REG - VPC Specialty - Half-year Report

VPC Specialty Lending InvestmentsAnnouncement

20/09/2024 07:00

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RNS Number : 9516E  VPC Specialty Lending Invest. PLC  20 September 2024

20 September 2024

VPC SPECIALTY LENDING INVESTMENTS PLC

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

Half-Year Report and Unaudited Financial Statements

For the Six-Month Period Ended 30 June 2024

 

The Board of Directors (the "Board") of VPC Specialty Lending Investments PLC
(ticker: VSL) present the Company's Half-Year Report and Unaudited Financial
Statements for the period ended 30 June 2024.

 

A copy of the Company's Half Year 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 Half-Year 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 Half-Year 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           Tel: +44 20 7954 9567

 (Company Secretary)                    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 seeks to generate stable income with significant downside
protection.

This half year report for the period to 30 June 2024 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 was able to 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 recognised 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 AND HIGHLIGHTS FOR THE HALF-YEAR PERIOD

The financial and business highlights for the six months to 30 June 2024 are
as follows:

v February 2024: One of the Company's SPAC investments, ZeroFox, Inc. (NASDAQ:
ZFOX), announced that it had entered into a definitive agreement to be
acquired by Haveli Investments. As a result, the Company's convertible-note
investment (L&F Acquisition Holdings Fund, L.P.) was repaid, and the
common shares (JAR Sponsor, LLC) were redeemed which resulted in total
proceeds of $7.7 million.

v Sunbit Inc., one of the Company's investments, was named No. 30 on its
fourth annual Inc. 5000 Regionals: Pacific list, the most prestigious ranking
of the fastest-growing private companies based in California, Oregon,
Washington, Hawaii or Alaska.

v March 2024: Two of the Company's eCommerce investments, Razor Group and
PerchHQ, LLC, closed a transaction in which Razor acquired Perch in an
all-stock deal.

v The Company made a follow-on investment of £0.4 million in WeFox to
preserve the value of the investment.

v April 2024: The Company announced an initial ~£11.9 million distribution
through the B-share Scheme, representing approximately 5% of the Company's 31
January 2024 NAV.

v May 2024: The Company distributed the initial B-Share redemption to
Shareholders, which represented a 4.26p return.

v The Company received proceeds of $6.6 million related to its
convertible-note investment in L&F Acquisition Holdings Fund, LLC. This
represents a full exit of the position and a realised gain of $1.1 million.

v The Company received proceeds of $0.8 million related to the partial return
of capital of its investment in Keller Lenkner LLC.

v June 2024: The Company declared a dividend of 1.89p. This represents a 2.00p
equivalent dividend after adjusting for the reduction to NAV as a consequence
of the B Shares redeemed in May.

v The Company completed a restructuring of its investment in Integra Credit
Holdings, LLC. As a result of the amendment, a portion of the accrued interest
will be capitalised into a new non-interest-bearing note. The maturity date
has been extended to 31 December 2025.

v The Investment Manager announced that it had facilitated transactions that
resulted in a merger of four leading Amazon aggregators: Juvo Plus, Cap Hill
Brands, Dragonfly and Moonshot Brands. The resultant company, Infinite
Commerce, is one of the world's largest developers and sellers of consumer
products on eCommerce marketplaces.

v The Investment Manager received a partial repayment of $1.6 million on the
Company's investment in Caribbean Financial Group, with full repayment of the
facility expected at the stated maturity date of 31 December 2024.

SUBSEQUENT EVENTS

v July 2024: The Company received proceeds from Sunbit Inc. equity, resulting
in $3.9 million being returned to the Company, which is the valuation mark as
at 30 June 2024.

v The Company fully exited its investment in Covalto Ltd., ahead of the
scheduled maturity date of 22 November 2024, resulting in $0.2 million being
returned to the Company. This represents a full return of principal capital as
well as interest on the full life of the investment.

RETURN SUMMARY AS AT 30 JUNE 2024

                                                     30 June 2024      Comparative
 Net Asset Value ("NAV" per Ordinary Share           68.79p            80.91p - 31 December 2023
 Ordinary Share Price                                42.50p            66.20p - 31 December 2023
 Discount to NAV                                     38.22%            18.18% - 31 December 2023
 NAV (Cum Income) Return(1)                          -4.76%            -9.45% - 31 December 2023
 Total Shareholder Return (based on share price)(2)  -23.32%           -14.32% - 30 June 2023
 Dividends per Ordinary Share(3)                     4.26p             8.00p - 31 December 2023
 Total Net Return                                    -£11.03 million   -£5.55 million - 30 June 2023
 Revenue Return                                      +£12.71 million   +£21.79 million - 30 June 2023

( )

(1)           Comparative for the full year 2023.

(2)           Net of issue costs.

(3)           Dividends declared which relate to the period.

 

TOP TEN POSITIONS

The tables below provide a summary of the top ten exposures of the Group, net
of gearing, as at 30 June 2024 by asset backed lending, equity investment and
fund investment.

 ASSET BACKED LENDING INVESTMENT                          COUNTRY        EXPOSURE (£)
 Deinde Group, LLC (d/b/a, Integra Credit)                United States  48,732,641
 Razor Group GmbH                                         Germany        21,558,906
 FinAccel Pte Ltd                                         Singapore      17,763,774
 Heyday Technologies, Inc.                                United States  11,908,261
 Infinite Commerce Holdings, LLC                          United States  11,820,784
 Counsel Financial Holdings, LLC                          United States  8,332,141
 Dave, Inc.                                               United States  3,796,426
 Caribbean Financial Group Holdings, L.P.                 Latin America  2,935,153
 Kueski, Inc.                                             Latin America  2,033,743
 SellerX Germany GMBH & Co. KG                            Germany        1,808,837
                                                          COUNTRY        EXPOSURE (£)

 EQUITY INVESTMENT
 Razor Group GmbH                                         Germany        11,897,421
 Wefox Holding AG                                         Switzerland    8,499,298
 Caribbean Financial Group Holdings, L.P.                 Latin America  4,860,128
 FinAccel Pte Ltd                                         Singapore      4,301,803
 Sunbit, Inc.                                             United States  3,090,866
 Keller Lenkner LLC                                       United States  2,759,082
 West Creek Financial, Inc.                               United States  2,612,663
 Calumet Capital Partners, LLC                            United States  2,164,674
 Statera Capital Partners, LLC                            United States  2,038,185
 Kueski, Inc.                                             Latin America  1,982,586
                                                          COUNTRY        EXPOSURE (£)

 FUND INVESTMENT
 VPC Synthesis, L.P.                                      United States  15,979,174
 VPC Offshore Unleveraged Private Debt Fund Feeder, L.P.  United States  673,475

 

 

CHAIRMAN'S STATEMENT

I present to you the half-year results for the Company for the period to 30
June 2024. Many of the themes that made 2023 so testing persisted in the first
half of 2024. Prominent among them were stubborn levels of inflation, high
interest rates in most developed economies, and war in Eastern Europe and the
Middle East. These factors have been compounded by an unusual degree of
political uncertainty as an unprecedented number of countries are holding
elections in 2024.

Against this turbulent backdrop, the Company faced a challenging period. Net
returns from the portfolio were negative, with unrealised negative capital
returns offsetting positive revenue returns. Market conditions and
stock-specific issues both played a part in this, as you can read in the
Investment Manager's report. Nevertheless, the Investment Manager has
continued to make some progress towards the Company's winding down, and the
Company has been able both to maintain its dividend and to make an initial
B-share distribution to Shareholders. As noted in the announcement on 29
August 2024, the dividend is likely to be materially lower in the future. The
Board and the Manager would like to accelerate the wind-down, but, as you will
see, market conditions coupled with impacts on certain portfolio positions
have resulted in the extension of some maturity dates, as well as write-downs.
For ease of reference the maturity profile as at 30 June 2024 can be found on
page 9 below.

2024 FIRST-HALF HIGHLIGHTS

v Gross revenue return of 5.46% offset by a gross capital return of -7.82%;

v Total net asset value (NAV) return of -4.76% for the six-month period and
43.51% from inception to date;

v Total Shareholder return of -23.32% for the six-month period and 14.35% from
inception to date;

v Robust performance of the asset-backed loan investments;

v A first distribution of ~£11.9 million through the B-share scheme,
representing 5.12% of the Company's NAV at 31 January 2024; and

v A 25th consecutive quarterly dividend of 1.89p per share for the period from
1 January 2024 to 31 March 2024, which represents a 2.00p equivalent dividend
after adjusting for the reduction to NAV resulting from the B-share
distribution.

THE COMPANY'S BUSINESS

In line with the wind-down policy approved by Shareholders in June 2023, the
Investment Manager has continued to realise value through debt repayments and
the sale of equity securities. In the first half of this year, proceeds of
approximately $45 million were generated from the sale or redemption of
Company investments. These proceeds have either been distributed to
Shareholders or used to reduce the level of gearing in the portfolio. While it
is too early to predict when the gearing will be eliminated entirely, the
Company intends to continue to reduce the gearing as progress towards full
wind-down continues.

In May, the Company made an initial distribution to Shareholders of $15
million, equivalent to approximately £11.9 million as at the date it was
announced, through the issue and redemption of B Shares. The capital returned
represented 5.12% of the Company's net asset value on 31 January 2024.

With the changes to the portfolio brought about by the wind-down, we
anticipate impacts on both dividends and hedging. As we have previously
indicated, the dividend paid by the Company has started to be reduced
proportionately with the distribution of capital from the portfolio. For the
three-month period to 31 March, the Company paid an interim dividend of 1.89
pence per share on 18 July. This was equivalent to the preceding dividends of
2.00 pence per share when the reduction in the Company's net asset value
caused by the B-share distribution was taken into account, and we have
announced a further dividend of 1.89p in respect of the period to 30 June
2024. We expect that the dividend will be reduced further as the portfolio's
income falls during the progression towards wind-down.

Additionally, the Board intends to significantly reduce the extent to which
the portfolio is hedged by the end of 2024. While unhedged earnings and
valuation will reflect volatility in foreign exchange rates, the Board
believes that the impact will be in part offset by the release of capital and
the reduced costs of maintaining the hedging positions.

After reviewing the reporting of a comparable peer group for the Company, as
provided by the brokers, the Board has approved the shift from a monthly
newsletter / NAV to a quarterly shareholder presentation / NAV, following
publication of the September 2024 NAV.

BOARD COMPOSITION

I would like to note that two new directors, Nick Campsie and Martin Rigby,
joined the Board on 12 June. Both bring considerable expertise to the Board,
as detailed in their biographies on the Company website:
https://vpcspecialtylending.com/the-board/
(https://vpcspecialtylending.com/the-board/) . Nick and Martin have already
made a significant contribution to the work of the Board as a whole and as
members of the Company's Audit and Valuation and Management Engagement
Committees. We look forward to that continuing as we work towards wind-down.

OUTLOOK

Despite the difficult period that the Company has had to weather, the Board is
hopeful that the investment environment will improve as markets tend to be
cyclical. Macroeconomic conditions are still uncertain but are becoming more
benign as inflation gradually abates. Meanwhile, corporate earnings have been
reasonably robust.

We are disappointed by the performance of the Company's unrealised equity
portfolio. The core investments in asset-backed securities, the Investment
Manager's credit expertise and the implementation of judicious risk-management
measures have meanwhile all helped the Company to continue to generate income
in a further challenging period.

With the realisation process now underway, the Board continues to meet
regularly to review the liquidity of unrealised holdings and progress towards
the Company's revised investment objective. The Board and the Investment
Manager are proceeding on a case-by-case and cost-conscious basis, with the
due flexibility and patience required by the illiquidity of the Company's
assets. Throughout, we will balance the need to maximise Shareholder value
with the time sensitivities of our Shareholders. We will make every effort to
keep Shareholders informed of progress and developments as they arise.

Your Board and I would like to thank you once again for your continued support
as we work towards the successful realisation of the Company's assets.

 

Graeme Proudfoot

Chairman

19 September 2024

 

INVESTMENT MANAGER'S REPORT

REVIEW OF PERFORMANCE IN THE FIRST HALF OF 2024

Over the first six months of 2024, VPC continued to work towards the Company's
wind-down. As in 2022 and 2023, the strong performance of the Company's asset
backed lending investments was outweighed by weakness in the equity portion of
the portfolio. By the end of the period, the Company's asset backed lending
investments represented approximately 73% of the total investment portfolio.
The remainder of the investment portfolio consists of the Company's equity
interests and cash.

The most significant driver of the movement in the equity portion of the
portfolio was the unlisted investment in digital insurance platform wefox
Holding AG ("WeFox"). Regulatory challenges forced the business to seek
further funding, including an additional investment of €0.5 million from the
Company in March as part of total funds raised of €15 million. In light of
the new funding agreements that WeFox reached, VPC updated the valuation of
the Company's WeFox positions. This led to an unrealised loss of £11.0
million (-3.95p). The Investment Manager continues to monitor the discussions
between WeFox and its shareholders.

Further negative contributions came in the form of unrealised losses on two of
the Company's unlisted equity investments (Caribbean Financial Group Holdings,
L.P. and Pattern Brands, LLC), incremental losses on the Company's publicly
traded investment in Bakkt Holdings Inc. (NYSE: BKKT; "Bakkt") through VPC
Impact Acquisition Holdings and incremental expected credit loss reserves
taken within the eCommerce portfolio, specifically on the Company's investment
in SellerX Germany GMBH & Co. KG. The Company has now substantially exited
the position in Bakkt.

The Investment Manager has continued 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. In June,
the Investment Manager announced the completion of a merger of four leading
Amazon aggregators: Juvo Plus, Cap Hill Brands, Dragonfly and Moonshot Brands.
The Company holds its respective share of debt as well as equity in the newly
formed company, Infinite Commerce Holdings, LLC, as a result of this merger.
Infinite Commerce is now one of the world's largest developers and sellers of
consumer products on eCommerce marketplaces.

Earlier in the period, Razor Group GmbH and PerchHQ, LLC, closed a transaction
in which Razor acquired Perch in an all-stock deal. As part of the
transaction, Razor secured an incremental €34.5 million in new equity
financing that is subordinate to both the Razor asset backed investment and
the Class A Preferred Units.  During the period, the Company has recognised
an unrealised loss of £1.5 million (-0.54p) across all Perch/Razor positions.

INVESTMENTS

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.

In the first six months of 2024, the Company made follow-on investments
totalling $1.1 million. The Company will continue to honour existing
documented contractual commitments to Portfolio Companies as they arise.

During the period, 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. Although maturity dates may be
extended on certain investments, the Investment Manager and the Company will
continue to look for ways to exit the investments before the stated maturity
date, where possible, 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 Shareholders.

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
maximising Shareholder value.

At the end of the six-month period, the expected credit loss ("ECL") reserve
as a percentage of total loans at amortised cost was 1.6%, indicating strength
in the underlying debt investments.

OUTLOOK

Many of the themes that had characterised 2023 persisted in the first half of
2024: sustained high interest rates, economic uncertainty and ongoing conflict
in Ukraine and the Middle East. The US Federal Reserve maintained the federal
funds rate at 5.25%-5.5%, with expectations as to the timing and extent of
rate cuts fluctuating over the six months.

With financing options constrained by high interest rates, venture capital
("VC") markets continued to be subdued, with VC investors still cautious. As
the excitement over generative artificial intelligence persisted, the funding
available for other technology-focused companies remained limited.

Although interest rates are still at elevated levels, central banks in
Europe and the UK have already begun to reduce rates, and the market is
signalling that further rate cuts may occur later this year. 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 there is still the possibility that market expectations may be
disappointed as to the timing and extent of any rate cuts.

In working towards the continued realisation of the Company's assets, the
Investment Manager will take full account of market circumstances. But as the
main challenges in the portfolio have been specific to individual holdings,
most of VPC's efforts have been directed towards resolving these at the
Portfolio Company level. The Investment Manager is hopeful that the remedial
actions taken to date will have the desired effect in time. 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

19 September 2024

 

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