 31 May 2023.
Financial Summary
| Six months to 31 May 2023 | Six months to 31 May 2022 | Year to 30 November 2022 | |
| Net assets (£’000) | 88,237 | 103,831 | 101,794 |
| Loss after tax (£’000) | (9,038) | (26,909) | (36,695) |
| Net asset value (NAV) per share (p) | 53.9 | 70.5 | 61.6 |
| Total return (%)1 | (8.8) | (20.0) | (27.5) |
| Dividends paid in the period (p) | 2.3 | 2.1 | 4.2 |
| Interim dividend (p)2 | 1.8 | 2.1 | 2.3 |
1Total Return is an alternative performance measure calculated as movement in NAV per share in the period plus dividends paid in the period, divided by the NAV per share at the beginning of the period.
2The interim dividend will be paid on 9 November 2023 to shareholders on the register on 13 October 2023.
Chair’s statement
The six months to 31 May 2023 have seen a continuation of the challenging conditions for smaller company investments that we outlined in our last annual report. Inflation has remained stubbornly high with the result that expectations for peak interest rates have risen and are now anticipated to remain higher into 2024. As explained further below, the market turbulence resulting from this has been particularly harsh on smaller companies in some of the key sectors in which we invest. Against this background it is disappointing to report the net asset value (NAV) of the Company fell by 8.8% in the period after adding back the 2.3p dividend paid in May 2023 and underperformed the AIM index.
At the time of the full-year results we reported that the flow of fundraisings, particularly new listings, had been weak in the second half of the year. Volatile market conditions have meant that new listings planned for the first half of 2023 have also been delayed although many existing AIM companies have still been able to access funding on lower valuations. Furthermore, market conditions have led to significant numbers of shares now being priced well below their recent peaks despite many individual companies in the portfolio continuing to report encouraging trading momentum.
Against this backdrop of challenge and some opportunity, in accordance with our stated objectives of maintaining predictable levels of returns for investors the Board has declared an interim dividend of 1.8p which will be paid on 9 November 2023 to shareholders on the register on 13 October 2023.
Keith Mullins Chair
Investment Manager’s review
Overview The six months to 31 May 2023 has been a frustrating period for smaller company investors. Good growth companies trading robustly have seen their share prices and ratings fall as investors have shied away from taking risks. This has partly been the result of persistently high inflation which has led to interest rates being raised to 5%, further than had been anticipated, with any change of direction now not expected until next year. This nervousness has resulted in many valuations falling to levels not seen since the Financial Crisis nearly 15 years ago and has left the wider equity market trading at a discount of over 25% to its longer-term average. The Company has been particularly badly affected by these market conditions over the past two years as it invests in early stage companies which rely on supportive market conditions for capital until they reach profitability. However, on a more positive note the economy has remained more robust than expected and many companies in the portfolio are still managing significant progress and growth. Valuations are at an attractive level and we see scope to deploy cash profitably once the market becomes comfortable that interest rates have peaked.
Performance Adding back the 2.3p paid out in dividends in the period, the NAV fell by 8.8% in the six months to 31 May 2023. This compares with a 7.1% fall in the AIM Index, a 1.6% rise in the FTSE Small Cap Index (ex Investment Trusts) and a 0.2% rise in the FTSE All Share Index, all on a total return basis. The Company’s relatively high exposure to the healthcare and technology sectors (which had been a reason for good returns in the past) was once again detrimental to performance in a world where risk averse investors have little appetite for earlier stage growth stocks. Companies yet to reach profitability were particularly affected with those needing to raise money now rather than wait for more favourable market conditions suffering some steep falls in their valuations. The VCT rules require investment to be made at this early stage and the benefits of doing so have been clear in past periods.
AIM itself was once again the worst performing index, affected in part by the same factors and the FTSE All Share Index performed noticeably better reflecting a higher weighting in larger companies. The FTSE Small Cap Index (ex Investment Trusts) did better but has a much narrower membership than AIM and its members were not as affected by the conditions described above.
Among the larger and more profitable companies the de-rating of shares was also reflected. The largest single detractor from performance was Ergomed, which gave up some of its former gains as investor sentiment cooled towards the pharmaceutical sector. It produced final results ahead of expectations and has since reported robust trading at its AGM. Learning Technologies also produced good results and robust trading statements but its shares have been de-rated. Craneware was another negative performer after analysts adjusted their forecasts for higher interest rates and more measured growth expectations in a slow US hospital market. SDI and EKF diagnostics were both punished for profit expectations post-Covid-19 still being set too high. Of the top ten detractors, half were companies still on the pathway to profitability. Lunglife and Maxcyte both suffered (as did other smaller holdings) from being in the healthcare sector and lossmaking despite each reporting encouraging progress and Maxcyte being particularly well funded. Engage XR, which has a virtual reality platform and some very high profile clients successfully raised money in the period and is growing strongly although profitability remains some distance in the future. Popsa, a private company, scaled back its marketing spend to preserve cash and has set its growth expectations at a more modest rate. This, and a review of peer group valuations, caused us to cut the valuation from the previous year-end level.
There were several positive contributors to performance including Equipmake, which has made some encouraging announcements since its successful fundraise, Netcall, which has had upgrades to forecasts as a result of good demand for its Lo-Code software and Hasgrove, another private company, which is still seeing strong demand for its intranet software. In the retail sector both Sosandar and Vertu motors are still trading well and Breedon announced a move to the full list. It will remain a qualifying holding for two years following this. Other smaller contributors include Judges Scientific, Feedback and Spectral MD.
Portfolio activityIn the period under review, the Company made two qualifying investments totalling £1.2 million, a decrease on the £4.6 million we invested in the corresponding period last year, reflecting some caution on the part of companies and brokers about raising new capital against a background of volatile markets. One of these was a small follow-on investment into an existing holding in Equipmake of £0.1 million. Equipmake is an electric drivetrain specialist focusing on retrofitting carbon-intensive vehicles and aeroplanes, most notably diesel buses. The company made its stock market debut in July 2022 and successfully raised a further £6.2 million in January 2023, expanding its shareholder base. We opted to make a small further investment given the exciting progress the team are making.
We invested £1.1 million in Itaconix, an existing AIM company. It is a leading producer of plant-based additives for a range of consumer products, from detergents to shampoos. Itaconix’s natural polymers help to decarbonise products, whilst providing improved performance, safety and sustainability. The company raised a total of £10.5 million in a heavily over-subscribed share placing, which will be used to support a range of growth initiatives, including the development of new products and applications for its technology.
A number of disposals in the period resulted in a small net overall loss of £0.3 million over book cost. We sold the entire holdings of Adept Telecom and TP Group which were both the subject of cash takeover bids. We also disposed of Itsarm (formerly In The Style). Its business had been very badly affected by a squeeze between the consumer’s dwindling appetite for on-line purchases and cost and logistics challenges exacerbated by inflation and the management sold the business for cash. We made partial disposals of Genedrive, Intelligent Ultrasound, Judges Scientific and Nexteq (formerly Quixant).
In the period we also invested £1.5 million of the cash balances into the FP Octopus UK Micro Cap Growth Fund, FP Octopus UK Multi Cap Income Fund and FP Octopus Future Generations Fund at reduced prices. The strategy is to reduce other individually held non-qualifying holdings and replace them with liquid collective funds. Although the funds have had a small negative impact on returns in this period, we expect them to provide a positive return on our cash awaiting investment once stock markets return to a more settled state and equity valuations recover.
Unquoted investments As stated in the investment policy, the Company is able to make investments in unquoted companies intending to float. At 31 May 2023 8.0% (31 May 2022: 7.7% and 30 November 2022: 7.9%) of the Company’s net assets were invested in unquoted companies. This is after reducing the valuation of the holding in Popsa on the basis of peer group comparisons and slightly increasing the valuation of Hasgrove, which continues to grow strongly.
Transactions with the Investment Manager Details of amounts paid to the Investment Manager are disclosed in Note 8.
Share buybacks In the six months to 31 May 2023, the Company bought back 2,675,889 Ordinary shares for a total consideration of £1,507,000. It is evident from the conversations that the Investment Manager has that this facility remains an important consideration for investors. The Board remains committed to maintaining its policy of buying back shares at a discount of approximately 4.5% to NAV (equating to up to a 5.0% discount to the selling shareholder after costs).
Share issues In this period 1,340,242 new shares were issued, through the dividend reinvestment scheme (DRIS).
Dividend On 25 May 2023, the Company paid a dividend of 2.3p per share, being the final dividend for the year ended 30 November 2022. For the period to 31 May 2023, the Board has declared an interim dividend of 1.8p. This will be paid on 9 November 2023 to shareholders on the register on 13 October 2023. It remains the Board’s intention to maintain a minimum annual dividend payment of 3.6p per share or a 5% yield based on the prior year-end share price, whichever is the greater. This will usually be paid in two instalments during each year.
Principal risks and uncertainties The principal risks and uncertainties are set out in Note 7.
Outlook The very real issue of inflation and the need to tighten monetary policy by raising interest rates further than had been anticipated six months ago has prolonged the pain for the share prices of companies exposed to growth sectors. This has impacted the NAV and left some of the more mature companies in the portfolio held for their long-term growth potential valued well below their long-term averages despite profit forecasts showing resilience. It has also had a dampening effect on the new issue pipeline although there are recent signs that this is becoming more active again. Short-term attention is fixed on the monthly inflation figures with the most recent figure showing a larger than expected fall giving hope that interest rates may be nearing their peak. If confirmed it will have a huge impact on investor confidence.
The portfolio’s strength is that it is well diversified both in terms of sector exposure and of individual company concentration. At the period end it contained 85 holdings (31 May 2022: 92 holdings and 30 November 2022: 87 holdings) across a range of sectors with exposure to some exciting new technologies in the environmental and healthcare sectors. The Company currently has funds available for new investments as well as supporting those who are still on their journey to profitability. These are difficult macroeconomic and geopolitical times, but the balance of the portfolio towards profitable companies remains, and the Investment Manager is confident that there will continue to be sufficient opportunities to invest our funds in good companies seeking more growth capital at attractive valuations which we expect will result in improved future returns.
The Octopus Quoted Companies team
Directors’ responsibilities statement
We confirm that to the best of our knowledge:
the half-yearly financial statements have been prepared in accordance with Financial Reporting Standard 104 ‘Interim Financial Reporting’ issued by the Financial Reporting Council;the half-yearly financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;the half-yearly report includes a fair review of the information required by the Financial Conduct Authority Disclosure and Transparency Rules, being: we have disclosed an indication of the important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;we have disclosed a description of the principal risks and uncertainties for the remaining six months of the year; andwe have disclosed a description of related party transactions that have taken place in the first six months of the current financial year, that may have materially affected the financial position or performance of the Company during that period and any changes in the related party transactions described in the last annual report that could do so.On behalf of the Board
Keith Mullins Chair
| Income statement | |||||||||
| UnauditedSix months to 31 May 2023 | UnauditedSix months to 31 May 2022 | AuditedYear to 30 November 2022 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Gain/(loss) on disposal of fixed asset investments | – | 402 | 402 | – | 78 | 78 | – | (32) | (32) |
| Loss on valuation of fixed asset investments | – | (8,417) | (8,417) | – | (24,037) | (24,037) | – | (31,821) | (31,821) |
| Loss on valuation of current asset investments | – | (397) | (397) | – | (1,733) | (1,733) | – | (2,946) | (2,946) |
| Investment income | 496 | - | 496 | 182 | – | 182 | 589 | 19 | 608 |
| Investment management fees | (211) | (633) | (844) | (271) | (814) | (1,085) | (481) | (1,443) | (1,924) |
| Other expenses | (278) | - | (278) | (314) | – | (314) | (580) | – | (580) |
| Profit/(loss) before tax | 7 | (9,045) | (9,038) | (403) | (26,506) | (26,909) | (472) | (36,223) | (36,695) |
| Tax | – | – | – | – | – | – | – | – | – |
| Profit/(loss) after tax | 7 | (9,045) | (9,038) | (403) | (26,506) | (26,909) | (472) | (36,223) | (36,695) |
| Earnings per share – basic and diluted | (0.0p) | (5.5p) | (5.5p) | (0.3p) | (17.9p) | (18.2p) | (0.3p) | (24.5p) | (24.8p) |
There is no other comprehensive income for the period.
The ‘Total’ column of this statement is the profit and loss account of the Company; the supplementary revenue return and capital return columns have been prepared in accordance with the AIC Statement of Recommended Practice.All revenue and capital items in the above statement derive from continuing operations.The Company has only one class of business and derives its income from investments made in shares and securities and from bank and money market funds, as well as Open Ended Investment Company (OEIC) funds.Balance sheet
| UnauditedAs at 31 May 2023 | UnauditedAs at 31 May 2022 | AuditedAs at 30 November 2022 | ||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Fixed asset investments | 63,851 | 78,551 | 72,249 | |||
| Current assets: | ||||||
| Investments | 10,462 | 10,484 | 9,399 | |||
| Money market funds | 13,455 | 3,490 | 3,515 | |||
| Debtors | 184 | 199 | 205 | |||
| Cash at bank | 903 | 11,674 | 17,217 | |||
| 25,004 | 25,847 | 30,336 | ||||
| Creditors: amounts falling due within one year | (618) | (567) | (791) | |||
| Net current assets | 24,386 | 25,280 | 29,545 | |||
| Total assets less current liabilities | 88,237 | 103,831 | 101,794 | |||
| Called up equity share capital | 17 | 15 | 17 | |||
| Share premium | 13,637 | 55,284 | 12,904 | |||
| Special distributable reserve | 70,902 | 26,028 | 76,154 | |||
| Capital reserve realised | (6,777) | (4,786) | (5,843) | |||
| Capital reserve unrealised | 13,079 | 29,850 | 21,190 | |||
| Capital redemption reserve | 3 | 2 | 3 | |||
| Revenue reserve | (2,624) | (2,562) | (2,631) | |||
| Total equity shareholders’ funds | 88,237 | 103,831 | 101,794 | |||
| NAV per share – basic and diluted | 53.9p | 70.5p | 61.6p | |||
The statements were approved by the Directors and authorised for issue on 10 August 2023 and are signed on their behalf by:
Keith Mullins Chair
Company Number: 05528235
Statement of changes in equity
| Sharecapital | Share premium | Special distributable reserves 1 | Capital reserve realised 1 | Capital reserve unrealised | Capital redemption reserve | Revenue reserve 1 | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| As at 1 December 2022 | 17 | 12,904 | 76,154 | (5,843) | 21,190 | 3 | (2,631) | 101,794 |
| Total comprehensive income for the period | – | – | – | (231) | (8,814) | – | 7 | (9,038) |
| Contributions by and distributions to owners: | ||||||||
| Repurchase and cancellation of own shares | – | – | (1,507) | – | – | – | – | (1,507) |
| Issue of shares | – | 733 | – | – | – | – | – | 733 |
| Share issue costs | – | – | – | – | – | – | – | – |
| Dividends paid | – | – | (3,745) | – | – | – | – | (3,745) |
| Total contributions by and distributions to owners | – | 733 | (5,252) | – | – | – | – | (4,519) |
| Other movements: | ||||||||
| Prior years’ holding losses now realised | – | – | – | (703) | 703 | – | – | – |
| Total other movements | – | – | – | (703) | 703 | – | – | – |
| Balance as at 31 May 2023 | 17 | 13,637 | 70,902 | (6,777) | 13,079 | 3 | (2,624) | 88,237 |
1The sum of these reserves is an amount of £61,501,000 (31 May 2022: £18,680,000 and 30 November 2022: £67,680,000) which is considered distributable to shareholders.
| Share capital | Share premium | Special distributable reserves 1 | Capital reserve realised 1 | Capital reserve unrealised | Capital redemption reserve | Revenue reserve 1 | Total | ||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| As at 1 December 2021 | 15 | 54,600 | 30,826 | (4,533) | 56,103 | 2 | (2,159) | 134,854 | |
| Total comprehensive income for the period | – | – | – | (736) | (25,770) | – | (403) | (26,909) | |
| Contributions by and distributions to owners | |||||||||
| Repurchase and cancellation of own shares | – | – | (1,719) | – | – | – | – | (1,719) | |
| Issue of shares | – | 689 | – | – | – | – | – | 689 | |
| Share issue costs | – | (5) | – | – | – | – | – | (5) | |
| Dividends paid | – | – | (3,079) | – | – | – | – | (3,079) | |
| Total contributions by and distributions to owners | – | 684 | (4,798) | – | – | – | – | (4,114) | |
| Other movements: | |||||||||
| Prior years’ holding gains now realised | – | – | – | 483 | (483) | – | – | – | |
| Total other movements | – | – | – | 483 | (483) | – | – | – | |
| Balance as at 31 May 2022 | 15 | 55,284 | 26,028 | (4,786) | 29,850 | 2 | (2,562) | 103,831 | |
1The sum of these reserves is an amount of £61,501,000 (31 May 2022: £18,680,000 and 30 November 2022: £67,680,000) which is considered distributable to shareholders.
| Share capital | Share premium | Special distributable reserves 1 | Capital reserve realised 1 | Capital reserve unrealised | Capital redemption reserve | Revenue reserve 1 | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| As at 1 December 2021 | 15 | 54,600 | 30,826 | (4,533) | 56,103 | 2 | (2,159) | 134,854 |
| Total comprehensive income for the period | – | – | – | (1,456) | (34,767) | – | (472) | (36,695) |
| Contributions by and distribution to owners | ||||||||
| Repurchase and cancellation of own shares | (1) | – | (3,117) | – | – | 1 | – | (3,117) |
| Issue of shares | 3 | 13,698 | – | – | – | – | – | 13,701 |
| Share issue costs | – | (794) | – | – | – | – | – | (794) |
| Dividends paid | – | – | (6,155) | – | – | – | – | (6,155) |
| Total contributions by and distributions to owners | 2 | 12,904 | (9,272) | – | – | 1 | – | 3,635 |
| Other movements: | ||||||||
| Cancellation of share premium | – | (54,600) | 54,600 | – | – | – | – | – |
| Prior years’ holding gains now realised | – | – | – | 146 | (146) | – | – | – |
| Total other movements | – | (54,600) | 54,600 | 146 | (146) | – | – | – |
| Balance as at 30 November 2022 | 17 | 12,904 | 76,154 | (5,843) | 21,190 | 3 | (2,631) | 101,794 |
1The sum of these reserves is an amount of £61,501,000 (31 May 2022: £18,680,000 and 30 November 2022: £67,680,000) which is considered distributable to shareholders.
Cash flow statement
| Unaudited Six months to 31 May 2023£’000 | Unaudited Six months to 31 May 2022£’000 | Audited Year to30 November 2022£’000 | |
| Cash flows from operating activities | |||
| Loss before tax | (9,038) | (26,909) | (36,695) |
| Adjustments for: | |||
| (Increase)/decrease in debtors | 21 | (14) | (20) |
| Decrease in creditors | (173) | (195) | (196) |
| (Gain)/loss on disposal of fixed assets investments | (402) | (78) | 32 |
| Loss on valuation of fixed asset investments | 8,417 | 24,037 | 31,821 |
| Loss on valuation of current asset investments | 397 | 1,733 | 2,946 |
| Non-cash distributions | - | - | (19) |
| Cash from operations | (778) | (1,426) | (2,131) |
| Net cash used in operating activities | (778) | (1,426) | (2,131) |
| Cash flows from investing activities | |||
| Purchase of fixed asset investments | (1,159) | (4,618) | (6,071) |
| Proceeds from sale of fixed asset investments | 1,542 | 2,144 | 2,249 |
| Purchase of current asset investments | (1,460) | (223) | (352) |
| Net cash flows used in investing activities | (1,077) | (2,697) | (4,174) |
| Cash flows from financing activities | |||
| Purchase of own shares | (1,507) | (1,719) | (3,117) |
| Share issues | – | 89 | 12,502 |
| Share issue costs | – | (5) | (794) |
| Dividends paid (net of DRIS) | (3,012) | (2,480) | (4,956) |
| Net cash flows from financing activities | (4,519) | (4,115) | 3,635 |
| Decrease in cash and cash equivalents | (6,374) | (8,238) | (2,670) |
| Opening cash and cash equivalents | 20,732 | 23,402 | 23,402 |
| Closing cash and cash equivalents | 14,358 | 15,164 | 20,732 |
| Closing cash and cash equivalents is represented by: | |||
| Cash at bank | 903 | 11,674 | 17,217 |
| Money market funds | 13,455 | 3,490 | 3,515 |
| Total cash and cash equivalents | 14,358 | 15,164 | 20,732 |
Notes to the half-yearly report
1. Basis of preparationThe unaudited half-yearly report which covers the six months to 31 May 2023 has been prepared in accordance with the Financial Reporting Council’s (FRC) Financial Reporting Standard (FRS) 104 Interim Financial Reporting (March 2018) and the Statement of Recommended Practice (SORP) for Investment Companies issued by the Association of Investment Companies in 2014 (updated in July 2022).
The Directors consider it appropriate to adopt the going concern basis of accounting. The Directors have not identified any material uncertainties to the Company’s ability to continue to adopt the going concern basis over a period of at least 12 months from the date of approval of the financial statements. In reaching this conclusion the Directors have had regard to the potential impact on the economy and the Company of the current economic conditions including inflation, the possibility of recession and the war in Ukraine.
The principal accounting policies have remained unchanged from those set out in the Company’s 2022 Annual Report and Accounts.
2. Publication of non-statutory accountsThe unaudited half-yearly report for the six months ended 31 May 2023 does not constitute statutory accounts within the meaning of Section 415 of the Companies Act 2006. The comparative figures for the year ended 30 November 2022 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The independent auditor’s report on those financial statements, in accordance with chapter 3, part 16 of the Companies Act 2006, was unqualified. This half-yearly report has not been reviewed by the Company’s auditor.
3. Earnings per shareThe earnings per share at 31 May 2023 are calculated on the basis of 163,971,209 shares (31 May 2022: 147,560,275 and 30 November 2022: 147,948,350), being the weighted average number of shares in issue during the period.
There are no potentially dilutive capital instruments in issue and, so no diluted returns per share figures are relevant.
4. Net asset value per shareThe net asset value per share is based on net assets as at 31 May 2023 divided by 163,837,197 shares in issue at that date (31 May 2022: 147,345,533 and 30 November 2022: 165,172,844).
5. DividendsThe Directors have declared an interim dividend of 1.8 pence per share (2022: 2.1 pence per share) payable from the special distributable reserve. This dividend will be paid on 9 November 2023 to those shareholders on the register at 13 October 2023. On 25 May 2023 the prior year final dividend of 2.3 pence per share was paid.
6. Buybacks and share issuesDuring the six months ended 31 May 2023 the Company repurchased the following shares.
| Date | No. of shares | Price (p) | Cost (£) |
| 15 December 2022 | 274,131 | 57.9 | 159,000 |
| 19 January 2023 | 436,267 | 57.7 | 252,000 |
| 16 February 2023 | 432,226 | 58.5 | 253,000 |
| 16 March 2023 | 731,856 | 55.6 | 407,000 |
| 20 April 2023 | 442,177 | 55.6 | 246,000 |
| 18 May 2023 | 359,232 | 53.1 | 190,000 |
| Total | 2,675,889 | 1,507,000 |
The weighted average price of all buybacks during the period was 56.3 pence per share.
During the six months ended 31 May 2023 the Company issued the following shares:
| Date | No. of shares | Price (p) | Net proceeds (£) |
| 25 May 2023 (DRIS) | 1,340,242 | 54.7 | 733,000 |
| Total | 1,340,242 | 733,000 |
The weighted average allotment price of all shares issued during the period net of costs was 54.7 pence per share.
7. Principal risks and uncertaintiesThe Company’s principal risks are: VCT qualifying status risk; Operational risk; Regulatory and reputational risk, Valuation risk, Investment risk, Financial risk; and Economic and price risk. These risks, and the way in which they are managed, are described in more detail in the Company’s Annual Report and Accounts for the year ended 30 November 2022. The Board has also considered emerging risks, including the conflict in Ukraine, the ongoing inflationary pressure and the unstable economic environment, which the Board seeks to mitigate by setting policy and reviewing performance. Otherwise, the Company’s principal risks and uncertainties have not changed materially since the date of that report.
8. Related party transactionsThe Company has employed Octopus Investments Limited (‘Octopus’ or ‘the Investment Manager’) throughout the period as Investment Manager. Octopus has also been appointed as Custodian of the Company’s investments under a Custodian Agreement. The Company has been charged £844,000 by Octopus as a management fee in the period to 31 May 2023 (31 May 2022: £1,085,000 and 30 November 2022: £1,924,000). The management fee is payable quarterly and is based on 2% of net assets measured at quarterly intervals.
The Company receives a reduction in the management fee for the investments in other Octopus managed funds, being the Multi Cap Income Fund, Micro Cap Growth Fund and Future Generations Fund, to ensure the Company is not double charged on these products. This amounted to £29,000 in the period to 31 May 2023 (31 May 2022: £32,000 and 30 November 2022: £57,000). For further details please refer to the Company’s Annual Report and Accounts for the year ended 30 November 2022.
As at 31 May 2023, Octopus Investments Nominees Limited (OINL) held nil shares (2022: nil) in the Company as beneficial owner. Throughout the period to 31 May 2023 OINL purchased nil shares (2022: 3,632) at a cost of £nil (2022: £3,000) and sold 4,284 shares (2022: 3,632) for proceeds of £2,000 (2022: £3,000). This is classed as a related party transaction as Octopus, the Investment Manager, and OINL are part of the same group of companies. Any such future transactions, where OINL takes over the legal and beneficial ownership of Company shares will be announced to the market and disclosed in annual and half yearly reports.
9. Post-balance sheet eventsThe following events occurred between the balance sheet date and the signing of these financial statements:
• Partial disposals of FP Octopus UK Multi Cap Income Fund for total consideration of £360,000;• A partial disposal of EKF Diagnostics Holdings plc for total consideration of £250,000;• Partial disposals of Glantus Holdings plc for total consideration of £86,000;• Investments totalling £360,000 into FP Octopus UK Micro Cap Growth Fund;• An investment of £80,000 into FP Octopus UK Future Generations;• On 15 June 2023, the Company purchased for cancellation 219,586 Ordinary shares at a price of 52.0p;• On 5 July 2023, the Company announced its intention to launch a new offer for subscription later in the year;• On 13 July 2023, the Company purchased for cancellation 320,586 Ordinary shares at a price of 50.3p.
10. Fixed asset investments
Accounting policyThe Company’s principal financial assets are its investments and the policies in relation to those assets are set out below.
Purchases and sales of investments are recognised in the financial statements at the date of the transaction (trade date).
These investments will be managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy and information about them has to be provided internally on that basis to the Board. Accordingly, as permitted by FRS 102, the investments are measured as being fair value through profit or loss (FVTPL) on the basis that they qualify as a group of assets managed, and whose performance is evaluated, on a fair value basis in accordance with a documented investment strategy. The Company’s investments are measured at subsequent reporting dates at fair value.
In the case of investments quoted on a recognised stock exchange, fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending upon convention of the exchange on which the investment is quoted. This is consistent with the International Private Equity and Venture Capital Valuation (IPEV) guidelines.
Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the Income Statement and allocated to the capital reserve – unrealised. The Managers review changes in fair value of investments for any permanent reductions in value and will give consideration to whether these losses should be transferred to the Capital reserve – realised.
In the preparation of the valuations of assets the Directors are required to make judgements and estimates that are reasonable and incorporate their knowledge of the performance of the investee companies.
Fair value hierarchy
Paragraph 34.22 of FRS 102 suggests following a hierarchy of fair value measurements, for financial instruments measured at fair value in the balance sheet, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). This methodology is adopted by the Company and requires disclosure of financial instruments to be dependent on the lowest significant applicable input, as laid out below:
Level 1: The unadjusted, fully accessible and current quoted price in an active market for identical assets or liabilities that an entity can access at the measurement date.
Level 2: Inputs for similar assets or liabilities other than the quoted prices included in Level 1 that are directly or indirectly observable, which exist for the duration of the period of investment.
Level 3: This is where inputs are unobservable, where no active market is available and recent transactions for identical instruments do not provide a good estimate of fair value for the asset or liability.
There have been no reclassifications between levels in the period. The change in fair value for the current and previous period is recognised through the profit and loss account.
Disclosure
| Level 1: Quoted equity | Level 3: Unquoted equity | ||
| investments£’000 | investments£’000 | Total£’000 | |
| Cost as at 1 December 2022 | 49,113 | 3,087 | 52,200 |
| Opening unrealised gain at 1 December 2022 | 15,159 | 4,890 | 20,049 |
| Valuation at 1 December 2022 | 64,272 | 7,977 | 72,249 |
| Purchases at cost | 1,159 | – | 1,159 |
| Disposal proceeds | (1,542) | – | (1,542) |
| Profit on realisation of investments | 402 | – | 402 |
| Change in fair value in year | (7,883) | (534) | (8,417) |
| Valuation at 31 May 2023 | 56,408 | 7,443 | 63,851 |
| Cost at 31 May 2023 | 48,430 | 3,087 | 51,517 |
| Closing unrealised gain at 31 May 2023 | 7,978 | 4,356 | 12,334 |
| Valuation at 31 May 2023 | 56,408 | 7,443 | 63,851 |
Level 1 valuations are valued in accordance with the bid-price on the relevant date. Further details of the fixed asset investments held by the Company are shown within the Interim Management Report.
Level 3 investments are reported at fair value in accordance with FRS 102 Sections 11 and 12, which is determined in accordance with the latest IPEV guidelines. In estimating fair value, there is an element of judgement, notably in deriving reasonable assumptions, and it is possible that, if different assumptions were to be used, different valuations could have been attributed to some of the Company’s investments.
Level 3 investments include £400,000 (31 May 2022: £400,000 and 30 November 2022: £400,000) of convertible loan notes held at cost, which is deemed to be current fair value, in addition to this the Company holds six unquoted investments which are classified as level 3 in terms of fair value hierarchy. These are valued based on a range of valuation methodologies, determined on an investment specific basis. The price of recent investment is used where a transaction has occurred sufficiently close to the reporting date to make this the most reliable indicator of fair value. Where recent investment is not deemed to indicate the most reliable indicator of fair value i.e. the most recent investment is too distant from the reporting date for this to be deemed a reasonable indicator, other market based approaches including earnings multiples, annualised recurring revenues, discounted cashflows or net assets are used to determine a fair value for the investments.
All capital gains or losses on investments are classified at FVTPL. Given the nature of the Company’s venture capital investments, the changes in fair value of such investments recognised in these financial statements are not considered to be readily convertible to cash in full at the balance sheet date and accordingly these gains are treated as holding gains or losses.
At 31 May 2023 there were no commitments in respect of investments approved by the Investment Manager but not yet completed. The transaction costs incurred when purchasing or selling assets are written off to the Income Statement in the period that they occur.
11. Half-Yearly Report
The unaudited half-yearly report for the six months ended 31 May 2023 will shortly be available to view at https://octopusinvestments.com/our-products/venture-capital-trusts/octopus-aim-vcts/
For further information please contact:
Octopus Company Secretarial Services LimitedTel: 020 3935 3803
LEI: 213800BW27BKJCI35L17