Vpc Specialty Regulatory News (VSL)

21 May 2020

VPC SPECIALTY LENDING INVESTMENTS PLC

(the "Company" or "Parent Company") with its subsidiaries (together) the "Group")

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2019

The Board of Directors (the "Board") of VPC Specialty Lending Investments PLC (ticker: VSL) present the Company's Annual Financial Report for the year ended 31 December 2019.

VPC Specialty Lending Investments PLC (the "Company" or "VSL") provides asset-backed lending solutions to emerging and established businesses ("Portfolio Companies") with the goal of building long-term, sustainable income generation. VSL focuses on providing capital to vital segments of the economy, which for regulatory and structural reasons are underserved by the traditional banking industry. Among others, these segments include small business lending, working capital products, consumer finance and real estate. VSL offers shareholders access to a diversified portfolio of opportunistic credit investments originated by non-bank lenders with a focus on the rapidly developing technology-enabled lending sector. Through rigorous diligence and credit monitoring by the Investment Manager, VSL generates stable income with significant downside protection. The Company (No. 9385218) is incorporated in the UK, listed on the premium segment of the Official List and admitted to trading on the London Stock Exchange's main market.

The Company's investing activities have been delegated by the Directors to Victory Park Capital Advisors, LLC (the "Investment Manager" or "VPC"). VPC is an established private capital manager headquartered in the United States with a global presence. VPC identifies and finances emerging and established businesses globally and seeks to provide the Company with attractive yields on its portfolio of credit investments. VPC offers a differentiated private lending approach by financing Portfolio Companies through asset-backed delayed draw term loans, which is referred to as "Balance Sheet Lending," designed to limit downside risk while providing shareholders with strong income returns.

1. Net of issue costs.

2. Dividends declared and paid relating to 31 December 2019 include the dividend declared in February 2020 relating to the three-month period ended 31 December 2019. Dividends declared and paid relating to 31 December 2018 include the dividend declared in February 2019 relating to the three-month period ended 31 December 2018.

SUMMARY AND HIGHLIGHTS FOR THE PERIOD

During the year ended 31 December 2019, the Company:

v generated a revenue return of 9.83% and a total NAV (Cum Income) return of 11.34% for the Ordinary Shares;

v declared quarterly dividends of 2.00 pence per Ordinary Share for each quarter of 2019;

v invested 87% of the of the Company's NAV in balance sheet investments as at 31 December 2019 compared to 85% as at 31 December 2018; and

v continued the share buyback programme, purchasing 47,808,578 shares during the year at an average price of 73.31 pence per Ordinary Share representing 12.5% of the Ordinary Shares issued by the Company.

The financial and business highlights for the year ended 31 December 2019 are as follows:

v January 2019: The Company announced that it had fully exited its investment in Fundbox, Ltd. ("Fundbox") via refinancing. The investment in Fundbox represented 7.24% of the Company's NAV at the time of the paydown and substantially all of the proceeds from the paydown were used to lower the Company's gearing facility or were reinvested into existing balance sheet investments.

v February 2019: Elevate Credit, Inc. ("Elevate" NYSE: ELVT) announced amended terms of its facility with the Investment Manager. Both the Company and the Investment Manager view this as a positive impact for the Company and its shareholders as Elevate will continue to be a key investment in the Company's portfolio for the foreseeable future. The Company also announced a dividend of 2.00 pence per Ordinary Share for the three-month period to 31 December 2018.

v April 2019: The Company announced that Kevin Ingram was appointed as Chairman of the Company and Clive Peggram was appointed as Chairman of the Audit and Valuation Committee. The Company also announced that Mark Katzenellenbogen was appointed as a new independent non-executive director of the Company. Woodford Investment Management Ltd. notified the Company of its sale of its shares in the Company.

v May 2019: The Company announced a dividend of 2.00 pence per Ordinary Share for the three-month period to 31 March 2019.

v June 2019: The Investment Manager closed on the first of two built-in USD$25 million upsizes of the existing gearing facility to USD$100 million from USD$75 million.

v July 2019: The Investment Manager completed a sale of the Company's equity investment in Upstart Network, Inc. for a realised gain of USD$3.1 million (£2.5 million) and a cash on cash return of 3.5x for the Company. FTSE Russell confirmed the reinstatement of the Company to the FTSE All Share Index with effect from 1 August 2019 following the recognition of a liquidity data error at the June 2019 index review. Despite the impact, the Company posted strong performance since the erroneous removal which took place at the beginning of June.

v August 2019: The Company declared a dividend of 2.00 pence per Ordinary Share for the three-month period ending 30 June 2019.

v October 2019: The Company received a full repayment of its balance sheet investment in Branch International, Ltd. ("Branch"). The investment in Branch comprised 1.56% of the Company's NAV at the time of the repayment. The proceeds from the repayment were reinvested into existing balance sheet investments.

v November 2019: The Company declared a dividend of 2.00 pence per Ordinary Share for the three-month period ending 30 September 2019.

v December 2019: The Investment Manager closed on the second of two built-in USD$25 million upsizes of the existing gearing facility to USD$125 million from USD$100 million.

SUBSEQUENT EVENTS

Since the year ended 31 December 2019:

v In February 2020, the Company declared a dividend of 2.00 pence per Ordinary Share relating to the three-month period ending 31 December 2019.

v In February 2020, the Company announced that SVS Opportunity Fund, L.P., a newly formed investment vehicle, whose underlying investor is a large US insurance company, managed by the Investment Manager, acquired 16.61% of the Outstanding Ordinary Shares in the Company from a major shareholder and that the entity now owns 18.12% of the Company. Invesco announced to the market that it had sold its entire position held in the Company.

v In May 2020, the Company declared a dividend of 2.00 pence per Ordinary Share for the three-month period ended 31 March 2020 on 7 May 2020 to be paid on 11 June 2020. The Company also released its March NAV and the Investment Manager published its Q1 2020 quarterly letter.

v From 1 January 2020 to 20 May 2020 a total of 6,491,024 shares had been repurchased under the buyback programme at an average price of 71.27 pence per Ordinary Share. The Ordinary Shares repurchased represent 2.10% of the Ordinary Shares outstanding as at 31 December 2019.

ENQUIRIES

For further information, please contact:

ABOUT

VPC Specialty Lending Investments PLC (the "Company" or "VSL") provides asset-backed lending solutions to emerging and established businesses ("Portfolio Companies") with the goal of building long-term, sustainable income generation. VSL focuses on providing capital to vital segments of the economy, which for regulatory and structural reasons are underserved by the traditional banking industry. Among others, these segments include small business lending, working capital products, consumer finance and real estate. VSL offers shareholders access to a diversified portfolio of opportunistic credit investments originated by non-bank lenders with a focus on the rapidly developing technology-enabled lending sector. Through rigorous diligence and credit monitoring by the Investment Manager, VSL generates stable income with significant downside protection. The Company (No. 9385218) is incorporated in the UK, listed on the premium segment of the Official List and admitted to trading on the London Stock Exchange's main market.

The Company's investing activities have been delegated by the Directors to Victory Park Capital Advisors, LLC (the "Investment Manager" or "VPC"). VPC is an established private capital manager headquartered in the United States with a global presence. VPC identifies and finances emerging and established businesses globally and seeks to provide the Company with attractive yields on its portfolio of credit investments. VPC offers a differentiated private lending approach by financing Portfolio Companies through asset-backed delayed draw term loans, which is referred to as "Balance Sheet Lending," designed to limit downside risk while providing shareholders with strong income returns.

This annual report for the year to 31 December 2019 (the "Annual Report") includes the results of the Company (also referred to as the "Parent Company") and its consolidated subsidiaries (together the "Group"). The Company was admitted to the premium listing segment of the Official List of the UK Listing Authority (the "Official List") and to trading on the London Stock Exchange's main market for listed securities (the "Main Market") on 17 March 2015, raising £200 million by completing a placing and offer for subscription (the "Issue"). The Company raised a further £183 million via a C Share issue on 2 October 2015. The C Shares were converted into Ordinary Shares and were admitted to the Official List and to trading on the Main Market on 4 March 2016. The Company provides its investors access to an illiquid asset class and is committed to generating attractive risk-adjusted returns through a diversified, liquid vehicle traded on the premium segment of the Main Market.

A summary of the principal terms of the Investment Manager's appointment can be found on pages 51 and 52 and a statement relating to their continuing appointment can be found on page 52. The investment policy can be found beginning on page 131 of this Annual Report. Founded in 2007 and headquartered in Chicago, VPC is an SEC-registered investment adviser that has been actively involved in the financial services marketplace since 2010.

Further information on VPC Specialty Lending Investments PLC is available at https://vpcspecialtylending.com.

A copy of the Company's Annual Report will shortly be available to view and download from the Company's website, https://vpcspecialtylending.com. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.

The following text is extracted from the Annual Report and Financial Statements of the Company for the year ended 31 December 2019. All page numbers below refer to the Annual Report on the Company's website.

STRATEGIC REPORT

CHAIRMAN'S STATEMENT

Our record-breaking performance in 2019 has been overshadowed by the outbreak of COVID-19 (the global pandemic) and the resulting impact of this crisis on the world economy. Our current investment exposure is predominantly in the U.S. and our investment portfolio and returns will be impacted by this crisis. However, VPC has always focused on protecting the downside when underwriting and structuring our investments so that we should be well positioned to withstand significant stress in our underlying credits. These are challenging times, and the Investment Manager's Report provides information on how the portfolio risks have, and are being managed.

RECORD PERFORMANCE IN 2019

The Company delivered record total NAV return performance in 2019 with a total NAV (Cum Income) return of 11.34% for the year. The Total Shareholder Return (based on share price)3 for the year was 12.24%, up from 8.46% in 2018. Comparisons of the returns to the FTSE All Share Index can be found on page 59, and to European and US high yield indices on page 13. The Group generated revenue returns of £27,054,994 and paid dividends of £26,627,820 for the year. Total interest income generated during the year of £43,847,431 was relatively consistent with interest income of £45,836,424 in 2018, even as the Company repurchased £35,049,382 of Ordinary Shares through the buyback programme.

The total return for the year comprised revenue returns of 9.83% and capital returns of 1.51%. Dividends approved for the year were 8.00 pence per share4, representing an 8.70%5 yield on the average NAV (Cum Income) of the Company and a 10.23%6 yield on the 31 December 2019 market price of 78.20 pence per share. This represents a dividend in line with the target dividend set out in the 2015 Prospectus.

3. Based on a share price of 100 pence. Calculated as the change in the traded share price from 31 December 2019 and 31 December 2018 plus dividends declared during 2019 divided by the traded share price from 31 December 2018.

4. Includes the dividend for the three months ending 31 December 2019 that was declared and paid in 2020.

5. This return denotes the average return calculated by the dividends declared for 2019 divided by the average Net Asset Value (Cum Income) of the Company for the year.

6. The trailing twelve-month dividend yield is calculated as the total dividends declared over the last twelve months as at 31 December 2019 divided by the 31 December 2019 closing share price.

INVESTMENTS

As at 31 December 2019, the Group was fully invested in a diversified portfolio of balance sheet investments that continued to deliver strong returns. The investment portfolio consisted of 87% balance sheet loans, 10% equity investments and 1% marketplace loans and securitisation residuals combined. The remaining 2% was cash held by the Group as at year end.

The balance sheet loan portfolio comprised 19 Portfolio Companies that ranged in position size from 0.14% to 15.56% of the Company's NAV (Cum Income) as at 31 December 2019. Further, at year end, the weighted average coupon rate of the balance sheet investment portfolio (excluding gearing) was 11.82% and the weighted average remaining life of the balance sheet investments was 34 months. The total expected credit losses as at 31 December 2019, which also included reserves on the residual marketplace loans, was £9,631,612, up slightly from £7,259,430 as at 31 December 2018. The reserve as at 31 December 2019 represented 2.6% of the cost before the expected credit losses, which increased marginally from 2.3% as at 31 December 2018.

The vast majority of the balance sheet investments are delayed draw, floating rate senior secured loans that have subordinated equity contributed by the individual Portfolio Companies. The balance sheet investments are backed by underlying collateral consisting of consumer loans, small business loans and other types of collateral. During the year the Group made an initial investment in one new balance sheet loan and had five existing balance sheet loans fully repaid. The repayments on the balance sheet loans were via refinancing and primarily in the case where the Group and Investment Manager had the right to match the terms via Rights of First Refusal, but instead chose not to because of the revised terms not being deemed adequate for the risk taken.

The equity portfolio comprised 25 investments in Portfolio Companies, many of the investments being warrants and common stock that are often received in conjunction with funding the Group's balance sheet loan investments. During the year, the Company announced that VPC had reached an agreement to sell the Group's equity investment in Upstart Network, Inc. The sale, which closed in July, resulted in a USD$3.1 million (£2.5 million) realised gain for the Group. Many of our other equity investments closed on recent equity rounds, leading to strong capital returns during the year from all equity investments.

COSTS

The Company's annualised ratio of ongoing charges for the calendar year 2019 stands at 1.70% (1.49% in 2018). After factoring in the change in the average NAV over 2019 as compared to the 2018 ratio, the ongoing charges ratio would be 1.57%. Ongoing charges comprise management fees, advisory, legal, professional and other operating costs of the Company. Expenses incurred at any investment fund or special purpose vehicle in which the Company invests and performance fees are excluded from the ongoing charges calculation of the Company. The average NAV of the Company used in the calculation of ongoing charges decreased due to the significant share buyback programme during the year.

SHARE PRICE DISCOUNT MANAGEMENT POLICY

It is disappointing to report that the Company's shares moved from a discount of 15.61% as at 1 January 2019 to 16.21% as at 31 December 2019, especially given the strong revenue and dividend return generated by the Company in 2019. During the year, the Company continued to implement the share buyback programme in light of the significant disparity between the Company's share price and its NAV.

The Company bought back a total of 47,808,578 shares at an average price of 73.31 pence per share, representing 12.50% of the Company's issued shares during 2019. There were significant trading volumes during the year as a result of events we believe to be unrelated to the fundamental performance of the Company. These included the sale of the holding by a fund managed by Woodford Investment Management Ltd. ("Woodford") as well as the ejection and subsequent reinstatement of the Company in the FTSE All Share Index. These events presented a favourable opportunity to buy back shares in sizeable numbers.

The Board believes that the best form of discount management over time is to have strong and consistent investment performance and to be able to communicate and demonstrate this to existing and potential shareholders. We have also taken measures to broaden our contact with the market through the appointment of Winterflood as joint broker as well as a variety of other initiatives that are starting to bear fruit. The Board continually monitors the share buyback programme, as well as the Company's premium or discount, and has the ability to issue or buy back shares to limit the volatility of the share price discount or premium. For more information on the Company's authorities in relation to its share capital, see page 38.

In addition to the measures which form part of the continuation vote, the Board is committed to seeking to narrow the discount to NAV if it persists via the buyback strategy, which from inception to 20 May 2020, has resulted in the repurchase 76.8 million shares (20.1% of the total issued share capital as at 20 May 2020). Until it is possible for the Investment Manager to re-commence investor roadshows in person, there will continue to be an active programme of calls, including by video link, if feasible. In addition, the Board and the Investment Manager will continue their strategy of open and active communication through the quarterly newsletters and presentations posted on the Company's website.

FTSE ALL SHARE INDEX

In June 2019, we were notified by the index provider FTSE Russell that the Company's shares no longer met the FTSE Index liquidity requirements to be included within the FTSE All Share Index. We undertook the analysis ourselves, and concluded that the index provider's analysis was incorrect. We promptly filed a formal appeal to protect the interests of the Company's shareholders that cited an omission of data in the formula used by FTSE Russell to calculate the liquidity requirements. On 29 July 2019, our successful formal appeal resulted in FTSE Russell confirming the reinstatement of the Company in the FTSE All Share Index with effect from 1 August 2019, following the recognition of a liquidity data error in their calculation at the June 2019 Index review.

GEARING

The Company closed the year with a look-through gearing ratio of 0.38x, which is well below the limit of 1.50x outlined in the IPO Prospectus, and is a conservative level of gearing for a portfolio of senior debt investments. Since the coronavirus (COVID-19) crisis, the Company has taken a more conservative approach to liquidity and risk management with the gearing facilities. The gearing is in the form of US Dollar borrowings, which also assist the Company to hedge its US Dollar exposure in a flexible and cost-effective manner. It should be noted that approximately half the borrowings (0.18x) are non-recourse to the Company and are linked to specific investments.

ANNUAL GENERAL MEETING & CONTINUATION VOTE

In accordance with the Company's articles of association, it is necessary to propose at this year's AGM an additional ordinary resolution that the Company continues in existence as an investment company.

The Board has considered a number of factors that have led to its unanimous recommendation that shareholders vote in favour of continuation. In coming to its unanimous recommendation, the Board consulted its professional advisers and drew on discussions the Board and or its professional advisers had with, or feedback received from, shareholders, holding in aggregate over two-thirds of the Company's shares in issue.

In February 2020, Winterflood and Jefferies (joint brokers to the Company) were asked by the Board to advise on the Company's continuation vote options. To ensure the views of shareholders were considered, Winterflood were asked to canvass the opinions of shareholders. This consultation process continued into May so that shareholders could be provided with the Investment Manager's analysis of the unfolding impact of the COVID-19 pandemic on the Company's investments. This analysis was provided to shareholders in the Q1 newsletter issued on 7 May 2020 by the Investment Manager, along with the NAV and monthly report for March. After this I spoke directly to a range of shareholders to get their views and then discussed the outcome of these consultations with the Board and its advisers.

The form of the continuation vote has been carefully structured to reflect the advice the Board has received, the views of the shareholders and the Directors' assessment of what is in the best interests of shareholders as a whole.

In response to the wide spread of COVID-19, the Stay at Home Measures were passed into law in England and Wales on 26 March 2020, with immediate effect. These measures dictate that gatherings of more than two people are not permitted. However, the legal requirement to hold an AGM remains in force and we are therefore obliged to convene this year's AGM, during June 2020. Please refer to the AGM Notice of Meeting for further details.

As the attendance of more than two people at an AGM (other than where this is essential for work purposes) is not permitted under the Stay at Home Measures, the Chairman will exercise his statutory powers to exclude other attendees. The meeting will take place with the minimum necessary quorum of two shareholders, which will be facilitated by the Company in line with the Government's strict social distancing advice.

With this in mind, this year's AGM will run with a substantially reduced programme. The meeting will be restricted to the formal business of the meeting as set out in the separate AGM circular and voting on the resolutions therein. The Investment Manager will not attend the meeting; however, the Investment Manager's presentation will be made available on the Company's website as soon as practicable.

It is not the Board's intention to exclude or discount the views of the Company's shareholders, but at the moment, the health of all investors, workforce and officers must be paramount. We urge all shareholders to vote electronically and to appoint the Chair of the meeting as their proxy with their voting instructions. If you hold shares through a nominee (and not directly in your own name) please contact the company with which you hold your shares to determine alternative options (if available) for lodging your voting instructions.

We thank you for your cooperation and sincerely hope to resume the meeting's usual format in future.

OUTLOOK

We are focused on continuing the positive momentum from the last two years through the continuation vote and beyond. We are acutely aware of the continued discount of the Ordinary Share price to NAV and we are determined to continue to use the variety of tools at our disposal to mitigate this.

The Board believes that, following the Woodford exit in 2019 and the Invesco exit in 2020, the share register of the Company comprises a much more diverse base that is not dependent on two large shareholders, removing any perceived downward pressure on the Ordinary Share price due to the uncertainty around both Woodford and Invesco. We believe that prior to the coronavirus outbreak, shareholders were starting to appreciate the strength and consistency of our investment performance as well as the efforts we have made to attract new shareholders. We continue to monitor the Company's foreign currency exposure closely and the Company's US Dollar investment exposure remains fully hedged. The Investment Manager has built the Company's investment portfolio on expertise in managing credit and performance through multiple credit cycles along with the processes and systems that have been put in place to monitor risk.

As the COVID-19 outbreak continues to spread, there has been increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The Board and Investment Manager have been reviewing business continuity plans and operational resilience strategies on an ongoing basis and will take all reasonable steps to continue meeting the Company's regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support the Company's shareholders. The Company's other third-party service providers have also confirmed the implementation of similar measures to ensure no business disruption.

Given the current state of the market, we believe it is important to continue monitoring COVID-19 and its current and future impacts on the global economy. From early March the Investment Manager began to take a more active operational approach to working with and advising the Company's portfolio companies' management teams through the crisis. The VPC risk team with direction from senior management is working with each individual portfolio investment team to develop a coordinated response across the entire portfolio. This includes daily internal meetings to address specific updates and issues as well as a full portfolio review twice a week. With the benefit of some hindsight, we believe these initial steps along with the daily information we receive on the underlying portfolio have proven invaluable to properly manage the risks due to the current crisis.

The Directors have also taken into account the recent share price volatility and further information is provided in the Investment Manager's Report. As at 20 May 2020, the Company's published NAV per Ordinary Share was 88.89p and the latest share price was 58.00p.

Finally, the Board would like to express the hope that you, your family, friends and colleagues are, and remain, healthy.

Kevin Ingram

Chairman

20 May 2020

INVESTMENT OBJECTIVES

The Company's investment objectives are to:

v generate an attractive total return for shareholders of consistent distributable income and capital growth through asset-backed lending;

v achieve portfolio diversification to emerging and established businesses across different industries and geographies with the goal of building long-term, sustainable value; and

v enable shareholders to benefit from equity upside through equity-linked securities issued in conjunction asset-backed lending.

The Company's Net Asset Value (the "NAV") as at 31 December 2019 was £291.5 million (cum income).

TOP TEN POSITIONS

The table below provides a summary of the top ten positions of the Group, net of gearing and excluding equity exposure, as at 31 December 2019. The summary includes a look-through of the Group's investment in VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. to illustrate the exposure to underlying Portfolio Companies as it is a requirement of the investment policy (set out on pages 131 and 132) to consider the application of the restrictions in this policy on a look-through basis. All balance sheet investments are disclosed as loans at amortised cost in accordance with the International Financial Reporting Standards ("IFRS") within the Statement of Financial Position.

The table below provides a summary of the top ten positions of the Group, excluding equity exposure, as at 31 December 2018. The summary includes a look-through of the Group's investment in VPC Offshore Unleveraged Private Debt Fund Feeder, L.P.

INVESTMENT MANAGER'S REPORT

SUMMARY

The Company completed the year with a total NAV return of 11.34% and a total net revenue return of 9.83%, setting a full year total return record for the Company. The strong revenue returns were driven by positive performance of our balance sheet investments as our portfolio companies performed in line with underwriting. Capital returns included a mix of strong equity performance offset by foreign exchange hedging costs and some additional reserves.

The investment portfolio delivered strong credit performance during the year and we did not see signs of a broad-based weakening in credit fundamentals at the underlying portfolio companies in which the Company was invested.

During 2019 and into 2020 we continued to use 20.0% of our management fees to buy shares in the open market to ensure our incentives are aligned with the shareholders. As of the date of this report, we have purchased 3,159,635 Ordinary Shares with proceeds from our management fees. The Company's dividend was fully covered for the year by the revenue returns of the Company and as of year-end, the trailing twelve-month dividend yield was 10.23%7. While we prefer to analyse the Company on an absolute return basis, as seen below, the Company also delivered strong relative value returns when compared against other fixed income asset classes.

7. Calculated as the total dividends declared over the last twelve months, including the current reporting month, divided by the 31 December 2019 closing share price.

The Investment Manager has continued to invest heavily in both investment and operational resources to support the Company's growth as one of the largest and most active financial technology investors globally. Additionally, we continue to expand our relationships into new products and geographies to help foster innovation and growth in the financial technology ecosystem. We are committed to producing strong risk-adjusted returns by partnering with the best-in-class management teams and sponsors in the industry, while at the same time focusing on downside protection from credit losses through rigorous analysis and portfolio monitoring.

In summary, we are pleased with the Company's record NAV (Cum Income) return for 2019. However, we recognise that to close the discount on the Company's stock price, investors expect consistent strong performance and a covered dividend. As such, both the performance and dividend of the Company remain as our primary focus heading into 2020. Over the last few months, the market has seen a rapid reversal of consumer sentiment as COVID-19 has continued to spread globally. While the market has reacted sharply and governments have worked to contain the spread, the economic effects in the coming months are highly uncertain. We remain cautious as the situation develops and have instructed our portfolio companies to do the same. We have expertise in managing credit and performance through multiple credit cycles and we continue to work with the Company's portfolio investments along with continuing to develop the processes and systems that have been put in place to monitor risk.

COMPANY PERFORMANCE

NAV (Cum Income) Return Analysis

During the year, the Company generated a record NAV return of 11.34% for the Ordinary Shares and declared dividends relating to the period totalled 8.00 pence per Ordinary Share. The NAV per share (Cum Income) at year end 2019 was 93.33 pence per Ordinary Share. The Company generated gross revenue returns of 14.82% as a percentage of NAV in 2019 from the Company's balance sheet investments, a record in performance for the Company. The other revenue return of 0.62% comprises of interest earned on the Company's outstanding cash balances and the impact of the share buyback programme on revenue returns. Expenses were -5.61% for a net revenue return of 9.83%. Capital returns contributed 1.51%, comprised of -1.17% from balance sheet expected credit loss reserves, 0.38% from marketplace investments, 0.20% from securitisation residuals, 1.77% from equity investments and 0.33% from other capital returns primarily relating to the cost of the Company's foreign exchange hedging program, offset with the impact of the share buyback programme, for a net total return of 11.34%.

The Group generated revenue returns of £27,054,994 and paid dividends of £26,627,820 for the year. Total interest income generated during the year of £43,847,431 was relatively consistent with interest income of £45,836,424 in 2018, even as the Company repurchased £35,049,382 of Ordinary Shares through the buyback programme. As described below, the Group continued to utilise a modest level of gearing throughout the year to minimise the cash drag on the Company created by the buyback and hedging programmes.

INVESTMENTS

In order to meet the Company's investment objectives within the pre-defined portfolio limits, we allocate capital across several Portfolio Companies with a focus on portfolio level diversification. As at 31 December 2019, the Company's investments were diversified across 34 different Portfolio Companies across the U.S., UK, Europe and Latin America. As at 31 December 2019, the Company had exposure to 19 Portfolio Companies through balance sheet loans and 25 portfolio companies through equity securities or convertible notes.

During the year, the Company's portfolio of balance sheet investments continued to generate strong risk-adjusted returns. These investments benefit from first loss protection and excess spread, which provides downside protection in the case of increased credit losses. The credit metrics on the portfolio's underlying loans have continued to show strong performance with no signs of immediate macro weakness. Furthermore, the pipeline of available balance sheet investment opportunities remains strong

Portfolio Composition as at 31 December 2019

We continue to implement our strategy of deploying capital across a broad range of Portfolio Companies with diversity of geographies, borrower types and credit quality. As at 31 December 2019, consumer exposure accounted for 85.0% of the investment portfolio, while SME exposure accounted for 15.0%. As referenced above, the Company has investments in the U.S., UK, Europe and Latin America.

8. Percentages calculated on a look-through basis to the Company's investee entities and SPVs.

9. Calculations using gross asset exposure and not reduced for gearing. Excludes cash.

Corporate Protection

While we often discuss the underlying credit performance of our balance-sheet investments, it is also important to emphasise that we have additional layers of protection beyond our direct asset security. Due to the structured nature of our balance sheet investments, including (in most cases) corporate guarantees and significant first-loss protection, the Company is not affected by changes in credit performance until an investment defaults and all corporate resources (separate from our borrowing base of loan collateral) are exhausted. In addition to monitoring the credit performance, we monitor the overall corporate performance of the portfolio companies, including attending board meetings as an observer and having weekly update calls with management.

VPC has continued to structure investments with tight covenant packages designed for downside protection in a variety of credit environments. VPC can do this because we operate in niche markets and do not participate in broadly syndicated deals, allowing us to control the exact make up the Company's portfolio and dictate the terms of investments. We believe that these structural protections combined with a disciplined and rigorous credit and diligence process are the best form of risk management. Remaining disciplined in our underwriting approach allows for continued success through multiple credit cycles. Our team continues to focus on sourcing and structuring since our investment approach requires a higher touch than simply receiving allocations of broadly syndicated deals.

The success and overall health of the Portfolio Companies is our first line of defence, and we only rely on our asset security in the case of corporate default. Although each investment has different corporate resources, which shift quarter-over-quarter, this source of security offers an additional layer of protection beyond the first-loss protection directly within our borrowing base of loan assets. In particular, the current make-up of our portfolio has strong corporate credit protection. The larger positions are profitable and operate at significant scale with large cash balances, while some of our smaller positions have recently raised significant amounts of equity and are in the process of scaling their credit portfolios.

VPC was founded in late 2007, just before the emergence of the Global Financial Crisis. Our goal is to take many of the lessons learned then and use them in our approach to the volatile markets today. We have always been a trusted partner and capital provider to our portfolio companies, and we will do everything we can to continue that way in the current environment.

Stress Scenario Performance and Wind-down Analysis

Our risk management team performs regular analysis to stress test each Portfolio Company's lending performance to determine a portfolio level downside scenario. The largest risk mitigant in the downside scenarios is the first-loss protections that are structured into the Company's balance sheet investments. This ensures that the Portfolio Companies and their equity investors' capital would have to be fully impaired before a balance sheet facility loses any interest income or principal invested. In the Company's recourse investments, this means the portfolio companies would also lose the cash and other assets that are outside of the borrowing base to cover the first-loss protections. We pride ourselves on our structural protections, risk management and portfolio monitoring as this is an important area of focus that is constantly evaluated.

As we move through this uncertainty caused by COVID-19, the focus continues to centre on risk management and risk controls with a particular emphasis on liquidity across the spectrum. Our dedicated VPC risk management team continues to work collaboratively with the VPC investment teams to limit deployment considerably as we seek further information on performance. In addition, we are closely monitoring the Company's investment portfolio and proactively working with the Portfolio Companies to ensure that they are taking prudent steps to mitigate risk and manage through the ongoing situation. In early March 2020, VPC instituted an all-hands call at the beginning and end of each day, to ensure everyone on the VPC team is updated on any new developments given this rapidly changing environment.

Geographic Diversification

While a majority of the Company's investments are concentrated within the U.S., we continue to leverage our extensive sponsor network to build our international exposure and we expect this trend to continue over time. Furthermore, we are evaluating unique opportunities to partner with leading entrepreneurs in emerging markets. In addition to the Company's exposure in the U.S., the Company also has investments in Mexico, UK, Europe and Latin America.

Expected Credit Losses

During the year, the Group continued to carry expected credit loss reserves on only two of the Group's balance sheet investments, Oakam, Ltd. and Borro, Ltd. The total expected credit losses as at 31 December 2019, which also includes reserves on the residual marketplace loans, was £9,631,612 which is up slightly from £7,259,430 as at 31 December 2018. The reserve as at 31 December 2019 represents 2.6% of the cost before the expected credit losses, which increased slightly from 2.3% as at 31 December 2018.

GEARING AND CAPITAL MARKETS

The Company selectively employs gearing to enhance returns generated by the underlying credit assets. This is structured to limit the borrowings to individual SPVs that hold the assets and to ensure the gearing providers have no recourse to the Company. As the online lending industry continues to grow and become more established, VPC has been approached by multiple large global banks to offer the Company attractive gearing facilities. Given the breadth of VPC's portfolio, we believe the Company has a distinct competitive advantage in securing these gearing facilities at attractive rates.

At the beginning of 2019, the Company had a Look-Through Gearing Ratio of 0.16x and the Company finished the year with a Look-Through Gearing Ratio of 0.38x. During the year, we closed on a low cost, non-recourse gearing facility on the Elevate Elastic product. At the time of the closing of this facility in April 2019, it reduced the Company's exposure to Elevate by 6.34%. VPC also completed two USD$25.0 million upsizes on the Pacific Western Bank facility during 2019, bringing the total facility to USD$125.0 million. As at 31 December 2019, the Company had USD$76.8 million outstanding on the Pacific Western Bank facility.

MARKET UPDATE AND OUTLOOK

Market Update

Over the last few months, the market has seen a rapid reversal of consumer sentiment as COVID-19 has continued to spread globally and economies have been locked down. While the market has reacted sharply and governments have worked to contain the spread, the economic effects in the coming months are highly uncertain but with near certainty the global economy is entering a recession, which is likely to be prolonged. We remain cautious as the situation develops and have instructed our portfolio companies to do the same.

As we enter this period of uncertainty caused by COVID-19, we continue to exercise caution on the macro front, structuring our portfolios with the goal to perform in any economic environment. We structure and underwrite our investments with a focus on downside protection in addition to stress-testing our loan pools across various scenarios. From a purely macroeconomic standpoint, we continue to believe that our current portfolio's main advantages include the floating rate, short duration and fully amortising underlying collateral. Specifically, the weighted average duration of VPC's underlying collateral as of year-end was less than one year. We believe that duration is a misunderstood risk, which has been added to fixed income portfolios in recent years as interest rates have come down and borrowers have looked to lock in long duration fixed rate credit. In the extremely competitive credit markets over the past few years, borrowers have inevitably succeeded, and as a result, investors are largely exposed to long duration covenant-lite loans and bonds. From a credit ratings perspective, this can be demonstrated by the continual degradation of quality of investment grade bonds. For the first time, the lowest rating level needed to achieve an investment grade rating from Moody's (Baa) makes up a majority of corporate debt outstanding.10

10. Source: Market Insights - Guide to the Markets (J.P. Morgan Asset Management - January 2020).

As of the publication of this report, we are two months into what may be the worst economic and social crisis of our lifetimes. But the data we have seen thus far gives us reason to be cautiously optimistic that the downside protection structured into our portfolio of balance sheet investments will remain resilient to the shocks we are seeing in the economy. We do not expect a "V" shaped recovery, but instead expect the global economy to remain depressed for an extended period, albeit with lockdowns easing gradually in the coming months. While the future remains uncertain, our investments have been structured conservatively in order to sustain a prolonged and sharp downturn in the economy and early indications have proven that the portfolio is well positioned to withstand the worst impacts of the crisis.

Our cautious optimism is based on the following factors addressed below:

v Structure: First and foremost, the Company's deals are structured with first loss cushions sitting below our debt position. Therefore, our balance sheet deals do not take a loss when delinquencies and charge offs increase at our portfolio companies, unless the entirety of the first loss capital is eroded (along with other additional credit enhancements). This aligns incentives and ensures that the portfolio company and its equity owners would take a complete loss before we experienced any loss on our balance sheet positions. At this point, all portfolio companies remain supportive of the respective credit facilities and are current on all interest payments. If this were to change, we would then seek to recover our capital by winding down the underlying loan portfolios and paying ourselves down over time.

v Loan performance: The majority of the underlying exposure in the Group is to the U.S. consumer. As of the publication of this report, while we have seen modest deterioration in loan performance, it is not as drastic as might have been expected when quarantines began. Further, all portfolio companies have revised underwriting criteria, the result of which is that originations have been significantly reduced if not completely stopped depending on the company. Given the short duration of the overall portfolio and reduction of originations, our portfolio companies have generated a significant amount of cash in March and April 2020, which has either been repaid to the Group as a prepayment on the credit facility or remains at the portfolio company and is directly collateralising our investment. In total the Group has received USD$60 million of prepayments since the beginning of March 2020, USD$25 million of which has been used to pay down part of the revolving credit facility with Pacific Western Bank in April 2020. The Group retains the right, but not the obligation, to redeploy this capital back to the portfolio companies on the same terms once the situation stabilises. The Group will only redeploy capital when it feels completely comfortable it will be used prudently and at good risk adjusted yields. A few highlights below:

v Payment Relief: The earliest indicator of distress across all portfolios is the number of borrowers seeking payment relief. Portfolio companies can offer payment relief in many forms depending on the nature of the product, but this often includes payment deferral or forbearance, revised repayment plans or payment reductions, often resulting from a job loss. We have encouraged portfolio companies to offer fair and transparent options to borrowers both because of the number of individuals facing true hardship, but also because historical data suggests that such programmes are the best way to maximise the ultimate collectability of debt. Specifically, borrowers that proactively reach out to seek such relief are demonstrating a willingness to pay in the future (once they regain the ability to pay), which can be a positive signal. In early April, we began to see an increase in the number of borrowers seeking hardship relief, though over the past several weeks that trend has slowed significantly and seems to be levelling off. While it varies by platform, the range of portfolio hardship relief is approximately 2%-12% across the consumer portfolios, which is consistent with broader industry data and compared to 0%-6% pre-COVID-19. While this represents a decrease in the credit quality of the portfolios, current trend levels suggest a less severe impact than many predicted and that the impact is likely to be manageable from the perspective of the Company's investments. Lastly, while we do not discount the possibility that these trends may still worsen, given the short duration of the underlying portfolios, time is on our side and each week that goes by without accelerating deterioration allows each of these investments to further de-risk and de-lever.

v Borrower Delinquency and Payment Rates: Aside from borrowers seeking payment relief, overall delinquency rates have remained relatively stable, if not decreasing, and as a result the overall payment rates on the underlying portfolios have continued to generate significant amounts of cash, reducing VPC's net portfolio exposures across the portfolio. Similar to modification trends, payment rates have improved in the second half of April compared to the beginning of the month. While we can only speculate on the cause, the unprecedented level of government support for individuals in the U.S. has likely played a role in stabilising the finances of the underlying borrowers.

While there is no guarantee it will continue, some credit segments of the portfolio have held up particularly well at this point in the crisis relative to the broader impacts. In particular, we have seen consumers prioritising payments on debt associated with specific purchases, particularly where they have made a down payment on the purchase, such as with our point of sale financing companies (Sunbit, Cognical, West Creek). The legal lending platforms (ATA-KS Holdings LLC, Counsel Financial) have also been strong performers, which we expect will remain uncorrelated to the overall economy as the underlying loans are to law firms secured by highly diversified contingency fee receivables and other claims which are not dependent on economic growth.

Portfolio company liquidity is a significant factor for ensuring that each portfolio company can meet its contractual obligations under the credit facility. In the vast majority of our balance sheet investments, (>93% of balance sheet exposure) we are secured not only by our direct portfolio collateral, but also by a guarantee from the portfolio company. This guarantee often includes additional assets beyond those that are counted towards the borrowing base of the credit facility, including significant cash balances in excess of the cash required under the credit facility. Furthermore, in some instances, excess cash balances represent a significant percentage of the Company's investment exposure making it highly unlikely we would experience a loss regardless of underlying loan performance.

If we see a sustained downturn with losses beginning to approach the level of the financial crisis, the equity holders of a small number of our portfolio companies may need to support the business with more capital. In this instance if a sponsor chooses not to invest more capital we would then enforce our rights at which point we can decide to 1) operate the business as a going concern 2) attempt to raise equity from a new sponsor to recapitalise the business or 3) to wind down the portfolio and seek recovery on our secured debt. While we have structured our deals assuming a wind down, in all cases we would prefer that the portfolio company continue operating, assuming our position is adequately collateralised, and we are being compensated for the risk. Continuing operations is the best outcome for employees, customers, unsecured creditors and secured creditors alike. We have intentionally partnered with well capitalised sponsors to ensure in a scenario like this they would have the means (if not the intention) to support the business if necessary. Given the unprecedented situation that has developed in March and April 2020, and while not necessary immediately, in certain cases we have begun having these discussions should an equity injection become more necessary in the coming months. While we do not consider equity support in any of our valuation scenarios, as of now we are optimistic that certain sponsors will likely be supportive of their platform companies should the situation worsen in the coming months in order to avert a portfolio liquidation.

Portfolio Update

As of the publication of this report, the Company has received all contractual interest payments through the month of April. During the first quarter, the Company took what is hoped will be one-time loss reserve adjustments to incorporate the potential economic changes from the COVID-19 crisis as well as reductions in valuations of our venture equity portfolio, where we utilise public market comparables to estimate fair value. Equity valuations accounted for -3.02% during the first quarter of 2020, to reflect unrealised valuation adjustments resulting from general market deterioration caused by the COVID-19 pandemic in addition to the decline in Elevate's (NYSE: ELVT) stock price which is marked to market monthly. Our equity portfolio has been a strong performer for us in recent years and we remain bullish on the long-term prospects of these investments. The equity portfolio remains well diversified with investments in 25 portfolio companies across several geographies and the Company's venture equity investments as a whole remain in an unrealised gain position after these adjustments.

The Company also increased its estimate of expected credit losses on the Company's balance sheet investments by 2.55% (£6.9 million) to 4.33% of the Company's gross balance sheet investment portfolio, which reflects revised loss given default assumptions of loan performance over the next 12 months. Our accounting is the same standard used by commercial banks to determine the level of losses estimated to occur over a 12 month period depending on a range of scenarios. As of the date of this report we have sustained no permanent losses of capital and all portfolio companies are current on interest payments. However given the unprecedented situation our valuations have been updated to account for the likelihood of a severe and sustained recession similar to the 2008 Financial Crisis. Given the high levels of credit support we have in the portfolio, in most cases we have not historically carried a loss reserve against most performing positions as the structural protections would be expected to absorb any foreseeable losses, even in times of stress. Considering the current circumstances and ensuing uncertainty over what the next 12 months might look like, we have revised our modelling assumptions to reflect a 100% likelihood of a stress scenario, which assumes a significant level of incremental stress beyond the amounts witnessed thus far and comparable to loss rates on similar asset performance during the 2008 Financial Crisis. Our updated reserves reflect the possibility that some of these portfolio companies may default in the future under such adverse scenarios (hopefully this is not the case), and there is some probability we may not fully recover on the investment.

These reserves are calculated using a probability weighted estimate of losses that could reasonably be sustained if a portfolio company defaulted and we were forced to seek recovery by winding down the underlying collateral. Our loss reserves are based on the default performance on similar asset classes during the 2008 Financial Crisis and include credit support from portfolio company assets we are secured by outside our direct borrowing base, as discussed above. These reserves also include operating reserves for the cost of winding down the portfolio including an estimate of legal and servicing costs that would occur in a downside. During the 2008 Financial Crisis peak loss rates on U.S. consumer credit ranged from 1.15x to 2.60x base case losses on a portfolio level based on the type of product and the credit quality of underlying debtor. We have used these historical data points to inform our current loss reserve estimates.

The change in our reserves reflects the immediacy of the onset of the current crisis as well as the increased likelihood of stress in the portfolios over the next 12 months, and we are making these changes to our loss reserves now with a view to expected additional stress to come. In the coming months, we will continue to modify these reserves as the situation develops and we receive additional information, but we believe our downside scenario incorporates a significant level of stress that we have not yet seen within the portfolio. If the situation improves, we would then release these reserves over time.

Market Outlook

Given the current state of the market, we believe it is important to continue monitoring COVID-19 and its current and future impacts on the global economy. From early March we began to take a more active operational approach to working with and advising our portfolio companies' management teams through the crisis. The VPC risk team with direction from senior management is working with each individual portfolio investment team to develop a coordinated response across the entire portfolio. This includes daily internal meetings to address specific updates and issues as well as a full portfolio review twice a week. With the benefit of some hindsight, we believe these initial steps along with the daily information we receive on the underlying portfolio have proven invaluable to properly manage the risks due to the current crisis.

The first and possibly most important step we took was to coordinate rapidly with portfolio companies to revise underwriting and originations strategies to ensure that any new originations were only being made to the most creditworthy customers. This resulted in a decrease of new originations of approximately 75-95% depending on the platform. Underwriting credit is fundamentally about using data signals to assess and price risk. Under the circumstances, it quickly became clear that the data sources that typically inform underwriting decisions (i.e., income and employment information, credit bureau data, etc.) were no longer providing relevant, accurate and timely signals and thus few lenders could adequately assess and price risk across any sector of the economy. Considering the short duration of the underlying loan portfolios, if a platform ceases new lending, cash begins to accumulate inside the SPV's quickly. As we anticipated this would happen, we waived prepayment penalties so that portfolio companies could repay our debt, therefore taking risk off for our investors and saving on interest expense for the portfolio company. In all cases we have retained the right to redeploy this capital on the same terms in the coming months if we feel it is appropriate. Since early March, we have received USD$60 million of prepayments on the Company's balance sheet investments, of which we have used 1) USD$25 million to pay down the PacWest credit facility (which we can redraw in the future) 2) made opportunistic investments into our Legal Finance strategy which is uncorrelated to the economic outlook and 3) the other proceeds we retained for new investment opportunities or to redeploy into existing portfolio companies. Additionally, in almost all cases (even after the paydowns) the cash levels within our SPVs have continued to grow, which we expect to continue in the coming weeks, ultimately de-risking our investments.

In the normal course of our portfolio management process we receive a significant amount of data and reporting from our portfolio companies, including loan tapes and payment statistics directly from the servicing systems. Usually we require this information at least monthly and in some cases more frequently. In light of COVID-19, we increased our overall communication with portfolio companies as well as the frequency of obtaining additional detailed data and reporting. Our portfolio companies have been very cooperative in a collaborative effort to achieve the best outcome. We are currently analysing several gigabytes of data daily through our internal risk systems to identify trends that allow us to make timely decisions as the situation develops.

We have also worked closely with our portfolio companies with regard to collection and borrower contact strategies. This includes: (a) ensuring companies have adequate resources to manage collections and servicing of the portfolio, including geographically redundant call centres and remote employee access; (b) developing fair and transparent hardship relief options (as referenced above) which allow the portfolio companies to provide relief to borrowers facing difficulty, but also positioning the portfolio companies to maximise the collectability of those loans once borrowers regain the ability to make payments; and (c) generally making sure that portfolio companies are employing best practices in servicing the portfolio. In certain instances, we have brought in external collections experts via a third-party consulting firm with deep expertise in consumer credit and collections to ensure portfolio companies further enhance collections capabilities. While the situation we are facing is novel, there have been many instances of natural disasters which disrupt regional economies and believe this historical data can provide insights regarding best practices, including:

v Borrowers ending modification in a crisis performed significantly better than borrowers that miss payments in normal times, which can be used to ascertain a lower bound expectation on collectability;

v Borrowers taking modifications during a crisis had almost half the losses of borrowers taking modifications during normal times; and

v Borrowers who were not modified but became delinquent in a crisis had a similar propensity to roll to default as those populations did in a non-crisis. This supports the notion that taking a modification is a strong positive signal compared to simply not paying.

While we hope for the best, we must be prepared for the worst. As such, we will continue to monitor the portfolio very closely and proactively work with our portfolio companies to manage the situation as it unfolds. In addition, we continue to coordinate with our portfolio companies to ensure they are equipped to manage employee illness/dislocation during the lockdown orders and react to any impact to borrowers and manage any resulting liquidity needs in the short term.

For VPC, risk management entails being proactive in managing issues as they arise, but also being prudent in those responses. We will have a better understanding of the initial impacts, if any, on the portfolio as we receive additional data from our companies.

STRATEGY AND BUSINESS MODEL

Differentiated proposition

During 2019, the Company's strong returns continued to be driven by the success of the Company's assets invested in the "Balance Sheet Model" for providing debt capital to Portfolio Companies (see descriptions below). Under the Balance Sheet Model, the Company provides a floating rate Credit Facility to the Portfolio Company via a Special-Purpose Vehicle ("SPV"), which retains Debt Instruments that are originated by the Portfolio Company. The debt financing is typically arranged in the form of a senior secured facility and the Portfolio Company injects junior capital in the SPV, which provides significant first loss protection to the Company and excess spread, which provides downside protection.

As a pioneer of financial services lending, VPC has structuring expertise and relationships, enabling it to secure preferential capacity to lock up attractive, long-term economics through structured facility upsizes and rights of first refusal. VPC primarily invests in financial services companies through delayed draw warehouse facilities.

Competitive advantage

The hunt for yield is extremely competitive in an environment of negative interest rates. This means that we compete with some of the largest and most recognised firms in the world when sourcing new investments. However, we believe that we have created a sustainable competitive advantage in our investment strategy, having invested and committed over $7.0 billion across more than 50 financial services investments. With more than a decade of experience lending in this sector, we benefit from sourcing relationships, pattern recognition and an intense focus on process. The Company's performance for 2019 reflects less of a standalone event, but rather the accumulated results of VPC's decade-plus track record of investing in asset-backed, balance sheet investments. Our investment approach has consistently paid off, as we have been successful in backing earlier-stage companies with excellent management and marquee venture capital backing, allowing for locked-up terms that would otherwise be difficult to negotiate at a later stage. Not only does this provide better economics, but VPC can also structure its investments more conservatively than we might be able to negotiate in a more competitive process. VPC benefits from working with companies as they scale under a conservative structure. As investments approach maturity several years later, VPC has an informed opinion to approach an extension and/or upsize negotiations. We believe that the Company's investment performance in 2019 is a reflection of the successful execution of its investment approach over the past decade.

Since the Company invests alongside VPC's private funds into the underlying balance sheet investments, many of the portfolio's investments precede the listing of the Company in 2015 and have grown significantly over time. The Company, alongside VPC's private funds, also receives the benefit of scale from the arrangement. We are in a position to negotiate better terms and grow with the portfolio companies, ultimately resulting in the ability to provide larger facilities. All investors benefit, as we continue to have significant undrawn investment opportunities from longstanding investments, some of which were initiated a decade ago. The scale of the relationships also serves to minimise the cash drag within the Company. Investments are funded based on draw requests received on a weekly basis. As the Company receives a repayment on an investment, capital can be redeployed quickly, and in some cases even the same day.

Proprietary sourcing and structuring

The Company has exposure to several proprietary investments in Portfolio Companies with attractive risk/reward characteristics that other investors in the sector are typically unable to access. We believe this is due to the Investment Manager's long experience in the sector as an early participant with an extensive sourcing network, having executed transactions partnering with more than 40 leading financial and venture capital sponsors in the specialty lending sector.

The Investment Manager also leverages its relationships with Portfolio Companies and financial sponsors to secure significant lending capacity and negotiate attractive equity kickers as well as mitigate prepayment and interest rate risks. The rapid growth of capital deployed in this sector since 2010 has also generated positive network effects and helps ensure that the Investment Manager has a first look at opportunities developing in the sector.

Portfolio management

With a strong focus on capital preservation, the Investment Manager structures its investments to minimise risk for the Company and augments this with a comprehensive risk management framework. This involves a rigorous, hands-on approach to post-investment monitoring of portfolio risk and performance. Assessing the balance of expected returns with inherent risks is an integral part of the Investment Manager's investment strategy and drives all aspects of portfolio construction. We believe that this approach and focus are a key driver in meeting the Company's investment objectives, particularly in a potentially more challenging future credit environment.

Shareholder Outreach and Marketing

Our focus as the Investment Manager of the Company will, first and foremost, always be to deliver strong risk-adjusted returns and build a portfolio that will perform in all economic environments. We also recognise that for the Company to succeed we need to deliver strong share-price performance to our shareholders. The Board and the Investment Manager have continued to focus on the trading discount to our NAV and have made efforts to reduce it. The discount remains challenging as we have delivered strong performance over the past two years and believe our current investment portfolio is as strong as it has ever been. While it may take some time for the discount to narrow, the Company has taken significant steps, through both capital markets and marketing efforts, to attract new long-term shareholders. A few key aspects of our plan include the following:

v Buybacks: During the year, the Company executed a large and consistent buyback programme which we will continue to execute while the discount remains wide. Up to the date of this report, the Company has repurchased a total of 76,804,384 Ordinary Shares since December 2016, as part of the buyback programme.

v New Shareholders: There has been high turnover in our shareholder register this year for reasons which the Chairman discussed, and which we believe are largely unrelated to the Company. We have significantly increased our outreach to potential shareholders to broaden and diversify our register. We have had success on this front and acquired several new, high-quality shareholders. We will continue to focus on this initiative in the coming year. In addition, our shareholder register is already significantly less concentrated among the top five shareholders, which has improved liquidity and, overall, we feel this is healthy for the long-term success of the Company.

v Broker Relationships: During the year, the Company onboarded Winterflood as a joint broker alongside Jefferies, our existing broker, to help acquire additional shareholders. Winterflood has been an excellent addition and we are impressed with the team, who has been fully engaged in helping to broaden our distribution reach. We appreciate the combined efforts from both Jefferies and Winterflood and look forward to the ongoing partnerships.

v Roadshows: We have worked with both of our brokers to organise numerous roadshows during the year, mainly focusing on both potential and existing shareholders. We remain dedicated to meeting with shareholders to share the Company's story and its compelling investment opportunity.

v Third-Party Research: In order to reach more retail shareholders, the Company has also engaged Kepler Partners to produce third-party research for potential and existing shareholders who are unable to access broker-produced research.

v Redesigned Website: In July 2019, we redesigned the Company's website, which we believe is more user friendly for both new and existing shareholders. The website provides access to all of our monthly reports, quarterly letters and shareholder presentations. We also redesigned the monthly NAV announcement.

Victory Park Capital Advisors, LLC

Investment Manager

20 May 2020

PERFORMANCE MANAGEMENT

The Board uses the following KPIs to help assess progress against the Company's objectives. Further comments on these KPIs are contained in the Chairman's Statement and Investment Manager's Report sections of the Strategic Report respectively.

NAV AND TOTAL RETURN

The Directors regard the Company's NAV return as a key component to delivering value to shareholders over the long term. Furthermore, the Board believes that in accordance with the Company's objective, total return (which includes dividends) is the best measure for long term shareholder value.

At each meeting, the Board receives reports detailing the Company's NAV and total return performance, portfolio composition and related analyses. A full description of performance and the investments is contained in the Investment Manager's Report, commencing on page 12.

DIVIDEND YIELD

The Company intends to distribute at least 85% of its distributable income earned in each financial year by way of dividends. Including the distribution made in April 2020, which related to the three-month period ended 31 December 2019 the Company has distributed 95% of its distributable income earned through the year ended 31 December 2019.

GEARING RATIO

As at 31 December 2019, the look-through gearing ratio was 0.38x for the Company. As disclosed in the investment policy starting on page 131, the aggregate gearing of the Company and any investee entity (on a look-through basis, including borrowing through securitisation using SPVs) shall not exceed 1.5 times its NAV (1.5x). The Board and Investment Manager monitor the look-through gearing ratio to ensure it is in line with the investment policy.

SHARE PRICE PREMIUM/DISCOUNT

As a closed-ended listed investment trust, the Company's share price can and does deviate from its NAV. This results in either a premium or a discount to NAV. This is another component of the long-term shareholder return. The Board continually monitors the Company's premium or discount to NAV and has the ability to issue or buy back shares to limit the volatility of the share price discount or premium. For more information on the Company's authorities in relation to its share capital, see page 38.

During the trading period, the Ordinary Shares moved in a discount range of between 13.0% to 27.4%. This was partly a result of the sale of the Company's shares by one of the Company's largest shareholders and the incorrect withdrawal from the FTSE All Share Index as referenced on page 9. The Company closed the year at a discount of 16.2% to NAV. During the year, the Company made the decision to significantly enhance the share buyback programme in light of the large disparity between the Company's share price and its NAV, repurchasing a total of 47,808,578 shares at an average price of 73.31 pence per share.

EXPENSES

The Board is conscious of the impact of expenses on returns and seeks to minimise expenses while ensuring that the Company receives strong service from its suppliers. The industry-wide measure for investment trusts is the ongoing charges ratio. This seeks to quantify the on-going costs of running the Company. The ongoing charges ratio for 2019 was 1.70%. After factoring in the change in the average NAV over 2019 as compared to 2018, as referenced on page 8, the on-going charges ratio has risen to 1.57% for 2019 compared to 1.49% for 2018. This measures the annual normal on-going costs of an investment trust, excluding performance fees, one-off expenses and dealing costs, as a percentage of the average shareholders' funds.

PRINCIPAL RISKS

Because the Company operates globally, it is exposed to risks that are monitored and actively managed to meet its investment objectives. These include market risks related to interest rates, currencies and general availability of financing as well as credit and liquidity risks given the nature of the instruments in which the Company invests. In addition, the underlying Portfolio Companies are exposed to operational and regulatory risks as this part of the financial services sector remains relatively nascent.

The Directors are ultimately responsible for identifying and controlling risks. Day-to-day management of the risks arising from the financial instruments held by the Group has been delegated to the Investment Manager of the Company.

The Investment Manager regularly reviews the investment portfolio and industry developments to make sure that any events impacting the Group are identified and considered. This also ensures that any risks, including emerging risks, affecting the investment portfolio are identified and mitigated to the fullest extent possible.

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks. The matrix is monitored by the Audit and Valuation Committee quarterly.

This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving its strategic objectives. The principal risks, emerging risks and the monitoring system are subject to a robust assessment at least annually. The last review by the Board took place in February 2020.

Although the Board believes that it has a robust framework of internal controls in place, it can provide only reasonable, and not absolute, assurance against material financial mis-statement or loss and is designed to manage, not eliminate, risk.

A summary of the principal risks and uncertainties faced by the Company and the Group and actions taken by the Board and, where appropriate, its Committees, to manage and mitigate these risks and uncertainties, is set out below:

Discussion on the Group's risk management and internal controls is on page 54.

CULTURE

The Directors agree that establishing and maintaining a healthy corporate culture among the Board and in its interaction with the Investment Manager, shareholders and other stakeholders will support the delivery of its purpose, values and strategy. The Board seeks to promote a culture of openness, debate and integrity through on-going dialogue and engagement with its service providers, principally the Investment Manager.

The Board strives to ensure that its culture is in line with the Company's purpose, values and strategy. The Company has a number of policies and procedures in place to assist with maintaining a culture of good governance including those relating to Diversity, Directors' conflicts of interest and Directors' dealings in the Company's shares. The Board assesses and monitors compliance with these policies as well as the general culture of the Board through Board meetings and in particular during the annual evaluation process which is undertaken by each Director (for more information see the performance evaluation section on page 43).

The Board seeks to appoint the best possible service providers and evaluates their remit, performance and cost effectiveness on a regular basis as described on page 43. The Board considers the culture of the Investment Manager and other service providers, including their policies, practices and behaviour, through regular reporting from these stakeholders and in particular during the annual review of the performance and continuing appointment of all service providers.

EMPLOYEES, HUMAN RIGHTS, SOCIAL AND COMMUNITY ISSUES

The Board recognises the requirement under the Companies Act 2006 to detail information about human rights, employees and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements do not apply to the Company as it has no employees, all the Directors are non-executive and it has outsourced all its functions to third party service providers. The Company has therefore not reported further in respect of these provisions, but does expect its service providers and portfolio companies to respect these requirements.

BOARD DIVERSITY

As at 31 December 2019, the Board of Directors of the Company comprised four male Directors and one female Director. The Board acknowledges the benefits of diversity, including gender diversity, and remains committed to ensuring that the Company's Directors bring a wide range of skills, knowledge, experience, backgrounds and perspectives. Further details of the Company's diversity policy are set out on page 49.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) ISSUES

The Company has no employees, property or activities other than investments, so its direct environmental impact is minimal. In carrying out its activities, and in its relationships, the Company aims to conduct itself responsibly, ethically and fairly. Directors are mindful of their own carbon footprints if they are required to travel on Company business.

The Board is comprised entirely of non-executive Directors and the day-to-day management of the Company's business is delegated to the Investment Manager. The Investment Manager aims to be a responsible investor and believes it is important to invest in companies that act responsibly in respect of environmental, ethical and social issues.

The Company has no internal operations and therefore no greenhouse gas emissions to report nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013, including those within its underlying investment portfolio. However, the Company believes that high standards of corporate social responsibility such as the recycling of paper waste will support its strategy and make good business sense.

APPROVAL

This Strategic Report has been approved by the Board of Directors and signed on its behalf by:

Kevin Ingram

Chairman

20 May 2020

GOVERNANCE

RESPONSIBILITY FOR FINANCIAL STATEMENTS AND GOING CONCERN STATEMENT

As discussed in note 2 to the financial statements, the Directors have reviewed the financial projections of the Group from the date of this report, which shows that the Group will be able to generate sufficient cash flows in order to meet its liabilities as they fall due. In assessing the Group's ability to continue as a going concern, the Directors have considered the Company's investment objective, risk management policies (the Group also has detailed policies and processes for managing those risks on pages 25 to 28), capital management (see note 14 to the financial statements), the monthly NAV and the nature of its portfolio and expenditure projections.

Additionally, the Directors have considered the risks arising of reduced asset values and economic disruption caused by the COVID-19 pandemic. The Investment Manager has also performed a range of stress tests and demonstrated to the Directors that even in an adverse scenario of depressed markets that the Group could still generate sufficient funds to meet its liabilities over the next twelve months. The Directors believe that the Group has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future being a period of at least twelve months from the date of this report.

Whilst the Company is obliged to hold a continuation vote at the 2020 AGM, the Directors do not believe this should automatically trigger the adoption of a basis other than going concern in line with the Association of Investment Companies ("AIC") Statement of Recommended Practice ("SORP") which states that it is more appropriate to prepare financial statements on a going concern basis unless a continuation vote has already been triggered and shareholders have voted against continuation. Additionally, the SORP guidance sets out that it is appropriate for the financial statements to be prepared on a going concern basis whilst making a material uncertainty disclosure as set out in accounting standards.

The Directors considered a number of factors in determining unanimously that shareholders should vote in favour of continuation and has engaged in discussions with a number of shareholders and its advisers in reaching that conclusion, in addition to having considered the recent performance of the Company. Based on this assessment the Directors have made the assumption that the continuation vote will pass, however recognise that the outcome of the vote is not yet known and therefore creates some uncertainty. In accordance with the SORP guidance, the Directors note that these conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group and Company's ability to continue as a going concern.

Based on their assessment and considerations above, the Directors have concluded that the financial statements of the Group and Company should continue to be prepared on a going concern basis and the financial statements have been prepared accordingly. The Directors have also made an assessment of the viability of the Company. The viability statement can be found below.

VIABILITY STATEMENT

In accordance with provision 31 of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018, and as part of an ongoing programme of risk assessment, the Directors have assessed the prospects of the Company, to the extent that they are able, over a three-year period. The Directors have chosen a three-year period as this is viewed as sufficiently long term to provide shareholders with a meaningful view, without extending the period so far into the future as to undermine the value of the exercise. Additionally, the balance sheet loan investments held by the Group have a weighted average maturity of approximately three years which allows the investment cash flows, recycling of investments and expenditures commitments of the Group to be reasonably forecasted over this timeframe assuming that the loans are held to maturity.

The three-year review considers the Group's cash flow, cash distributions and other key financial ratios over the period. The three-year review also makes certain assumptions about the normal level of expenditure likely to occur and considers the impact on the financing facilities of the Group. Furthermore, the three-year review period to 31 December 2022 was modelled under several different scenarios. Whilst the financial statements have been prepared on a going concern basis, as noted above there is a material uncertainty in respect of the passing of the continuation vote. As such the models have been produced where the continuation vote passes, as well as where the vote does not pass. As a part of this review, under both continuation vote scenarios, the Directors reviewed a series of stress test scenarios carried out by the Investment Manager which assumed a significant fall in income and asset levels, including the impacts to the Group's financing facilities and were satisfied with the result of this analysis.

The Company's Articles of Association (the "Articles") require an ordinary resolution for continuation of the Company to be proposed at forthcoming Annual General Meeting on 17 June 2020, the Directors fully support a vote in favour of the continuation of the Company and have a reasonable expectation that the continuation vote will be supported by a majority of the Company's shareholders.

In making this assessment on the viability of the Group, the Directors have also taken into consideration each of the principal risks and uncertainties on pages 25 to 28, their mitigants and the impact these might have on the business model, future performance, solvency and liquidity. In addition, the Directors considered the Company's current financial position and prospects, the composition of the investment portfolio, the level of outstanding capital commitments, the term structure and availability of borrowings and the ongoing costs of the business. As part of the approach, due consideration has been given to the uncertainty inherent in financial forecasts and, where applicable, as described above reasonable sensitivities have been applied to the investment portfolio in stress situations.

The main risk to the Company's continuation is shareholder dissatisfaction through failure to meet the Company's investment objective, through poor investment performance or through the investment policy not being appropriate in prevailing market conditions. The Board has given this particular consideration when assessing the longer-term viability of the Company. The Directors have reviewed the level of the discount and do not believe that the currently traded share price is representative of the value of the Company's assets. Performance and demand for the Company's shares are not things that can be forecast.

Based on the Group's processes for monitoring operating costs, the Investment Manager's compliance with the investment objective, asset allocation, the portfolio risk profile, liquidity risk and financial controls, and assuming stressed market conditions the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 December 2022.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. 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 Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:

v select suitable accounting policies and then apply them consistently;

v make judgements and accounting estimates that are reasonable and prudent;

v state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and IFRSs as adopted by the European Union have been followed for the Parent Company financial statements, subject to any material departures disclosed and explained in the financial statements; and

v prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, about the Group financial statements, Article 4 of the IAS Regulation.

The Directors are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Directors' Report confirm that, to the best of their knowledge:

v the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

v the Parent Company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

v the Directors' Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

In the case of each Director in office at the date the Directors' Report is approved:

v so far as the director is aware, there is no relevant audit information of which the Group and Company's auditors are unaware; and

v they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group and Company's auditors are aware of that information.

For and on behalf of the Board:

Kevin Ingram

Chairman

20 May 2020

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2018 but is derived from those accounts. Statutory accounts for the year ended 31 December 2019 will be delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (ii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Financial Statements on the Company's website at https://vpcspecialtylending.com/.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2019

1. GENERAL INFORMATION

VPC Specialty Lending Investments PLC (the "Parent Company") with its subsidiaries (together "the Group") is focused on asset-backed lending to emerging and established businesses with the goal of building long-term, sustainable income generation. The Group identifies investment opportunities across various industries and geographies to offer shareholders access to a diversified portfolio of opportunistic credit investments originated by non-bank lenders with a focus on the rapidly developing technology-enabled lending sector. The Parent Company was incorporated in England and Wales on 12 January 2015 with registered number 9385218. The Parent Company commenced its operations on 17 March 2015 and intends to carry on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.

The Group's investment manager is Victory Park Capital Advisors, LLC (the "Investment Manager"), a US Securities and Exchange Commission registered investment adviser. The Investment Manager also acts as the Alternative Investment Fund Manager of the Group under the Alternative Investment Fund Managers Directive ("AIFMD"). The Parent Company is defined as an Alternative Investment Fund and is subject to the relevant articles of the AIFMD.

The Group will invest directly or indirectly into available opportunities, including by making investments in, or acquiring interests held by, third party funds (including those managed by the Investment Manager or its affiliates). Direct investments may include consumer loans, SME loans, advances against corporate trade receivables and/or purchases of corporate trade receivables ("Debt Instruments") originated by platforms which engage with and directly lend to borrowers ("Portfolio Companies"). Such Debt Instruments may be subordinated in nature, or may be second lien, mezzanine or unsecured loans. Indirect investments may include investments in Portfolio Companies (or in structures set up by Portfolio Companies) through the provision of credit facilities ("Credit Facilities"), equity or other instruments. Additionally, the Group's investments in Debt Instruments and Credit Facilities may be made through subsidiaries of the Parent Company or through partnerships or other structures. The Group may also invest in other specialty lending related opportunities through any combination of debt facilities, equity or other instruments.

As at 31 December 2019, the Parent Company had equity in the form of 382,615,665 Ordinary Shares, 312,302,305 Ordinary Shares in issue and 70,313,360 Ordinary Shares in Treasury (31 December 2018: 382,615,665 Ordinary Shares, 360,110,883 Ordinary Shares in issue and 22,504,782 Ordinary Shares in Treasury). The Ordinary Shares are listed on the premium segment of the Official List of the UK Listing Authority and trade on the London Stock Exchange's main market for listed securities.

Northern Trust Hedge Fund Services LLC (the "Administrator") has been appointed as the administrator of the Group. The Administrator is responsible for the Group's general administrative functions, such as the calculation and publication of the Net Asset Value ("NAV") and maintenance of the Group's accounting records.

For any terms not herein defined, refer to Part X of the IPO Prospectus. The Parent Company's IPO Prospectus dated 26 February 2015 is available on the Parent Company's website, www.vpcspecialtylending.com.

2. SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies followed by the Group are set out below:

Basis of preparation

The consolidated financial statements present the financial performance of the Group for the year ended 31 December 2019. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). They comprise standards and interpretations approved by the International Accounting Standards Board and International Financial Reporting Committee, interpretations approved by the International Accounting Standard Committee that remain in effect, to the extent they have been adopted by the European Union. The financial statements are also in compliance with relevant provisions of the Companies Act 2006 as applicable to companies reporting under IFRS.

The Directors have reviewed the financial projections of the Group and Company from the date of this report, which shows that the Group and Company will be able to generate sufficient cash flows in order to meet its liabilities as they fall due. In assessing the Group's and Company's ability to continue as a going concern, the Directors have considered the Company's investment objective, risk management policies, capital management, the nature of its portfolio and expenditure projections.

Additionally, the Directors have considered the risks arising of reduced asset values and economic disruption caused by the COVID-19 pandemic. The Investment Manager has also performed a range of stress tests and demonstrated to the Directors that even in an adverse scenario of depressed markets that the Group could still generate sufficient funds to meet its liabilities over the next twelve months. The Directors believe that the Group has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future being a period of at least twelve months from the date of this report.

Whilst the Company is obliged to hold a continuation vote at the 2020 AGM, the Directors do not believe this should automatically trigger the adoption of a basis other than going concern in line with the Association of Investment Companies ("AIC") Statement of Recommended Practice ("SORP") which states that it is more appropriate to prepare financial statements on a going concern basis unless a continuation vote has already been triggered and shareholders have voted against continuation. Additionally, the SORP guidance sets out that it is appropriate for the financial statements to be prepared on a going concern basis whilst making a material uncertainty disclosure as set out in accounting standards.

The Directors considered a number of factors in determining unanimously that shareholders should vote in favour of continuation and has engaged in discussions with a number of shareholders and with its advisers in reaching that conclusion, in addition to having considered the recent performance of the Company. Based on this assessment the Directors have made the assumption that the continuation vote will pass, however recognise that the outcome of the vote is not yet known and therefore creates some uncertainty. In accordance with the SORP guidance, the Directors note that these conditions, indicate the existence of a material uncertainty which may cast significant doubt about the Group and Company's ability to continue as a going concern. The Group and Company financial statements do not include adjustments that would result if the Group and Company was unable to continue as a going concern.

Based on their assessment and considerations above, the Directors have concluded that the financial statements of the Group and Company should continue to be prepared on a going concern basis and the financial statements have been prepared accordingly.

Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("AIC") in November 2014 and updated in October 2019 with consequential amendments is consistent with the requirements of IFRS, the Directors have sought to prepare the consolidated financial statements on a basis compliant with the recommendations of the SORP.

The Parent Company and Group's presentational currency is Pound Sterling (£). Pound Sterling is also the functional currency because it is the currency of the Parent Company's share capital and the currency which is most relevant to the majority of the Parent Company's shareholders. The Group enters into forward currency Pound Sterling hedges where operating activity is transacted in a currency other than the functional currency.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Parent Company and its subsidiaries. Control is achieved where the Parent Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Parent Company controls an entity when the Parent Company is exposed to, or has rights to, variable returns from its investment and has the ability to affect those returns through its power over the entity. All intra-group transactions, balances, income and expenses are eliminated on consolidation. The accounting policies of the subsidiaries have been applied on a consistent basis to ensure consistency with the policies adopted by the Parent Company. The period ends for the subsidiaries are consistent with the Parent Company.

Subsidiaries of the Parent Company, where applicable, have been consolidated on a line by line basis as the Parent Company does not meet the definition of an investment entity under IFRS 10 because it does not measure and evaluate the performance of all its investments on the fair value basis of accounting.

Investments in subsidiaries

Investments in subsidiaries are carried at cost less impairment. The Parent Company assesses at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that investments in subsidiaries are impaired. Investments in subsidiaries are non-monetary items and therefore the costs of investment in currencies other than Pound Sterling are translated to at the rate of exchange ruling on the date the investment is made.

The total net asset value shown on the Parent Company Statement of Financial Position is therefore lower than the consolidated net asset value shown for the Group by £10,734,680 as at 31 December 2019 (31 December 2018: lower than by £13,786,944).

Presentation of Consolidated Statement of Comprehensive Income

In order to better reflect the activities of an investment trust company and in accordance with the guidance set out by the AIC, supplementary information which analyses the Consolidated Statement of Comprehensive Income between items of revenue and capital nature has been presented alongside the Consolidated Statement of Comprehensive Income.

The Directors have taken advantage of the exemption under Section 408 of the Companies Act 2006 and accordingly have not presented a separate Parent Company statement of comprehensive income. The net return on ordinary activities after taxation of the Parent Company was £28,475,350 (31 December 2018: £10,826,956).

Income

For financial instruments measured at amortised cost, the effective interest rate method is used to measure the carrying value of a financial asset or liability and to allocate associated interest income or expense in the revenue account over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.

In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider expected credit losses. The calculation includes all fees received and paid, costs borne that are an integral part of the effective interest rate and all other premiums or discounts above or below market rates.

Dividend income from investments is taken to the revenue account on an ex-dividend basis. Bank interest and other income receivable is accounted for on an effective interest basis. Dividend income from investments is reflected in Other income on the Statement of Comprehensive Income. Further disclosure can be found in Note 5.

Distributions from investments in funds are accounted for on an accrual basis as of the date the Group is entitled to the distribution. The income is treated as revenue return provided that the underlying assets of the investments comprise solely income generating loans, or investments in lending platforms which themselves generate net interest income. Distributions from investments in funds is reflected in Other income on the Statement of Comprehensive Income. Further disclosure can be found in Note 5.

Interest income from Investment assets designated as held at fair value through profit or loss are reflected in Other income on the Statement of Comprehensive Income. Further disclosure can be found in Note 5.

In the instance where the retained earnings of the Parent Company's investment in a subsidiary are negative, all income from that investment is allocated to the capital reserve for both the Group and the Parent Company.

Finance costs

Finance costs are recognised using the effective interest rate method. The Group currently charges all finance costs to either revenue or capital based on retained earnings of the investment that generates the fees from the perspective of the Parent Company.

Expenses

Expenses not directly attributable to generating a financial instrument are recognised as services are received, or on the performance of a significant act which means the Group has become contractually obligated to settle those amounts.

The Group currently charges all expenses, including investment management fees and performance fees, to either revenue or capital based on the retained earnings of the investment that generates the fees from the prospective of the Parent Company. All operating expenses of the Parent Company are charged to revenue as the current expectation is that the majority of the Group and Parent Company's return will be generated through revenue rather than capital gains on investments.

At 31 December 2019, no management fees (31 December 2018: £74,322) have been charged to the capital return of the Group. No management or performance fees were charged to capital at the Parent Company. Refer to Note 10 for further details of the management and performance fees.

All expenses are accounted for on an accruals basis.

Dividends payable to Shareholders

Dividends payable to Shareholders are recognised in the Consolidated Statement of Changes in Equity when they are paid or have been approved by Shareholders in the case of a final dividend and become a liability to the Parent Company.

Taxation

The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the Consolidated Statement of Financial Position date.

In line with the recommendations of SORP for investment trusts issued by the AIC, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Consolidated Statement of Comprehensive Income is the "marginal basis".

Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Consolidated Statement of Comprehensive Income, then no tax relief is transferred to the capital return column.

Investment trusts which have approval as such under section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains.

Financial assets and financial liabilities

The Group classifies its financial assets and financial liabilities in one of the following categories below. The classification depends on the purpose for which the financial assets and liabilities were acquired. The classification of financial assets and liabilities are determined at initial recognition.

IFRS 9 contains a classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains a principal-based approach and applies one classification approach for all types of financial assets. For Debt Instruments, two criteria are used to determine how financial assets should be classified and measured:

v The entity's business model (i.e. how an entity manages its financial assets in order to generate cash flows by collecting contractual cash flows, selling financial assets or both); and

v The contractual cash flow characteristics of the financial asset (i.e. whether the contractual cash flows are solely payments of principal and interest).

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at fair value through profit or loss ("FVTPL"):

v It is held within a business model whose objective is to hold assets to collect contractual cash flows; and

v Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured as described further in this note.

A financial asset is measured at fair value through other comprehensive income ("FVOCI") if it meets both of the following conditions and is not designated as at FVTPL:

v It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

v Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Movements in the carrying amount are taken through the Other Comprehensive Income ("OCI"), except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the investments amortised cost which is recognised in the Consolidated Statement of Comprehensive Income. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to the Consolidated Statement of Comprehensive Income and recognised in Income. Interest income from these financial assets in included in Income using the effective interest rate method ("ERIM").

Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an irrevocable election can be made on initial recognition to measure them at FVOCI with no subsequent reclassification to the Consolidated Statement of Comprehensive Income. This election is made on an investment by investment basis.

All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. All equity positions are measured at FVTPL. Financial assets measured at FVTPL are recognised in the Consolidated Statement of Financial Position at their fair value. Fair value gains and losses, together with interest coupons and dividend income, are recognised in the Consolidated Statement of Comprehensive Income within net trading income in the period in which they occur. The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively.

If the market is not active, the Group establishes a fair value by using valuation techniques. In addition, on initial recognition, the Company may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

There are no positions measured at FVOCI in the current or prior year.

The Group has reclassified the cash flows on the purchases and sales of loans and the interest received under operating activities from investing activities on the Consolidated Statement of Cash Flows.

Business model assessment

The Group will assess the objective of the business model in which a financial asset is held at a portfolio level in order to generate cash flows because this best reflects the way the business is managed, and information is provided to the Investment Manager. That is, whether the Group's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these are applicable, then the financial assets are classified as part of the other business model and measured at FVTPL.

The information that will be considered by the Group in determining the business model includes:

v The stated policies and objectives for the portfolio and the operation of those policies in practice, including whether the strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of assets;

v Past experience on how the cash flows for these assets were collected;

v How the performance of the portfolio is evaluated and reported to the Investment Manager;

v The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and

v The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Investment Manager's stated objective for managing the financial assets is achieved and how cash flows are realised.

Assessment whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, "principal" is defined as the fair value of the financial asset on initial recognition. "Interest" is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a reasonable profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest, the contractual terms of the instrument will be considered to see if the contractual cash flows are consistent with a basic lending arrangement. In making the assessment, the following features will be considered:

v Contingent events that would change the amount and timing of cash flows;

v Prepayment and extension terms;

v Terms that limit the Company's claim to cash flows from specified assets, e.g. non-recourse asset arrangements; and

v Features that modify consideration for the time value of money, e.g. periodic reset of interest rates.

The Group reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification that has taken place forms the start of the first reporting period following the change. Such changes are expected to be very infrequent.

Expected credit loss allowance for financial assets measured at amortised cost

The Credit impairment losses in the Consolidated Statement of Comprehensive Income includes the change in expected credit losses which are recognised for loans and advances to customers, other financial assets held at amortised cost and certain loan commitments.

At initial recognition, allowance is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase in credit risk, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are allocated to Stage 3.

The measurement of expected credit losses will primarily be based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"), taking into account the value of any collateral held or other mitigants of loss and including the impact of discounting using the effective interest rate ("EIR").

v The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months ("12M PD"), or over the remaining lifetime ("Lifetime PD") of the obligation.

v EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months ("12M EAD") or over the remaining lifetime ("Lifetime EAD"). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur.

v LGD represents the Group's expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default. LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.

The estimated credit loss ("ECL") is determined by projecting the PD, LGD, and EAD for each future month and for each individual exposure. Movements between Stage 1 and Stage 2 are based on whether an instrument's credit risk as at the reporting date has increased significantly relative to the date it was initially recognised. Where the credit risk subsequently improves such that it no longer represents a significant increase in credit risk since origination, the asset is transferred back to Stage 1.

General expectations with regards to expected losses on loans at a given level of delinquency are assessed based on (a) an analysis of loan collateral and credit enhancement (for collateralised balance sheet investments), and (b) historical roll rates on the marketplace loans (marketplace loans).

Impairments are recognised once a loan is deemed to have a non-trivial likelihood of facing a material loss. The expected credit loss allowance reflects the increasing likelihood of loss as (a) collateral and credit enhancement become diminished or impaired (for collateralised balance sheet investments), or (b) loans progress to more advanced stages of delinquency (marketplace loans) as more payments are missed and are calculated based on historical performance of similar loans within the Group's investment portfolio. As loans progress through the levels of delinquency, the Group applies a greater amount of expected credit loss allowance on the loan balance.

Unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. The Group does not rebut the presumption in IFRS 9 that all financial assets that are more than 30 days past due have experienced a significant increase in credit risk. The assessment as to when a financial asset has experienced a significant increase in the probability of default requires the application of management judgement.

In addition, the Group considers a financial instrument to have experienced a significant increase in credit risk when one of the following have occurred:

v Significant increase in credit spread;

v Significant adverse changes in business, financial and/or economic conditions in which the borrower operates;

v Actual or expected forbearance or restructuring;

v Actual or expected significant adverse change in operating results of the borrower;

v Significant change in collateral value which is expected to increase the risk of default; or

v Early signs of cashflow or liquidity problems.

Movements between Stage 2 and Stage 3 are based on whether financial assets are credit impaired as at the reporting date. Assets can move in both directions through the stages of the impairment model.

The criteria for determining whether credit risk has increased significantly will vary by portfolio and will include a backstop based on delinquency. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due which the Group does not rebut. For marketplace loans, if a loan is delinquent for more than 90 days, has four missed payments or considered by management as unlikely to pay their obligations in full without realisation of collateral, the Group reserves at least 85% of the balance of the delinquent loan. A loan is normally written off, either partially or in full, when there is no realistic prospect of recovery (as a result of the customer's insolvency, ceasing to trade or other reason) and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded. The Company assesses at each reporting date whether there is objective evidence that a loan or group of loans is impaired. In performing such analysis, the Company assesses the probability of default based on the level of collateral and credit enhancement (collateralised balance sheet loans) and on the number of days past due, using recent historical rates of default on loan portfolios with credit risk characteristics similar to those of the Company or past history if sufficient data is available to demonstrate a reliable loss profile (marketplace loans).

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.

Under IFRS 9, when determining whether the credit risk (i.e. the risk of default) on a financial instrument has increased significantly since initial recognition, reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on historical experience, credit assessment and forward-looking information is used.

The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk must consider information about past events and current conditions as well as reasonable and supportable forward-looking information. A "base case" view of the future direction of relevant economic variables and a representative range of other possible forecasts scenarios. The process will involve developing two or more additional economic scenarios and considering the relative probabilities of each outcome. The base case will represent a most likely outcome and be aligned with information used for other purposes, such as strategic planning and budgeting. The number of scenarios used and their attributes are reassessed at each reporting date by investment. The scenario weightings are determined by a combination of statistical analysis and expert credit judgement, taking account of the range of possible outcomes each chosen scenario is representative of.

The estimation and application of forward-looking information requires significant judgement. PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances, are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes and has analysed the non-linearities and asymmetries within the Group's different portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.

Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on a quarterly basis.

Collateral and other credit enhancements

The Group employs a range of policies to mitigate credit risk. The most common of these is accepting collateral for funds advanced. The Group has internal policies of the acceptability of specific classes of collateral or credit risk mitigation.

Modification of financial assets

The Group sometimes modifies the terms or loans provided to customers due to commercial renegotiations, or for distressed loans, with a view to maximising recovery.

Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring policies and practice are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review.

The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original assets. The Group monitors the subsequent performance of modified assets. The Group may determine that the credit risk has significantly improved after restructuring, so that the assets are moved from Stage 3 or Stage 2.

Modification of terms is not an indicator of a change in risk.

Modification of loans

The Group sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors:

v If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay;

v Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan;

v Significant extension of the loan term when the borrower is not in financial difficulty;

v Significant change in the interest rate;

v Change in the currency the loan is denominated in; and

v Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan.

If the terms are substantially different, the Group derecognises the original financial asset and recognises a new asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining if a significant increase in credit risk has occurred. However, the Group also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amounts are also recognised in the Consolidated Statement of Comprehensive Income as a gain or loss on derecognition.

If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in the Consolidated Statement of Comprehensive Income. The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).

Derecognition other than a modification

Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control.

The Group enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as 'pass through' transfers that result in derecognition if the Group:

v Has no obligation to make payments unless it collects equivalent amounts from the assets;

v Is prohibited from selling or pledging the assets; and

v Has an obligation to remit any cash it collects from the assets without material delay.

Collateral furnished by the Group under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met.

Financial assets and financial liabilities designated as held at fair value through profit or loss

This category consists of forward foreign exchange contracts, common equity, preferred stock, warrants and investments in funds.

Assets and liabilities in this category are carried at fair value. The fair values of derivative instruments are estimated using discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties.

Investments in funds are carried at fair value through profit or loss and designated as such at inception. This is valued for the units at the balance sheet date based on the NAV where it is assessed that NAV equates to fair value.

Common equity, preferred stock and warrants are valued using a variety of techniques. These techniques include market comparables, discounted cash flows, yield analysis, and transaction prices. Refer to Note 3.

Gains and losses arising from the changes in the fair values are recognised in the Consolidated Statement of Comprehensive Income.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group's loan assets are classified as loans and receivables.

Loans are recognised when the funds are advanced to borrowers. Loans and receivables are carried at amortised cost using the effective interest rate method less provisions for impairment.

Purchases and sales of financial assets

Purchases and sales of financial assets are accounted for at trade date. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.

Fair value estimation

The determination of fair value of investments requires the use of accounting estimates and assumptions that could cause material adjustment to the carrying value of those investments.

Financial liabilities

Borrowings, deposits, debt securities in issue and subordinated liabilities, if any, are recognised initially at fair value, being the issue proceeds net of premiums, discounts and transaction costs incurred.

All borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is adjusted for the amortisation of any premiums, discounts and transaction costs. The amortisation is recognised in interest expense and similar charges using the effective interest rate method.

Financial liabilities are derecognised when the obligation is discharged, cancelled or has expired.

Derivatives

Derivatives are entered into to reduce exposures to fluctuations in interest rates, exchange rates, market indices and credit risks and are not used for speculative purposes. The Parent Company entered into forward foreign currency exchange contracts as a hedge against exchange rate fluctuations for investments in Portfolio Companies denominated in foreign currencies. A forward foreign currency exchange contract is an agreement between two parties to purchase or sell a specified quantity of a currency at or before a specified date in the future. Forward contracts are typically traded in the OTC markets and all details of the contract are negotiated between the counterparties to the agreement. Accordingly, the forward contracts are valued at the forward rate by reference to the contracts traded in the OTC markets and are classified as Level 2 in the fair value hierarchy.

Derivatives are carried at fair value with movements in fair values recorded in the Consolidated Statement of Comprehensive Income. Derivative financial instruments are valued using discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties.

Gains and losses arising from derivative instruments are credited or charged to the Consolidated Statement of Comprehensive Income. Gains and losses of a revenue nature are reflected in the revenue column and gains and losses of a capital nature are reflected in the capital column. Gains and losses on forward foreign exchange contracts are reflected in Foreign exchange gain/(loss) in the Consolidated Statement of Comprehensive Income.

All derivatives are classified as assets where the fair value is positive and liabilities where the fair value is negative. Where there is the legal ability and intention to settle net, then the derivative is classified as a net asset or liability, as appropriate.

Securities sold under agreement to repurchase

The Group entered into an agreement with a third party to sell its ownership of an equity security under an agreement to repurchase the equity security from the third party at a future date. The Group is entitled to receive an amount equal to all income paid or distributed in respect of the equity security to the full extent it would be so entitled if the equity security had not been sold to the third party. The Group is obligated to pay the third-party monthly interest.

The underlying value of the repurchase agreement is valued under the sole discretion of the third party. Reductions in the value of the repurchase agreement could require the Group to make margin calls up to the value of the repurchase agreement purchase price. No margin was called during the year. On 15 January 2019, the repurchase agreement was repaid.

Securities sold under agreements to repurchase are accounted for at fair value based on the maximum of their purchase price or the current broker bid price on the sold security.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the Consolidated Statement of Financial Position if, and only if, there is currently enforceable legal right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously.

Investments in funds

Investments in funds are measured at fair value through profit or loss. Fair value through profit or loss is determined using the NAV of the fund. The NAV is the value of all the assets of the fund less its liabilities to creditors (including provisions for such liabilities) determined in accordance with applicable accounting standards. Refer to Note 3 and Note 19 for further information.

Equity securities

Equity securities are measured at fair value. These securities are considered either Level 1 or Level 3 investments. Further details of the valuation of equity securities are included in Note 3. Equity securities consist of common and preferred stock, warrants and convertible note investments.

Other receivables

Other receivables do not carry interest and are short-term in nature and are accordingly recognised at fair value as reduced by appropriate allowances for estimated irrecoverable amounts.

Cash and cash equivalents

Cash comprises of cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments with a maturity of 90 days or less that readily convertible to known amounts of cash.

Deferred income

The Group and Parent Company defer draw fees received from investments and the deferred fees amortise into income on a straight-line basis over the life of the loan, which approximates the effective interest rate method.

Other liabilities

Other liabilities and accrued expenses are not interest-bearing and are stated at their nominal values. Due to their short-term nature this is determined to be equivalent to their fair value.

Share Capital

The Ordinary Shares are classified as equity. The costs of issuing or acquiring equity are recognised in equity (net of any related income tax benefit), as a reduction of equity on the condition that these are incremental costs directly attributable to the equity transaction that otherwise would have been avoided.

The costs of an equity transaction that is abandoned are recognised as an expense. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties.

The Group's equity NAV per share is calculated by dividing the equity - net assets attributable to the holder of Ordinary Shares by the total number of outstanding Ordinary Shares.

Treasury Shares have no entitlements to vote and are held by the Company.

Foreign exchange

Transactions in foreign currencies are translated into Pound Sterling at the rate of exchange ruling on the date of each transaction. Monetary assets, liabilities and equity investments in foreign currencies at the Consolidated Statement of Financial Position date are translated into Pound Sterling at the rates of exchange ruling on that date. Profits or losses on exchange, together with differences arising on the translation of foreign currency assets or liabilities, are taken to the capital return column of the Consolidated Statement of Comprehensive Income. Foreign exchange gains and losses arising on investment assets including loans are included within Net gain/(loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.

The assets and liabilities of the Group's foreign operations are translated using the exchange rates prevailing at the reporting date. Income and expense items are translated using the average exchange rates during the period. Exchange differences arising from the translation of foreign operations are taken directly as currency translation differences through the Consolidated Statement of Comprehensive Income.

Capital reserves

Capital reserve - arising on investments sold includes:

❖ gains/losses on disposal of investments and the related foreign exchange differences;

❖ exchange differences on currency balances;

❖ cost of own shares bought back; and

❖ other capital charges and credits charged to this account in accordance with the accounting policies above.

Capital reserve - arising on investments held includes:

❖ increases and decreases in the valuation of investments held at the year-end;

❖ increases and decreases in the IFRS 9 reserve of investments held at the year-end; and

❖ investments in subsidiaries by the Parent Company where retained earnings is negative.

In the instance where the retained earnings of the Parent Company's investment in a subsidiary are negative, all income and expenses from that investment are allocated to the capital reserve for both the Group and the Parent Company.

All the above are accounted for in the Consolidated Statement of Comprehensive Income except the cost of own shares bought back, if applicable, which would be accounted for in the Consolidated Statement of Changes in Equity.

Revenue reserves

The revenue reserve represents the accumulated revenue profits retained by the Group. The Group makes interest distributions from the revenue reserve to Shareholders.

Segmental reporting

The chief operating decision maker is the Board of Directors. The Directors are of the opinion that the Group is engaged in a single segment of business, being the investment of the Group's capital in financial assets comprising consumer loans, SME loans, corporate trade receivables and/or advances thereon.

The Board focuses on the overall return from these assets irrespective of the structure through which the investment is made.

Critical accounting estimates

The preparation of financial statements in conformity with IFRS adopted in the EU requires the Group to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based on the Directors' best knowledge of the amount, actual results may differ ultimately from those estimates.

The areas requiring a higher degree of judgement or complexity and areas where assumptions and estimates are significant to the financial statements, are in relation to effective interest rate, expected credit losses and investments at fair value through profit or loss. These are detailed below.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Base case and stress case cash flow methodology under IFRS 9

Each loan in the Group's investment portfolio is analysed to assess the likelihood of the Group incurring any loss either (i) in the normal course of events, or (ii) in a stress scenario. Given that these positions are typically secured by specific collateral, typically in the form of loan or lease receivables, and often further secured by guarantees from the operating business, the analysis looks at the impacts on both the specific collateral, as well as any obligations of the operating business to understand how the Group's investment would fair in each scenario. The loss rate assumptions for each transaction is established using all available historical loss performance data on the specific asset pool being assessed, supplemented by additional sources as needed.

The significant estimates used on a majority of the Group's investments within these scenarios are:

v Impact on loss rates in a stress scenario - 1.15x to 2.10x;

v Probability of a stress scenario occurring - 27%-33%; and

v Range of net losses - 0%-38.9%.

Further detail on these estimates and the methodology applied are set out below.

Base case

To establish the base case model, a representative portfolio is established based on the average portfolio parameters from the actual collateral pool (based on the most recent available reporting date). The annual percentage rate ("APR") and term of the representative portfolio are reflected as a weighted average of the actual pool, a simplifying assumption which should largely capture the dynamics of the dispersion in the underlying. Prepayment and loss curves are established using a combination of (1) historical performance, (2) management forecasts, (3) proxy data from comparable assets or businesses, and (4) judgement from the Investment Manager's investment professionals based on general research and knowledge. Emphasis is given to the loss curves because they have a significantly larger impact on the liquidation outcomes compared to prepayments (and prepayment data is more difficult to accurately monitor for many platforms).

The timing of the loss curve is first established using a flat constant default rate model, such that we arrive at the loss speeds which would correlate to the previously determined cumulative net loss amount. For products with terms in excess of five months, the loss curve is then shifted to front load losses by increasing the monthly default rate in the first three months by 25% above the ongoing rate. This reflects that (a) for many products, losses tend to occur earlier in the life of the product, and (b) since earlier losses will necessarily result in less total interest coverage (and worse outcomes for the Group, all else being constant), this was deemed a prudent approach to loss application.

The model is then burdened with the following costs: (1) servicing costs which broadly reflect the expected costs of either (i) engaging a backup servicer to wind down the portfolio, or (ii) of operating the business through a liquidation, (2) upfront liquidation costs to reflect potential expenses associated with moving into liquidation, and (3) ongoing liquidation costs to reflect incremental costs born to oversee the liquidation.

The last input component is the terms of the Group's investment, which includes the applicable advance rate and interest rate assuming that the facility is fully levered at the time of liquidation.

The representative portfolio is deemed to reflect the most reliable and relevant information available about the portfolio attributes and expected performance. As part of the ongoing investment monitoring and risk management process, the Investment Manager is monitoring performance on the underlying collateral on a monthly basis to identify whether performance indicators are trending positively or negatively, and how much cushion exists compared to contractual covenant trigger levels. Any such changes would be reviewed to determine whether an adjustment is required to the model assumptions.

For the Group's legal finance balance sheet investments, we perform a similar analysis as with our financial services balance sheet investments, though in those cases we are assessing the likely return on legal sector investments based on historical data and expert judgement and stressing the return and/or loss expectation on those platforms. In general, those assets by their nature tend to be uncorrelated across both the macro economy as well as across the portfolio(s), which has an impact on the range of outcomes factored into the model.

Stress case

For nearly all of the investments being reviewed, the primary driver of collateral value is the loss rates on the underlying loans or leases, measured by cumulative net loss, which considers the total principal losses between a given point in time and the final repayment on the portfolio. While many of the companies and asset classes being reviewed do not have historical performance data going back to pre-2007, macro-economic data is available which can be used as a proxy for the specific asset classes being analysed. VPC commissioned a study of historical loss rates on various asset classes and segments in the US from 2006-2014 in order to understand the changes in loss rates by segment from the benign credit environment of 2006 through the worst parts of the recession. The following table summarizes the loss stress observed by segment where 0% indicates no change and 100% indicates a doubling of the relevant loss rate.

Source: Assessing Performance of Consumer Lending Assets through Macroeconomic Shocks, Second Order Solutions (June 2019)

The most heavily represented populations in the Group's borrower portfolios are personal loans (or amortising installment loans). As seen in the above table, default rates on these loans increased by 1.16x-2.08x. Each portfolio was assessed based on the applicable stress factor range based on the product and borrower population.

IFRS 9 calls for an assessment of the probability of default over the upcoming 12 months, and thus the Investment Manager provides a view of the probability of such a severe scenario occurring in the next 12 months for each of the investments which are at risk of incurring a loss (as some of the variables will vary between investments). From a macro-economic perspective, the latest recession probability models suggest a moderate probability of such an imminent downturn. The Cleveland Fed model predicts an 27% probability of a recession within 12 months from December 2019, and while this does not indicate the severity of such recession, it should be considered that the 2008-2009 recession which is being used as a proxy was the most prolonged and severe in at least 25 years and would not be expected to reflect a typical recession. Additionally, the Bank of England predicted a 33% likelihood of a recession in the August of 2019 which is used specifically for the Group's investment in Oakam. These macro factors will be considered in the transaction level analysis as well.

Once the model has been run at the stressed scenario, if the cash flows continue to support the payment of an investment's principal and interest, the portfolio is deemed to have adequate coverage. If there is a shortfall in principal payments, a further assessment is done to note whether there are any excluded variables that need to be considered in determining the need for reserves on the position, including taking into account other additional credit enhancements provided in each deal (i.e., corporate guarantees, etc.). Such assessment would consider the likelihood of a scenario that could pose a loss and the expected magnitude of such loss in order to determine the appropriate reserve level.

For balance sheet investments, two of the primary drivers of the impairment analysis are the underlying collateral loss rates and the likelihood of an economic recession in the upcoming 12-month period. Regarding the underlying collateral loss rates, these variables are stressed by 15% to 110% as part of the impairment analysis and the impacts of those stresses are reflected in the impairment amounts. Regarding the likelihood of an economic recession in the upcoming 12-month period, an increase of 10% in this variable would have had an impact of £90,000 on the expected credit loss provision of the Group as at 31 December 2019. Regarding the loss assumptions, an increase of 5% in this variable would have had an impact of approximately £1,300,000 on the expected credit loss provision of the Group as at 31 December 2019. All stress scenarios on the balance sheet investments were run at a balance sheet date of 31 December 2019 with the most recently available reporting.

For marketplace loan investments, the IFRS 9 reserve provision is estimated using historical performance data about the Group's loans which is regularly updated and reviewed. A 5% increase in relation to the assumed delinquency and loss rates would increase the provision and the impairment charge shown in the Consolidated Statement of Comprehensive Income by £14,102. A decrease in these assumptions would have an opposite effect. The marketplace loan investments represent 1% of the Group's net asset value. All stress scenarios on the marketplace loan investments were run at a balance sheet date of 31 December 2019.

Measurement of the expected credit loss allowance

The calculation of the Group's ECL allowances and provisions against loan commitments and guarantees under IFRS 9 is highly complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9. The most significant estimates that have been discussed above are considered to be the expected life of the financial instrument, what is considered to be a significant increase in credit risk to affect a movement between stages, and the effect of potential future economic scenarios.

Valuation of unquoted investments

The valuation of unquoted investments and investments for which there is an inactive market is a key area of judgement and may cause material adjustment to the carrying value of those assets and liabilities. The unquoted equity assets are valued on periodic basis using techniques including a market approach, costs approach and/or income approach. The valuation process is collaborative, involving the finance and investment functions within the Investment Manager with the final valuations being reviewed by the Board's Audit and Valuation Committee. The specific techniques used typically include earnings multiples, discounted cash flow analysis, the value of recent transactions, and, where appropriate, industry rules of thumb. The valuations often reflect a synthesis of a number of different approaches in determining the final fair value estimate. The individual approach for each investment will vary depending on relevant factors that a market participant would take into account in pricing the asset. Changes in fair value of all investments held at fair value are recognised in the Consolidated Statement of Comprehensive Income as a capital item. On disposal, realised gains and losses are also recognised in the Consolidated Statement of Comprehensive Income as a capital item. Transaction costs are included within gains or losses on investments held at fair value, although any related interest income, dividend income and finance costs are disclosed separately in the Consolidated Financial Statements. The ultimate sale price of investments may not be the same as fair value. Refer to Note 3.

Critical accounting judgments

Judgement is required to determine whether the Parent Company exercises control over its investee entities and whether they should be consolidated. Control is achieved where the Parent Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Parent Company controls an investee entity when the Parent Company is exposed to, or has rights to, variable returns from its investment and has the ability to affect those returns through its power over the entity. At each reporting date, an assessment is undertaken of investee entities to determine control. In the intervening period, assessments are undertaken where circumstances change that may give rise to a change in the control assessment. These include when an investment is made into a new entity, or an amendment to existing entity documentation or processes. When assessing whether the Parent Company has the power to affect its variable returns, and therefore control investee entities, an assessment is undertaken of the Parent Company's ability to influence the relevant activities of the investee entity. These activities include considering the ability to appoint or remove key management or the manager, which party has decision making powers over the entity and whether the manager of an entity is acting as principal or agent. The assessment undertaken for entities considers the Parent Company's level of investment into the entity and its intended long-term holding in the entity and there may be instances where the Parent Company owns less than 51% of an investee entity but that entity it consolidated. Further details of the Parent Company's subsidiaries are included in Note 17.

The Group's investments in associates all consist of limited partner interest in funds. There are no significant restrictions between investors with joint control or significant influence over the associates listed above on the ability of the associates to transfer funds to any party in the form of cash dividends or to repay loans or advances made by the Group. The Group holds 52% interest in Larkdale III, L.P. while the Group's ultimate ownership of the investment held by Larkdale III, L.P. is 34%. The Group has determined it does not have accounting control as the general partner has operating control over the vehicle and acts as an agent for a number of the Investment Manager's funds. Further details of the Parent Company's associates are included in Note 19.

Accounting standards issued but not yet effective or not material to the Group

At the date of authorisation of these financial statements, the following standards and interpretations, which have not been applied in these financial statements, were in issue.

Accounting standards effective

IFRS 16 'Leases' eliminates the classification of leases as either operating leases or finance leases for a lessee and requires lease assets and lease liabilities to be recognised in the statement of financial position, initially measured at present value of future lease payments. In addition, depreciation of the lease assets and interest on lease liabilities will be recognised in the statement of comprehensive income. Cash payments will be separated into principal and interest in the statement of cash flows. This standard is effective from 1 January 2019 and does not have a material impact on the Group's financial statements given that the Group does not enter into leases.

Accounting standards issued but not yet effective

IFRS 17 'Insurance Contract' establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The Directors do not anticipate that the adoption of this standard and interpretations will have a material impact on the financial statements, given the nature of the Group's business being that it has no insurance contracts.

The IASB has issued 'Definition of a Business (Amendments to IFRS 3)' aimed at resolving the difficulties that arise when an entity determines whether it has acquired a business or a group of assets. The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020. The Directors do not anticipate that the adoption of this standard and interpretations will have a material impact on the financial statements.

Other future developments include the IASB undertaking a comprehensive review of existing IFRSs. The Group will consider the financial impact of these new standards as they are finalised.

3. FAIR VALUE MEASUREMENT

Financial instruments measured and reported at fair value are classified and disclosed in one of the following fair value hierarchy levels based on the significance of the inputs used in measuring its fair value:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities;

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and

Level 3 - Pricing inputs for the asset or liability that are not based on observable market data (unobservable inputs).

An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases, the fair value measurement for an investment may use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and is specific to the investment.

Valuation of investments in funds

The Group's investments in funds are subject to the terms and conditions of the respective fund's offering documentation. The investments in funds are primarily valued based on the latest available financial information. The Investment Manager reviews the details of the reported information obtained from the funds and considers: (i) the valuation of the fund's underlying investments; (ii) the value date of the NAV provided; (iii) cash flows (calls/distributions) since the latest value date; and (iv) the basis of accounting and, in instances where the basis of accounting is other than fair value, fair valuation information provided by the funds. If necessary, adjustments to the NAV are made to the funds to obtain the best estimate of fair value. The funds in which the Group invests are close-ended and unquoted. No adjustments have been determined to be necessary to the NAV as provided as at 31 December 2019 as this reflects fair value under the relevant valuation methodology. The NAV is provided to investors only and is not made publicly available.

Valuation of equity securities

Fair value is determined based on the Group's valuation methodology, which is either determined using market comparables, discounted cash flow models or recent transactions.

In using a valuation methodology based on the discounting of forecasted cash flows of the Portfolio Company, significant judgment is required in the development of an appropriate discount rate to be applied to the forecasted cash flows. The assumptions incorporated in the valuation methodologies used to estimate the enterprise value consists primarily of unobservable Level 3 inputs, including management assumptions based on judgment. In evaluating the impact on the valuation for such items, the amount that a market participant would consider in estimating fair value is considered. These estimates are highly subjective, based on the Group's assessment of the potential outcome(s) and the related impact on the fair value of such potential outcome(s). A change in these assumptions could have a material impact on the determination of fair value.

In using a valuation methodology based on comparable public companies or sales of private or public comparable companies, significant judgment is required in the application of discounts or premiums to the prices of comparable companies for factors such as size, marketability and relative performance.

Under the yield analysis approach, expected future cash flows are discounted back using a discount rate. The discount rate used incorporates market based yields for similar credits to the public market and the underlying risk of the individual credit.

Fair value disclosures

The following table analyses the fair value hierarchy of the Group's assets and liabilities measured at fair value at 31 December 2019: