REG - VPC Specialty - Annual Financial Report

VPC Specialty Lending InvestmentsAnnouncement

24/04/2024 07:00

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RNS Number : 7695L  VPC Specialty Lending Invest. PLC  24 April 2024

24 April 2024

VPC SPECIALTY LENDING INVESTMENTS PLC

(the "Company" or "Parent Company" with its subsidiaries (together) the
"Group")

Annual Report and Audited Financial Statements

For the Year Ended 31 December 2023

 

The Board of Directors (the "Board") of VPC Specialty Lending Investments PLC
(ticker: VSL) present the Company's Annual Report and Audited Financial
Statements for the period ended 31 December 2023.

 

A copy of the Company's Annual Report is available to view and download from
the Company's website, https://vpcspecialtylending.com/documents/
(https://vpcspecialtylending.com/documents/) . Neither the contents of the
Company's website nor the contents of any website accessible from hyperlinks
on the Company's website (or any other website) is incorporated into or forms
part of this announcement.

 

A copy of the Annual Financial Report will be submitted shortly to the
National Storage Mechanism ("NSM") and will be available for inspection at the
NSM, which is situated
at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) , in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.

 

All page numbers below refer to the Annual Report on the Company's website.

 

Further information on VPC Specialty Lending Investments PLC is available
at https://vpcspecialtylending.com (https://vpcspecialtylending.com/) .

 

Enquiries

For further information, please contact:

 

 VPC Specialty Lending Investments PLC             via Jefferies or Winterflood (below)

 Graeme Proudfoot

 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)7717 857736

 Matthew Jervois                                   vpc@montfort.london

 Link Company Matters Limited (Company Secretary)  Tel: +44 20 7954 9567

                                                   Email: VPC@linkgroup.co.uk

 

LEI: 549300UPEXC5DQB81P34

 

INTRODUCTION TO THE COMPANY AND THE GROUP

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 owners of shares of the Company ("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 ("U.S.") with a
global presence. VPC identifies and finances emerging and established
businesses globally and seeks to provide the Company with attractive yields on
its portfolio of credit investments. VPC offers a differentiated private
lending approach by financing Portfolio Companies through asset-backed delayed
draw term loans, which is referred to as "Asset Backed Lending," designed to
limit downside risk while providing Shareholders with strong income returns.
Through rigorous due diligence and credit monitoring by the Investment
Manager, the Company generates stable income with significant downside
protection.

 

A summary of the principal terms of the Investment Manager's appointment and a
statement relating to their continuing appointment can be found on page 113.
The investment policy can be found beginning on page 125 of this Annual
Report. Founded in 2007 and headquartered in Chicago, VPC is an SEC-registered
investment adviser that has been actively involved in the financial services
marketplace since 2010.

 

This annual report for the year 2023 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.

 

INVESTMENT OBJECTIVE

The Company's investment objective is to conduct an orderly realisation of the
assets of the Company, to be effected in a manner that seeks to achieve a
balance between returning cash to Shareholders promptly and maximising value.

INVESTMENT POLICY

The Company's investments will be realised in an orderly manner, that is, with
a view to achieving a balance between returning cash to Shareholders promptly
and maximising value.

 

Until 30 June 2023, the Company could make new investments directly (in
aggregate) up to 5%. of its Gross Assets (at the time of the investment) in
consumer loans, SME loans, advances against corporate trade receivables and/or
purchases of corporate trade receivables originated by portfolio companies
("Debt Instruments").

 

Following this period, the Company may not make any new investments save that:
(a) investments may be made to honour existing documented contractual
commitments to existing portfolio companies as a majority of the Company's
investments are delayed draw term loans; (b) further investment may be made
into the Company's existing investments without redemption rights in order to
preserve the value of such investments; and (c) realised cash may be invested
in cash or cash equivalents, government or public securities (as defined in
the rules of the UK Financial Conduct Authority), money market instruments,
bonds, commercial paper or other debt obligations with banks or other
counterparties having a "single A" (or equivalent) or higher credit rating as
determined by any internationally recognized rating agency selected by the
directors of the Company (which may or may not be registered in the European
Union) ("Cash Instruments") pending its return to Shareholders in accordance
with the Company's investment objective.

Any return of proceeds to the Shareholders will be subject to compliance with
existing gearing facilities and hedging arrangements, payment of expenses and
reserves for potential liabilities.

 

The Company will continue to comply with the restrictions imposed by the
Listing Rules.

FINANCIAL HIGHLIGHTS

SUMMARY HIGHLIGHTS FOR 2023

v February 2023: The Company declared its 20th consecutive dividend of 2.00p
for the three-month period to 31 December 2022.

v May 2023: The General Meeting Circular was announced and published to the
Company's website, inclusive of two proposals for the managed realisation of
the Company's assets.

v June 2023: At the General Meeting, the resolutions put to the meeting,
inclusive of two proposals for the Company's managed realisation that were
approved by Shareholders. The Company announced that at its Annual General
Meeting ("AGM"), all resolutions set out in the Notice of AGM were passed by
the requisite majority.

v June 2023: The Company declared its 21st consecutive dividend of 2.00 pence
per share for the three-month period to 31 March 2023.

v July 2023: The Company sold 932,968 shares of Bakkt (NYSE: BKKT)
for US$1.6 million, including a gain of US$0.1 million.

v August 2023: The Company sold a portion of its remaining equity in Kueski,
Inc., for US$0.8 million, including a gain of US$0.7 million. Additionally,
the Company received a paydown of US$5.3 million on CFG Partners Holdings,
L.P., which was used to reduce the outstanding gearing facility.August 2023:
The Company declared its 22nd consecutive dividend of 2.00p per share for the
three months to 30 June 2023.

v September 2023: The Company received cash inflows totalling US$14.0
million from the Company's asset backed lending and equity investments. The
proceeds were used to partially reduce the outstanding gearing facility.

v November 2023: The Company declared its 23rd consecutive dividend of 2.00p
per share for the three months to 30 September 2023.

v December 2023: The Company exited its debt investment in Applied Data
Finance, LLC. Additionally, the Company exited majority of the remaining
equity investment in VPC Impact Acquisition Holdings (NYSE: BKKT).

SUBSEQUENT EVENTS

v January 2024: The Company exited its debt investments in Elevate Credit,
Inc., and Koalafi (formerly known as West Creek Financial, LLC).

v February 2024: The Company declared its 24th consecutive dividend of 2.00p
per share for the three months to 31 December 2023.

v March 2024: On 4 March 2024, two of the Company's eCommerce investments,
Razor Group ("Razor") and PerchHQ, LLC ("Perch"), closed a transaction in
which Razor will acquire Perch in an all-stock deal. This acquisition paves
the way for Razor to reach over $1.0 billion in topline revenue in the medium
term and adds significant scale to its operations.

v April 2024: On 5 April 2024, the Company held a General Meeting at which
shareholders approved the Capital Return Mechanism. On 9 April 2024, the Board
decided to make an initial distribution to shareholders of $15 million,
equivalent to approximately £11.9 million as at the date of release, through
the issue and redemption of B Shares.

RETURN SUMMARY AS AT 31 DECEMBER 2023

                                                     31 December 2023  31 December 2022
 Inception to Date NAV (Cum Income) Return           47.44%            56.91%
 Inception to Date Total Shareholder Return          29.79%            38.69%
 Net Asset Value ("NAV" per Ordinary Share           80.91p            98.19p
 Ordinary Share Price                                66.20p            83.10p
 Discount to NAV                                     18.18%            15.37%
 NAV (Cum Income) Return                             -9.45%            -6.97%
 Total Shareholder Return (based on share price)(1)  -10.71%           -1.19%
 Dividends per Ordinary Share(2)                     8.00p             8.00p
 Total Net Return                                    -£25.83 million   -£22.11 million
 Revenue Return                                      +£25.62 million   +£28.02 million

( )

(1)     Net of issue costs.

(2)     Dividends declared which relate to the period.

 

TOP TEN POSITIONS

The table below provides a summary of the top ten exposures of the Group, net
of gearing, as at 31 December 2023 by both asset backed lending and equity
investment. 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 page 3 to consider the
application of the restrictions in this policy on a look-through basis.

 

 ASSET BACKED LENDING INVESTMENT  COUNTRY                                      EXPOSURE (£)
 Deinde Group, LLC                United States                                38,087,857
 Razor Group GMBH                 Germany                                      21,602,947
 Perch HQ, LLC                    United States                                19,069,470
 FinAccel Pte Ltd                 Singapore                                    17,642,647
 Heyday Technologies, Inc.        United States                                13,017,276
 Elevate Credit, Inc.             United States                                9,376,011
 Counsel Financial Holdings, LLC  United States                                8,486,624
 Juvo Solutions, LLC              United States                                8,747,121
 Dave, Inc.                       United States                                3,769,775
 Moonshot Brands Inc.             Latin America                                3,593,763

 EQUITY INVESTMENT                                       COUNTRY        EXPOSURE (£)
 WeFox Holding AG                                        Switzerland    19,917,885
 Caribbean Financial Group Holdings, L.P.                Latin America  11,339,755
 L&F Acquisition Holding Fund, L.P.                      United States  5,737,743
 Sunbit, Inc.                                            United States  3,456,842
 FinAccel Pte Ltd                                        Singapore      3,194,149
 Keller Lenker, LLC                                      United States  2,602,177
 West Creek Financial, Inc.                              United States  2,545,402
 VPC Impact Acquisition Holdings                         United States  2,380,476
 Pattern Brands                                          United States  2,012,320
 Calumet Capital                                         United States  1,982,177

 

CHAIRMAN'S STATEMENT

The Company faced multiple challenges during 2023. With inflation remaining
high in many advanced economies, a major theme throughout the year was the
continued tightening of monetary policy through the raising of interest rates,
which constrained spending by business and consumers. This made for a
difficult environment for the Company's equity portfolio, which continued to
experience setbacks. Additionally, the eCommerce industry experienced various
challenges in 2023, including competition growth, supply-chain interruptions,
and increased regulations. The Company's eCommerce portfolio was negatively
affected by these industry changes, which also detracted from the Company's
performance.

 

A further challenge was the stubbornly wide discount to net asset value
("NAV") at which the Company's shares traded. In its review of 2023, the
Association of Investment Companies ("AIC") reported that, on average, UK
investment trusts traded at a double-digit discount to NAV for the entire year
- the first time that this has happened since 2008. 1  Discounts have been
especially steep for investment trusts that invest in illiquid assets.
Although discounts have narrowed from their widest point of October 2023, they
remain in the double digits. The high discount is one of the reasons the
Directors recommended the

managed wind-down, which shareholders approved in June.

 

Despite the unfavourable and uncertain environment, the Company's core
asset-backed lending business continued to perform well in 2023. This
component of the portfolio benefitted from rising short-term interest rates
for most of the year because most of its loans have variable rates. Meanwhile,
the negative unrealised capital returns from the equity portfolio were driven
by three main factors: (i) depressed revenues and margin; (ii) marking the
equity investments to current exit values; and (iii) reflecting the impact of
terms of mergers within the portfolio as of year-end and reflecting the
general downward trend in comparable multiples. Here, we should note that
Victory Park Capital Advisors, LLC (the "Investment Manager" or "VPC") have a
stated policy of taking a rigorous and conservative approach to valuations.
For more information on this, see the Investment Manager's Report.

 

2023 HIGHLIGHTS

v Gross revenue return of +13.93% offset by a gross capital unrealised loss of
-18.34%;

v NAV total return of -9.45% for the year and +47.44% from inception to date;

v Total Shareholder return of -10.71% for the year and a cumulative return of
+29.79% from inception to date;

v Robust performance of the asset-backed loan investments;

v In December 2023 and January 2024, the Company received full repayment of
the debt investments in Applied Data Finance, LLC, Elevate Credit, Inc., and
Koalafi (formerly known as West Creek Financial, LLC). These three investments
returned $38.0 million of gross proceeds to the Company, before required
repayments of the Company's gearing facility; and

v A 24th consecutive quarterly dividend of 2.00p per share for the three-month
period to December 2023 in February 2024.

 

THE COMPANY'S BUSINESS

As in the previous year, the Company experienced divergent performances from
the asset-backed lending and equity portfolios. For the twelve months to the
end of December 2023, the NAV per share of the Company decreased by -7.45% on
a total return basis. This return consists of a NAV per share reduction from
98.19p to 80.91p, including 8.00p of dividends paid in 2023 (in line with the
target dividend of 8.00p per year set out in the IPO Prospectus), which were
fully covered by the revenue returns during

the year. During the year, the Company's share price fell from 83.10p to
66.20p.

 

At the year-end, the Company's core asset-backed lending business represented
73.0% (67.0% at 31 December 2022) of the total portfolio. This component of
the portfolio has continued to benefit from a secure lending position,
targeting minimal capital losses and a high level of income generation that
supports regular dividend payments. Most of the Company's asset-backed
investments are delayed-draw, floating-rate senior secured loans that may have
equity subordination. These investments are secured by underlying collateral,
which consists of consumer loans, small business loans, and alternative
assets. The weighted average coupon on the Company's asset-backed investments
increased from 14.65% as at 31 December 2022 to 16.41% as at 31 December 2023,
boosted by the sustained rise in short-term interest rates for most of the
year. At the year-end, the expected credit loss ("ECL") reserve was £6.4
million (£16.4 million at 31 December 2022) on all of the Company's debt
investments.

 

Although there were significant unrealised losses in the investment portfolio
during the year, these occurred as a result of taking account of market
information as it arose, in accordance with the Investment Manager's strict
valuation methodology. The Investment Manager continues to work with
underlying Portfolio Companies (primarily in the FinTech and eCommerce
sectors) as they restructure their balance sheets and evaluate strategic
combinations to maximise shareholder value.

 

CAPITAL RETURN TO SHAREHOLDERS

At the General Meeting on 12 June 2023, Shareholders approved the following
proposed amendments:

v To the Company's investment policy with a view to realising the Company's
assets in an orderly manner that achieves a balance between maximising the
value received from investments and making timely returns of cash to the
Company's Shareholders; and

v To the investment management agreement between the Company and VPC as a
consequence of the modification of the Company's investment policy (the
"Investment Policy") so as to better align the interests of the Shareholders
and the Investment Manager.

 

Since then, the Investment Manager has been working, and will continue to
work, to exit the Company's investments in a manner that maximises Shareholder
value in a timely and cost-effective manner.

 

We are also conscious that our Shareholder register features both
institutional and retail investors. The Board therefore explored mechanisms
for structuring the return of capital so that neither investor group is
disadvantaged. The option that the Company decided to pursue is the
distribution of capital on a strict pro rata basis. On 15 March 2024, the
Company published a Notice of General Meeting for the proposed adoption of a B
Share Scheme to facilitate the return of capital to Shareholders. The General
Meeting was held on 5 April 2024, and the B Share Scheme was approved by
Shareholders.

 

THE COMPANY'S ESG IMPACT

Following the June 2023 General Meeting, the Investment Manager has focused on
the realisation of the Company's assets in an orderly manner. The Investment
Manager continues to operate under its environmental, social and governance
("ESG") policy and monitors any ESG risks that it identifies and presents them
to their Investment Committee for review. The Investment Manager is then
responsible for developing an action plan to address these risks as required.
In addition, the Investment Manager continues to be a signatory of the United
Nations Principles for Responsible Investment, the leading global network for
investors committed to integrating ESG considerations into long-term
investment decision-making.

 

Throughout the realisation process, the Investment Manager continues to ensure
ESG considerations remain embedded in its approach. The Investment Manager
continues to emphasise the fair, responsible and ethical treatment of
Portfolio Companies. In some cases, this may require a degree of flexibility.
Although most borrowers intend to repay their asset-backed investments at the
stated maturity dates, some have sought renegotiation. In some cases, this
best serves the interests of the Company and its Shareholders by increasing
the likelihood of recovering the full value of the investments. Accordingly,
the Investment Manager extended certain debt maturities over the course of
2023. In addition, throughout the realisation process, the Company continues
to have policies and procedures in place to maintain a culture of good
governance. These include policies and procedures relating to all aspects of
diversity, equity and inclusion.

 

OPERATIONAL RESILIENCE

Over the year, eCommerce companies had to contend with a slower growth
environment and the effects of the cost-of-living crisis in many countries. As
high interest rates and elevated inflation constrained consumers, companies
also had to cope with strained supply chains. These came under further
pressure towards the end of the year, with attacks on shipping in the Red Sea
and drought affecting transit through the Panama Canal. In this environment,
many Portfolio Companies continued to engage in cost-cutting activity and
reassess their strategic combinations.

 

Risk management remains a critical function throughout the realisation
process. The Investment Manager maintains comprehensive operational processes
and procedures that support a culture of compliance and institutional best
practices. A team of more than 25 risk and operations professionals
proactively assess and monitor Portfolio Companies and related activities on a
daily, weekly or monthly basis using proprietary analytic tools. Technology
systems and best-in-class service providers are used to supplement internal
capabilities. The Investment Manager's expertise and experience in credit and
structuring, ability to navigate uncertain market conditions and emphasis on
stringent risk management should facilitate a disciplined and orderly
realisation of the Company's assets.

 

BOARD COMPOSITION

During 2023, two directors, Elizabeth Passey and Clive Peggram, retired from
the Board. Both had served since the Company was established in early 2015. As
I commented at the time of the 2023 AGM, my fellow directors and I found
Elizabeth and Clive's wise counsel and experience of the Company hugely
valuable, and we thank them again for their contributions on our own behalf
and on the Company's. The Board has taken the decision to recruit an
additional director and the process has started.

 

OUTLOOK

As interest rates remain elevated and geopolitical uncertainty is likely to
persist in the months ahead, we draw some encouragement from the resilience
that the Company has demonstrated over the past two years. In particular in
the core investments in asset-backed securities, the Investment Manager's
credit expertise and the implementation of judicious risk-management measures
have all helped the Company to weather a challenging period while maintaining
a high and stable level of income. The volatility of the unrealised equity
portfolio is a challenge, and we are disappointed by its performance.
Realising good value will take some time, but we are also concerned that, as
the debt portfolio matures, the equity holdings will likely constitute a
larger portion of total NAV and consequently impact the overall volatility of
the portfolio, a risk the Board will seek to mitigate.

 

With the realisation process now underway, the Board meets regularly to review
the liquidity of unrealised holdings and progress towards the Company's
revised investment objective. In this, we recognise that flexibility and
patience are vital to get value from individual investments and that
arrangements may need to be altered to reflect changing circumstances and
market conditions, including the greater volatility that might arise from a
higher proportion of equities. The Board and the Investment Manager will
proceed on a case-by-case and cost-conscious basis. In doing so, we must
balance the need to maximise Shareholder value with the time-sensitive
requirements of many of our Shareholders. Throughout this process, we will
strive to keep Shareholders informed of progress and developments as they
arise. We are also mindful that where markets are less conducive to liquidity,
the management of risk is crucial.

 

In recent weeks, Shareholders approved the B share scheme for the efficient
return of capital to Shareholders and we were pleased to announce the first
such distribution. Meantime, your Board and I would like to thank you for your
continued support as we work towards the successful realisation of the
Company's assets.

 

Graeme Proudfoot

Chair

23 April 2024

 

INVESTMENT MANAGER'S REPORT

REVIEW OF 2023 PERFORMANCE

Last year was another year of economic uncertainty and geopolitical turmoil
with the war in Ukraine, tensions between China and the US, and conflict that
erupted once more in the Middle East. Supply chains remained under pressure,
and consumers in many countries had to contend with a continued cost-of-living
crisis, in large part precipitated by persistently high inflation. In response
to inflationary pressures, key central banks continued to raise interest
rates. The US Federal Reserve increased the federal funds rate four times over
the year, from 4.25%-4.5% to 5.25%-5.5%, although it refrained from further
rate hikes after July. This pause in further rate hikes gave rise to hopes
that rates might be cut in 2024, although statements from Federal Reserve
officials have somewhat dampened optimism.

 

With financing options harder to come by in an environment of higher interest
rates, venture capital ("VC") markets have been subdued, and VC investors have
been cautious. The excitement over generative artificial intelligence meant
that other technology-focused companies struggled to secure funding. Moreover,
the collapse of Silicon Valley Bank and the poor post-flotation performance of
several high-profile technology companies added to VC investors' wariness.
Crunchbase reports that VC funding fell to its lowest level for five years in
2023, with a 38% decline from the previous year. Meanwhile, mergers and

acquisitions ("M&A") fell to their lowest level for a decade.

 

Similar to 2022, VPC's strong performance of its asset-backed lending
investments was outweighed by weakness in the equity portion of the portfolio
in 2023. By year-end, the Company's asset-backed lending investments
represented approximately 73.0% of the total investment portfolio. Here, the
Company benefitted from continued increases in short-term interest rates
during the year, which underscore the power of variable-rate loans. The
remainder of the investment portfolio comprises the Company's equity
interests.

 

The Company completed the year with a NAV total return of -9.45%, a gross
revenue return of +13.93% and a gross capital return of -18.34%. The Company's
revenue return remained in line with expectations, providing a full cash
coverage of the 8.00p per share dividend for Shareholders during the year as
set out in the IPO Prospectus (the "Target Dividend"). In February 2024, the
Company declared its 24th consecutive quarterly dividend payment of 2.00p per
share for the three months to 31 December

2023, and the dividend was paid to Shareholders in March 2024.

 

Although capital returns were negative, the FinTech portfolio continued to
produce consistently positive revenue returns. Since the agreement to realise
the Company's assets at the General Meeting held in June 2023, the Investment
Manager has achieved the repayment of several asset-backed FinTech
investments. These include the positions in Applied Data Finance, LLC, and,
after the year-end, Elevate Credit, Inc., and Koalafi (formerly known as West
Creek Financial, LLC). In the FinTech equity portfolio, the reduction in
unrealised capital returns generally stemmed from marking these investments to
year-end exit values, in light of near-to-medium-term exit opportunities and
the depressed VC and M&A environment.

 

For the Company's eCommerce assets, the ongoing depression of revenue growth
and margins in the overall industry played a significant role in the
adjustment of the fair market value of equity holdings. This arose as
consumers came under pressure from the cost-of-living crisis, and companies
had to cope with further disruptions to their supply chains. In certain cases,
individual portfolio holdings underperformed expectations, leading to
additional adjustments. The Investment Manager is actively working to mitigate
the risks associated with this sector of the portfolio, including exploring
strategic combinations, among other options. Please see the Subsequent Events
section below for additional details on specific strategic combinations. VPC
continues to work with its eCommerce Portfolio Companies as they strengthen
their balance sheets and evaluate additional strategic combinations in an
effort to maximise Shareholder value.

 

The Company's positions in legal finance have continued to perform well, and
the Investment Manager continues to evaluate exit opportunities for these
investments.

 

At the year-end, the Company accrued ECL reserves of £6.4 million (£16.4
million at 31 December 2022). During the year, certain asset-backed lending
investment maturities were extended to reflect changes in the circumstances of
the particular investment or the prevailing market conditions. In each case,
these extensions were made to preserve value for the Shareholders, as
disclosed in the General Meeting Circular.

 

During the realisation process, VPC will continue to draw on its longstanding
reputation and relationships with management teams, industry professionals and
experts to determine the most cost-effective distribution mechanisms for
maximizing Shareholder value.

 

INVESTMENTS

During the year, the investment objective of the Company was amended following
Shareholder approval at the General Meeting in June 2023. Until 30 June 2023,
the Company could make new asset-backed lending investments directly (in
aggregate) up to 5.0% of its Gross Assets (at the time of the investment) in
consumer loans, small-and-medium-sized business loans, advances against
corporate trade receivables and/or purchases of corporate trade receivables
originated by Portfolio Companies. During

this period, the Company made new investments of a nominal £3.1 million.

 

Under the terms agreed for the wind-down, the Investment Manager is not
permitted to make any new investments save that: (i) investments may be made
to honour existing documented contractual commitments to existing Portfolio
Companies (as a majority of the Company's investments are delayed-draw term
loans); (ii) further investment may be made into the Company's existing
investments without redemption rights in order to preserve the value of such
investments; and (iii) realised cash may be invested in cash or cash
equivalents, government or public securities (as defined in the rules of the
UK Financial Conduct Authority), money market instruments, bonds, commercial
paper or other debt obligations with banks or other counterparties having a
"single A" (or equivalent) or higher credit rating as determined by any
internationally recognised rating agency selected by the Directors of the
Company (which may or may not be registered in the European Union) pending its
return to Shareholders in accordance with the Company's investment objective.
During the second half of the year, the Company made follow-on investments
totalling £0.7 million in aggregate and will continue to honour existing
documented contractual commitments to Portfolio Companies as they arise.

 

GEARING FACILITY

During the year, the "look-through" gearing ratio decreased as investments
were repaid and payments required by the facility provider were made on the
Company-level gearing facility. Having started the year at 0.35x, the
look-through gearing ratio ended the year at 0.17x, which reflects VPC's
conservative approach to liquidity and risk management with the gearing
facilities. After the year-end, the non-recourse gearing facility was repaid
following the successful exit of Elevate Credit, Inc.

 

As the realisation of the Company's assets progresses, the Company's level of
gearing may increase as a result of further drawdowns to honour commitments to
funds under existing contractual arrangements or revaluations of the
portfolio, as well as the realisation of assets at less than their carrying
value. An increased level of gearing would increase Shareholders' exposure to
realisation values.

 

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG") INVESTMENT CONSIDERATIONS

The Investment Manager has a long history of commitment to ESG considerations
as part of its investment process and firm-wide operations. VPC believes that
integrating ESG principles and prudently identifying and managing ESG-related
risks is integral to its investment process.

 

As part of its standard risk management process, VPC actively monitors its
Portfolio Companies across all dimensions of risk and performance, including
ESG. There is frequent communication with Portfolio Companies, and VPC
receives extensive reporting to identify potential issues. Further, the
Investment and Risk teams meet with the Investment Committee at least weekly
to discuss potential ESG concerns and how to address or remediate them.

 

Concerning any follow-on investments in existing Portfolio Companies or
material restructurings of existing investments, VPC will re-evaluate the ESG
risks and communicate any potential incremental ESG risks to the formally
designated "ESG Officer" and "ESG Coordinator", as well as the Investment
Committee, before any such follow-on investment or restructuring.

 

As it relates to the realisation process, the Investment Manager believes that
there are minimal ESG implications of exiting an asset-backed lending
investment. While ESG considerations may not specifically apply to an exit,
the ESG Policy prescribes a process for managing ESG risk throughout the life
of an investment.

 

OUTLOOK

Although interest rates remain at elevated levels, rate cuts may occur in the
medium term. The Company's Portfolio Companies are typically high-growth
businesses that have historically raised their funding through venture capital
or private equity, so a loosening of monetary policy would be positive for
improving fundraising opportunities. Much economic and geopolitical
uncertainty remains, however, and market expectations may well meet with
disappointment as to the timing and extent of any rate cuts.

 

The Investment Manager will take full account of market circumstances in
working towards the continued realisation of the Company's assets, along with
any situations specific to individual Portfolio Companies. In some cases,
providing Portfolio Companies additional time to repay asset-backed lending
investments in full will be in the best interests of Portfolio Companies and
Shareholders alike. Though maturity dates may be extended on certain
investments, VPC and the Company will look for ways to potentially exit the
investments before the stated maturity date, where possible. VPC will remain
focused on mitigating exogenous credit risks and managing downside protection
in the investment portfolio to ensure a timely return of capital to
Shareholders and manage an orderly realisation process.

 

Victory Park Capital Advisors, LLC

Investment Manager

23 April 2024

 1  Investment company 2023 review (updated) | The AIC

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