Schroder BSC Social - Final Results
30/10/2023 07:00
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RNS Number : 6181R Schroder BSC Social Impact Trust 30 October 2023
Schroder BSC Social Impact Trust plc
Annual Report and Accounts
Schroder BSC Social Impact Trust plc (the "Company") hereby submits its final
results for the year ended 30 June 2023.
Highlights
The Company has generated resilient shareholder returns since inception on 22
December 2020 in a highly volatile market and continues to provide a source of
portfolio diversification for investors, along with the opportunity to make a
meaningful positive difference to communities across the UK.
· NAV of 104.90 pence per share as of 30 June 2023.
· NAV total return per share of 0.8% in the financial year ended 30 June
2023, during a period of continued downwards pressure in the wider market.
· NAV total return per share of 8.6% since inception (3.4% annualised).
· Dividend of 2.30p per share for the year, increasing 77% from 1.30p
per share for the year to 30 June 2022; dividend yield on NAV guidance
increased to 2-3% (from 1-2%).
· High impact housing portfolio remains resilient - 100% of rent
collection due by June 2023.
· £87m of capital committed to date to support 168 frontline
organisations, reaching 276,000 people, at least 94% of whom are disadvantaged
or vulnerable.
· 100% of investments align with the UN Sustainable Development Goals,
across four key impact themes, with the majority of the portfolio aimed at
reducing poverty and inequality (SDGs 1 & 10).
The Portfolio Manager will be presenting at a webinar on 31 October 2023 at
14:00. This is open to all existing and potential shareholders, who can sign
up for the webinar at:
https://registration.duuzra.com/form/SBSI23
(https://registration.duuzra.com/form/SBSI23)
The Company's Report and Accounts for the year ended 30 June 2023 is also
being published in hard copy format and an electronic copy will shortly be
available to download from the Company's website:
https://www.schroders.com/en-gb/uk/individual/funds-and-strategies/investment-trusts/schroder-bsc-social-impact-trust-plc/
(https://www.schroders.com/en-gb/uk/individual/funds-and-strategies/investment-trusts/schroder-bsc-social-impact-trust-plc/)
Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/6181R_1-2023-10-28.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/6181R_1-2023-10-28.pdf)
Enquiries:
Augustine Chipungu
(Press)
020 7658 6000
Matthew Riley (Company
Secretary)
020 7658 6000
Schroder BSC Social Impact Trust plc
Chair's Statement
I am pleased to present the third annual report of Schroder BSC Social Impact
Trust plc ("the Company"), covering the year ended 30 June 2023.
Following a period of high market volatility, the Bank of England's monetary
tightening policy appears to have been successful in bringing inflation back
in single-digit territory in 2023. The "worst-case" recessionary concerns of
late 2022 appear to have been (narrowly) averted, and we start seeing early
signs of interest rate stabilisation, alongside hopes of reducing inflation.
However, the full impact of the higher inflation and interest rates
environment are only beginning to be felt and will have long-term consequences
for the cost of living in the UK, putting pressure on the affordability of
essential items like food, energy, and housing.
It is estimated that UK households are facing the largest fall in living
standards since records began in the 1950s, and low-income households are the
most affected. In this challenging environment, the social impact created by
the Company's investments is needed more than ever, with many investments
providing solutions to the cost-of-living crisis, such as increasing the
supply of affordable housing and helping households manage energy costs
through retrofit businesses and community renewables. In a time of constrained
government spending, the Company's investments targeting innovation in public
service commissioning through Social Outcomes Contracts generate significant
savings for the Government 1 (#_ftn1) .
The Board believes the Company offers investors a valuable source of portfolio
diversification, through access to a unique mix of private market investments,
with the dual objectives of providing long term capital growth and income and
serving as a source of permanent funding for organisations dedicated to
positive social impact.
Furthermore, the Board, AIFM and Portfolio Manager are committed to advancing
impact investing in the UK, through events and publications aimed at
increasing investors' understanding of best practices and supporting them in
making impact allocations in their portfolios. We build relationships and
maintain an active dialogue with the investment community, actively seeking to
understand how the Company can best serve investors' requirements in
committing capital to high quality, high impact investments.
We understand that our investors want the Company to grow, both through NAV
asset growth and fresh capital raises, and it is a stated high priority for
the Board to take actions to make this possible. We welcome conversations with
investors interested in helping us to achieve this goal of growing the
Company.
Financial performance
The Company has delivered resilient NAV total returns since inception on
22 December 2020, in a highly volatile market. Net asset value ("NAV") total
return for the year ended 30 June 2023 was 0.8% (2022: 1.6%), resulting in a
NAV total return since inception of 8.6% (3.4% annualised).
Overall, the Company's NAV per share fell from 105.4p to 104.9p during the
year ended 30 June 2023, after fees which included an interim dividend
payment of 1.30p per share paid on 6 December 2022 (2021: 0.57p).
The total share price return during the year ended 30 June 2023 was -11.0%
(2022: -4.7%) as the Company's shares were not immune to negative investor
sentiment towards equities resulting in a wider discount to NAV. The Company
moved from trading at a premium to NAV to a discount after the mini budget of
September 2022, and traded at an average discount of 7.3% in the twelve months
to 30 June 2023, narrower than the average investment trust discount of 13.2%
over the same period.
A more detailed analysis of performance and additional information on
investments in the period under review are included in the Portfolio Manager's
Report. I would particularly like to highlight that our Portfolio Manager has
demonstrated the benefits of extensive experience and an impact-led approach
to investing in social housing this year. Our portfolio has shown resilience
within a turbulent market, and should the Company raise more capital, we are
well positioned to deploy it responsibly in this important sector.
Social impact performance
The Company published its second Impact Report on 29 June 2023, showcasing
the meaningful roles our investees have played in communities across the UK
during the year, the engagement of our Portfolio Manager to support their
success, and our impact management methodology.
As of the date of the Impact Report the Company had committed £87m, financing
168 organisations and reaching 276,000 people, of whom at least 94% were from
disadvantaged and vulnerable backgrounds. The Company's investments helped
fund over 27,000 affordable homes through the High Impact Housing asset class
and generated over £98m of near-term value as savings for government and
households. The full report is available on the Company's website.
The Company's investments are also contributing to addressing the specific
social challenges created by rising energy costs. For example, Agility Eco (in
the Bridges Evergreen portfolio) is a leading installer of energy efficiency
improvements for low-income households. Man Community Housing Fund received
planning permission for a development of 226 zero carbon, 100% affordable
homes. Heart of England Community Energy (backed by Triodos UK and the
Community Investment Fund) generates enough power for 4,500 homes as well as
providing wider community benefits.
More detail can be found in the Impact Report section on pages 29 to 30 of
the 2023 Annual Report and Accounts. We continue to welcome your feedback on
the report, to help guide our communications with shareholders about the
frontline work of our investees and our impact management methodology.
The Board was privileged in May 2023 to see first hand the valuable work that
our investees are undertaking in Hull and together with representatives from
the Portfolio Management team visited Hull Women's Network, an organisation
helping women and their children escape domestic abuse, and Hull and East
Yorkshire Mind, providing support services to individuals and families
experiencing poor mental health. Both organisations also provide safe and
appropriate housing for people who need it most as part of their wrap-around
support services and have used social investment from the Social and
Sustainable Housing fund (in the Company's High Impact Housing portfolio) to
purchase and refurbish homes to a high standard for their beneficiaries.
The Board is keen to help our investors meet their own developing needs in
relation to impact reporting, and we welcome feedback.
Discount management
During the year to 30 June 2023 the Company's share rating ranged between a
discount to NAV of 15.3% and a premium to NAV of 1.5%. The 12-month average
discount on 30 June 2023 was 7.3% (average discount 2022: 0.5%).
The Company's share price moved to a discount to NAV in October 2022, during a
period of turbulence for UK equities. Following consultation with the Manager
and the Company's corporate broker in late 2022 the Board agreed that it was
in shareholders' best interests to commence buying back a limited number of
shares with the aim of narrowing the discount at which the shares were trading
to NAV. The Board also considers the shares an attractive investment and the
buybacks have been accretive to existing shareholders.
While the Board is conscious that buybacks shrink the size of the Company
marginally in the short-term it remains our ambition to grow the Company
through share issuance in the longer term. Addressing the discount to NAV is
considered critical to achieving this goal and the Board believes buy backs
are one of the tools to use in pursuit of this. During the year ended 30 June
2023 the Company bought back 711,720 ordinary shares for a total consideration
of £674,000. All shares were bought back at a discount to the prevailing NAV,
and were placed into Treasury for future re-issue. Should the Company's shares
reach a sufficient rating to its NAV, the Board will seek to use these shares
to issue to new and existing investors. Our Portfolio Manager has an
attractive pipeline of high impact investments, and it is the Board's ambition
to raise funds to take advantage of these opportunities for our shareholders
and to deploy further capital to create more equal life chances and build
resilient communities in the UK.
Since 30 June 2023 and up to 26 October 2023, a further 449,924 shares have
been bought back for a total consideration of £411,130.84 and placed in
Treasury.
At the forthcoming Annual General Meeting ("AGM") the Board will seek to renew
the authorities previously granted by shareholders to issue or buy back
shares. We encourage shareholders to vote in favour of these resolutions which
are described in more detail in the on pages 91 to 94 of the 2023 Annual
Report and Accounts.
Investor engagement
Another important plank in the strategy of closing the discount and ultimately
growing the Company, is active engagement with current and prospective
shareholders, which the Board and the Managers take very seriously. Webinars
and forums have been held during the year under review to shed light on the
investment approach and portfolio holdings, and to help educate and inform
investors newer to social impact investing. In particular, excellent feedback
was received about the event convened in March 2023 that focused on the UK
social housing market and the way that a high impact focus has successfully
been used to manage risk and deliver resilient returns.
I am personally keen to meet with investors who may have a desire or mandate
to allocate to social impact, as the Company aspires to be an attractive,
diversified and reliable 'go-to' partner for such portfolios. It has been
useful to hear the issues being faced by investors in this regard, and I am
grateful for the ideas shared in the meetings I have had during the year under
review and subsequently.
The Board recognises the size of the Company is a hurdle for some investors,
but we also hear from many that our strategy answers a need across a range of
investor types. Therefore, the Board is thinking creatively and proactively
about our outreach in the year ahead. I hope our events, reports, and
activities will be valuable to you, and will help broaden and deepen our
shareholder base. I look forward to more dialogue with new investors to
increase our own investor impact and accelerate the much-needed deployment of
capital into high quality, high impact investments in communities across the
UK.
Dividend
The Board has considered the amount available to distribute to investors and,
as in previous years, has declared that the Company will pay out substantially
all of its income as a dividend, resulting in a dividend of 2.30p per share
(2022: 1.30p), payable on 20 December 2023 to shareholders on the Company's
share register on 10 November 2023. This is above the target dividend of 1-2%
of net asset value communicated to investors at the initial public offering
("IPO") and the Portfolio Manager is increasing its guidance for future
dividends to yield 2-3%. The dividend of 2.30p is split between a 2.16p
interest distribution and a 0.14p equity dividend.
Continuation vote
In the Prospectus, published at the time of the IPO, the Company undertook to
provide shareholders with the opportunity to vote on the Company's
continuation should the Company's shares trade, on average, at a discount in
excess of 10% to NAV for the two-year period ending 31 December 2023 and in
any subsequent two-year period. In the event that a vote was triggered
shareholders would be provided with the opportunity to vote on whether the
Company should continue in its present form.
The Board believes that since launch the Company has established a clearly
differentiated and unique position relative to other investment companies. The
Company provides shareholders with exposure to hard to access high impact
assets and managers whilst its investments support partnerships between UK
fund managers, social organisations and the communities they serve. The Board
also believes that social impact investments should continue to provide
attractive long term investment opportunities and that the prospects for
private market social impact investments remains positive. In addition, your
Board notes that if the discount on 26 October 2023 of 13.13% were to continue
until the end of this year, then the Company's shares will have traded for the
two years ending 31 December 2023 on average at a discount of 6.79%.
Quarterly valuations
In the Half Year Report, I advised that the Company intended to increase the
frequency of its valuation points from bi-annually to quarterly to provide
increased transparency for existing and potential shareholders. Subsequently,
the quarterly NAVs in respect of 31 March and 30 June 2023 were published
and the Company will continue to publish the NAVs on a quarterly basis.
Online presentation
There will be a presentation by the Portfolio Manager at 2.00 p.m. on
Tuesday, 31 October 2023 which will be available to watch online. To sign up
to watch the presentation please click on this link:
https://registration.duuzra.com/form/SBSI23
Details on how to watch the presentation are also available on the Company's
webpage: www.schroders.com/sbsi
By using a webinar, I hope more shareholders, and interested parties will be
able to listen to and ask questions of the Portfolio Manager.
AGM
The AGM will be held on Friday, 15 December 2023 at 12.00 noon at the
offices of Schroders at 1 London Wall Place, London, EC2Y 5AU. A
presentation from the Portfolio Manager will be given at the AGM, and
attendees will also be able to ask questions in person. The presentation will
be made available on the Company's website following the meeting. Details of
the formal business of the meeting are set out in the Notice of Meeting on
pages 92 to 94 of the 2023 Annual Report and Accounts.
All shareholders are encouraged to vote by proxy in advance of the AGM and to
appoint the Chair of the meeting as their proxy. This will ensure that
shareholders' votes will be counted even if they (or any appointed proxy) are
not able to attend.
If shareholders have any questions for the Board, please write to the
Company's registered office address: Company Secretary, Schroder BSC Social
Impact Trust plc, 1 London Wall Place, London, EC2Y 5AU, or email:
amcompanysecretary@schroders.com.
For regular news about the Company, shareholders are also encouraged to sign
up to the Manager's investment trusts update by visiting the Company's
website:
https://www.schroders.com/en/uk/private-investor/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/never-miss-an-update/
Outlook
Following the volatile environment in global and UK markets, a higher
inflation, higher interest rate environment is expected to have a long-term
impact on the real economy, and the standards of living of UK households. Most
vulnerable and disadvantaged households are the most affected, at a time when
government spending is also constrained.
In this context, the services provided by the organisations funded by the
Company's investments are needed more than ever. While some of these
organisations themselves will be affected by rising cost pressures, the
organisations in the Company's portfolio have an average 30-years' track
record, having demonstrated their resilience through multiple economic cycles.
An expected election in the UK in the next twelve months introduces further
uncertainty around the policy risk. A significant portion of the Company's
portfolio is invested in organisations with government-backed revenue sources.
The Portfolio Manager mitigates policy risk by diversifying the portfolio
across policy areas, and targeting areas with broad cross-party support, such
as housing, health and social care, and energy resilience.
Despite the challenging market environment, the social investment market in
the UK grew by 18% to £9.4bn in 2022, according to the most recent annual
market sizing exercise published by Big Society Capital 2 (#_ftn2) . The
Board believes that the Company remains well positioned to lead and benefit
from further market growth, as the Portfolio Manager continues to see an
expanding and maturing pipeline of investment opportunities.
One of these opportunities is in very advanced stages, and we expect the
Portfolio Manager to fully commit the capital available (following partial
exits and capital repayments from the existing portfolio) by early 2024. This
opportunity would increase the portfolio exposure to the "just transition to
net zero" impact theme and is expected to provide attractive returns to
investors.
In September 2023, the Company was Highly Commended in the Best Newcomer
Sustainable Fund category of Investment Week's Sustainable Investment Awards
2023. We are pleased that the Company's contribution as a key player in the
sustainable investing space is being recognised by the investor community.
We are encouraged to see growing appetite for sustainable investment products,
and an increased focus both from regulators and investors on ensuring quality
and clear standards. In the UK, the Company engaged with the Financial Conduct
Authority's Sustainable Disclosure Requirement ("SDR") consultation through
Schroders and Big Society Capital, and we were pleased to see extensive
engagement from the broader financial sector. The proposed SDR framework
signals the regulator's commitment to supporting the integrity and growth of
the impact and wider sustainability investment markets in the UK. We believe
transparent labelling and disclosure of impact products are essential for the
impact investment market to grow healthily. We also welcome the EU's
Sustainable Finance Disclosure Requirements ("SFDR") consultation, launched
this year to review SFDR's implementation and explore new classifications that
offer greater clarity on investment product impact credentials.
Through engagement with key stakeholders in the investment and regulatory
space, as well as showcasing best practice in making successful impact
investments, the Managers aspire to position the Company as a trusted leader
and attractive partner for investors making allocations to this emerging asset
class.
We have been gratified to hear the interest in, and support for, the Company's
approach and purpose, but realise successful growth depends on converting more
of this latent demand and widening the shareholder base. We look forward to
speaking with you during the year.
Susannah Nicklin
Chair
27 October 2023
Portfolio Manager's Report
Market developments
The twelve months to 30 June 2023 were a particularly challenging one for the
UK economy with inflation at a 40 year high, led by large increases in energy
and food prices and contending with recessionary concerns. The "mini-budget"
of September 2022 further exacerbated the instability in financial markets,
and negative investor sentiment, despite its subsequent reversal.
The Bank of England's ("BoE") response to market conditions was to raise
interest rates eight times in a 12-month period, to 5% on 30 June 2023, with a
further rise to 5.25% voted for in August 2023. The new interest rate
environment has broad implications on the investment community as well as the
broader population, in particular, the most vulnerable and disadvantaged
people that the Company's investments are aiming to support.
Inflation started to reduce during 2023, returning to single digits; however,
the full effects of the higher inflationary and interest rate environment are
only just beginning to be felt, and are expected to have long term
consequences in areas such as housing affordability, and continued pressures
on cost-of-living.
A House of Commons research briefing published in September 2023 highlights
some of the starkest data illustrating the impact on the cost of living of the
last 2 years of rising inflation:
• Food prices: Over the two years from August 2021 to August
2023 food prices rose by 28.4%. It previously took over 13 years, from April
2008 to August 2021, for average food prices to rise by the same amount.
• Energy prices: household energy tariffs and road fuel costs
increased sharply in 2022; in an effort to mitigate the impact of rising gas
and electricity prices, the Government introduced an Energy Price Guarantee
(EPG) in October 2022, capping typical consumption at £2,500 a year. This
limited increases in typical bills to 27% in October 2022.
• Housing affordability: base interest rates rose from 0.1% in
December 2021 to 5.25% in September 2023, which led to higher borrowing rates
for households (specifically higher mortgage rates), and higher rental costs -
significantly impacting housing affordability.
Low-income households are most affected by rising prices, mostly due to being
more affected by high food and energy prices.
"Food bank charities are reporting an increase in demand: the Trussell Trust
reported that in the year to March 2023 they provided nearly 3 million
emergency food parcels, a record number, more than during the pandemic and
more than double the number in the same period five years before."
- House of Commons Library Research -
Rising Cost of Living in UK - Sep 23.
The new environment creates both risk and opportunities for the Company on
both social impact and financial returns. Looking first at the social impact
risk, many of the charities and social enterprises supported by the Company's
investments, and the vulnerable people who benefit from their services, will
be negatively affected by the current environment. Whilst increasing the need
for the positive impact of our investments it means that in some cases impact
will be outweighed in overall terms by the rising cost of living. On financial
returns, we have aimed to build a portfolio with a degree of inflation
correlation. However, in a very volatile inflation environment some of those
correlations will be only partial and some operate with a time-lag. In
particular, as the portfolio relies to a significant extent on government
backed revenues, government restrictions on how fast inflation flows through
into social housing rents and contract payments will be important.
Looking at the opportunities for our investment strategy, the social impact
created by our investments is needed more than ever. Many of our investments
are directly tackling the cost of living crisis, such as increasing the supply
of affordable housing and our retrofit and community renewable investments
tackling fuel poverty. In a time of constrained government finances our
investments are targeting service innovation that create significant savings -
for example our recent review of Social Outcomes Contracts showed that every
£1 spent has generated £10 in public value.
On the financial side, we expect the Company will continue to provide a
valuable source of diversification in a challenging investment environment.
High and volatile inflation is strongly negative for traditional public market
equity and bond portfolios. We have aimed for a unique mix of impact-focused
private assets with diverse and resilient revenue streams that has thus far
protected capital and should continue to do so in the event of further sharp
market downturns.
Across our portfolios we are seeing the wider move to invest in impact
continuing. Our latest market sizing report values the social impact
investment market at £9.4bn as of the end of 2022, an 18% increase from 2021.
This represents an almost 11-fold increase in the social impact investment
market in the last 11 years. As a result, we are seeing an expanding and
maturing pipeline of investment opportunities, primarily in private markets
that are difficult for many investors to access. We believe the Company
remains well positioned to offer investor access to a mature portfolio of high
quality impact investments within this expanding opportunity set.
Performance update
The NAV total return per share for the twelve-month period to 30 June 2023 was
0.8%. Overall, the Company's total NAV reduced slightly from £89.92m to
£88.75m over the period due to share buy-backs reducing the number of shares
in issue from 85.32 million to 84.60 million. The shares bought back were held
in Treasury at the end of the financial year.
The Company's NAV per share declined from 105.39p to 104.90p after an 1.30p
dividend payment - with a full performance bridge in the chart below.
In the 12 months to 30 June 2023 the Company recorded gross revenue of £2.77m
(2022 - £1.86m) and net revenue after fees, costs and expenses of £1.97m
(2022 - £1.12m), providing a net revenue return per share of 2.32 pence
(2022 - 1.37 pence). The Company recorded losses on the fair value of
investments of £1.02m (2022 - gains of £0.63m) and capitalised expenses of
£0.33m (2022 - £0.29m), resulting in a total gross return of £1.75m (2022 -
£2.49m), and total net return of £0.62m (2022 - £1.44m), or 0.73 pence per
share (2022 - 1.77 pence).
As shown in the table below, portfolio returns since inception have been
driven by the performance of investments in their mature phase, contributing
10.67% to NAV total return. However, in the 12 months to 30 June 2023, the
mature phase investments underperformed plan contributing 0.17% due to a
significant write down in the Bridges Evergreen portfolio and the headwinds of
rising rates.
Assets in their investment phase, which are earlier in their lifecycles and
J-curves, made a 1.58% contribution to NAV total return during the year to 30
June 2023, which is in line with expectations.
Liquidity Assets made a positive contribution of 0.16% to performance during a
challenging year for markets through allocations to shorter duration and
floating rate credit.
30 Jun 2023 30 Jun 2023 NAV total return NAV total return
% NAV % NAV contribution contribution
committed invested 12m to 30 June 2023 since launch
Mature 65.04% 63.89% 0.17% 10.67%
Investment phase 32.33% 23.62% 1.58% 1.74%
Liquidity Assets - 10.53% 0.16% -0.57%
Cash and cash equivalents - 1.97% -1.14% -3.23%
Total* 97.37% 100.00% 0.78% 8.61%
*Please note totals might not sum due to rounding
The key drivers of financial performance in the twelve-month period to 30 June
2023 were:
• A ramp-up of returns in the High Impact Housing portfolio,
in particular valuation gains in the CBRE Affordable Housing Fund,
contributing 0.58p to NAV per share, and the Man Community Housing Fund
contributing 0.48p to NAV per share, mostly driven by developments reaching
completion.
• A mix of income and capital gains in the Social Outcomes
Contracts portfolio driven by strong performance of the underlying projects,
with Bridges Social Outcomes Fund II contributing 0.48p to NAV per share.
• A notable negative development in the Bridges Evergreen
portfolio was the write-down to zero of their investment in Skills Training
UK. Bridges Evergreen contributed a negative 1.66p to NAV per share.
• With the exception of the Bridges Evergreen investment, all
other holdings in the Company's High Impact Portfolio made a positive
contribution to returns and are performing to plan.
The Social Impact performance of the portfolio was reported in the Company's
second Impact report published in June 2023. The report highlighted that since
launch, the Company's investments have reached 276,000 people, 94% of whom are
from disadvantaged, vulnerable or underserved backgrounds; generated £98m in
social outcomes and savings; and funded 27,000 affordable, decent homes. The
Impact Section of this report contains the key highlights from the Social
Impact report, as well as details of our evolving approach to impact
management and reporting.
Portfolio cash flows and balance sheet
Overall, in the period £7.61m was deployed into existing and new investments
in the High Impact Portfolio:
• The majority of the amount invested (£6.27m) was deployed
towards delivering new affordable homes in the High Impact Housing allocation:
Man Community Housing Fund drew down £2.55m and the Social and Sustainable
Housing fund drew down £3.72m over the year.
• In Debt and Equity for Social Enterprises, £1.03m was drawn
for further investment into the secured co-investments made with Charity Bank,
and the Charity Bond portfolio, delivering high social impact in Health and
Social Care.
• Within Social Outcomes Contracts, further investment was
made into existing projects helping children on the edge of care and
homelessness. The Social Outcomes Contracts investments made in the year to 30
June 2023 totaled £419,000.
Some of the Company's higher impact investments involve the staged deployment
of capital over multiple years; we aim to mitigate any cash drag on returns
through our Liquidity Assets allocation. This is invested in assets with
similar financial risk and return characteristics as the core asset
allocation, though has a lower direct social impact given the lack of
availability of social impact-focused assets in publicly listed markets.
During the period, we fully redeemed our positions in two investments to
fulfil drawdowns in our High Impact Portfolio. The Liquidity Assets portfolio
experienced some volatility over the year due to market turbulence but had a
small net positive contribution to the total return for the year of 0.16%.
Portfolio Allocation
The Company's investment objective is defined as:
• Delivering measurable positive social impact as well as long
term capital growth and income, through investing in a diversified portfolio
of private market impact funds, co-investments alongside impact investors and
direct investments in order to gain exposure to private market social impact
investments.
• Aiming to provide NAV total return of CPI plus 2 per cent.
per annum (once the portfolio is fully invested and averaged over a rolling
three- to five-year period, net of fees).
• With low correlation to traditional quoted markets whilst
offering to address significant social issues in the UK.
A diversified asset allocation delivering local UK social impact
The Company delivers its investment objective through allocating to
best-in-class social impact managers in private markets - with proven track
records delivering high quality financial returns alongside measurable social
impact for more disadvantaged groups in the UK. Investments that are committed
but not yet drawn by private market funds are held in listed Liquidity Assets
investments to mitigate cash drag during longer drawdown periods.
As of 30 June 2023, the portfolio was 97% committed and 88% invested in the
Company's High Impact Portfolio. The Company has approximately £2.5m of
uncommitted capital, following the cancellation of an unused follow-on
commitment to the Charity Bond portfolio, a partial exit from the Real
Lettings Property Fund in the third quarter of 2023, scheduled capital
repayments from the portfolio, and share buybacks. Furthermore 10% of NAV was
held in our Liquidity Assets portfolio and will in the longer term be invested
in higher impact private investments. In response to the higher interest rate
environment, the Company is balancing use of Liquidity Assets with greater use
of cash and cash equivalents in money market funds, earning interest in line
with base rates.
Providing access to a seasoned high impact portfolio
The Company has built a seasoned high impact portfolio that would be difficult
for shareholders to access directly - through a combination of a seed
portfolio and secondary investments from the Portfolio Manager's relationships
and knowledge of the sector. This provides a greater allocation to more mature
assets that will help drive future financial and impact performance. The
Portfolio Manager's broader portfolio relationships offer additional fee
benefits to Company shareholders - with 41% of the Company's portfolio with no
or discounted management fees - from co-investments or fee discounts that the
Portfolio Manager has negotiated, often through their role as initial
cornerstone investor in funds.
Targeting inflation resilient returns
The Company aims to deliver an asset allocation that is resilient through
periods of rising prices through targeting two-thirds of its asset allocation
to assets that will benefit from inflation. These assets are:
• Property and renewables - with a mix of long dated inflation
linked leases, shorter property leases where value is more driven by property
prices, and smaller investments in community renewables in our Debt and Equity
for Social Enterprises asset class; we also hold renewables investments in our
Liquidity Assets portfolio
• Mezzanine and equity investments - where the value is driven
by government contracts that have historically moved with inflation
• Floating rate instruments which will benefit from increases
in the base rate
As of 30 June 2023, the Company had committed 62% of its capital to inflation
sensitive assets. The remaining capital committed to high impact investments
was allocated to fixed income securities such as charity bonds and social
outcomes contracts; the Company aims to minimise the duration of these fixed
income assets, to allow reinvestment over time into a potentially higher
interest rate environment. Including the investments in Liquidity Assets and
cash and cash equivalents held in money market funds, the Company's invested
amount in assets that will benefit from inflation is 66% of its capital. The
Portfolio Manager is seeking to optimise its liquidity management, by
investing its cash reserves in money market funds benefitting from increases
in the base rate.
As previously indicated, the Company sees significant risk in achieving target
returns to match recent elevated inflation levels. As a result, the Company is
underperforming its CPI+2% aim. This is due to:
• Property and renewables: The presence of caps and collars in
property index linked leases, caps in housing benefit increases and expected
real falls in property prices.
• Mezzanine and equity investments: Delays in the pass through
of inflation to government contracts in the current environment
• Floating rate instruments: Expected path of floating rates
to continue to lag inflation
• A portion of the investment allocation (34% of invested
capital) in fixed income securities and social outcome contracts where Company
revenue will only benefit over time from inflation at higher interest rates as
capital is re-invested.
Targeting low correlation to mainstream markets
The Company's asset allocation aims to achieve low correlation to mainstream
markets by backing business models that are underpinned by government
expenditure and have been historically resilient through economic cycles. As
at 30 June 2023, 70% of the committed portfolio (61% invested) is underpinned
by government backed revenue streams. The proportion of government-backed
revenues in the portfolio is slightly below our long-term target of 75% (on a
committed basis) due to the partial exit from The Real Lettings Property Fund
("RLPP1"), the cancellation of the charity bond top-up commitment, capital
repayments in the period and the write-down in the BEH portfolio; however, the
advanced pipeline opportunities which are being considered for the
re-deployment of available capital have a high proportion of government-backed
revenues, which we expect to bring our capital allocation in line with the
target. These revenue streams are themselves diversified across policy areas,
such as housing, clean energy and fuel poverty, education, redressing
inequalities/levelling up. This diversification reduces exposure to individual
policy risk, such as the risk that government or budgetary changes would
significantly reduce or withdraw payments. The Company targets areas with a
track record of delivering impact for more disadvantaged groups and generating
savings for the public purse which provides additional revenue resilience.
Reflecting the uncorrelated nature of the portfolio relative to mainstream
markets, the Company's share price had a negative correlation with the FTSE
ALL Share Index in the twelve months to 30 June 2023 (-0.62), and since
inception (-0.53).
Recent Events
Following the realisation of capital from RLPF1 and the cancellation of unused
commitments, and net of capital used for share buybacks to date, the Company
has c. £2.5m of uncommitted capital, held to invest in further High
Impact Investment opportunities or provide flexibility for further share
buybacks. We are actively reviewing an active pipeline of investments in the
High Impact Portfolio, which we think will provide further diversification and
exposure to the four key impact themes identified in our latest Impact Report
(reducing poverty and inequalities; good health and wellbeing; education,
training and decent work; and just transition to net zero), while also
enhancing returns. In particular, we are in an advanced stage with a new
investment in an opportunity that will increase the Company's exposure to the
"just transition to net zero" theme (currently with the lowest weight in our
investment portfolio), while providing an attractive returns profile. We
expect to be in a position to complete and announce the transaction by the
first quarter of next year, which would bring us back to being fully
committed.
We are confident that the Company remains well positioned to lead and benefit
from further market growth, as we continue to see an expanding and maturing
pipeline of investment opportunities.
In September, the Company was Highly Commended in the Best Newcomer
Sustainable Fund category of Investment Week's Sustainable Investment Awards
2023. Entries were judged by a panel of experts from across the investment
industry considering factors such as strong performance record; strength of
the team; meeting the fund's sustainable objectives; excellence in sustainable
investing within the investment process; strong engagement record; effective
client communication; wider fund impact; and key developments on the strategy
in the past year. We are pleased that the Company's contribution is being
recognised as playing a key role in the evolution of sustainable investing.
Outlook
Following a year of monetary tightening, inflation continued on a downward
trend over the summer, and in October UK food prices dropped slightly for the
first time in two years. The Bank of England slowed its rate increases, and
guides towards inflation reaching mid-single digits by the end of the year,
returning to the long-term 2% target by 2025. HM Treasury has set 22 November
2023 for this year's Autumn Statement, to be accompanied by an Office for
Budget Responsibility forecast. This is expected to be the chancellor's last
fiscal update before a general election, and it is expected that one of the
areas of scrutiny will be the government's performance against the economic
pledges from earlier this year, in particular the pledge to halve inflation by
year end. While the Prime Minister made comments about prioritising curbing
inflation and easing cost of living, there is an expectation that we will see
real-term cuts to benefits and public spending while the UK is trying to
contain high levels of national debt.
Despite the "bright spots", the outlook for the UK economy remains uncertain,
with some market commentators suggesting a recession remains "unavoidable" 3
(#_ftn3) , as higher rates will have a lagged effect on the economy.
It is estimated that UK households are facing the largest fall in living
standards since records began in the 1950s 4 (#_ftn4) , and this fall in
living standards disproportionately affects those who are already most
vulnerable in society 5 (#_ftn5) . UK households are seeing their real
incomes fall, while struggling to meet significantly higher costs for
essential items like food, energy and housing 6 (#_ftn6) .
With continued pressures on government spending, the scaling of proven
solutions tackling social issues - such as the organisations that the Company
supports - remains as essential as ever.
This uncertain environment provides opportunities and risks for the Company.
While the solutions provided by the organisations that the Company supports
are needed more than ever, these organisations need to manage higher cost
bases themselves in order to remain viable. We work with organisations with
long track records (30 years on average 7 (#_ftn7) ), who have demonstrated
their resilience over multiple economic cycles. Two thirds of our capital is
invested in models with revenues rising with inflation; while our historical
returns to date are lagging the CPI+2% target, as explained in the Performance
Update section, we are maintaining our target for the medium-to-long term, as
we expect some of the benefits to flow through with a lagged effect, and the
inflation and interest rate environment to stabilise. What we have seen in the
last year was an increase in the income generated by the portfolio, as a
result of increases in the interest rate on floating-rate loans, and higher
income generated by maturing investments. This increased income is being
passed on to our investors as a dividend exceeding our previous guidance of
1-2% yield on net asset value. We expect the income generated by our
investments to continue to improve in the future and have increased our future
guidance on dividend yield to 2-3%.
With a general election expected in the next 12 months, we acknowledge our
portfolio is subject to policy risk. At the time of writing, 70% of our
committed capital is underpinned by government-backed revenues. During the
year, we have seen a negative impact from policy risk in our portfolio,
following a change in government policy regarding traineeships, leading to a
write-down in the Bridges Evergreen portfolio. While this development was
disappointing, we believe this to be an isolated case in our portfolio, which
is diversified across multiple policy areas, mostly targeting the most
vulnerable and disadvantaged groups. Successful interventions in these areas
typically generate savings for the government that are multiples of the cost,
and therefore these areas benefit from cross-party support. We further
mitigate policy risk by working with organisations that have been successfully
operating for several decades, navigating different policy environments, and
making investments that benefit from some element of asset backing.
We are encouraged to see growing appetite for sustainable investment products,
and an increased focus both from regulators and investors on ensuring quality
and clear standards.
In this uncertain environment the goals of the Company remain the same: to
deliver for shareholders high quality returns with a low correlation to
traditional quoted markets alongside significant social impact for more
disadvantaged groups across the UK.
Hermina Popa, Jeremy Rogers
Big Society Capital
27 October 2023
Strategic Report
Principal and emerging risks and uncertainties
The Board, through its delegation to the Audit and Risk Committee, is
responsible for the Company's system of risk management and internal control
and for reviewing its effectiveness. The Board has adopted a detailed matrix
of principal risks affecting the Company's business as an investment trust and
has established associated policies and processes designed to manage and,
where possible, mitigate those risks, which are monitored by the Audit and
Risk Committee on an ongoing basis. This system assists the Board in
determining the nature and extent of the risks it is willing to take in
achieving the Company's strategic objectives. Both the principal and emerging
risks and the monitoring system are also subject to robust assessment at least
annually. The last assessment took place in October 2023.
During the year, the Board discussed and monitored a number of risks which
could potentially impact the Company's ability to meet its strategic
objectives. The Board received updates from the Manager, Portfolio Manager,
Company Secretary and other service providers on emerging risks that could
affect the Company. The Board was mindful of the following emerging risks
during the year; the ongoing conflict in Ukraine, rising inflation and
interest rates, the threat of a UK recession and volatile energy prices. These
risks were not seen as new principal or emerging risks but those that
exacerbate existing risks and have been incorporated in the market risks
section in the table below.
Although the Board believes that it has a robust framework of internal control
in place this can provide only reasonable, and not absolute, assurance against
material financial misstatement or loss and is designed to manage, not
eliminate, risk.
Actions taken by the Board and, where appropriate, its committees, to manage
and mitigate the Company's principal risks and uncertainties are set out in
the table below.
The "Change" column on the right highlights the Audit and Risk Committee's
assessment of any increases or decreases in risk during the year after
mitigation and management. The arrows show the risks as increased or
decreased, and sideway arrows show risks as stable.
Risk Mitigation and management Change
Strategic risk
The Company's investment objectives may become out of line with the The appropriateness of the Company's investment remit is regularly reviewed Up
requirements of investors, or the Company's investment strategy might not lead and the success of the Company in meeting its stated objectives is monitored.
to the Company achieving its investment objective resulting in the Company
being subscale and shares trading at a discount.
The share price relative to NAV per share is monitored and the Board has
implemented a buy-back programme.
The target return of the company is inflation plus 2%. There is no guarantee
that this will be achieved and in high inflation environments the target
becomes more challenging despite a element of the portfolios investment
returns benefitting from higher inflation, with a lag.
Continuity risk
31 December 2023, and in any two-year period following such date, the Ordinary The Portfolio Manager has extensive experience and a track record in Up
Shares have traded, on average, at a discount in excess of 10 per cent. to Net accurately timing the exits of private equity investments. The Board will
Asset Value per Share, the Directors will propose an ordinary resolution at regularly monitor the position to ensure that any alternative proposals to be
the Company's next annual general meeting that the Company continues its made to shareholders are put forward at an appropriate time.
business as presently constituted (the "Continuation Resolution").
The Board also made enquiry of the broker and discussed with Big Society
It could take several years until all of the Company's private equity Capital and Schroders, who in aggregate hold 43.99% of the Company's total
investments are disposed of and any final distribution of proceeds made to voting rights as at 30 September 2023. It believed that there is no reason to
shareholders. anticipate that shareholders would not be supportive should a continuation
vote be held in 2024.
The Company moved from trading at a premium to NAV to trading at an average
discount of 7.3% in the twelve months to 30 June 2023, which is narrower than If the Continuation Resolution is not passed, the Directors will put forward
the average investment trust discount over the period. proposals for the reconstruction or reorganisation of the Company, bearing in
mind the liquidity of the Company's Investments, as soon as reasonably
practicable following the date on which the Continuation Resolution is not
passed. These proposals may or may not involve winding up the Company and,
accordingly, failure to pass the Continuation Resolution will not necessarily
result in the winding up of the Company.
Investment management risks
Risks relating to the social impact of investee companies and the achievement The Portfolio Manager has extensive experience in selecting private social No change
of the target financial return. impact investments and has a robust investment process to ensure that the
anticipated positive impact of investee companies is realistic and achievable.
The Board also monitors impact regularly and publishes an annual impact
report.
The Portfolio Manager makes investments according to a tested and robust
process and based on the goal of achieving the target return. A pipeline of
opportunities is vetted and reviewed and significant care is taken in
selecting high quality managers and investees. The Portfolio Manager receives
regular management information and engages regularly with investees to monitor
and ensure performance to plan.
Liquidity risk
Liquidity risks include those risks resulting from holding private equity Concentration limits are imposed on single investments to minimise the size of No change
investments as well as not being able to participate in follow-on fundraises positions.
through lack of available capital which could result in dilution of an
investment.
The Portfolio Manager can sell Liquidity Assets to meet investment commitments
and capital calls. The Portfolio Manager will monitor and manage cash flows
Risks relating to investment commitments and capital calls. and expected capital calls.
The Portfolio Manager will seek to manage cashflow such that the Company will
be able to participate in follow on fundraisings where appropriate.
Valuation risk
Private equity investments are generally less liquid and more difficult to Contracts with investee companies and funds are drafted to include obligations No change
value than publicly traded companies. A lack of open market data and reliance to provide information to the Portfolio Manager in a timely manner, where
on investee company projections may also make it more difficult to estimate possible.
fair value on a timely basis.
The Portfolio Manager and AIFM have extensive track records of valuing
privately held investments.
A valuation policy has been agreed by the AIFM and Portfolio Manager and
includes a robust process for the valuation of assets, including consideration
of the valuations provided by investee companies and the methodologies they
have used. Any changes to this policy must be approved by the Audit and Risk
Committee.
The Audit and Risk Committee reviews all valuations of unlisted investments
and challenges the methodologies used by the Portfolio Manager and AIFM. The
Audit and Risk Committee may also appoint an independent party to complete a
valuation of the Company's assets.
Cyber security risks
Each of the Company's service providers is at risk of cyber attack, data theft Experienced third party service providers are employed by the Company under No change
or disruption to their infrastructure which could have an effect on the appropriate terms and conditions and with agreed service level specifications
services they provide to the Company. These risks could lead to reputational in relation to cyber security and related procedures.
damage or the risk or loss control of sensitive information leading to a
potential breach of data protection law.
The Board receives regular reports from its service providers and the
Management Engagement Committee will review the performance of key service
providers at least annually.
The Audit and Risk Committee reviews reports on the external audits of the
internal controls operated by certain service providers.
Economic, policy, and market risk
Changes in general economic and market conditions, such as interest rates, The risk profile of the portfolio is considered and appropriate strategies to N/A
inflation rates, industry conditions, tax laws, political events and trends mitigate any negative impact of substantial changes in markets and government
can substantially and adversely affect the value of investments. policies are discussed with the Portfolio Manager.
Market risk includes the potential impact of events which are outside the The rise in government bond yields has had, and may continue to have, a
Company's control, such as pandemics, civil unrest and wars. negative impact on property prices. A portion of the Company's portfolio is
invested in UK property.
Policy risk includes the potential negative impact of changes in UK government
policies that affect the business models, revenue streams or have other
material implications for investees.
Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality of the systems
of internal control operating within key service providers, and ensures
regular communication of the results of monitoring by such providers to the
Audit and Risk Committee, including the incidence of significant control
failings or weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies that may have
a material impact on the Company's performance or condition.
No significant control failings or weaknesses were Identified from the Audit
and Risk Committee's ongoing risk assessment which has been in place
throughout the financial year and up to the date of this report. The Board is
satisfied that it has undertaken a detailed review of the risks facing the
Company.
A full analysis of the financial risks facing the Company is set out in note
20 to the accounts on pages 86 to 89 of the 2023 Annual Report and Accounts.
Viability statement
The Directors have assessed the viability of the Company over a five year
period, taking into account the Company's position at 30 June 2023 and the
potential impact of the principal risks and uncertainties it faces for the
review period. The Directors have assessed the Company's operational
resilience and they are satisfied that the Company's outsourced service
providers will continue to operate effectively, following the implementation
of their business continuity plans.
A period of five years has been chosen as the Board believes that this
reflects a suitable time horizon for strategic planning, taking into account
the investment policy, liquidity of investments, payment of commitments,
potential impact of economic cycles, nature of operating costs, dividends and
availability of funding. This time period also reflects the average holding
period of an investment.
In its assessment of the viability of the Company, the directors have
considered each of the Company's principal risks and uncertainties detailed on
pages 47 to 49 of the 2023 Annual Report and Accounts. The Directors have also
considered the Company's income and expenditure projections, liquid
investments, cash balances as well as commitments to provide further funding
to the Company's private equity investee companies; the Company currently has
no borrowings. A substantial proportion of the Company's expenditure varies
with the value of the investment portfolio. In the event that there is
insufficient cash to meet the Company's liabilities, the liquid investments in
the portfolio may be realised.
The Company has additionally performed stress tests which confirm that a 50%
fall in the market prices of the portfolio would not affect the Board's
conclusions in respect of going concern.
The Board monitors the portfolio risk profile, limits imposed on gearing,
counterparty exposure, liquidity risk and financial controls at its quarterly
meetings. Although there continue to be regulatory changes which could
increase costs or impact revenue, the Directors do not believe that this would
be sufficient to affect its viability.
The Board has assumed that the business model of a closed ended investment
company, as well as the Company's investment objective, will continue to be
attractive to investors. The Directors also considered the beneficial tax
treatment the Company is eligible for as an investment trust. If changes to
these taxation arrangements were to be made it would affect the viability of
the Company to act as an effective investment vehicle.
The Board made enquiry of the broker and discussed with Big Society Capital
and Schroders, who in aggregate hold 43.99% of the Company's total voting
rights as at 30 September 2023. It believes that there is no reason to
anticipate that shareholders would not be supportive should a continuation
vote be held in 2024.
Therefore, Directors have concluded that there is a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the five year period of their assessment.
Going concern
The Directors have assessed the principal risks, the impact of the emerging
risks and uncertainties and the matters referred to in the viability
statement. Based on the work the Directors have performed, they have not
identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Company's
ability to continue as a going concern for the period assessed by the
Directors, being the period to 31 October 2024 which is at least twelve
months from the date the financial statements were authorised for issue.
By order of the Board
Schroder Investment Management Limited
Company Secretary
27 October 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the annual report and accounts in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial period. Under that law the Directors have prepared the financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (FRS: 102 The Financial Reporting Standard applicable in the UK and
Republic of Ireland) and applicable law. Under company law the Directors must
not approve the financial statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Company and of the return
or loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and accounting estimates that are reasonable
and prudent;
- state whether applicable UK Accounting Standards, comprising
FRS 102, have been followed, subject to any material departures disclosed and
explained in the financial statements;
- prepare a directors' report, a strategic report and directors'
remuneration report which comply with the requirements of the Companies Act
2006; and
- prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
The Directors are responsible for ensuring the annual report and the financial
statements are made available on a website. Financial statements are
published on the Company's website in accordance with legislation in the
United Kingdom governing the preparation and dissemination of financial
statements, which may vary from legislation in other jurisdictions. The
maintenance and integrity of the Company's website is the responsibility of
the Manager. The Directors' responsibility also extends to the ongoing
integrity of the financial statements contained therein.
Each of the Directors, whose names and functions are listed on pages 51 and 52
of the 2023 Annual Report and Accounts, confirm that to the best of their
knowledge:
- the financial statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law), give a true and fair view of
the assets, liabilities, financial position and net return of the Company;
- the annual report and accounts includes a fair review of the
development and performance of the business and the financial position of the
Company, together with a description of the principal risks and uncertainties
that it faces; and
- the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
On behalf of the Board
Susannah Nicklin
Chair
27 October 2023
Income Statement
For the year ended 30 June 2023
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments held at fair value through profit or loss - (1,020) (1,020) - 632 632
Income from investments 2,695 - 2,695 1,817 - 1,817
Other interest receivable and similar income 77 - 77 40 - 40
Gross return 2,772 (1,020) 1,752 1,857 632 2,489
Investment management fees (334) (334) (668) (286) (286) (572)
Administrative expenses (464) - (464) (452) - (452)
Transaction costs - - - - (22) (22)
Net return/(loss) before taxation 1,974 (1,354) 620 1,119 324 1,443
Taxation - - - - - -
Net return/(loss) after taxation 1,974 (1,354) 620 1,119 324 1,443
Return/(loss) per share 2.32p (1.59)p 0.73p 1.37p 0.40p 1.77p
The "Total" column of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income, and
therefore the net return after taxation is also the total comprehensive income
for the year.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year (2022:
none).
Statement of Changes in Equity
For the year ended 30 June 2023
Year ended 30 June 2023
Called-up
share Share Special Capital Revenue
capital premium reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At 30 June 2022 853 10,571 72,993 4,373 1,126 89,916
Repurchase of the Company's own shares into treasury - - (674) - - (674)
Net (loss)/return after taxation - - - (1,354) 1,974 620
Dividends paid in the year - - - - (1,109) (1,109)
At 30 June 2023 853 10,571 72,319 3,019 1,991 88,753
Year ended 30 June 2022
Called-up
share Share Special Capital Revenue
capital premium reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At 30 June 2021 750 - 72,993 4,049 435 78,227
Issue of ordinary shares 103 10,729 - - - 10,832
Share issue costs - (158) - - - (158)
Net return after taxation - - - 324 1,119 1,443
Dividends paid in the year - - - - (428) (428)
At 30 June 2022 853 10,571 72,993 4,373 1,126 89,916
Statement of Financial Position
at 30 June 2023
30 June 30 June
2023 2022
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 64,199 67,000
Investments held at amortised cost 22,583 21,832
86,782 88,832
Current assets
Debtors 401 206
Cash at bank and in hand 2,089 1,310
2,490 1,516
Current liabilities
Creditors: amounts falling due within one year (519) (432)
Net current assets 1,971 1,084
Total assets less current liabilities 88,753 89,916
Net assets 88,753 89,916
Capital and reserves
Called-up share capital 853 853
Share premium 10,571 10,571
Special reserve 72,319 72,993
Capital reserves 3,019 4,373
Revenue reserve 1,991 1,126
Total equity shareholders' funds 88,753 89,916
Net asset value per share 104.90p 105.39p
Cash Flow Statement
For the year ended 30 June 2023
2023 2022
£'000 £'000
Net cash inflow from operating activities 1,116 873
Investing activities
Purchases of investments (7,833) (31,411)
Sales of investments 9,279 4,516
Net cash inflow/(outflow) from investing activities 1,446 (26,895)
Net cash inflow/(outflow) before financing 2,562 (26,022)
Financing activities
Dividend paid (1,109) (428)
Repurchase of the Company's own shares into treasury (674) -
Issue of Ordinary Shares - 10,832
Share issue costs - (158)
Net cash (outflow)/inflow from financing activities (1,783) 10,246
Net cash inflow/(outflow) in the year 779 (15,776)
Cash at bank and in hand at the beginning of the year 1,310 17,086
Net cash inflow/(outflow) in the year 779 (15,776)
Cash at bank and in hand at the end of the year 2,089 1,310
Included in net cash inflow from operating activities are dividends received
amounting to £860,000 (year ended 30 June 2022: £723,000), income from debt
securities amounting to £1,236,000 (year ended 30 June 2022: £1,039,000) and
other interest receivable and similar income amounting to £70,000 (year ended
30 June 2022: £40,000).
Notes to the Accounts
1. Accounting Policies
(a) Basis of accounting
Schroder BSC Social Impact Trust plc ("the Company") is registered in
England and Wales as a public company limited by shares. The Company's
registered office is 1 London Wall Place, London EC2Y 5AU.
The accounts are prepared in accordance with the Companies Act 2006, United
Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in
accordance with Financial Reporting Standard (FRS) 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland", and with the
Statement of Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" (the "SORP") issued by the Association
of Investment Companies in July 2022. All of the Company's operations are of a
continuing nature.
The accounts have been prepared on a going concern basis under the historical
cost convention, as modified by the revaluation of investments held at fair
value. The Directors believe that the Company has adequate resources to
continue operating until 31 October 2024, which is at least 12 months from the
date of approval of these accounts. In forming this opinion, the Directors
have taken into consideration: the controls and monitoring processes in place;
the Company's level of debt, undrawn commitments and other payables; the low
level of operating expenses, comprising largely variable costs which would
reduce pro rata in the event of a market downturn; the Company's cash flow
forecasts and the liquidity of the Company's investments. In forming this
opinion, the Directors have also considered any potential impact of climate
change, and the risk/impact of elevated and sustained inflation and interest
rates on the viability of the Company. The Company has additionally performed
stress tests which confirm that a 50% fall in the market prices of the
portfolio would not affect the Board's conclusions in respect of going
concern. Further details of Directors' considerations regarding this are given
in the Chair's Statement, Portfolio Managers' Review, Going Concern Statement,
Viability Statement and under the Principal and emerging risks and
uncertainties heading on page 47 of the 2023 Annual Report and Accounts.
The accounts are presented in sterling and amounts have been rounded to the
nearest thousand.
The accounting policies applied to these accounts are consistent with those
applied in the accounts for the year ended 30 June 2022.
Certain judgements, estimates and assumptions have been required in valuing
the Company's investments and these are detailed in note 19 on page 85 of the
2023 Annual Report and Accounts.
(b) Valuation of investments
The Company's business is investing in financial assets with a view to
profiting from their total return in the form of income and capital growth.
Investments with a fixed coupon and redemption amount are valued at amortised
cost in accordance with FRS 102. Other financial assets are managed and their
performance evaluated on a fair value basis, in accordance with a documented
investment objective and information is provided internally on that basis to
the Company's Board of Directors. Upon initial recognition these investments
are designated by the Company as "held at fair value through profit or loss",
included initially at cost and subsequently at fair value using the
methodology below. This valuation process is consistent with International
Private Equity and Venture Capital Guidelines issued in December 2022, which
are intended to set out current best practice on the valuation of Private
Capital investments.
(i) Quoted bid prices for investments traded in active markets.
(ii) The price of a recent investment, where there is considered to
have been no material change in fair value.
(iii) Where it is felt that a milestone has been reached or a target
achieved, the Company may use the price of a recent investment adjusted to
reflect that change.
(iv) Investments in funds may be valued using the NAV per unit with an
appropriate discount or premium applied to arrive at a unit price.
(v) Price earnings multiples, based on comparable businesses.
(vi) Industry benchmarks, where available.
(vii) Discounted Cash Flow techniques, where reliable estimates of cash
flows are available.
The above valuation methodologies are deemed to reflect the impact of climate
change risk on the investments held.
Purchases and sales of quoted investments are accounted for on a trade date
basis. Purchases and sales of unquoted investments are recognised when the
related contract becomes unconditional.
(c) Accounting for reserves
Gains and losses on sales of investments and the management fee or finance
costs allocated to capital, are included in the Income Statement and dealt
with in capital reserves. Increases and decreases in the valuation of
investments held at the year end, are included in the Income Statement and in
capital reserves within "Investment holding gains and losses".
For shares that are repurchased and held in treasury, the full cost is charged
to the Special reserve.
(d) Income
Dividends receivable are included in revenue on an ex-dividend basis except
where, in the opinion of the Board, the dividend is capital in nature, in
which case it is included in capital.
Income from limited partnerships will be included in revenue on the income
declaration date.
Income from fixed interest debt securities is recognised using the effective
interest method.
Deposit interest outstanding at the year end is calculated and accrued on a
time apportionment basis using market rates of interest.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses are allocated
wholly to the revenue column of the Income Statement with the following
exceptions:
- The management fee is allocated 50% to revenue and 50% to
capital in line with the Board's expected long-term split of revenue and
capital return from the Company's investment portfolio.
- Expenses incidental to the purchase of an investment are
charged to capital. These expenses are commonly referred to as transaction
costs and comprise brokerage commission and stamp duty. Details of transaction
costs are given in note 9 (c) on page 83 of the 2023 Annual Report and
Accounts.
The underlying costs incurred by the Company's investments in collective funds
are not included in the various expense disclosures.
(f) Finance costs
Finance costs, including any premiums payable on settlement or redemption and
direct issue costs, are accounted for on an accruals basis using the effective
interest method and in accordance with FRS 102.
Finance costs are allocated 50% to revenue and 50% to capital in line with the
Board's expected long-term split of revenue and capital return from the
Company's investment portfolio.
(g) Financial instruments
Cash at bank and in hand may comprise cash, short-term deposits and highly
liquid investments which are readily convertible to a known amount of cash and
are subject to insignificant risk of changes in value.
Other debtors and creditors do not carry any interest, are short-term in
nature and are accordingly stated at nominal value, with debtors reduced by
appropriate allowances for estimated irrecoverable amounts.
Bank loans and overdrafts are initially measured at fair value and
subsequently measured at amortised cost. They are recorded at the proceeds
received net of direct issue costs. The Company had no bank loans or
overdrafts at 30 June 2023 (2022: nil).
(h) Taxation
Taxation on ordinary activities comprises amounts expected to be received or
paid.
Tax relief is allocated to expenses charged to the capital column of the
Income Statement on the "marginal basis". On this basis, if taxable income is
capable of being entirely offset by revenue expenses, then no tax relief is
transferred to the capital column.
As the Company continues to meet the conditions required to retain its status
as an Investment Trust, any capital gains or losses arising on the revaluation
or disposal of investments are exempt. The Company has no deferred tax asset,
recognised or unrecognised at 30 June 2023 (2022: nil).
(i) Value added tax ("VAT")
Expenses are disclosed inclusive of the related irrecoverable VAT.
(j) Dividends payable
In accordance with FRS 102, dividends payable are included in the accounts in
the year in which they are paid. Part, or all of any dividend declared may be
designated as an "interest distribution", calculated in accordance with the
investment trust income streaming rules and paid without deduction of any
income tax.
2. Gains on investments held at fair value through profit or loss
2023 2022
£'000 £'000
(Losses)/gains on sales of investments based on historic cost (642) 99
Amounts recognised in investment holding gains in the previous year in 537 12
respect of investments sold in the year
(Losses)/gains on sales of investments based on the carrying value at the (105) 111
previous balance sheet date
Net movement in investment holding (losses)/gains (915) 521
(Losses)/gains on investments held at fair value in the current year (1,020) 632
through profit and loss
3. Income from investments
2023 2022
£'000 £'000
Income from investments:
UK dividends 1,133 752
Overseas dividends 163 20
Interest income from debt securities and other financial assets 1,399 1,045
2,695 1,817
Other interest receivable and similar income:
Deposit interest 37 2
Other income 40 38
77 40
Total income 2,772 1,857
4. Investment management fees
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fees 334 334 668 286 286 572
The bases for calculating the investment management fees are set out in the
Report of the Directors on page 54 of the 2023 Annual Report and Accounts and
details of all amounts payable to the managers are given in note 17 on page 85
of the 2023 Annual Report and Accounts.
5. Administrative expenses
2023 2022
£'000 £'000
Other administrative expenses 261 263
Directors' fees(1) 141 137
Auditor's remuneration for the audit of the Company's annual accounts(2) 62 52
464 452
(1)Full details are given in the remuneration report on pages 65 to 66 of
the 2023 Annual Report and Accounts
(2)Includes VAT amounting to £12,000 (2022: £9,000).
6. Taxation
(a) Analysis of tax charge for the year
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Taxation for the year - - - - - -
The Company has no corporation tax liability for the year ended 30 June
2023 (2022: nil).
(b) Factors affecting tax charge for the year
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before taxation 1,974 (1,354) 620 1,119 324 1,443
Net return before taxation multiplied by the Company's applicable rate of 405 (278) 127 213 62 275
corporation tax for the year of 20.5% (2022: 19%)
Effects of:
Capital gains on investments - 210 210 - (120) (120)
Tax deductible interest distribution (405) 68 (337) (213) 54 (159)
Expenses not deductible for corporation tax purposes - - - - 4 4
Taxation on ordinary activities - - - - - -
UK Corporation Tax rate has increased from 19% to 25% with effect from 1
April 2023.
(c) Deferred taxation
The Company has met the condition to retain its status as an Investment Trust
Company. The Company has no unrecognised deferred tax asset (2022: nil).
7. Return per share
2023 2022
£'000 £'000
Revenue return 1,974 1,119
Capital return (1,354) 324
Total return 620 1,443
Weighted average number of shares in issue during the year 85,132,892 81,387,804
Revenue return per share 2.32p 1.37p
Capital return per share (1.59)p 0.40p
Total return per share 0.73p 1.77p
There are no dilutive instruments, the return per share is actual return.
8. Dividends
2023 2022
£'000 £'000
2022 final dividend of 1.30p (2021: 0.57p) paid out of revenue profits as an 1,109 428
interest distribution
2023 2022
£'000 £'000
2023 final dividend proposed of 2.30p (2022: 1.30p), to be paid out of revenue 1,946 1,109
profits
The 2023 final dividend of 2.30p will be split between a 2.16p interest
distribution and a 0.14p equity dividend (2022: 1.30p was interest
distribution).
The proposed final dividend amounting to £1,946,000 (2022: £1,109,000) is
the amount used for the basis of determining whether the Company has satisfied
the distribution requirements of Section 1158 of the Corporation Tax Act 2010.
The revenue available for distribution by way of dividend for the year is
£1,974,000 (2022: £1,119,000).
9. Fixed assets
(a) Movement in investments
2023 2022
Investments Investments Total Investments Investments Total
held at amortised
£'000
held at amortised
£'000
held at fair value through profit or loss cost held at fair value through profit or loss cost
£'000
£'000
£'000 £'000
Opening book cost 62,267 21,832 84,099 37,169 21,142 58,311
Opening investment holding gains 4,733 - 4,733 4,200 - 4,200
Opening fair value 67,000 21,832 88,832 41,369 21,142 62,511
Purchases at cost 7,269 980 8,249 31,411 3,195 34,606
Sales proceeds (9,050) (229) (9,279) (6,101) (2,816) (8,917)
(Losses)/gains on investments held at fair value through profit or loss (1,020) - (1,020) 321 311 632
Closing fair value 64,199 22,583 86,782 67,000 21,832 88,832
Closing book cost 59,844 22,583 82,427 62,267 21,832 84,099
Closing investment holding gains 4,355 - 4,355 4,733 - 4,733
Closing fair value 64,199 22,583 86,782 67,000 21,832 88,832
(b) Unquoted investments, including investments quoted in inactive
markets
Material revaluations of unquoted investments during the year
Investment Opening Purchases Revaluation Distributions Closing
valuation £'000 £'000 £'000 valuation
at 30 June at 30 June
2022 2023
£'000 £'000
Bridges Evergreen Capital LP 14,451 - (1,701) - 12,750
Man GPM RI Community Housing 1 LP 5,202 2,930 397 (383) 8,146
UK Affordable Housing Fund 9,848 - 351 - 10,199
Material revaluations of unquoted investments during the year ended 30 June
2022
Investment Opening Purchases Revaluation Distributions Closing
valuation £'000 £'000 £'000 valuation
at 30 June at 30 June
2021 2022
£'000 £'000
Community Investment fund - 4,500 957 - 5,457
Material disposals of unquoted investments during the year
2023
Investment Book Sales Realised
cost
proceeds gain/(loss)
£'000 £'000 £'000
Resonance Real Lettings Property Fund LP 990 990 -
Material disposals of unquoted investments during the year ended 30 June
2022
2022
Investment Book Sales Realised
cost
proceeds gain/(loss)
£'000 £'000 £'000
Man GPM RI Community Housing 1 LP 851 851 -
There were no material disposals of unquoted investments during the year
ended 30 June 2022.
(c) Transaction costs
The following transaction costs, comprising stamp duty and legal fees, were
incurred in the year:
2023 2022
£'000 £'000
On acquisitions - 12
On disposals - -
- 12
10. Current assets
Debtors 2023 2022
£'000 £'000
Dividends and interest receivable 382 193
Other debtors 19 13
401 206
11. Current liabilities
Creditors: amounts falling due within one year
2023 2022
£'000 £'000
Other creditors and accruals 519 432
The Directors consider that the carrying amount of creditors falling due
within one year approximates to their fair value.
12. Called-up share capital
2023 2022
£'000 £'000
Ordinary Shares of 1p each, allotted, called up and fully paid:
Opening balance of 85,316,586 (2022: 75,000,000) shares 853 750
Repurchase of 711,720 (2022: nil) shares into treasury (7) -
Placing of nil (2022: 10,316,586) shares - 103
Subtotal of 84,604,866 (2022: 85,316,586) shares 846 853
711,720 (2022: nil) shares held in treasury 7 -
Closing balance(1) 853 853
(1)Represents 85,316,586 (2022: 85,316,586) shares of 1p each, including
711,720 (2022: nil) held in treasury.
During the year, the Company repurchased 711,720 of its own shares, nominal
value £7,117, to hold in treasury, representing 0.83% of the shares
outstanding at the beginning of the year. The total consideration paid for
these shares amounted to £674,000. The reason for these purchases was to seek
to manage the volatility of the share price discount to NAV per share.
13. Reserves
Year ended 30 June 2023
Capital reserves
Share Special Gains Investment Revenue
premium(1) reserve(2) and losses holding reserve(5)
£'000 £'000 on sales of gains and £'000
investments(3) losses(4)
£'000 £'000
Opening balance 10,571 72,993 (360) 4,733 1,126
Losses on sales of investments based on the carrying value at the previous - - (105) - -
balance sheet date
Net movement in investment holding losses - - - (915) -
Transfer on disposal of investments - - (537) 537 -
Repurchase of the Company's own shares into treasury - (674) - - -
Management fees allocated to capital - - (334) - -
Dividends paid - - - - (1,109)
Retained revenue for the year - - - - 1,974
Closing balance 10,571 72,319 (1,336) 4,355 1,991
Year ended 30 June 2022
Capital reserves
Share Special Gains Investment Revenue
premium(1) reserve(2) and losses holding reserve(5)
£'000 £'000 on sales of gains and £'000
investments(3) losses(4)
£'000 £'000
Opening balance - 72,993 (151) 4,200 435
Proceeds of placing 10,729 - - - -
Expenses of placing (158) - - - -
Gains on sales of investments based on the carrying value at the previous - - 111 - -
balance sheet date
Net movement in investment holding gains - - - 521 -
Transfer on disposal of investments - - (12) 12 -
Management fees allocated to capital - - (286) - -
Transaction costs - - (22) - -
Dividend paid - - - - (428)
Retained revenue for the year - - - - 1,119
Closing balance 10,571 72,993 (360) 4,733 1,126
The Company's Articles of Association permit dividend distributions out of
realised capital profits.
(1)Share premium is a non distributable reserve and represents the amount by
which the fair value of the consideration received from shares issued exceeds
the nominal value of shares issued.
(2)This is a distributable capital reserve arising from the cancellation of
the share premium, and may be distributed as dividends or used to repurchase
the Company's own shares.
(3)This is a realised (distributable) capital reserve and may be distributed
as dividends or used to repurchase the Company's own shares.
(4)This reserve may include some holding gains on liquid investments (which
may be deemed to be realised) and other amounts which are unrealised. An
analysis has not been made between those amounts that are realised (and may be
distributed as dividends or used to repurchase the Company's own shares) and
those that are unrealised.
(5)The revenue reserve may be distributed as dividends or used to repurchase
the Company's own shares.
14. Net asset value per share
2023 2022
Net assets attributable to shareholders (£'000) 88,753 89,916
Shares in issue at the year end 84,604,866 85,316,586
Net asset value per share 104.90p 105.39p
15. Reconciliation of total return on ordinary activities before finance
costs and taxation to net cash inflow from operating activities
2023 2022
£'000 £'000
Total return before taxation 620 1,443
Less capital return before taxation 1,354 (324)
Less accumulation dividends(1) (416) (51)
(Increase)/decrease in prepayments and accrued income (189) 14
(Increase)/decrease in other debtors (6) 1
Increase in other creditors 87 98
Management fee and transaction costs allocated to capital (334) (308)
Net cash inflow from operating activities 1,116 873
(1)Accumulation dividends are capitalised to investments.
16. Uncalled capital commitments
At 30 June 2023, the Company had uncalled capital commitments amounting to
£8,749,000 (2022: £17,392,000) in respect of follow-on investments, which
may be drawn down or called by investee entities, subject to standard notice
periods.
17. Transactions with the Managers
Under the terms of the Alternative Investment Fund Manager Agreement, the
Manager is entitled to receive a management fee. Details of the basis of the
calculation are given in the Directors' Report on page 54 of the 2023 Annual
Report and Accounts.
The fee payable to the Manager in respect of the year ended 30 June 2023
amounted to £614,000 (2022: £512,000), of which £307,000 (2022: £171,000)
was outstanding at the year end. Any investments in funds managed or advised
by the Manager or any of its associated companies, are excluded from the
assets used for the purpose of the calculation and therefore incur no fee.
Under the terms of the Investment Management Agreement, the Manager may
reclaim from the Company certain expenses paid by the Manager on behalf of the
Company to HSBC in connection with accounting and administrative services
provided to the Company. These charges amounted to £66,000 for the year ended
30 June 2023 (2022: £96,000), and the whole of this amount (2022: same) was
outstanding at the year end.
No Director of the Company served as a Director of any company within the
Schroder Group at any time during the year, or prior period.
In accordance with the terms of a discretionary mandate between the Company,
Big Society Capital Limited and Rathbone Investment Management Limited is
entitled to receive a management fee for portfolio management services
relating to certain of the Company's investments. Details of the basis of the
calculation are given in the Directors' Report on page 54 of the 2023 Annual
Report and Accounts. The fee payable to Rathbone in respect of the year ended
30 June 2023 amounted to £55,000, (2022: £61,000) of which £13,000 (2022:
£14,000) was outstanding at the year end.
18. Related party transactions
Details of the remuneration payable to directors are given in the
Directors' Remuneration Report on page 64 of the 2023 Annual Report and
Accounts and details of Directors' shareholdings are given in the Directors'
Remuneration Report on page 65 of the 2023 Annual Report and Accounts. Details
of transactions with the Managers are given in note 17 above. There have been
no other transactions with related parties during the year or prior period.
19. Disclosures regarding financial instruments measured at fair
value
The Company's financial instruments within the scope of FRS 102 that are held
at fair value comprise certain investments held in its investment portfolio.
FRS 102 requires that financial instruments held at fair value are categorised
into a hierarchy consisting of the three levels below. A fair value
measurement is categorised in its entirety on the basis of the lowest level
input that is significant to the fair value measurement.
Level 1 - valued using unadjusted quoted prices in active markets for
identical assets.
Level 2 - valued using observable inputs other than quoted prices included
within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the Company's policy for valuing investments are given in note
1(b) on page 78 of the 2023 Annual Report and Accounts. Level 3 investments
have been valued in accordance with note 1(b)(ii) to (vii).
The Company's unlisted investments held at fair value are valued using a
variety of techniques consistent with the recommendations set out in the
International Private Equity and Venture Capital guidelines. Investments in
third-party managed funds were valued by reference to the most recent net
asset value provided by the relevant manager. The valuation methods adopted by
third-party managers include using comparable company multiples, net asset
values, assessment of comparable company performance and assessment of
milestone achievement at the investee. For certain investments, such as High
Impact Housing, the third-party manager may appoint external valuers to
periodically value the underlying portfolio of assets. The valuations of
third-party managed funds will also be subject to an annual audit. The
valuations of all investments are considered by the Portfolio Manager and
recommended to the AIFM, who in turn recommends them to the Company. Where it
is deemed appropriate, the Portfolio Manager may recommend an adjusted
valuation to the extent that the adjusted valuation represents the Portfolio
Manager's view of fair value.
At 30 June, the Company's investment held at fair value, were categorised as
follows:
2023 2022
£'000 £'000
Level 1 9,342 16,847
Level 2 - -
Level 3 54,857 50,153
Total 64,199 67,000
There have been no other transfers between Levels 1, 2 or 3 during the year
(2022: nil).
Movements in fair value measurements included in Level 3 during the year are
as follows:
2023 2022
£'000 £'000
Opening book cost 44,693 26,222
Opening investment holding gains 5,460 4,244
Opening fair value of Level 3 investments 50,153 30,466
Purchases at cost 6,957 18,471
Sales proceeds (1,742) -
Net gains on investments (511) 1,216
Closing fair value of Level 3 investments 54,857 50,153
Closing book cost 49,908 44,693
Closing investment holding gains 4,949 5,460
Closing fair value of Level 3 investments 54,857 50,153
20. Financial instruments' exposure to risk and risk management policies
The Company's objectives are set out on the inside front cover of this report.
In pursuing these objectives, the Company is exposed to a variety of financial
risks that could result in a reduction in the Company's net assets or a
reduction in the profits available for dividends.
These financial risks include market risk (comprising interest rate risk and
other price risk), liquidity risk and credit risk. The Directors' policy for
managing these risks is set out below. The Board coordinates the Company's
risk management policy. The Company has no significant exposure to foreign
exchange risk on monetary items.
The Company's classes of financial instruments may comprise the following:
- investments in collective funds, listed and unlisted bonds,
shares of quoted and unquoted companies which are held in accordance with the
Company's investment objective;
- debtors, creditors, short-term deposit and cash arising
directly from its operations;
- bank loans used for investment purposes; and
- derivatives used for efficient portfolio management or
currency hedging.
(a) Market risk
The fair value or future cash flows of a financial instrument held by the
Company may fluctuate because of changes in market prices. This market risk
comprises two elements: interest rate risk and other price risk. Information
to enable an evaluation of the nature and extent of these two elements of
market risk is given in parts (i) and (ii) of this note, together with
sensitivity analyses where appropriate. The Board reviews and agrees policies
for managing these risks. The Manager assesses the exposure to market risk
when making each investment decision and monitors the overall level of market
risk on the whole of the investment portfolio on an ongoing basis.
(i) Interest rate risk
Interest rate movements may affect the level of income receivable on
investments carrying a floating interest rate coupon, cash balances and
interest payable on any loans or overdrafts when interest rates are re-set.
Management of interest rate risk
Liquidity and borrowings are managed with the aim of increasing returns to
shareholders. The Company may borrow from time to time, but gearing will not
exceed 20 per cent of net asset value at the time of drawing. Gearing is
defined as borrowings less cash, expressed as a percentage of net assets. The
Company has arranged an overdraft facility with HSBC Bank plc but it has not
been utilised during the year or prior year.
Interest rate exposure
The exposure of financial assets and financial liabilities to floating
interest rates, giving cash flow interest rate risk when rates are re-set, is
shown below:
2023 2022
£'000 £'000
Exposure to floating interest rates:
Investments carrying a floating interest rate coupon 5,603 4,852
Cash at bank and in hand 2,089 1,310
7,692 6,162
Sterling cash balances at call earn interest at floating rates based on the
Sterling Overnight Interest Average rates ("SONIA"). The above year end
amounts are broadly representative of the exposure to interest rates during
the year and prior year.
Interest rate sensitivity
The following table illustrates the sensitivity of the return after taxation
for the year and net assets to a 0.75% (2022: 0.75%) increase or decrease in
interest rates in regards to the Company's monetary financial assets and
financial liabilities. This level of change is considered to be a reasonable
illustration based on observation of current market conditions. The
sensitivity analysis is based on the Company's monetary financial instruments
held at the accounting date with all other variables held constant.
2023 2022
0.75% 0.75% 0.75% 0.75%
increase decrease increase decrease
in rate
in rate
in rate
in rate
£'000
£'000
£'000
£'000
Income statement - return after taxation
Revenue return 58 (58) 46 (46)
Capital return - - - -
Total return after taxation 58 (58) 46 (46)
Net assets 58 (58) 46 (46)
(ii) Other price risk
Other price risk includes changes in market prices which may affect the value
of investments.
Management of other price risk
The Board meets on at least four occasions each year to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors. The portfolio management team has responsibility for monitoring the
portfolio, which is selected in accordance with the Company's investment
objective and seeks to ensure that individual stocks meet an acceptable
risk/reward profile. The Board may authorise the Manager to enter derivative
transactions for the purpose of currency hedging, although non-sterling
exposures are expected to be limited.
Market price risk exposure
The Company's total exposure to changes in market prices at 30 June comprises
the following:
2023 2022
£'000 £'000
Investments held at fair value through profit or loss 64,199 67,000
The above data is broadly representative of the exposure to market price
risk during the period.
Concentration of exposure to market price risk
An analysis of the Company's investments is given on pages 34 and 35 of the
2023 Annual Report and Accounts. This shows a concentration of exposure to the
social housing sector in the United Kingdom.
Market price risk sensitivity
The following table illustrates the sensitivity of the return after taxation
for the period and net assets to an increase or decrease of 10% in the fair
values of the Company's investments. This level of change is considered to be
a reasonable illustration based on observation of current market conditions.
The sensitivity analysis is based on the Company's exposure to the underlying
investments and includes the impact on the management fee but assumes that all
other variables are held constant.
2023 2022
10% 10% 10% 10%
increase in decrease in increase in decrease in
fair value fair value fair value fair value
£'000 £'000 £'000 £'000
Income statement - return after taxation
Revenue return (26) 26 (27) 27
Capital return 6,394 (6,394) 6,673 (6,673)
Total return after taxation and net assets 6,368 (6,368) 6,646 (6,646)
Percentage change in net asset value 7.2% (7.2%) 7.4% (7.4%)
(b) Liquidity risk
This is the risk that the Company will encounter difficulty in meeting its
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset.
Management of the risk
The Portfolio Manager monitors the cash position to ensure sufficient is
available to meet the Company's financial obligations. For this purpose, the
Portfolio Manager may retain up to 20% of net assets in Liquidity Assets,
other liquid investments and a reserve of cash. The Company has also arranged
an overdraft facility with HSBC Bank plc.
Liquidity risk exposure
Contractual maturities of financial liabilities, based on the earliest date on
which payment can be required are as follows:
2023 2022
Three Total Three Total
months
£'000
months
£'000
or less
or less
£'000
£'000
Creditors: amounts falling due within one year
Other creditors and accruals (519) (519) (432) (432)
(519) (519) (432) (432)
(c) Credit risk
Credit risk is the risk that the failure of the counterparty to a transaction
to discharge its obligations under that transaction could result in loss to
the Company.
Credit risk exposure
The Company is exposed to credit risk principally from debt securities held,
loans and receivables and cash deposits.
Portfolio dealing
The credit ratings of broker counterparties are monitored by the AIFM and
limits are set on exposure to any one broker.
Exposure to the Custodian
The custodian of the Company's assets is HSBC Bank plc which has long-term
Credit Ratings of AA- with Fitch and Aa3 with Moody's.
Any assets held by the custodian will be held in accounts which are segregated
from the custodian's own trading assets. If the custodian were to become
insolvent, the Company's right of ownership of those investments is clear and
they are therefore protected. However the Company's cash balances are all
deposited with the custodian as banker and held on the custodian's balance
sheet. Accordingly, in accordance with usual banking practice, the Company
will rank as a general creditor to the custodian in respect of cash balances.
Exposure to debt securities
The Portfolio Manager's investment process ensures that potential investments
are subject to robust analysis, appropriate due diligence and approval by an
investment committee. Pre-investment checks are made to prevent breach of the
Company's investment limits, which are designed to ensure a diversified
portfolio to manage risk. Debt securities are subject to continuous monitoring
and quarterly reports are presented to the Board.
Credit risk exposure
The following amounts shown in the Statement of Financial Position, represent
the maximum exposure to credit risk at the year end:
2023 2022
Balance Maximum Balance Maximum
Sheet
exposure
Sheet
exposure
£'000
£'000
£'000
£'000
Fixed assets
Investments held at fair value through profit 64,199 - 67,000 -
Investments held at amortised cost (debt securities) 22,583 22,583 21,832 21,832
Current assets
Debtors 401 401 206 206
Cash at bank and in hand 2,089 2,089 1,310 1,310
89,272 25,073 90,348 23,348
(d) Fair values of financial assets and financial liabilities
All financial assets and liabilities are either carried in the balance sheet
at fair value, or the balance sheet amount is a reasonable approximation of
fair value.
21. Capital management policies and procedures
The Company's capital management objectives are to ensure that it will be able
to continue as a going concern, and to maximise the income and capital return
to its equity shareholders.
The Company's capital structure comprises the following:
2023 2022
£'000 £'000
Equity
Called-up share capital 853 853
Reserves 87,900 89,063
Total equity 88,753 89,916
The Board, with the assistance of the Manager, monitors and reviews the
broad structure of the Company's capital on an ongoing basis. This review will
include:
- the possible use of gearing, which will take into account the
Manager's views on the market;
- the potential benefit of repurchasing the Company's own shares
for cancellation or holding in treasury, which will take into account the
share price discount;
- the opportunity for issue of new shares; and
- the amount of dividend to be paid, in excess of that which is
required to be distributed.
22. Events after the accounting date that have not been reflected in the
financial statements
There have been no events we are aware of since the balance sheet date which
either require changes to be made to the figures included in the financial
statements or to be disclosed by way of note.
Status of announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the
published Annual Report and Accounts for the year ended 30 June 2022 and do
not constitute the statutory accounts for that year. The 2022 Annual Report
and Accounts have been delivered to the Registrar of Companies and included
the Report of the Independent Auditors which was unqualified and did not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted from the Annual
Report and Accounts for the year ended 30 June 2023 and do not constitute the
statutory accounts for the year. The 2023 Annual Report and Accounts include
the Report of the Independent Auditors which is unqualified and does not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2023 Annual Report and Accounts will be delivered to
the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents of any website
accessible from hyperlinks on the Company's webpages (or any other website) is
incorporated into, or forms part of, this announcement.
1 (#_ftnref1) Outcomes for All: Ten Years of Social Outcomes Contracts, Big
Society Capital, June 2022
2 (#_ftnref2)
https://bigsocietycapital.com/latest/investment-into-uk-social-impact-exceeds-9-billion-despite-economic-gloom/
3 (#_ftnref3)
https://www.investmentweek.co.uk/opinion/4130808/recession-probablycoming
4 (#_ftnref4) Institute for Government, 2023
5 (#_ftnref5) Joseph Rowntree Foundation, 2023
6 (#_ftnref6) House of Commons Library, Rising Cost of Living in the UK
report, 2023
7 (#_ftnref7) SBSI Impact Report
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