REG - Calculus VCT - Publication of Circular and Notice of GM

Calculus VCTAnnouncement

17/07/2023 15:15

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RNS Number : 2692G  Calculus VCT PLC  17 July 2023

Publication of Circular and Notice of General Meeting

 

Recommended Proposals to approve entry into a new

Performance Incentive Scheme with Calculus Capital Limited ("Related Party
Transaction")

 

17 July 2023

Calculus VCT plc announces that a circular relating to a proposed new
Performance Incentive Agreement, which is a related party transaction under
the Listing Rules, has been approved by the Financial Conduct Authority and is
being published today.

A copy of the Circular will be available for download on the Company's website
https://calculuscapital.com/investment-opportunities/calculus-vct/investor-information/
(https://calculuscapital.com/investment-opportunities/calculus-vct/investor-information/)
from the date of this announcement up to and including the date of the General
Meeting and for the duration of the General Meeting.

In addition, a copy of the Circular will shortly be submitted to the National
Storage Mechanism and will be available for inspection
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .

A notice convening the General Meeting is set out at the end of the Circular
which proposes a single Resolution to approve the Related Party Transaction.
The General Meeting will be held immediately following the conclusion of the
Company's Annual General Meeting scheduled for 12.00 p.m. on 21 August 2023 at
1 Warwick, 1 Warwick Street, London W1B 5LR.

 

The Circular is expected to be posted to Shareholders by 28 July 2023 and
extracts from the Chairman's letter to Shareholders are set out below.

 

Enquiries:

Calculus Capital Limited, Manager

020 7493 4940

Madeleine Ingram/Francesca Rayneau

 

Beaumont Cornish Limited, Sponsor

020 7628 3396

Roland Cornish

Recommended proposals to enter into a new performance incentive agreement with
the Company's manager, Calculus Capital Limited ("Calculus Capital")

 

The Directors' Report contained in the Company's published annual accounts for
the year ended 28 February 2022 referred to the board of the Company ("the
Board") having recognised that the existing performance fee arrangements with
the Company's manager, Calculus Capital, were no longer compatible with the
current strategy of the Company. The Board resolved to undertake a review of
the existing arrangements, and comparable arrangements within the VCT market,
and communicate any proposed changes in due course.

Following the conclusion of that process, I am writing to you to seek
Shareholders' approval for a new performance incentive agreement with Calculus
Capital, to replace the existing incentive agreement.

As further set out below, it is proposed that the existing arrangements, which
permit incentive payments to be made only following the payment of dividends
totalling 105p per Ordinary Share, be replaced with an incentive scheme based
instead on the achievement of realised gains made through the sale of
investments by the Company. For incentive payments to become due under the
proposed arrangements, two total return hurdles must also be satisfied and no
payment may be made to the extent it would cause either of those hurdles not
to be met.

Description of existing performance incentive arrangements

Under the current arrangements, Calculus Capital would be entitled to receive
a performance incentive payment equal to 20% of distributions made by the
Company to Shareholders once those Shareholders have received distributions
equal to 105p per share. Distributions for these purposes are defined as
dividends paid in cash and the consideration paid by the Company, on a per
share basis, where it buys back shares from its Shareholders.

These arrangements were conceived when the Company was in its early stages as
a 'structured products' VCT under the joint management of Investec Structured
Products as well as Calculus Capital and operating in a very different market,
regulatory environment and with a different strategy and return profile. No
performance incentive has been paid historically under these arrangements and
the Board do not consider any payment to be achievable in the foreseeable
future.

Description of proposed new performance incentive arrangements

Under the proposed new arrangements, the incentive fees are only payable to
Calculus Capital if:

·      the Company's cumulative realised investment gains are greater
than its cumulative realised investment losses since inception;

·      the total return to Shareholders, made up of net asset value
("NAV") per share and dividends per share paid, ("the Total Return") is
positive over a rolling five-year performance period; and

·      the Total Return for the year preceding any payment has increased
by at least 4.5% from the NAV per share at the end of the previous year.

If all three conditions are met, a performance fee equal to 20% of the excess
realised gains (less previous performance incentive payments made) is payable
to Calculus Capital. Excess gains are calculated simply by subtracting
realised losses made on the disposal or write off of investments by the
Company from realised gains made on the disposal of investments by the
Company.

By way of illustration, if the new performance incentive arrangements were to
have been in place as at the date of this document, the Company would have
achieved excess cumulative realised gains of £326,997. However, this would
not have resulted in an initial performance payment to Calculus Capital of
£65,400 (ie 20% for such excess realised gains) being due in respect of the
period ended on 28 February 2023 since both of the Total Return conditions set
out above were not met at the relevant times.

Rationale for the revised performance incentive arrangements
The existing performance incentive fee arrangement has been substantively
unchanged since 2010, having been conceived of when the Company was in its
first years of operation, with a co-manager in the form of Investec Structured
Products, and in a period when the regulatory landscape for VCTs was markedly
different.

The purpose of any performance fee arrangement with a fund manager is to
incentivise that manager to perform, to enable it to attract and retain key
staff and to align the interests of the manager with those of investors. The
existing arrangements are not achieving those goals and so it is the opinion
of the Board that they need to be refreshed.

 

With that in mind, we have surveyed the market for other arrangements which we
believe are well structured to achieve the above aims and consulted with
leading market commentators on what they consider to be optimal in terms of
providing protection and value for money for shareholders.

 

A key element of the proposed new arrangements is that performance incentive
fees would only be paid out based on realised gains made on disposals. A
common weakness of certain of the VCT performance fee structures we reviewed,
in the Board's opinion, is where these are based simply upon unrealised
"paper" gains.

 

By combining a requirement for overall positive returns, the achievement of a
4.5% value hurdle in the lead up to any calculation, and the important
requirement that fees are only then payable where actual, realised gains
exceed realised losses, the Board believe that the proposed arrangements
ensure shareholders' position is well protected while allowing the manager to
be appropriately incentivised.

 

Related Party Transaction

As Calculus Capital is the investment manager of the Company, the entry into
the new performance incentive arrangements described above will constitute a
related party transaction under the listing rules of the FCA (the "Listing
Rules") (the "Related Party Transaction"). Accordingly, the approval of
Shareholders for the Company's entry into the Related Party Transaction is
required in accordance with Listing Rule 11.1.7(3).

 

John Glencross, as the chief executive of Calculus Capital and a
non-independent director, did not take part in the Board's consideration of
the proposed new arrangements, nor vote on the Board's decision to put the
Related Party Transaction to Shareholders for their approval at the General
Meeting.

 

A notice convening the General Meeting is set out at the end of this document
which proposes a single Resolution to approve the Related Party Transaction.
The General Meeting will be held immediately following the conclusion of the
Company's Annual General Meeting scheduled for 12.00 p.m. on 21 August 2023 at
1 Warwick, 1 Warwick Street, London W1B 5LR.

 

The Board, which has been so advised by Beaumont Cornish Limited, the
Company's Sponsor, considers the Related Party Transaction to be fair and
reasonable insofar as the Company's shareholders are concerned. In providing
its advice to the Board, Beaumont Cornish Limited has taken into account the
Board's commercial assessment of the effects of Related Party Transaction.

 

Risk factors relating to the Related Party Transaction

If the Related Party Transaction is not approved by Shareholders, the existing
performance incentive arrangements will continue. As noted above, the Board
and Calculus Capital consider that it may be more difficult to recruit, retain
and incentivise quality investment management personnel without an appropriate
incentive scheme in place. This may affect the performance of Calculus
Capital, which may in turn impact the performance of the Company's portfolio
and, thereby, returns to Shareholders, as the ability to pay performance
incentive fees is an important component of management returns payable to an
investment manager and, accordingly, an investment executive's remuneration
package for managing a venture capital portfolio.

Recommendations
The Board are of the opinion that the Related Party Transaction to be proposed
at the General Meeting is in the best interests of the Shareholders as a whole
and unanimously recommends that you vote in favour of the Resolution.

The Board, with only the exception of John Glencross who is ineligible to vote
his shares, intend to vote, in respect of their own holdings of 37,455
Ordinary Shares (representing 0.05% of the voting rights in the Company), in
favour of the Resolution.

Under the Listing Rules, Calculus Capital as a related party is not entitled
to vote on the Resolution to be proposed at the General Meeting to approve the
Related Party Transaction. Calculus Capital does not hold any shares in the
Company and has undertaken to take all reasonable steps to ensure that its
associates shall not vote on the Resolution and to include procuring
undertakings not to vote from its employees.

 

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