REG - British Smlr Comp 2 - Annual Financial Report
20/03/2023 15:00
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RNS Number : 5619T British Smaller Companies VCT2 Plc 20 March 2023
British Smaller Companies VCT2 plc
Annual Financial Report Announcement
for the year ended 31 December 2022
British Smaller Companies VCT2 plc (the "Company") today announces its audited
results for the year ended 31 December 2022.
HIGHLIGHTS
l 5.0 per cent return on opening net assets, driven by positive realisations and
strong underlying revenue growth in portfolio companies.
l Total Return increased by 3.1 pence to 142.6 pence per share.
l Net asset value at 31 December 2022 of 61.6 pence per share (2021: 61.5 pence
per share).
l Realisations generated total proceeds of £12.9 million in the year, a gain of
£3.6 million over the opening carrying value and £4.1 million over cost.
l Six new investments and nine follow-on investments totalling £16.3 million
completed during the year. One new investment of £2.4 million made subsequent
to the year end.
l Total dividends paid during the year ended 31 December 2022 of 3.0 pence per
share (2021: 8.0 pence per share), bringing total cumulative dividends paid
since inception to 81.0 pence per ordinary share at 31 December 2022 (2021:
78.0 pence per ordinary share).
l Special dividend of 2.25 pence per share paid on 11 January 2023 taking the
adjusted net asset value to 59.35 pence per share and cumulative dividends
paid to date to 83.25 pence per share.
l £24.2 million raised in fully subscribed September 2021 offer, with shares
allotted at the beginning of the year. Gross Applications of £23.5 million
received to date in relation to November 2022 offer, with shares to be
allotted in early April 2023.
l The Board is declaring an interim dividend of 1.5 pence per share in respect
of the year ending 31 December 2023. The dividend will be paid on 26 June 2023
to shareholders on the register on 12 May 2023.
Chairman's Statement
I am pleased to present the 2022 annual report and financial statements of
British Smaller Companies VCT2 plc ("BSC2" or "the Company"), highlighting
another year of resilience from the Company in a challenging economic
environment.
The past twelve months has seen the continued trend of high inflation driving
up interest rates, with consumers struggling with rising costs of energy, food
and other goods and services. The higher interest rate environment has in
turn fed through into a cooling of sentiment towards growth-focused
investments, reducing valuations of many publicly listed companies.
In light of these conditions, the robust performance of BSC2 is all the more
pleasing, with the Company generating a 5.0 per cent return on its opening Net
Asset Value in the year. In contrast, the FTSE Small Cap has fallen by 16.3
per cent over the same period, while the Share Price Total Return for an index
of generalist VCTs which are members of the AIC has reduced by 4.2 per cent.
The Company is now ranked second across all generalist VCTs when considering a
blended average performance ranking over 1, 3, 5 and 10 years.
Two factors have driven this solid outcome. First, the Company achieved
three strong exits from portfolio companies in the year, all at significant
uplifts from where the companies were valued at the start of the year.
Second, despite softer public markets resulting in reduced valuations
multiples, the Company's underlying portfolio companies are continuing to
grow; the ten largest investments in the portfolio are currently growing
revenues at an average of c.51 per cent a year. This has helped to offset
decreases in valuations, contributing to the Company's positive return.
Financial Performance
In 2022, the Company delivered a 3.1 pence per ordinary share increase in
Total Return, which as noted above is equivalent to 5.0 per cent of the
opening net asset value at 31 December 2021. Total Return is now 142.6 pence
per ordinary share.
This was driven by the investment portfolio, which generated a return of £7.9
million, 11.2 per cent over its opening value, of which £3.6 million was
realised and £4.3 million unrealised. New and follow-on investments
totalling £16.3 million were completed.
Realisations in the Year
Realisations of investments generated total proceeds of £12.9 million, a gain
of £3.6 million over the opening carrying value and £4.1 million over the
original cost. There were three significant realisations in the year:
Springboard and Intelligent Office in September 2022 and Vuealta in December
2022.
The realisation of Springboard generated proceeds of £5.8 million,
representing a capital profit over cost of £3.9 million, an uplift of 46.0
per cent or £1.8 million on the carrying value at the beginning of the year.
Including income, the total return from this investment was £6.6 million over
a near eight year holding period, producing an internal rate of return of 23
per cent and a multiple of 4.1x cost. There is the prospect of further
consideration in 2023 based on performance targets; however no value has been
recognised relating to these potential payments at this time.
The sale of Intelligent Office generated proceeds of £4.1 million,
representing a capital profit over cost of £2.1 million and an uplift of 29.0
per cent, or £0.9 million, on the carrying value at the beginning of the
year. Including income, the total return from this investment was £5.0
million over an eight and a half year holding period, producing an internal
rate of return of 14 per cent and a multiple of 2.6x cost.
In December 2022, the Company completed the partial exit of its investment in
leading planning and forecasting software and services business, Vuealta,
through the sale of its fast-growing software division to long-standing
partner, Anaplan. The sale generated proceeds of £3.1 million, 1.5x cost, and
an uplift of 49 per cent or £1.0 million on the carrying value at the
beginning of the year (including further investments made in the financial
year prior to sale). The Company remains invested in the core Vuealta
consulting business to support its next phase of growth. Further details on
Vuealta are given in the case study on page 24 of the annual report.
In addition, two investments, Arraco and Seven, which had previously been
fully provided for, were unable to recover any value and were subsequently
realised during the year.
Shortly after year-end, the Company realised its investment in Wakefield
Acoustics, generating a return of 1.5x cost. This was a pleasing result,
given the investment was valued at £nil just nine months before, emphasising
the need to support companies at all stages through their growth journey.
New Investments
The Company invested £16.3 million in the year. Six new investments were made
in the year, totalling £8.1 million. In our continued support of the
portfolio, nine companies received follow-on funding in the year, totalling
£8.2 million in aggregate. The new investments are:
Investment Sector
AutomatePro SaaS platform providing test-automation tools for ServiceNow
Biorelate Medical data curation
Plandek DevOps analytics platform
Quality Clouds Quality control technology for low code software solutions
Relative Insight AI-based text data analytics platform
Summize Contract lifecycle management software provider
Financial Results
During the year, the Board paid ordinary dividends of 3.0 pence per ordinary
share in respect of the year ended 31 December 2022, bringing the cumulative
dividends paid as at 31 December 2022 to 81.0 pence per ordinary share.
The movement in net asset value ("NAV") per ordinary share and the dividends
paid are set out in the table below:
Pence per ordinary share £000
NAV at 31 December 2021 61.5 87,375
Increase in value 2.3 4,287
Gain on disposal of investments 2.0 3,586
Net underlying change in investment portfolio 4.3 7,873
Net operating costs (0.5) (985)
Incentive fee (0.4) (635)
Total Return in period 3.4 6,253
Issue/buy-back of new shares* (0.3) 23,685
NAV before the payment of dividends 64.6 117,313
Dividends paid (3.0) (5,444)
NAV at 31 December 2022 61.6 111,869
Cumulative dividends paid 81.0
Total Return: at 31 December 2022 142.6
at 31 December 2021 139.5
* The allotment of shares from the 2021/22 fundraising reduces total return per
ordinary share as the fundraising was priced at the 30 September 2021 NAV per
ordinary share but allotted shortly after 31 December 2021 for operational
reasons.
The charts on page 12 of the annual report show in greater detail the movement
in Total Return and Net Asset Value over time.
The investments held at the beginning of the financial year, amounting to
£70.0 million, delivered a return over the year of £7.9 million.
The current portfolio's net valuation increased by £4.3 million. Within
this there were valuation gains of £10.8 million, offset by £6.5 million of
downward movements.
As anticipated by the impact of the changes to VCT regulations in 2015, the
composition of the portfolio continues to evolve towards younger, higher
growth companies which are reinvesting earnings for further growth. This,
along with the ongoing realisation of earlier, more income-focused
investments, results in the reduction of the Company's ongoing income.
However, helped by the receipt of an ordinary dividend of £0.4 million from
Displayplan and the benefit of higher interest rates on cash balances held,
income in the year was £1.1 million, compared to £0.7 million in the
previous financial year. The trend of lower ongoing income from the
portfolio is expected to continue as the proportion of new investments
continues to grow, though this may be offset by higher interest on cash
deposits, at least in the short term.
Shareholder Relations
The Annual General Meeting of the Company will be held at 2:30 pm on 15 June
2023 at 8-10 Hill Street, London, W1J 5NG. Full details of the agenda for
this meeting are included in the Notice of the Annual General Meeting on page
90 of the annual report.
Dividends
Dividends paid in the year totalled 3.0 pence per ordinary share. These
comprised interim dividends of 3.0 pence per ordinary share for the year ended
31 December 2022. Cumulative dividends paid as at 31 December 2022 were 81.0
pence per ordinary share.
Following the realisations of Springboard and Intelligent Office, a special
dividend for the year ending 31 December 2023 of 2.25 pence per ordinary share
was paid on 11 January 2023, to shareholders on the register at 18 November
2022, increasing cumulative dividends to date to 83.25 pence per ordinary
share.
An interim dividend for the year ending 31 December 2023 of 1.5 pence per
ordinary share will be paid on 26 June 2023, to shareholders on the register
at 12 May 2023.
Dividend Re-investment Scheme ("DRIS")
The Company operates a DRIS, which gives shareholders the opportunity to
re-invest any cash dividends; it is open to all shareholders, including those
who invested under the recent offers. The main advantages of the DRIS are:
1 the dividends remain tax free; and
2 any DRIS investment attracts income tax relief at
the rate of 30 per cent.
For the financial year ended 31 December 2022, £1.1 million was re-invested
by way of the DRIS, from overall dividend proceeds of £5.4 million.
Liquidity and Fundraising
At 31 December 2022, the Company's cash reserves of £28.5 million represented
25.5 per cent of net assets; this includes £24.2 million from the Company's
2021/22 fundraise, for which the associated shares were allotted in January
2022.
Having previously assessed its expected cash requirements, the Company
announced a new share offer on 30 November 2022, alongside British Smaller
Companies VCT plc, with the intention of raising up to £75 million, in
aggregate which included an over-allotment facility of £25 million, in
aggregate. Gross Applications exceeding £62.5 million have been received as
at the date of this report, of which £23.5 million relate to the Company. The
related allotment will take place in early April 2023.
Share Premium Cancellation
Following shareholder approval at a General Meeting, in March 2022, the
Company cancelled the balance of its Share Premium, £44.3 million, which was
transferred to the Capital Reserve, giving the Company greater flexibility to
continue to pay regular dividends to shareholders and to provide its periodic
offer to buy back shares from shareholders. As set out on under the
Statement of Changes in Equity, this will become available for distribution at
various times over the period to 1 January 2026.
Shareholder Relations
The shareholder workshop held on 29 June 2022 was well attended. Attendees
heard from economist and author Paul Collier; Ben Hookway, CEO of Relative
Insight, one of the Company's recent investments; and Matthew Scullion of
Matillion. The Matillion interview and the slides from the event can be
viewed on the website www.bscfunds.com (http://www.bscfunds.com) .
We also hosted an event by video platform on 1 December 2022, which included
presentations from Karen Barrett, CEO of Unbiased and Sarim Khan, CEO of
SharpCloud.
We are pleased to announce that the next in-person shareholder workshop will
be held jointly with British Smaller Companies VCT Plc on 20 June 2023 at 1
Great George Street, Westminster, London SW1 3AA.
The electronic communications policy continues to be a success, with 82 per
cent of shareholders now receiving communications in this way. Documents
such as the annual report are published on the website www.bscfunds.com
(http://www.bscfunds.com) rather than by post, saving on printing costs, as
well as being more environmentally friendly.
The Company's website, www.bscfunds.com (http://www.bscfunds.com) , is
refreshed on a regular basis and provides a comprehensive level of information
in what I hope is a user-friendly format.
Post Balance Sheet Events
Since year-end, the Company has invested £2.4 million into DrDoctor, a
patient engagement and communications software platform. The Company also
realised its investment in Wakefield Acoustics at the value recognised at 31
December 2022 (£0.6 million).
Outlook
As we look forward, inflation, and in turn interest rates, are showing signs
of nearing peaks. The resilience of the Company's portfolio through a
challenging period has been pleasing for me and my fellow board members, and
we are hopeful that the experiences gained by the portfolio companies stand
them in good stead to take advantage of opportunities as they arise in the
coming year.
The Company's current fundraising is being well supported by new and existing
shareholders, and we remain grateful as always for your ongoing trust and
support. The funds raised will keep the Company well positioned to continue
to support the existing portfolio and to continue to seek out the most
promising new opportunities to augment the portfolio. I look forward to
updating investors on this progress later in the year.
Peter Waller
Chairman
20 March 2023
Objectives and Key Policies
The Company's objective is to maximise Total Return and provide investors with a long-term tax free dividend yield whilst maintaining the Company's status as a venture capital trust.
Investment Policy
The investment strategy of the Company is to invest in UK businesses across a
broad range of sectors that blends a mix of businesses operating in
established and emerging industries that offer opportunities in the
application and development of innovation in their products and services.
These investments will all meet the definition of a Qualifying Investment and
be primarily in unquoted UK companies. It is anticipated that the majority of
these businesses will be re-investing their profits for growth and the
investments will comprise mainly equity investments.
The Company seeks to build a broad portfolio of investments in early stage
companies focussed on growth with the aim of spreading the maturity profiles
and maximising return as well as ensuring compliance with the VCT guidelines.
Borrowing
The Company does not borrow and has no borrowing facilities, choosing to fund
investments from its own resources.
Co-investment
British Smaller Companies VCT2 plc and British Smaller Companies VCT plc
(together "the VCTs") typically co-invest in investments, allocating such
investments 40 per cent to the Company and 60 per cent to British Smaller
Companies VCT plc. However, the Board of the Company has discretion as to
whether or not to take up its allocation; where British Smaller Companies VCT
plc does not take its allocation, the Board may opt to increase the Company's
allocation in such opportunities.
The VCTs may invest alongside co-investment funds managed by YFM, the Manager
of the VCTs. The VCTs have first choice on the initial £4.5 million of all
equity investment opportunities meeting the VCT qualifying criteria. Amounts
above £4.5 million are allocated two thirds to the VCTs and one third to
YFM's co-investment funds.
Asset Mix
Cash which is pending investment in VCT-qualifying securities is primarily
held in interest bearing instant access, short-notice bank accounts, money
market funds and investment funds listed on a recognised stock exchange
(including FCA authorised and regulated UCITS funds).
Remuneration Policy
The Company's policy on the remuneration of its directors, all of whom are
non-executive, can be found on page 49 of the annual report.
Other Key Policies
Details of the Company's policies on the payment of dividends, the DRIS and
the buy-back of shares are given on page 1 of the annual report. In addition
to these the Company's anti-bribery and environmental and social
responsibilities policies can be found on page 36 of the annual report.
Processes and Operations
The Manager is responsible for the sourcing and screening of investment
opportunities, carrying out suitable due diligence investigations and making
submissions to the Board regarding potential investments. Post investment, the
Manager works intensively with the businesses and management teams in which
the Company is invested, monitoring progress, effecting change and, where
applicable, redefining strategies with a view to maximising values through
structured exit processes.
The Board regularly monitors the performance of the portfolio and the
investment requirements set by the relevant VCT legislation. Reports are
received from the Manager regarding the trading and financial position of each
investee company and senior members of the Manager regularly attend the
Company's Board meetings. Monitoring reports on compliance with VCT
regulations are also received at each Board meeting so that the Board can
monitor that the Venture Capital Trust status of the Company is maintained and
take corrective action if appropriate. Monitoring reports carrying out an
independent review of this compliance are received twice a year.
The Board reviews the terms of YFM Private Equity Limited's appointment as
Manager on a regular basis.
YFM Private Equity Limited has performed investment advisory, management,
administrative and secretarial services for the Company since its inception on
28 November 2000. The principal terms of the agreement under which these
services are performed are set out in note 3 to the financial statements.
In the opinion of the directors, the continuing appointment of YFM Private
Equity Limited as Manager is in the interests of the shareholders as a whole,
in view of its experience in managing venture capital trusts and in making,
managing and exiting investments of the nature falling within the Company's
investment policies.
Administration of the Listed Investment Funds Quoted Portfolio
The Company holds a small portfolio of listed investment funds, the purpose of
which is to optimise returns from liquid assets while preserving capital
value. Reporting to the Manager, this portfolio is managed by Brewin Dolphin
Limited on a discretionary basis. The Board receives regular reports on the
make-up and market valuation of this portfolio.
Key Performance Indicators
Total Return, calculated by reference to the cumulative dividends paid plus
net asset value (excluding tax reliefs received by shareholders), is the
primary measure of performance in the VCT industry.
Total Return (as at 31 December)
The chart on page 12 of the annual report shows how the Total Return of your
Company has developed over the last ten years.
The evaluation of comparative success of the Company's Total Return is by way
of reference to the Share Price Total Return for an index of generalist VCTs
that are members of the AIC (based on figures provided by Morningstar). This
is the Company's stated benchmark index. A comparison and explanation of the
calculation of this return is shown in the Directors' Remuneration Report on
page 51 of the annual report.
Total Return with Dividend Re-Investment Scheme (as at 31 December)
The chart on page 12 of the annual report illustrates the Total Return
(excluding tax reliefs received by shareholders) for investors who subscribed
to the first fundraising in 2000/01 who have re-invested their dividends.
Shareholder Returns
The Board considers Total Return to be the primary measure of shareholder
value. The IRR returns from the offers over the last ten years are set out on
page 13 of the annual report. IRR is the annual rate of return that equates
the cost at the date of the original investment, with the value of subsequent
dividends plus the audited 31 December 2022 Net Asset Value per Share. This
excludes the benefit of any initial tax relief.
Set out on page 13 of the annual report is the annualised return over 10, 5,
3, 2 and 1 years to 31 December 2022. The annualised return is calculated with
reference to the cumulative dividends paid in the period plus the unaudited
NAV at 31 December 2022.
Expenses
Ongoing Charges
The Ongoing Charges figure, as calculated in line with the AIC recommended
methodology, is used by the Board to monitor expenses. This figure shows
shareholders the costs of the Company's recurring operational expenses,
expressed as a percentage of the average net asset value. Whilst based on
historical information, this provides an indication of the likely level of
costs that will be incurred in managing the Company in the future.
Expenses Year to 31 December 2022 (%) Year to 31 December 2021 (%)
Ongoing Charges figure* 2.08 2.16
* Alternative Performance Measure
The level of ongoing charges has fallen in the year due to the increased level
of net assets. Shareholders also benefit from the Company's agreement with the
Manager to pay a lower level of management fee of 1 per cent on surplus cash.
The Company's ongoing charges ratio is one of the lowest in the VCT industry.
Expenses Cap
The total costs incurred by the Company in the year (excluding any performance
related fees, trail commission payable to financial intermediaries and VAT) is
capped at 2.9 per cent of the total net asset value as at the relevant year
end. The treatment of costs in excess of the cap is described in note 3 on
page 71 of the annual report. There was no breach of the expenses cap in the
current or prior year.
Compliance with VCT Legislative Tests
A principal risk facing the Company is the retention of its VCT qualifying
status. The Board receives regular reports on compliance with the VCT
legislative tests from its Manager. In addition, the Board receives formal
reports from its VCT Tax Adviser (Philip Hare & Associates LLP) twice a
year. The Board can confirm that during the period, all of the VCT legislative
tests have been met.
Under Chapter 3 Part 6 of the Income Tax Act 2007, in addition to the
requirement for a VCT's ordinary share capital to be listed in the Official
List on a European regulated market throughout the period, there are further
specific tests that VCTs must meet following the initial three year
provisional period.
Income Test
The Company's income in the period must be derived wholly or mainly (70 per
cent) from shares or securities.
Retained Income Test
The Company must not retain more than 15 per cent of its income from shares
and securities.
Qualifying Investments Test
At least 80 per cent by value of the Company's investments must be represented
throughout the period by shares or securities comprised in Qualifying
Investments of investee companies.
For shares issued in accounting periods beginning on or after 6 April 2018, at
least 30 per cent of those share issues must be invested in Qualifying
Investments of investee companies by the anniversary of the accounting period
in which those shares are issued.
Eligible Shares Test
At least 70 per cent of the Company's Qualifying Investments must be
represented throughout the period by holdings of non-preferential shares.
Investments made before 6 April 2018 from funds raised before 6 April 2011 are
excluded from this requirement.
At least 10 per cent of the Company's total investment in each Qualifying
Investment must be in eligible shares.
In addition, monies are not permitted to be used to finance buy-outs or
otherwise to acquire existing businesses or shares.
Investment Limits
There is an annual limit for each investee company which provides that they
may not raise more than £5 million of state aided investment (including from
VCTs) in the 12 months ending on the date of each investment (£10 million for
Knowledge Intensive Companies).
There is also a lifetime limit that a business may not raise more than £12
million of state aided investment (including from VCTs); the limit for
Knowledge Intensive Companies is £20 million.
Maximum Single Investment Test
The value of any one investment must not, at any time in the period, represent
more than 15 per cent of the Company's total investment value. This is
calculated at the time of investment and updated should there be further
additions; as such, it cannot be breached passively.
The Board can confirm that during the period, all of the VCT legislative tests
set out above have been met, where required.
Further restrictions placed on VCTs are:
Dividends from Cancelled Share Premium
The Finance Act 2014 introduced a restriction with respect to the use of
monies in respect of VCTs. In particular, no dividends can be paid out of
cancelled share premium arising from shares allotted on or after 6 April 2014
until at least three full financial years have elapsed from the date of
allotment.
Following shareholder approval at a General Meeting, in March 2022 the Company
cancelled the balance of its Share Premium, £44.3 million, of which £16.4
million is now distributable. The remaining £27.9 million will become
distributable over the period to 1 January 2026, as set out on page 63 of the
annual report.
Other
No more than seven years can have elapsed since the first commercial sale
achieved by the business (ten years in the case of a Knowledge Intensive
Company), unless:
a. The business has previously received an investment from a source that
has received state aid; or
b. The investment comprises more than 50 per cent of the average of the
previous five years' turnover and the funds are to be used in the business to
fund growth into new product markets and/or new geographies.
Wherever possible, the Company self-assures that an investment is a Qualifying
Investment, subject to the receipt of professional advice.
Portfolio Structure and Analysis
Portfolio Structure
The broad range of the portfolio is illustrated on page 16 of the annual
report, with 47 per cent of the portfolio valuation being held for more than
five years, whilst 93 per cent is held at cost or above. 18 per cent of the
portfolio value is held in loans and preference shares, although loans now
account for only 4 per cent of the value.
Portfolio Analysis
Also included on page 17 of the annual report is a profile of the portfolio by
investments made before and after the VCT rule changes in 2015, and the break
down by industry sector.
Investment Review
The movements in the investment portfolio are set out in Table A below:
Table A Listed investment funds Investment Portfolio
£million
£million
Investment Portfolio Portfolio
£million
Opening fair value at 1 January 2022 70.0 - 70.0
Additions 16.3 1.7 18.0
Disposal proceeds (12.9) - (12.9)
Valuation movement 8.0 (0.1) 7.9
Closing fair value at 31 December 2022 81.4 1.6 83.0
At 31 December 2022 the investment portfolio was valued at £83.0 million,
representing 74.2 per cent of net assets (80.1 per cent at 31 December
2021). Cash and fixed term deposits at 31 December 2022 of £28.5 million
represented 25.5 per cent of net assets (24.3 per cent at 31 December 2021).
The Portfolio
£81.4 million Fair value of the portfolio (2021: £70.0 million)
26 Number of portfolio companies with a value of more than £0.5 million (2021: 22)
£0.8 million Income from the portfolio (2021: £0.7 million)
£16.3 million Level of investment (2021: £6.1 million)
£8.0 million Return from portfolio (2021: £26.0 million)
The portfolio showed robust performance in the period, adding £8.0 million of
value on the opening fair value of £70.0 million. The composition of
investments continues to show its dynamism, with £16.3 million invested in
the period and cash proceeds of £12.9 million received.
Fair value changes
Table B
Investment Portfolio £million %
Gain in fair value from the portfolio 4.4 55
Gain on disposal over opening value from the portfolio 3.6 45
Gain arising from the portfolio 8.0 100
Fall in value of other investments (0.1)
Gain arising from the investment portfolio 7.9
Of the £8.0 million gain in the year, £3.6 million arose from investments
which were realised, including Springboard (£1.8 million), Intelligent Office
(£0.9 million) and the partial realisation of Vuealta (£1.0 million).
Further details can be found in the Chairman's Statement and note 7 to the
financial statements.
The ongoing portfolio delivered a net value gain of £4.4 million in the year.
It is pleasing to see the fair value increases arising across a range of
companies, including tech-focused businesses such as Outpost, Unbiased and
Vuealta, as well as legacy companies such as Displayplan and ACC.
Some decreases in value have been seen. The Company's largest investment,
Matillion, saw its valuation decrease, driven by lower valuation multiples of
comparable public companies; although the effect of this has been partly
offset by the company's continued strong revenue growth and movements in
exchange rates over the year. Arcus Global and Sipsynergy have both struggled
somewhat over the past 12 months, but the Manager continues to work closely
with the companies' management teams to navigate their current challenges.
Other Significant Investment Movements
Investments
During the year ended 31 December 2022, the Company invested £16.3 million
across 15 companies.
Six new companies were added to the portfolio, receiving aggregate investment
of £8.1 million; while a further £8.2 million was invested across nine
existing portfolio companies. The analysis of these investments is shown in
Table C. The case study on page 24 of the annual report gives more information
on the investment in AutomatePro.
Table C Investments made £million
Investments
Company New Follow-on Total
Outpost - 2.0 2.0
Relative Insight 2.0 - 2.0
Unbiased - 1.8 1.8
AutomatePro 1.5 - 1.5
Plandek 1.4 - 1.4
Summize 1.2 - 1.2
Vypr - 1.2 1.2
Biorelate 1.0 - 1.0
Quality Clouds 1.0 - 1.0
Elucidat - 0.8 0.8
Wooshii - 0.7 0.7
Vuealta - 0.6 0.6
Force24 - 0.5 0.5
Sipsynergy - 0.4 0.4
Other (including capitalised income) - 0.2 0.2
Portfolio 8.1 8.2 16.3
Listed investment funds 1.7
Total additions in the year 18.0
Disposal of Investments
During the year to 31 December 2022, the Company received proceeds from
disposals of £12.9 million, a net gain of £3.6 million over the opening
carrying value at the beginning of the year, and an overall net gain of £4.1
million over cost. This included the successful realisations of Springboard,
Intelligent Office and Vuealta. Further details are given in the Chairman's
statement.
Table D
Disposal of Investments Net proceeds from sale of investments Opening value 31 December 2021* Gain on opening value
£million £million £million
Total investment disposals 12.9 9.3 3.6
* Including further investments during the year prior to
realisation.
Further analysis of all investments sold in the year can be found in note 7
below.
Investment Portfolio Composition
As at 31 December 2022, the portfolio was valued at £81.4 million, comprising
wholly of unquoted investments. An analysis of the movements in the year is
shown in note 7 below.
The portfolio has 26 investments valued above £0.5 million, four more than a
year earlier, with the single largest investment, Matillion, representing 19.6
per cent of the net asset value.
The charts on pages 16 and 17 of the annual report show the diversity of the
portfolio, split by industry sector, age of investment, investment instrument
and the valuation compared to cost.
Under VCT legislation, it is not possible to deposit funds for longer than
seven days, which means that cash deposits must be available on very short
notice. The Board and the Manager continually review opportunities to generate
a higher level of income, without significantly changing the risk profile of
the funds held. As part of this, the Company holds a small diversified quoted
portfolio of listed investment funds, managed by Brewin Dolphin Limited. At
31 December 2022, this quoted portfolio was valued at £1.6 million, or 1.4
per cent of net assets. The quoted portfolio value decreased by £0.1 million
in the year.
Valuation Policy
Unquoted investments are valued in accordance with both IFRS 13 'Fair Value
Measurement' and International Private Equity and Venture Capital Guidelines,
December 2022 edition (IPEV Guidelines).
Initially, at the first quarter-end following investment, investments are
valued at the price of the funding round; following this, the valuation
switches to a new primary basis for all subsequent periods.
The valuation methodology applied depends upon the facts and circumstances of
each individual investment. This may be with reference to revenue multiples,
earnings multiples, net assets, discounted cash flows or calibrated from the
price of the most recent investment.
The full valuation policy is set out in note 1 on pages 66 and 67 of the
annual report.
Table E shows the value of investments within each valuation category as at 31
December 2022; no investments are currently valued using discounted cash flow
methodologies.
With continued investment in earlier stage businesses that are investing for
growth, the majority of valuations continue to be based on revenue multiples.
Table E 2022 2021
Valuation Policy Valuation % of portfolio by value % of portfolio by value
£million
Revenue multiple 61.6 75 78
Earnings multiple 9.9 12 19
Cost or price of recent investment, reviewed for change in fair value 5.3 7 -
Sale proceeds 2.6 3 -
Net assets, reviewed for change in fair value 2.0 3 3
Total 81.4 100 100
Sustainable Investment and Environmental, Social and Governance ("ESG")
Management
The Company backs small UK businesses to help them to grow and produce strong
financial returns for shareholders with the additional aim of building better
businesses that are ultimately more sustainable.
In order to deliver more sustainable businesses, and to meet its commitments
under the Principles for Responsible Investment (PRI), the Manager has
continued to develop its processes in this area. The Manager's approach is
based on the belief that good businesses:
• Grow our economy
• Improve our society
• Value their people
• Protect the environment
These aims are consistent with the Company's financial aims because businesses
which improve in these areas also strengthen their resilience and value
creation potential through their increased attractiveness to customers,
employees, suppliers and eventual future owners and investors.
Sustainable Investment Principles
This set of principles guides the Manager's investment process:
To seek to understand the ESG related impacts and potential impacts of
investments, aiming to grow and enhance positive impacts and to avoid, reduce
or minimise any negative impacts over an investment's lifetime, leaving them
overall better businesses;
To play a positive role in the investor, business and wider communities by
promoting good practice in ESG management, and by being transparent in the way
that investments are made and how the Manager behaves;
To increase focus on the challenge of climate change both as it may be
affected by our investments, and as it may impact on them and their resilience
to possible climate change scenarios;
To show leadership by managing the Manager's own business' ESG impacts to the
best of their ability; and
To be a proactive signatory to the PRI and to integrate its principles into
the Manager's business practices.
In line with the PRI the Manager has developed processes to help the portfolio
businesses to be better in each of these spheres, by assessing them in terms
of creating positive impacts and outcomes and preventing or minimising
negative ones.
The Manager has more recently developed and integrated its ESG management
processes, which are:
Pre-investment Phase:
Structured processes at the pre-investment stage to identify areas of
potential ESG improvement as part of the due diligence and pre-investment
deliberations. Appropriate data is collected and assessed on each business
against ESG criteria at the point of investment as a benchmark against which
to evaluate future progress.
Portfolio Phase:
For those investments made since 2020, based on the data collected at the
point of investment at the start of the portfolio phase, bespoke areas for
improvement are agreed with each management team together with consequent
objectives and targets. A similar process has been applied to the significant
majority of investments made prior to 2020. Improvements are then measured
and recorded against a set of ESG criteria using the Manager's bespoke ESG
framework, refreshing targets annually and placing focus on any new issues as
they become more material in the management of the company and in meeting the
expectations of its stakeholders.
Reporting:
Annual reports will be produced, using the Manager's ESG framework for
consistency, recording the relevant initiatives, impacts and ESG KPI
performance of each company and providing an overview of progress across the
Manager's portfolios.
Note that Investment Companies are not within scope for reporting under the
Task Force on Climate-Related Financial Disclosures (TCFD); and the Company
does not use more than 40,000kWh of energy and therefore is not required to
report on its energy usage within Streamlined Energy and Carbon Reporting
regulations.
ESG Performance Data and Reporting
ESG KPI data analysis
The Manager has developed its ESG KPI data collation process. It has
established a data set reflecting the above ESG themes and a means of
collecting this to make year on year comparisons for each company and across
the portfolio. Where possible baseline data has been collected from the date
of investment with a view to showing where the Manager's support has made a
difference during the hold period to the reporting date.
Annual company specific ESG performance progress report
The reviews that the Manager has been conducting enabled the identification of
relative strengths and weaknesses and agreement of programmes of action with
each business.
Since 2021 the Manager has moved to recording annual updates and agreed
actions in a more visual and detailed report on both qualitative and
quantitative aspects of each company's progress. As well as using this for
portfolio reporting to investors it will be used as an engagement tool with
the senior management teams of each company.
2022 ESG KPI Report for Investments held in YFM's VCT funds
Growing our economy
• £44.7 million of R&D investment during 2022
• £51.6 million of export sales achieved in 2022
Improving our society
• 95 per cent of companies were independently chaired in 2022
• 40 per cent of companies had female directors on boards, with 20 per
cent having a female CEO
• 40 per cent of businesses had a designated board member with
responsibility for improving ESG issues
Valuing our people
• 35 per cent of the portfolio workforce was female in 2022
• 995 new jobs were created from date of investment to 2022
• 75 per cent had mental wellbeing programmes in place and 70 per cent
held regular employee engagement surveys
• Approaching 29,000 hours of training was given to employees
Protecting our environment
• 60 per cent of companies had active carbon reduction strategies (up
from 10 per cent at investment)
• 25 per cent offset all or a defined portion of their carbon impact
• But only 20 per cent formally measure their carbon footprint
Summary and Outlook
The portfolio continues to show its resilience, with strong underlying levels
of revenue growth across the largest investments, helping to counter downward
pressure on revenue multiples. Portfolio company management teams continue to
be resilient and adaptable to economic conditions, which will hold them in
good stead for future progress.
We continue to see a strong pipeline of potential investments in a range of
growth companies, as well as opportunities to further support the continued
growth of the current portfolio. We thank investors for their continuing
support in the Company's ongoing fundraising, and are looking forward to
putting the funds raised to work.
David Hall
YFM Private Equity Limited
Portfolio Summary at 31 December 2022
Name of company Date of initial investment Location Industry Sector Amount Invested Valuation at 31 December 2022 Recognised income/ proceeds to date Realised & unrealised value to date*
£000 £000 £000 £000
Matillion Limited Nov-16 Manchester Data 1,778 21,874 5,946 27,820
Outpost VFX Limited Feb-21 Bournemouth New Media 3,000 6,202 10 6,212
Unbiased EC1 Limited Dec-19 London Tech-enabled Services 3,731 6,072 - 6,072
Wooshii Limited May-19 London New Media 3,096 4,197 305 4,502
Displayplan Holdings Limited Jan-12 Stevenage Business Services 700 4,109 1,706 5,815
Elucidat Ltd May-19 Brighton Application Software 2,640 4,039 4 4,043
ACC Aviation Group Limited Nov-14 Reigate Business Services 1,379 3,575 3,525 7,100
Force24 Ltd Nov-20 Leeds Application Software 2,100 3,091 - 3,091
Vypr Validation Technologies Limited Jan-21 Manchester Tech-enabled Services 2,200 2,598 - 2,598
SharpCloud Software Limited Oct-19 London Data 2,271 2,508 - 2,508
Relative Insight Limited Mar-22 Lancaster Tech-enabled Services 2,000 2,010 - 2,010
Investment companies Apr-15 - - 2,500 1,961 - 1,961
KeTech Enterprises Limited Nov-15 Nottingham Tech-enabled Services 2,000 1,788 2,599 4,387
Tonkotsu Limited Jun-19 London Retail & Brands 1,592 1,485 - 1,485
AutomatePro Limited Dec-22 London Cloud & DevOps 1,483 1,483 - 1,483
Plandek Limited Oct-22 London Cloud & DevOps 1,380 1,380 - 1,380
Sipsynergy (via Hosted Network Services Limited) Jun-16 Hampshire Cloud & DevOps 2,045 1,378 - 1,378
Traveltek Group Holdings Limited Oct-16 East Kilbride Application Software 1,163 1,359 527 1,886
Frescobol Carioca Ltd Mar-19 London Retail & Brands 1,200 1,284 - 1,284
Summize Limited Oct-22 Manchester Application Software 1,200 1,200 - 1,200
Vuealta Holdings Limited Sep-21 London Tech-enabled Services 2,030 1,192 3,067 4,259
Ncam Technologies Limited Mar-18 London New Media 1,762 1,175 87 1,262
Biorelate Limited Nov-22 Manchester Application Software 1,040 1,040 - 1,040
Quality Clouds Limited May-22 London Cloud & DevOps 1,000 1,000 - 1,000
Panintelligence (via Paninsight Limited) Nov-19 Leeds Data 1,000 1,000 - 1,000
E2E Engineering Limited Sep-17 Welwyn Garden City Business Services 600 800 142 942
Wakefield Acoustics** (via Malvar Engineering Limited) Dec-14 Wakefield Advanced Manufacturing 761 648 442 1,090
Other investments below £0.5 million 10,136 937 5,210 6,147
Total unquoted investments 57,787 81,385 23,570 104,955
Full disposals to date 45,622 - 74,347 74,347
Total portfolio 103,409 81,385 97,917 179,302
* represents income/proceeds recognised to date plus the unrealised valuation
at 31 December 2022.
** realised in January 2023 at the valuation shown
Summary of Portfolio Movement since 31 December 2021
Name of Company Investment valuation at 31 December 2021 Disposal proceeds Additions/ Capitalised income Valuation gains including profits / (losses) on disposal Investment valuation at 31 December 2022
£000 £000 £000 £000 £000
Outpost VFX Limited 1,614 - 2,000 2,588 6,202
Vuealta Holdings Limited/Vuealta Group Limited 1,491 (3,067) 631 2,137 1,192
Unbiased EC1 Limited 3,082 - 1,767 1,223 6,072
Wooshii Limited 3,162 - 656 379 4,197
Traveltek Group Holdings Limited 983 - - 376 1,359
Elucidat Limited 2,926 - 840 273 4,039
Panintelligence (via Paninsight Limited) 750 - - 250 1,000
Frescobol Carioca Ltd 1,148 - - 136 1,284
E2E Engineering Limited 688 - - 112 800
Vypr Validation Technologies Limited 1,386 - 1,200 12 2,598
Relative Insight Limited - - 2,000 10 2,010
AutomatePro Limited - - 1,483 - 1,483
Plandek Limited - - 1,380 - 1,380
Summize Limited - - 1,200 - 1,200
Biorelate Limited - - 1,040 - 1,040
Quality Clouds Limited - - 1,000 - 1,000
Tonkotsu Limited 1,520 - - (35) 1,485
Force24 Ltd 2,773 - 500 (182) 3,091
Other investments £0.5 million and below 310 - 160 (316) 154
SharpCloud Software Limited 2,927 - - (419) 2,508
Ncam Technologies Limited 1,636 - - (461) 1,175
Sipsynergy (via Hosted Network Services Limited) 1,561 - 409 (592) 1,378
Arcus Global Limited 1,324 - - (1,119) 205
Matillion Limited 25,050 - - (3,176) 21,874
Investments made after November 2015 54,331 (3,067) 16,266 1,196 68,726
Displayplan Holdings Limited 1,891 - - 2,218 4,109
Springboard Research Holdings Limited 3,959 (5,782) - 1,823 -
ACC Aviation Group Limited 2,450 - - 1,125 3,575
Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) 3,163 (4,080) - 917 -
Other investments £0.5 million and below 2,063 - - 476 2,539
Wakefield Acoustics (via Malvar Engineering) 186 - - 462 648
KeTech Enterprises Limited 1,976 - - (188) 1,788
Investments made prior to November 2015 15,688 (9,862) - 6,833 12,659
Total investments 70,019 (12,929) 16,266 8,029 81,385
Risk Factors
The Board carries out a regular review of the risk environment in which the
Company operates. The emerging and principal risks and uncertainties
identified by the Board and techniques used to mitigate these risks are set
out in this section.
The Board seeks to mitigate its emerging and principal risks by setting
policy, regularly reviewing performance and monitoring progress and
compliance. In the mitigation and management of these risks, the Board
rigorously applies the principles detailed in section 4: "Audit, Risk and
Internal Control" of The UK Corporate Governance Code issued by the Financial
Reporting Council in July 2018. Details of the Company's internal controls are
contained in the Corporate Governance Internal Control section on pages 47 and
48 and further information on exposure to risks, including those associated
with financial instruments, can be found in note 17a of the financial
statements.
The Board has considered emerging risks. The Board seeks to mitigate emerging
risks and identified risks by regular reviews of performance and monitoring
compliance with policy. The Board has identified the following as potential
emerging risks:
· Deterioration of macro-economic environment
· Geo-political instability
VCT Qualifying Status:
Risk - The Company must at all times ensure compliance with the conditions for
maintenance of approved VCT status. The loss of approval as a VCT could lead
to its investors losing the various tax benefits associated with VCT
investments.
Mitigation - One of the Key Performance Indicators monitored by the Company is
the compliance with VCT rules. Compliance with these rules is closely
monitored by the Manager on an ongoing basis and regularly reported to and
reviewed by the Board. The Company also makes use of external experts, who
review the Company's compliance with VCT rules on a regular basis. Details of
how the Company manages these requirements can be found under the heading
"Compliance with VCT Legislative Tests" on pages 14 and 15 of the annual
report.
Change - No change
Economic:
Risk - Events such as recession and interest rate fluctuations, which may
include factors arising from geopolitical shocks, could adversely affect
investee companies' performance and valuations. This could result in a
reduction in the performance of the Company
Mitigation - As well as the response to the 'Investment and Strategic' risk
below, the Company has a clear investment policy (summarised above) and a
diversified portfolio operating in a range of sectors which helps mitigate
against sector specific impacts. The Manager actively monitors investee
company performance, which provides quality information for monthly reviews of
the portfolio.
Change - Increased - following a reduction of risk owing to COVID-19
restrictions ending, the war in Ukraine and rising global inflation has
created a small increase to this risk.
Investment and Strategic:
Risk - Inappropriate strategy, poor asset allocation or consistently weak
stock allocation may lead to underperformance and poor returns to
shareholders. The quality of enquiries, investments, investee company
management teams and monitoring, and the risk of not identifying investee
company difficulties may lead to underperformance by the Company and poor
returns to shareholders.
Mitigation - The Board reviews strategy annually. At each of the Board
meetings, the directors review the appropriateness of the Company's objectives
and stated strategy in response to changes in the operating environment and
peer group activity. It also reviews compliance of the Manager with the stated
investment strategy.
The Manager carries out appropriate due diligence on potential investee
companies and their management teams and utilises external reports where
appropriate to assess the viability of investee businesses before investing.
Wherever possible, a nonexecutive director will be appointed to the board of
the investee company on behalf of the Company.
Change - No change
Regulatory:
Risk - The Company is required to comply with the Companies Act 2006, the
rules of the UK Listing authority, the Financial Conduct Authority's
Prospectus Rules and UK-adopted International Financial Reporting Standards;
it is also subject to the AIFMD EU Exit Regulations. Breach of any of these
might lead to suspension of the Company's Stock Exchange listing, financial
penalties or a qualified audit report.
Mitigation - The Manager and the Company Secretary have procedures in place to
ensure recurring Listing Rules requirements are met and actively consult with
brokers, solicitors and external compliance advisers as appropriate.
The Manager ensures that it hires suitably qualified members of staff who are
experienced with regulatory requirements and relevant accounting standards.
The key controls around regulatory compliance are explained on pages 47 and 48
of the annual report.
Change - No change
Legislative:
Risk A change to the VCT regulations could result in a significant change to
investment strategy which could adversely impact the Company. Such changes may
also result in changes to VCT tax reliefs for investors, which could make
future fundraising difficult.
Mitigation - The Manager is a member of the Venture Capital Trust Association
which engages with the Government to help shape future legislation.
Change - No change
Reputational:
Risk - Inadequate or failed controls might result in breaches of regulations
or loss of shareholder trust.
Mitigation - The Board is comprised of directors with suitable experience and
qualifications who report annually to the shareholders on their independence.
The Manager is well-respected, with a proven track record. It has a formal
recruitment process to employ experienced investment staff. Advice is sought
from external advisors where required.
Change - No change
Operational:
Risk - The Company is reliant on a number of third parties, in particular the
Manager, for investment management and administrative services. Failure of the
operational systems and controls of these third parties could result in an
inability to provide accurate reporting and monitoring.
Mitigation - The Manager has a documented business continuity plan, which
provides for back-up services in the event of a system breakdown. The
Manager's systems are protected against viruses and other cyber-attacks. The
Manager regularly tests its business continuity plan. Both the Company and the
Manager maintain appropriate insurances.
Change - No change
Cyber Security and Information Technology:
Risk - A failure in IT systems and controls might lead to business
interruption, loss of data, the inability of the Manager to provide accurate
reporting and monitoring or the loss of Company records.
Mitigation - The Manager has in place significant cybersecurity controls,
including two factor authentication, email protection software, monitored
firewalls and regularly updated electronic devices. The Manager is Cyber
Essentials Plus certified. Staff at the Manager regularly receive training
in relation to their cybersecurity obligations.
Change - No change
ESG
Risk - The Company, the Manager and the portfolio companies may fail to
positively contribute towards, and adapt to, the global transition towards
decarbonisation and other ESG priorities, which could result in regulatory
breaches, reduced investor and/or employee attraction and the reduced ability
of portfolio companies to attract lending to fund their growth.
Mitigation - The Manager is a signatory of the UN's Principles for Responsible
Investment; it has published its Sustainable Investment Principles; and has
rewritten its Ethical Policy. Its investment process now includes a set of
over 50 thematic ESG KPIs, with which it is now tracking its portfolio over
time across four key areas: Improve our Society; Protect our Environment; Grow
our Economy; and Value our People. Further details can be found on pages 21 to
23 of the annual report.
Change - No change
Liquidity:
Risk -
a. The Company may not have sufficient liquidity available to meet its
financial obligations.
b. The VCT invests into smaller unquoted companies, which by their
nature are illiquid, therefore they may be difficult to realise, at fair
market value, at short notice.
Mitigation - The Company's overall liquidity risks and cashflow forecast are
monitored on an ongoing basis by the Manager and on a quarterly basis by the
Board.
The Company's valuation methodology takes account of potential liquidity
restrictions in the markets in which it invests.
For any publicly listed investments, accounting standards require an ongoing
assessment of the liquidity of the stock.
The Manager regularly reviews its exit plans for investee companies to allow
it to identify the optimal point at which to seek a sale. As part of a
planned exit, the assistance of a third party adviser will normally be sought,
with a view to identifying the largest number of possible purchasers.
Change - No change
Other Matters
Section 172 Statement
This Section 172 Statement should be read in conjunction with the other
contents of the Strategic Report, on pages 6 to 36 of the annual report.
Section 172 of the Companies Act 2006 requires that a director must act in the
way that they consider, in good faith, would be most likely to promote the
success of the company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to:
· the likely consequences of any decision in the long term;
· the interests of the company's employees;
· the need to foster the company's business relationships with
suppliers, customers and others;
· the impact of the company's operations on the community and the
environment;
· the desirability of the company maintaining a reputation for high
standards of business conduct; and
· the need to act fairly as between members of the company.
The Company takes a number of steps to understand the views of investors and
other key stakeholders and considers these, along with the matters set out
above, in Board discussions and decision making.
Key Stakeholders
As an investment company with no employees, the Company's key stakeholders are
its investors, its service providers and its portfolio companies.
Investors
The Board engages and communicates with shareholders in a variety of ways.
The Company encourages shareholders to attend its Annual General Meeting.
Along with British Smaller Companies VCT plc, the Company held two Investor
Workshops during the year. A physical workshop was held on 29 June 2022 and
an online webinar was hosted on 1 December 2022. Both were well attended.
Maintaining the Company's status as a VCT is critical to meeting the Company's
objective to maximise Total Return and provide investors with an attractive
long-term tax-free dividend yield. The Company receives regular reports on
this issue from the Manager and has taken various steps in the year to ensure
that the relevant tests are met.
The Board also aims for investors to continue to have tax efficient
opportunities to invest in the Company, and to generate tax-free returns from
both capital appreciation and ongoing dividends.
After carefully considering its funding needs, on 30 November 2022, the
Company issued a prospectus, alongside British Smaller Companies VCT plc, to
raise up to £75 million in aggregate for the 2022/23 tax year.
Following shareholder approval at a General Meeting, in March 2022, the
Company cancelled the balance of its Share Premium, £44.3 million, which was
transferred to the Capital Reserve, giving the Company greater flexibility to
continue to pay regular dividends to shareholders and to provide its periodic
offer to buy back shares from shareholders. As set out under the Statement
of Changes in Equity, this will become available for distribution at various
times over the period to 1 January 2026.
During the year the Board kept its arrangements for dividends, share buy-backs
and the dividend re-investment scheme under constant review. Along with
normal dividends totalling 3.0 pence per ordinary share in the year ended 31
December 2022, a special dividend of 2.25 pence per ordinary share was paid in
January 2023, following the realisation of the Company's investments in
Springboard and Intelligent Office.
Manager
The Company's most important service provider is its Manager. There is
regular contact with the Manager, and members of the Manager's board attend
all of the Company's Board meetings. There is also an annual strategy
meeting with the Manager, alongside the board of British Smaller Companies VCT
plc.
The Manager maintains strong relationships with relevant media publications
and a wide range of distributors for the Company's shares, including wealth
managers, independent financial advisers and execution-only brokers. RAM
Capital acts as a promoter of the Company's shares to smaller distributors.
The Company is a member of the Association of Investment Companies which
promotes the interests of investment companies, including VCTs. The Manager
is a founder member of the Venture Capital Trust Association, which promotes
the interests of VCTs in a variety of ways.
Portfolio Companies
The Company holds minority investments in its portfolio companies and has
delegated the management of the portfolio to the Manager. The Manager
provides the Board with regular updates on the performance of each portfolio
company at least quarterly and the Board is made aware of all major issues.
The Manager has a dedicated Portfolio team to assist the portfolio companies
with the challenges that they face as fast-growing companies. The Manager
promotes ongoing, sustainable growth within the businesses; this often
involves improving systems and processes, as well as significant job creation.
Employees
The Company has no employees. The Board is composed of one female
non-executive director and two male non-executive directors. For a review of
the policies used when appointing directors to the Board of the Company,
please refer to the Directors' Remuneration Report.
Environment and Community
The Company seeks to ensure that its business is conducted in a manner that is
responsible to the environment. The management and administration of the
Company is undertaken by the Manager, YFM Private Equity Limited, who
recognises the importance of its environmental responsibilities and has signed
up to the United Nations' Principles for Responsible Investment.
More details of the work that the Manager has done in this area are set out on
pages 21 to 23 of the annual report. Its Sustainable Investment Policy can
be found at www.yfmep.com/who-we-are/our_impact/
(http://www.yfmep.com/who-we-are/our_impact/) .
Business Conduct
The Company has a zero tolerance approach to bribery. The following is a
summary of its policy:
· It is the Company's policy to conduct all of its business in an
honest and ethical manner. The Company is committed to acting professionally,
fairly and with integrity in all its business dealings and relationships;
· The directors of the Company, the Manager and any other service
providers must not promise, offer, give, request, agree to receive or accept
financial or other advantage in return for favourable treatment, to influence
a business outcome or gain any business advantage on behalf of the Company or
encourage others to do so;
· The Company has communicated its anti-bribery policy to the
Manager and its other service providers and, in turn, the Manager ensures that
portfolio companies implement appropriate policies of their own; and
· The Manager has its own Anti-Bribery and Anti-Slavery policies
and ensures that portfolio companies adopt a similar policy.
Peter Waller
Chairman
Statement of Comprehensive Income
For the year ended 31 December 2022
2022 2021
Notes
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Gains on investments held at fair value 7 - 4,287 4,287 - 20,702 20,702
Gain on disposal of investments 7 - 3,586 3,586 - 5,342 5,342
Gain arising from the investment portfolio - 7,873 7,873 - 26,044 26,044
Income 2 1,075 - 1,075 661 - 661
Total income 1,075 7,873 8,948 661 26,044 26,705
Administrative expenses:
Manager's fee (447) (1,339) (1,786) (374) (1,118) (1,492)
Incentive fee - (635) (635) - (4,407) (4,407)
Other expenses (274) - (274) (417) - (417)
3 (721) (1,974) (2,695) (791) (5,525) (6,316)
Profit (loss) before taxation 354 5,899 6,253 (130) 20,519 20,389
Taxation 4 - - - - - -
Profit (loss) for the year 354 5,899 6,253 (130) 20,519 20,389
Total comprehensive income (expense) for the year 354 5,899 6,253 (130) 20,519 20,389
Basic and diluted earnings (loss) per ordinary share 6 0.20p 3.25p 3.45p (0.09p) 14.80p 14.71p
The accompanying notes on pages 65 to 89 of the annual report are an integral
part of these financial statements.
The Total column of this statement represents the Company's Statement of
Comprehensive Income, prepared in accordance with UK-adopted Financial
Reporting Standards (UK-adopted IFRS). The supplementary Revenue and Capital
columns are prepared under the Statement of Recommended Practice 'Financial
Statements of Investment Trust Companies and Venture Capital Trusts' (issued
in July 2022 - "SORP") published by the AIC.
Balance Sheet
At 31 December 2022
Notes 2022 2021
£000 £000
ASSETS
Non-current assets at fair value through profit or loss
Financial assets at fair value through profit or loss 7 82,981 70,019
Accrued income and other assets 948 493
83,929 70,512
Current assets
Accrued income and other assets 287 217
Current asset investments 1,988 1,988
Cash and cash equivalents 26,486 19,201
28,761 21,406
LIABILITIES
Current liabilities
Trade and other payables (821) (4,543)
Net current assets 27,940 16,863
Net assets 111,869 87,375
Shareholders' equity
Share capital 20,014 15,808
Share premium account 858 24,122
Capital redemption reserve 88 88
Other reserves 2 2
Merger reserve 5,525 5,525
Capital reserve 52,263 12,818
Investment holding gains and losses reserve 7 31,762 28,009
Revenue reserve 1,357 1,003
Total shareholders' equity 111,869 87,375
Net asset value per ordinary share 8 61.6p 61.5p
The accompanying notes on pages 65 to 89 of the annual report are an integral
part of these financial statements.
The financial statements were approved and authorised for issue by the Board
of Directors and were signed on its behalf on 20 March 2023.
Peter Waller
Chairman
Statement of Changes in Equity
For the year ended 31 December 2022
Share capital Share premium account Other reserves* Capital reserve Investment holding gains and losses reserve Revenue reserve Total equity
£000 £000 £000 £000 £000 £000 £000
Balance at 31 December 2020 14,133 16,735 5,615 22,461 9,254 2,731 70,929
Revenue loss for the year - - - - - (130) (130)
Expenses charged to capital - - - (5,525) - - (5,525)
Investment holding gain on investments held at fair value - - - - 20,702 - 20,702
Realisation of investments in the year - - - 5,342 - - 5,342
Total comprehensive (expense) income for the year - - - (183) 20,702 (130) 20,389
Issue of share capital 1,276 5,774 - - - - 7,050
Issue of shares - DRIS 399 1,851 - - - - 2,250
Issue costs ** - (238) - (48) - - (286)
Purchase of own shares - - - (1,942) - - (1,942)
Dividends - - - (9,456) - (1,559) (11,015)
Total transactions with owners 1,675 7,387 - (11,446) - (1,559) (3,943)
Realisation of prior year investment holding gains - - - 1,986 (1,947) (39) -
Balance at 31 December 2021 15,808 24,122 5,615 12,818 28,009 1,003 87,375
Revenue return for the year - - - - - 354 354
Expenses charged to capital - - - (1,974) - - (1,974)
Investment holding gain on investments held at fair value - - - - 4,287 - 4,287
Realisation of investments in the year - - - 3,586 - - 3,586
Total comprehensive income for the year - - - 1,612 4,287 354 6,253
Issue of share capital 4,023 21,274 - - - - 25,297
Issue of shares - DRIS 183 902 - - - - 1,085
Issue costs ** - (1,125) - - - - (1,125)
Share premium cancellation - (44,315) - 44,315 - - -
Purchase of own shares - - - (1,572) - - (1,572)
Dividends - - - (5,444) - - (5,444)
Total transactions with owners 4,206 (23,264) - 37,299 - - 18,241
Realisation of prior year investment holding gains - - - 534 (534) - -
Balance at 31 December 2022 20,014 858 5,615 52,263 31,762 1,357 111,869
The accompanying notes on pages 65 to 89 of the annual report are an integral
part of these financial statements.
Reserves available for distribution
Under the Companies Act 2006 the capital reserve and the revenue reserve are
distributable reserves. The table below shows amounts that are available for
distribution.
Capital reserve Revenue reserve Total
£000 £000 £000
Distributable reserves as shown above 52,263 1,357 53,620
Income not yet distributable - (988) (988)
Cancelled share premium not yet distributable (27,879) - (27,879)
Revaluation losses (490) - (490)
Dividend paid 11 January 2023 (4,097) - (4,097)
Reserves available for distribution*** 19,797 369 20,166
* Other reserves include the capital redemption reserve, the
merger reserve and the other reserve, which are non-distributable. The other
reserve was created upon the exercise of warrants, the capital redemption
reserve was created for the purchase and cancellation of own shares, and the
merger reserve was created on the merger with British Smaller Technologies
Company VCT plc.
** Issue costs include both fundraising costs and costs incurred from
the Company's DRIS.
*** Following the circulation of the Annual Report to shareholders.
The merger reserve was created to account for the difference between the
nominal and fair value of shares issued as consideration for the acquisition
of the assets and liabilities of British Smaller Technology Companies VCT plc.
The reserve was created after meeting the criteria under section 131 of the
Companies Act 1985 and the provisions of the Companies Act 2006 for merger
relief. The merger reserve is a non-distributable reserve.
The capital reserve and revenue reserve are both distributable reserves. The
reserves total £53,620,000, representing an increase of £39,799,000 during
the year. The directors also take into account the level of the investment
holding gains and losses reserve and the future requirements of the Company
when determining the level of dividend payments.
Of the potentially distributable reserves of £53,620,000 shown above,
£988,000 relates to income not yet distributable and £27,879,000 relates to
cancelled share premium which will become distributable from the dates shown
in the table below. In addition revaluation losses of £490,000 included
within the investment holding gains and losses reserve are not considered to
be recoverable.
The Company held a General Meeting on 25 February 2022, at which shareholders
approved the cancellation of the Company's share premium account, subject to
the sanction of the High Court which was subsequently received on 11 March
2022. Total share premium cancelled will be available for distribution from
the following dates:
£000
1 January 2024 299
1 January 2025 7,387
1 January 2026 20,193
Cancelled share premium not yet distributable 27,879
Statement of Cash Flows
For the year ended 31 December 2022
Notes 2022 2021
£000 £000
Net cash outflow from operating activities (5,911) (1,419)
Cash flows generated from (used in) investing activities
Purchase of financial assets at fair value through profit or loss 7 (17,978) (6,092)
Proceeds from sale of financial assets at fair value through profit or loss 7 12,929 11,182
Deferred consideration 7 4 471
Net cash (outflow) inflow from investing activities (5,045) 5,561
Cash flows from financing activities
Issue of ordinary shares 25,297 7,050
Costs of ordinary share issues* (1,125) (286)
Purchase of own ordinary shares (1,572) (1,942)
Dividends paid 5 (4,359) (8,765)
Net cash inflow (outflow) from financing activities 18,241 (3,943)
Net increase in cash and cash equivalents 7,285 199
Cash and cash equivalents at the beginning of the year 19,201 19,002
Cash and cash equivalents at the end of the year 26,486 19,201
*Issue costs include both fundraising costs and expenses incurred from the
Company's DRIS.
Reconciliation of Profit before Taxation to Net Cash Outflow from Operating
Activities
2022 2021
£000 £000
Profit before taxation 6,253 20,389
(Decrease) increase in trade and other payables (3,722) 4,412
Increase in accrued income and other assets (529) (117)
Gain on disposal of investments (3,586) (5,342)
Gains on investments held at fair value (4,287) (20,702)
Capitalised income (40) (59)
Net cash outflow from operating activities (5,911) (1,419)
The accompanying notes on pages 65 to 89 of the annual report are an integral
part of these financial statements.
Notes to the Financial Statements
1. Principal Accounting Policies
Basis of Preparation
The accounts have been prepared on a going concern basis as set out in the
Directors Report on page 38 of the annual report and in accordance with
UK-adopted Financial Reporting Standards (UK-adopted IFRS).
The directors have carefully considered the issue of going concern in view of
the Company's activities and associated risks. The Company has a
well-diversified portfolio with businesses in a variety of sectors, many of
which are well funded. Some portfolio companies may require additional
funding in the near- to medium-term; the Company is well placed to provide
this, where appropriate.
The Company has a significant level of liquidity, which will be further
enhanced by the current fundraising. In addition, the Board has control over,
and can flex as appropriate, the Company's major outgoings, which
predominantly comprise investments, dividends and share buy-backs.
The directors have also assessed whether material uncertainties exist and
their potential impact on the Company's ability to continue as a going
concern; they have concluded that no such material uncertainties exist.
Taking all of the above into consideration, the directors are satisfied that
the Company has sufficient resources to meet its obligations for at least 12
months from the date of this report and therefore believe that it is
appropriate to continue to apply the going concern basis of accounting in
preparing the financial statements.
The financial statements have been prepared under the historical cost basis as
modified by the measurement of investments at fair value through profit or
loss.
The accounts have been prepared in compliance with the recommendations set out
in the Statement of Recommended Practice 'Financial Statements of Investment
Trust Companies and Venture Capital Trusts' issued by the Association of
Investment Companies (issued in July 2022 - "SORP") to the extent that they do
not conflict with UK-adopted Financial Reporting Standards (UK-adopted IFRS).
The financial statements are prepared in accordance with UK-adopted Financial
Reporting Standards (UK-adopted IFRS) and interpretations in force at the
reporting date. New standards coming into force during the year and future
standards that come into effect after the year-end have not had a material
impact on these financial statements.
The Company has carried out an assessment of accounting standards, amendments
and interpretations that have been issued by the IASB and that are effective
for the current reporting period. The Company has determined that the
transitional effects of the standards do not have a material impact.
The financial statements are presented in sterling and all values are rounded
to the nearest thousand (£000), except where stated.
Financial Assets held at Fair Value through Profit or Loss - Investments
Financial assets designated as at fair value through profit or loss ("FVPL")
at inception are those that are managed and whose performance is evaluated on
a fair value basis, in accordance with the documented investment strategy of
the Company. Information about these financial assets is provided internally
on a fair value basis to the Company's key management. The Company's
investment strategy is to invest cash resources in venture capital investments
as part of the Company's long-term capital growth strategy. Consequently, all
investments are classified as held at fair value through profit or loss.
All investments are measured at fair value on the whole unit of account basis
with gains and losses arising from changes in fair value being included in the
Statement of Comprehensive Income as gains or losses on investments held at
fair value.
Transaction costs on purchases are expensed immediately through profit or
loss.
Although the Company holds more than 20 per cent of the equity of certain
companies, it is considered that the investments are held as part of the
investment portfolio, and their value to the Company lies in their marketable
value as part of that portfolio. These investments are therefore not accounted
for using equity accounting, as permitted by IAS 28 'Investments in
associates' and IFRS 11 'Joint arrangements' which give exemptions from equity
accounting for venture capital organisations.
Under IFRS 10 "Consolidated Financial Statements", control is presumed to
exist when the Company has power over an investee (whether or not used in
practice); exposure or rights; to variable returns from that investee, and
ability to use that power to affect the reporting entities returns from the
investees. The Company does not hold more than 50 per cent of the equity of
any of the companies within the portfolio. The Company does not control any
of the companies held as part of the investment portfolio. It is not
considered that any of the holdings represent investments in subsidiary
undertakings.
Valuation of Investments
Unquoted investments are valued in accordance with IFRS 13 "Fair Value
Measurement" and, using the International Private Equity and Venture Capital
Valuation Guidelines ("the IPEV Guidelines") updated in December 2022. Quoted
investments are valued at market bid prices. A detailed explanation of the
valuation policies of the Company is included below.
Initial Measurement
The best estimate of the initial fair value of an unquoted investment is the
cost of the investment. Unless there are indications that this is
inappropriate, an unquoted investment will be held at this value within the
first three months of investment.
Subsequent Measurement
Based on the IPEV Guidelines we have identified six of the most widely used
valuation methodologies for unquoted investments. The Guidelines advocate that
the best valuation methodologies are those that draw on external, objective
market-based data in order to derive a fair value.
Unquoted Investments
> Revenue multiples. An appropriate multiple, given the risk profile and
revenue growth prospects of the underlying company, is applied to the revenue
of the company. The multiple is adjusted to reflect any risk associated with
lack of marketability and to take account of the differences between the
investee company and the benchmark company or companies used to derive the
multiple.
> Earnings multiple. An appropriate multiple, given the risk profile and
earnings growth prospects of the underlying company, is applied to the
maintainable earnings of the company. The multiple is adjusted to reflect any
risk associated with lack of marketability and to take account of the
differences between the investee company and the benchmark company or
companies used to derive the multiple.
> Net assets. The value of the business is derived by using appropriate
measures to value the assets and liabilities of the investee company.
> Discounted cash flows of the underlying business. The present value of
the underlying business is derived by using reasonable assumptions and
estimations of expected future cash flows and the terminal value, and
discounted by applying the appropriate risk-adjusted rate that quantifies the
risk inherent in the company.
> Discounted cash flows from the investment. Under this method, the
discounted cash flow concept is applied to the expected cash flows from the
investment itself rather than the underlying business as a whole.
> Price of recent investment. This may represent the most appropriate basis
where a significant amount of new investment has been made by an independent
third party. This is adjusted, if necessary, for factors relevant to the
background of the specific investment such as preference rights and will be
benchmarked against other valuation techniques. In line with the IPEV
Guidelines the price of recent investment will usually only be used for the
initial period following the round and after this an alternative basis will be
found.
Due to the significant subjectivity involved, discounted cash flows are only
likely to be reliable as the main basis of estimating fair value in limited
situations. Their main use is to support valuations derived using other
methodologies and for assessing reductions in fair value.
One of the valuation methods described above is used to derive the gross
attributable enterprise value of the company after which adjustments are then
made to reflect specific circumstances, such as the impact of the coronavirus
pandemic. This value is then apportioned appropriately to reflect the
respective debt and equity instruments in the event of a sale at that level at
the reporting date.
Listed Investment Funds
Listed investment funds are valued at active market bid price. An active
market is defined as one where transactions take place regularly with
sufficient volume and frequency to determine price on an ongoing basis. No
methodology other than active market bid price has been applied as at 31
December 2022.
Income
Dividends and interest are received from financial assets measured at fair
value through profit and loss and are recognised on the same basis in the
Statement of Comprehensive Income. This includes interest and preference
dividends rolled up and/or payable at redemption. Interest income is also
received on cash, cash equivalents and current asset investments. Dividend
income from unquoted equity shares is recognised at the time when the right to
the income is established.
Expenses
Expenses are accounted for on an accruals basis. Expenses are charged
through the Revenue column of the Statement of Comprehensive Income, except
for the Manager's fee and incentive fees. Of the Manager's fees 75 per cent
are allocated to the Capital column of the Statement of Comprehensive Income,
to the extent that these relate to an enhancement in the value of the
investments and in line with the Board's expectation that over the long term
75 per cent of the Company's investment returns will be in the form of capital
gains. The incentive fee payable to the Manager (as set out in note 3) is
charged wholly through the Capital column.
Tax relief is allocated to the Capital Reserve using a marginal basis.
Incentive Fee
The incentive fee is accounted for on an accruals basis. As further detailed
in note 3, the incentive fee is calculated as 20 per cent of the amount by
which the cumulative dividends per ordinary share paid as at the last business
day in December in any year, plus the average of the Company's middle market
price per ordinary share on the five dealing days prior to that day, exceeds
the Hurdle (as defined in note 3), multiplied by the number of ordinary shares
issued and the ordinary shares under option. At the end of each reporting
period, an accrual is recognised based upon the cumulative dividends per
ordinary share paid to the reporting date, plus the average of the Company's
middle market price per ordinary share on the five dealing days prior to the
reporting date. The incentive fee is charged wholly through the Capital
column.
Cash, Cash Equivalents and Current Asset Investments
Cash at bank comprises cash at hand and bank deposits with an original
maturity of less than three months, readily convertible to a known amount of
cash and subject to an insignificant risk of changes in value.
Current asset investments comprise money market funds and balances held in
fixed term deposits which mature after three months.
Cash and cash equivalents include cash at hand, money market funds and bank
deposits repayable on up to three months' notice as these meet the definition
in IAS 7 'Statement of cash flows' of a short-term highly liquid investment
that is readily convertible into known amounts of cash and subject to
insignificant risk of change in value.
Balances held in fixed term deposits which mature after three months are not
classified as cash and cash equivalents, as they do not meet the definition in
IAS 7 'Statement of cash flows' of short-term highly liquid investments.
Cash and cash equivalents are valued at amortised cost, which equates to fair
value.
Cash flows classified as "operating activities" for the purposes of the
Statement of Cash Flows are those arising from the Revenue column of the
Statement of Comprehensive Income, together with the items in the Capital
column that do not fall to be easily classified under the headings for
"investing activities" given by IAS 7 'Statement of cash flows', being
management and incentive fees payable to the Manager. The capital cash flows
relating to the acquisition and disposal of investments are presented under
"investing activities" in the Statement of Cash Flows in line with both the
requirements of IAS 7 and the positioning given to these headings by general
practice in the industry.
Share Capital and Reserves
Share Capital
This reserve contains the nominal value of all shares allotted under offers
for subscription.
Share Premium Account
This reserve contains the excess of gross proceeds less issue costs over the
nominal value of shares allotted under offers for subscription, to the extent
that it has not been cancelled.
Capital Reserve
The following are included within this reserve:
· Gains and losses on realisation of investments;
· Realised losses upon permanent diminution in value of investments;
· Capital income from investments;
· 75 per cent of the Manager's fee expense, together with the related
taxation effect to this reserve in accordance with the policy on expenses in
note 1 of the financial statements;
· Incentive fee payable to the Manager;
· Capital dividends paid to shareholders;
· Applicable share issue costs;
· Purchase and holding of the Company's own shares; and
· Credits arising from the cancellation of any share premium account.
Investment Holding Gains and Losses Reserve
Increases and decreases in the valuation of investments held at the year end
are accounted for in this reserve, except to the extent that the diminution is
deemed permanent.
Revenue Reserve
This reserve includes all revenue income from investments along with any costs
associated with the running of the Company - less 75 per cent of the Manager's
fee expense as detailed in the Capital Reserve above.
Taxation
Due to the Company's status as a venture capital trust and the continued
intention to meet the conditions required to comply with Chapter 3 Part 6 of
the Income Tax Act 2007, no provision for taxation is required in respect of
any realised or unrealised appreciation of the Company's investments which
arises. Deferred tax is recognised on all temporary differences that have
originated, but not reversed, by the balance sheet date.
Deferred tax assets are only recognised to the extent that they are regarded
as recoverable. Deferred tax is calculated at the tax rates that are
expected to apply when the asset is realised. Deferred tax assets and
liabilities are not discounted.
Dividends Payable
Dividends payable are recognised only when an obligation exists. Interim and
special dividends are recognised when paid and final dividends are recognised
when approved by shareholders in general meetings.
Segmental Reporting
In accordance with IFRS 8 'Operating segments' and the criteria for
aggregating reportable segments, segmental reporting has been determined by
the directors based upon the reports reviewed by the Board. The directors are
of the opinion that the Company has engaged in a single operating segment -
investing in equity and debt securities within the United Kingdom - and
therefore no reportable segmental analysis is provided.
Critical Accounting Estimates and Judgements
The preparation of financial statements in conformity with generally accepted
accounting practice requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results may ultimately
differ from those estimates. The estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year are those used to
determine the fair value of investments at fair value through profit or loss,
as disclosed in note 7 to the financial statements.
The fair value of investments at fair value through profit or loss is
determined by using valuation techniques. As explained above, the Board uses
its judgement to select from a variety of methods and makes assumptions that
are mainly based on market conditions at each balance sheet date.
The Board uses its judgement to select the appropriate method for determining
the fair value of investments through profit or loss.
2. Income
2022 2021
£000 £000
Dividends from unquoted companies 642 328
Interest on loans to unquoted companies 206 273
Income from unquoted portfolio 848 601
Income from listed investment funds 22 -
Income from investments held at fair value through profit or loss 870 601
Interest on bank deposits 205 60
1,075 661
3. Administrative Expenses
2022 2021
£000 £000
Manager's fee 1,786 1,492
Administration fee 75 70
Total payable to YFM Private Equity Limited 1,861 1,562
Incentive fee 635 4,407
Other expenses:
General expenses 120 63
Directors' remuneration 106 96
Listing and registrar fees 68 55
Auditor's remuneration - audit fees (excluding irrecoverable VAT) 62 41
Trail commission 59 33
Printing 40 34
Irrecoverable VAT 43 25
2,994 6,316
Fair value movement related to credit risk (299) -
2,695 6,316
Ongoing charges figure 2.08% 2.16%
Directors' remuneration comprises only short term benefits including social
security contributions of £10,000 (2021: £8,000).
The directors are the Company's only key management personnel.
No fees are payable to the auditor in respect of other services (2021: £nil,
apart from costs of £12,000 for audit-related services which were charged to
the share premium account).
YFM Private Equity Limited has acted as Manager and performed administrative
and secretarial duties for the Company under an agreement dated 28 November
2000, superseded by an agreement dated 31 October 2005 and as varied by
agreements dated 8 December 2010, 26 October 2011, 16 November 2012, 17
October 2014, 7 August 2015 and 13 November 2019 (the "IA"). The agreement
may be terminated by not less than twelve months' notice given by either party
at any time. Under an Investment Agreement dated 13 November 2019, YFM
Private Equity Limited was appointed as the Company's Alternative Investment
Fund Manager. As a result, the Company was de-registered by the Financial
Conduct Authority as a Small Registered Alternative Fund Manager on 24 March
2021 and responsibility for the custody of the Company's investments passed to
YFM Private Equity Limited on that date.
The key features of the agreement are:
· YFM Private Equity Limited receives a Manager's fee, payable
quarterly in advance, calculated at half-yearly intervals as at 30 June and 31
December. The fee is allocated between capital and revenue as described in
note 1;
· The annual Manager's fee payable to the Manager is 1.0 per cent on
all surplus cash, defined as all cash above £5 million. The annual fee on all
other assets will be 2.0 per cent of net assets per annum. Based on the
Company's net assets at 31 December 2022 of £111,869,000, and cash of
£28,274,000 at that date this equates to approximately £2,002,000 per annum;
· YFM Private Equity Limited shall bear the annual operating costs of
the Company (including the Manager's fee set out above but excluding any
payment of the performance incentive fee, details of which are set out below
and excluding VAT and trail commissions) to the extent that those costs exceed
2.9 per cent of the net asset value of the Company; and
· under the IA, YFM Private Equity Limited also provides administrative
and secretarial services to the Company for a fee of £46,000 per annum plus
annual adjustments to reflect movements in the Retail Prices Index. This fee
is charged fully to revenue, and totalled £75,000 for the year ended 31
December 2022 (2021: £70,000).
When the Company makes investments into its unquoted portfolio, the Manager
charges that investee an advisory fee. With effect from 1 October 2013, if
the average of relevant fees exceeds 3.0 per cent of the total invested into
new portfolio companies and 2.0 per cent into follow-on investments over the
Company's financial year, this excess will be rebated to the Company. As at 31
December 2022, the Company was due a rebate from the Manager of £nil (2021:
£nil).
Monitoring and directors' fees the Manager receives from the investee
companies are limited to a maximum of £40,000 (excluding VAT) per annum per
company.
The total remuneration payable to YFM Private Equity Limited under the IA in
the year was £1,861,000 (2021: £1,562,000).
Under the IA, YFM Private Equity Limited is entitled to receive fees from
investee companies in respect of the provision of non-executive directors and
other advisory services. YFM Private Equity Limited is responsible for paying
the due diligence and other costs incurred in connection with proposed
investments which for whatever reason do not proceed to completion. In the
year ended 31 December 2022, the fees receivable by YFM Private Equity Limited
from investee companies which were attributable to advisory and directors' and
monitoring fees amounted to £2,026,000 (2021: £1,235,000).
Under the Subscription Rights Agreement dated 23 November 2001 between the
Company, YFM Private Equity Limited and Chord Capital Limited ("Chord"
formerly Generics Asset Management Limited), as amended by an agreement
between those parties dated 31 October 2005, YFM Private Equity Limited and
Chord have a performance-related incentive, structured so as to entitle them
to an amount equivalent to 20 per cent of the amount by which the cumulative
dividends per ordinary share paid as at the last business day in December in
any year, plus the average of the middle market price per ordinary share on
the five dealing days prior to that day, exceeds 120 pence per ordinary share,
multiplied by the number of ordinary shares issued and the ordinary shares
under option (if any) (the "Hurdle"). Under the terms of the Subscription
Rights Agreement, once the Hurdle has been exceeded it is reset at that value
going forward, which becomes the new Hurdle. Any subsequent exercise of these
rights will only occur once the new Hurdle has been exceeded. The subscription
rights are exercisable in the ratio 95:5 between the Manager and Chord Capital
Limited.
By a Deed of Assignment dated 19 December 2003 (together with a supplemental
agreement dated 5 October 2005), the benefit of the YFM Private Equity Limited
subscription right was assigned to YFM Private Equity Limited Carried Interest
Trust (the "Trust"), an employee benefit trust formed for the benefit of
certain employees of YFM Private Equity Limited and associated companies.
Pursuant to a deed of variation dated 16 November 2012 between the Company,
the trustees of the Trust and Chord, the Subscription Rights Agreement was
varied so that the subscription rights will be exercisable in the ratio of
95:5 between the trustees of the Trust and Chord. Pursuant to a deed of
variation dated 5 August 2014 the Subscription Rights Agreement was varied so
that the recipient was changed from the Trust to YFM Private Equity Limited.
Pursuant to a deed of variation dated 13 November 2019 the Subscription Rights
Agreement was varied so that the recipients can elect to receive the incentive
in the form of shares or cash.
As at 31 December 2021 the total of cumulative cash dividends paid and
mid-market price was 135.5 pence per ordinary share. Consequently the Hurdle
was exceeded and a performance related incentive of £4,407,000 for the year
ended 31 December 2021 was paid. The Hurdle for the year ending 31 December
2022 was reset at 135.5 pence per ordinary share.
As at 31 December 2022, the total of cumulative cash dividends paid and
mid-market price was 137.25 pence per ordinary share. Consequently the
Hurdle was exceeded and a performance related incentive of £635,000 for the
year ended 31 December 2022 is payable. The Hurdle for the year ending 31
December 2023 is reset at 137.25 pence per ordinary share.
If the IA is terminated, the beneficiaries of the Incentive Agreement will
continue to be entitled to the Incentive Payment. The Incentive Payment will
be modified so as to entitle the recipients to an Incentive Payment that is
fair, having regard to all the circumstances.
Under the terms of the offer launched with British Smaller Companies VCT plc
on 22 September 2021, YFM Private Equity Limited was entitled to 3.0 per cent
of gross subscriptions, (3.5 per cent for Applications received from
Applicants who did not invest their money through a financial intermediary
advisor and invested directly into the Company) less commissions payable to an
execution-only broker or platform. The net amount paid to YFM Private Equity
Limited under this offer amounted to £744,000.
Under the terms of the offer launched with British Smaller Companies VCT plc
on 30 November 2022, YFM Private Equity Limited will be entitled to 3.0 per
cent of gross subscriptions, (3.5 per cent for Applications received from
Applicants who did not invest their money through a financial intermediary
advisor and invested directly into the Company) less commissions payable to an
execution-only broker or platform.
The details of directors' remuneration are set out in the Directors'
Remuneration Report on page 50 of the annual report under the heading
"Directors' Remuneration for the year ended 31 December 2022 (audited)".
4 Taxation
2022 2021
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Profit (loss) before taxation 354 5,899 6,253 (130) 20,519 20,389
Profit (loss) before taxation multiplied by standard rate of corporation tax 67 1,121 1,188 (25) 3,899 3,874
in UK of 19% (2021 :19%)
Effect of:
UK dividends received (172) - (172) (62) - (62)
Non-taxable profits on investments - (1,496) (1,496) - (4,948) (4,948)
Deferred tax not recognised 105 375 480 87 1,049 1,136
Tax charge - - - - - -
The Company has no provided or unprovided deferred tax liability in either
year.
Deferred tax assets of £3,703,000 (2021: £3,072,000) calculated at 25%
(2021: 25%) in respect of unrelieved management expenses (£14.81 million as
at 31 December 2022 and £12.29 million as at 31 December 2021) have not been
recognised as the directors do not currently believe that it is probable that
sufficient taxable profits will be available against which assets can be
recovered.
Due to the Company's status as a venture capital trust and the continued
intention to meet with the conditions required to comply with Section 274 of
the Income Tax Act 2007, the Company has not provided for deferred tax on any
capital gains or losses arising on the revaluation or realisation of
investments.
5. Dividends
Amounts recognised as distributions to equity holders in the period to 31
December:
2022 2021
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
Interim dividend for the year ended 31 December 2022 of 1.5p (2021: 1.5p) per - 2,718 2,718 - 1,934 1,934
ordinary share
Second interim dividend for the year ended 31 December 2022 of 1.5p (2021: - 2,726 2,726 1,559 544 2,103
1.5p) per ordinary share
Third interim dividend for the year ended 31 December 2021 of 5.0p per - - - - 6,978 6,978
ordinary share
- 5,444 5,444 1,559 9,456 11,015
Shares allotted under DRIS (1,085) (2,250)
Dividends paid in Statement of Cashflows 4,359 8.765
The first interim dividend of 1.5 pence per ordinary share was paid on 6 May
2022 to shareholders on the register as at 1 April 2022.
The second interim dividend of 1.5 pence per ordinary share was paid on 3
October 2022 to shareholders on the register as at 2 September 2022.
A special dividend of 2.25 pence per ordinary share in respect of the year
ending 31 December 2023, amounting to £4,097,000, was paid on 11 January 2023
to shareholders on the register on 18 November 2022. An interim dividend of
1.5 pence per ordinary share, in respect of the year ending 31 December 2023,
will be paid on 26 June 2023 to shareholders on the register on 12 May 2023.
These dividends were not recognised in the year ended 31 December 2022 as the
obligations did not exist at the balance sheet date.
6. Basic and Diluted Earnings per Ordinary Share
The basic and diluted earnings per ordinary share is based on the profit after
tax attributable to shareholders of £6,253,000 (2021: £20,389,000) and
181,163,554 (2021: 138,592,343) ordinary shares being the weighted average
number of ordinary shares in issue during the year.
The basic and diluted revenue earnings (loss) per ordinary share is based on
the revenue profit for the year attributable to shareholders of £354,000
(2021: loss of £130,000) and 181,163,554 (2021: 138,592,343) ordinary shares
being the weighted average number of ordinary shares in issue during the year.
The basic and diluted capital earnings per ordinary share is based on the
capital profit for the year attributable to shareholders of £5,899,000 (2021:
£20,519,000) and 181,163,554 (2021: 138,592,343) ordinary shares being the
weighted average number of ordinary shares in issue during the year.
During the year the Company allotted 1,826,028 new ordinary shares in respect
of its DRIS and 40,224,521 new ordinary shares from the fundraising.
The Company has also repurchased 2,737,038 of its own shares in the year, and
these shares are held in the capital reserve. The total of 18,666,812
treasury shares has been excluded in calculating the weighted average number
of ordinary shares for the period. The Company has no securities that would
have a dilutive effect and hence basic and diluted earnings per ordinary share
are the same.
The Company has no potentially dilutive shares and consequently, basic and
diluted earnings per ordinary share are equivalent in both the year ended 31
December 2022 and 31 December 2021.
7. Financial Assets at Fair Value though Profit or Loss
- Investments
IFRS 13, in respect of financial instruments that are measured in the balance
sheet at fair value, requires disclosure of fair value measurements by level
of the following fair value measurement hierarchy:
Level 1: quoted prices in active markets for identical assets or liabilities.
The fair value of financial instruments traded in active markets is based on
quoted market prices at the balance sheet date. A market is defined as a
market in which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on an ongoing
basis. The quoted market price used for financial assets held by the Company
is the current bid price. These instruments are included in level 1 and
comprise fixed income securities classified as held at fair value through
profit or loss.
Level 2: the fair value of financial instruments that are not traded in an
active market is determined by using valuation techniques. These valuation
techniques maximise the use of observable market data where it is available
and rely as little as possible on entity specific estimates. If all
significant inputs required to fair value an instrument are observable, the
instrument is included in level 2. The Company held no such instruments in the
current or prior year.
Level 3: the fair value of financial instruments that are not traded in an
active market (for example, investments in unquoted companies) is determined
by using valuation techniques such as revenue and earnings multiples. If one
or more of the significant inputs is not based on observable market data, the
instrument is included in level 3. The majority of the Company's investments
fall into this category at 31 December 2022.
Each investment is reviewed at least quarterly to ensure that it has not
ceased to meet the criteria of the level in which it is included at the
beginning of each accounting period. The change in fair value for the current
and previous year is recognised through profit or loss.
There have been no transfers between these classifications in either period.
All items held at fair value through profit or loss were designated as such
upon initial recognition.
Valuation of Investments
Full details of the methods used by the Company are set out in note 1. Where
investments are held in listed investment funds, fair value is set at the
market bid price.
Movements in investments at fair value through profit or loss during the year
to 31 December 2022 are summarised as follows:
IFRS 13 measurement classification Level 3 Level 1
Unquoted Listed Investment Funds Total
Investments Investments
£000 £000 £000
Opening cost 42,037 - 42,037
Opening investment holding gain* 27,982 - 27,982
Opening fair value at 1 January 2022 70,019 - 70,019
Additions at cost 16,226 1,752 17,978
Capitalised income 40 - 40
Disposal proceeds (12,929) - (12,929)
Net profit on disposal 3,586 - 3,586
Change in fair value 1,451 (156) 1,295
Foreign exchange gain 2,992 - 2,992
Closing fair value at 31 December 2022 81,385 1,596 82,981
Closing cost 49,494 1,752 51,246
Closing investment holding gain* 31,891 (156) 31,735
Closing fair value at 31 December 2022 81,385 1,596 82,981
*Following the merger between the Company and British Smaller Technologies
Company VCT plc a total of £975,000 of negative goodwill was recognised in
the investment holding gains and losses reserve in respect of the investments
acquired. The relevant amount per investment is realised at the point of
disposal to the capital reserve. At 31 December 2022 a total of £27,000
(2021: £27,000) was held on investments yet to be realised in the investment
holdings gains and losses reserve.
There were no individual reductions in fair value during the year that
exceeded 5 per cent of the total assets of the Company (2021: £nil).
Level 3 valuations include assumptions based on non-observable market data,
such as discounts applied either to reflect changes in fair value of financial
assets held at the price of recent investment, or to adjust revenue and
earnings multiples. IFRS 13 requires an entity to disclose quantitative
information about the significant unobservable inputs used. Of the Company's
level 3 investments, 75 per cent are held on a revenue multiple basis and 12
per cent on an earnings multiple basis, which have significant judgement
applied to the valuation inputs. The table on page 76 of the annual report
sets out the range of Revenue Multiple (RM), Earnings Multiple (EM) multiple,
and discounts applied in arriving at investments valued on these bases. The
remaining 13 per cent are valued based on cost or price of recent investment,
reviewed for change in fair value (7 per cent), net asset value reviewed for
change in fair value (3 per cent) and expected sale proceeds (3 per cent).
The following disposals took place in the year:
Net proceeds from sale Cost Opening carrying value as at 1 January 2022 Profit (loss) on disposal
£000 £000 £000 £000
Unquoted investments:
Springboard Research Holdings Limited 5,782 1,881 3,959 1,823
Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) 4,080 1,956 3,163 917
Vuealta Group Limited* 3,067 1,970 2,061 1,006
Arraco Global Markets Limited* - 1,780 160 (160)
Seven Technologies Holdings Limited - 1,222 - -
Total proceeds received** 12,929 8,809 9,343 3,586
* opening carrying value includes further investments made during the year.
** The total from disposals in the year in the table above is £12,929,000
whereas that shown in the Statement of Cash Flows is £12,933,000. The
difference comprises proceeds of £4,000 which were received relating to a
prior year disposal.
8. Basic and Diluted Net Asset Value per Ordinary Share
The basic and diluted net asset value per ordinary share is calculated on
attributable assets of £111,869,000 (2021: £87,375,000) and 181,468,710
(2021: 142,155,199) ordinary shares in issue at the year end.
The treasury shares have been excluded in calculating the number of ordinary
shares in issue at 31 December 2022.
The Company has no potentially dilutive shares and consequently, basic and
diluted net asset values per ordinary share are equivalent in both the years
ended 31 December 2022 and 31 December 2021.
9. Total Return per Ordinary Share
The Total Return per ordinary share is calculated on cumulative dividends paid
of 81.0 pence per ordinary share (2021: 78.0 pence per ordinary share) plus
the net asset value as calculated per note 8 above.
10. Financial Commitments
There are no financial commitments at 31 December 2022 or 31 December 2021.
11. Related Party Transactions
Fees payable during the year to the directors and their interests in shares of
the Company are disclosed within the Directors' Remuneration Report on page 50
of the annual report. There were no amounts outstanding and due to the
directors at 31 December 2022 (2021: £nil).
12. Events after the Balance Sheet Date
Having previously assessed its expected cash requirements, the Company
announced a new share offer on 30 November 2022, alongside British Smaller
Companies VCT plc, with the intention of raising up to £75 million, in
aggregate which included an over-allotment facility of £25 million, in
aggregate. Gross Applications exceeding £62.5 million have been received as
at the date of this report, of which £23.5 million relate to the Company. The
related allotment will take place in early April 2023.
Since year-end, the Company has invested £2.4 million into DrDoctor, a
patient engagement and communications software platform. The Company also
realised its investment in Wakefield Acoustics at the value recognised at 31
December 2022 (£0.6 million).
13. Contingent Liability
As set out in note 3 above, the Manager and Chord Capital are entitled to a
performance-related incentive fee if the cumulative dividends per ordinary
share paid as at the last business day of December in any year, plus the
average of the middle market price per ordinary share of the five dealing days
prior to that day, exceeds a Hurdle, which is set at 137.25 pence per ordinary
share for the year ending 31 December 2023. The value of the incentive fee
is 20 per cent of the excess to the Hurdle, multiplied by the number of
ordinary shares issued. Excluding the payment of dividends, the reported net
assets per ordinary share have increased by 2.8 pence per ordinary share since
31 December 2022. If this increase were to flow through to an increase in
the middle market price per ordinary share in the last five dealing days of
December 2023, at a discount of 5 per cent to the net asset value per ordinary
share, then an incentive fee of approximately £872,000 would be payable at 31
December 2023 based on the number of shares in issue at 20 March 2023.
14. Annual Report and Accounts
Copies of the statutory accounts for the year ended 31 December 2022 will
shortly be submitted to the National Storage Mechanism and will be available
to the public for viewing online at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) . They can also
shortly be viewed on the Company's website at http://www.bscfunds.com
(http://www.bscfunds.com) . Hard copies of the statutory accounts for the
year to 31 March 2022 will be distributed by post or electronically to
shareholders and will thereafter be available to members of the public from
the Company's registered office.
15. Directors
The directors of the Company are Mr P C Waller, Ms B L Anderson and Mr R S
McDowell.
16. Annual General Meeting
The Annual General Meeting of the Company will be held at 2:30 pm on 15 June
2023 at 8-10 Hill Street, London, W1J 5NG. Full details of the agenda for
this meeting are included in the Notice of the Annual General Meeting on page
90 of the annual report.
17. Interim Dividend for the Year Ending 31 March 2023
The directors are pleased to announce the payment of an interim dividend for
the year ending 31 December 2023 of 1.5 pence per ordinary share ("Interim
Dividend").
The Interim Dividend will be paid on 26 June 2023 to those shareholders on the
Company's register at the close of business on 12 May 2023. The ex-dividend
date will be 11 May 2023.
The directors are not proposing a final dividend for the year ended 31
December 2022.
18. Dividend Re-investment Scheme
The Company operates a dividend re-investment scheme ("DRIS"). The latest
date for receipt of new or updated DRIS elections in respect of the Interim
Dividend is the close of business on 26 May 2023.
19. Inside Information
The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulations
(EU No. 596/2014). Upon the publication of this announcement via Regulatory
Information Service this inside information is now considered to be in the
public domain.
For further information, please contact:
David Hall YFM Private
Equity Limited Tel: 0113 244
1000
Alex Collins Panmure Gordon
(UK) Limited Tel: 0207 886 2767
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