REG - VPC Specialty - Annual Financial Report
28/04/2023 07:15
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RNS Number : 7889X VPC Specialty Lending Invest. PLC 28 April 2023
28 April 2023
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 2022
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 2022 (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.
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 2023 Annual General Meeting will be held in June 2023. A copy of the
Notice of the Company's 2023 Annual General Meeting will be published and made
available in due course.
Printed copies of the Annual Report and Notice of the Company's 2023 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/)
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2022. 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 2022 are
as follows:
v January 2022: Dave Inc., a banking app on a mission to build products that
level the financial playing field reported the closing of its previously
announced business combination with VPC Impact Acquisition Holdings III, Inc..
On 5 January 2022, the combined company began trading under the NASDAQ ticker
symbol: "DAVE".
v January 2022: The Company partially exited its equity investment in Kueski,
Inc., realising a gain on the sale of $4.37 million, which was included in the
NAV of the Company on 31 December 2021.
v January 2022: On 17 January 2022, one of the Company's privately held
investments, Beforepay, closed its IPO and began trading on the Australian
Stock Exchange under the ticker "B4P".
v February 2022: The Company declared its 16th consecutive dividend of 2.00
pence per share for the three months to 31 December 2021.
v March 2022: VPC Impact Acquisition Holdings II (NASDAQ: VPCB) ("VPCB"), a
special purpose acquisition company sponsored by VPC Impact Acquisition
Holdings Sponsor II, LLC, an affiliate of Victory Park Capital 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.
v June 2022: The Company declared its 17th consecutive dividend of 2.00p per
share for the three months to 31 March 2022.
v July 2022: The Company invested in one new asset backed investment, Loyal
Foundry Holdings, Inc. ("Loyal Foundry"). Loyal Foundry is a leading global
platform of non-gaming mobile apps.
v August 2022: ZeroFox Inc., a VPC portfolio company and an enterprise
software-as-a-service leader in external cybersecurity reported the closing of
its previously announced business combination with L&F Acquisition Corp
("L&F"), a special purpose acquisition company, and ID Experts Holdings
Inc. ("IDX"). On 4 August 2022, the combined company began trading under the
NASDAQ ticker symbol: "ZFOX".
v August 2022: The Company declared its 18th consecutive dividend of 2.00p per
share for the three months to 30 June 2022.
v November 2022: The Company declared its 19th consecutive dividend of 2.00p
per share for the three months to 30 September 2022.
v December 2022: After further consultation with its major Shareholders, the
Board determined that it would be in the Company's best interests and
Shareholders to put forward formal proposals to Shareholders for a managed
wind-down of the Company instead of the 25% Exit Opportunity. A circular with
further details will be published shortly.
SUBSEQUENT EVENTS
Since the year ended 31 December 2022:
v February 2023: The Company declared its 20th consecutive dividend of 2.00p
per share for the three months to 31 December 2022.
TOP TEN POSITIONS
The table below provides a summary of the top ten exposures of the Group, net
of gearing, as at 31 December 2022. 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 130 and 131) to consider the application of the restrictions in this
policy on a look-through basis.
INVESTMENT COUNTRY INVESTMENT TYPE EXPOSURE
Deinde Group, LLC United States Asset Backed Lending 11.76%
Deinde Group, LLC ("Integra") is an early-stage online provider of unsecured
consumer loans to nonprime 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. The company is headquartered in Chicago, IL, and is
owned by its management team and employees.
Caribbean Financial Group Holdings, L.P. Latin America Asset Backed Lending 9.28%
Caribbean Financial Group Holdings, L.P. ("CFG") is the largest non-bank
provider of unsecured consumer installment loans to the Caribbean market,
operating primarily in the western and southern Caribbean. CFG was founded in
1979, operates over 70 store branches across eight Caribbean and Latin
American countries, and has its most significant operations in Panama,
Colombia, and Trinidad & Tobago. CFG's product offering includes loan
sizes ranging from $200 to $13,000, loan terms up to 84 months with no
prepayment penalties, and fully amortizing simple interest loans with equal
monthly payments and rates based on underwriting customers' ability to pay.
Applied Data Finance, LLC United States Asset Backed Lending 8.74%
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 installment loans and range
up to $5,000.
Perch HQ, LLC United States Asset Backed Lending 7.55%
Perch HQ, LLC ("Perch") is a technology-enabled platform that seeks to acquire
and operate a diverse portfolio of e-commerce assets on retail marketplaces.
The company aims to acquire underlying brands and drive value through
post-acquisition brand initiatives, including pricing strategy, advertising
strategy, cost savings, supply chain efficiencies, and general Amazon account
management optimization. The company was founded in October 2019 by Chris
Bell, former Head of Custom Supply Chain at Wayfair and principal at Bain
& Company.
Razor Group GMBH Germany Asset Backed Lending 6.58%
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.
FinanceApp AG Switzerland Equity Investment 6.19%
FinanceApp AG ("WeFox") is a software application providing a hybrid
technology and an in-person alternative to the modern insurance broker. The
company operates in Switzerland and Germany, acting as an intermediary between
major insurance providers and individual consumers. WeFox creates an
innovative marketplace for the insurance industry, digitizing the management
of consumer and broker insurance portfolios and aggregating data via one
secure, easy-to-use platform. Customer users can view their insurance
agreements on their smartphones or computers, allowing them to review policies
and premium pricing, submit claims, and receive superior customer service
support all through the WeFox platform.
FinAccel Pte Ltd Singapore Asset Backed Lending 5.65%
FinAccel Pte Ltd ("FinAccel") provides underbanked Indonesian consumers with a
digital credit platform (d/b/a Kredivo) to finance e-commerce purchases, pay
bills and secure personal loans at competitive interest rates. The Kredivo
platform allows users to secure 30-day "interest-free" point-of-sale loans to
finance small ticket e-commerce purchases up to $200. Eligible Kredivo users
are also offered interest-bearing point-of-sale installment loans to finance
larger e-commerce transactions up to $2,200. Kredivo operates as a digital
credit card and the underlying transaction engine with a dedicated checkout
embedded into over 250 e-commerce merchant websites and a mobile application
that facilitates direct merchant purchases.
Heyday Technologies, Inc. United States Asset Backed Lending 4.30%
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.
Elevate Credit, Inc. United States Asset Backed Lending 3.18%
Elevate Credit, Inc. ("Elevate") is a lender of unsecured short-term cash
advances and installment loans to individuals primarily through the internet.
Elevate 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. installment loans (Rise), lines of
credit (Elastic) and credit cards (Today Card).
Heyday Technologies, Inc. United States Equity Investment 3.11%
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.
ENQUIRIES
For further information, please contact:
Victory Park Capital via Jefferies or Winterflood (below) info@vpcspecialtylending.com
Gordon Watson
Sora Monachino
Jefferies International Limited Tel: +44 20 7029 8000
Stuart Klein
Gaudi le Roux
Winterflood Securities Limited Tel: +44 20 3100 0000
Joe Winkley
Neil Morgan
Montfort Communications Tel: +44 (0)7798 626282 / +44 (0)7717 857736
Matthew Jervois vpc@montfort.london
Gay Collins
Link Company Matters Limited (Company Secretary) Tel: +44 20 7954 9567
Email: VPC@linkgroup.co.uk
STRATEGIC REPORT
CHAIRMAN'S STATEMENT
In last year's Chairman's Statement, I noted that while 2021 was a year of
exceptional progress and strong returns for its shareholders, as 2022
unfolded, there was much to feel apprehensive about. In the event, although
the threat of COVID-19 faded somewhat, Russia's invasion of Ukraine was a
geopolitical event that indeed had broader implications for the global
economy. It was also a year when central banks attempted to counter rising
inflation with a program of interest rate hikes that affected businesses and
consumers. These factors all contributed to a turbulent economic and
geopolitical backdrop, and also impacted the performance and the longer-term
prospects of the VPC Specialty Lending Investments PLC ("VSL" or the
"Company") itself. Despite economic and geopolitical turbulence and
uncertainty, the Company's core asset backed lending business continued to
perform in line with expectations; however, the equity and publicly traded
investments experienced continued unrealised losses. Nonetheless the Board
will propose to shareholders that the Company change its investment policy to
one providing for the orderly winding down of the Company - more detail on
which the Board expects will be published shortly after certain regulatory
approvals are received.
In light of the recent situation with Silicon Valley Bank ("SVB") and
Signature Bank ("SB"), the Company has reviewed all portfolio company exposure
and overall indirect exposure is considered to be low. As at 27 April 2023,
there is no exposure to SB and minor exposure to SVB, as all impacted
portfolio companies with meaningful balances at SVB, were able to transfer
almost all of their deposits out of the bank. Small deposit amounts may remain
at SVB to pay out expenses as balances wind down and/or new accounts are
opened.
To note, the Group, Company and the Investment Manager do not have a direct
banking relationship with SVB or SB.
2022 HIGHLIGHTS
v Gross Revenue Return of 12.63% offset by Gross Capital Return of -15.13% for
the year;
v Total Net Asset Value (NAV) return of -6.97% for the year and 56.91% from
inception-to-date;
v Total Shareholder return of -1.19% for the year and 38.69% from
inception-to-date;
v Strong performance of the asset backed lending investments with revenue
returns of 10.70%; and
v The Company declared its 20th consecutive quarterly dividend of 2.00p per
share for the three-month period to December 2022 in February 2023.
THE COMPANY'S BUSINESS
It was a year of significantly different investment performance between the
debt and equity portfolios. However, credit performance was resilient. For the
twelve months to the end of December 2022, the NAV per share of the Company
decreased -6.97% on a total return basis, comprising a NAV per share reduction
from 114.14p to 98.19p, plus the 8.00p of dividends paid in 2022. During the
year, the traded share price fell from 92.20p to 83.10p. Dividends paid during
the year were in line with the dividend of 8.00p per year set out in the IPO
Prospectus ("the Target Dividend") and fully covered by the revenue returns.
Paying dividends in line with the Target Dividend continues to be the
near-term target of the Company.
During the year, the weighted average coupon on the Company's asset backed
investments increased to 14.65% at 31 December 2022 from 10.41% at 31 December
2021 as the Company saw a rise in short-term interest rates.
As we announced on 22 December 2022, the commitment the Board made to
Shareholders in 2020 (the "25% Exit Opportunity") was to offer Shareholders an
Exit Opportunity for up to 25% of the shares in issue following the June 2023
Annual General Meeting, should the shares continue to trade at an average
discount greater than 5% over the first quarter of 2023. Three measures of
future performance were put in place in 2020, with the intention of offering
the 25% Exit Opportunity in the event that all three measures could not be
met.
Various steps were taken from 2020 through 2022 to find a solution that would
reduce the discount to NAV. While some of those Shareholder-focused
initiatives (including meetings with existing, new, and potential
Shareholders) bore some fruit, the discount to NAV nonetheless remained
stubbornly wide.
In 2022, while it was understood by the Board that two of the three measures
of future performance would be achieved, the Board and its advisers believed
that the third measure of reducing the discount to NAV would not be met.
Further, the Board and its advisers took the view that the 25% Exit
Opportunity alone would not have a lasting impact on the discount and that it
might have a potentially detrimental impact on the Company's Shareholders. If
the 25% Exit Opportunity was realised, the Company would shrink in size,
resulting in the Company's shares potentially becoming less liquid and the
ratio of fees and other costs potentially increasing as a proportion of NAV.
After further consultation with its major Shareholders, the Board announced on
22 December 2022 that it would be in the best interests of the Company and
Shareholders to put forward formal proposals to Shareholders for a managed
wind-down of the entire Company instead of the 25% Exit Opportunity.
The Company expects shortly to issue a circular inviting shareholders to vote
on two resolutions - the first to approve revisions to the investment policy
of the Company so that the Company's assets can be realised in an orderly
manner in order to provide a managed exit over time for all Shareholders; and
the second (to be voted on by independent shareholders) to approve proposed
amendments to the terms of the Investment Management Agreement between the
Company and the Investment Manager, principally concerning the way in which
the Investment Manager is remunerated. The purpose of this is to reflect the
change in the Company's investment objective and policy and to better align
the interests of the Shareholders and the Investment Manager. The resolution
relating to the Investment Management Agreement will be voted on by
independent shareholders only because it is a related party transaction under
the Listing Rules. Full details will be contained in the Circular, but the
Board, who have been so advised by its advisors, feels that the proposal is
both fair and reasonable as far as shareholders are concerned and incentivises
the Manager to undertake the winding up process efficiently and in a way that
optimises value and decreases risk for shareholders.
THE COMPANY'S IMPACT
The Investment Manager continues to operate and invest responsibly, ethically,
and fairly, and the Board remains committed to reviewing the Investment
Manager's Environmental, Social and Governance ("ESG") policy. If during the
course of an investment, VPC becomes aware of any material ESG risks, such ESG
risks are documented in an Investment Committee memorandum and presented to
the Investment Committee for review. VPC develops an action plan to address
such risks as applicable. In addition, the Investment Manager continues to be
a signatory of the United Nations Principles for Responsible Investment
("PRI"), the leading global network for investors committed to integrating ESG
considerations into long-term investment decision-making.
OPERATIONAL RESILIENCE
There were a few consistent themes observed across the broader market
throughout 2022: asset backed security spreads widened, both interest rates
and inflation rose, equity markets were volatile, and there were lower
transaction volumes for new capital raising. In the financial technology
sector, the theme was a strong shift of investor interest and valuation from
growth to profitability. To that end, many Portfolio Companies that overbuilt
for growth in 2021 have enacted varying degrees of headcount reductions and
other cost-cutting initiatives. The Board is aware that such cost-cutting
initiatives can introduce elements of operational risk for the portfolio
companies and this is being closely watched.
The Board believes risk management will remain a critical function throughout
the wind-down process. The Investment Manager is committed to promoting a
culture of proactive risk management and controls across its portfolio of
investments. VPC has itself developed a culture of risk management. A team of
20 Risk and Operations professionals assess and monitor Portfolio Companies
and related activities on a daily, weekly, or monthly basis using proprietary,
technology-driven analytic tools. VPC's combination of deep credit and
structuring expertise, the ability to navigate uncertain market conditions,
and an adherence to consistent risk management will assist the Investment
Manager to stay disciplined during the proposed wind-down process.
OUTLOOK
At the time of writing, fears of a U.S. recession and the COVID-19 global
pandemic have somewhat abated, and there are encouraging signs that any
recession may be mild. The Investment Manager expects modest origination
activity may persist through much of 2023 and mergers will continue to gain
popularity across the e-commerce space. VPC and its Portfolio Companies remain
focused on mitigating external credit risks and managing downside protection
in legacy assets. More details on the outlook for the Company can be found on
page 17 of the Investment Manager's Report.
In the wake of the collapse of SVB, the Board expects that there will be many
lessons learned in the market served by SVB. The Investment Manager will
continue to employ prudent risk management practices and encourage its
portfolio managers to be thoughtful about their risk exposure.
Finally, the Board wants to thank all Shareholders for their continued support
as it works towards a successful wind-down of the Company. We will update you
on our progress in our monthly reports.
Graeme Proudfoot
Chair
27 April 2023
INVESTMENT MANAGER'S REPORT
ABOUT VPC
The Company's investment manager is Victory Park Capital Advisors, LLC ("VPC",
the "Firm", or the "Investment Manager"), an SEC-registered, established
private capital manager. The Investment Manager was founded in 2007 and is
headquartered in Chicago, Illinois, with additional resources in New York, Los
Angeles, San Francisco, and London. VPC provides custom financing solutions
across the private capital spectrum, focusing on asset-rich companies with
significant corporate governance and a strong growth trajectory. VPC invests
in both emerging and established businesses across various industries in the
U.S. and abroad that often cannot access traditional sources of capital.
As of 31 December 2022, the Investment Manager had invested approximately $9.1
billion across more than 200 investments since inception. Additionally,
throughout its history, VPC has developed a significant culture of risk
management. A team of 20 Risk & Operations professionals proactively
assess and monitor Portfolio Companies and related activities on a daily,
weekly, or monthly basis using proprietary, technology-driven analytic tools.
Further, while investment returns are important, VPC places great significance
on the <1%cumulative principal loss since inception. VPC believes strong
return and risk metrics result from a combination of deep credit and
structuring expertise, the ability to navigate uncertain market conditions,
and a significant adherence to risk management.
The Investment Manager was founded by Richard Levy and Brendan Carroll, who
have worked together for more than two decades across multiple credit cycles
and market environments. As of December 31, 2022, VPC employs 53 professionals
across its Investment, Risk & Operations, Legal, and Investor Relations
teams. For more information, please visit www.victoryparkcapital.com
(http://www.victoryparkcapital.com/) .
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, San
Francisco, and London
v Investment Manager of the Company since its IPO in 2015
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
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
STRATEGY AND BUSINESS MODEL
PROTECTIVE DEAL STRUCTURING
The Company's investments are typically structured as delayed draw, floating
rate, and senior-secured term loans with significant credit enhancements.
Portfolio Companies draw capital over time, subject to availability under
their borrowing base, covenant compliance and underlying collateral
performance. Utilising this structure provides added transparency into capital
deployment as Portfolio Companies provide notice to VPC of present and
expected future funding requests on the debt facilities. In addition, given
the delayed draw structure, the at-risk capital on day one is
typically not fully funded and grows over the life of an investment. VPC is
able to monitor performance and become more familiar with the business and
collateral prior to lending additional capital. Structuring floating-rate
loans has allowed VPC to benefit from the meaningful increase in spread as
rates have risen in recent quarters. Additionally, VPC is predominantly the
agent and sole lender in the transaction. Alternatively, in a syndicated
transaction, there may be misalignment among lenders due to varying interests,
leading to an inability to manage risk appropriately. As the agent and sole
lender, VPC can better maximise value for Shareholders. Lastly, VPC's loans
are typically shorter in duration (two to five years), which is generally
attractive for borrowers looking for near-term solutions and beneficial for
VPC to mitigate risk further.
As one of the pioneers of financial services lending, VPC has structuring
expertise and long-standing industry relationships, enabling it to secure
preferential capacity to lock up attractive, long-term economics through
structured facility upsizes with meaningful over-collateralization. VPC lends
against a narrowly defined and dynamic collateral pool, which reduces adverse
selection risk. Collateral is tested regularly to help avoid deterioration of
the collateralised assets. If needed, VPC can foreclose on collateral and
control the liquidation of assets to protect its investments and minimise
losses. With the collateralised nature of the underlying investments within
the Company's portfolio, under most scenarios, even with a default on the
instrument, the Company would expect to recover most or all the investment.
This robust structuring, monitoring and collateralization has allowed the
Company to minimize credit losses and record minimal expected credit losses as
required by IFRS 9.
VPC's investments typically also include meaningful credit enhancements
including first loss equity subordination, robust covenant packages, extensive
reporting requirements and monitoring, corporate guarantees, first lien
priority, and transparency and control over cash. VPC is able to 'control
cash' by ring-fencing the collateral in a blocked account or special purpose
vehicle ("SPV"). VPC also structures a right of first refusal ("ROFR") for
most credit investments, allowing for control of the refinancing processes and
ultimately creating an additional captive sourcing funnel for the investment
portfolio. Lastly, VPC's loans are secured against liens and equity pledges on
the corporate entity or collateral, further providing multiple avenues of
structural protection.
VPC is further able to support the growth of its Portfolio Companies, as it
has the flexibility to invest with small and large Portfolio Companies alike
and to continue to finance a Portfolio Company as it grows in size. Each
additional draw request from a Portfolio Company requires an Investment
Committee meeting, where the Investment Team is responsible for presenting a
detailed update on the Portfolio Company and the rationale behind the funding
before it is approved. As in all transactions, unanimous consent from the
Investment Committee must be given prior to any new funding being released.
VPC believes this feature uniquely positions the Firm to grow alongside its
Portfolio Companies and effectively mitigates risk as fundings are
thoughtfully paced out in line with performance.
HIGHLY SELECTIVE DEAL SOURCING
VPC has a cultivated sourcing network powered by investment professionals
across the U.S. and London, creating a wide funnel of investment
opportunities. Additionally, VPC has a local presence in five major cities in
the U.S. and U.K., providing real-time "boots on the ground" for investment
opportunities. The Investment Manager leverages an internal database to target
attractive businesses and undertakes extensive outreach with management teams
to diligence new investment opportunities. The network includes investment
banks, business brokers, restructuring firms, private equity managers, venture
capital firms, and law and accounting firms. Furthermore, VPC has
long-standing relationships with Portfolio Company management teams, industry
professionals, and experts in various sectors that bolster its access to
transactions. When positioned as a premier financing solution, the Investment
Manager's executive board adds credibility and further provides VPC with a
differentiated sourcing channel. Together, these efforts result in a robust
pipeline of new investment opportunities built through trusted relationships,
industry knowledge, and reliable partnerships.
More than 80% of the Firm's deal flow is sourced directly. This highlights the
strength of VCP's relationships and its reputation as a flexible financing
solutions provider. Notably, VPC only invests in approximately 1% of its deal
flow which exemplifies its high barrier to entry.
BEST-IN-CLASS RISK MANAGEMENT
VPC's significant emphasis on risk management is the backbone of its investing
ethos. As discussed above, VPC has 20 dedicated Risk & Operations
professionals that proactively monitor Portfolio Companies daily, weekly, or
monthly, utilising sophisticated, technology-driven analytics tools. VPC
leverages iLevel and Tableau, which have been customised for VPC's high-touch
approach to risk management, to enhance further its ability to assess, manage
and monitor risk and trends on a real-time basis.
At VPC, risk management is closely involved throughout the life cycle of an
investment, from underwriting and structuring to monitoring and, ultimately,
maturity. VPC has a well-established Risk Team, which is an objective,
independent function that reports directly to the Investment Committee. The
Senior Risk Team meets with the Executive Team twice-weekly to discuss any
material risk issues and key initiatives. More broadly, the Investment
Committee meets two to three times a week to collectively address and manage
potential risks as appropriate. Additionally, the Risk Team will often travel
on-site to meet with Portfolio Companies throughout the duration of the
investment to ensure key metrics are being met and collateral performance is
in line with expectations.
To bolster VPC's risk management efforts further, reputable third-party
consultants may be used to assess specific, industry-related risks. Industry
publications such as 2nd Order Solutions white papers are regularly reviewed
for broader credit market trends that may influence VPC's investments. As a
result of this best-in-class adherence to risk, VPC is proud to report a
cumulative net principal loss of less than 1% since inception. After
considering any post-default recoveries, the less than 1% net loss1 represents
the net principal shortfall on both completed and active investments. VPC
places great significance on its institutional infrastructure and risk
management process to structure, execute, monitor, and manage risk within the
portfolio.
1 Loss Ratio reflects the cumulative net principal loss over the full life
of each investment as a percentage of cumulate gross invested capital for the
VPC Credit Strategies. VPC's historical track record data is tracked based on
net loss rather than default and recovery ratios. VPC requires an executed NDA
before further sharing additional information around potential defaults and
recoveries, as well as historical examples of investments where a workout or
liquidation was warranted. As mentioned above, VPC's historical loss ratio is
minimal, at less than 1.00% since 2007. For active investments, any unrealised
value is determined based on the fair market value of the outstanding
investment.
REVIEW OF 2022 PERFORMANCE
The Company completed the year with a total NAV return of -6.97%, a gross
revenue return of 12.63% and a gross capital return of -15.13%. The Company's
revenue return remained in line with expectations, thereby supporting the
8.00p per year dividend yield for Shareholders as set out in the IPO
Prospectus ("the Target Dividend"). In February 2023, the Company declared its
twentieth consecutive quarterly dividend payment of 2.00p per share for the
three months to 31 December 2022, and the dividend was paid to Shareholders in
March 2023. During the year, the weighted average coupon on the Company's
asset backed investments increased to 14.65% at 31 December 2022 from 10.41%.
2022 was characterized by economic and geopolitical turbulence and
uncertainty, including fears surrounding the COVID-19 global pandemic,
Russia's invasion of Ukraine, and central banks' attempts to counter rising
inflation with interest rate hikes. For example, in January 2022, the Fed
Funds rate was 0%-0.25%. By the end of the year, after seven rate increases
from the US Federal Reserve, it stood at 4.25%-4.5%, its highest level in 15
years, with the promise of further hikes in 2023.
Despite economic and geopolitical turbulence and uncertainty, the Company's
core loan business continued to perform in line with expectations, benefiting
from the rising short-term interest rate environment throughout 2022 and
further illustrating the power of variable rate loans. The Company's core
asset backed lending business represented approximately 67% of the total
investment portfolio at year-end and continued to perform in line with
expectations.
The Company's equity interests derive from its core lending business and
provide it with equity participation without contributing equity risk capital.
The mark down of equity prices during the year, specifically within the
financial technology and e-commerce sectors, impacted the value of the
Company's equity holdings and contributed to the negative total NAV return.
Unrealised losses were also driven by the decrease in value of the Company's
holdings in publicly traded investments. However, the unrealised losses on
investments were due to Company investments being marked to publicly-traded
prices, driven generally by the weaker market environment, rather than
specific issues with underlying Portfolio Companies. Therefore, VPC does not
view these mark downs as an indicator of concern to the underlying Portfolio
Companies and are confident the lending to these businesses remains well
secured.
VPC's long-standing reputation and relationships with Portfolio Company
management teams, industry professionals and experts continued to facilitate a
differentiated deal pipeline. The Company was able to take advantage of market
dislocation and closed four new asset backed investments during the year on
attractive terms, which may not have been available to VPC in prior periods.
Overall, 2022 demonstrated the merit of VPC's approach to structured credit
lending to technology-enabled businesses and a strong culture of risk
management, which has proven particularly important during a volatile year.
VPC has made additional investments in human capital throughout the year as it
continues to grow, hiring 18 individuals across its front office, Operations,
and Investor Relations teams, a testament to VPC's growth ambitions, its
reputation, and standing within the investment management industry.
INVESTMENTS
To meet the Company's investment objectives within pre-defined portfolio
limits, capital was allocated across several Portfolio Companies, focusing on
portfolio-level diversification. As of 31 December 2022, the Company's
investments were diversified across 48 different Portfolio Companies across
the U.S., UK, Europe, Australia, Asia, and Latin America and the Company had
exposure to 24 Portfolio Companies through asset backed loans.
VPC believes that its short-duration, non-correlated asset-intensive
investments provide insulation across volatile environments, particularly
during times of uncertainty (e.g., the Great Financial Crisis, ongoing impacts
from the COVID-19 pandemic, etc.), and the Firm is equipped with an
institutional risk infrastructure and independent risk management process
focused on downside protection. Conversely and more prominently, the equity
portfolio experienced continued unrealised negative returns, generally driven
by the normalisation of equity instrument returns, ongoing volatile market
conditions, and lower recent equity raises by comparable companies within the
financial technology and e-commerce sectors. Lastly, unrealised losses were
driven by the decrease in value of the Company's publicly traded investments.
GEARING AND CAPITAL MARKETS
The Company selectively employs gearing to enhance returns generated by the
underlying credit assets. Gearing is structured to limit the borrowings to
individual SPVs holding the assets to ensure the gearing providers have no
recourse to the Company. 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 0.34x, it ended the year at
0.35x, as VPC continued to take a conservative approach to liquidity and risk
management with the gearing facilities.
The Company's level of gearing may increase as a result of further drawdowns
to honour commitments to funds under existing contractual arrangements,
revaluations of the portfolio or realisation of assets at less than their
carrying value. An increased level of gearing would increase Shareholders'
exposure to realisation values.
ESG INVESTMENT CONSIDERATIONS
VPC has a long history of commitment to Environmental, Social and Governance
("ESG") considerations as part of its investment process and firm-wide
operations. 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 the initial policy in 2018,
the policy and processes around how VPC integrates ESG into its investment
strategies and firm operations have expanded in scope and sophistication.
VPC's ESG policy is considered in all investment decisions. Part of the policy
involves clearly defining what the Company will and will not invest in, as
specific industries and business practices are not supported. Another
important piece of the ESG programme involves understanding the risks and
potential risks related to ESG, and identifying, mitigating and remediating
any issues. Perhaps most importantly, the ESG policy creates accountability
throughout the organisation and across Portfolio Companies.
VPC approaches ESG holistically 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 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 most significant overall impact on the
business. VPC looks to invest in fintech companies that support financial
inclusion and positively impact 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 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. It is VPC's
responsibility to educate itself about the key issues relating to any
potential investment. VPC must set appropriate standards in these areas and
discuss issues with all relevant partners.
As part of VPC's standard risk management process, it actively monitors
Portfolio Companies across all dimensions, including ESG. It has frequent
touchpoints with Portfolio Companies and receives extensive reporting to
identify 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 that 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 processes. 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 that 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.
Lastly, the Investment Manager is committed to maintaining a culture of good
governance, as well as policies and procedures to assist with all aspects of
diversity, as the Company's activities benefit from a wide range of skills,
knowledge, experience, backgrounds, and perspectives. VPC formally published
its DEI Policy in October 2021 and prioritised Diversity, Equity and Inclusion
(DEI) goals for recruitment in Q3 of 2021 to diversify points of view and idea
generation. To this end, VPC set formal goals of increasing the female
population by 20% and ethnic diversity by 200% within the next five years. To
date, VPC has exceeded those goals by increasing the female and ethnically
diverse population by 64% and 500%, respectively.
OUTLOOK
As noted above, the Company completed the year with a total NAV return of
-6.97%, a gross revenue return of 12.63% and a gross capital return of
-15.13%. It was a bifurcated year regarding investment performance, with
credit performance remaining resilient. Importantly, the Company's revenue
return remained in line with expectations, thereby supporting the dividend
yield for Shareholders.
Many of the Investment Manager's peers and Portfolio Companies have not
seen interest rates at these levels before, and rates are expected to
continue trending up from here. In 2023, VPC expects equity valuations will be
flat or down, an environment that encourages companies to be measured on
valuation expectations. As such, Portfolio Companies are de-prioritising
growth and instead working to reduce operating expenses to extend cash runway
and/or generate free cash flow.
In specific credit market sectors in which the Company is invested, the
Investment Manager market and risk commentary is as follows:
v Consumer: In the consumer space, consumer credit has exhibited signs of
softening across multiple asset classes; however, metrics remain largely
within historical norms and mirror those of 2019. Inflation continues to be a
primary driver of pressure on consumers, particularly those in the lower
income brackets. The Investment Manager is starting to see early indications
of cracks in the strong employment environment and some segments of the
economy are showing more significant weakness, such as subprime and lower
income bands and certain geographic regions.
v E-Commerce: In E-Commerce, while many of the supply chain challenges from
early 2022 have eased, inflation and rising rates has put pressure on margins.
Additionally, many retail and e-commerce companies are facing inventory
challenges. Generally, higher prices are not fully offsetting the pressure on
margins, and reductions in force have been commonplace as E-Commerce growth
normalises to more historic run-rate levels.
In response to the market outlook, VPC and its Portfolio Companies remain
focused on mitigating exogenous credit risks and managing downside protection
in legacy assets. As noted above, VPC believes that its short-duration,
non-correlated asset-intensive investments provide insulation across volatile
environments, particularly during times of uncertainty, and the Firm is
equipped with an institutional risk infrastructure and independent risk
management process focused on downside protection The Investment Manager will
look to manage the wind-down effectively with the near-term goal to maintain
the Company's dividend target, and to manage the portfolio in accordance with
VPC's institutionalised policies and procedures and towards maximising returns
to shareholders.
Victory Park Capital Advisors, LLC
Investment Manager
27 April 2023
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 its 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 its 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.
As previously disclosed, the Board determined that it would be in the best
interests of the Company and its shareholders to put forward formal proposals
for a managed wind-down of the Company. Upon a successful vote at the general
meeting on the proposals put forth by the Board, the updated investment
objective of the Company will be to conduct an orderly realisation of the
assets of the Company and be effected in a manner that seeks to achieve a
balance between returning cash to Shareholders promptly and maximising value.
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 the 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 88 and 89.
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.
A full description of performance is contained in the Investment Manager's
Report, commencing on page 10.
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.
DIVIDEND YIELD
The Company intends to distribute at least 85% of its distributable income
earned in each financial year by way of dividends.
GEARING RATIO
The aggregate gearing of the Company and any investee entity (on a
look-through basis, including borrowing through securitisation using SPVs)
shall not exceed 1.5 times its NAV (1.5x). The Board and Investment Manager
monitor the look-through gearing ratio to ensure it is in line with the
investment policy.
SHARE PRICE PREMIUM/DISCOUNT
As a closed-ended listed investment trust, the Company's share price can and
does deviate from its NAV. This results in either a premium or a discount to
NAV. This is another component of the long-term shareholder return. The Board
continually monitors the Company's premium or discount to NAV and has the
ability to issue or buy back shares to limit the volatility of the share price
discount or premium. For more information on the Company's authorities in
relation to its share capital, see page 104.
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 2022 was 1.99%, compared to 1.79% for
2021. 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 2023. 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:
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.
The Group may invest in the listed or unlisted equity of any Portfolio
Company. Investments in unlisted equity, by their nature, involve a higher
degree of valuation and performance uncertainties and liquidity risks than
investments in listed securities and therefore may be more difficult to
realise.
In the event of adverse economic conditions in which it would be preferable
for the Group to sell certain of its assets, the Group may not be able to sell
a sufficient proportion of its portfolio as a result of liquidity constraints.
In such circumstances, the overall returns to the Group from its investments
may be adversely affected.
The Group is also exposed to liquidity risk with respect to the requirement to
pay margin cash to collateralise forward foreign exchange contracts used for
currency hedging purposes.
MITIGATION
The Investment Manager manages the Group's liquidity risk by investing
primarily in a diverse portfolio of assets. As at 31 December 2022, 53% of the
loans had a stated maturity date of less than a year.
In general, the weighted average maturity profile of the Group's assets was
lower than or equal to the term of the Group's corresponding debt facilities
which thereby reduced liquidity risk. Refer to Note 6 of the financial
statements for the maturity profile of the Group's assets and liabilities.
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 130 and 131. The Board reviews cash flow forecasts to ensure the
group can meet its liabilities as they fall due.
The Group continuously monitors 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.
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.
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 financial markets.
MITIGATION
There is inherent credit risk in the Group's investments in credit assets.
However, this is typically mitigated by the significant first loss protection
provided by the Portfolio Company under the Asset Backed Lending Model and the
excess spread generated by the underlying assets under both models.
The Investment Manager performs a robust analysis during the underwriting
process for all new investments of the Group and monitors the eligibility of
the collateral at least monthly of the current assets in the Group's
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 130 and 131. The Investment Manager monitors performance and
underwriting on an ongoing basis.
FINANCING RISK
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
investment's underlying assets is rising, it will, however, have the opposite
effect when the underlying asset value is falling. In addition, if 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.
The Group uses gearing to enhance returns generated by the underlying credit
assets and is exposed to the availability of financing at acceptable terms as
well as interest rate expenses and other related costs.
MITIGATION
This risk is mitigated by limiting borrowings to ring-fenced SPVs without
recourse to the Group and employing gearing in a disciplined manner.
The Group has maintained a level of gearing throughout the year significantly
below the limit stipulated in the Prospectus as the Group is primarily
invested in the Asset Backed Lending Model.
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 130 and 131.
MARKET RISK
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.
The Group is exposed to price risk arising from the investments held by the
Group for which prices in the future are uncertain. The investments in funds
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
price 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.
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 Group is exposed to risks related to the reference rate reform and
replacement of benchmark interest rates such as GBP LIBOR and other interbank
offered rates. There remains some uncertainty around the timing and precise
nature of these changes.
MITIGATION
The Group has a diversified investment portfolio which significantly reduces
the exposure to individual asset price risk. Detailed portfolio valuations and
exposure analysis are prepared monthly and form the basis for the on-going
risk management and investment decisions. In addition, regular scenario
analysis is undertaken to assess likely downside risks and sensitivity to
broad market changes, as well as assessing the underlying correlations amongst
the separate asset classes.
Exposure to interest rate risk is limited as the underlying credit assets are
typically fully amortising with a maximum maturity of five years. Furthermore,
generally the Group's Credit Facilities include a floating interest rate
component to the Portfolio Companies to account for an increase in interest
rate risk and they also have a set floor in the instance that interest rates
were to drop.
The Group mitigates its exposure to currency risk by hedging exposure between
Pound Sterling and any other currencies in which a significant portion of the
Group's assets may be denominated.
The Board reviews the price, interest rate and currency risk with the
Investment Manager to ensure that exposure to these risks are appropriately
mitigated.
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. On November 30, 2020, the LIBOR
administrator proposed extending the publication of the overnight and the
one-, three-, six- and 12- month USD LIBOR settings through June 30, 2023,
when many existing contracts that reference LIBOR will have expired.
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
changing. There is a risk that the Group will not be able to deploy its
capital, re-invest capital and interest of the proceeds of any future capital
raisings, in a timely or efficient manner given the increased demand for
suitable investments.
The Group may face increasing competition for access to investments as the
alternative finance industry continues to evolve. The Group may face
competition from other institutional lenders such as fund vehicles and
commercial banks that are substantially larger and have considerably greater
financial, technical and marketing resources than the Group. Other
institutional sources of capital may enter the market in the UK, US and other
geographies.
MITIGATION
VPC has negotiated a significant number of proprietary capital deployment
agreements with its existing asset backed lending partners each of which
typically ensures the ability to deploy capital on attractive terms for
several years.
In addition, VPC is one of the largest investors in the specialty lending
sector and therefore enjoys timely information and good access to emerging
Portfolio Company opportunities. VPC has a team of investment and operational
professionals which ensures that deployment opportunities with new and
existing Portfolio Companies can be executed rapidly while minimising
operational risk.
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
regulations. The financial services sector continues to experience significant
regulatory change at national and international levels. Failure to act in
accordance with these regulations could cause fines, censure or other losses
including taxation or reputational loss.
The Association of Investment Companies (AIC) is becoming increasingly focused
on ensuring ESG measures are implemented within investment companies.
In order to continue to qualify as an investment trust, the Company must
comply with the requirements of Section 1158 of the Corporation Tax Act 2010.
MITIGATION
The Company provides debt capital to Portfolio Companies, which typically must
comply with various state and national level regulations. This includes some
operating under interim permission and some now regulated from the FCA in the
UK as well as consumer lending and collections licenses in some US states.
This risk is limited via detailed upfront due diligence of Portfolio
Companies' regulatory environments performed by the Investment Manager on
behalf of the Board.
The Company continues to review its ESG stance to ensure that it promotes the
values and commitment of the Company. All decisions taken are made with due
consideration to the long-term sustainability and impact on stakeholders.
The Company has procedures to monitor the status of its compliance with the
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.
CLIMATE RISK
The world is facing unprecedented challenges in the face of climate change and
growing inequality. The FSB Task Force on Climate-related Financial
Disclosures (TCFD) has developed climate-related financial risk disclosures
for companies to provide information to investors, lenders, insurers, and
other stakeholders.
MITIGATION
The Investment Manager has performed an initial high-level materiality
assessment of climate risk across its investment portfolio and is developing a
comprehensive action plan for both the Company and Group. No material impact
on the financial statements has been identified from the risks arising from
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,
including war, terrorist attacks, natural disasters, and ongoing pandemics,
which could create economic, financial, and business disruptions.
MITIGATION
The Investment Manager has a dedicated risk committee comprised of senior
leadership and key principals. This committee works with each individual
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.
Discussion on the Group's risk management and internal controls is on page
120.
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
112).
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 111. 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 2022, 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 115.
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 2023
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 31 December 2022 but is derived from
those accounts. Statutory accounts for the year ended 31 December 2022 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 2022
31 DECEMBER 2022 31 DECEMBER 2021
NOTES £ £
Assets
Cash and cash equivalents 7 15,538,602 6,300,572
Cash posted as collateral 7 2,222,734 4,133,588
Derivative financial assets 3,4 1,081,849 2,069,698
Interest receivable 5,848,979 4,708,481
Dividend and distribution receivable 4,735 3,996
Other assets and prepaid expenses 2,190,718 2,877,815
Loans at amortised cost 3,9 220,225,329 279,339,002
Investment assets designated as held at fair value through profit or loss 3 130,870,709 141,797,222
Total assets 377,983,655 441,230,374
Liabilities
Management fee payable 10 97,785 155,399
Performance fee payable 10 - 12,913,280
Derivative financial liabilities 3,4 3,283,142 1,508,675
Deferred income 41,201 174,603
Other liabilities and accrued expenses 1,815,268 1,550,415
Due to broker 4,848,569 -
Notes payable 8 94,669,284 107,267,260
Total liabilities 104,755,249 123,569,632
Total assets less total liabilities 273,228,406 317,660,742
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 14 112,779,146 112,779,146
Capital reserve (48,473,649) 1,667,026
Revenue reserve 26,369,664 20,615,367
Currency translation reserve 1,213,245 1,213,245
Total equity attributable to shareholders of the Parent Company 273,228,406 317,614,784
Non-controlling interests 18 - 45,958
Total equity 273,228,406 317,660,742
Net Asset Value per Ordinary Share 12 98.19p 114.14p
The financial statements on pages 40 to 99 were approved by the Board of
Directors on 27 April 2023 and signed on its behalf by:
Graeme Proudfoot
Chair
27 April 2023
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
REVENUE CAPITAL TOTAL
NOTES £ £ £
Revenue
Net gain (loss) on investments 5 - (42,614,991) (42,614,991)
Foreign exchange gain (loss) - (1,552,676) (1,552,676)
Interest income 5 33,917,279 - 33,917,279
Other income 5 7,418,009 - 7,418,009
Total return 41,335,288 (44,167,667) (2,832,379)
Expenses
Management fee 10 3,840,270 - 3,840,270
Performance fee 10 - - -
Credit impairment losses 9 - 5,956,807 5,956,807
Other expenses 10 2,432,132 - 2,432,132
Total operating expenses 6,272,402 5,956,807 12,229,209
Finance costs 7,046,478 - 7,046,478
Net return on ordinary activities before taxation 28,016,408 (50,124,474) (22,108,066)
Taxation on ordinary activities 11 - - -
Net return on ordinary activities after taxation 28,016,408 (50,124,474) (22,108,066)
Attributable to:
Equity shareholders 28,016,408 (50,140,675) (22,124,267)
Non-controlling interests 18 - 16,201 16,201
Return per Ordinary Share (basic and diluted) 13 10.07 (18.02) (7.95)
Other comprehensive income
Currency translation differences - - -
Total comprehensive income 28,016,408 (50,124,474) (22,108,066)
Attributable to:
Equity shareholders 28,016,408 (50,140,675) (22,124,267)
Non-controlling interests 18 - 16,201 16,201
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 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 CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
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
£ £ £ £ £ £ £ £ £
20,300,000 161,040,000 112,779,146 1,667,026 20,615,367 1,213,245 317,614,784 45,958 317,660,742
Opening balance at
1 January 2022
- - - - - - - - -
Amounts paid on buyback of Ordinary Shares
- - - - - - - - -
Contributions by non-controlling interests
- - - - - - - (62,159) (62,159)
Distributions to non-controlling interests
- - - (50,140,675) 28,016,408 - (22,124,267) 16,201 (22,108,066)
Return on ordinary activities after taxation
- - - - (22,262,111) - (22,262,111) - (22,262,11)
Dividends declared and paid
Other comprehensive income - - - - -
- - - - - - - - -
Currency translation differences
20,300,000 161,040,000 112,779,146 (48,473,649) 26,369,664 1,213,245 273,228,406 - 273,228,406
Closing balance at
31 December 2022
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 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 CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2022
31 DECEMBER 2022
RESTATED
31 DECEMBER 2021
NOTES £ £
Cash flows from operating activities:
Total comprehensive income (22,108,066) 73,201,872
Adjustments for:
-- Interest income (33,917,279) (33,158,150)
-- Dividend and distribution income 5 (7,418,009) (4,419,620)
-- Finance costs 7,046,478 5,706,429
-- Exchange (gains) losses 1,552,676 2,049,374
Total (54,844,200) 43,379,905
Loss (gain) on investment assets designated as held at fair value through 20,298,529 (67,354,436)
profit or loss
Gain on derivative financial instruments (35,736,991) (6,131,547)
Increase in other assets and prepaid expenses 687,097 (1,988,667)
(Decrease) increase in performance fee payable (12,913,280) 63,158
(Decrease) increase in management fee payable (57,614) 8,873,195
Decrease in deferred income (133,402) (78,800)
Increase in due to broker 4,848,569 -
(Decrease) increase in accrued expenses and other liabilities 58,599 250,148
Interest received 32,776,781 32,062,716
Purchase of loans (33,762,744) (129,180,445)
Redemption or sale of loans 123,524,905 145,742,133
Impairment of loans 5,956,807 3,636,142
Net cash inflow from operating activities 50,703,055 29,273,502
Cash flows from investing activities:
Investment income received 7,417,270 4,419,436
Purchase of investment assets designated as held at fair value through profit (30,034,376) (51,430,977)
or loss
Sale of investment assets designated as held at fair value through profit or 20,662,359 30,929,189
loss
Increase (decrease) of cash posted as collateral 1,910,854 (2,993,588)
Net cash outflow from investing activities (43,893) (19,075,940)
Cash flows from financing activities:
Dividends distributed (22,262,111) (22,355,761)
Treasury shares repurchased - (3,741,814)
Distributions to non-controlling interests (62,159) -
Proceeds from note payable 11,874,530 179,944,080
Repayment of note payable (37,295,732) (158,764,003)
Finance costs paid (6,840,222) (5,739,082)
Net cash outflow from financing activities (54,585,694) (10,656,580)
Net change in cash and cash equivalents (3,926,531) (459,018)
Exchange gains on cash and cash equivalents 13,164,561 343,562
Cash and cash equivalents at the beginning of year 6,300,572 6,416,028
Cash and cash equivalents at the end of year 7 15,538,602 6,300,572
PARENT COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2022
31 DECEMBER 2022 31 DECEMBER 2021
NOTES £ £
Assets
Cash and cash equivalents 7 14,640,647 4,301,574
Cash posted as collateral 7 2,222,734 4,133,588
Derivative financial assets 3,4 1,081,849 2,069,698
Interest receivable 5,848,979 4,298,886
Other current assets and prepaid expenses 3,015,560 2,881,811
Investments in subsidiaries 17 233,951,844 303,174,979
Investment assets designated as held at fair value through profit or loss 3 22,474,910 12,531,090
Total assets 283,236,523 333,391,626
Liabilities
Management fee payable 10 97,785 155,399
Due to broker 4,848,569 -
Derivative financial liabilities 3,4 3,283,142 1,508,675
Deferred income 41,201 174,603
Performance fee payable 10 - 12,913,280
Other liabilities and accrued expenses 1,737,420 1,024,885
Total liabilities 10,008,117 15,776,842
Total assets less total liabilities 273,228,406 317,614,784
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 14 112,779,146 112,779,146
Capital reserve (47,260,404) 2,880,271
Revenue reserve 26,369,664 20,615,367
Total equity 273,228,406 317,614,784
Net return on ordinary activities after taxation (22,124,267) 73,175,251
The financial statements on pages 48 to 99 were approved by the Board of
Directors on 27 April 2023 and signed on its behalf by:
Graeme Proudfoot
Chair
27 April 2023
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
Called Up Share Premium Other Distributable Reserve Capital Reserve Revenue Reserve Total
Share Capital
£ £ £ £ £ £
Opening balance at 1 January 2022 20,300,000 161,040,000 112,779,146 2,880,271 20,615,367 317,614,784
Amounts paid on repurchase of Ordinary Shares - - - - - -
Return on ordinary activities after taxation - - - (50,140,675) 28,016,408 (22,124,267)
Dividends declared and paid - - - - (22,262,111) (22,262,111)
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2021
Called Up Share Premium Other Distributable Reserve Capital Reserve Revenue Reserve Total
Share Capital
£ £ £ £ £ £
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 CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2022
31 DECEMBER 2022 31 DECEMBER 2021
NOTES £ £
Cash flows from operating activities:
Net return on ordinary activities after taxation (22,124,267) 73,175,251
Adjustments for:
-- Interest income (34,288,810) (31,871,341)
-- Exchange (gains) losses 1,552,676 2,049,374
Total (54,860,401) 43,353,284
Unrealised loss (gain) on investment assets designated as held at fair value (6,815,010) (7,141,907)
through profit or loss
Unrealised loss (gain) on investments in subsidiaries 47,763,004 (52,213,993)
Gain on derivative financial instruments (35,736,991) (6,131,547)
Increase in other assets and prepaid expenses (133,010) (1,992,663)
(Decrease) increase in management fee payable (57,614) 63,158
Increase in due to broker 4,848,569 -
Decrease in deferred income (133,402) (78,800)
(Decrease) increase in performance fee payable (12,913,280) 8,873,195
Increase in accrued expenses and other liabilities 96,684 233,894
Net cash outflow from operating activities (57,941,451) (15,035,379)
Cash flows from investing activities:
Interest received 33,353,829 30,746,141
Purchase of investment assets designated as held at fair value through profit (3,556,974) (19,086,855)
or loss
Sale of investment assets designated as held at fair value through profit or 428,164 16,220,038
loss
Purchase of investments in subsidiaries (48,397,941) (29,910,829)
Sales of investment in subsidiaries 106,463,368 45,377,842
Cash posted as collateral 1,910,854 (2,993,588)
Net cash inflow from investing activities 90,201,300 40,352,749
Cash flows from financing activities:
Treasury Shares repurchased - (3,741,814)
Dividends paid (22,262,111) (22,355,761)
Net cash outflow from financing activities (22,262,111) (26,097,575)
Net change in cash and cash equivalents 9,997,738 (780,205)
Exchange gains on cash and cash equivalents 341,335 343,562
Cash and cash equivalents at the beginning of the year 4,301,574 4,738,217
Cash and cash equivalents at the end of the year 7 14,640,647 4,301,574
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2022
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 2022, 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 2021: 382,615,665
Ordinary Shares, 278,276,392 Ordinary Shares in issue and 104,339,273 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.
Citco Fund Administration (Cayman Islands) Limited (the "Administrator") is
the administrator of the Group. The Administrator is responsible for the
Group's general administrative functions, such as the calculation and
publication of the Net Asset Value ("NAV") and maintenance of the Group's
accounting records.
For any terms not herein defined, refer to Part X of the IPO Prospectus. The
Parent Company's IPO Prospectus dated 26 February 2015 is available on the
Parent Company's website, www.vpcspecialtylending.com.
2. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies followed by the Group are set out below 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 2022. These statements have
been 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 have considered the impact of the proposed winddown. 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.
Restatement of Consolidated Statement of Cash Flows
The presentation of cash flows related to notes payable within the
Consolidated Statement of Cash Flows has been restated to report proceeds and
repayments on a gross basis, which were previously reported on a net basis.
Below is the impact of this change on the Consolidated Statement of Cash
Flows:
31 DECEMBER 2021 RESTATED
31 DECEMBER 2021
£ £
(Decrease) increase in note payable 21,180,077 -
Proceeds from note payable - 179,944,080
Repayment of note payable - (158,764,003)
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
The Parent Company's investments in its subsidiaries are 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.
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 loss on ordinary activities
after taxation of the Parent Company was £(22,124,267) (31 December 2021:
£73,175,251).
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 2022, no management fees (31 December 2021: £nil) have been
charged to the capital return of the Group or the Parent Company. At
31 December 2022, no performance fees (31 December 2021: £9,179,370) 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 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. The adequacy of credit enhancement is typically based
on the actual contractual terms of the investment, including such provisions
as collateral eligibility, advance rate and/or loan to value ratio. The
value and cash flows of the collateral are determined based on all available
historical performance data on the specific asset pool being assessed,
including historical loss performance data and forward-looking information,
supplemented by additional sources as needed. 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. These scenarios are informed by data from the
Federal Reserve regarding the probability of a recession in the US over the
subsequent 12-month period.
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, no investments were modified per the Group's policy. During
the prior year, three investments were modified per the Group's policy. The
Group performed the analysis mentioned above on the investments modified in
2021 and determined that the modification did not result in a substantial
change to the terms of the loans and derecognition was not required. The
modification of the loans in the 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.
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. The investment manager proactively
monitors and reviews the Company's investments monthly related to expected
credit losses and IFRS 9. Specific models are developed for each underlying
investment and the results are discussed on an ongoing basis as new
information is received. A review is first performed to identify what stage
the Company's investments are in and the appropriate analysis is then
performed. 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 below are
considered to be the effect of potential future economic scenarios, collateral
cash flows, and probability of default. These estimates vary on an
investment-by-investment basis and may not be applicable to all investments
held in the portfolio.
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 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 collateral
performance assumptions for each transaction are established using all
available historical performance data on the specific asset pool being
assessed, including historical loss performance data and forward-looking
information, supplemented by additional sources as needed.
Base case
To establish the base case model, a representative portfolio is established
based on the specific nature of the underlying collateral. The expected cash
flows are assessed based on the relevant collateral parameters which will vary
based on the specific asset class being assessed. In certain instances the
collateral cash flows may entail the presumed sale of collateral assets to
third parties based on expected market values. Cash flow and market
assumptions are based on a combination of (1) historical collateral data, (2)
management forecasts, (3) proxy data from comparable assets or businesses, and
(4) judgement from the investment professionals based on general research and
knowledge.
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.
Stress case
Once the Base Case scenario is established, one or more "Stress Case"
scenarios are created for each transaction. The Stress Case is established by
stressing the inputs that are most directly tied to outcomes to an extent
consistent with a severe recession or comparably severe deterioration in the
investment position. The primary driver of collateral value for many asset
classes is the loss rates on the underlying receivables as these have the most
direct impact on liquidation outcomes. For other asset classes it may include
revenue yields, market values, or other economic variables. Certain variables
with less significant impacts on the cash flow outcomes may be held constant
to enhance model explanatory power. Stress variables may be adjusted to
reflect the fact that stress will emerge (and dissipate) over a period of time
rather than having an immediate and constant impact.
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 forward looking 12-month horizon. Such information may be supplemented
with additional investment level or macroeconomic information to determine the
appropriate probabilities of stress (most commonly any such adjustments would
be to apply additional likelihood of stress). In certain instances, the
assessed impairment reserves are constant across all scenarios, this most
commonly occurs when the assessed impairment reserves are zero. In these
instances, there shall be no need to assess probability weightings as it would
not impact the overall analysis. 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 cash flows and the probability of
default which is defined as the likelihood of an economic recession in the
upcoming 12-month period. Regarding the underlying collateral cash flows,
these may vary based on various underlying drivers depending on asset class
(such as loss rates for financial assets and asset revenue and margin for
ecommerce assets). For financial assets, loss rates are stressed to
110%-210% of base case as part of the impairment analysis and the impacts of
those stresses are reflected in the impairment amounts on a probability
weighted basis. For ecommerce assets, revenue and margins are stressed, on
average, by 18% and 10%, respectively, over the forecast period.
Establishing Impairment Reserves
Once the model has been run at the stressed scenario, if the cash flows
continue to support the payment of all principal and interest after the
burdens of servicing and liquidation costs, the portfolio is deemed to have
adequate coverage based solely on direct collateral. 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 other additional credit enhancements
provided in each deal (i.e., corporate guarantees, boot collateral, etc.).
Such assessment would consider the likelihood of a scenario that could pose a
loss or impairment and the expected magnitude of such loss in order to
determine the appropriate reserve level.
IFRS 9 calls for an assessment of the probability of default over the upcoming
12 months, and thus the Investment Manager will also provide 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). The Investment Manager reviews
macroeconomic data and central bank indicators to assess the probability of a
recession or stress scenario over a forward looking 12-month horizon. Such
information may be supplemented with additional investment level or
macroeconomic information to determine the appropriate probabilities of stress
(most commonly any such adjustments would be to apply additional likelihood of
stress). In certain instances, the assessed impairment reserves are constant
across all scenarios, this most commonly occurs when the assessed impairment
reserves are zero. In these instances there shall be no need to assess
probability weightings as it would not impact the overall analysis.
The Group has established impairment reserves by applying a weighting of 46%
to the base case scenario and 54% to the stress case scenario as at 31
December 2022. If the stress case scenario weighting was increased by 10% to
65% the impact on the increase to expected credit losses as at 31 December
2022 is not material. In 2021, the weighting was 100% to the stress scenario.
The cumulative loss rates ranged from 9% to 50%. If the cumulative loss rates
in the stress scenario were increased by 10%, the impact on the increase to
expected credit losses as at 31 December 2022 is not material.
The probability of default percentages ranged from 3% to 23%. If the
probability of default percentages were increased by 10%, the impact on the
increase to the expected credit losses as at 31 December 2022 is not material.
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.
IFRS 17 'Insurance Contracts' 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
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 2022 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.
Valuation of derivative instruments
Forward contracts are typically traded in the over-the-counter ("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. The change in the value of
the forward contracts during the year is recognized as foreign exchange
gain/(loss) on the Consolidated Statement of Comprehensive Income. When the
contract is closed, the Group recognizes the difference between the value of
the contract at the time it was entered and the value at the time it was
closed as foreign exchange gain/(loss).
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 2022:
INVESTMENT ASSETS DESIGNATED TOTAL LEVEL 1 LEVEL 2 LEVEL 3
AS HELD AT FAIR VALUE £ £ £ £
Investments in funds 22,474,910 - - 22,474,910
Common stock 17,661,510 4,080,425 491,852 13,089,233
Preferred stock 52,310,062 - - 52,310,062
Warrant 13,902,427 - - 13,902,427
Convertible debt 24,521,800 - - 24,521,800
Total 130,870,709 4,080,425 491,852 126,298,432
DERIVATIVE FINANCIAL ASSETS TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 1,081,849 - 1,081,849 -
Total 1,081,849 - 1,081,849 -
DERIVATIVE FINANCIAL LIABILITIES TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 3,283,142 - 3,283,142 -
Total 3,283,142 - 3,283,142 -
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 Parent Company's
assets and liabilities measured at fair value at 31 December 2022:
INVESTMENT ASSETS DESIGNATED TOTAL LEVEL 1 LEVEL 2 LEVEL 3
AS HELD AT FAIR VALUE £ £ £ £
Investments in funds 22,474,910 - - 22,474,910
Total 22,474,910 - - 22,474,910
DERIVATIVE FINANCIAL ASSETS TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 1,081,849 - 1,081,849 -
Total 1,081,849 - 1,081,849 -
DERIVATIVE FINANCIAL LIABILITIES TOTAL LEVEL 1 LEVEL 2 LEVEL 3
£ £ £ £
Forward foreign exchange contracts 3,283,142 - 3,283,142 -
Total 3,283,142 - 3,283,142 -
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 -
There were transfers into Level 3 fair value measurements of $4,485,316 and
$nil for the Group during the year ended 31 December 2022 and 31 December
2021, respectively. There were no transfers into and out of Level 3 fair value
measurements for the Parent Company during the years ended 31 December 2022
and 31 December 2021.
The following table presents the movement in Level 3 positions for the year
ended 31 December 2022 for the Group:
TOTAL INVESTMENTS IN FUNDS COMMON STOCK PREFERRED STOCK WARRANT CONVERTIBLE DEBT
£ £ £ £ £ £
107,483,401 12,531,090 16,308,485 38,090,065 19,864,610 20,689,151
Beginning balance, 1 January 2022
30,030,596 3,556,974 6,607,765 6,511,747 2,602,645 10,751,465
Purchases
(18,624,490) (428,164) (10,801,119) (687,454) (1,124,097) (5,583,656)
Sales
4,485,316 - 4,485,316 - - -
Transfer In (Out)
2,923,609 6,815,010 (3,511,214) 8,395,704 (7,440,731) (1,335,160)
Net change in unrealised gains (losses)
126,298,432 22,474,910 13,089,233 52,310,062 13,902,427 24,521,800
Ending balance, 31 December 2022
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 2021 for the Group:
TOTAL INVESTMENTS IN FUNDS COMMON STOCK PREFERRED STOCK WARRANT CONVERTIBLE DEBT
£ £ £ £ £ £
48,463,617 2,522,367 11,072,305 19,771,889 4,996,048 10,101,008
Beginning balance, 1 January 2021
45,439,031 19,086,855 7,661,428 2,250,450 5,338,445 11,101,853
Purchases
(25,600,304) (16,220,038) (4,899,071) (1,275,157) (2,656,064) (549,974)
Sales
39,181,057 7,141,906 2,473,823 17,342,883 12,186,181 36,264
Net change in unrealised gains (losses)
107,483,401 12,531,090 16,308,485 38,090,065 19,864,610 20,689,151
Ending balance, 31 December 2021
The following table presents the movement in Level 3 positions for the period
ended 31 December 2022 for the Parent Company:
INVESTMENTS
IN FUNDS
£
Beginning balance, 1 January 2022 12,531,090
Purchases 3,556,974
Sales (428,164)
Net change in unrealised foreign exchange gains (losses) -
Net change in unrealised gains (losses) 6,815,010
Ending balance, 31 December 2022 22,474,910
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)
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 net change in unrealised gains (losses) is recognised within gains
(losses) on investments in the Consolidated Statement of Comprehensive Income.
Quantitative information regarding the unobservable inputs for Level 3
positions as at 31 December 2022 is given below:
DESCRIPTION FAIR VALUE AT VALUATION UNOBSERVABLE RANGE
31 DECEMBER
TECHNIQUE
INPUT
2022
£
Common stock 5,274,594 Discounted Cash Flows & Multiples Discount Rate 20.0%
Price to Book 1.1x
Price to Earnings 5.7x
Private Company Discount 10.0%
261,649 Public Stock Price N/A N/A
1,693,212 Transaction Price Cost Basis of Investment N/A
4,815,023 Transaction Price/Recent Round Price Deal Execution Risk Discount 20.0%
Recent Round Price per Share $34.86
Illiquidity Discount 30.0%
1,044,755 Net Asset Value SPV N/A N/A
Convertible debt 1,716,747 Probability Weighting Recent Round Price per Share €6,036
Rights & Preferences Discount 20.0%
9,933,062 PV of Expected Proceeds/Discounted Discount Rate 23.0%
Cash Flows Annual Free Cash Flow Growth Rate 3.0%
Expected Proceeds Discount Rate Range 16.0%
Expected Proceeds Value $24.9M
9,800,393 Transaction Price Cost Basis of Investment N/A
1,156,323 Transaction Price/Recent Round Price Recent Round Price per Share $3.41 - $5.56
Rights & Preferences Discount 20.0%
1,915,276 Yield Analysis Market Yield 13.8 % - 17.1%
Preferred stock 52,310,062 Transaction Price/Recent Round Price Rights & Preferences Discount 20.0%
Recent Round Price per Share $0.30 - €92.17
Price per Share €8.79
Market Risk Discount 5.0% - 20.0%
Illiquidity Discount 20.0%
Investments in funds 22,474,910 Net Asset Value N/A N/A
Warrants 610,074 Black Scholes Price Per Share $0.57 - $5.56
Rights & Preferences Discount 0.0% - 20.0%
Risk Free Rate 4.41%
Term 1.5 - 3.0 years
Volatility 22.3% - 40.0%
Market Risk Discount 20.0%
43,562 Black Scholes/Recent Transaction Price Illiquidity Discount 0.27% - 7.64%
Risk Free Rate 3.99%
Term 4.0 - 4.6 years
Volatility 25.0% - 40.0%
13,248,791 Transaction Price/Recent Round Price Deal Execution Risk Discount 20.0%
Recent Round Price per Share $3.30 - $34.86
Price per Share $1.43 - €6,036
Rights & Preferences Discount 20.0% - 40.0%
Risk Free Rate 4.41%
Term 1.3 - 2.0 years
Volatility 40.0%
Market Risk Discount 5.0% - 20.0%
Total 126,298,432
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 £1,899,353 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 £6,276,925 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 £1,042,220which 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 £12,526,169 (31 December 2021: £10,600,644)
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
2022 but for which fair value is disclosed. 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. In determining the fair value
of loans and advances to customers, the expected future cash flows are
discounted back using a discount rate. The discount rate used incorporates
market-based yields for similar credits in the public market and the
underlying risk of the individual credit.
CARRYING FAIR MARKET VALUE
VALUE
£ £
Assets
Loans 220,225,329 224,705,680
Total 220,225,329 224,705,680
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
2021 but for which fair value is disclosed. The carrying value has been used
where it is a reasonable approximation of fair value:
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.
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 2022 and 2021, 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. Notional contract amounts of
derivatives indicate the nominal value of transactions outstanding as of the
balance sheet date and do not represent the amounts at risk.
As at 31 December 2022, 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 and all have a maturity of less
than three months from 31 December 2022:
Fair Value Fair Value
As at 31 December 2022 Notional (£) Assets (£) Liabilities (£)
Foreign Exchange Rate Contracts 693,888,170 1,081,849 (3,283,142)
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 and all have a maturity of less
than three months from 31 December 2021:
Fair Value Fair Value
As at 31 December 2021 Notional (£) Assets (£) Liabilities (£)
Foreign Exchange Rate Contracts 334,162,068 2,069,698 (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 2022 for both the Parent Company and the
Group:
GROSS AMOUNTS OF RECOGNISED FINANCIAL ASSETS GROSS AMOUNTS OF FINANCIAL LIABILITIES TO BE SET-OFF IN THE STATEMENT OF NET AMOUNTS OF RECOGNISED ASSETS PRESENTED IN THE STATEMENT OF FINANCIAL RELATED AMOUNTS NOT
FINANCIAL POSITION POSITION
ELIGIBLE TO BE SET-OFF IN
THE STATEMENT OF FINANCIAL POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET AMOUNT
As at 31 December 2022 £ £ £ £ £ £
Foreign Exchange Rate Contracts 12,068,610 (10,986,761) 1,081,849 - - 1,081,849
Total 12,068,610 (10,986,761) 1,081,849 1,081,849
GROSS AMOUNTS OF RECOGNISED FINANCIAL LIABILITIES GROSS AMOUNTS OF FINANCIAL ASSETS TO BE SET-OFF IN THE STATEMENT OF FINANCIAL NET AMOUNTS OF RECOGNISED LIABILITIES PRESENTED IN THE STATEMENT OF FINANCIAL RELATED AMOUNTS NOT
POSITION POSITION
ELIGIBLE TO BE SET-OFF IN
THE STATEMENT OF FINANCIAL POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET AMOUNT
As at 31 December 2022 £ £ £ £ £ £
Foreign Exchange Rate Contracts 14,269,903 (10,986,761) 3,283,142 - - 3,283,142
Total 14,269,903 (10,986,761) 3,283,142 3,283,142
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 AMOUNTS OF RECOGNISED FINANCIAL ASSETS GROSS AMOUNTS OF FINANCIAL LIABILITIES TO BE SET-OFF IN THE STATEMENT OF NET AMOUNTS OF RECOGNISED ASSETS PRESENTED IN THE STATEMENT OF FINANCIAL RELATED AMOUNTS NOT
FINANCIAL POSITION POSITION
ELIGIBLE TO BE SET-OFF IN
THE STATEMENT OF FINANCIAL POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET AMOUNT
As at 31 December 2021 £ £ £ £ £ £
Foreign Exchange Rate Contracts 3,193,548 (1,123,850) 2,069,698 - - 2,069,698
Total 3,193,548 (1,123,850) 2,069,698 2,069,698
GROSS AMOUNTS OF RECOGNISED FINANCIAL ASSETS GROSS AMOUNTS OF FINANCIAL ASSETS TO BE SET-OFF IN THE STATEMENT OF FINANCIAL NET AMOUNTS OF RECOGNISED LIABILITIES PRESENTED IN THE STATEMENT OF FINANCIAL RELATED AMOUNTS NOT
POSITION POSITION
ELIGIBLE TO BE SET-OFF IN
THE STATEMENT OF FINANCIAL POSITION
FINANCIAL INSTRUMENTS COLLATERAL RECEIVED NET AMOUNT
As at 31 December 2021 £ £ £ £ £ £
Foreign Exchange Rate Contracts 2,632,525 (1,123,850) 1,508,675 - - 1,508,675
Total 2,632,525 (1,123,850) 1,508,675 1,508,675
5. INCOME AND GAINS ON INVESTMENTS AND LOANS
Interest income in the amount of £33,917,279 (31 December 2021: £33,158,150)
has been allocated to revenue and £nil (31 December 2021: £nil) has been
allocated to capital in line with the Group's policy as set out in Note 2.
31 DECEMBER 31 DECEMBER
2022 2021
£ £
Other Income
Distributable income from investments in funds 6,294,501 1,265,158
Interest income from investment assets designated as held at fair value 288,503 2,088,723
through profit or loss
Other income 835,005 1,065,739
Total 7,418,009 4,419,620
31 DECEMBER 31 DECEMBER
2022 2021
£ £
Net gains (losses) on investments
Realised loss on sale of investments (1,924,340) (239,441)
Unrealised gains on investment in funds (377,775) 7,141,906
Unrealised (loss) gains on equity securities (40,312,876) 60,212,530
Total (42,614,991) 67,114,995
The Group received £20,662,359 from investments held at fair market value
sold during the year. The cost of these investments sold were £22,586,699.
These investments have been revalued over time and until they were sold any
unrealised gains/losses were included in the fair value of the investments.
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 2022, 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 2022 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 2022, 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 £814,989 (31 December 2021: 480,654). As at 31 December 2022,
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 £(814,989)
(31 December 2021: £nil) 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 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 the above has had little impact to the
Group as the underlying financial instruments have little to no exposure to
any reference rates that are yet to transition apart for USD 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. Any USD LIBOR rates to which the Group is exposed will
cease or become non-representative immediately after 30 June 2023.
The following table contains details of all of the financial instruments that
the Group holds at 31 December 2022 which reference LIBOR and have not yet
transitioned to an alternative interest rate benchmark.
As at 31 December 2022 ASSETS LIABILITIES
Assets and liabilities exposed to USD LIBOR £ £
Loans at amortised cost 168,736,615 -
Notes Payable - 94,669,284
Total exposure 168,736,615 94,669,284
As at 31 December 2021 ASSETS LIABILITIES
Assets and liabilities exposed to USD LIBOR £ £
Loans at amortised cost 261,955,830 -
Notes Payable - 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 2022 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
2022. 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. If the GBP exchange rate
simultaneously increased/decreased by 10% against the below currencies, the
impact on profit would be an increase/decrease of £1,189,960. 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.
ASSETS LIABILITIES FORWARD CONTRACTS NET EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2022 2022 2022 2022
£ £ £ £
Euro 9,456,293 - 15,395,790 (5,939,497)
US Dollar 341,615,281 (94,669,284) 239,923,214 7,022,783
Swiss Francs 10,649,047 - - 10,649,047
Australian Dollars 167,266 - - 167,266
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.
ASSETS LIABILITIES FORWARD CONTRACTS NET 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)
The table below presents the net exposure to foreign currency at 31 December
2022. 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.
ASSETS LIABILITIES FORWARD CONTRACTS NET EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2022 2022 2022 2022
£ £ £ £
Euro 9,456,293 - 15,395,790 (5,939,497)
US Dollar 246,945,997 - 239,923,214 7,022,783
Swiss Francs 10,649,047 - - 10,649,047
Australian Dollars 167,266 - - 167,266
If the GBP exchange rate simultaneously increased/decreased by 10% against the
above currencies, the impact on profit would be an increase/decrease of
£1,189,960. 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
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.
ASSETS LIABILITIES FORWARD CONTRACTS NET 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)
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 2022:
WITHIN ONE TO OVER FIVE TOTAL
ONE YEAR FIVE YEARS YEARS
£ £ £ £
Assets
Loans 142,426,534 77,798,795 - 220,225,329
Cash and cash equivalents 15,538,602 - - 15,538,602
Cash posted as collateral 2,222,734 - - 2,222,734
Interest receivable 5,848,979 - - 5,848,979
Dividend receivable 4,735 - - 4,735
Other assets and prepaid expenses 2,190,718 - - 2,190,718
Total 168,232,302 77,798,795 - 246,031,097
WITHIN ONE TO OVER FIVE TOTAL
ONE YEAR FIVE YEARS YEARS
£ £ £ £
Liabilities
Notes payable - 94,669,284 - 94,669,284
Management fee payable 97,785 - - 97,785
Performance fee payable - - - -
Deferred income 41,201 - - 41,201
Due to broker 4,848,569 - - 4,848,569
Other liabilities and accrued expenses 1,753,109 - - 1,753,109
Total 6,740,664 94,669,284 - 101,409,948
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 Investment Manager manages the Group's liquidity risk by investing
primarily in a diverse portfolio of assets. At 31 December 2022, the Group had
investments in 48 Portfolio Companies (31 December 2021: 48 Portfolio
Companies). At 31 December 2022, 65% of the loans had a stated maturity date
of less than a year (31 December 2021: 10%).
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 2022, £15.6 million (31 December 2021: £19.8 million) 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 2022 and do not project cash flows until maturity of the
investment liabilities.
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 eCOMMERCE LEGAL FINANCE TOTAL
31 DECEMBER
£ £ £ 2022
£
Stage 1
A - 1 35,552,643 12,444,752 - 47,997,395
A - 2 101,982,526 23,312,077 - 125,294,603
B 19,550,356 4,058,917 9,148,556 32,757,829
C - - - -
Total 157,085,525 39,815,746 9,148,556 206,049,827
Stage 2
A - 1 - - - -
A - 2 - 18,607,769 - 18,607,769
B - - - -
C - - - -
Total - 18,607,769 - 18,607,769
Stage 3
A - 1 - - - -
A - 2 - - - -
B - - - -
C 11,952,754 - - 11,952,754
Total 11,952,754 - - 11,952,754
INTERNAL GRADE UNITED STATES LATIN EUROPE ASIA TOTAL
31 DECEMBER
£ AMERICA £ £
2022
£
£
Stage 1
A - 1 47,997,395 - - - 47,997,395
A - 2 72,452,114 30,513,572 15,049,798 7,279,119 125,294,603
B 17,413,809 - 4,058,917 11,285,103 32,757,829
C - - - - -
Total 137,863,318 30,513,572 19,108,715 18,564,222 206,049,827
Stage 2
A - 1 - - - - -
A - 2 18,607,769 - - - 18,607,769
B - - - - -
C - - - - -
Total 18,607,769 - - - 18,607,769
Stage 3
A - 1 - - - - -
A - 2 - - - - -
B - - - - -
C - - 11,952,754 - 11,952,754
Total - - 11,952,754 - 11,952,754
INTERNAL GRADE FINTECH eCOMMERCE 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 LATIN AMERICA EUROPE ASIA TOTAL
31 DECEMBER
STATES £ £ £
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 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
2022 2021 2022 2021
£ £ £ £
Cash held at bank 15,538,602 6,300,572 14,640,647 4,301,574
Total 15,538,602 6,300,572 14,640,647 4,301,574
The Parent Company has posted cash collateral of £1,140,000 as at 31 December
2022 (31 December 2021: £3,010,000) with Goldman Sachs and cash of
£1,082,734 (31 December 2021: £1,123,927) with Morgan Stanley in relation
to the outstanding derivatives. A portion of the Cash and cash equivalents
balance is held as collateral for an underlying loan and the balance is also
reflected as a liability under Due to broker on the Consolidated and Parent
Company Statement of Financial Position.
Below are the credit ratings of the banks where the Parent Company and Group
hold cash as at 31 December 2022 from Moody's:
BANK RATING
Northern Trust A2
Goldman Sachs A2
Morgan Stanley A1
Keybank A1
Wells Fargo A1
Bank of America 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.
Notes payable is inclusive of unrealised foreign exchange losses of £12.8 and
£4.6 million as of December 31, 2022 and 2021, respectively. Due to cash
settlements the occurred during the period in a foreign currency and
translated into GBP, these previously unrealised losses have been realised in
cash in the period during which the purchase/sale had occurred.
The table below provides details of the outstanding debt of the Group at 31
December 2022:
INTEREST RATE OUTSTANDING PRINCIPAL
31 DECEMBER 2022 £ MATURITY
Credit Facility 03-2021 3.95% + 1M LIBOR 79,010,738 1 March 2027
Total 79,010,738
The table below provides details of the outstanding debt of the Group at 31
December 2021:
INTEREST RATE OUTSTANDING PRINCIPAL
31 DECEMBER 2021 £ MATURITY
Credit Facility 03-2021 3.95% + 1M LIBOR 87,432,895 1 March 2027
Total 87,432,895
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 2022:
OUTSTANDING PRINCIPAL
31 DECEMBER 2022 £ MATURITY
First-Out Participation 04-2019 15,658,546 1 January 2024
Total 15,658,546
The table below provides details of the outstanding first-out participation
liabilities of the Group at 31 December 2021:
OUTSTANDING PRINCIPAL
31 DECEMBER 2021 £ MATURITY
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 the movement of the notes payable and securities sold
under agreements to repurchase for the year ended 31 December 2022 for the
Group.
NOTES
PAYABLE
£
Beginning balance, 1 January 2022 107,267,260
Purchases 11,874,530
Sales (37,295,732)
Net change in unrealised foreign exchange gains 12,823,226
Ending balance, 31 December 2022 94,669,284
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
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 2022 under IFRS 9:
COST BEFORE ECL CARRYING
ECL VALUE
£ £ £
Loans at amortised cost 236,610,350 16,385,021 220,225,329
Total 236,610,350 16,385,021 220,225,329
During the year ended 31 December 2022, £2,035,759 of loans were written off,
all of which were previously fully reserved.
The table below provides details of the investments at amortised cost held by
the Group as at 31 December 2021 under IFRS 9:
COST BEFORE ECL ECL CARRYING
VALUE
£ £ £
Loans at amortised cost 291,802,975 12,463,973 279,339,002
Total 291,802,975 12,463,973 279,339,002
During the year ended 31 December 2021, no loans were written off.
The Parent Company does not hold any loans.
Credit impairment losses
The credit impairment losses of the Group for the year ended 31 December 2022
comprises of the following under IFRS 9:
CREDIT IMPAIRMENT LOSSES
31
DECEMBER 2022
£
Change in expected credit losses 5,956,807
Currency translation on expected credit losses -
Credit impairment losses 5,956,807
The impairment charge 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
Impairment of loans written off
Impairment charges of loans written off (recovered) of £2,035,759 (31
December 2021: £(358,867)) 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. All loans written off
in 2022 were previously fully reserved.
Provision for expected credit losses
As at 31 December 2022, the Group has created a reserve provision on the
outstanding principal of the Group's loans of £16,385,021 (31 December 2021:
£12,463,973), 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 allowance for expected credit losses comprised the following during 2022:
31 DECEMBER
2022
£
Beginning balance 1 January 2022 12,463,973
Change in expected credit losses or equivalent 5,956,807
Loan written off (2,035,759)
Ending balance 31 December 2022 16,385,021
The allowance for 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
Below is a breakout of the provision for expected credit losses by stage of
the ECL model as at 31 December 2022:
INTERNAL GRADE FINTECH eCOMMERCE LEGAL FINANCE 31 DECEMBER
£ £ £ 2022
£
Stage 1 2,917,873 802,799 149,505 3,870,177
Stage 2 - 562,090 - 562,090
Stage 3 11,952,754 - - 11,952,754
Expected credit losses 14,870,627 1,364,889 149,505 16,385,021
INTERNAL GRADE UNITED LATIN EUROPE ASIA 31 DECEMBER
STATES AMERICA £ £ 2022
£ £ £
Stage 1 3,870,177 - - - 3,870,177
Stage 2 562,090 - - - 562,090
Stage 3 - - 11,952,754 - 11,952,754
Expected credit losses 4,432,267 - 11,952,754 - 16,385,021
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
£ eCOMMERCE £ 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
The breakout of the gross value of loans by stage of the ECL model as at 31
December 2022 and 31 December 2021 can be found in footnote 6. During the
year, one investment was moved from Stage 1 to Stage 2 and during the prior
year, one investment was moved from Stage 2 to Stage 3. All write-offs
(recoveries) during the current and prior year were on assets that were
considered Stage 3.
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 of the
group for the year is £3,840,270 (31 December 2021: £3,802,097), of which
£97,785 (31 December 2021: £155,399) was payable as at 31 December 2022.
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 £nil (31
December 2021: £12,913,280), of which none (31 December 2021: £12,913,280)
was payable as at 31 December 2022.
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 2022, the remuneration for work carried out by
PricewaterhouseCoopers LLP, the statutory auditors, was as follows:
31 DECEMBER 31 DECEMBER
2022 2021
£ £
Fees charged by PricewaterhouseCoopers LLP:
v the audit of the Parent Company and Consolidated Financial Statements; and 375,000 317,000
v the audit of the Company's subsidiaries. - 22,300
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 2022:
REVENUE CAPITAL TOTAL
£ £ £
Net return on ordinary activities before taxation 28,016,408 (50,124,474) (22,108,066)
Tax at the standard UK corporation tax rate of 19.00% 5,323,118 - 5,323,118
Effects of:
Non-taxable income (5,323,118) - (5,323,118)
Capital items exempt from corporation tax - - -
Total tax charge - - -
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 - - -
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 31 DECEMBER AS AT 31 DECEMBER
2022 2021
£ £
Net assets attributable to Shareholders of the Parent Company 273,228,406 317,614,784
Ordinary Shares in issue (excluding Treasury Shares) 278,276,392 278,276,392
Net asset value per Ordinary Share 98.19p 114.14p
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 31 DECEMBER AS AT 31 DECEMBER
2022 2021
£ £
(Loss) profit for the year (22,124,267) 73,183,772
Average number of Ordinary Shares in issue during the year (excluding Treasury 278,276,392 279,617,119
Shares)
Earnings per Share (basic and diluted) (7.95)p 26.17p
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
2022. All shares issued are fully paid with none not fully paid:
NOMINAL VALUE NUMBER OF SHARES
£
Ordinary Shares in issue (excluding Treasury Shares) 0.01 278,276,392
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 VALUE NUMBER OF SHARES
£
Ordinary Shares in issue (excluding Treasury Shares) 0.01 278,276,392
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 2022:
FOR THE YEAR FROM 1 JANUARY 2022 SHARES IN ISSUE AT THE BEGINNING OF THE PERIOD SHARES REPURCHASED SHARES IN ISSUE AT THE END OF THE PERIOD
TO 31 DECEMBER 2022
Ordinary Shares 278,276,392 - 278,276,392
The table below shows the movement in shares through 31 December 2021:
SHARES IN ISSUE AT THE BEGINNING OF THE PERIOD SHARES REPURCHASED SHARES IN ISSUE AT THE END OF THE PERIOD
FOR THE YEAR FROM 1 JANUARY 2021
TO 31 DECEMBER 2021
Ordinary Shares 282,647,364 (4,370,972) 278,276,392
Share buyback programme
All Ordinary Shares bought back through the share buyback programme are held
in treasury as at 31 December 2022. There were no share buybacks in 2022.
Details of the share buyback program during the year ended 31 December 2021 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
Other distributable reserve
During 2022, the Company declared and paid dividends of £nil (2021: £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 £nil (2021: £3,741,814). The closing balance in the other
distributable reserve remains at £112,779,146 (31 December 2021:
£112,779,146).
15. DIVIDENDS PER SHARE
The following table summarises the amounts recognised as distributions to
equity shareholders in the period:
31 DECEMBER 31 DECEMBER
2022 2021
£ £
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
2021 interim dividend of 2.00 pence per Ordinary Share paid on 31 March 2022 5,565,527 -
2022 interim dividend of 2.00 pence per Ordinary Share paid on 21 July 2022 5,565,528 -
2022 interim dividend of 2.00 pence per Ordinary Share paid on 6 October 2022 5,565,528 -
2022 interim dividend of 2.00 pence per Ordinary Share paid on 29 December 5,565,528 -
2022
Total 22,262,111 22,355,761
An interim dividend of 2.00 pence per Ordinary Share, equalling £5,565,528,
was declared by the Board on 22 February 2023 in respect of the period to
31 December 2022, was paid to shareholders on 30 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.
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 2022, £269,183 (31 December 2021: £193,200) was paid to the
Directors and £13,042 (31 December 2021: £nil) was owed for services
performed.
As at 31 December 2022 and 31 December 2021, the Directors' interests in the
Parent Company's Shares were as follows:
31 DECEMBER 31 DECEMBER
2022 2021
Oliver Grundy Ordinary Shares 30,000 30,000
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 130,000 130,000
Investment management fees for the year ended 31 December 2022 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 2022, 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 2022, the Investment Manager
has purchased 706,659 (31 December 2021: 4,496,991) Ordinary Shares.
As at 31 December 2022, Partners and Principals of the Investment Manager held
510,000 (31 December 2021: 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 2022
the Group owned 26% (31 December 2021: 26%) of VPC Offshore Unleveraged
Private Debt Fund Feeder, L.P. and the value of the Group's investment in VPC
Offshore Unleveraged Private Debt Fund Feeder, L.P. was £1,231,984 (31
December 2021: £1,640,256).
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 2022 the Group owned 4% (31
December 2021: 4%) of VPC Synthesis, L.P. and the value of the Group's
investment in VPC Synthesis, L.P. was £21,242,926 (31 December 2021:
£10,890,834).
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 2022, none (31 December 2021: £23,697) was due to the Investment
Manager 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 PERCENTAGE OWNERSHIP AS AT 31 DECEMBER 2021
OWNERSHIP AS AT 31 DECEMBER 2022
VPC Specialty Lending Investments Investment vehicle USA Limited partner interest Sole limited Sole limited
Intermediate, L.P. partner partner
VPC Specialty Lending Investments Investment vehicle USA Limited partner interest Sole limited Sole limited
Intermediate Holdings, L.P. partner partner
VPC Specialty Lending Investments General partner USA Membership interest Sole member Sole member
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 USA 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 2022:
INVESTMENTS
IN SUBSIDIARIES
£
Beginning balance, 1 January 2022 303,174,979
Purchases 48,397,941
Sales (106,463,368)
Change in fair value of investments in subsidiaries (11,157,708)
Ending balance, 31 December 2022 233,951,844
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)
Change in fair value of investments in subsidiaries 61,150,460
Ending balance, 31 December 2021 303,174,979
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 represents the portion of the NAV
of the controlled subsidiaries attributable to the other investors. As at 31
December 2022, the portion of the NAV attributable to non-controlling
interests investments totaled £nil (31 December 2021: £45,958). 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 2022:
PRINCIPAL PROPORTION PROFIT OR LOSS ACCUMULATED
PLACE OF OF OWNERSHIP OF SUBSIDIARY NON-
INTERESTS ALLOCATED TO CONTROLLING
HELD BY NON- INTERESTS IN
NON- CONTROLLING SUBSIDIARY AS
CONTROLLING INTERESTS AT 31 DECEMBER
INTERESTS AS AT DURING THE 2022
31 DECEMBER PERIOD ENDED
31 DECEMBER
2022
NAME OF SUBSIDIARY BUSINESS 2022 £ £
Drexel I, L.P. USA 47% 21,809 -
Duxbury Court I, L.P. USA 5% (5,608) -
Totals 16,201 -
31 DECEMBER
SUMMARISED FINANCIAL 2022
NAME OF SUBSIDIARY INFORMATION FOR SUBSIDIARY £
Drexel I, L.P. Distributions to non-controlling interests 42,315
Profit/(loss) of subsidiary for period ended 31 December 2022 41,681
Assets as at 31 December 2022 104,584
Liabilities as at 31 December 2022 104,584
Duxbury Court I, L.P. Distributions to non-controlling interests 19,844
Profit/(loss) of subsidiary for period ended 31 December 2022 80,558
Assets as at 31 December 2022 630,907
Liabilities as at 31 December 2022 630,907
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-
INTERESTS 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 PERIOD ENDED
31 DECEMBER
2021
NAME OF SUBSIDIARY 2021 £ £
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
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 OF BUSINESS PRINCIPAL ACTIVITY PROPORTION OF BASIS OF FAIR VALUE OF MAXIMUM
OWNERSHIP VALUATION INTEREST AS AT EXPOSURE TO
INTERESTS HELD 31 DECEMBER LOSS AS AT
2022 31 DECEMBER
£ 2022
£
VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. Cayman Investment 26% Designated as held at fair value through profit or loss - using NAV 1,231,984 1,231,984
Islands fund
VPC Synthesis, L.P. USA Investment 4% Designated as held at fair value through profit or loss - using NAV 21,242,926 21,242,926
fund
NAME OF ASSOCIATE SUMMARISED FINANCIAL 31 DECEMBER 2022
£
INFORMATION FOR ASSOCIATE
VPC Offshore Unleveraged Profit/(loss) of associate for period ended 31 December 2022 (436,363)
Private Debt Fund Feeder, L.P. Assets as at 31 December 2022 3,115,627
Liabilities at 31 December 2022 110,043
VPC Synthesis, L.P. Profit/(loss) of associate for period ended 31 December 2022 23,848,843
Assets as at 31 December 2022 430,198,842
Liabilities at 31 December 2022 340,919,367
NAME OF ASSOCIATE PRINCIPAL PLACE OF BUSINESS PRINCIPAL ACTIVITY PROPORTION OF BASIS OF FAIR VALUE OF MAXIMUM
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 2021
£
INFORMATION FOR ASSOCIATE
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
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.
20. SUBSEQUENT EVENTS AFTER THE REPORTING PERIOD
The Company declared a dividend of 2.00 pence per Ordinary Share, equalling
£2,565,528 for the three-month period ended 31 December 2022 and paid the
dividend on 30 March 2023.
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 2023.
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, adverse economic conditions and the impact of the proposed managed
winddown. The Investment Manager has 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 in scenarios where the proposed
winddown is approved and not approved by shareholders. 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 from 31
December 2022. 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 investments held by the Group have
maturities that extend beyond three years allowing for 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 2025 was modelled
considering the impact of the proposed winddown. After being so advised by
Winterflood and Jefferies, the Directors considered a number of factors in
determining unanimously that shareholders should vote in favour of the
amendment to the investment policy and has engaged in discussions with a
number of shareholders and its advisers in reaching that conclusion, in
addition to having considered the recent performance of the Company. Based on
this assessment the Directors have made the assumption that the vote will
pass, however recognise that the outcome of the vote is not yet known and
therefore creates some uncertainty.
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, delay in repayment of the asset backed
lending facilities, and various assumptions on the equity investment
portfolio, including the impacts to the Group's financing facilities and were
satisfied with the result of this analysis. Additionally, the Directors
reviewed models where the proposed managed winddown vote does not pass.
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 21 to 24, 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 throughout the managed winddown of the
Company, specifically the asset backed lending investments, 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 2025.
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL
STATEMENTS
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 loss 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 2023
SHAREHOLDER INFORMATION
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.
As previously disclosed, the Board determined that it would be in the best
interests of the Company and its shareholders to put forward formal proposals
for a managed wind-down of the Company. Upon a successful vote at the general
meeting on the proposals put forth by the Board, the updated investment
objective of the Company will be to conduct an orderly realisation of the
assets of the Company and be effected in a manner that seeks to achieve a
balance between returning cash to Shareholders promptly and maximising value.
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.
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 Asset Backed Lending 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 2023 Annual General Meeting
30 June 2023 Half-year End
July 2023 Payment of interim dividend to 31 March 2022
September 2023 Announcement of half-yearly results
October 2023 Payment of interim dividend to 30 June 2022
December 2023 Payment of interim dividend to 30 September 2022
31 December 2023 Year End
DIVIDENDS
The following table summarises the amounts recognised as distributions to
equity shareholders relating to 2022:
£
2022 interim dividend of 2.00 pence per Ordinary Share paid on 21 July 2022 5,565,527
2022 interim dividend of 2.00 pence per Ordinary Share paid on 6 October 2022 5,565,528
2022 interim dividend of 2.00 pence per Ordinary Share paid on 29 December 5,565,528
2022
2022 interim dividend of 2.00 pence per Ordinary Share paid on 30 March 2023 5,565,528
Total 22,262,111
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 the
investors 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
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 divided by the NAV Cum (Income)
per Ordinary Share.
Dividend Yield on Average NAV - Calculated as the dividends declared during
2022 divided by the average Net Asset Value (Cum Income) of the Company for
the year.
Gross Returns - The gross revenue and gross capital returns represent 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.
2022 Calculation 2021 Calculation Inception to Date Calculation
(A) Closing NAV (Cum Income) per share 98.19p 114.14p 98.19p
(B) Opening NAV (Cum Income) per share 114.14p 95.72p 98.00p
(C) Dividends declared and paid 8.00p 8.00p 55.59p
D = (A - B + C) / B -6.97% 27.60% 56.91p
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.
2022 Calculation 2021 Calculation
(A) Ongoing Charges £5,911,749 £5,460,145
(B) Average Net Asset Value £296,360,140 £304,231,779
C = A / B 1.99% 1.79%
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 2022 to 31 December 2021 plus the dividends declared in 2022
divided by the traded share price as at 31 December 2021.
2022 Calculation 2021 Calculation Inception to Date Calculation
(A) Closing Ordinary Share price 83.10p 92.20p 83.10p
(B) Opening Ordinary Share price 92.20p 78.70p 100.00p
(C) Dividends declared and paid 8.00p 8.00p 55.59p
D = (A - B + C) / B -1.19% 27.32% 38.69%
Trailing Twelve Month Dividend Yield - Calculated as the total dividends
declared over the last twelve months as at 31 December 2022 divided by the 31
December 2022 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 Citco Fund Administration (Cayman Islands) Limited
3 Second Street, Harborside Plaza 10, 6(th) Floor
Jersey City
NJ 07302
United States
Registrar Link Group
Central Square
29 Wellington Street
Leeds
LS1 4DL
United Kingdom
PR Advisor Montfort Communications
Chelsea Harbour
109 Harbour Yard
London
SW10 0XD
United Kingdom
Custodians Merrill Lynch, Pierce, Fenner & Smith Incorporated
101 California Street
San Francisco
CA 94111
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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