REG - VPC Specialty - Annual Financial Report
28/04/2022 07:00
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RNS Number : 6105J VPC Specialty Lending Invest. PLC 28 April 2022
28 April 2022
VPC SPECIALTY LENDING INVESTMENTS PLC
(the "Company" or "Parent Company") with its subsidiaries (together) the
"Group")
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2021
The Board of Directors (the "Board") of VPC Specialty Lending Investments PLC
(ticker: VSL) present the Company's Annual Financial Report for the year ended
31 December 2021 (the "Annual Report").
ABOUT
VPC Specialty Lending Investments PLC (the "Company" or "VSL") provides
asset-backed lending solutions to emerging and established businesses
("Portfolio Companies") with the goal of building long-term, sustainable
income generation. VSL focuses on providing capital to vital segments of the
economy, which for regulatory and structural reasons are underserved by the
traditional banking industry. Among others, these segments include small
business lending, working capital products, consumer finance and real estate.
VSL offers shareholders access to a diversified portfolio of opportunistic
credit investments originated by non-bank lenders with a focus on the rapidly
developing technology-enabled lending sector.
The Company's investing activities are undertaken by Victory Park Capital
Advisors, LLC (the "Investment Manager" or "VPC"). VPC is an established
private capital manager headquartered in the United States with a global
presence. VPC identifies and finances emerging and established businesses
globally and seeks to provide the Company with attractive yields on its
portfolio of credit investments. VPC offers a differentiated private lending
approach by financing Portfolio Companies through asset-backed delayed draw
term loans, which is referred to as "Asset Backed Lending," designed to limit
downside risk while providing shareholders with strong income returns. Through
rigorous due diligence and credit monitoring by the Investment Manager, the
Company generates stable income with significant downside protection.
A summary of the principal terms of the Investment Manager's appointment and a
statement relating to their continuing appointment can be found on page 122
within the full version Annual Report. The investment policy can be found
beginning on page 134 of the full version Annual Report. Founded in 2007 and
headquartered in Chicago, VPC is an SEC-registered investment adviser that has
been actively involved in the financial services marketplace since 2010.
The Annual Report includes the results of the Company (also referred to as the
"Parent Company") and its consolidated subsidiaries (together the "Group").
The Company (No. 9385218) was admitted to the premium listing segment of the
Official List of the Financial Conduct Authority ("FCA") (the "Official List")
and to trading on the London Stock Exchange's main market for listed
securities (the "Main Market") on 17 March 2015, raising £200 million by
completing a placing and offer for subscription (the "Issue"). The Company
raised a further £183 million via a C Share issue on 2 October 2015. The C
Shares were converted into Ordinary Shares and were admitted to the Official
List and to trading on the Main Market on 4 March 2016.
Further information on VPC Specialty Lending Investments PLC is available at
https://vpcspecialtylending.com (https://vpcspecialtylending.com) .
The 2022 Annual General Meeting will be held on Monday, 13 June 2022.
Printed copies of the Annual Report and Notice of the Company's 2022 Annual
General Meeting will be posted or made available to the Company's
shareholders.
A copy of the Annual Report will be submitted shortly to the National
Storage Mechanism and will be available for inspection at
https://data.fca.org.uk/a/nsm/nationalstoragemechanism
(https://data.fca.org.uk/a/nsm/nationalstoragemechanism) and will also
available on the Company's website at https://vpcspecialtylending.com/
(https://vpcspecialtylending.com/)
A copy of the Notice of the Company's 2022 Annual General Meeting will be
published and made available in due course.
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2021. All page
numbers below refer to the Annual Report on the Company's website.
SUMMARY AND HIGHLIGHTS FOR THE YEAR
The financial and business highlights for the year ended 31 December
2021 are as follows:
v January 2021: VPC Impact Acquisition Holdings (NASDAQ: "VIH") announced on
11 January 2021 that it had entered into a definitive agreement to combine
with Bakkt Holdings, LLC.
v February 2021: The Company declared a dividend of 2.00 pence per share for
the three-month period to 31 December 2020.
v March 2021: The Company fully exited its equity investment in Elevate
Credit, Inc. (NYSE: ELVT) and the Company funded equity investments in VPC
Impact Acquisition Holdings II (NASDAQ: VPCB) ("VPCB") and VPC Impact
Acquisition Holdings III (NYSE: VPCC) ("VPCC") for USD$1.3 million each.
Additionally, the Company closed on a USD$130 million gearing facility with
Massachusetts Mutual Life Insurance Company, which was used to repay the
Company's previous gearing facility with Pacific Western Bank and the
first-out participation facility on Avant, held with Axos Bank.
v April 2021: The Company fully exited its asset backed investments in ATA KS
Holdings, LLC and reinvested in three new asset backed and equity investments
in Razor Group GmbH ("Razor"), Moonshot Holdings LLC ("Moonshot"), and CHEQ
Limited CAN ("Beforepay").
v May 2021: The Company declared its 13th consecutive dividend of 2.00p per
share for the three-month period to 31 March 2021.
v May 2021: The Company invested in three new asset backed investments in
Pattern Brands, Inc ("Pattern"), Factory 14 S.a.r.l. ("Factory 14") and
Holland Law Firm ("Holland").
v June 2021: VPCC entered into a definitive agreement to combine with Dave.
The business combination, which remains subject to VPCC shareholder and
customary regulatory approvals, is expected to close in the third or fourth
quarter of 2021.
v July 2021: The Company invested in one new asset backed investment, TALA
Mobile, S.A.P.I. DE C.V. ("Tala").
v August 2021: The Company declared its 14th consecutive dividend of 2.00p per
share for the three-month period to 30 June 2021.
v August 2021: VPCB announced it had entered into a definitive agreement to
combine with FinAccel Pte. Ltd.
v August 2021: VPC announced it had become a signatory of the United
Nations-supported Principles for Responsible Investment ("PRI"), demonstrating
its commitment to integrating ESG considerations into investment decision
making.
v October 2021: Bakkt Holdings, LLC, announced it had completed the previously
announced business combination with VCP Impact Acquisition Holdings, a special
acquisition company sponsored by VPC Impact Acquisition Holders Sponsor, LLC
(VPC Sponsor"), an affiliate of VPC. The combined company now operates as
Bakkt Holdings, Inc. ("Bakkt") (NTSE: BKKT).
v November 2021: The Company declared its 15th consecutive of 2.00p per share
for the three-month period to 30 September 2021.
v November 2021: The Company receives Investment Week's Annual Investment
Company of the Year Award (Debt Category).
v December 2021: L&F Acquisition Corp (NYSE: LNGA) ("LNFA") a special
purpose acquisition company sponsored by JAR Sponsor, LLC ("VPC Sponsor"), an
affiliate of VPC, announced it had entered into a definitive agreement to
combine with ZeroFox, an enterprise software-as-a-service leader in external
cybersecurity.
SUBSEQUENT EVENTS
Since the year ended 31 December 2021:
v January 2022: VPCC and Dave, Inc. announced that the business combination
closed following approval by the VPCC stockholders.
v February 2022: The Company declared its 16th consecutive dividend of 2.00p
per share for the three-month period to 31 December 2021.
v March 2022: The Company noted that on 14 March 2022, VPC Impact Acquisition
Holdings II (NASDAQ: VPCB) ("VPCB"), a special purpose acquisition company
sponsored by VPC Impact Acquisition Holdings Sponsor II, LLC ("VPC Sponsor"),
an affiliate of Victory Park Capital ("VPC"), and FinAccel, the parent company
of Kredivo, the leading AI-enabled digital consumer credit platform in
Southeast Asia, announced the mutual termination of their previously announced
business combination agreement. VPCB was to consider future options, including
seeking an alternative business combination. The parties agreed that, in the
event that VPCB was liquidated, Kredivo would issue a warrant with a nominal
exercise price to VPCB, providing VPCB with the ability to acquire a stake
equal to 3.5% of the fully diluted equity securities of Kredivo.
TOP TEN POSITIONS
The table below provides a summary of the top ten positions of the Group, net
of gearing, as at 31 December 2021. The summary includes a look-through of the
Group's investments in VPC Synthesis, L.P. and VPC Offshore Unleveraged
Private Debt Fund Feeder, L.P. to illustrate the exposure to underlying
Portfolio Companies as it is a requirement of the investment policy (set out
on pages 134 and 135) to consider the application of the restrictions in this
policy on a look-through basis.
INVESTMENT COUNTRY INVESTMENT TYPE PERCENTAGE
OF NAV
Applied Data Finance, LLC United States Asset Backed Lending 12.14%
Applied Data Finance, LLC provides credit to non-prime and near-prime
consumers in select states across the U.S. The company is headquartered in San
Diego, with offices in New York, in addition to an IT and call center support
in Chennai, India. Financings are in the form of instalment loans and range up
to $10,000.
Caribbean Financial Group Holdings, L.P. Latin America Asset Backed Lending 10.74%
Caribbean Financial Group Holdings, L.P. is the largest non-bank provider of
unsecured consumer instalment loans to the Caribbean market, operating
primarily in the western and southern Caribbean. CFG was founded in 1979,
operates over 70 store branches across seven Caribbean countries and has its
largest operations in Panama and Trinidad & Tobago. CFG's product offering
includes loan sizes ranging from $200 to $10,000, loan terms up to 79 months
with no prepayment penalties and fully amortizing simple interest loans with
equal monthly payments and rates based on underwriting customers' ability to
pay.
Perch HQ, LLC United States Asset Backed Lending 9.84%
PerchHQ, LLC is a technology-enabled platform that seeks to acquire and
operate a diverse portfolio of e-commerce assets on retail marketplaces. Perch
primarily targets Amazon third-party sellers ("TPS") and e-commerce brands
with: (i) leading market positions in respective product categories; (ii) a
defensible "moat" from customer reviews and search engine optimisation; and
(iii) $1-15M in sales and $200K-5M in contribution margin (or "Asset-Level
EBITDA") (on average, ~$2M of Asset-Level EBITDA at ~25% operating margins).
The company aims to acquire underlying brands at 2-5x Asset Level EBITDA, and
drive value through post-acquisition brand initiatives including pricing
strategy, advertising strategy, cost savings, supply chain efficiencies, and
general Amazon account management optimization.
Elevate Credit, Inc. United States Asset Backed Lending 7.36%
Elevate Credit, Inc. ("Elevate") is a lender of unsecured short-term cash
advances and instalment loans to individuals primarily through the internet.
The company provides consumers with access to responsible and transparent
credit options within the non-prime lending industry. Elevate currently offers
and / or supports the following products: U.S. instalment loans (Rise), lines
of credit (Elastic) and credit card (Today Card).
Deinde Group, LLC United States Asset Backed Lending 4.86%
Deinde Group, LLC ("Integra") is an early stage, online provider of unsecured
consumer loans to borrowers. Integra was founded in March 2014 by Arthur
Tretyak (CEO) and is led by a team of seasoned consumer finance and risk
analytics executives, with prior experience including TitleMax, a $400.0
million nonprime consumer lender, and Enova, a $800.0 million nonprime
consumer lender).
Heyday Technologies, Inc. United States Asset Backed Lending 4.40%
Heyday Technologies, Inc. ("Heyday") is a tech enabled platform that seeks to
acquire and aggregate a diverse portfolio of retail assets which are sold
primarily via e-commerce marketplaces. Heyday primarily targets Amazon
Marketplace third-party sellers ("TPS"). The company aims to acquire
underlying brands/seller at 2-5x earnings, and drive value through
post-acquisition brand management initiatives and underlying multiple
expansion. Heyday aims to differentiate itself from other TPS aggregators in
the novel ecosystem by investing heavily and early in its technology and
analytics capabilities thereby allowing the company to easily identify and
optimize operating improvements within its portfolio at scale.
VPC Impact Acquisition Holdings Sponsor, LLC United States Equity Investment 4.01%
Bakkt Holdings, LLC, the digital asset marketplace founded in 2018, completed
a business combination with VPC Impact Acquisition Holdings, a special purpose
acquisition company sponsored by VPC Impact Acquisition Holdings Sponsor, LLC
("VPC Sponsor"), an affiliate of Victory Park Capital ("VPC"). The combined
company operates as Bakkt Holdings, Inc. ("Bakkt"), and Bakkt's shares of
Class A common stock trade on the New York Stock Exchange under the ticker
symbol "BKKT". Bakkt is a trusted digital asset marketplace that enables
consumers to buy, sell, store and spend digital assets. Bakkt's retail
platform, now available through the recently released Bakkt App and to
partners through the Bakkt platform, amplifies consumer spending and bolsters
loyalty programmes, adding value for all key stakeholders within the Bakkt
payments and digital assets ecosystem.
Razor Group GMBH Germany Asset Backed Lending 3.59%
Razor Group GmbH ("Razor") is a technology driven consumer goods platform that
acquires and operates a diverse portfolio of branded Amazon third-party seller
("TPS") assets primarily in Europe. Razor targets brands with €100K - €3.5
million of seller's discretionary earnings ("Asset-Level EBITDA") to be
acquired at purchase multiples of 1.5x - 5.0x TTM Asset-Level EBITDA.
West Creek Financial, Inc. United States Asset Backed Lending 2.56%
West Creek Financial, Inc. ("West Creek") provides a point-of-sale,
lease-to-own solution for underserved customers enabling purchases of durable
goods such as furniture, mattresses, appliances and tires. West Creek's
proprietary underwriting model verifies FICO scores, a measure of consumer
credit risk, and collects additional data from third-party providers such as
Clarity, DataXRisk, and FactorTrust to analyse numerous variables to evaluate
and approve users.
Dave, Inc. United States Asset Backed Lending 2.31%
Dave, Inc. ("Dave") is an emerging Neobank and mobile app-based service that
links to consumers' external bank accounts, monitors spending behaviour,
provides budgeting tools and issues warnings about upcoming bills that might
push users towards an overdraft. Dave has over 5.0 million bank connected
customers on its platform and recently launched "Dave Banking", its own
branded, zero fee checking account (1 million+ accounts). On top of its
banking services, Dave's core product allows users to budget for upcoming
expenses before their next paycheck and offers interest-free advances of up to
$200.
ENQUIRIES
For further information, please contact:
Victory Park Capital via Jefferies or Winterflood (below) info@vpcspecialtylending.com
Brendan Carroll (Senior Partner and Co-Founder)
Gordon Watson (Partner)
Jefferies International Limited Tel: +44 20 7029 8000
Stuart Klein
Gaudi le Roux
Winterflood Securities Limited Tel: +44 20 3100 0000
Neil Morgan
Chris Mills
Link Company Matters Limited (Company Secretary) Tel: +44 20 7954 9567
Email: VPC@linkgroup.co.uk
STRATEGIC REPORT
CHAIRMAN'S STATEMENT
In my first Chairman's Statement, I am pleased to report on a year in which
the Company made excellent progress and delivered strong returns to
shareholders. This against a backdrop which continues to this day of turbulent
economic and geopolitical events. Throughout, our Investment Manager has
remained focused on the successful management of risk, supporting Portfolio
Companies and discovering new investment opportunities.
Whilst elements of our returns in the financial year may be particular to
2021, we believe that the investment case for the Company remains robust, not
only due to the resilient nature of its asset backed investments, but also
through its advantageous market positioning in the fintech universe.
HIGHLIGHTS IN 2021
v Total NAV return of 27.60% for the year, the Company's best ever, surpassing
the 2019 and 2020 total NAV returns of 11.34% and 11.12%, respectively;
v Total shareholder return of 27.32% for the year;
v The Company paid its 16th consecutive quarterly dividend of 2.00p per share
for the three-month period to December 2021;
v Resilient performance of the asset backed loan investments with the Company
receiving all interest payments on time during the year; and
v The Company was named "Investment Company of the Year" (Debt Category) at
Investment Week's annual investment awards in November 2021.
THE COMPANY'S BUSINESS
For the twelve months to the end of December 2021, the NAV per share of the
Company increased by 27.60% (26..42p) on a total return basis, comprising a
NAV per share increase from 95.72p to 114.14p, plus the 8.00p of dividends
paid in 2021. During the year, the share price increased from 78.70p to
92.20p. The dividends paid are in line with the target dividend of 8.00p per
year set out in the IPO Prospectus, were fully covered by the total returns
during the year and continue to be the long-term dividend target of the
Company.
The Company generated returns from three key sources: the core lending
business, equity interests arising from the core lending business, and special
purpose acquisition company ("SPAC") investments.
The core lending business, which represents 67% of the total portfolio at
year-end, has over recent years benefitted from a secure lending position,
ensuring minimal capital losses and a high level of income generation that
supports the annual dividend payment of 8.00p per share. Most of the Company's
asset backed investments are delayed draw, floating rate senior secured loans
that have equity subordination. The asset backed investments are also backed
by underlying collateral consisting of consumer loans, small business loans
and other types of collateral.
The equity interests arising from the core lending business allow us to
benefit from an element of equity participation without having to contribute
equity risk capital. This has proven to be an extremely valuable aspect of the
Company performance in 2021. Over the year to 31 December 2021, this has
contributed 11.59p per share to overall returns.
Finally, VPC's strength in the market has allowed us to participate in the
opportunities presented by SPAC sponsorship. VPC has successfully developed an
extensive deal sourcing network in the fintech universe through its existing
lending business, and throughout 2021 SPAC deals have provided a way to
capitalise on this network for the benefit of our shareholders. The SPAC deals
that VPC participates in are generally with counterparties it is already
familiar with through its lending relationships, ensuring a greater element of
confidence in the SPAC process. That said, the SPAC market as a whole has been
particularly volatile of late, and our holdings have been no exception, with
valuations of the Company's SPAC holdings over the year ranging from 27.95p to
4.82p per share. The value of the Company's SPAC holdings have contributed
10.64p per share to overall returns and had a total value of 12.43p per share
at 31 December 2021.
As at 31 December 2021, the Group was fully invested in a diversified
portfolio of asset backed and equity investments that continue to deliver
strong risk-adjusted returns. While the macroeconomic backdrop for
non-traditional credit has remained somewhat volatile, VPC's risk mitigation
measures, the resilience of the portfolio and its performance have been
encouraging.
THE COMPANY'S SHARES
The Board takes the view that the typical discount to NAV at which our
Company's shares trade is too high and this has obvious disadvantages to the
Company. Shareholders are unable to fully realise the underlying value of
their holdings, while the Company is unable to raise additional equity capital
to take advantage of attractive lending opportunities in the market.
As noted in last year's Annual Report, in 2020 as part of the Continuation
vote, the Company will offer an exit opportunity where the Company will buy
back up to 25% of the shares in the Company should they trade at an average
discount greater than 5% over the first quarter of 2023. As things currently
stand, that exit opportunity is likely to be offered and all shareholders will
be notified in due course should this continue to be the case. In the
meantime, taking action to reduce the discount to NAV is a priority for the
Company, and various steps are being taken towards achieving that goal. In the
meantime, the discount ought to be helped by our strong and consistent
investment performance, backed by active risk management, by our ability to
demonstrate that to existing and potential shareholders, and to market the
shares actively.
INVESTMENT OPPORTUNITIES
As the Investment Manager details in their report, they are seeing a healthy
supply of opportunities in the market. VPC's long-standing reputation and
relationships with Portfolio Company management teams, industry professionals
and experts have helped to create a differentiated deal pipeline.
Overall, we are very pleased with the Company's performance, which
demonstrates the merit of VPC's approach to structured credit lending to
technology-enabled businesses combined with a strong culture of risk
management. It also demonstrates the value of acquiring equity stakes that
benefit from the continued growth of the Portfolio Companies.
THE COMPANY'S IMPACT
As an investment trust, the Company does not itself have employees, property,
factories, and the like, so our ability to positively impact what we do flows
to the greatest extent from our Investment Manager and the opportunities we
are invested in. The Investment Manager aims to operate and invest
responsibly, ethically, and fairly and we continue to review our
environmental, social and governance ("ESG") stance. Decisions taken are made
with due consideration to long-term sustainability and impact on stakeholders.
For example, the Directors and Investment Manager are mindful of their carbon
footprints if they are required to travel on Company business.
In addition, the Board and the Investment Manager is committed to ensuring the
Company's culture is in line with its stated purpose, values, and strategy.
The Company has several policies and procedures in place to assist with
maintaining a culture of good governance, including those relating to
diversity. All aspects of diversity, including gender diversity, are
acknowledged, and we believe the Company's activities benefit from a wide
range of skills, knowledge, experience, backgrounds, and perspectives.
Through our lending to and investing in innovative and often technology-based
businesses, we are able to have a particularly positive impact on the wider
world in which we operate. For example, our lending has helped Sunbit, Inc. to
grow its business helping people with everyday needs like car repairs and
opticians. Our investment in Dave, Inc. supports the company's cash advance
product which helps consumers avoid bank fees with little or no cost to the
consumer. These are examples of the Investment Manager's commitment to leading
by example, taking a progressive approach to responsible investment, and
playing its part in building a more sustainable financial system.
OPERATIONAL RESILIENCE
As the world entered its second full year of the COVID-19 pandemic, its
effects continue to impact global health, economies, and social behavior. Our
Investment Manager's senior leadership has continued to follow guidance from
the U.S. Centers for Disease Control and Prevention ("CDC"). VPC employees
have more recently been able to make a successful return to working in the
office, following the procedures outlined in VPC's Pandemic Response Plan. At
the same time, VPC's technology and resources ensured that their employees
could also work from home where necessary, without any operational disruption,
as they largely did through 2021. As a result, the work of the Company has not
been negatively impacted by those factors. The Investment Manager continues to
monitor the latest health developments to determine the most appropriate
working policies for employees. For example, the Pandemic Response Plan
continues to be updated on a regular basis by a dedicated internal team who
use government and CDC guidance to define safety policies and procedures, and
whilst we hope that this year's Annual General Meeting will be able to be held
in person, our ability to do so will depend on current conditions.
In terms of portfolio management, the Investment Manager continues to promote
a culture of proactive risk management and controls across the portfolio. Most
of the underlying investment exposure is to the U.S. consumer. As such, the
impact on the US economy from the COVID-19 pandemic continues to present
additional potential credit risk. The investment teams are in contact with the
Portfolio Companies to ensure they are taking prudent steps to mitigate
transmission risk. The Investment Manager monitors the cash balances of the
Company daily and as of the writing of this report, the Company has received
all contractual interest payments and will continue to monitor cash flow
closely during the COVID-19 pandemic.
OUTLOOK
Finally, the Board hopes that you, your family, friends and colleagues are and
remain healthy. At the time of writing this outlook, and as 2022 unfolds,
there is much to feel apprehensive about. The COVID-19 pandemic is still with
us, delaying hopes of a return to normality. Interest rates are rising sharply
as governments withdraw pandemic support programmes and as central banks
battle spiraling inflation. Of even greater concern, the ongoing conflict
between Russia and Ukraine is an historic geopolitical event and a
humanitarian tragedy that threatens to have long-term implications for the
global economy. More details on the outlook of the Company can be found on
pages 17 and 18 of the Investment Manager's Report.
At uncertain times like these, it is understandable to consider only the
negatives. But there is also room for some optimism. As of the date of this
report, the prospects for the Company remain attractive. Our Investment
Manager has shown it can carry on its normal business and continue to deliver
risk-adjusted returns through the pandemic to date. It has also demonstrated
the level of its commitment to invest responsibly, both within the Company and
as an exemplar to Portfolio Companies. That is something that the Board and
all shareholders can feel justifiably positive about whilst the Investment
Manager continues to work to generate returns on our behalf.
Graeme Proudfoot
Chair
27 April 2022
INVESTMENT MANAGER'S REPORT
The Company's investment manager is Victory Park Capital Advisors, LLC ("VPC"
or the "Investment Manager"), an established private capital manager
headquartered in the United States with a global presence. VPC identifies and
finances emerging and established businesses globally and seeks to provide the
Company with attractive yields on its portfolio of credit investments. VPC
offers a differentiated private lending approach by financing Portfolio
Companies through asset-backed delayed draw term loans, which is referred to
as "Asset Backed Lending". This is designed to limit downside risk while
providing shareholders with strong income returns.
VPC's senior secured credit strategy provides opportunistic financing across
select investment verticals. Target investments are typically shorter in
duration and aim to offer higher yields and greater structural protections
than traditional lenders, with an emphasis on capital preservation and income
generation across market cycles. VPC generates value through its core
competency as a credit investor with direct origination and primarily acts as
a sole lender. VPC believes its dedicated, seasoned and experienced investment
team provides an advantage in sourcing, deal structuring and risk management.
Together, this allows VPC to provide reliable capital solutions throughout the
ecosystem. VPC offers an institutional-calibre partnership with a hands-on
approach. As a result, companies and global partners continue to seek out VPC
as a leading capital provider.
VPC believes it is uniquely positioned to unlock potential value given its
background investing across multiple, complex and non-traditional assets as a
financial services investor, together with its special situations and
event-driven investing expertise.
ESTABLISHED CREDIT MANAGER
v Founded prior to the global financial crisis in 2007 by Richard Levy and
Brendan Carroll
v VPC has long-standing experience investing opportunistically amidst
volatility and market complexities
v Headquartered in Chicago with resources in New York, Los Angeles, Austin,
and Miami
v Investment Manager of the Company since its IPO in 2015
v Company named "Best Performing Debt Fund" in Citywire's Fourth Annual
Investment Trust Awards
PRIVATE CREDIT SOLUTIONS
v Private credit specialist with a focus on capital preservation across
multiple market environments
v Lender to both established and emerging businesses across various industries
in the U.S. and abroad
v Extensive experience lending to companies across the credit spectrum
DEVELOPED RISK MANAGEMENT CULTURE & PROCESS
v Deeply embedded risk culture permeates VPC
v VPC leverages proprietary risk tools and analytics to drive underwriting and
portfolio management decisions
v Customised monitoring and reporting process allows for granular analysis
across multiple dimensions
SEASONED INVESTMENT TEAM
v Senior investment team averages over 20 years of relevant experience
v Since inception, VPC has invested approximately USD$9.0 billion across 144+
investments
v History of generating strong returns throughout various market cycles
v Differentiated restructuring expertise complements strong risk management
STRATEGY AND BUSINESS MODEL
STRUCTURING APPROACH
The Company provides a floating rate Credit Facility with an interest rate
floor to the Portfolio Company via a Special-Purpose Vehicle ("SPV"),
which retains assets that are originated by the Portfolio Company. The
financing is typically arranged in the form of a senior secured facility and
the Portfolio Company injects junior capital into the SPV, along with the
excess spread from the underlying assets providing significant first-loss
protection to the Company. The Company's investments are typically structured
with significant overcollateralisation and credit enhancement to minimise any
loss given default in a scenario where the Company must foreclose on
collateral to repay its investment. The overcollateralisation is sized to
withstand significant stress to liquidation values without impacting the
Company's investment outcome. As the Investment Manager of the Company, VPC
targets collateral assets with stable and predictable liquidation value and a
clear path to exit in the event of a default. Investments are secured via
liens and equity pledges on the corporate entity or collateral which provide
multiple avenues of structural protection.
One of the pioneers of financial services lending, VPC has structuring
expertise and relationships, enabling it to secure preferential capacity to
lock up attractive, long-term economics through structured facility upsizes
and rights of first refusal. The hunt for yield is extremely competitive in a
low interest rate environment. This means VPC competes with some of the
largest and most recognised firms in the world when sourcing new investments.
However, VPC believes it has created a sustainable competitive advantage in
its investment strategy. VPC's investment approach has consistently paid off,
evident through the success in backing earlier-stage companies with excellent
management and marquee venture capital backing, allowing for locked-up terms
that would otherwise be difficult to negotiate at a later stage. Not only does
this provide better economics, but VPC can also structure its investments more
conservatively than in a more competitive process. VPC benefits from working
with companies as they scale under a conservative structure. As investments
approach maturity several years later, VPC has an informed opinion to approach
an extension and/or upsize negotiations.
The Company, alongside VPC's private funds, also receives the benefit of scale
from the arrangement. VPC is in a position to negotiate better terms and grow
with the Portfolio Companies, ultimately resulting in the ability to provide
larger facilities. All investors benefit, as the Company continues to have
significant undrawn investment opportunities from longstanding investments,
some of which were initiated a decade ago. The scale of the relationships also
serves to minimise the cash drag within the Company. Investments are funded
based on draw requests received on a weekly basis. As the Company receives a
repayment on an investment, capital can be redeployed quickly, and in some
cases even the same day.
PROPRIETARY SOURCING ADVANTAGE
The Company has exposure to several proprietary investments in Portfolio
Companies with attractive risk/reward characteristics that other investors in
the sector are typically unable to access. This is due to VPC's long
experience and reliable reputation in the sector as an early participant with
an extensive sourcing network, having executed transactions partnering with
several leading financial and venture capital sponsors in the financial
services sector.
VPC also leverages its relationships with Portfolio
Companies and financial sponsors to secure significant lending capacity
and is able to
negotiate attractive equity kickers as well as mitigate prepayment and interest rate risks.
The rapid growth of capital deployed in this sector since 2010 has also
generated positive network effects and helps ensure that the Investment
Manager has a first look at opportunities developing in the sector.
RISK MANAGEMENT
With a strong focus on capital preservation, VPC structures its investments to minimise risk
for the Company and augments this with a comprehensive risk management
framework. This involves a rigorous, hands-on approach to post-investment
monitoring of portfolio risk and performance. Assessing the balance of
expected returns with inherent risks is an integral part of the Investment
Manager's investment strategy and drives
all aspects of portfolio construction. This risk management
approach and focus are key to meeting the
Company's investment objectives, particularly in a potentially more
challenging future credit environment.
Stress Scenario Performance and Wind-down Analysis
The Company's Risk Management team performs regular analysis to stress test
each Portfolio Company's lending performance to determine a portfolio level
downside scenario. The largest risk mitigant in the downside scenarios is the
first-loss protections that are structured into the Company's asset backed
investments. This ensures that the Portfolio Companies and their equity
investors' capital would have to be fully impaired before a asset backed
facility loses any interest income or principal invested. In the Company's
recourse investments, this means the Portfolio Companies would also lose the
cash and other assets that are outside of the borrowing base to cover the
first-loss protections. VPC prides itself on its structural protections, risk
management and portfolio monitoring, as this is an important area of focus
that is constantly evaluated.
Even as the risks brought about by the COVID-19 pandemic begin to recede, risk
management, risk controls, and liquidity management remain key concerns. VPC's
dedicated Risk Management team is committed to working collaboratively with
investment teams to closely monitor the Company's investment portfolio. Teams
have also continued to work proactively with the Portfolio Companies to ensure
they are taking prudent steps to mitigate risk and throughout the pandemic.
REVIEW OF 2021 PERFORMANCE
The Company completed the year with a total NAV return of 27.60% and a gross
revenue return of 13.03%. This was the Company's best year since inception in
performance terms, and caps four years of very strong returns. Investors
continue to benefit from the "best of both worlds", with consistent
distributable income achieved through asset backed lending, combined with the
positive performance of the Company's equity investments.
Credit investments are structured with first-loss protection as Portfolio
Companies generally contribute the equity tranche, which aligns incentives
with equity investors. Equity investments are made up of common stock,
preferred stock, warrants and convertible debt, many of which were acquired in
conjunction with making the Company's asset backed loan investments. While the
world has not yet returned to "normal", the existing asset backed loan
portfolio has continued to perform as expected, and collateral across asset
classes has remained healthy and stable. The post-COVID investments made in
2021 offer attractive risk-adjusted returns and will continue to provide
growth opportunities over the coming years.
VPC's long-standing reputation and relationships with Portfolio Company
management teams, industry professionals and experts has facilitated a
differentiated deal pipeline. Over the course of 2021, the Company had the
opportunity to expand its exposure in special purpose acquisition companies
("SPACs"). SPACs have proven to be an extremely effective way for private
companies to tap into public equity markets, and SPAC sponsors typically
receive 20% of the common equity in the SPAC for an investment of
approximately 3% to 4% of the IPO proceeds. VPC's expertise as an investment
manager, and relationships in the financial technology sector, gave it the
opportunity to supplement its core business model by identifying SPAC
opportunities within the sector. As at 31 December 2021, VPC had sponsored
attractive deals for four SPACs. The Company has invested 1.43p per share in
SPACs, and as at 31 December 2021 the SPACs represented approximately 12.43p
per share, of which 11.00p per share of the total was unrealised gain.
As the world entered its second full year of the COVID-19 pandemic, the VPC
Senior Leadership team continued to follow the updates and guidance from the
U.S. Centers for Disease Control and Prevention ("CDC"). VPC employees were
able to continue to work in the office, utilise resources and meet with
visitors at their comfort level, provided they followed the procedures
outlined in the corporate Pandemic Response Plan. At the same time, VPC's
robust technology systems and resources enabled VPC employees to continue to
work remotely where necessary, without any operational disruption. In terms of
portfolio management, VPC maintained a culture of proactive risk management
and controls across the portfolio. The investment teams were in constant
contact with the Portfolio Companies to proactively ensure prudent steps were
being taken to mitigate transmission risk on a real-time basis.
Overall, VPC is very pleased with the Company's performance, which
demonstrates the merit of VPC's approach to structured credit lending to
technology-enabled businesses and strong culture of risk management. It also
demonstrates the value of acquiring equity stakes that benefit from the
continued growth of the Portfolio Companies, and the strong pipeline of
investment opportunities that result from these relationships, which gives VPC
a critical advantage in sourcing deals and securing preferential capacity in
the development of Portfolio Companies. This approach has now attracted a
significant following among retail investors and led to increased industry
recognition, including receiving Investment Week's Annual Investment Company
of the Year (Debt Category) Award in November 2021.
In February 2022, the Company declared its sixteenth consecutive quarterly
dividend payment of 2.00p per share for the three-month period to 31 December
2021. In an era where high levels of income are increasingly hard to maintain,
VPC is proud of the Company's proven track record of earning consistently high
returns for investors, while protecting downside risk via credit enhancement
and deep structuring expertise.
INVESTMENTS
In order to meet the Company's investment objectives within the pre-defined
portfolio limits, capital was allocated across several Portfolio Companies
with a focus on portfolio level diversification. As at 31 December 2021, the
Company's investments were diversified across 48 different Portfolio Companies
across the U.S., UK, Europe, Australia, Asia and Latin America. As at 31
December 2021, the Company had exposure to 24 Portfolio Companies through
asset backed loans and 34 Portfolio Companies through equity securities or
convertible notes.
During the year, the Company's portfolio of asset backed investments continued
to generate strong risk-adjusted returns. These investments benefit from
first-loss protection and excess spread, which provides downside protection in
the case of increased credit losses. The credit metrics on the portfolio's
underlying loans continued to show strong performance with no signs of
immediate macro weakness. Furthermore, the pipeline of available asset backed
investment opportunities remained strong.
GEARING AND CAPITAL MARKETS
The Company selectively employs gearing to enhance returns generated by the
underlying credit assets. This is structured to limit the borrowings to
individual SPVs that hold the assets, and to ensure the gearing providers have
no recourse to the Company. As the financial services industry continues to
grow and become more established, VPC has been approached by multiple large
global banks to offer the Company attractive gearing facilities. Given the
breadth of VPC's portfolio, the Company has a distinct competitive advantage
in securing these gearing facilities at attractive rates. During the year, the
Look-Through Gearing Ratio remained relatively consistent. Having started the
year at 0.32x it ended the year at 0.34x, as VPC continued to take a
conservative approach to liquidity and risk management with the gearing
facilities through the COVID-19 pandemic.
ESG INVESTMENT CONSIDERATIONS
VPC has a long history of commitment to ESG considerations as part of its
investment process and firm-wide operations and has always aimed to invest in
businesses that it can be proud to support. In 2018, VPC launched a
partnership with the International Finance Corporation ("IFC"), the private
sector arm of the World Bank, to provide credit to businesses in emerging
markets. Since that initial policy in 2018, the policy and processes around
how VPC integrates ESG into its investment strategies and firm operations have
continued to expand in scope and sophistication.
Today, VPC's ESG policy is considered in the investment decisions made across
its organisation. Part of the policy involves clearly defining what the
Company will and will not invest in, as there are certain industries and
business practices that are not supported. Another important piece of the ESG
programme involves understanding the risks and potential risks related to ESG,
and enacting processes to identify, mitigate and remediate any issues that do
arise. Lastly, and perhaps most importantly, the ESG policy creates
accountability throughout the organisation and across Portfolio Companies.
VPC approaches ESG from a holistic perspective to understand the full range of
potential ESG risks for any given investment. For each investment
underwritten, the applicable ESG factors are identified and mapped-out in
conjunction with a due diligence plan to understand the relevant risks and
mitigants related to those factors. With fintech investments, the Investment
Manager focuses on the "Social" aspects of ESG, as those typically have the
largest overall impact on the business. It looks to invest in fintech
companies that are supporting financial inclusion and have a positive impact
on customers and other stakeholders. That means having products that are
transparent and structured in a way that is fair to customers and promotes
financial health. It also means having proper controls and systems in place to
safeguard against harmful tactics or business practices.
As VPC has expanded into new investment categories, this frequently means
re-evaluating ESG factors and risks in those specific areas. The past 12
months saw tremendous growth in e-commerce-related businesses, and those
investments face unique ESG questions around acceptable manufacturing
practices and supply chains. It is VPC's responsibility to educate itself
about the key issues relating to any potential investment, and it is important
it sets appropriate standards in these areas and discusses those issues with
all relevant partners.
As part of VPC's standard risk management process, it is very active in
monitoring Portfolio Companies across all dimensions, including ESG. It has
frequent touchpoints with Portfolio Companies and receives extensive reporting
to identify any potential issues. It also holds weekly Investment Committee
meetings to discuss any potential concerns and how to address or remediate
them. Equally important, VPC regularly engages with Portfolio Companies to
understand how they are thinking about ESG-related issues and to share best
practices. Given VPC works with many early stage, high growth companies, it
aims to act as a resource to Portfolio Companies as they grow and develop
their ESG practices over time.
In August 2021, VPC announced it had become a signatory of the United
Nations-supported Principles for Responsible Investment ("PRI"), further
demonstrating its commitment to integrating ESG considerations into its
investment decision making. PRI is the pre-eminent institution advocating for
ESG issues to be at the forefront of investment decision making and VPC is
proud to be a signatory. This demonstrates VPC takes its responsibility to
drive positive impact, both within the financial services industry and in
society, very seriously, and that it is committed to responsible investing for
the long term.
OUTLOOK
In 2021, the Company completed its best-ever year in performance terms, and
investors benefited from a fully covered annual dividend of 8.00p per share
and double-digit total NAV returns. VPC found significant opportunity to earn
attractive risk-adjusted returns through its extensive sourcing relationships
around the globe, largely focusing on emerging sectors of the digital economy,
where pricing margins were not yet compressed but risk could be properly
underwritten. The Company will continue to cautiously deploy capital, and, at
this point, the portfolio is well-positioned to withstand future challenges.
In addition, the Investment Manager remains optimistic about future capital
gains through the Company's equity portfolio, strong pipeline of potential new
investments, and through SPAC sponsorship.
At the time of writing, the global economic outlook remains uncertain. The
COVID-19 pandemic continues to present significant risks, and as government
support and monetary stimulus begins to taper off, a period of extended
volatility seems likely. High inflation and persistent supply shortages are
also having a negative impact. In addition, the invasion of Ukraine by Russia
has led to increased market volatility and widespread sanctions on Russian
assets and individuals, contributing to a spiking oil price and concern over
long-term energy valuations. In its role as Investment Manager, VPC continues
to monitor all risks very closely, to ensure the portfolio can perform
regardless of the economic environment, by offering capital protection and
income generation throughout various market cycles.
As these uncertainties are navigated, the Investment Manager will continue to
exercise caution. It structures and underwrites investments with a focus on
downside protection, in addition to stress-testing collateral across various
scenarios. For example, while the Company's investment portfolio primarily
consists of floating-rate credit facilities with interest rate floors, a
rising interest rate environment has the potential to affect the investments,
the profitability of the Portfolio Companies (and that of underlying
borrowers), potentially leading to lower returns or changes in repayments or
default rates of the underlying borrowers.
From a purely macroeconomic standpoint, the Investment Manager believes the
main advantages of the current portfolio includes the floating rate, shorter
duration and fully amortised underlying collateral. Specifically, the weighted
average duration of the Company's underlying collateral as at 31 December 2021
was less than one year. VPC believes duration is a misunderstood risk that
could present significant challenges during a rising interest rate
environment, particularly for those investors currently locked into
long-duration fixed-rate credit.
While VPC often discusses the underlying credit performance of the Company's
asset backed investments, it is also important to emphasise the additional
layers of protection beyond direct asset security. Due to the structured
nature of the Company's asset backed investments, including (in most cases)
corporate guarantees and significant first-loss protection, the investments
are generally not affected by changes in credit performance until a platform
defaults and all corporate resources (separate from the borrowing base of loan
collateral) are exhausted. In addition to monitoring the credit performance,
VPC monitors the overall corporate performance of Portfolio Companies,
including attending board meetings as an observer and having weekly update
calls with Portfolio Company management.
VPC remains focused on providing capital to vital segments of the economy that
are underserved by the traditional banking industry, including small
businesses, working capital products, consumer finance and real estate, among
others. It believes in the long-term value of providing capital to these
sectors and will continue to look for and identify other trends that can
create opportunities for additional investments in the future.
Victory Park Capital Advisors, LLC
Investment Manager
27 April 2022
BUSINESS MODEL
COMPANY STATUS
The Company is registered as a public limited company under the Companies Act
2006 and is an investment company under Section 833 of the Companies Act 2006.
It is a member of the Association of Investment Companies ("AIC").
The Company was incorporated on 12 January 2015 and commenced its operations
on 17 March 2015.
The Company has been approved as an investment trust under Sections 1158/1159
of the Corporation Tax Act 2010. The Directors are of the opinion, under
advice, that the Company continues to conduct its affairs as an Approved
Investment Trust under the Investment Trust (Approved Company) (Tax)
Regulations 2011.
Under the Investment Management Agreement ("IMA") dated 26 February 2015
between the Company and the Investment Manager, the Investment Manager is
appointed to act as investment manager and Alternative Investment Fund Manager
("AIFM") of the Company with responsibility for portfolio management and risk
management of the Company's investments.
PURPOSE
The Company's defined purpose is to deliver our Investment Objective. Board
culture promotes strong governance and long-term investment, mindful of the
interests of all stakeholders. The Board believes that, as an investment
company with no employees, this is best achieved by working in partnership
with our appointed Investment Manager.
INVESTMENT OBJECTIVE
The Company provides asset backed lending solutions to emerging and
established businesses with the goal of building long-term, sustainable income
generation. The Company focuses on providing capital to vital segments of the
economy, which for regulatory and structural reasons are underserved by the
traditional banking industry. Among others, these segments include small
business lending, working capital products, consumer finance and real
estate. The Company offers shareholders access to a diversified portfolio of
opportunistic credit investments originated by non-bank lenders with a focus
on the rapidly developing technology-enabled lending sector. Through rigorous
diligence and credit monitoring, the Company generates stable income with
significant downside protection.
INVESTMENT POLICY
The Company seeks to achieve its investment objectives by investing in
opportunities in the financial services market through portfolio companies and
other lending related opportunities.
The Company invests directly or indirectly into available opportunities,
including by making investments in, or acquiring interests held by,
third-party funds (including those managed by the Investment Manager or its
affiliates).
Direct investments include consumer loans, SME loans, advances against
corporate trade receivables and/or purchases of corporate trade receivables
originated by portfolio companies ("Debt Instruments"). Such Debt Instruments
may be subordinated in nature, or may be second lien, mezzanine or unsecured
loans.
Indirect investments include investments in portfolio companies (or in
structures set up by portfolio companies) through the provision of senior
secured floating rate credit facilities ("Credit Facilities"), equity or other
instruments. Additionally, the Company's investments in Debt Instruments and
Credit Facilities are made through subsidiaries of the Company or through
partnerships in order to achieve bankruptcy remoteness from the platform
itself, providing an extra layer of credit protection.
The Company may also invest in other financial services related opportunities
through a combination of debt facilities, equity or other instruments.
The Company may also invest (in aggregate) up to 10% of its Gross Assets (at
the time of investment) in listed or unlisted securities (including equity and
convertible securities or any warrants) issued by one or more of its portfolio
companies or financial services entities.
The Company invests across several portfolio companies, asset classes,
geographies (primarily US, UK, Europe, Australia, Asia and Latin America) and
credit bands in order to create a diversified portfolio and thereby mitigates
concentration risks.
Borrowing policy
Borrowings may be employed at the level of the Company and at the level of any
investee entity (including any other investment fund in which the Company
invests or any special purpose vehicle ("SPV") that may be established by the
Company in connection with obtaining gearing against any of its assets).
The Company may, in connection with seeking such gearing or securitising its
loans, seek to assign existing assets to one or more SPVs and/or seek to
acquire loans using an SPV.
The Company may establish SPVs in connection with obtaining gearing against
any of its assets or in connection with the securitisation of its loans (as
set out further below). It intends to use SPVs for these purposes to seek to
protect the geared portfolio from group level bankruptcy or financing risks.
The aggregate gearing of the Company and any investee entity (on a
look-through basis, including borrowing through securitisation using SPVs)
shall not exceed 1.5 times its NAV (1.5x).
As is customary in financing transactions of this nature, the particular SPV
will be the borrower and the Company may from time to time be required to
guarantee or indemnify a third-party lender for losses incurred as a result of
certain "bad boy" acts of the SPV or the Company, typically including fraud or
wilful misrepresentation or causing the SPV voluntarily to file for bankruptcy
protection. Any such arrangement will be treated as 'non-recourse' with
respect to the Company provided that any such obligation of the Company shall
not extend to guaranteeing or indemnifying ordinary portfolio losses or the
value of the collateral provided by the SPV.
Management Arrangements
The Company has an independent Board of Directors which has appointed Victory
Park Capital Advisors, LLC ("VPC"), the Company's Investment Manager, as
Alternative Investment Fund Manager ("AIFM") under the terms of an Investment
Management Agreement ("IMA") dated 26 February 2015. The IMA is reviewed
annually by Board and may be terminated by six-months' notice from either
party subject to the provisions for earlier termination as stipulated therein.
The Company's investing activities have been delegated by the Directors to
VPC. VPC has significant expertise in the sector and enables the Company to
identify unique investment opportunities to add to the Portfolio. It has made
investments and commitments across several financial services Portfolio
Companies, spanning multiple geographies, products and structures, and is
continuing to deploy capital into existing and new Portfolio Companies.
Details of the Investment Management fee and performance fees payable to VPC
during the period are set out in note 10 on pages 90 and 91.
PERFORMANCE MANAGEMENT
The Board uses the following KPIs to help assess progress against the
Company's objectives. Further comments on these KPIs are contained in the
Chairman's Statement and Investment Manager's Report sections, respectively.
NAV AND TOTAL RETURN
The Directors regard the Company's NAV return as a key component to delivering
value to shareholders over the long term. Furthermore, the Board believes that
in accordance with the Company's objective, total return (which includes
dividends) is the best measure for long term shareholder value.
At each meeting, the Board receives reports detailing the Company's NAV and
total return performance, portfolio composition and related analyses. A full
description of performance and the investments is contained in the Investment
Manager's Report, commencing on page 10.
DIVIDEND YIELD
The Company intends to distribute at least 85% of its distributable income
earned in each financial year by way of dividends. Including the distribution
made in March 2022, which related to the three-month period ended 31 December
2021, the Company has distributed 100% (2020: 97%) of its distributable income
earned during the year ended 31 December 2021.
GEARING RATIO
As at 31 December 2021, the look-through gearing ratio was 0.34x (2020: 0.32x)
for the Company. As disclosed in the investment policy, the aggregate gearing
of the Company and any investee entity (on a look-through basis, including
borrowing through securitisation using SPVs) shall not exceed 1.5 times its
NAV (2020: 1.5x). The Board and Investment Manager monitor the look-through
gearing ratio to ensure it is in line with the investment policy.
SHARE PRICE PREMIUM/DISCOUNT
As a closed-ended listed investment trust, the Company's share price can and
does deviate from its NAV. This results in either a premium or a discount to
NAV. This is another component of the long-term shareholder return. The Board
continually monitors the Company's premium or discount to NAV and has the
ability to issue or buy back shares to limit the volatility of the share price
discount or premium. For more information on the Company's authorities in
relation to its share capital, see page 106.
During the trading period, the Ordinary Shares moved in a discount range of
9.53% to 26.09%. The Company closed the year at a discount of 19.22% (2020:
17.77%) to NAV. During the year, the Company repurchased a total of 4,370,972
shares at an average price of 85.61 pence per share.
EXPENSES
The Board is conscious of the impact of expenses on returns and seeks to
minimise expenses while ensuring that the Company receives good service from
its suppliers. The industry-wide measure for investment trusts is the ongoing
charges ratio. This seeks to quantify the on-going costs of running the
Company. The ongoing charges ratio for 2021 was 1.79%, compared to 1.86% for
2020. This measures the annual normal on-going costs of an investment trust,
excluding performance fees, one-off expenses and dealing costs, as a
percentage of the average shareholders' funds.
PRINCIPAL RISKS
The Company is exposed to risks that are monitored and actively managed to
meet its investment objectives. These include market risks related to interest
rates, currencies and general availability of financing as well as credit and
liquidity risks given the nature of the instruments in which the Company
invests. In addition, the underlying Portfolio Companies are exposed to
operational and regulatory risks as this part of the financial services sector
remains relatively nascent.
The Directors are ultimately responsible for identifying and controlling
risks. Day-to-day management of the risks arising from the financial
instruments held by the Group has been delegated to the Investment Manager of
the Company.
The Investment Manager regularly reviews the investment portfolio and industry
developments to make sure that any events impacting the Group are identified
and considered. This also ensures that any risks affecting the investment
portfolio are identified and mitigated to the fullest extent possible.
The Board is responsible for the Company's system of risk management and
internal control and for reviewing its effectiveness. The Board has adopted a
detailed matrix of principal risks affecting the Company's business as an
investment trust and has established associated policies and processes
designed to manage and, where possible, mitigate those risks. The matrix is
monitored by the Audit and Valuation Committee quarterly.
This system assists the Board in determining the nature and extent of the
risks it is willing to take in achieving its strategic objectives. Both the
principal and emerging risks and the monitoring system are subject to a robust
assessment at least annually. The last review by the Board took place in
February 2022.
Although the Board believes that it has a robust framework of internal
controls in place, it can provide only reasonable, and not absolute, assurance
against material financial misstatement or loss and is designed to manage, not
eliminate, risk.
Below is a summary of the principal and emerging risks and uncertainties faced
by the Company and the Group, which have remained unchanged throughout the
year, and actions taken by the Board and, where appropriate, its Committees,
to manage and mitigate these risks and uncertainties. Principal risks include
liquidity risk, credit risk, financing risk, portfolio company risk,
regulatory risk and market risk. Business continuity risk, climate risk and
geopolitical risk are all considered to be emerging risks. The non-financial
risks comprise of regulatory risk, business continuity risk and geopolitical
risk and the financial risks comprise of liquidity risk, credit risk,
financing risk, market risk and portfolio company risk. These are set out
below:
RISK MITIGATION
LIQUIDITY RISK
Liquidity risk is defined as the risk that the Group may not be able to settle The Investment Manager manages the Group's liquidity risk by investing
or meet its obligations on time or at a reasonable price. primarily in a diverse portfolio of assets. As at 31 December 2021, 10% of the
loans had a stated maturity date of less than a year.
The Group may invest in the listed or unlisted equity of any Portfolio
Company. Investments in unlisted equity, by their nature, involve a higher In general, the weighted average maturity profile of the Group's assets was
degree of valuation and performance uncertainties and liquidity risks than lower than or equal to the term of the Group's corresponding debt facilities
investments in listed securities and therefore may be more difficult to which thereby reduced liquidity risk. Refer to Note 6 of the financial
realise. statements for the maturity profile of the Group's assets and liabilities.
In the event of adverse economic conditions in which it would be preferable The Board and the Investment Manager review the investment portfolio to ensure
for the Group to sell certain of its assets, the Group may not be able to sell it is in line with the investment policy, including restrictions, as outlined
a sufficient proportion of its portfolio as a result of liquidity constraints. on pages 134 and 135. The Board reviews cash flow forecasts to ensure the
In such circumstances, the overall returns to the Group from its investments group can meet its liabilities as they fall due.
may be adversely affected.
The Group continuously monitors fluctuations in currency rates. The Group
The Group is also exposed to liquidity risk with respect to the requirement to performs stress tests and liquidity projections to determine how much cash
pay margin cash to collateralise forward foreign exchange contracts used for should be held back to meet potential future obligations to settle margin
currency hedging purposes. calls arising from foreign exchange hedging.
The gearing facility has helped the Group reduce cash drag associated with the
currency hedging portfolio, while also allowing the Group to meet its
liabilities as they fall due.
The Investment Manager monitors the cash balances of the Group daily to ensure
that all ongoing expenses can be paid as they come due. During 2021, the Group
has received all contractual interest payments and continues to monitor cash
flow closely during the COVID-19 pandemic.
CREDIT RISK There is inherent credit risk in the Group's investments in credit assets.
However, this is typically mitigated by the significant first loss protection
Credit risk is the risk that one party to a financial instrument will cause a provided by the Portfolio Company under the Asset Backed Lending Model and the
financial loss for the other party by failing to discharge an obligation. excess spread generated by the underlying assets.
The Group's credit risks arise principally through exposures to loans acquired The Investment Manager performs a robust analysis during the underwriting
by the Group, which are subject to risk of borrower default. The ability of process for all new investments of the Group and monitors the eligibility of
the Group to earn revenue is completely dependent upon payments being made by the collateral at least monthly of the current assets in the Group's
the borrower, such as adverse movements in financial markets. portfolio. This process also includes due diligence performed by a third-party
reviewer during the underwriting process and subsequent reviews at least once
per year for the Group's Portfolio Companies.
The Group will invest across several Portfolio Companies, asset classes,
geographies (primarily US, UK, Europe, Australia, Asia and Latin America) and
credit bands to ensure diversification and to seek to mitigate concentration
risks.
The Investment Manager did not see new payment defaults during the year and
the Group has received all contractual payments through the date of this
report.
The Board and the Investment Manager review the investment portfolio to ensure
it is in line with the investment policy, including restrictions, as outlined
on pages 134 and 135. The Investment Manager monitors performance and
underwriting on an ongoing basis.
FINANCING RISK This risk is mitigated by limiting borrowings to ring-fenced SPVs without
recourse to the Group and employing gearing in a disciplined manner.
Financing risk is the risk that, whilst the use of borrowings by the Group
should enhance the net asset value of an investment when the value of an The Group has maintained a level of gearing throughout the year significantly
investment's underlying assets is rising, it will, however, have the opposite below the limit stipulated in the Prospectus as the Group is primarily
effect when the underlying asset value is falling. In addition, if an invested in the Asset Backed Lending Model.
investment's income falls for whatever reason, the use of borrowings will
increase the impact of such a fall on the net revenue of the Group's During the year, the Group replaced the current gearing provider with a new
investment and accordingly will have an adverse effect on the ability of the provider. The current facility was negotiated at attractive terms including a
investment to make distributions to the Group. three-year revolving period, an interest rate lower than that of the previous
facility, and an option to upsize the facility from US$130 million to US$200
The Group uses gearing to enhance returns generated by the underlying credit million and a six-year maturity.
assets and is exposed to the availability of financing at acceptable terms as
well as interest rate expenses and other related costs. The Board and the Investment Manager review the investment portfolio to ensure
it is in line with the investment policy, including investment restrictions,
as outlined on pages 134 and 135.
MARKET RISK
Market risk is the risk of loss arising from movements in observable market The Group has a diversified investment portfolio which significantly reduces
variables such as foreign exchange rates, equity prices and interest rates. the exposure to individual asset price risk. Detailed portfolio valuations and
The Group is exposed to market risk primarily through its Financial exposure analysis are prepared monthly and form the basis for the on-going
Instruments. risk management and investment decisions. In addition, regular scenario
analysis is undertaken to assess likely downside risks and sensitivity to
The Group is exposed to price risk arising from the investments held by the broad market changes, as well as assessing the underlying correlations amongst
Group for which prices in the future are uncertain. The investments in funds the separate asset classes.
are exposed to market price risk. Refer to Note 3 in the Financial Statements
for further details on the sensitivity of the Group's Level 3 investments to Exposure to interest rate risk is limited as the underlying credit assets are
price risk. typically fully amortising with a maximum maturity of five years. Furthermore,
generally the Group's Credit Facilities include a floating interest rate
Interest rate risk arises from the possibility that changes in interest rates component to the Portfolio Companies to account for an increase in interest
will affect future cash flows or the fair values of financial instruments. rate risk and they also have a set floor in the instance that interest rates
were to drop.
Currency risk is the risk that the value of net assets will fluctuate due to
changes in foreign exchange rates. Relevant risk variables are generally The Group mitigates its exposure to currency risk by hedging exposure between
movements in the exchange rates of non-functional currencies in which the Pound Sterling and any other currencies in which a significant portion of the
Group holds financial assets and liabilities. Group's assets may be denominated.
The Group is exposed to risks related to the reference rate reform and The Board reviews the price, interest rate and currency risk with the
replacement of benchmark interest rates such as GBP LIBOR and other interbank Investment Manager to ensure that exposure to these risks are appropriately
offered rates. There remains some uncertainty around the timing and precise mitigated.
nature of these changes.
The Investment Manager continues to monitor the potential impact of a
discontinuation of LIBOR rates on the Company's investments, based on the
expectation that reference rates will be evaluated and replaced timely for
investments with a variable rate component. Accordingly, it is difficult to
predict the full impact of the transition until new reference rates and
fallbacks are commercially accepted.
PORTFOLIO COMPANY RISK
The current market in which the Group participates is competitive and rapidly VPC has negotiated a significant number of proprietary capital deployment
changing. There is a risk that the Group will not be able to deploy its agreements with its existing asset backed lending partners each of which
capital, re-invest capital and interest of the proceeds of any future capital typically ensures the ability to deploy capital on attractive terms for
raisings, in a timely or efficient manner given the increased demand for several years.
suitable investments.
In addition, VPC is one of the largest investors in the specialty lending
The Group may face increasing competition for access to investments as the sector and therefore enjoys timely information and good access to emerging
alternative finance industry continues to evolve. The Group may face Portfolio Company opportunities. VPC has a team of investment and operational
competition from other institutional lenders such as fund vehicles and professionals which ensures that deployment opportunities with new and
commercial banks that are substantially larger and have considerably greater existing Portfolio Companies can be executed rapidly while minimising
financial, technical and marketing resources than the Group. Other operational risk.
institutional sources of capital may enter the market in the UK, US and other
geographies. VPC's pipeline of deployment opportunities remains strong with both existing
and new asset backed lending Portfolio Companies.
REGULATORY RISK
As an investment trust, the Company's operations are subject to wide ranging The Company provides debt capital to Portfolio Companies, which typically must
regulations. The financial services sector continues to experience significant comply with various state and national level regulations. This includes some
regulatory change at national and international levels. Failure to act in operating under interim permission and some now regulated from the FCA in the
accordance with these regulations could cause fines, censure or other losses UK as well as consumer lending and collections licenses in some US states.
including taxation or reputational loss. This risk is limited via detailed upfront due diligence of Portfolio
Companies' regulatory environments performed by the Investment Manager on
The Association of Investment Companies (AIC) is becoming increasingly focused behalf of the Board. All decisions taken are made with due consideration to
on ensuring ESG measures are implemented within investment companies. the long-term sustainability and impact on stakeholders.
In order to continue to qualify as an investment trust, the Company must The Company has procedures to monitor the status of its compliance with the
comply with the requirements of Section 1158 of the Corporation Tax Act 2010. relevant requirements to maintain its Investment Trust status, including
receiving and reviewing information and reporting from the Company Secretary
and other service providers as appropriate.
BUSINESS CONTINUITY RISK
As a result of the COVID-19 pandemic, there has been increased focus from The Investment Manager reviews its business continuity plans and operational
financial services regulators around the world on the contingency plans of resilience strategies on an ongoing basis and will take all reasonable steps
regulated financial firms. to continue meeting its regulatory obligations and to assess operational
risks, the ability to continue operating and the steps it needs to take to
serve and support its clients, including the Board.
The Investment Manager has not seen any disruptions to business during 2021
and into the beginning of 2022.
CLIMATE RISK
The world is facing unprecedented challenges in the face of climate change and The Investment Manager has performed an initial high-level materiality
growing inequality. The FSB Task Force on Climate-related Financial assessment of climate risk across its investment portfolio and is developing a
Disclosures (TCFD) has developed climate-related financial risk disclosures comprehensive action plan for both the Company and Group. No material impact
for companies to provide information to investors, lenders, insurers, and on the financial statements has been identified from the risks arising from
other stakeholders. climate change through the work performed by the Investment Manager from this
initial assessment.
The Investment Manager is reviewing the core disclosure elements of the TCFD
reporting framework. As an investment trust, the Company is not required to
provide information in compliance with TCFD.
GEOPOLITICAL RISK
The Group is subject to risks associated with unforeseen geopolitical events, The Investment Manager has a dedicated risk committee comprised of senior
including war, terrorist attacks, natural disasters, and ongoing pandemics, leadership and key principals. This committee works with each individual
which could create economic, financial, and business disruptions. portfolio investment team to develop a coordinated risk response across the
entire portfolio. The Investment Manager also increased the frequency of
portfolio company data collection and reporting. Additional information on the
Investment Manager's Pandemic Response plan can be found on pages 13 and 14.
Discussion on the Group's risk management and internal controls is on page
124.
As of the writing of this report, neither the Group nor Investment Manager
have any direct exposure to Russia or Ukraine in the portfolio, and the
Investment Manager has not seen any impact on the Group's collateral or
investments. That being said, the Group and Investment Manager recognise that
this conflict can lead to prolonged volatility in the global capital markets,
other macro implications on the world economy, and heightened risks generally.
The Investment Manager will continue to monitor all of our portfolio companies
closely and consider these developments as we look to invest additional
capital.
CULTURE
The Directors agree that establishing and maintaining a healthy corporate
culture among the Board and in its interaction with the Investment Manager,
shareholders and other stakeholders will support the delivery on its purpose,
values, and strategy. The Board is encouraged to lead by example and exemplify
the Company's culture of openness, debate and integrity through ongoing
dialogue and engagement with its service providers, principally the Investment
Manager.
The Board strives to ensure that its culture is in line with the Company's
purpose, values, and strategy. The Company has several policies and procedures
in place to assist with maintaining a culture of good governance including
those relating to diversity, Directors' conflicts of interest and Directors'
dealings in the Company's shares. The Board assesses and monitors compliance
with these policies as well as the general culture of the Board through Board
meetings and during the annual evaluation process which is undertaken by each
Director (for more information see the performance evaluation section on page
116).
The Board seeks to appoint the best possible service providers and evaluates
their remit, performance, and cost effectiveness on a regular basis as
described on page 115. The Board considers the culture of the Investment
Manager and other service providers, including their policies, practices, and
behaviour, through regular reporting from these stakeholders and during the
annual review of the performance and continuing appointment of all service
providers to ensure there is an alignment in the long-term objectives. The
Investment Manager and other service providers appointment are reviewed
annually to ensure these objectives are met.
EMPLOYEES, HUMAN RIGHTS, SOCIAL AND COMMUNITY ISSUES
The Board recognises the requirement under the Companies Act 2006 to detail
information about human rights, employees, and community issues, including
information about any policies it has in relation to these matters and the
effectiveness of these policies. These requirements do not apply to the
Company as it has no employees, all the Directors are non-executive, and it
has outsourced all its functions to third party service providers. The Company
has therefore not reported further in respect of these provisions but does
expect its service providers and portfolio companies to respect these
requirements.
BOARD DIVERSITY
As at 31 December 2021, following the retirement of Kevin Ingram, the Board of
Directors of the Company comprised of four male Directors and one female
Director. As at the date of this report the Board composition remains
unchanged. The Board acknowledges the benefits of diversity, including gender
diversity, and remains committed to ensuring that the Company's Directors
bring a wide range of skills, knowledge, experience, backgrounds and
perspectives. Further details of the Company's diversity policy are set out on
page 119.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) ISSUES
The Company has no employees, property or activities other than investments,
so its direct environmental impact is minimal. In carrying out its activities,
and in its relationships, the Company aims to conduct itself responsibly,
ethically and fairly. Directors are mindful of their own carbon footprints if
they are required to travel on Company business.
The Board is comprised entirely of non-executive Directors and the day-to-day
management of the Company's business is delegated to the Investment Manager.
The Investment Manager aims to be a responsible investor and believes it is
important to invest in companies that act responsibly in respect of
environmental, ethical and social issues.
The Company has no internal operations and therefore no greenhouse gas
emissions to report, nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic Report and
Directors' Reports) Regulations 2013, including those within its underlying
investment portfolio. However, the AIC is encouraging all member companies to
demonstrate how they are factoring ESG issues into their business practices.
The company continues to monitor the guidance published by the AIC and works
towards the drafting of its ESG policy. The business remains conscious of its
business decisions and the Board, supported by its service providers and
Investment Manager consider the long-term impact of all decisions and
challenge appropriately.
STREAMLINED ENERGY AND CARBON REPORTING (SECR)
The Company has no employees or property, and it does not combust any fuel or
operate any facility thus is taking the exemption. It does not, therefore,
have any greenhouse gas emissions to report from its operations, nor does it
have responsibility for any other emissions producing sources under the
Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013,
including those within its underlying investment portfolio. Additionally,
there are no annual emissions from the purchase of electricity, heat, steam or
cooling by the Company for its own use.
APPROVAL
This Strategic Report has been approved by the Board of Directors and signed
on its behalf by:
Graeme Proudfoot
Chair
27 April 2022
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 31 December 2021 but is derived from
those accounts. Statutory accounts for the year ended 31 December 2021 will be
delivered to the Registrar of Companies in due course. The Auditors have
reported on those accounts; their report was (i) unqualified, (ii) did not
include a reference to any matters to which the Auditors drew attention by way
of emphasis without qualifying their report and (ii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006. The text of
the Auditors' report can be found in the Company's full Annual Report and
Financial Statements on the Company's website at
https://vpcspecialtylending.com/ (https://vpcspecialtylending.com/) .
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2021
31 DECEMBER 2021 31 DECEMBER 2020
NOTES £ £
Assets
Cash and cash equivalents 7 6,300,572 6,416,028
Cash posted as collateral 7 4,133,588 1,140,000
Derivative financial assets 3,4 2,069,698 5,758,880
Interest receivable 4,708,481 3,613,047
Dividend and distribution receivable 3,996 3,812
Other assets and prepaid expenses 2,877,815 889,148
Loans at amortised cost 3,9 279,339,002 293,123,379
Investment assets designated as held at fair value through profit or loss 3 141,797,222 51,417,983
Total assets 441,230,374 362,362,277
Liabilities
Management fee payable 10 155,399 92,241
Performance fee payable 10 12,913,280 4,040,085
Derivative financial liabilities 3,4 1,508,675 -
Deferred income 174,603 253,403
Other liabilities and accrued expenses 1,550,415 1,332,920
Notes payable 8 107,267,260 86,087,183
Total liabilities 123,569,632 91,805,832
Total assets less total liabilities 317,660,742 270,556,445
Capital and reserves
Called-up share capital 20,300,000 20,300,000
Share premium account 161,040,000 161,040,000
Other distributable reserve 14 112,779,146 116,520,960
Capital reserve 1,667,026 (50,393,578)
Revenue reserve 20,615,367 21,847,960
Currency translation reserve 1,213,245 1,221,766
Total equity attributable to shareholders of the Parent Company 317,614,784 270,537,108
Non-controlling interests 18 45,958 19,337
Total equity 317,660,742 270,556,445
Net Asset Value per Ordinary Share 12 114.14p 95.72p
The financial statements on pages 42 to 49 were approved by the Board of
Directors on 27 April 2022 and signed on its behalf by:
Graeme Proudfoot
Chair
27 April 2022
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2021
Revenue Capital Total
NOTES £ £ £
Revenue
Net gain (loss) on investments 5 - 67,114,995 67,114,995
Foreign exchange gain (loss) - (2,049,374) (2,049,374)
Interest income 5 33,158,150 - 33,158,150
Other income 5 4,419,620 - 4,419,620
Total return 37,577,770 65,065,621 102,643,391
Expenses
Management fee 10 3,802,097 - 3,802,097
Performance fee 10 3,733,910 9,179,370 12,913,280
Credit impairment losses 9 - 3,636,142 3,636,142
Other expenses 10 3,212,166 159,909 3,372,075
Total operating expenses 10,748,173 12,975,421 23,723,594
Finance costs 5,706,429 - 5,706,429
Net return on ordinary activities before taxation 21,123,168 52,090,200 73,213,368
Taxation on ordinary activities 11 - - -
Net return on ordinary activities after taxation 21,123,168 52,090,200 73,213,368
Attributable to:
Equity shareholders 21,123,168 52,060,604 73,183,772
Non-controlling interests 18 - 29,596 29,596
Return per Ordinary Share (basic and diluted) 13 7.55 18.62 26.17
Other comprehensive income
Currency translation differences - (11,496) (11,496)
Total comprehensive income 21,123,168 52,078,704 73,201,872
Attributable to:
Equity shareholders 21,123,168 52,052,083 73,175,251
Non-controlling interests 18 - 26,621 26,621
The total column of this statement represents the Group's statement of
comprehensive income, prepared in accordance with UK-adopted International
Accounting Standards and with the requirements of the Companies Act 2006 as
applicable to companies reporting under those standards. The supplementary
revenue and capital columns are both prepared under guidance published by the
Association of Investment Companies ("AIC"). All items in the above Statement
derive from continuing operations. Amounts in Other comprehensive income may
be reclassified to profit or loss in future periods.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2020
REVENUE CAPITAL TOTAL
NOTES £ £ £
Revenue
Net gain (loss) on investments 5 - 1,845,962 1,845,962
Foreign exchange gain (loss) - (2,970,304) (2,970,304)
Interest income 5 35,454,974 524,984 35,979,958
Other income 5 5,799,767 - 5,799,767
Total return 41,254,741 (599,358) 40,655,383
Expenses
Management fee 10 3,394,740 - 3,394,740
Performance fee 10 4,040,085 - 4,040,085
Credit impairment losses 9 - 112,550 112,550
Other expenses 10 2,313,540 232,265 2,545,805
Total operating expenses 9,748,365 344,815 10,093,180
Finance costs 7,607,524 - 7,607,524
Net return on ordinary activities before taxation 23,898,852 (944,173) 22,954,679
Taxation on ordinary activities 11 - - -
Net return on ordinary activities after taxation 23,898,852 (944,173) 22,954,679
Attributable to:
Equity shareholders 23,898,852 (1,019,223) 22,879,629
Non-controlling interests 18 - 75,050 75,050
Return per Ordinary Share (basic and diluted) 13 8.08p (0.34p) 7.74p
Other comprehensive income
Currency translation differences - 21,443 21,443
Total comprehensive income 23,898,852 (922,730) 22,976,122
Attributable to:
Equity shareholders 23,898,852 (1,005,035) 22,893,817
Non-controlling interests 18 - 82,305 82,305
The total column of this statement represents the Group's statement of
comprehensive income, prepared in accordance with UK-adopted International
Accounting Standards and with the requirements of the Companies Act 2006 as
applicable to companies reporting under those standards. The supplementary
revenue and capital columns are both prepared under guidance published by the
Association of Investment Companies ("AIC"). All items in the above Statement
derive from continuing operations. Amounts in Other comprehensive income may
be reclassified to profit or loss in future periods.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2021
CALLED UP SHARE OTHER CURRENCY TOTAL NON-
SHARE PREMIUM DISTRIBUTABLE CAPITAL REVENUE TRANSLATION SHAREHOLDERS' CONTROLLING TOTAL
CAPITAL ACCOUNT RESERVE RESERVE RESERVE RESERVE EQUITY INTERESTS EQUITY
£ £ £ £ £ £ £ £ £
20,300,000 161,040,000 116,520,960 (50,393,578) 21,847,960 1,221,766 270,537,108 19,337 270,556,445
Opening balance at 1 January 2021
- - (3,741,814) - - - (3,741,814) - (3,741,814)
Amounts paid on buyback of Ordinary Shares
- - - - - - - - -
Contributions by non-controlling interests
- - - - - - - - -
Distributions to non-controlling interests
- - - 52,060,604 21,123,168 - 73,183,772 29,596 73,213,368
Return on ordinary activities after taxation
- - - - (22,355,761) - (22,355,761) - (22,355,761)
Dividends declared and paid
Other comprehensive income
- - - - - (8,521) (8,521) (2,975) (11,496)
Currency translation differences
20,300,000 161,040,000 112,779,146 1,667,026 20,615,367 1,213,245 317,614,784 45,958 317,660,742
Closing balance at 31 December 2021
The supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies ("AIC").
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2020
CALLED UP SHARE OTHER CURRENCY TOTAL NON-
SHARE PREMIUM DISTRIBUTABLE CAPITAL REVENUE TRANSLATION SHAREHOLDERS' CONTROLLING TOTAL
CAPITAL ACCOUNT RESERVE RESERVE RESERVE RESERVE EQUITY INTERESTS EQUITY
£ £ £ £ £ £ £ £ £
20,300,000 161,040,000 136,682,176 (49,374,355) 21,623,852 1,207,578 291,479,251 60,940 291,540,191
Opening balance at 1 January 2020
Amounts paid on buyback of Ordinary Shares - - (20,161,216) - - - (20,161,216) - (20,161,216)
Contributions by non-controlling interests - - - - - - - - -
Distributions to non-controlling interests - - - - - - - (123,908) (123,908)
Return on ordinary activities after taxation - - - (1,019,223) 23,898,852 - 22,879,629 75,050 22,954,679
Dividends declared and paid - - - - (23,674,744) - (23,674,744) - (23,674,744)
Other comprehensive income
Currency translation differences - - - - - 14,188 14,188 7,255 21,443
Closing balance at 31 December 2020 20,300,000 161,040,000 116,520,960 (50,393,578) 21,847,960 1,221,766 270,537,108 19,337 270,556,445
The supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies ("AIC").
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2021
31 DECEMBER 2021 31 DECEMBER 2020
NOTES £ £
Cash flows from operating activities:
Total comprehensive income 73,201,872 22,976,122
Adjustments for:
-- Interest income (33,158,150) (35,979,958)
-- Dividend and distribution income 5 (4,419,620) (5,799,767)
-- Finance costs 5,706,429 7,607,524
-- Exchange losses 2,049,374 2,970,304
Total 43,379,905 (8,225,775)
Gain on investment assets designated as held at fair value through profit or (67,354,436) (1,845,962)
loss
(Gain) loss on derivative financial instruments (6,131,547) (1,402,050)
Decrease (increase) in other assets and prepaid expenses (1,988,667) 5,009
Increase (decrease) in management fee payable 8,873,195 (51,174)
Increase (decrease) in performance fee payable 63,158 (3,370,529)
Decrease in deferred income (78,800) (236,919)
Increase (decrease) in accrued expenses and other liabilities 250,148 (458,591)
Interest received 32,062,716 37,597,261
Purchase of loans (129,180,445) (105,292,885)
Redemption or sale of loans 145,742,133 160,405,704
Impairment of loans 3,636,142 112,550
Net cash (outflow) inflow from operating activities 29,273,502 77,236,639
Cash flows from investing activities:
Investment income received 4,419,436 5,815,327
Purchase of investment assets designated as held at fair value through profit (51,430,977) (16,671,467)
or loss
Sale of investment assets designated as held at fair value through profit or 30,929,189 8,538,783
loss
(Decrease) increase of cash posted as collateral (2,993,588) (160,000)
Net cash inflow (outflow) from investing activities (19,075,940) (2,477,357)
Cash flows from financing activities:
Dividends distributed (22,355,761) (23,674,744)
Treasury shares repurchased (3,741,814) (20,213,722)
Distributions to non-controlling interests - (123,908)
(Decrease) increase in note payable 21,180,077 (23,502,528)
Finance costs paid (5,739,082) (7,165,276)
Net cash outflow from financing activities (10,656,580) (74,680,178)
Net change in cash and cash equivalents (459,018) 79,104
Exchange gains on cash and cash equivalents 343,562 205,802
Cash and cash equivalents at the beginning of the period 6,416,028 6,131,122
Cash and cash equivalents at the end of the period 7 6,300,572 6,416,028
PARENT COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2021
31 DECEMBER 2021 RESTATED
31 DECEMBER 2020
NOTES £ £
Assets
Cash and cash equivalents 7 4,301,574 4,738,217
Cash posted as collateral 7 4,133,588 1,140,000
Derivative financial assets 3,4 2,069,698 5,758,880
Interest receivable 4,298,886 3,173,686
Other current assets and prepaid expenses 2,881,811 889,148
Investments in subsidiaries 17 303,174,979 257,491,532
Investment assets designated as held at fair value through profit or loss 3 12,531,090 2,522,366
Total assets 333,391,626 275,713,829
Liabilities
Management fee payable 10 155,399 92,241
Performance fee payable 10 12,913,280 4,040,085
Derivative financial liabilities 3,4 1,508,675 -
Deferred income 174,603 253,403
Other liabilities and accrued expenses 1,024,885 790,992
Total liabilities 15,776,842 5,176,721
Total assets less total liabilities 317,614,784 270,537,108
Equity attributable to Shareholders of the Company
Called-up share capital 14 20,300,000 20,300,000
Share premium account 14 161,040,000 161,040,000
Other distributable reserve 14 112,779,146 116,520,960
Capital reserve 2,880,271 (49,171,812)
Revenue reserve 20,615,367 21,847,960
Total equity 317,614,784 270,537,108
Net return on ordinary activities after taxation 73,175,251 22,893,817
The financial statements on pages 50 to 53 were approved by the Board of
Directors on 27 April 2022 and signed on its behalf by:
Graeme Proudfoot
Chair
27 April 2022
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2021
Called Up Other
Share Share Distributable Capital Revenue
Capital Premium Reserve Reserve Reserve Total
£ £ £ £ £ £
Opening balance at 1 January 2021 20,300,000 161,040,000 116,520,960 (49,171,812) 21,847,960 270,537,108
Amounts paid on repurchase of Ordinary Shares - - (3,741,814) - - (3,741,814)
Return on ordinary activities after taxation - - - 52,052,083 21,123,168 73,175,251
Dividends declared and paid - - - - (22,355,761) (22,355,761)
Closing balance at 31 December 2021 20,300,000 161,040,000 112,779,146 2,880,271 20,615,367 317,614,784
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2020 RESTATED
Called Up Other
Share Share Distributable Capital Revenue
Capital Premium Reserve Reserve Reserve Total
£ £ £ £ £ £
Opening balance at 1 January 2020 20,300,000 161,040,000 136,682,176 (48,166,777) 21,623,852 291,479,251
Amounts paid on repurchase of Ordinary Shares - - (20,161,216) - - (20,161,216)
Return on ordinary activities after taxation - - - (1,005,035) 23,898,852 22,893,817
Dividends declared and paid - - - - (23,674,744) (23,674,744)
Closing balance at 31 December 2020 20,300,000 161,040,000 116,520,960 (49,171,812) 21,847,960 270,537,108
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2021
RESTATED
31 DECEMBER 2021 31 DECEMBER 2020
NOTES £ £
Cash flows from operating activities:
Net return on ordinary activities after taxation 73,175,251 22,893,817
Adjustments for:
-- Interest income (31,871,341) (35,842,688)
-- Exchange (gains) losses 2,049,374 (315,612)
Total 43,353,284 (13,264,483)
Unrealised loss on investment assets designated as held at fair value through (7,141,907) 563,327
profit or loss
Unrealised (gain) loss on investments in subsidiaries (52,213,993) 1,018,002
(Gain) loss on derivative financial instruments (6,131,547) (1,773,515)
Increase in other assets and prepaid expenses (1,992,663) (221,594)
Decrease in management fee payable 63,158 (51,174)
(Decrease) increase in performance fee payable 8,873,195 (3,370,529)
Decrease in deferred income (78,800) (236,919)
Increase in accrued expenses and other liabilities 233,894 172,389
Net cash outflow from operating activities (15,035,379) (17,164,496)
Cash flows from investing activities:
Interest received 30,746,141 37,332,932
Purchase of investment assets designated as held at fair value through profit (19,086,855) -
or loss
Sale of investment assets designated as held at fair value through profit or 16,220,038 1,376,253
loss
Purchase of investments in subsidiaries (29,910,829) (80,568,889)
Sales of investment in subsidiaries 45,377,842 103,634,391
Cash posted as collateral (2,993,588) (160,000)
Net cash inflow from investing activities 40,352,749 61,614,687
Cash flows from financing activities:
Treasury Shares repurchased (3,741,814) (20,213,722)
Dividends paid (22,355,761) (23,674,744)
Net cash outflow from financing activities (26,097,575) (43,888,466)
Net change in cash and cash equivalents (780,205) 561,725
Exchange gains on cash and cash equivalents 343,562 205,802
Cash and cash equivalents at the beginning of the period 4,738,217 3,970,690
Cash and cash equivalents at the end of the period 7 4,301,574 4,738,217
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2021
1. GENERAL INFORMATION
VPC Specialty Lending Investments PLC (the "Parent Company") with its
subsidiaries (together "the Group") is focused on asset-backed lending to
emerging and established businesses with the goal of building long-term,
sustainable income generation. The Group focuses on providing capital to vital
segments of the economy that are underserved by the traditional banking
industry, including small businesses, working capital products, consumer
finance and real estate, among others. The Group executes this strategy by
identifying investment opportunities across various industries and geographies
to offer shareholders access to a diversified portfolio of opportunistic
credit investments originated by non-bank lenders with a focus on the rapidly
developing technology-enabled lending sector. The Parent Company, which is
limited by shares, was incorporated and domiciled in England and Wales on 12
January 2015 with registered number 9385218. The Parent Company commenced its
operations on 17 March 2015 and intends to carry on business as an investment
trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act
2010.
The Group's investment manager is Victory Park Capital Advisors, LLC (the
"Investment Manager"), a US Securities and Exchange Commission registered
investment adviser. The Investment Manager also acts as the Alternative
Investment Fund Manager of the Group under the Alternative Investment Fund
Managers Directive ("AIFMD"). The Parent Company is defined as an Alternative
Investment Fund and is subject to the relevant articles of the AIFMD.
The Group will invest directly or indirectly into available opportunities,
including by making investments in, or acquiring interests held by, third
party funds (including those managed by the Investment Manager or its
affiliates). Direct investments may include consumer loans, SME loans,
advances against corporate trade receivables and/or purchases of corporate
trade receivables ("Debt Instruments") originated by platforms which engage
with and directly lend to borrowers ("Portfolio Companies"). Such Debt
Instruments may be subordinated in nature, or may be second lien, mezzanine or
unsecured loans. Indirect investments may include investments in Portfolio
Companies (or in structures set up by Portfolio Companies) through the
provision of credit facilities ("Credit Facilities"), equity or other
instruments. Additionally, the Group's investments in Debt Instruments and
Credit Facilities may be made through subsidiaries of the Parent Company or
through partnerships or other structures. The Group may also invest in other
specialty lending related opportunities through any combination of debt
facilities, equity or other instruments.
As at 31 December 2021, the Parent Company had equity in the form of
382,615,665 Ordinary Shares, 278,276,392 Ordinary Shares in issue and
104,339,273 Ordinary Shares in Treasury (31 December 2020: 382,615,665
Ordinary Shares, 282,647,364 Ordinary Shares in issue and 99,968,301 Ordinary
Shares in Treasury). The Ordinary Shares are listed on the premium segment of
the Official List of the UK Listing Authority and trade on the London Stock
Exchange's main market for listed securities.
During the year, Citco Fund Administration (Cayman Islands) Limited (the
"Administrator") was appointed as the administrator of the Group, replacing
Northern Trust Hedge Fund Services LLC. The Administrator is responsible for
the Group's general administrative functions, such as the calculation and
publication of the Net Asset Value ("NAV") and maintenance of the Group's
accounting records.
For any terms not herein defined, refer to Part X of the IPO Prospectus. The
Parent Company's IPO Prospectus dated 26 February 2015 is available on the
Parent Company's website, www.vpcspecialtylending.com.
2. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies followed by the Group are set out below and
have been applied consistently in both the current and prior year:
Basis of preparation
The consolidated financial statements present the financial performance of the
Group and Company for the year ended 31 December 2021. The consolidated
financial statements are prepared in accordance with UK-adopted International
Accounting Standards and with the requirements of the Companies Act 2006 as
applicable to companies under those standards. They comprise standards and
interpretations approved by the International Accounting Standards Board
("IASB") and International Financial Reporting Committee, including
interpretations issued by the IFRS Interpretations Committee and
interpretations issued by the International Accounting Standard Committee
("IASC") that remain in effect. The financial statements have been prepared on
a going concern basis and under the historical cost convention modified by the
revaluation to a fair value basis for certain financial instruments as
specified in the accounting policies below.
The Directors have reviewed the financial projections of the Group and Company
from the date of this report, which shows that the Group and Company will be
able to generate sufficient cash flows in order to meet its liabilities as
they fall due. In assessing the Group's and Company's ability to continue as a
going concern, the Directors have considered the Company's investment
objective, risk management policies, capital management, the nature of its
portfolio and expenditure projections.
Additionally, the Directors have considered the risks arising of reduced asset
values and economic disruption caused by the COVID-19 pandemic. The Investment
Manager has also performed a range of stress tests and demonstrated to the
Directors that even in an adverse scenario of depressed markets that the Group
could still generate sufficient funds to meet its liabilities over the next
twelve months. The Directors believe that the Group has adequate resources, an
appropriate financial structure and suitable management arrangements in place
to continue in operational existence for the foreseeable future being a period
of at least twelve months from the date of this report.
Based on their assessment and considerations above, the Directors have
concluded that the financial statements of the Group and Company should
continue to be prepared on a going concern basis and the financial statements
have been prepared accordingly.
Where presentational guidance set out in the Statement of Recommended Practice
("SORP") for investment trusts issued by the Association of Investment
Companies ("AIC") in November 2014 and updated in October 2019 with
consequential amendments is consistent with the requirements of IFRS, the
Directors have sought to prepare the consolidated financial statements on a
basis compliant with the recommendations of the SORP.
The Parent Company and Group's presentational currency is Pound Sterling (£).
Pound Sterling is also the functional currency because it is the currency of
the Parent Company's share capital and the currency which is most relevant to
the majority of the Parent Company's shareholders. The Group enters into
forward currency Pound Sterling hedges where operating activity is transacted
in a currency other than the functional currency.
Change in accounting policy with retrospective application
All accounting policies are consistent with prior year with the exception of a
voluntary change in accounting policy with respect to investments in
subsidiaries. Refer to Investment in subsidiaries section below for further
information.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Parent Company and its subsidiaries. Control is achieved where the Parent
Company has the power to govern the financial and operating policies of an
investee entity so as to obtain benefits from its activities. The Parent
Company controls an entity when the Parent Company is exposed to, or has
rights to, variable returns from its investment and has the ability to affect
those returns through its power over the entity. All intra-group transactions,
balances, income and expenses are eliminated on consolidation. The accounting
policies of the subsidiaries have been applied on a consistent basis to ensure
consistency with the policies adopted by the Parent Company. The period ends
for the subsidiaries are consistent with the Parent Company.
Subsidiaries of the Parent Company, where applicable, have been consolidated
on a line-by-line bases as the Parent Company does not meet the definition of
an investment entity under IFRS 10 because it does not measure and evaluate
the performance of all its investments on the fair value basis of
accounting.
Investments in subsidiaries
During the year, the Parent Company voluntarily changed its accounting policy
for valuing its investments in subsidiaries. In previous years, the Parent
Company's investments in its subsidiaries were measured at cost less
impairment and costs of investments in currencies other than Pound Sterling
were historically translated to at the rate of exchange ruling on the date the
investment was made. This previously caused a difference in the total net
asset value shown on the Parent Company Statement of Financial Position as
compared to the Group.
With the change in accounting policy, the Parent Company's investments in its
subsidiaries are now measured at fair value which is determined with reference
to the underlying NAV of the subsidiary. The NAV of the subsidiaries are used
as a best estimate of fair value through profit or loss. The NAV is the value
of all the assets of the subsidiary less its liabilities to creditors
(including provisions for such liabilities) determined in accordance with
applicable accounting standards, which represents fair value based on the
Company's assessment.
The Investment Manager believes that the implemented change in accounting will
provide the Shareholders of the Company with the best indication of value of
the Parent Company and will align the accounting policies of the Parent
Company reporting to be more in line with the accounting policies of the
Group.
Below is the impact of this change in accounting policy on the Parent Company
Statement of Financial Position:
HISTORICAL COST FAIR MARKET VALUE
Financial Assets 31 DECEMBER 2020 31 DECEMBER 2020 CHANGE
Investments in subsidiaries 250,042,768 257,491,532 7,448,764
Below is the impact of this change in accounting policy on the Parent Company
Statement of Changes in Equity:
HISTORICAL COST FAIR MARKET VALUE CHANGE
2020 2020
£ £ £
Total equity at 1 January 2020 280,744,571 291,479,251 10,734,680
Return on ordinary activities after taxation 26,179,731 22,893,817 -3,285,914
Total equity at 31 December 2020 263,088,342 270,537,108 7,448,766
The impact of this change in the accounting policy on the Parent Company
Statement of Cash flows is the decrease of the net return on ordinary
activities after taxation noted above and an increase to the unrealised
appreciation on investments in subsidiaries.
Below is the impact of this change in accounting policy on the Parent
Company's basic earnings per share:
2020 2020
HISTORICAL COST FAIR MARKET VALUE
£ £
Profit for the year 26,179,731 22,893,817
Average number of Ordinary Shares in issue during the year 295,430,078 295,430,078
Earnings per Share (basic and diluted) 8.86p 7.75p
Presentation of Consolidated Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and
in accordance with the guidance set out by the AIC, supplementary information
which analyses the Consolidated Statement of Comprehensive Income between
items of revenue and capital nature has been presented alongside the
Consolidated Statement of Comprehensive Income.
The Directors have taken advantage of the exemption under Section 408 of the
Companies Act 2006 and accordingly have not presented a separate Parent
Company statement of comprehensive income. The net return on ordinary
activities after taxation of the Parent Company was £73,175,251 (31 December
2020: £22,893,817).
Income
For financial instruments measured at amortised cost, the effective interest
rate method is used to measure the carrying value of a financial asset or
liability and to allocate associated interest income or expense in the revenue
account over the relevant period. The effective interest rate is the rate that
discounts estimated future cash payments or receipts over the expected life of
the financial instrument or, when appropriate, a shorter period, to the net
carrying amount of the financial asset or financial liability.
In calculating the effective interest rate, the Group estimates cash flows
considering all contractual terms of the financial instrument but does not
consider expected credit losses. The calculation includes all fees received
and paid, costs borne that are an integral part of the effective interest rate
and all other premiums or discounts above or below market rates.
Dividend income from investments is taken to the revenue account on an
ex-dividend basis. Bank interest and other income receivable is accounted for
on an effective interest basis. Dividend income from investments is reflected
in Other income on the Statement of Comprehensive Income. Further disclosure
can be found in Note 5.
Distributions from investments in funds are accounted for on an accrual basis
as of the date the Group is entitled to the distribution. The income is
treated as revenue return provided that the underlying assets of the
investments comprise solely income generating loans, or investments in lending
platforms which themselves generate net interest income. Distributions from
investments in funds is reflected in Other income on the Statement of
Comprehensive Income. Further disclosure can be found in Note 5.
Interest income from Investment assets designated as held at fair value
through profit or loss are reflected in Other income on the Statement of
Comprehensive Income. Further disclosure can be found in Note 5.
In the instance where the retained earnings of the Parent Company's investment
in a subsidiary are negative, all income from that investment is allocated to
the capital reserve for both the Group and the Parent Company.
Finance costs
Finance costs are recognised using the effective interest rate method. The
Group currently charges all finance costs to either revenue or capital based
on retained earnings of the investment that generates the fees from the
perspective of the Parent Company.
Expenses
Expenses not directly attributable to generating a financial instrument are
recognised as services are received, or on the performance of a significant
act which means the Group has become contractually obligated to settle those
amounts.
The Group currently charges all expenses, including investment management fees
and performance fees, to either revenue or capital based on the retained
earnings of the investment that generates the fees from the perspective of the
Parent Company.
At 31 December 2021, no management fees (31 December 2020: £nil) have been
charged to the capital return of the Group or the Parent Company. At 31
December 2021, performance fees of £9,179,370 (31 December 2020: £nil) have
been charged to the capital return of the Group and Parent Company relating to
the net return on ordinary activities after taxation allocated to the capital
return. Refer to Note 10 for further details of the management and performance
fees.
All expenses are accounted for on an accruals basis.
Dividends payable to Shareholders
Dividends payable to Shareholders are recognised in the Consolidated Statement
of Changes in Equity when they are paid or have been approved by Shareholders
in the case of a final dividend and become a liability to the Parent Company.
Taxation
The tax currently payable is based on the taxable profit for the year. Taxable
profit differs from net profit as reported in the Consolidated Statement of
Comprehensive Income because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items that are
never taxable or deductible. The Group's liability for current tax is
calculated using tax rates that have been enacted or substantively enacted at
the Consolidated Statement of Financial Position date.
In line with the recommendations of SORP for investment trusts issued by the
AIC, the allocation method used to calculate tax relief on expenses presented
against capital returns in the supplementary information in the Consolidated
Statement of Comprehensive Income is the "marginal basis".
Under this basis, if taxable income is capable of being offset entirely by
expenses presented in the revenue return column of the Consolidated Statement
of Comprehensive Income, then no tax relief is transferred to the capital
return column.
Investment trusts which have approval as such under section 1158 of the
Corporation Tax Act 2010 are not liable for taxation on capital gains.
Financial assets and financial liabilities
The Group classifies its financial assets and financial liabilities in one of
the following categories below. The classification depends on the purpose for
which the financial assets and liabilities were acquired. The classification
of financial assets and liabilities are determined at initial recognition.
IFRS 9 contains a classification and measurement approach for financial assets
that reflects the business model in which assets are managed and their cash
flow characteristics. IFRS 9 contains a principal-based approach and applies
one classification approach for all types of financial assets. For Debt
Instruments, two criteria are used to determine how financial assets should be
classified and measured:
v The entity's business model (i.e., how an entity manages its financial
assets in order to generate cash flows by collecting contractual cash flows,
selling financial assets or both); and
v The contractual cash flow characteristics of the financial asset (i.e.,
whether the contractual cash flows are solely payments of principal and
interest).
A financial asset is measured at amortised cost if it meets both of the
following conditions and is not designated as at fair value through profit or
loss ("FVTPL"):
v It is held within a business model whose objective is to hold assets to
collect contractual cash flows; and
v Its contractual terms give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
The carrying amount of these assets is adjusted by any expected credit loss
allowance recognised and measured as described further in this note.
A financial asset is measured at fair value through other comprehensive income
("FVOCI") if it meets both of the following conditions and is not designated
as at FVTPL:
v It is held within a business model whose objective is achieved by both
collecting contractual cash flows and selling financial assets; and
v Its contractual terms give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.
Movements in the carrying amount are taken through the Other Comprehensive
Income ("OCI"), except for the recognition of impairment gains or losses,
interest revenue and foreign exchange gains and losses on the investments
amortised cost which is recognised in the Consolidated Statement of
Comprehensive Income. When the financial asset is derecognised, the cumulative
gain or loss previously recognised in OCI is reclassified from equity to the
Consolidated Statement of Comprehensive Income and recognised in Income.
Interest income from these financial assets in included in Income using the
effective interest rate method ("ERIM").
Equity instruments are measured at FVTPL, unless they are not held for trading
purposes, in which case an irrevocable election can be made on initial
recognition to measure them at FVOCI with no subsequent reclassification to
the Consolidated Statement of Comprehensive Income. This election is made on
an investment-by-investment basis.
All financial assets not classified as measured at amortised cost or FVOCI as
described above are measured at FVTPL. Financial assets measured at FVTPL are
recognised in the Consolidated Statement of Financial Position at their fair
value. Fair value gains and losses, together with interest coupons and
dividend income, are recognised in the Consolidated Statement of Comprehensive
Income within net trading income in the period in which they occur. The fair
values of assets and liabilities traded in active markets are based on current
bid and offer prices respectively. If the market is not active, the Group
establishes a fair value by using valuation techniques. In addition, on
initial recognition, the Company may irrevocably designate a financial asset
that otherwise meets the requirements to be measured at amortised cost or at
FVOCI as FVTPL if doing so eliminates or significantly reduces an accounting
mismatch that would otherwise arise.
There are no positions measured at FVOCI in the current or prior year.
Business model assessment
The Group will assess the objective of the business model in which a financial
asset is held at a portfolio level in order to generate cash flows because
this best reflects the way the business is managed, and information is
provided to the Investment Manager. That is, whether the Group's objective is
solely to collect the contractual cash flows from the assets or is to collect
both the contractual cash flows and cash flows arising from the sale of
assets. If neither of these are applicable, then the financial assets are
classified as part of the other business model and measured at FVTPL.
The information that will be considered by the Group in determining the
business model includes:
v The stated policies and objectives for the portfolio and the operation of
those policies in practice, including whether the strategy focuses on earning
contractual interest revenue, maintaining a particular interest rate profile,
matching duration of the financial assets to the duration of the liabilities
that are funding those assets or realising cash flows through the sale of
assets;
v Past experience on how the cash flows for these assets were collected;
v How the performance of the portfolio is evaluated and reported to the
Investment Manager;
v The risks that affect the performance of the business model (and the
financial assets held within that business model) and how those risks are
managed; and
v The frequency, volume and timing of sales in prior periods, the reasons for
such sales and expectations about future sales activity. However, information
about sales activity is not considered in isolation, but as part of an overall
assessment of how the Investment Manager's stated objective for managing the
financial assets is achieved and how cash flows are realised.
Assessment whether contractual cash flows are solely payments of principal and
interest
For the purposes of this assessment, "principal" is defined as the fair value
of the financial asset on initial recognition. "Interest" is defined as
consideration for the time value of money, for the credit risk associated with
the principal amount outstanding during a particular period of time and for
other basic lending risks and costs (e.g. liquidity risk and administrative
costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely payments of
principal and interest, the contractual terms of the instrument will be
considered to see if the contractual cash flows are consistent with a basic
lending arrangement. In making the assessment, the following features will be
considered:
v Contingent events that would change the amount and timing of cash flows;
v Prepayment and extension terms;
v Terms that limit the Company's claim to cash flows from specified assets,
e.g., non-recourse asset arrangements; and
v Features that modify consideration for the time value of money, e.g.,
periodic reset of interest rates.
The Group reclassifies debt investments when and only when its business model
for managing those assets changes. The reclassification that has taken place
forms the start of the first reporting period following the change. Such
changes are expected to be very infrequent.
Expected credit loss allowance for financial assets measured at amortised cost
The Credit impairment losses in the Consolidated Statement of Comprehensive
Income includes the change in expected credit losses which are recognised for
loans and advances to customers, other financial assets held at amortised cost
and certain loan commitments.
At initial recognition, allowance is made for expected credit losses resulting
from default events that are possible within the next 12 months (12-month
expected credit losses). In the event of a significant increase in credit
risk, allowance (or provision) is made for expected credit losses resulting
from all possible default events over the expected life of the financial
instrument (lifetime expected credit losses). Financial assets where 12-month
expected credit losses are recognised are considered to be Stage 1; financial
assets which are considered to have experienced a significant increase in
credit risk are in Stage 2; and financial assets which have defaulted or are
otherwise considered to be credit impaired are allocated to Stage 3.
The measurement of expected credit losses will primarily be based on the
product of the instrument's probability of default ("PD"), loss given default
("LGD"), and exposure at default ("EAD"), taking into account the value of any
collateral held or other mitigants of loss and including the impact of
discounting using the effective interest rate ("EIR").
v The PD represents the likelihood of a borrower defaulting on its financial
obligation, either over the next 12 months ("12M PD"), or over the remaining
lifetime ("Lifetime PD") of the obligation.
v EAD is based on the amounts the Group expects to be owed at the time of
default, over the next 12 months ("12M EAD") or over the remaining lifetime
("Lifetime EAD"). For example, for a revolving commitment, the Group includes
the current drawn balance plus any further amount that is expected to be drawn
up to the current contractual limit by the time of default, should it occur.
v LGD represents the Group's expectation of the extent of loss on a defaulted
exposure. LGD varies by type of counterparty, type and seniority of claim and
availability of collateral or other credit support. LGD is expressed as a
percentage loss per unit of exposure at the time of default. LGD is calculated
on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss
expected to be made if the default occurs in the next 12 months and Lifetime
LGD is the percentage of loss expected to be made if the default occurs over
the remaining expected lifetime of the loan.
The estimated credit loss ("ECL") is determined by projecting the PD, LGD, and
EAD for each future month and for each individual exposure. Movements between
Stage 1 and Stage 2 are based on whether an instrument's credit risk as at the
reporting date has increased significantly relative to the date it was
initially recognised. Where the credit risk subsequently improves such that it
no longer represents a significant increase in credit risk since origination,
the asset is transferred back to Stage 1.
General expectations with regards to expected losses on loans at a given level
of delinquency are assessed based on an analysis of loan collateral and
credit enhancement. Impairments are recognised once a loan is deemed to have a
non-trivial likelihood of facing a material loss. The expected credit loss
allowance reflects the increasing likelihood of loss as collateral and credit
enhancement become diminished or impaired. As loans progress through the
levels of delinquency, the Group applies a greater amount of expected credit
loss allowance on the loan balance.
Unless identified at an earlier stage, the credit risk of financial assets is
deemed to have increased significantly when more than 30 days past due. The
Group does not rebut the presumption in IFRS 9 that all financial assets that
are more than 30 days past due have experienced a significant increase in
credit risk. The assessment as to when a financial asset has experienced a
significant increase in the probability of default requires the application of
management judgement.
In addition, the Group considers a financial instrument to have experienced a
significant increase in credit risk when one of the following have occurred:
v Significant increase in credit spread;
v Significant adverse changes in business, financial and/or economic
conditions in which the borrower operates;
v Actual or expected forbearance or restructuring;
v Actual or expected significant adverse change in operating results of the
borrower;
v Significant change in collateral value which is expected to increase the
risk of default; or
v Early signs of cashflow or liquidity problems.
Movements between Stage 2 and Stage 3 are based on whether financial assets
are credit impaired as at the reporting date. Assets can move in both
directions through the stages of the impairment model.
The criteria for determining whether credit risk has increased significantly
will vary by portfolio and will include a backstop based on delinquency. IFRS
9 contains a rebuttable presumption that default occurs no later than when a
payment is 90 days past due which the Group does not rebut. A loan is
normally written off, either partially or in full, when there is no realistic
prospect of recovery (as a result of the customer's insolvency, ceasing to
trade or other reason) and the amount of the loss has been determined.
Subsequent recoveries of amounts previously written off decrease the amount of
impairment losses recorded. The Company assesses at each reporting date
whether there is objective evidence that a loan or group of loans is impaired.
In performing such analysis, the Company assesses the probability of default
based on the level of collateral and credit enhancement and on the number of
days past due, using recent historical rates of default on loan portfolios
with credit risk characteristics similar to those of the Company or past
history if sufficient data is available to demonstrate a reliable loss
profile.
Inputs into the assessment of whether a financial instrument is in default and
their significance may vary over time to reflect changes in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the risk of
default) on a financial instrument has increased significantly since initial
recognition, reasonable and supportable information that is relevant and
available without undue cost or effort, including both quantitative and
qualitative information and analysis based on historical experience, credit
assessment and forward-looking information is used.
The measurement of expected credit losses for each stage and the assessment of
significant increases in credit risk must consider information about past
events and current conditions as well as reasonable and supportable
forward-looking information, including a "base case" view of the future
direction of relevant economic variables and a representative range of other
possible forecasts scenarios. The process will involve developing two or more
additional economic scenarios and considering the relative probabilities of
each outcome. The base case will represent a most likely outcome and be
aligned with information used for other purposes, such as strategic planning
and budgeting. The number of scenarios used and their attributes are
reassessed at each reporting date by investment. The scenario weightings are
determined by a combination of statistical analysis and expert credit
judgement, taking account of the range of possible outcomes each chosen
scenario is representative of.
The estimation and application of forward-looking information requires
significant judgement. PD, LGD and EAD inputs used to estimate Stage 1 and
Stage 2 credit loss allowances, are modelled based on the macroeconomic
variables (or changes in macroeconomic variables) that are most closely
correlated with credit losses in the relevant portfolio. As with any economic
forecasts, the projections and likelihoods of occurrence are subject to a high
degree of inherent uncertainty and therefore the actual outcomes may be
significantly different to those projected. The Group considers these
forecasts to represent its best estimate of the possible outcomes and has
analysed the non-linearities and asymmetries within the Group's different
portfolios to establish that the chosen scenarios are appropriately
representative of the range of possible scenarios.
Other forward-looking considerations not otherwise incorporated within the
above scenarios, such as the impact of any regulatory, legislative or
political changes, have also been considered, but are not deemed to have a
material impact and therefore no adjustment has been made to the ECL for such
factors. This is reviewed and monitored for appropriateness on a quarterly
basis.
Collateral and other credit enhancements
The Group employs a range of policies to mitigate credit risk. The most common
of these is accepting collateral for funds advanced. The Group has internal
policies of the acceptability of specific classes of collateral or credit risk
mitigation.
Modification of financial assets
The Group sometimes modifies the terms or loans provided to customers due to
commercial renegotiations, or for distressed loans, with a view to maximising
recovery.
Such restructuring activities include extended payment term arrangements,
payment holidays and payment forgiveness. Restructuring policies and practice
are based on indicators or criteria which, in the judgement of management,
indicate that payment will most likely continue. These policies are kept under
continuous review.
The risk of default of such assets after modification is assessed at the
reporting date and compared with the risk under the original terms at initial
recognition, when the modification is not substantial and so does not result
in derecognition of the original assets. The Group monitors the subsequent
performance of modified assets. The Group may determine that the credit risk
has significantly improved after restructuring, so that the assets are moved
from Stage 3 or Stage 2.
Modification of terms is not an indicator of a change in risk.
Modification of loans
The Group sometimes renegotiates or otherwise modifies the contractual cash
flows of loans to customers. When this happens, the Group assesses whether or
not the new terms are substantially different to the original terms. The Group
does this by considering, among others, the following factors:
v If the borrower is in financial difficulty, whether the modification merely
reduces the contractual cash flows to amounts the borrower is expected to be
able to pay;
v Whether any substantial new terms are introduced, such as a profit
share/equity-based return that substantially affect the risk profile of the
loan;
v Significant extension of the loan term when the borrower is not in financial
difficulty;
v Significant change in the interest rate;
v Change in the currency the loan is denominated in; and
v Insertion of collateral, other security or credit enhancements that
significantly affect the credit risk associated with the loan.
If the terms are substantially different, the Group derecognises the original
financial asset and recognises a new asset at fair value and recalculates a
new effective interest rate for the asset. The date of renegotiation is
consequently considered to be the date of initial recognition for impairment
calculation purposes, including for the purpose of determining if a
significant increase in credit risk has occurred. However, the Group also
assesses whether the new financial asset recognised is deemed to be
credit-impaired at initial recognition, especially in circumstances where the
renegotiation was driven by the debtor being unable to make the originally
agreed payments. Differences in the carrying amounts are also recognised in
the Consolidated Statement of Comprehensive Income as a gain or loss on
derecognition.
If the terms are not substantially different, the renegotiation or
modification does not result in derecognition, and the Group recalculates the
gross carrying amount based on the revised cash flows of the financial asset
and recognises a modification gain or loss in the Consolidated Statement of
Comprehensive Income. The new gross carrying amount is recalculated by
discounting the modified cash flows at the original effective interest rate
(or credit-adjusted effective interest rate for purchased or originated
credit-impaired financial assets).
During the year, three investments were modified per the Group's policy (2020:
two investments). The modification of the loans in both the current year and
prior year did not result in any gains or losses recognised as a result of the
modification of the loans as the carrying value of the loans was the same
before and after the modification. The changes to the interest rates in the
loans are reflected in the income earned by the Group.
Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when the contractual
rights to receive the cash flows from the assets have expired, or when they
have been transferred and either (i) the Group transfers substantially all the
risks and rewards of ownership, or (ii) the Group neither transfers nor
retains substantially all the risks and rewards of ownership and the Group has
not retained control.
The Group enters into transactions where it retains the contractual rights to
receive cash flows from assets but assumes a contractual obligation to pay
those cash flows to other entities and transfers substantially all of the
risks and rewards. These transactions are accounted for as 'pass through'
transfers that result in derecognition if the Group:
v Has no obligation to make payments unless it collects equivalent amounts
from the assets;
v Is prohibited from selling or pledging the assets; and
v Has an obligation to remit any cash it collects from the assets without
material delay.
Collateral furnished by the Group under standard repurchase agreements and
securities lending and borrowing transactions are not derecognised because the
Group retains substantially all the risks and rewards on the basis of the
predetermined repurchase price, and the criteria for derecognition are
therefore not met.
Financial assets and financial liabilities designated as held at fair value
through profit or loss
This category consists of forward foreign exchange contracts, common equity,
preferred stock, warrants and investments in funds.
Assets and liabilities in this category are carried at fair value. The fair
values of derivative instruments are estimated using discounted cash flow
models using yield curves that are based on observable market data or are
based on valuations obtained from counterparties.
Investments in funds are carried at fair value through profit or loss and
designated as such at inception. This is valued for the units at the balance
sheet date based on the NAV where it is assessed that NAV equates to fair
value.
Common equity, preferred stock and warrants are valued using a variety of
techniques. These techniques include market comparables, discounted cash
flows, yield analysis, and transaction prices. Refer to Note 3.
Gains and losses arising from the changes in the fair values are recognised in
the Consolidated Statement of Comprehensive Income.
Loans at amortised cost
Loans at amortised cost are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Loans are
recognised when the funds are advanced to borrowers and are carried at
amortised cost using the effective interest rate method less provisions for
impairment.
Purchases and sales of financial assets
Purchases and sales of financial assets are accounted for at trade date.
Financial assets are derecognised when the rights to receive cash flows from
the investments have expired or have been transferred and the Group has
transferred substantially all risks and rewards of ownership.
Fair value estimation
The determination of fair value of investments requires the use of accounting
estimates and assumptions that could cause material adjustment to the carrying
value of those investments.
Financial liabilities
Borrowings, deposits, debt securities in issue and subordinated liabilities,
if any, are recognised initially at fair value, being the issue proceeds net
of premiums, discounts and transaction costs incurred.
All borrowings are subsequently measured at amortised cost using the effective
interest rate method. Amortised cost is adjusted for the amortisation of any
premiums, discounts and transaction costs. The amortisation is recognised in
interest expense and similar charges using the effective interest rate method.
Financial liabilities are derecognised when the obligation is discharged,
cancelled or has expired.
Derivatives
Derivatives are entered into to reduce exposures to fluctuations in interest
rates, exchange rates, market indices and credit risks and are not used for
speculative purposes. The Parent Company entered into forward foreign currency
exchange contracts as a hedge against exchange rate fluctuations for
investments in Portfolio Companies denominated in foreign currencies. A
forward foreign currency exchange contract is an agreement between two parties
to purchase or sell a specified quantity of a currency at or before a
specified date in the future. Forward contracts are typically traded in the
OTC markets and all details of the contract are negotiated between the
counterparties to the agreement. Accordingly, the forward contracts are valued
at the forward rate by reference to the contracts traded in the OTC markets
and are classified as Level 2 in the fair value hierarchy.
Derivatives are carried at fair value with movements in fair values recorded
in the Consolidated Statement of Comprehensive Income. Derivative financial
instruments are valued using discounted cash flow models using yield curves
that are based on observable market data or are based on valuations obtained
from counterparties.
Gains and losses arising from derivative instruments are credited or charged
to the Consolidated Statement of Comprehensive Income. Gains and losses of a
revenue nature are reflected in the revenue column and gains and losses of a
capital nature are reflected in the capital column. Gains and losses on
forward foreign exchange contracts are reflected in Foreign exchange
gain/(loss) in the Consolidated Statement of Comprehensive Income.
All derivatives are classified as assets where the fair value is positive and
liabilities where the fair value is negative. Where there is the legal ability
and intention to settle net, then offsetting is applied and the derivative is
classified as a net asset or liability, as appropriate.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
Consolidated Statement of Financial Position if, and only if, there is
currently enforceable legal right to set off the recognised amounts and there
is an intention to settle on a net basis, or to realise an asset and settle
the liability simultaneously.
Investments in funds
Investments in funds are measured at fair value through profit or loss. The
NAV of the fund is used as a best estimate of fair value through profit or
loss. The NAV is the value of all the assets of the fund less its liabilities
to creditors (including provisions for such liabilities) determined in
accordance with applicable accounting standards, which represents fair value
based on the Company's assessment. Refer to Note 3 and Note 19 for further
information.
Equity securities
Equity securities are measured at fair value. These securities are considered
either Level 1, 2, or 3 investments. Further details of the valuation of
equity securities are included in Note 3. Equity securities consist of common
and preferred stock, warrants and convertible note investments.
Other receivables
Other receivables do not carry interest and are short-term in nature and are
accordingly recognised at fair value as reduced by appropriate allowances for
estimated irrecoverable amounts.
Cash and cash equivalents
Cash comprises of cash on hand and demand deposits. Cash equivalents are
short-term, highly liquid investments with a maturity of 90 days or less that
are readily convertible to known amounts of cash.
Deferred income
The Group and Parent Company defer draw fees received from investments and the
deferred fees amortise into income on a straight-line basis over the life of
the loan, which approximates the effective interest rate method.
Other liabilities
Other liabilities and accrued expenses are not interest-bearing and are stated
at their nominal values. Due to their short-term nature this is determined to
be equivalent to their fair value.
Share Capital
The Ordinary Shares are classified as equity. The costs of issuing or
acquiring equity are recognised in equity (net of any related income tax
benefit), as a reduction of equity on the condition that these are incremental
costs directly attributable to the equity transaction that otherwise would
have been avoided.
The costs of an equity transaction that is abandoned are recognised as an
expense. Those costs might include registration and other regulatory fees,
amounts paid to legal, accounting and other professional advisers, printing
costs and stamp duties.
The Group's equity NAV per share is calculated by dividing the equity - net
assets attributable to the holder of Ordinary Shares by the total number of
outstanding Ordinary Shares.
Treasury Shares have no entitlements to vote and are held by the Company.
Foreign exchange
Transactions in foreign currencies are translated into Pound Sterling at the
rate of exchange ruling on the date of each transaction. Monetary assets,
liabilities and equity investments in foreign currencies at the Consolidated
Statement of Financial Position date are translated into Pound Sterling at the
rates of exchange ruling on that date. Profits or losses on exchange,
together with differences arising on the translation of foreign currency
assets or liabilities, are taken to the capital return column of the
Consolidated Statement of Comprehensive Income. Foreign exchange gains and
losses arising on investment assets including loans are included within Net
gain/(loss) on investments within the capital return column of the
Consolidated Statement of Comprehensive Income.
The assets and liabilities of the Group's foreign operations are translated
using the exchange rates prevailing at the reporting date. Income and expense
items are translated using the average exchange rates during the period.
Exchange differences arising from the translation of foreign operations are
taken directly as currency translation differences through the Consolidated
Statement of Comprehensive Income.
Capital reserves
Capital reserve - arising on investments sold includes:
v gains/losses on disposal of investments and the related foreign exchange
differences;
v exchange differences on currency balances;
v cost of own shares bought back; and
v other capital charges and credits charged to this account in accordance with
the accounting policies above.
Capital reserve - arising on investments held includes:
v increases and decreases in the valuation of investments held at the
year-end;
v increases and decreases in the IFRS 9 reserve of investments held at the
year-end; and
v investments in subsidiaries by the Parent Company where retained earnings is
negative.
In the instance where the retained earnings of the Parent Company's investment
in a subsidiary are negative, all income and expenses from that investment are
allocated to the capital reserve for both the Group and the Parent Company.
All the above are accounted for in the Consolidated Statement of Comprehensive
Income except the cost of own shares bought back, if applicable, which would
be accounted for in the Consolidated Statement of Changes in Equity.
Revenue reserves
The revenue reserve represents the accumulated revenue profits retained by the
Group. The Group makes interest distributions from the revenue reserve to
Shareholders.
Segmental reporting
The chief operating decision maker is the Board of Directors. The Directors
are of the opinion that the Group is engaged in a single segment of business,
being the investment of the Group's capital in financial assets comprising
consumer loans, SME loans, corporate trade receivables and/or advances
thereon. The Board focuses on the overall return from these assets
irrespective of the structure through which the investment is made.
Critical accounting estimates
The preparation of financial statements in conformity with international
accounting standards requires the Group to make judgements, estimates and
assumptions that affect the application of accounting policies and the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Although these estimates are based on the Directors' best
knowledge of the amount, actual results may differ ultimately from those
estimates.
The areas requiring a higher degree of judgement or complexity and areas where
assumptions and estimates are significant to the financial statements, are in
relation to expected credit losses and investments at fair value through
profit or loss. These are detailed below.
Estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
Measurement of the expected credit loss allowance
The calculation of the Group's ECL allowances and provisions against loan
commitments and guarantees under IFRS 9 is highly complex and involves the use
of significant judgement and estimation. This includes the formulation and
incorporation of multiple forward-looking economic conditions into ECL to meet
the measurement objective of IFRS 9. The most significant estimates that are
discussed are what is considered to be a significant increase in credit risk
to affect a movement between stages, and the effect of potential future
economic scenarios.
Base case and stress case cash flow methodology under IFRS 9
Each loan in the Group's investment portfolio is analysed to assess the
likelihood of the Group incurring any loss either (i) in the normal course of
events, or (ii) in a stress scenario. Given that these positions are typically
secured by specific collateral, most commonly in the form of loan or lease
receivables, and often further secured by guarantees from the operating
business, the analysis looks at the impacts on both the specific collateral,
as well as any obligations of the operating business to understand how the
Group's investment would fair in each scenario. The loss rate assumptions for
each transaction is established using all available historical loss
performance data on the specific asset pool being assessed, supplemented by
additional sources as needed.
Base case
To establish the base case model, a representative portfolio is established
based on the average portfolio parameters from the actual collateral pool
(based on the most recent available reporting date). The expected cash flows
are assessed based on these parameters, such as interest rate, term to
maturity, amortisation schedule, etc., as well as estimates of prepayments,
losses and any other activity which would impact the expected cash flows. Cash
flow assumptions, such as prepayment and loss curves are established using a
combination of: (1) historical performance; (2) management forecasts; (3)
proxy data from comparable assets or businesses; and (4) judgement from the
Investment Manager's investment professionals based on general research and
knowledge. Emphasis is given to the loss curves because, for most asset
classes, they have a significantly larger impact on the liquidation outcomes
compared to other assumptions such as prepayment rates.
The model is then burdened with the following costs: (1) servicing costs which
broadly reflect the expected costs of either (i) engaging a backup servicer to
wind down the portfolio, or (ii) of operating the business through a
liquidation; (2) upfront liquidation costs to reflect potential expenses
associated with moving into liquidation; and (3) ongoing liquidation costs to
reflect incremental costs born to oversee the liquidation.
The last input component is the terms of the Group's investment, which
includes the applicable advance rate and interest rate which are based on the
prevailing terms and circumstances of the facility.
The representative portfolio is deemed to reflect the most reliable and
relevant information available about the portfolio attributes and expected
performance. As part of the ongoing investment monitoring and risk management
process, the Investment Manager is monitoring performance on the underlying
collateral on a monthly basis to identify whether performance indicators are
trending positively or negatively, and how much cushion exists compared to
contractual covenant trigger levels. Any such changes would be reviewed to
determine whether an adjustment is required to the model assumptions.
For the Group's asset backed balance sheet investments, the Investment Manager
performs a similar analysis as with our financial services asset backed
balance sheet investments, though in those cases we are assessing the likely
return on legal sector investments based on historical data and expert
judgement and stressing the return and/or loss expectation on those
platforms. In general, those assets by their nature tend to be uncorrelated
across both the macro economy as well as across the portfolio(s), which has an
impact on the range of outcomes factored into the model.
Stress case
For most of the investments being reviewed, the primary driver of collateral
value is the loss rates on the underlying loans or leases, measured by
cumulative net loss, which considers the total principal losses between a
given point in time and the final repayment on the portfolio. While many of
the companies and asset classes being reviewed do not have historical
performance data going back to pre-2007, macro-economic data is available
which can be used as a proxy for the specific asset classes being analysed.
VPC commissioned a study of historical loss rates on various asset classes and
segments in the US from 2006-2014 in order to understand the changes in loss
rates by segment from the benign credit environment of 2006 through the worst
parts of the recession. The following table summarizes the loss stress
observed by segment where 0% indicates no change and 100% indicates a doubling
of the relevant loss rate.
2008 Recession Loss Scalars
by Asset and Population
Subprime & Deep Subprime Near Prime Prime
Vintage Score below 601 Vintage Score 601-660 Vintage Score above 660
Student Loan 0% 10% 8%
Retail 17% 10% 3%
Personal Loan 16% 41% 108%
Auto 24% 54% 88%
Credit Card 43% 71% 132%
Source: Assessing Performance of Consumer Lending Assets through Macroeconomic
Shocks, Second Order Solutions (June 2019)
The most heavily represented populations in the Group's borrower portfolios
are personal loans (or amortising instalment loans). As seen in the above
table, default rates on these loans increased by 1.16x-2.08x. Each portfolio
was assessed based on the applicable stress factor range based on the product
and borrower population.
IFRS 9 calls for an assessment of the probability of default over the upcoming
12 months, and thus the Investment Manager provides a view of the probability
of such a severe scenario occurring in the next 12 months for each of the
investments which are at risk of incurring a loss (as some of the variables
will vary between investments). Typically, the Investment Manager reviews
macroeconomic data to assess the probability of a recession or stress scenario
over a 12 month horizon. Given the rapid progression of COVID-19 around the
globe and the ensuing macroeconomic impacts of the crisis, relevant models
have assumed a 100% probability of a stress scenario, which is a very
conservative approach. This is consistent with the prior year. The severity of
stress is based on data from the recession in 2008-2009 and continues to be
refined with additional information based on the current economic
circumstances.
Once the model has been run at the stressed scenario, if the cash flows
continue to support the payment of an investment's principal and interest, the
portfolio is deemed to have adequate coverage. If there is a shortfall in
principal payments, a further assessment is done to note whether there are any
excluded variables that need to be considered in determining the need for
reserves on the position, including taking into account other additional
credit enhancements provided in each deal (i.e., corporate guarantees, etc.).
Such assessment would consider the likelihood of a scenario that could pose a
loss and the expected magnitude of such loss in order to determine the
appropriate reserve level.
For asset backed investments, two of the primary drivers of the impairment
analysis are the underlying collateral loss rates and the likelihood of an
economic recession in the upcoming 12-month period. Regarding the underlying
collateral loss rates, these variables are stressed to 110%-210% as part of
the impairment analysis and the impacts of those stresses are reflected in the
impairment amounts. Regarding the likelihood of an economic recession in the
upcoming 12-month period, as at 31 December 2021 an increase in the likelihood
of an economic recession would have no impact on the expected credit losses
since the analysis already assumes a 100% likelihood of an economic recession.
Valuation of unquoted investments
The valuation of unquoted investments and investments for which there is an
inactive market is a key area of judgement and may cause material adjustment
to the carrying value of those assets and liabilities. The unquoted equity
assets are valued on periodic basis using techniques including a market
approach, costs approach and/or income approach. The valuation process is
collaborative, involving the finance and investment functions within the
Investment Manager with the final valuations being reviewed by the Board's
Audit and Valuation Committee. The specific techniques used typically include
earnings multiples, discounted cash flow analysis, the value of recent
transactions, and, where appropriate, industry rules of thumb. The valuations
often reflect a synthesis of a number of different approaches in determining
the final fair value estimate. The individual approach for each investment
will vary depending on relevant factors that a market participant would take
into account in pricing the asset. Changes in fair value of all investments
held at fair value are recognised in the Consolidated Statement of
Comprehensive Income as a capital item. On disposal, realised gains and losses
are also recognised in the Consolidated Statement of Comprehensive Income as a
capital item. Transaction costs are included within gains or losses on
investments held at fair value, although any related interest income, dividend
income and finance costs are disclosed separately in the Consolidated
Financial Statements. The ultimate sale price of investments may not be the
same as fair value. Refer to Note 3.
Critical accounting judgments
Judgement is required to determine whether the Parent Company exercises
control over its investee entities and whether they should be consolidated.
Control is achieved where the Parent Company has the power to govern the
financial and operating policies of an investee entity so as to obtain
benefits from its activities. The Parent Company controls an investee entity
when the Parent Company is exposed to, or has rights to, variable returns from
its investment and has the ability to affect those returns through its power
over the entity. At each reporting date, an assessment is undertaken of
investee entities to determine control. In the intervening period, assessments
are undertaken where circumstances change that may give rise to a change in
the control assessment. These include when an investment is made into a new
entity, or an amendment to existing entity documentation or processes. When
assessing whether the Parent Company has the power to affect its variable
returns, and therefore control investee entities, an assessment is undertaken
of the Parent Company's ability to influence the relevant activities of the
investee entity. These activities include considering the ability to appoint
or remove key management or the manager, which party has decision making
powers over the entity and whether the manager of an entity is acting as
principal or agent. The assessment undertaken for entities considers the
Parent Company's level of investment into the entity and its intended
long-term holding in the entity and there may be instances where the Parent
Company owns less than 51% of an investee entity but that entity is
consolidated. Further details of the Parent Company's subsidiaries are
included in Note 17.
The Group's investments in associates all consist of limited partner interest
in funds. There are no significant restrictions between investors with joint
control or significant influence over the associates listed above on the
ability of the associates to transfer funds to any party in the form of cash
dividends or to repay loans or advances made by the Group. Further details of
the Parent Company's associates are included in Note 19.
Accounting standards issued but not yet effective or not material to the Group
At the date of authorisation of these financial statements, the following
standards and interpretations, which have not been applied in these financial
statements, were in issue.
Accounting standards issued but not yet effective
IFRS 17 'Insurance Contract' establishes the principles for the recognition,
measurement, presentation and disclosure of insurance contracts. This
information gives a basis for users of financial statements to assess the
effect that insurance contracts have on the entity's financial position,
financial performance and cash flows. IFRS 17 was issued in May 2017 and
applies to annual reporting periods beginning on or after 1 January 2023.The
Directors do not anticipate that the adoption of this standard and
interpretations will have a material impact on the financial statements, given
the nature of the Group's business being that it has no insurance contracts.
The narrow-scope amendments to IAS 1 Presentation of Financial Statements
clarify that liabilities are classified as either current or non-current,
depending on the rights that exist at the end of the reporting period.
Classification is unaffected by the expectations of the entity or events after
the reporting date (e.g., the receipt of a waver or a breach of covenant). The
amendments also clarify what IAS 1 means when it refers to the 'settlement' of
a liability. The amendments could affect the classification of liabilities,
particularly for entities that previously considered management's intentions
to determine classification and for some liabilities that can be converted
into equity. They must be applied retrospectively in accordance with the
normal requirements in IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. In May 2020, the IASB issued an Exposure Draft proposing
to defer the effective date of the amendments to 1 January 2023.
Accounting standards effective in the year
The IASB's Phase 2 amendments in response to issues arising from the
replacement of interest rate benchmarks in a number of jurisdictions are
effective for annual periods beginning on or after 1 January 2021. Under these
amendments, an immediate gain or loss is not recognised in the income
statement where the contractual cash flows of a financial asset or financial
liability are amended as a direct consequence of the rate reform and the
revised contractual terms are economically equivalent to the previous terms.
In addition, hedge accounting is continued for relationships that are directly
affected by the reform.
Refer to note 6 for further details on the Group's exposure to IBOR as at 31
December 2021.
Other future developments include the IASB undertaking a comprehensive review
of existing IFRSs. The Group will consider the financial impact of these new
standards as they are finalised.
3. FAIR VALUE MEASUREMENT
Financial instruments measured and reported at fair value are classified and
disclosed in one of the following fair value hierarchy levels based on the
significance of the inputs used in measuring its fair value:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets
and liabilities;
Level 2 - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (as prices) or
indirectly (derived from prices); and
Level 3 - Pricing inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
An investment is always categorised as Level 1, 2 or 3 in its entirety. In
certain cases, the fair value measurement for an investment may use a number
of different inputs that fall into different levels of the fair value
hierarchy. In such cases, an investment's level within the fair value
hierarchy is based on the lowest level of input that is significant to the
fair value measurement. The assessment of the significance of a particular
input to the fair value measurement requires judgment and is specific to the
investment.
Valuation of investments in funds
The Group's investments in funds are subject to the terms and conditions of
the respective fund's offering documentation. The investments in funds are
primarily valued based on the latest available financial information. The
Investment Manager reviews the details of the reported information obtained
from the funds and considers: (i) the valuation of the fund's underlying
investments; (ii) the value date of the NAV provided; (iii) cash flows
(calls/distributions) since the latest value date; and (iv) the basis of
accounting and, in instances where the basis of accounting is other than fair
value, fair valuation information provided by the funds. If necessary,
adjustments to the NAV are made to the funds to obtain the best estimate of
fair value. The funds in which the Group invests are close-ended and unquoted.
No adjustments have been determined to be necessary to the NAV as provided as
at 31 December 2021 as this reflects fair value under the relevant valuation
methodology. The NAV is provided to investors only and is not made publicly
available.
Valuation of equity securities
Fair value is determined based on the Group's valuation methodology, which is
either determined using market comparables, discounted cash flow models or
recent transactions.
Under the Enterprise Valuation Waterfall Analysis, the Group estimates the
fair value of a portfolio company using traditional valuation methodologies
including market, income, and cost approaches, as well as other applicable
industry-specific approaches and then waterfall the enterprise value over the
portfolio company's securities in order of their preference relative to one
another. Some or all the traditional valuation methodologies are weighted
based on the individual circumstances of the portfolio company to determine an
estimate of the enterprise value. The traditional valuation methodologies
consist of valuation estimates based on: valuations of comparable public
companies, recent sales of private and public comparable companies,
discounting the forecasted cash flows of the portfolio company, estimating the
liquidation or collateral value of the portfolio company's assets, third-party
valuations of the portfolio company or its assets, considering offers from
third-parties to buy the portfolio company, estimating the value to potential
strategic buyers and considering the value of recent investments in the equity
securities of the portfolio company. To determine the enterprise value of a
portfolio company, its historical and projected financial results, as well as
other factors that may impact value, such as exposure to litigation, loss of
significant customers or other contingencies are considered. This financial
and other information is generally obtained from the Group's portfolio
companies, and in most cases represents unaudited, projected, or pro-forma
financial information.
In using a valuation methodology based on the discounting of forecasted cash
flows of the portfolio company, significant judgment is required in the
development of an appropriate discount rate to be applied to the forecasted
cash flows. When applicable, a weighted average cost of capital approach is
used to derive a discount rate that takes into account i) the risk-free rate
ii) the cost of debt for creditworthiness and iii) the cost of equity for
performance risk. The three inputs to the discount rate are based on
third-party market studies, portfolio company interest rates, and an overall
understanding of the inherent risk in the cash flows. The remaining
assumptions incorporated in the valuation methodologies used to estimate the
enterprise value consist primarily of unobservable Level 3 inputs, including
management assumptions based on judgment. For example, from time to time, a
portfolio company has exposure to potential or actual litigation. In
evaluating the impact on the valuation for such items, the amount that a
market participant would consider in estimating fair value is considered.
These estimates are highly subjective, based on the Group's assessment of the
potential outcome(s) and the related impact on the fair value of such
potential outcome(s). A change in these assumptions could have a material
impact on the determination of fair value.
In using a valuation methodology based on comparable public companies or sales
of private or public comparable companies, significant judgment is required in
the application of discounts or premiums to the prices of comparable companies
for factors such as size, marketability and relative performance. Related to
the use of private company transactions, when a portfolio company closes on
new equity, the new round's implied valuation is used in valuing the equity
investment. The use of an equity round includes gaining an understanding of
the resulting rights between equity classes, and when applicable, a discount
related to rights and preference differences is applied to the implied
valuation. In addition, when a portfolio company has significant reason to
believe an equity round is closing in the near future, a weighted-probability
approach with the applicable discounts may be used. Under the yield analysis
approach, expected future cash flows are discounted back using a discount
rate. The discount rate used incorporates market-based yields for similar
credits to the public market and the underlying risk of the individual credit.
Due to the inherent uncertainty of determining the fair value of Level 3
assets that do not have a readily available market value, the fair value of
the assets may differ significantly from the values that would have been used
had a ready market existed for such assets and may differ materially from the
values that may ultimately be received or settled. Further, such assets are
generally subject to legal and other restrictions or otherwise are less liquid
than publicly traded instruments. If the Group were required to liquidate a
portfolio investment in a forced or liquidation sale, the Group may realise
significantly less than the value at which such investment had previously been
recorded.
The selection of appropriate valuation techniques may be affected by the
availability of relevant inputs as well as the relative reliability of the
inputs. In some cases, one valuation technique may provide the best indication
of fair value while in other circumstances, multiple valuation techniques may
be appropriate. The results of the application of the various techniques may
not be equally representative of fair value, due to factors such as
assumptions made in the valuation.
In some situations, the Group may determine it appropriate to evaluate and
weigh the results to develop a range of possible values, with the fair value
based on the Group's assessment of the most representative point within the
range.
Investments may be classified as Level 2 when market information becomes
available, yet the investment is not traded in an active market and/or the
investment is subject to transfer restrictions, or the valuation is adjusted
to reflect illiquidity and/or non-transferability.
The Group, at times, may hold Level 1 investments and will use the available
market quotes to value the investments. As noted above, these investments may
include an illiquid period in which the investment does not have the ability
to trade and will be classified as Level 2.
Fair value disclosures
The following table analyses the fair value hierarchy of the Group's assets
and liabilities measured at fair value at 31 December 2021:
INVESTMENT ASSETS DESIGNATED TOTAL LEVEL 1 LEVEL 2 LEVEL 3
AS HELD AT FAIR VALUE £ £ £ £
Investments in funds 12,531,090 - - 12,531,090
Common stock 49,501,940 11,992,005 21,201,450 16,308,485
Preferred stock 38,090,065 - - 38,090,065
Warrant 20,984,976 - 1,120,366 19,864,610
Convertible debt 20,689,151 - - 20,689,151
Total 141,797,222 11,992,005 22,321,816 107,483,401
DERIVATIVE FINANCIAL ASSETS TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 2,069,698 2,069,698
Total 2,069,698 - 2,069,698 -
DERIVATIVE FINANCIAL LIABILITIES TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 1,508,675 1,508,675
Total 1,508,675 - 1,508,675 -
The following table analyses the fair value hierarchy of the Group's assets
and liabilities measured at fair value at 31 December 2020:
INVESTMENT ASSETS DESIGNATED TOTAL LEVEL 1 LEVEL 2 LEVEL 3
AS HELD AT FAIR VALUE £ £ £ £
Investments in funds 2,522,367 - - 2,522,367
Equity securities 48,895,616 2,954,366 - 45,941,250
Total 51,417,983 2,954,366 - 48,463,617
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
DERIVATIVE FINANCIAL ASSETS £ £ £ £
Forward foreign exchange contracts 5,758,880 - 5,758,880 -
Total 5,758,880 - 5,758,880 -
The following table analyses the fair value hierarchy of the Parent Company's
assets and liabilities measured at fair value at 31 December 2021:
INVESTMENT ASSETS DESIGNATED TOTAL LEVEL 1 LEVEL 2 LEVEL 3
AS HELD AT FAIR VALUE £ £ £ £
Investments in funds 12,531,090 - - 12,531,090
Total 12,531,090 - - 12,531,090
DERIVATIVE FINANCIAL ASSETS TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 2,069,698 2,069,698
Total 2,069,698 - 2,069,698 -
DERIVATIVE FINANCIAL LIABILITIES TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 1,508,675 1,508,675
Total 1,508,675 - 1,508,675 -
The following table analyses the fair value hierarchy of the Parent Company's
assets and liabilities measured at fair value at 31 December 2020:
INVESTMENT ASSETS DESIGNATED TOTAL LEVEL 1 LEVEL 2 LEVEL 3
AS HELD AT FAIR VALUE
£ £ £ £
Investments in funds 2,522,366 - - 2,522,366
Total 2,522,366 - - 2,522,366
DERIVATIVE FINANCIAL ASSETS TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 5,758,880 - 5,758,880 -
Total 5,758,880 - 5,758,880 -
There were no transfers into and out of Level 3 fair value measurements for
either the Parent Company or the Group during the years ended 31 December 2021
and 31 December 2020.
The following table presents the movement in Level 3 positions for the year
ended 31 December 2021 for the Group:
INVESTMENTS IN COMMON PREFERED CONVERTIBLE
TOTAL FUNDS STOCK STOCK WARRANT DEBT
£ £ £ £ £
£
Beginning balance, 1 January 2021 48,463,617 2,522,367 11,072,305 19,771,889 4,996,048 10,101,008
Purchases 45,439,031 19,086,855 7,661,428 2,250,450 5,338,445 11,101,853
Sales (25,600,304) (16,220,038) (4,899,071) (1,275,157) (2,656,064) (549,974)
Net change in unrealised gains (losses) 39,181,057 7,141,906 2,473,823 17,342,883 12,186,181 36,264
Ending balance, 31 December 2021 107,483,401 12,531,090 16,308,485 38,090,065 19,864,610 20,689,151
The net change in unrealised gains (losses) is recognised within gains
(losses) on investments in the Consolidated Statement of Comprehensive Income.
The following table presents the movement in Level 3 positions for the year
ended 31 December 2020 for the Group:
INVESTMENTS IN EQUITY
TOTAL FUNDS SECURITIES
£ £ £
Beginning balance, 1 January 2020 39,100,521 4,461,946 34,638,575
Purchases 16,671,467 - 16,671,467
Sales (8,538,783) (1,376,253) (7,162,530)
Net change in unrealised foreign exchange gains (losses) (1,635,542) (624,808) (1,010,734)
Net realised gains (losses) (8,676,617) - (8,676,617)
Net change in unrealised gains (losses) 11,542,571 61,482 11,481,089
Ending balance, 31 December 2020 48,463,617 2,522,367 45,941,250
The following table presents the movement in Level 3 positions for the period
ended 31 December 2021 for the Parent Company:
INVESTMENTS IN
FUNDS
£
Beginning balance, 1 January 2021 2,522,367
Purchases 19,086,855
Sales (16,220,038)
Transfers in (out)
Net change in unrealised foreign exchange gains (losses) (5,567,642)
Net change in unrealised gains (losses) 12,709,548
Ending balance, 31 December 2021 12,531,090
The following table presents the movement in Level 3 positions for the period
ended 31 December 2020 for the Parent Company:
INVESTMENTS IN
FUNDS
£
Beginning balance, 1 January 2020 4,461,946
Purchases -
Sales (1,376,253)
Net change in unrealised foreign exchange gains (losses) (624,808)
Net change in unrealised gains (losses) 1,482
Ending balance, 31 December 2020 2,522,367
Quantitative information regarding the unobservable inputs for Level 3
positions as at 31 December 2021 is given below:
DESCRIPTION FAIR VALUE AT VALUATION UNOBSERVABLE RANGE
31 DECEMBER
TECHNIQUE
INPUT
2021
£
Common stock 4,819,588 Discounted Cash Flows Discount Rate 10.0%
Market Comparables Price to Book 2.1x
Price to Earnings 7.3x
7,472,470 Transaction Price Cost Basis of Investment N/A
1,710,424 Transaction Price/Recent Round Price Recent Round Price per Share $8.81
Illiquidity Discount 20.0%
2,306,004 Transaction Price Illiquidity Discount 30.0%
Convertible debt 10,786,776 Discounted Cash Flows Discount Rate 23.0%
Annual Free Cash Flow Growth Rates 3.0%
7,374,073 Transaction Price Cost Basis of Investment N/A
2,528,302 Transaction Price/Recent Round Price Recent Round Price per Share $3.41 - €10,530.89
Illiquidity Discount 20.0%
Preferred stock 38,090,065 Transaction Price/Recent Round Price Rights and Preferences Discount 0.0% - 20.0%
Recent Round Price per Share $0.19 - €3,671.49
Illiquidity Discount 0.0% - 20.0%
Investments in funds 12,531,090 Net Asset Value N/A N/A
Warrants 15,143,216 Black Scholes Price Per Share $0.36 - €10,530.89
Rights & Preferences Discount 0.0% - 30.0%
Risk Free Rate 0.7% - 1.3%
Term 1.6 - 5.0 years
Volatility 22.0% - 40.0%
2,693,389 Transaction Price Cost Basis of Investment N/A
2,028,004 Transaction Price/Recent Round Price Deal Execution Risk Discount 20.0%
Recent Round Price per Share $0.92 - $43.21
Rights & Preferences Discount 20.0% - 40.0%
Risk Free Rate 0.73%
Term 2.3 years
Volatility 40.0%
Total 107,483,401
The investments in funds consist of investments in VPC Synthesis, L.P. and VPC
Offshore Unleveraged Private Debt Fund Feeder, L.P. These are valued based on
the NAV as calculated at the balance sheet date. No adjustments have been
deemed necessary to the NAV as it reflects the fair value of the underlying
investments, as such no specific unobservable inputs have been identified. The
NAVs are sensitive to movements in interest rates due to the funds' underlying
investment in loans.
If the illiquidity discount of the convertible debt valued based on discounted
cash flows increased / decreased by 10% it would have resulted in an increase
/ decrease to the total value of those securities of £7,852,065, which would
affect the Net gain / (loss) on investments within the capital return column
of the Consolidated Statement of Comprehensive Income.
If the illiquidity discount of the preferred stock valued based on discounted
cash flows increased / decreased by 10% it would have resulted in an increase
/ decrease to the total value of those securities of £2,664,149, which would
affect the Net gain / (loss) on investments within the capital return column
of the Consolidated Statement of Comprehensive Income.
If the volatility rate used for the warrants valued based on a Black Scholes
increased / decreased by 10% it would have resulted in an increase / decrease
to the total value of those equity securities of £1,405,237, which would
affect the Net gain / (loss) on investments within the capital return column
of the Consolidated Statement of Comprehensive Income.
If the price of all the investment assets held at period end, including
individually those mentioned above, had increased / decreased by 10% it would
have resulted in an increase / decrease in the total value the investments in
funds and equity securities of £10,600,644 (31 December 2020: £4,846,362)
which would affect the Net gain / (loss) on investments within the capital
return column of the Consolidated Statement of Comprehensive Income.
Assets and liabilities not carried at fair value but for which fair value is
disclosed
The following table presents the fair value of the Group's assets and
liabilities not measured at fair value through profit and loss at 31 December
2021 but for which fair value is disclosed:
CARRYING FAIR MARKET VALUE
VALUE
£ £
Assets
Loans 279,339,002 279,339,002
Total 279,339,002 279,339,002
For all other assets and liabilities not carried at fair value, the carrying
value is a reasonable approximation of fair value.
The following table presents the fair value of the Group's assets and
liabilities not measured at fair value through profit and loss at 31 December
2020 but for which fair value is disclosed:
CARRYING FAIR MARKET VALUE
VALUE
£ £
Assets
Loans 293,123,379 293,123,379
Total 293,123,379 293,123,379
For all other assets and liabilities not carried at fair value, the carrying
value is a reasonable approximation of fair value.
4. DERIVATIVES
Typically, derivative contracts serve as components of the Group's investment
strategy and are utilised primarily to structure and hedge investments to
enhance performance and reduce risk to the Group. In 2021 and 2020, the Group
did not designate any derivatives as hedges for hedge accounting purposes as
described under IFRS 9. Derivative instruments are also used for trading
purposes where the Investment Manager believes this would be more effective
than investing directly in the underlying financial instruments. The only
derivative contracts that the Group currently holds or issues are forward
foreign exchange contracts.
The Group measures its derivative instruments on a fair value basis. See Note
2 for the valuation policy for financial instruments.
Forward contracts
Forward contracts entered into represent a firm commitment to buy or sell an
underlying asset, or currency at a specified value and point in time based
upon an agreed or contracted quantity. The realised/unrealised gain or loss is
equal to the difference between the value of the contract at the onset and the
value of the contract at settlement date/year end date and is included in the
Consolidated Statement of Comprehensive Income.
As at 31 December 2021, the following forward foreign exchange contracts were
included in the Group's Consolidated Statement of Financial Position at fair
value through profit or loss and the Parent Company's Statement of Financial
Position at fair value through profit or loss:
SETTLEMENT DATE PURCHASE CURRENCY PURCHASE SALE SALE FAIR VALUE
£
AMOUNT CURRENCY AMOUNT
28 January 2022 GBP 2,620,803 AUD 4,800,000 (18,152)
28 January 2022 GBP 6,683,400 EUR 7,900,000 57,080
28 January 2022 GBP 52,879,392 USD 73,000,000 (1,082,331)
28 January 2022 GBP 3,972,910 EUR 4,700,000 23,367
28 January 2022 GBP 74,903,643 USD 103,000,000 (1,532,042)
25 February 2022 GBP 74,593,466 USD 100,000,000 701,281
25 March 2022 GBP 118,508,454 USD 156,810,386 2,411,820
Unrealised gains on forward foreign exchange contracts 561,023
As at 31 December 2020, the following forward foreign exchange contracts were
included in the Group's Consolidated Statement of Financial Position at fair
value through profit or loss and the Parent Company's Statement of Financial
Position at fair value through profit or loss:
SETTLEMENT DATE PURCHASE CURRENCY PURCHASE SALE SALE AMOUNT FAIR VALUE
£
AMOUNT CURRENCY
22 January 2021 GBP 57,581,855 USD 78,700,000 1,832,031
10 February 2021 GBP 2,194,988 USD 3,000,000 29,483
10 February 2021 GBP 4,389,976 USD 6,000,000 11,655
10 February 2021 GBP 363,026 AUD 643,900 (9,702)
12 February 2021 GBP 54,874,703 USD 75,000,000 267,416
12 February 2021 GBP 1,083,960 EUR 1,200,000 11,208
12 February 2021 GBP 124,382,660 USD 170,000,000 3,616,789
Unrealised gains on forward foreign exchange contracts 5,758,880
The following tables provide information on the financial impact of netting
for instruments subject to an enforceable master netting arrangement or
similar agreement at 31 December 2021 for both the Parent Company and the
Group:
GROSS GROSS NET AMOUNTS RELATED AMOUNTS NOT
AMOUNTS OF AMOUNTS OF RECOGNISED ELIGBIBLE TO BE SET-OFF IN
RECOGNISED OF FINANCIAL ASSETS THE STATEMENT
FINANCIAL LIABILITIES TO BE PRESENTED IN OF FINANCIAL POSITION
ASSETS SET-OFF IN THE THE STATEMENT
STATEMENT OF OF FINANCIAL
FINANCIAL POSITION
POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET
AMOUNT
As At 31 December 2021 £ £ £ £ £ £
Bannockburn Global 2,468,900 (1,100,483) 1,368,417 1,368,417
Goldman Sachs 23,367 (23,367) - -
Morgan Stanley 701,281 - 701,281 701,281
Total 3,193,548 (1,123,850) 2,069,698 - - 2,069,698
GROSS GROSS NET AMOUNTS RELATED AMOUNTS NOT
AMOUNTS OF AMOUNTS OF OF RECOGNISED ELIGBIBLE TO BE SET-OFF IN
RECOGNISED FINANCIAL LIABILITIES THE STATEMENT
FINANCIAL ASSETS TO BE PRESENTED IN THE STATEMENT OF FINANCIAL POSITION
LIABILITIES SET-OFF IN THE OF FINANCIAL
STATEMENT OF POSITION
FINANCIAL
POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET
AMOUNT
AS AT 31 December 2021 £ £ £ £ £ £
Bannockburn Global 1,100,483 (1,100,483) - -
Goldman Sachs 1,532,042 (23,367) 1,508,675 1,508,675
Morgan Stanley - - - -
Total 2,632,525 (1,123,850) 1,508,675 - - 1,508,675
The following tables provide information on the financial impact of netting
for instruments subject to an enforceable master netting arrangement or
similar agreement at 31 December 2020 for both the Parent Company and the
Group:
GROSS GROSS NET AMOUNTS RELATED AMOUNTS NOT
AMOUNTS OF AMOUNTS OF RECOGNISED ELIGBIBLE TO BE SET-OFF IN
RECOGNISED OF FINANCIAL ASSETS THE STATEMENT
FINANCIAL LIABILITIES TO BE PRESENTED IN OF FINANCIAL POSITION
ASSETS SET-OFF IN THE THE STATEMENT
STATEMENT OF OF FINANCIAL
FINANCIAL POSITION
POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET
AMOUNT
AS AT 31 December 2020 £ £ £ £ £ £
Bannockburn Global 3,657,926 (9,702) 3,648,224 - - 3,648,224
Goldman Sachs 278,624 - 278,624 - - 278,624
Morgan Stanley 1,832,032 - 1,832,032 - - 1,832,032
Total 5,768,582 (9,702) 5,758,880 - - 5,758,880
GROSS GROSS NET AMOUNTS RELATED AMOUNTS NOT
AMOUNTS OF AMOUNTS OF OF RECOGNISED ELIGBIBLE TO BE SET-OFF IN
RECOGNISED FINANCIAL LIABILITIES THE STATEMENT
FINANCIAL ASSETS TO BE PRESENTED IN THE STATEMENT OF FINANCIAL POSITION
LIABILITIES SET-OFF IN THE OF FINANCIAL
STATEMENT OF POSITION
FINANCIAL
POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET
AMOUNT
AS AT 31 December 2020 £ £ £ £ £ £
Bannockburn Global 9,702 (9,702) - - - -
Goldman Sachs - - - - - -
Morgan Stanley - - - - - -
Total 9,702 (9,702) - - - -
5. INCOME AND GAINS ON INVESTMENTS AND LOANS
Interest income in the amount of £33,158,150 (31 December 2020: £35,454,974)
has been allocated to revenue and £nil (31 December 2020: £524,984) has been
allocated to capital in line with the Group's policy as set out in Note 2.
31 DECEMBER 31 DECEMBER
2021 2020
£ £
Other Income
Distributable income from investments in funds 1,265,158 609,083
Interest income from investment assets designated as held at fair value 2,088,723 4,791,537
through profit or loss
Other income 1,065,739 399,147
Total 4,419,620 5,799,767
31 DECEMBER 31 DECEMBER
2021 2020
£ £
Net gains (losses) on investments
Realised (loss) gain on sale of investments (239,441) (9,159,855)
Unrealised gains on investment in funds 7,141,906 61,482
Unrealised gains on equity securities 60,212,530 10,944,335
Total 67,114,995 1,845,962
6. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS
Introduction
Risk is inherent in the Group's activities, but it is managed through a
process of ongoing identification, measurement and monitoring, subject to risk
limits and other controls. The Group is exposed to market risk (which includes
currency risk, interest rate risk and other price risk), credit risk and
liquidity risk arising from the financial instruments held by the Group.
Risk management structure
The Directors are ultimately responsible for identifying and controlling
risks. Day to day management of the risks arising from the financial
instruments held by the Group has been delegated to Victory Park Capital
Advisors, LLC as Investment Manager to the Parent Company and the Group.
The Investment Manager regularly reviews the investment portfolio and industry
developments to ensure that any events which impact the Group are identified
and considered. This also ensures that any risks affecting the investment
portfolio are identified and mitigated to the fullest extent possible.
The Group has no employees, and the Directors have all been appointed on a
Non-Executive basis. Whilst the Group has taken all reasonable steps to
establish and maintain adequate procedures, systems and controls to enable it
to comply with its obligations, the Group is reliant upon the performance of
third-party service providers for its executive function. In particular, the
Investment Manager, the Custodian, the Administrator, the Corporate Secretary
and the Registrar will be performing services which are integral to the
operation of the Group. Failure by any service provider to carry out its
obligations to the Group in accordance with the terms of its appointment could
have a materially detrimental impact on the operation of the Group.
In seeking to implement the investment objectives of the Parent Company while
limiting risk, the Parent Company and the Group are subject to the investment
limits restrictions set out in the Credit Risk section of this note.
Market risk (incorporating price, interest rate and currency risks)
Market risk is the risk of loss arising from movements in observable market
variables such as foreign exchange rates, equity prices and interest rates.
The Group is exposed to market risk primarily through its Financial
Instruments.
Market price risk
The Group is exposed to price risk arising from the investments held by the
Group for which prices in the future are uncertain. The investment in funds
and equity investments are exposed to market price risk. Refer to Note 3 for
further details on the sensitivity of the Group's Level 3 investments to price
risk.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair values of financial instruments.
The Group is exposed to risks associated with the effects of fluctuations in
the prevailing levels of market interest rates on its financial position and
cash flows. Due to the nature of the investments at 31 December 2021, the
Group has limited exposure to variations in interest rates as the key
components of interest rates are fixed and determinable or variable based on
the size of the loan.
While the Group is exposed to risks associated with the effects of
fluctuations in the prevailing levels of market interest rates on its
financial position and cash flows, the downside exposure of the Group is
limited at 31 December 2021 due to the fixed rate nature of the investments or
interest rate floors that are in place on most of the Group's variable
interest rate loans. The interest rate floors that are in place on most of the
Group's variable interest rate loans reduces the potential impact that a
decrease in rates would have on the Group's investments.
As at 31 December 2021, if interest rates had increased by 1%, with all other
variables held constant, the change in 12 months of future cash flows on the
current investment portfolio, including both interest income and expense,
would have been £480,654 (31 December 2020: 461,430). As at 31 December 2021,
if interest rates had decreased by 1%, with all other variables held constant,
the change in 12 months of future cash flows on the current investment
portfolio, including both interest income and expense, would be £nil (31
December 2020: £(224,586)) due to the floors in place on the Group's
investments.
The Group does not intend to hedge interest rate risk on a regular basis.
However, where it enters floating rate liabilities against fixed-rate loans,
it may at its sole discretion seek to hedge out the interest rate exposure,
taking into consideration amongst other things the cost of hedging and the
general interest rate environment.
Effect of IBOR reform
Following the financial crisis, the reform and replacement of benchmark
interest rates such as GBP LIBOR and other inter-bank offered rates ('IBORs')
has become a priority for global regulators. There remains some uncertainty
around the timing and precise nature of these changes.
The effect of a discontinuation of GBP LIBOR on the Company's investments has
had little impact to the Group as the underlying investments have little to no
exposure to GBP LIBOR at the portfolio company level. It is difficult to
predict the full impact of the transition away from USD LIBOR until new
reference rates and fallbacks are commercially accepted.
The following table contains details of all of the financial instruments that
the Group holds at 31 December 2021 which reference LIBOR and have not yet
transitioned to an alternative interest rate benchmark:
ASSETS LIABILITIES
Non-derivative assets and liabilities exposed to USD LIBOR £ £
Credit assets at amortised cost 261,955,830 107,267,260
Total exposure 261,955,830 107,267,260
Currency risk
Currency risk is the risk that the value of net assets will fluctuate due to
changes in foreign exchange rates. Relevant risk variables are generally
movements in the exchange rates of non-functional currencies in which the
Group holds financial assets and liabilities.
The assets of the Group as at 31 December 2021 were invested in assets which
were denominated in US Dollar, Euro, Australian Dollar, Pound Sterling and
other currencies. Accordingly, the value of such assets may be affected
favourably or unfavourably by fluctuations in currency rates. The Group hedges
currency exposure between Pound Sterling and any other currency in which the
Group's assets may be denominated, in particular US Dollars, Australian
Dollars, and Euros.
The Group continuously monitors for fluctuations in currency rates. The Group
performs stress tests and liquidity projections to determine how much cash
should be held back to meet potential future obligations to settle margin
calls arising from foreign exchange hedging.
Micro and small cap company investing risk
The Group will generally invest with companies that are small, not widely
known and not widely held. Small companies tend to be more vulnerable to
adverse developments than larger companies and may have little or no track
records. Small companies may have limited product lines, markets, or financial
resources, and may depend on less seasoned management. Their securities may
trade infrequently and in limited volumes. It may take a relatively long
period of time to accumulate an investment in a particular issue in order to
minimise the effect of purchases on market price. Similarly, it could be
difficult to dispose of such investments on a timely basis without adversely
affecting market prices. As a result, the prices of these securities may
fluctuate more than the prices of larger, more widely traded companies. Also,
there may be less publicly available information about small companies or less
market interest in their securities compared to larger companies, and it may
take longer for the prices of these securities to reflect the full value of
their issuers' earnings potential or assets.
Gearing and borrowing risk
Whilst the use of borrowings by the Group should enhance the net asset value
of an investment when the value of an investment's underlying assets is
rising, it will, however, have the opposite effect where the underlying asset
value is falling. In addition, in the event that an investment's income falls
for whatever reason, the use of borrowings will increase the impact of such a
fall on the net revenue of the Group's investment and accordingly will have an
adverse effect on the ability of the investment to make distributions to the
Group. This risk is mitigated by limiting borrowings to ring-fenced
Special-Purpose Vehicles ("SPVs") without recourse to the Group and employing
gearing in a disciplined manner.
Concentration of foreign currency exposure
The Investment Manager monitors the fluctuations in foreign currency exchange
rates and may use forward foreign exchange contracts to hedge the currency
exposure of the Parent Company and Group's non-Pound Sterling denominated
investments. The Investment Manager re-examines the currency exposure on a
regular basis in each currency and manages the Parent Company's currency
exposure in accordance with market expectations.
The below table presents the net exposure to foreign currency at 31 December
2021. The table includes forward foreign exchange contracts at their notional
exposure value and excludes all GBP assets and liabilities recorded on the
Group's Consolidated Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2021 2021 2021 2021
£ £ £ £
Euro 8,010,560 - 10,656,310 (2,645,750)
US Dollar 402,708,565 (107,267,260) 320,884,955 (25,443,650)
Swiss Francs 10,238,876 - - 10,238,876
Australian Dollars 2,591,233 - 2,620,803 (29,570)
If the GBP exchange rate simultaneously increased/decreased by 10% against the
above currencies, the impact on profit would be an increase/decrease of
£1,778,009. 10% is considered to be a reasonably possible movement in foreign
exchange rates. The table above includes the exposure of the non-consolidated
interest investment in the Group.
The below table presents the net exposure to foreign currency at 31 December
2020. The table includes forward foreign exchange contracts at their notional
exposure value and excludes all GBP assets and liabilities recorded on the
Group's Consolidated Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2020 2020 2020 2020
£ £ £ £
Euro 1,302,950 - 1,083,960 218,990
US Dollar 331,021,454 (86,087,183) 243,424,181 1,510,090
Swiss Francs 4,899,168 - - 4,899,168
Australian Dollars 543,622 - 363,026 180,596
The table below presents the net exposure to foreign currency at 31 December
2021. The table includes forward foreign exchange contracts at their notional
exposure value and excludes all GBP assets and liabilities recorded on the
Parent Company's Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2021 2021 2021 2021
£ £ £ £
Euro 8,010,560 - 10,656,310 (2,645,750)
US Dollar 295,395,347 - 320,884,955 (25,489,608)
Swiss Francs 10,238,876 - - 10,238,876
Australian Dollars 2,591,233 - 2,620,803 (29,570)
If the GBP exchange rate simultaneously increased/decreased by 10% against the
above currencies, the impact on profit would be an increase/decrease of
£1,792,605 10% is considered to be a reasonably possible movement in foreign
exchange rates.
The table below presents the net exposure to foreign currency at 31 December
2020. The table includes forward foreign exchange contracts at their notional
exposure value and excludes all GBP assets and liabilities recorded on the
Parent Company's Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2020 2020 2020 2020
£ £ £ £
Euro 1,302,950 - 1,083,960 218,990
US Dollar 244,914,933 - 243,424,181 1,490,752
Swiss Francs 4,899,168 - - 4,899,168
Australian Dollars 543,622 - 363,026 180,596
Liquidity risk
Liquidity risk is defined as the risk that the Group may not be able to settle
or meet its obligations on time or at a reasonable price. Ordinary Shares are
not redeemable at the holder's option.
The maturities of the non-current financial liabilities are disclosed in Note
8. The following tables show the contractual maturity of the financial assets
and financial liabilities of the Group as at 31 December 2021:
WITHIN ONE TO OVER FIVE TOTAL
ONE YEAR FIVE YEARS YEARS
£ £ £ £
Assets
Loans 29,270,006 250,068,996 - 279,339,002
Cash and cash equivalents 6,300,572 - - 6,300,572
Cash posted as collateral 4,133,588 - - 4,133,588
Interest receivable 4,708,481 - - 4,708,481
Dividend receivable 3,996 - - 3,996
Other assets and prepaid expenses 2,877,815 - - 2,877,815
Total 47,294,458 250,068,996 - 297,363,454
WITHIN ONE TO OVER FIVE TOTAL
ONE YEAR FIVE YEARS YEARS
£ £ £ £
Liabilities
Notes payable - 19,834,365 87,432,895 107,267,260
Management fee payable 155,399 - - 155,399
Performance fee payable 12,913,280 - - 12,913,280
Deferred income 174,603 - - 174,603
Other liabilities and accrued expenses 1,550,415 - - 1,550,415
Total 14,793,697 19,834,365 87,432,895 122,060,957
The following tables show the contractual maturity of the financial assets and
financial liabilities of the Group as at 31 December 2020:
WITHIN ONE TO OVER FIVE TOTAL
ONE YEAR FIVE YEARS YEARS
£ £ £ £
Assets
Loans 44,436,582 246,668,944 2,017,853 293,123,379
Cash and cash equivalents 6,416,028 - - 6,416,028
Cash posted as collateral 1,140,000 - - 1,140,000
Interest receivable 3,613,047 - - 3,613,047
Dividend receivable 3,812 - - 3,812
Other assets and prepaid expenses 889,148 - - 889,148
Total 56,498,617 246,668,944 2,017,853 305,185,414
WITHIN ONE TO OVER FIVE TOTAL
ONE YEAR FIVE YEARS YEARS
£ £ £ £
Liabilities
Notes payable 10,109,810 75,977,373 - 86,087,183
Management fee payable 92,241 - - 92,241
Performance fee payable 4,040,085 - - 4,040,085
Deferred income 253,403 - - 253,403
Other liabilities and accrued expenses 1,332,920 - - 1,332,920
Total 15,828,459 75,977,373 - 91,805,832
The Investment Manager manages the Group's liquidity risk by investing
primarily in a diverse portfolio of assets. At 31 December 2021, the Group had
investments in 48 Portfolio Companies (31 December 2020: 43 Portfolio
Companies). At 31 December 2021, 10% of the loans had a stated maturity date
of less than a year (31 December 2020: 15%).
The Group and Parent Company continuously monitor for fluctuation in currency
rates. The Parent Company performs stress tests and liquidity projections to
determine how much cash should be held back to meet potential future
obligations to settle margin calls arising from foreign exchange hedging.
As at 31 December 2021, £19.8 million (£48.6 million as at 31 December 2020)
of the Group's liabilities relating to principal and interest payments are
tied directly to the performance of investment assets that mature on or near
the same date as the investment liability. The amounts above represent the
values as at 31 December 2021 and do not project cash flows until maturity of
the investment liabilities.
On 1 March 2021, the Company closed on a USD$130 million gearing facility with
MassMutual. At the closing, the Company repaid its previous facility with
Pacific Western Bank. The MassMutual gearing facility has a stated maturity
date of 1 March 2027. In accordance with IFRS 7 paragraph 39, the Group has
projected cash interest payments of £20,383,279 which is calculated using the
amount outstanding and interest rate as at 31 December 2021 and does not
factor in any future paydowns, draws or changes in interest and foreign
exchange rates before the maturity date on 1 March 2027.
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation. The
Group's credit risks arise principally through exposures to loans acquired by
the Group, which are subject to risk of borrower default. The ability of the
Group to earn revenue is completely dependent upon payments being made by the
borrower, such as adverse movements in investment markets.
The Group will invest across various Portfolio Companies, asset classes,
geographies (primarily United States, United Kingdom, Europe and Latin
America) and credit bands in order to ensure diversification and to seek to
mitigate concentration risks.
Under the Asset Backed Lending Model, the Group provides a floating rate
credit facility to the portfolio company via an SPV, which retains Debt
Instruments that are originated by the portfolio company. The debt financing
is typically arranged in the form of a senior secured facility and the
portfolio company injects junior capital in the SPV, which provides
significant first loss protection to the Group and excess spread. The Group's
asset backed investments are loans to SPVs that are capitalised and actively
managed by the portfolio companies in their capacity as both the owner and
managing partner of the SPVs and the SPVs are not considered structured
entities under IFRS 12. Refer to page 11 for further details on the
structuring of the lending investments of the Group.
There are no loans past due which are not impaired. Refer to Note 9.
Credit quality
The credit quality of loans is assessed through the evaluation of various
factors, including (but not limited to) credit scores, payment data,
collateral and other information. Set out below is the analysis of the Group's
loan investments by grade, geography, and sector:
INTERNAL GRADE FINTECH eSME LEGAL FINANCE TOTAL
31 DECEMBER
£ £ £
2021
£
Stage 1
A - 1 42,399,368 15,229,645 - 57,629,013
A - 2 144,483,270 49,803,839 4,216,832 198,503,941
B 9,917,622 3,470,478 8,182,974 21,571,074
C - - - -
Total 196,800,260 68,503,962 12,399,806 277,704,028
Stage 2
A - 1 - - - -
A - 2 - - - -
B - - - -
C - - - -
Total - - - -
Stage 3
A - 1 - - - -
A - 2 - - - -
B - - - -
C 14,098,947 - - 14,098,947
Total 14,098,947 - - 14,098,947
INTERNAL GRADE UNITED STATES LATIN EUROPE ASIA TOTAL
31 DECEMBER
£ AMERICA £ £
2021
£
£
Stage 1
A - 1 57,629,013 - - - 57,629,013
A - 2 123,954,264 48,352,882 13,417,801 12,778,994 198,503,941
B 18,100,596 - 3,470,478 - 21,571,074
C - - - - -
Total 199,683,873 48,352,882 16,888,279 12,778,994 277,704,028
Stage 2
A - 1 - - - - -
A - 2 - - - - -
B - - - - -
C - - - - -
Total - - - - -
Stage 3
A - 1 - - - - -
A - 2 - - - - -
B - - - - -
C - - 14,098,947 - 14,098,947
Total - - 14,098,947 - 14,098,947
INTERNAL GRADE FINTECH eSME LEGAL FINANCE MARKETPLACE TOTAL
31 DECEMBER
£ £ £ LOANS
2020
£
Stage 1
A - 1 85,551,562 - - 3,001 85,554,563
A - 2 139,465,092 12,296,728 41,934,631 39,332 193,735,783
B 6,351,153 - - 117,400 6,468,553
C - - - 8,325 8,325
Total 231,367,807 12,296,728 41,934,631 168,058 285,767,224
Stage 2
A - 1 - - - - -
A - 2 - - - 6,163 6,163
B - - - 20,251 20,251
C 3,675,244 - - - 3,675,244
Total 3,675,244 - - 26,414 3,701,658
Stage 3
A - 1 - - - - -
A - 2 - - - 11,537 11,537
B - - - 170,395 170,395
C 11,952,754 - - 11,970 11,964,724
Total 11,952,754 - - 193,902 12,146,656
INTERNAL GRADE LATIN EUROPE ASIA TOTAL
UNITED
31 DECEMBER
AMERICA £ £
STATES
2020
£
Stage 1
A - 1 80,371,977 - - 5,182,586 85,554,563
A - 2 148,757,061 41,854,564 2,761,132 363,026 193,735,783
B 6,351,153 - 117,400 - 6,468,553
C - - 8,325 - 8,325
Total 235,480,191 41,854,564 2,886,857 5,545,612 285,767,224
Stage 2
A - 1 - - - - -
A - 2 - - 6,163 - 6,163
B - - 20,251 - 20,251
C - - 3,675,244 - 3,675,244
Total - - 3,701,658 - 3,701,658
Stage 3
A - 1 - - - - -
A - 2 11,537 - - - 11,537
B 170,395 - - - 170,395
C 11,970 - 11,952,754 - 11,964,724
Total 193,902 - 11,952,754 - 12,146,656
INTERNAL GRADE DEFINITION
A - 1 Asset backed loans structured with credit enhancement and strong operating
liquidity positions
A - 2 High credit quality borrowers or asset backed loans structured with credit
enhancement
B High credit quality borrowers with some indicators of credit risk or asset
backed loans with
limited structural credit enhancement
C Borrowers with elevated levels of credit risk
The following investment limits and restrictions shall apply to the Group, to
ensure that the diversification of the Group's portfolio is maintained, and
that concentration risk is limited:
Portfolio Company restrictions
The Group does not intend to invest more than 20% of its Gross Assets in Debt
Instruments (net of any gearing ring-fenced within any special purpose vehicle
which would be without recourse to the Group), originated by, and/or Credit
Facilities and equity instruments in, any single Portfolio Company, calculated
at the time of investment. All such aggregate exposure to any single Portfolio
Company (including investments via a special purpose vehicle) will always be
subject to an absolute maximum, calculated at the time of investment, of 25%
of the Group's Gross Assets.
Asset class restrictions
The Group does not intend to acquire Debt Instruments for a term longer than
five years. The Group will not invest more than 20% of its Gross Assets, at
the time of investment, via any single investment fund investing in Debt
Instruments and Credit Facilities. In any event, the Group will not invest, in
aggregate, more than 60% of its Gross Assets, at the time of investment, in
investment funds that invest in Debt Instruments and Credit Facilities.
The Group will not invest more than 10% of its Gross Assets, at the time of
investment, in other listed closed-ended investment funds, whether managed by
the Investment Manager or not, except that this restriction shall not apply to
investments in listed closed-ended investment funds which themselves have
stated investment policies to invest no more than 15% of their gross assets in
other listed closed-ended investment funds.
The following restrictions apply, in each case at the time of investment by
the Group, to both Debt Instruments acquired by the Group via wholly owned
special purpose vehicles or partially-owned special purpose vehicles on a
proportionate basis under the Marketplace Model, as well as on a look-through
basis under the Asset Backed Lending Model and to any Debt Instruments held by
another investment fund in which the Group invests:
v No single consumer loan acquired by the Group shall exceed 0.25% of its
Gross Assets.
v No single SME loan acquired by the Group shall exceed 5.0% of its Gross
Assets. For the avoidance of doubt, Credit Facilities entered into directly
with Platforms are not considered SME loans.
v No single trade receivable asset acquired by the Group shall exceed 5.0% of
its Gross Assets.
Other restrictions
The Group's un-invested or surplus capital or assets may be invested in Cash
Instruments for cash management purposes and with a view to enhancing returns
to Shareholders or mitigating credit exposure.
Maximum credit exposure
The carrying value of the Group's loan investments represents the maximum
credit exposure of the Group.
7. CASH AND CASH EQUIVALENTS
GROUP GROUP PARENT PARENT
COMPANY COMPANY
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2021 2020 2021 2020
£ £ £ £
Cash held at bank 6,300,572 6,416,028 4,301,574 4,738,217
Total 6,300,572 6,416,028 4,301,574 4,738,217
The Parent Company has posted cash collateral of £3,010,000 as at 31 December
2021 (31 December 2020: £1,140,000) with Goldman Sachs and cash of
£1,123,927 (31 December 2020: £nil) with Morgan Stanley in relation to the
outstanding derivatives.
Below are the credit ratings of the banks where the Parent Company and Group
hold cash as at 31 December 2021 from Moody's:
BANK RATING
Northern Trust A2
Goldman Sachs A2
Morgan Stanley A1
US Bank A1
Keybank A1
Wells Fargo A2
8. NOTES PAYABLE
The Group entered into contractual obligations with a third party to
structurally subordinate a portion of the principal directly attributable to
existing investments. The cash flows received by the Group from the underlying
investments are used to pay the lender principal, interest, and draw fees
based upon the stated terms of the Credit Facility. Unless due to a fraudulent
act, as defined by the Credit Facilities, none of the Group's other investment
assets can be used to satisfy the obligations of the Credit Facilities in the
event that those obligations cannot be met by the subsidiaries. Each
subsidiary with a Credit Facility is a bankruptcy remote entity.
The table below provides details of the outstanding debt of the Group at 31
December 2021:
INTEREST RATE OUTSTANDING MATURITY
PRINCIPAL
31 DECEMBER 2021 £
Credit Facility 03-2021 3.95% + 1M LIBOR 87,432,895 1 March 2027
Total 87,432,895
The table below provides details of the outstanding debt of the Group at 31
December 2020:
INTEREST RATE OUTSTANDING MATURITY
PRINCIPAL
31 DECEMBER 2020 £
Credit Facility 11-2018 4.25% + 1M LIBOR 37,534,297 30 November 2022
Total 37,534,297
The Group entered into contractual obligations with a third party to
structurally subordinate a portion of principal directly attributable to an
existing loan facility. The Group is obligated to pay a commitment fee and
interest to the third party on the obligation as interest is paid on the
underlying loan facility. In the event of a default on the loan facility,
the third party has first-out participation rights on the accrued and unpaid
interest as well as the principal balance of the note.
The table below provides details of the outstanding first-out participation
liabilities of the Group at 31 December 2021:
OUTSTANDING
PRINCIPAL MATURITY
31 DECEMBER 2021 £
First-Out Participation 03-2017 18,181,601 1 January 2024
First-Out Participation 04-2019 1,652,764 1 January 2024
Total 19,834,365
The table below provides details of the outstanding first-out participation
liabilities of the Group at 31 December 2020:
OUTSTANDING
PRINCIPAL MATURITY
31 DECEMBER 2020 £
First-Out Participation 06-2015 10,109,810 13 June 2021
First-Out Participation 03-2017 20,446,931 1 January 2024
First-Out Participation 04-2019 17,996,145 1 January 2024
Total 48,552,886
The table below provides the movement of the notes payable and securities sold
under agreements to repurchase for the year ended 31 December 2021 for the
Group.
NOTES
PAYABLE
£
Beginning balance, 1 January 2021 86,087,183
Purchases 179,944,080
Sales (163,403,782)
Net change in unrealised foreign exchange gains (losses) 4,639,779
Ending balance, 31 December 2021 107,267,260
The table below provides the movement of the notes payable and securities sold
under agreements to repurchase for the year ended 31 December 2020 for the
Group.
NOTES
PAYABLE
£
Beginning balance, 1 January 2020 111,667,069
Purchases 40,758,337
Sales (64,260,865)
Net change in unrealised foreign exchange gains (losses) (2,077,358)
Ending balance, 31 December 2020 86,087,183
9. IMPAIRMENT OF FINANCIAL ASSETS AT AMORTISED COST
The table below provides details of the investments at amortised cost held by
the Group as at 31 December 2021 under IFRS 9:
LOANS
COST BEFORE WRITTEN-OFF CARRYING
ECL ECL VALUE
£ £ £ £
Loans at amortised cost 291,802,975 12,463,973 - 279,339,002
Total 291,802,975 12,463,973 - 279,339,002
The table below provides details of the investments at amortised cost held by
the Group as at 31 December 2020 under IFRS 9:
COST BEFORE ECL ECL LOANS WRITTEN-OFF CARRYING
VALUE
£ £ £ £
Loans at amortised cost 303,128,410 8,489,159 1,515,872 293,123,379
Total 303,128,410 8,489,159 1,515,872 293,123,379
The Parent Company does not hold any loans.
Credit impairment losses
The credit impairment losses of the Group for the year ended 31 December 2021
comprises of the following under IFRS 9:
CREDIT IMPAIRMENT LOSSES
31 DECEMBER 2021
£
Loans recovered (358,867)
Change in expected credit losses 3,974,814
Currency translation on expected credit losses 20,195
Credit impairment losses 3,636,142
The impairment charge of the Group for the year ended 31 December 2020
comprises of the following under IFRS 9:
CREDIT IMPAIRMENT LOSSES
31
DECEMBER 2020
£
Loans written off 1,515,872
Change in expected credit losses (1,142,453)
Currency translation on expected credit losses (260,869)
Credit impairment losses 112,550
Impairment of loans written off
Impairment charges of loans written off (recovered) of £(358,867) (31
December 2020: £1,515,872) have been recorded in the Group's Consolidated
Statement of Financial Position and are included in Credit impairment losses
on the Consolidated Statement of Comprehensive Income.
Provision for expected credit losses
As at 31 December 2021, the Group has created a reserve provision on the
outstanding principal of the Group's loans of £12,463,973 (31 December 2020:
£8,489,159), which have been recorded in the Group's Consolidated Statement
of Financial Position and are included in Credit impairment losses on the
Consolidated Statement of Comprehensive Income.
The expected credit losses comprised the following during 2021:
31 DECEMBER
2021
£
Beginning balance 1 January 2021 8,489,159
Change in expected credit losses or equivalent 3,974,814
Ending balance 31 December 2021 12,463,973
The expected credit losses comprised the following during 2020:
31 DECEMBER
2020
£
Beginning balance 1 January 2020 9,631,612
Change in expected credit losses or equivalent (1,142,453)
Ending balance 31 December 2020 8,489,159
Below is a breakout of the provision for expected credit losses by stage of
the ECL model as at 31 December 2021:
INTERNAL GRADE FINTECH LEGAL FINANCE 31 DECEMBER
£ eSME £ 2021
£ £
Stage 1 - - - -
Stage 2 - - - -
Stage 3 12,463,973 - - 12,463,973
Expected credit losses 12,463,973 - - 12,463,973
INTERNAL GRADE UNITED LATIN EUROPE ASIA 31 DECEMBER
STATES AMERICA £ £ 2021
£ £ £
Stage 1 - - - - -
Stage 2 - - - - -
Stage 3 - - 12,463,973 - 12,463,973
Expected credit losses - - 12,463,973 - 12,463,973
Below is a breakout of the provision for expected credit losses by stage of
the ECL model as at 31 December 2020:
INTERNAL GRADE FINTECH LEGAL FINANCE MARKETPLACE 31 DECEMBER
£ eSME £ LOANS 2020
£ £ £
Stage 1 - - - 61,040 61,040
Stage 2 500,000 - - 24,804 524,804
Stage 3 7,793,186 - - 110,129 7,903,315
Expected credit losses 8,293,186 - - 195,973 8,489,159
INTERNAL GRADE LATIN EUROPE ASIA 31 DECEMBER
UNITED AMERICA £ £ 2020
STATES £ £
£
Stage 1 - - 61,040 - 61,040
Stage 2 - - 524,804 - 524,804
Stage 3 110,129 - 7,793,186 - 7,903,315
Expected credit losses 110,129 - 8,379,030 - 8,489,159
The breakout of the gross value of loans by stage of the ECL model as at 31
December 2021 and 31 December 2020 can be found in footnote 6. One investment
moved from Level 2 to Level 3 in 2021. All write-offs (recoveries) during the
year were on assets that were considered Stage 3. There were no material
movements between stages during 2020.
10. FEES AND EXPENSES
Investment management fees
Under the terms of the Management Agreement, the Investment Manager is
entitled to a management fee and a performance fee together with reimbursement
of reasonable expenses incurred by it in the performance of its duties.
The management fee is payable in Pound Sterling monthly in arrears and is at
the rate of 1/12 of 1.0% per month of NAV (the "Management Fee"). For the
period from Admission until the date on which 90% of the net proceeds of the
Issue have been invested or committed for investment (other than in Cash
Instruments), the value attributable to any Cash Instruments of the Group held
for investment purposes will be excluded from the calculation of NAV for the
purposes of determining the Management Fee. The management fee expense for
the year is £3,802,097 (31 December 2020: £3,394,740), of which £155,399
(31 December 2020: £92,241) was payable as at 31 December 2021.
The Investment Manager shall not charge a management fee twice. Accordingly,
if at any time the Group invests in or through any other investment fund or
special purpose vehicle and a management fee or advisory fee is charged to
such investment fund or special purpose vehicle by the Investment Manager or
any of its affiliates, the Investment Manager agrees to either (at the option
of the Investment Manager): (i) waive such management fee or advisory fee due
to the Investment Manager or any of its affiliates in respect of such
investment fund or special purpose vehicle, other than the fees charged
by the Investment Manager under the Management Agreement; or (ii) charge
the relevant fee to the relevant investment fund or special purpose vehicle,
subject to the cap set out in the paragraph below, and ensure that the value
of such investment shall be excluded from the calculation of the NAV for the
purposes of determining the Management Fee payable pursuant to the above.
Notwithstanding the above, where such investment fund or special purpose
vehicle employs gearing from third parties and the Investment Manager or any
of its affiliates is entitled to charge it a fee based on gross assets in
respect of such investment, the Investment Manager may not charge a fee
greater than 1.0% per annum of gross assets in respect of any investment made
by the Parent Company or any member of the Group.
Performance fees
The performance fee is calculated by reference to the movements in the
Adjusted Net Asset Value since the end of the Calculation Period in respect of
which a performance fee was last earned or Admission if no performance fee has
yet been earned. The payment of any performance fees to the Investment Manager
will be conditional on the Parent Company achieving at least a 5.0% per annum
total return for shareholders relative to a 30 April 2017 High Water Mark.
The performance fee will be calculated in respect of each 12 month period
starting on 1 January and ending on 31 December in each calendar year (a
"Calculation Period") and provided further that if at the end of what would
otherwise be a Calculation Period no performance fee has been earned in
respect of that period, the Calculation Period shall carry on for the next 12
month period and shall be deemed to be the same Calculation Period and this
process shall continue until a performance fee is next earned at the end of
the relevant period. The performance fee expense for the year is £12,913,280
(31 December 2020: £4,040,085), of which £12,913,280 was payable as at 31
December 2021 (31 December 2020: £4,040,085).
The performance fee will be equal to the lower of (i) in each case as at the
end of the Calculation Period, an amount equal to (a) Adjusted Net Asset Value
minus the Adjusted Hurdle Value, minus (b) the aggregate of all Performance
Fees paid to the Manager in respect of all previous Calculation Periods; and
(ii) the amount by which (a) 15% of the total increase in the Adjusted Net
Asset Value since the Net Asset Value as at 30 April 2017 (being the aggregate
of the increase in the Adjusted Net Asset Value in the relevant Calculation
Period and in each previous Calculation Period) exceeds (b) the aggregate of
all Performance Fees paid to the Manager in respect of all previous
Calculation Periods. In the foregoing calculation, the Adjusted Net Asset
Value will be adjusted for any increases or decreases in the Net Asset Value
attributable to the issue or repurchase of any Ordinary Shares in order to
calculate the total increase in the Net Asset Value attributable to the
performance of the Parent Company.
"Adjusted Net Asset Value" means the Net Asset Value plus (a) the aggregate
amount of any dividends paid or distributions made in respect of any Ordinary
Shares and (b) the aggregate amount of any dividends or distributions accrued
but unpaid in respect of any Ordinary Shares, plus the amount of any
Performance Fees both paid and accrued but unpaid, in each case after the
Effective Date and without duplication. "Adjusted Hurdle Value" means the Net
Asset Value as at 30 April 2017 adjusted for any increases or decreases in the
Net Asset Value attributable to the issue or repurchase of any Ordinary Shares
increasing at an uncompounded rate equal to the Hurdle. The "Hurdle" means a
5% per annum total return for shareholders.
The Investment Manager shall not charge a performance fee twice. Accordingly,
if at any time the Group invests in or through any other investment fund,
special purpose vehicle or managed account arrangement and a performance fee
or carried interest is charged to such investment fund, special purpose
vehicle or managed account arrangement by the Investment
Manager or any of its affiliates, the Investment Manager agrees to
(and shall procure that all of its relevant affiliates shall) either
(at the option of the Investment Manager): (i) waive such performance fee or
carried interest suffered by the Group by virtue of the Investment Manager's
(or such relevant affiliate's/affiliates') management of (or advisory role in
respect of) such investment fund, special purpose vehicle or managed account,
other than the fees charged by the Investment Manager under the Management
Agreement; or (ii) calculate the performance fee as above, except that in
making such calculation the NAV (as of the date of the High Water Mark) and
the Adjusted NAV (as of the NAV calculation date) shall not include the value
of any assets invested in any other investment fund, special purpose vehicle
or managed account arrangement that is charged a performance fee
or carried interest by the Investment Manager or any of its affiliates (and
such performance fee or carried interest is not waived with respect to the
Group).
Administration
The Group has entered into an administration agreement with Citco Fund
Administration (Cayman Islands) Limited. The Group pays to the Administrator
an annual administration fee based on the Parent Company's net assets subject
to a monthly minimum charge.
The Administrator shall also be entitled to be repaid all its reasonable
out-of-pocket expenses incurred on behalf of the Group. All Administrator fees
are included in other expenses on the Consolidated Statement of Comprehensive
Income.
Secretary
Under the terms of the Company Secretarial Agreement, Link Group is entitled
to an annual fee of £75,000 (exclusive of VAT and disbursements). All
Secretary fees are included in other expenses on the Consolidated Statement of
Comprehensive Income.
Registrar
Under the terms of the Registrar Agreement, the Registrar is entitled to an
annual maintenance fee of £1.25 per Shareholder account per annum, subject to
a minimum fee of £2,500 per annum (exclusive of VAT). All Registrar fees are
included in other expenses on the Consolidated Statement of Comprehensive
Income.
Custodian
Under the terms of the Custodian Agreement, Merrill Lynch, Pierce, Fenner
& Smith Incorporated is entitled to be paid a fee of between US$180 and
US$500 per annum per holding of securities in an entity. In addition, the
Custodian is entitled to be paid fees up to US$300 per account per annum and
other incidental fees. All Custodian fees are included in other expenses on
the Consolidated Statement of Comprehensive Income.
Auditors' remuneration
For the year ended 31 December 2021, the remuneration for work carried out by
PricewaterhouseCoopers LLP, the statutory auditors, was as follows:
31 DECEMBER 31 DECEMBER
2021 2020
£ £
Fees charged by PricewaterhouseCoopers LLP:
v the audit of the Parent Company and Consolidated Financial Statements; and 317,000 245,000
v the audit of the Company's subsidiaries. 22,300 13,000
Amounts are included in other expenses on the Consolidated Statement of
Comprehensive Income and are exclusive of VAT. There were no non-audit
services provided by PricewaterhouseCoopers LLP during the year.
11. TAXATION ON ORDINARY ACTIVITIES
Investment trust status
It is the intention of the Directors to conduct the affairs of the Group so as
to satisfy the conditions for approval as an investment trust under section
1158 of the Corporation Taxes Act 2010. As an investment trust the Parent
Company is exempt from corporation tax on capital gains made on investments.
Although interest income received would ordinarily be subject to corporation
tax, the Parent Company will receive relief from corporation tax relief to the
extent that interest distributions are made to shareholders. It is the
intention of the Parent Company to make sufficient interest distributions so
that no corporation tax liability will arise in the Parent Company.
Any change in the Group's tax status or in taxation legislation generally
could affect the value of the investments held by the Group, affect the
Group's ability to provide returns to Shareholders, lead to the loss of
investment trust status or alter the post-tax returns to Shareholders.
The following table presents the tax chargeable on the Group for the period
ended 31 December 2021:
REVENUE CAPITAL TOTAL
£ £ £
Net return on ordinary activities before taxation 21,123,168 52,090,200 73,213,368
Tax at the standard UK corporation tax rate of 19.00% 4,013,402 9,897,138 13,910,540
Effects of:
Non-taxable income (4,013,402) - (4,013,402)
Capital items exempt from corporation tax - (9,897,138) (9,897,138)
Total tax charge - - -
The following table presents the tax chargeable on the Group for the period
ended 31 December 2020:
REVENUE CAPITAL TOTAL
£ £ £
Net return on ordinary activities before taxation 23,898,852 (944,173) 22,954,679
Tax at the standard UK corporation tax rate of 19.00% 4,540,782 (179,393) 4,361,389
Effects of:
Non-taxable income (4,540,782) - (4,540,782)
Capital items exempt from corporation tax - 179,393 179,393
Total tax charge - - -
Overseas taxation
The Parent Company and Group may be subject to taxation under the tax rules of
the jurisdictions in which they invest, including by way of withholding of tax
from interest and other income receipts. Although the Parent Company and Group
will endeavour to minimise any such taxes this may affect the level of returns
to Shareholders of the Parent Company.
12. NET ASSET VALUE PER ORDINARY SHARE
AS AT AS AT
31 DECEMBER 31 DECEMBER
2021 2020
£ £
Net assets attributable to Shareholders of the Parent Company 317,614,784 270,537,108
Ordinary Shares in issue (excluding Treasury Shares) 278,276,392 282,647,364
Net asset value per Ordinary Share 114.14p 95.72p
13. RETURN PER ORDINARY SHARE
Basic earnings per share is calculated using the weighted average number of
shares in issue during the year, excluding the average number of Ordinary
Shares purchased by the Parent Company and held as Treasury Shares.
AS AT AS AT
31 DECEMBER 31 DECEMBER
2021 2020
£ £
Profit for the year 73,183,772 22,879,629
Average number of Ordinary Shares in issue during the year 279,617,119 295,430,078
Earnings per Share (basic and diluted) 26.17p 7.74p
The Parent Company has not issued any shares or other instruments that are
considered to have dilutive potential.
14. SHAREHOLDERS' CAPITAL
Set out below is the issued share capital of the Company as at 31 December
2021. All shares issued are fully paid with none not fully paid:
NOMINAL NUMBER OF SHARES
VALUE
£
Ordinary Shares 0.01 278,276,392
Set out below is the issued share capital of the Company as at 31 December
2020. All shares issued are fully paid with none not fully paid:
NOMINAL NUMBER OF SHARES
VALUE
£
Ordinary Shares 0.01 282,647,364
Rights attaching to the Ordinary Shares
The holders of the Ordinary Shares are entitled to receive, and to participate
in, any dividends declared in relation to the Ordinary Shares. The holders
of the Ordinary Shares shall be entitled to all the Parent Company's remaining
net assets after taking into account any net assets attributable to other
share classes in issue. The Shares shall carry the right to receive notice of,
attend and vote at general meetings of the Parent Company. The consent of the
holders of Shares will be required for the variation of any rights attached to
the Ordinary Shares. The net return per Ordinary Share is calculated by
dividing the net return on ordinary activities after taxation by the number of
shares in issue.
Voting rights
Subject to any rights or restrictions attached to any shares, on a show of
hands every shareholder present in person has one vote and every proxy present
who has been duly appointed by a shareholder entitled to vote has one vote,
and on a poll, every shareholder (whether present in person or by proxy) has
one vote for every share of which he is the holder. A shareholder entitled to
more than one vote need not, if he votes, use all his votes or cast all the
votes he uses the same way. In the case of joint holders, the vote of the
senior who tenders a vote shall be accepted to the exclusion of the vote of
the other joint holders, and seniority shall be determined by the order in
which the names of the holders stand in the Register.
No shareholder shall have any right to vote at any general meeting or at any
separate meeting of the holders of any class of shares, either in person or by
proxy, in respect of any share held by him unless all amounts presently
payable by him in respect of that share have been paid.
Variation of Rights & Distribution on Winding Up
Subject to the provisions of the Act as amended and every other statute for
the time being in force concerning companies and affecting the Parent Company
(the "Statutes"), if at any time the share capital of the Parent Company is
divided into different classes of shares, the rights attached to any class may
be varied either with the consent in writing of the holders of three-quarters
in nominal value of the issued shares of that class or with the sanction of an
extraordinary resolution passed at a separate meeting of the holders of the
shares of that class (but not otherwise) and may be so varied either whilst
the Parent Company is a going concern or during or in contemplation of a
winding-up.
At every such separate general meeting the necessary quorum shall be at least
two persons holding or representing by proxy at least one-third in nominal
value of the issued shares of the class in question (but at any adjourned
meeting any holder of shares of the class present in person or by proxy shall
be a quorum), any holder of shares of the class present in person or by proxy
may demand a poll and every such holder shall on a poll have one vote for
every share of the class held by him. Where the rights of some only of the
shares of any class are to be varied, the foregoing provisions apply as if
each group of shares of the class differently treated formed a separate class
whose rights are to be varied.
The Parent Company has no fixed life but, pursuant to the Articles, an
ordinary resolution for the continuation of the Parent Company will be
proposed at the annual general meeting of the Parent Company to be held in
2025 and, if passed, every five years thereafter. Upon any such resolution,
not being passed, proposals will be put forward within three months after the
date of the resolution to the effect that the Parent Company be wound up,
liquidated, reconstructed or unitised.
If the Parent Company is wound up, the liquidator may divide among the
shareholders in specie the whole or any part of the assets of the Parent
Company and for that purpose may value any assets and determine how the
division shall be carried out as between the shareholders or different classes
of shareholders.
The table below shows the movement in shares through 31 December 2021:
SHARES IN SHARES IN
ISSUE AT THE ISSUE AT THE
FOR THE YEAR FROM 1 JANUARY 2021 BEGINNING OF SHARES END OF
TO 31 DECEMBER 2021 THE PERIOD REPURCHASED THE PERIOD
Ordinary Shares 282,647,364 (4,370,972) 278,276,392
The table below shows the movement in shares through 31 December 2020:
SHARES IN SHARES IN
ISSUE AT THE ISSUE AT THE
FOR THE YEAR FROM 1 JANUARY 2020 BEGINNING OF SHARES END OF
TO 31 DECEMBER 2020 THE PERIOD REPURCHASED THE PERIOD
Ordinary Shares 312,302,305 (29,654,941) 282,647,364
Share buyback programme
All Ordinary Shares bought back through the share buyback programme are held
in treasury as at 31 December 2021. Details of the programme are as follows:
ORDINARY AVERAGE LOWEST HIGHEST TOTAL
SHARES PRICE PER PRICE PER PRICE PER TREASURY
DATE OF PURCHASE PURCHASED SHARE SHARE SHARE SHARES
January 2021 - 0.00p 0.00p 0.00p 99,968,301
February 2021 583,465 88.25p 86.65p 88.99p 100,551,766
March 2021 1,587,507 84.01p 82.61p 89.77p 102,139,273
April 2021 550,000 85.56p 85.39p 85.80p 102,689,273
May 2021 600,000 85.63p 85.00p 86.20p 103,289,273
June 2021 1,050,000 84.07p 83.48p 84.07p 104,339,273
July 2021 - 0.00p 0.00p 0.00p 104,339,273
August 2021 - 0.00p 0.00p 0.00p 104,339,273
September 2021 - 0.00p 0.00p 0.00p 104,339,273
October 2021 - 0.00p 0.00p 0.00p 104,339,273
November 2021 - 0.00p 0.00p 0.00p 104,339,273
December 2021 - 0.00p 0.00p 0.00p 104,339,273
Details of the share buyback program during the year ended 31 December 2020 as
follows:
ORDINARY AVERAGE LOWEST HIGHEST TOTAL
SHARES PRICE PER PRICE PER PRICE PER TREASURY
DATE OF PURCHASE PURCHASED SHARE SHARE SHARE SHARES
January 2020 1,824,187 80.52p 78.64p 81.00p 72,137,547
February 2020 1,153,000 81.30p 78.10p 82.29p 73,290,547
March 2020 3,513,837 62.26p 54.97p 80.00p 76,804,384
April 2020 - 0.00p 0.00p 0.00p 76,804,384
May 2020 4,259,700 61.57p 58.44p 62.83p 81,064,084
June 2020 11,515,569 69.18p 66.60p 71.50p 92,579,653
July 2020 3,636,867 65.19p 63.03p 67.00p 96,216,520
August 2020 1,000,000 64.60p 63.00p 65.00p 97,216,520
September 2020 1,547,589 64.02p 62.80p 65.38p 98,764,109
October 2020 - 0.00p 0.00p 0.00p 98,764,109
November 2020 725,000 65.98p 65.92p 66.00p 99,489,109
December 2020 479,192 73.26p 73.05p 73.55p 99,968,301
Other distributable reserve
During 2021, the Company declared and paid dividends of £Nil (2020: £Nil)
from the other distributable reserve. Further, the cost of the buyback of
Ordinary Shares as detailed above was funded by the other distributable
reserve of £3,741,814 (2020: £20,161,216). The closing balance in the other
distributable reserve has been reduced to £112,779,146 (31 December 2020:
£116,520,960).
15. DIVIDENDS PER SHARE
The following table summarises the amounts recognised as distributions to
equity shareholders in the period:
31 DECEMBER 31 DECEMBER
2021 2020
£ £
2019 interim dividend of 2.00 pence per Ordinary Share paid on 2 April 2020 - 6,184,004
2020 interim dividend of 2.00 pence per Ordinary Share paid on 11 June 2020 - 6,116,226
2020 interim dividend of 2.00 pence per Ordinary Share paid on 17 September - 5,711,983
2020
2020 interim dividend of 2.00 pence per Ordinary Share paid on 17 December - 5,662,531
2020
2020 interim dividend of 2.00 pence per Ordinary Share paid on 1 April 2021 5,638,178 -
2021 interim dividend of 2.00 pence per Ordinary Share paid on 24 June 2021 5,586,527 -
2021 interim dividend of 2.00 pence per Ordinary Share paid on 23 September 5,565,528 -
2021
2021 interim dividend of 2.00 pence per Ordinary Share paid on 23 December 5,565,528 -
2021
Total 22,355,761 23,674,744
An interim dividend of 2.00 pence per Ordinary Share, equalling £5,565,528,
was declared by the Board on 24 February 2022 in respect of the period to 31
December 2021, was paid to shareholders on 31 March 2022. The interim dividend
has not been included as a liability in these financial statements in
accordance with International Accounting Standard 10: Events After the Balance
Sheet Date. The Parent Company allocated £88,856 of the 2021 interim dividend
paid on 1 April 2021 to a 2020 final dividend.
16. RELATED PARTY TRANSACTIONS
Each of the Directors is entitled to receive a fee from the Parent Company at
such rate as may be determined in accordance with the Articles. Save for the
Chair of the Board, the fees are £33,000 for each Director per annum. The
Chair's fee is £55,000 per annum. The chair of the Audit and Valuation
Committee may also receive additional fees for acting as the chairman of such
a committee. The current fee for serving as the chair of the Audit and
Valuation Committee is £5,500 per annum.
All the Directors are also entitled to be paid all reasonable expenses
properly incurred by them in attending general meetings, board or committee
meetings or otherwise in connection with the performance of their duties. The
Board may determine that additional remuneration may be paid, from time to
time, to any one or more Directors in the event such Director or Directors are
requested by the Board to perform extra or special services on behalf of the
Parent Company.
At 31 December 2021, £193,200 (31 December 2020: £179,563) was paid to the
Directors and £nil (31 December 2020: £nil) was owed for services performed.
As at 31 December 2021 and 31 December 2020, the Directors' interests in the
Parent Company's Shares were as follows:
31 DECEMBER 31 DECEMBER
2021 2020
Oliver Grundy Ordinary Shares 30,000 N/A
Kevin Ingram Ordinary Shares N/A 64,968
Mark Katzenellenbogen Ordinary Shares 215,000 215,000
Elizabeth Passey Ordinary Shares 10,000 10,000
Clive Peggram Ordinary Shares 333,240 333,240
Graeme Proudfoot Ordinary Shares 130,000 50,000
Investment management fees for the year ended 31 December 2021 are payable by
the Parent Company to the Investment Manager and these are presented on the
Consolidated Statement of Comprehensive Income. Details of investment
management fees and performance fees payable during the year are disclosed in
Note 10.
During 2021, as part of an amendment to its management agreement, the
Investment Manager continued to purchase Ordinary Shares of the Parent Company
with 20% of its monthly management fee. The Ordinary Shares were purchased
at the prevailing market price. As at 31 December 2021, the Investment Manager
has purchased 4,496,991 (31 December 2020: 3,705,991) Ordinary Shares.
As at 31 December 2021, Partners and Principals of the Investment Manager held
510,000 (31 December 2020: 510,000) Shares in the Parent Company.
The Group has invested in VPC Offshore Unleveraged Private Debt Fund Feeder,
L.P. The Investment Manager of the Parent Company also acts as manager to VPC
Offshore Unleveraged Private Debt Fund Feeder, L.P. The principal activity of
VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. is to invest in
alternative finance investments and related instruments with a view to
achieving the Parent Company's investment objective. As at 31 December 2021
the Group owned 26% of VPC Offshore Unleveraged Private Debt Fund Feeder, L.P.
(31 December 2020: 26%) and the value of the Group's investment in VPC
Offshore Unleveraged Private Debt Fund Feeder, L.P. was £1,640,256 (31
December 2020: £2,454,004).
The Group has invested in VPC Synthesis, L.P. The Investment Manager of the
Parent Company also acts as manager to VPC Synthesis, L.P. The principal
activity of VPC Synthesis, L.P. is to invest in alternative finance
investments and related instruments with a view to achieving the Parent
Company's investment objective. As at 31 December 2021 the Group owned 4% of
VPC Synthesis, L.P. (31 December 2020: £nil) and the value of the Group's
investment in VPC Synthesis, L.P. was £10,890,834 (31 December 2020: £nil).
The Investment Manager may pay directly various expenses that are attributable
to the Group. These expenses are allocated to and reimbursed by the Group to
the Investment Manager as outlined in the Management Agreement. Any excess
expense previously allocated to and paid by the Group to the Investment
Manager will be reimbursed to the Group by the Investment Manager. At 31
December 2021, £23,697 was due to the Investment Manager (31 December 2020:
£44,240) and is included in the Accrued expenses and other liabilities
balance on the Consolidated Statement of Financial Position.
17. SUBSIDIARIES
NAME PRINCIPAL ACTIVITY COUNTRY OF INCORPORATION NATURE OF INVESTMENT PERCENTAGE OWNERSHIP PERCENTAGE OWNERSHIP
AS AT
AS AT
31 DECEMBER 2021
31 DECEMBER 2020
VPC Specialty Investment vehicle USA Limited partner interest Sole limited Sole limited
Lending Investments Intermediate, L.P. partner partner
VPC Specialty Investment vehicle USA Limited partner interest Sole limited N/A
Lending Investments Intermediate Holdings, L.P. partner
VPC Specialty General partner USA Membership interest Sole member Sole member
Lending Investments Intermediate GP, LLC
Fore London, L.P. Investment vehicle UK Limited partner interest Sole limited partner Sole limited partner
Fore London GP, LLC General partner UK Membership interest Sole member Sole member
Duxbury Court I, L.P. Investment vehicle USA Limited partner interest 95% 95%
Duxbury Court I GP, LLC General partner USA Membership interest 95% 95%
Drexel I, L.P. Investment vehicle USA Limited partner interest 52% 52%
Drexel I GP, LLC General partner USA Membership interest 52% 52%
The subsidiaries listed above as investment vehicles are consolidated by the
Group and there is no activity to consolidate within the subsidiaries listed
as general partners.
NAME REGISTERED ADDRESS
VPC Specialty Lending Investments Intermediate, L.P. 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
VPC Specialty Lending Investments Intermediate Holdings, L.P. 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
VPC Specialty Lending Investments Intermediate GP, LLC 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
Fore London, L.P. 6th Floor, 65 Gresham Street, London, EC2V 7NQ United Kingdom
Fore London GP, LLC 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
Duxbury Court I, L.P. 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
Duxbury Court I GP, LLC 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
Drexel I, L.P. 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
Drexel I GP, LLC 150 North Riverside Plaza, Suite 5200, Chicago, IL 60606
The table below illustrates the movement of the investment in subsidiaries of
the Parent Company in 2021:
INVESTMENTS
IN SUBSIDIARIES
£
Beginning balance, 1 January 2021 257,491,532
Purchases 29,910,829
Sales (45,377,842)
Appreciation of investments in subsidiaries 61,150,460
Ending balance, 31 December 2021 303,174,979
The table below illustrates the movement of the investment in subsidiaries of
the Parent Company in 2020:
INVESTMENTS
IN SUBSIDIARIES
£
Beginning balance, 1 January 2020 281,465,228
Purchases 80,568,889
Sales (103,634,392)
Appreciation of investments in subsidiaries (908,193)
Ending balance, 31 December 2020 257,491,532
18. NON-CONTROLLING INTERESTS
The non-controlling interests arises from investments in limited partnerships
considered to be controlled subsidiaries into which there are other investors.
The value of the non-controlling interests at 31 December 2021 represents the
portion of the NAV of the controlled subsidiaries attributable to the other
investors. As at 31 December 2021, the portion of the NAV attributable to
non-controlling interests investments totaled £45,958 (31 December 2020:
£19,337). In the Consolidated Statement of Comprehensive Income, the amount
attributable to non-controlling interests represents the increase in the fair
value of the investment in the period.
The following entities have been consolidated which have non-controlling
interests as at 31 December 2021:
PRINCIPAL PROPORTION PROFIT OR LOSS ACCUMULATED
PLACE OF BUSINESS OF OWNERSHIP OF SUBSIDIARY NON-
INTERSTS ALLOCATED TO CONTROLLING
HELD BY NON- INTERESTS IN
NON- CONTROLLING SUBSIDIARY AS
CONTROLLING INTERESTS AT 31 DECEMBER
INTERESTS AS AT DURING THE 2021
31 DECEMBER 2021 PERIOD ENDED
31 DECEMBER
2021
NAME OF SUBSIDIARY £ £
Drexel I, L.P. USA 47% 14,468 20,506
Duxbury Court I, L.P. USA 5% 15,128 25,452
Totals 29,596 45,958
31 DECEMBER
SUMMARISED FINANCIAL 2021
NAME OF SUBSIDIARY INFORMATION FOR SUBSIDIARY £
Drexel I, L.P. Distributions to non-controlling interests -
Profit/(loss) of subsidiary for period ended 31 December 2021 31,707
Assets as at 31 December 2021 81,028
Liabilities as at 31 December 2021 36,960
Duxbury Court I, L.P. Distributions to non-controlling interests -
Profit/(loss) of subsidiary for period ended 31 December 2021 32,424
Assets as at 31 December 2021 527,330
Liabilities as at 31 December 2021 36,960
The following entities have been consolidated which have non-controlling
interests during 2020:
PRINCIPAL PLACE OF BUSINESS PROPORTION PROFIT OR LOSS ACCUMULATED
OF OWNERSHIP OF SUBSIDIARY NON-
INTERSTS ALLOCATED TO CONTROLLING
HELD BY NON- INTERESTS IN
NON- CONTROLLING SUBSIDIARY AS
CONTROLLING INTERESTS AT 31 DECEMBER
INTERESTS AS AT DURING THE 2020
31 DECEMBER 2020 PERIOD ENDED
31 DECEMBER
2020
NAME OF SUBSIDIARY £ £
Drexel I, L.P. USA 47% 51,213 5,699
Duxbury Court I, L.P. USA 5% 3,321 13,638
Larkdale I, L.P. USA 39% 20,554 -
SVTW, L.P. USA 1% (38) -
Totals 75,050 19,337
SUMMARISED FINANCIAL 31 DECEMBER
2020
NAME OF SUBSIDIARY INFORMATION FOR SUBSIDIARY £
Drexel I, L.P. Distributions to non-controlling interests 49,333
Profit/(loss) of subsidiary for period ended 31 December 2020 103,596
Assets as at 31 December 2020 35,200
Liabilities as at 31 December 2020 22,965
Duxbury Court I, L.P. Distributions to non-controlling interests -
Profit/(loss) of subsidiary for period ended 31 December 2020 60,888
Assets as at 31 December 2020 471,560
Liabilities as at 31 December 2020 18,285
Larkdale I, L.P. Distributions to non-controlling interests 72,605
Profit/(loss) of subsidiary for period ended 31 December 2020 83,800
Assets as at 31 December 2020 -
Liabilities as at 31 December 2020 -
SVTW, L.P. Distributions to non-controlling interests 1,970
Profit/(loss) of subsidiary for period ended 31 December 2020 (11,191)
Assets as at 31 December 2020 -
Liabilities as at 31 December 2020 -
19. INVESTMENTS IN FUNDS
The Group has been determined to exercise significant influence in relation to
certain of its in funds and other entities, as such these investments are
considered to be associates for accounting purposes and represent interests in
unconsolidated structured entities. The following additional information is
therefore provided as required by IFRS 12, Disclosure of Interests in Other
Entities:
NAME OF ASSOCIATE PRINCIPAL PLACE PRINCIPAL ACTIVITY PROPORTION OF BASIS OF FAIR VALUE OF MAXIMUM
OF BUSINESS OWNERSHIP VALUATION INTEREST AS AT EXPOSURE TO
INTERESTS HELD 31 DECEMBER LOSS AS AT
2021 31 DECEMBER
£ 2021
£
VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. Cayman Investment 26% Designated as held at fair value through profit or loss - using NAV 1,640,256 1,640,256
Islands fund
VPC Synthesis, L.P. USA Investment 4% Designated as held at fair value through profit or loss - using NAV 10,890,834 10,890,834
fund
NAME OF ASSOCIATE SUMMARISED FINANCIAL 31 DECEMBER
INFORMATION FOR ASSOCIATE 2021
£
VPC Offshore Unleveraged Profit/(loss) of associate for period ended 31 December 2021 1,151,744
Private Debt Fund Feeder, L.P. Assets as at 31 December 2021 4,431,392
Liabilities at 31 December 2021 157,672
VPC Synthesis, L.P. Profit/(loss) of associate for period ended 31 December 2021 5,838,471
Assets as at 31 December 2021 283,302,763
Liabilities at 31 December 2021 237,818,787
NAME OF ASSOCIATE PRINCIPAL PLACE PRINCIPAL ACTIVITY PROPORTION OF BASIS OF FAIR VALUE OF MAXIMUM
OF BUSINESS OWNERSHIP VALUATION INTEREST AS AT EXPOSURE TO
INTERESTS HELD 31 DECEMBER LOSS AS AT
2020 31 DECEMBER
£ 2020
£
VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. Cayman Investment 26% Designated as held at fair value through profit or loss - using NAV 2,454,004 2,454,004
Islands fund
Larkdale III, L.P. USA Investment 52%* Designated as held at fair value through profit or loss - using NAV 68,362 68,362
vehicle
NAME OF ASSOCIATE SUMMARISED FINANCIAL 31 DECEMBER
INFORMATION FOR ASSOCIATE 2020
£
VPC Offshore Unleveraged Profit/(loss) of associate for period ended 31 December 2020 345,196
Private Debt Fund Feeder, L.P. Assets as at 31 December 2020 7,049,729
Liabilities at 31 December 2020 1,356,552
Larkdale III, L.P. Profit/(loss) of associate for period ended 31 December 2020 12,207
Assets as at 31 December 2020 190,860
Liabilities at 31 December 2020 58,441
The Group's investments in associates all consist of limited partner interest
in funds. There are no significant restrictions between investors with joint
control or significant influence over the associates listed above on the
ability of the associates to transfer funds to any party in the form of cash
dividends or to repay loans or advances made by the Group.
*The Group holds 52% interest in Larkdale III, L.P. while the Group's ultimate
ownership of the investment held by Larkdale III, L.P. is 34%. The Group has
determined it does not have accounting control as the general partner has
operating control over the vehicle and acts as an agent for a number of the
Investment Manager's funds.
20. SUBSEQUENT EVENTS AFTER THE REPORTING PERIOD
The Company declared a dividend of 2.00 pence per Ordinary Share, equalling
£5,565,528 for the three-month period ended 31 December 2021 and paid the
dividend on 31 March 2022.
There were no other significant events subsequent to the year end.
APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS
The Annual report and Financial Statements were approved and authorised for
issue by the Directors on 27 April 2022.
GOVERNANCE
Responsibility for Financial Statements and Going Concern Statement
The Directors have reviewed the financial projections of the Group and Company
from the date of this report, which shows that the Group and Company will be
able to generate sufficient cash flows in order to meet its liabilities as
they fall due. In assessing the Group's and Company's ability to continue as a
going concern, the Directors have considered the Company's investment
objective, risk management policies capital management, the monthly NAV and
the nature of its portfolio and expenditure projections.
Additionally, the Directors have considered the risks arising of reduced asset
values and economic disruption caused by the COVID-19 pandemic. The Investment
Manager has also performed a range of stress tests and demonstrated to the
Directors that even in an adverse scenario of depressed markets that the Group
could still generate sufficient funds to meet its liabilities over the next
twelve months. The Directors believe that the Group has adequate resources, an
appropriate financial structure and suitable management arrangements in place
to continue in operational existence for the foreseeable future being a period
of at least twelve months from the date of this report.
Based on their assessment and considerations above, the Directors have
concluded that the financial statements of the Group and Company should
continue to be prepared on a going concern basis.
Viability Statement
In accordance with provision 31 of the UK Corporate Governance Code, published
by the Financial Reporting Council in July 2018, and as part of an ongoing
programme of risk assessment, the Directors have assessed the prospects of the
Company, to the extent that they are able, over a three-year period. The
Directors have chosen a three-year period as this is viewed as sufficiently
long term to provide shareholders with a meaningful view, without extending
the period so far into the future as to undermine the exercise. Additionally,
the asset backed loan investments held by the Group have a weighted average
maturity of approximately three years which allows the investment cash flows,
recycling of investments and expenditures commitments of the Group to be
reasonably forecasted over this timeframe.
The three-year review considers the Group's cash flow, cash distributions and
other key financial ratios over the period. The three-year review also makes
certain assumptions about the normal level of expenditure likely to occur and
considers the impact on the financing facilities of the Group.
Furthermore, the three-year review period to 31 December 2024 was modelled
under scenarios addressing the two conditions below:
v (i) The Board will offer shareholders an exit opportunity for up to 100% of
the Ordinary Shares in issue immediately following the Company's AGM in 2023
if the Company's NAV (Cum Income) Return (calculated as set out in the
Company's annual report and financial statements) for the period from 1 April
2020 to 31 March 2023 is less than 24%; and
v (ii) If the average discount to NAV at which the shares trade over
the three-month period ending on 31 March 2023 is greater than 5%, the
Board will offer shareholders an exit opportunity for up to 25% of the
Ordinary Shares in issue immediately following the Company's AGM in 2023. For
the avoidance of doubt, this exit opportunity will not be offered in the event
the 100% exit opportunity in condition (ii) has been triggered.
As a part of this review, the Directors reviewed a series of stress test
scenarios carried out by the Investment Manager which assumed a significant
fall in income and asset levels, including the impacts to the Group's
financing facilities and were satisfied with the result of this analysis. In
making this assessment on the viability of the Group, the Directors have also
taken into consideration each of the principal risks and uncertainties on
pages 15 to 18, their mitigants and the impact these might have on the
business model, future performance, solvency and liquidity. Both the principal
risks and the monitoring system are subject to a robust assessment at least
annually.
In addition, the Directors considered the Company's current financial position
and prospects, the composition of the investment portfolio, the level of
outstanding capital commitments, the term structure and availability of
borrowings and the ongoing costs of the business. As part of the approach, due
consideration has been given to the uncertainty inherent in financial
forecasts and, where applicable, as described above reasonable sensitivities
have been applied to the investment portfolio in stress situations.
All the analysis above indicates that due to the stability and cash generating
nature of the investment portfolio, specifically the asset backed investments,
as well as the debt facility in place, the Group would be able to withstand
the impacts outlined above. Based on the robust assessment of the principal
risks, prospects and viability of the Group, the Board confirms that they have
reasonable expectation that the Group will be able to continue operation and
meet its liabilities as they fall due over the three-year period to 31
December 2024.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
Company law requires the directors to prepare financial statements for each
financial year. Under that law the directors have prepared the group and the
company financial statements in accordance with UK-adopted international
accounting standards.
Under company law, directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the group and company and of the profit or loss of the group for that
period. In preparing the financial statements, the directors are required to:
v select suitable accounting policies and then apply them consistently;
v state whether applicable UK-adopted international accounting standards have
been followed, subject to any material departures disclosed and explained in
the financial statements;
v make judgements and accounting estimates that are reasonable and prudent;
and
v prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the group and company will continue in business.
The directors are responsible for safeguarding the assets of the group and
company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The directors are also responsible for keeping adequate accounting records
that are sufficient to show and explain the group's and company's transactions
and disclose with reasonable accuracy at any time the financial position of
the group and company and enable them to ensure that the financial statements
and the Directors' Remuneration Report comply with the Companies Act 2006.
The directors are responsible for the maintenance and integrity of the
company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from legislation in other
jurisdictions.
DIRECTORS' CONFIRMATIONS
The directors consider that the Annual Report and the financial statements,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group's and Company's
position and performance, business model and strategy.
Each of the directors, whose names and functions are listed in Strategic
Report and Directors' Report confirm that, to the best of their knowledge:
v the group and company financial statements, which have been prepared in
accordance with UK-adopted international accounting standards, give a true and
fair view of the assets, liabilities and financial position of the group and
company, and of the profit of the group; and
v the Strategic Report and Directors' Report includes a fair review of the
development and performance of the business and the position of the group and
company, together with a description of the principal risks and uncertainties
that it faces.
For and on behalf of the Board:
Graeme Proudfoot
Chair
27 April 2022
SHAREHOLDER INFORMATION
INVESTMENT OBJECTIVE
The Company's investment objective is to generate an attractive total return
for shareholders consisting of distributable income and capital growth through
investments in financial services opportunities. The Company provides
asset-backed lending solutions to emerging and established businesses with the
goal of building long-term, sustainable income generation. The Company focuses
on providing capital to vital segments of the economy, which for regulatory
and structural reasons are underserved by the traditional banking industry.
Among others, these segments include small business lending, working capital
products, consumer finance and real estate. The Company offers shareholders
access to a diversified portfolio of opportunistic credit investments
originated by non-bank lenders with a focus on the rapidly developing
technology-enabled lending sector. Through rigorous diligence and credit
monitoring, the Company generates stable income with significant downside
protection.
INVESTMENT POLICY
The Company seeks to achieve its investment objective by investing in
opportunities in the financial services market through portfolio companies and
other lending related opportunities.
The Company invests directly or indirectly into available opportunities,
including by making investments in, or acquiring interests held by,
third-party funds (including those managed by the Investment Manager or its
affiliates).
Direct investments include consumer loans, SME loans, advances against
corporate trade receivables and/or purchases of corporate trade receivables
originated by portfolio companies ("Debt Instruments"). Such Debt Instruments
may be subordinated in nature, or may be second lien, mezzanine or unsecured
loans.
Indirect investments include investments in portfolio companies (or in
structures set up by portfolio companies) through the provision of senior
secured floating rate credit facilities ("Credit Facilities"), equity or other
instruments. Additionally, the Company's investments in Debt Instruments and
Credit Facilities are made through subsidiaries of the Company or through
partnerships in order to achieve bankruptcy remoteness from the platform
itself, providing an extra layer of credit protection.
The Company may also invest in other financial services related opportunities
through a combination of debt facilities, equity or other instruments.
The Company may also invest (in aggregate) up to 10% of its Gross Assets (at
the time of investment) in listed or unlisted securities (including equity and
convertible securities or any warrants) issued by one or more of its portfolio
companies or financial services entities.
The Company invests across several portfolio companies, asset classes,
geographies (primarily US, UK, Europe and Latin America) and credit bands in
order to create a diversified portfolio and thereby mitigates concentration
risks.
INVESTMENT RESTRICTIONS
The following investment limits and restrictions apply to the Company, to
ensure that the diversification of the Company's portfolio is maintained, and
that concentration risk is limited.
PLATFORM RESTRICTIONS
Subject to the following, the Company generally does not intend to invest more
than 20% of its Gross Assets in Debt Instruments (net of any gearing
ring-fenced within any SPV which would be without recourse to the Company),
originated by, and/or Credit Facilities and equity instruments in, any single
portfolio company, calculated at the time of investment. All such aggregate
exposure to any single portfolio company (including investments via an SPV)
will always be subject to an absolute maximum, calculated at the time of
investment, of 25% of the Company's Gross Assets.
ASSET CLASS RESTRICTIONS
Single loans acquired by the Company will typically be for a term no longer
than five years.
The Company will not invest more than 20% of its Gross Assets, at the time of
investment, via any single investment fund investing in Debt Instruments and
Credit Facilities. In any event, the Company will not invest, in aggregate,
more than 60% of its Gross Assets, at the time of investment, in investment
funds that invest in Debt Instruments and Credit Facilities.
The Company will not invest more than 10% of its Gross Assets, at the time of
investment, in other listed closed-ended investment funds, whether managed by
the Investment Manager or not, except that this restriction shall not apply to
investments in listed closed-ended investment funds which themselves have
stated investment policies to invest no more than 15% of their gross assets in
other listed closed-ended investment funds.
The following restrictions apply, in each case at the time of investment by
the Company, to both Debt Instruments acquired by the Company via wholly-owned
SPVs or partially-owned SPVs on a proportionate basis under the Marketplace
Model, on a look-through basis under the Balance Sheet Model and to any Debt
Instruments held by another investment fund in which the Company invests:
v No single consumer loan acquired by the Company shall exceed 0.25% of its
Gross Assets.
v No single SME loan acquired by the Company shall exceed 5.0% of its Gross
Assets. For the avoidance of doubt, Credit Facilities entered into directly
with portfolio companies are not considered SME loans.
v No single trade receivable asset acquired by the Company shall exceed 5.0%
of its Gross Assets.
OTHER RESTRICTIONS
The Company's un-invested or surplus capital or assets may be invested in Cash
Instruments for cash management purposes and with a view to enhancing returns
to shareholders or mitigating credit exposure.
Where appropriate, the Company will ensure that any SPV used by it to acquire
or receive (by way of assignment or otherwise) any loans to UK consumers shall
first obtain the appropriate authorisation from the FCA for consumer credit
business.
BORROWING POLICY
Borrowings may be employed at the level of the Company and at the level of any
investee entity (including any other investment fund in which the Company
invests or any SPV that may be established by the Company in connection with
obtaining gearing against any of its assets).
The Company may, in connection with seeking such gearing or securitising its
loans, seek to assign existing assets to one or more SPVs and/or seek to
acquire loans using an SPV.
The Company may establish SPVs in connection with obtaining gearing against
any of its assets or in connection with the securitisation of its loans (as
set out further below). It intends to use SPVs for these purposes to seek to
protect the geared portfolio from group level bankruptcy or financing risks.
The aggregate leverage of the Company and any investee entity (on a
look-through basis, including borrowing through securitisation using SPVs)
shall not exceed 1.5 times its NAV (1.5x).
As is customary in financing transactions of this nature, the particular SPV
will be the borrower and the Company may from time to time be required to
guarantee or indemnify a third-party lender for losses incurred as a result of
certain "bad boy" acts of the SPV or the Company, typically including fraud or
wilful misrepresentation or causing the SPV voluntarily to file for bankruptcy
protection. Any such arrangement will be treated as 'non-recourse' with
respect to the Company provided that any such obligation of the Company shall
not extend to guaranteeing or indemnifying Ordinary portfolio losses or the
value of the collateral provided by the SPV.
SHARE REGISTER ENQUIRIES
For shareholder enquiries, please contact the Company's registrar, Link Group
on +44 (0) 371 664 0391.
Calls are charged at the standard geographic rate and will vary by provider.
Calls outside the United Kingdom will be charged at the applicable
international rate. Lines are open between 09:00 - 17:30, Monday to Friday
(excluding public holidays in England and Wales).
SHARE CAPITAL AND NET ASSET VALUE INFORMATION
Ordinary £0.01 Shares 278,276,392
SEDOL Number BVG6X43
ISIN Number GB00BVG6X439
SHARE PRICES
The Company's shares are listed on the London Stock Exchange.
ANNUAL AND HALF-YEARLY REPORTS
Copies of the Annual and Half-Yearly Reports are available from the Investment
Manager on and are available on the Company's website
http://vpcspecialtylending.com. (http://vpcspecialtylending.com/)
PROVISIONAL FINANCIAL CALENDAR
June 2022 Annual General Meeting
June 2022 Payment of interim dividend to 31 March 2022
30 June 2022 Half-year End
September 2022 Announcement of half-yearly results
September 2022 Payment of interim dividend to 30 June 2022
December 2022 Payment of interim dividend to 30 September 2022
31 December 2022 Year End
DIVIDENDS
The following table summarises the amounts recognised as distributions to
equity shareholders relating to 2021:
£
2021 interim dividend of 2.00 pence per Ordinary Share paid on 24 June 2021 5,586,528
2021 interim dividend of 2.00 pence per Ordinary Share paid on 23 September 5,565,528
2021
2021 interim dividend of 2.00 pence per Ordinary Share paid on 23 December 5,565,528
2021
2021 interim dividend of 2.00 pence per Ordinary Share paid on 31 March 2022 5,565,528
Total 22,283,112
DEFINITIONS OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES
The Group uses the terms and alternative performance measures below to present
a measure of profitability which is aligned with the requirements of our
investments and potential investors, to draw out meaningful subtotals of
revenues and earnings and to provide additional information not required for
disclosure under accounting standards to assist users of the financial
statements in gauging the profit levels of the Group. Alternative performance
measures are used to improve the comparability of information between
reporting periods, either by adjusting for uncontrollable or one-off factors
which impact upon IFRS measures or, by aggregating measures, to aid the user
to understand the activity taking place. The Strategic Report includes both
statutory and adjusted measures, the latter of which, reflects the underlying
performance of the business and provides a more meaningful comparison of how
the business is managed. APMs are not considered to be a substitute for IFRS
measures but provide additional insight on the performance of the business.
All terms and performance measures relate to past performance:
Discount to NAV - Calculated as the difference in the NAV (Cum Income) per
Ordinary Share and the Ordinary Share price dividend by the NAV Cum (Income)
per Ordinary Share
Dividend Yield on Average NAV - Calculated as the dividends declared during
2021 divided by the average Net Asset Value (Cum Income) of the Company for
the year
Gross Returns - Represents the return on shareholder's funds per share on
investments of the Company before operating and other expenses of the Company.
Look-Through Gearing Ratio - The aggregate gearing of the Company and any
investee entity (on a look through basis, including borrowing through
securitisations using SPVs) shall not exceed 1.50 times its NAV (1.5x).
NAV (Cum Income) or NAV or Net Asset Value - The value of assets of
the Company less liabilities determined in accordance with the accounting
principles adopted by the Company.
NAV (Cum Income) Return - The theoretical total return on shareholders' funds
per share reflecting the change in NAV assuming that dividends paid to
shareholders were reinvested at NAV at the time dividend was announced.
2021 Calculation 2020 Calculation Inception to Date Calculation
(A) Closing NAV (Cum Income) per share 114.14p 95.72p 114.14p
(B) Opening NAV (Cum Income) per share 95.72p 93.33p 98.00p
(C) Dividends declared and paid 8.00p 8.00p 47.59p
D = (A - B + C) / B 27.60% 11.12% 65.03%
NAV per Share (Cum Income) - The NAV (Cum Income) divided by the number of shares in issue.
Net Returns - Represents the return on shareholder's funds per share on
investments of the Company after operating and other expenses of the Company.
Ongoing Charges Ratio - Ongoing charges represents the management fee and all
other operating expenses, excluding finance costs, transaction costs and any
performance fee payable, expressed as a percentage of the average net asset
values during the year.
Premium/(Discount) to NAV (Cum Income) - The amount by which the share price
of the Company is either higher (at a premium) or lower (at a discount) than
the NAV per Share (Cum Income), expressed as a percentage of the NAV per
share.
Share Price - Closing share price at month end (excluding dividends
reinvested).
Total Shareholder Return - Calculated as the change in the traded share price
from 31 December 2021 to 31 December 2020 plus the dividends declared in 2021
divided by the traded share price as at 31 December 2020.
2021 Calculation 2020 Calculation Inception to Date Calculation
(A) Closing Ordinary Share price 92.20p 78.70p 92.20p
(B) Opening Ordinary Share price 78.70p 78.20p 100.00p
(C) Dividends declared and paid 8.00p 8.00p 47.59p
D = (A - B + C) / B 27.32% 10.87% 39.79%
Trailing Twelve Month Dividend Yield - Calculated as the total dividends
declared over the last twelve months as at 31 December 2021 divided by the 31
December 2021 closing share price.
CONTACT DETAILS OF THE ADVISERS
Directors Oliver Grundy
Mark Katzenellenbogen
Elizabeth Passey
Clive Peggram
Graeme Proudfoot
all of the registered office below
Registered Office 6(th) Floor
65 Gresham Street
London EC2V 7NQ
United Kingdom
Company Number 9385218
Website Address https://vpcspecialtylending.com
Corporate Brokers Jefferies International Limited
100 Bishpsgate
London EC2N 4JL
United Kingdom
Winterflood Securities Limited
Cannon Bridge House
25 Dowgate Hill
London EC4R 2GA
Investment Manager and AIFM Victory Park Capital Advisors, LLC
150 North Riverside Plaza, Suite 5200
Chicago
IL 60606
United States
Company Secretary Link Company Matters Limited
Beaufort House
51 New North Road
Exeter EX4 4EP
United Kingdom
Administrator Northern Trust Hedge Fund Services LLC
50 South LaSalle Street
Chicago
IL 60603
United States
Registrar Link Group
Central Square
29 Wellington Street
Leeds
LS1 4DL
United Kingdom
Custodians Merrill Lynch, Pierce, Fenner & Smith Incorporated
101 California Street
San Francisco
CA 94111
United States
Millennium Trust Company
2001 Spring Road
Oak Brook
IL 60523
United States
English Legal Adviser to the Company Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
United Kingdom
Independent Auditors PricewaterhouseCoopers LLP
7 More London Riverside
London SE1 2RT
United Kingdom
ENDS
LEI: 549300UPEXC5DQB81P34
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