TIDMNTV
16 MAY 2019
NORTHERN 2 VCT PLC
ANNUAL FINANCIAL REPORT FOR THE YEARED 31 MARCH 2019
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by NVM
Private Equity. It invests mainly in unquoted venture capital holdings
and aims to provide high long-term tax-free returns to shareholders
through a combination of dividend yield and capital growth.
Financial Summary (comparative figures as at 31 March 2018):
2019 2018
-------- --------
Net assets GBP84.1m GBP87.0m
Net asset value per share 64.7p 66.9p
Return per share:
Revenue 1.2p 1.3p
Capital 2.0p (0.4)p
Total 3.2p 0.9p
Dividend per share for the year:
Interim dividend 2.0p 2.0p
Proposed final dividend 2.0p 3.5p
Total 4.0p 5.5p
Cumulative return to shareholders since launch:
Net asset value per share 64.7p 66.9p
Dividends paid per share* 117.4p 111.9p
Net asset value plus dividends paid per share 182.1p 178.8p
Mid-market share price at end of year 59.0p 63.5p
Share price discount to net asset value 8.8% 5.1%
Tax-free dividend yield (based on net asset value
per share at the start of year) 6.0% 7.2%
*Excluding proposed final dividend payable on 19 July 2019
For further information, please contact:
NVM Private Equity LLP
Simon John/James Bryce 0191 244 6000
Website: www.nvm.co.uk
HIGHLIGHTS
-- Return per share for the year of 3.2 pence representing 4.8% of opening
NAV per share
-- Successful public share offer launched raising GBP6.6 million of gross
proceeds
-- GBP11.5 million of proceeds received from venture capital portfolio
realisations, generating a gain of GBP2.7 million (2018: GBP1.0 million)
-- Ten new and eight follow-on investments completed in innovative earlier
stage companies
CHAIRMAN'S STATEMENT
I am pleased to report on another busy year for your company during
which ten new VCT qualifying investments were completed. Cash flows
remained strong, supported by a number of successful investment
disposals and a top-up public share offer which was fully subscribed.
As a result, your company is well positioned both to pursue new
opportunities to support small and medium businesses and to work with
existing portfolio companies to realise their growth plans.
Results and dividend
In the year ended 31 March 2019 the company achieved a return on
ordinary activities of GBP4,237,000 (2018: GBP1,055,000) or 3.2 pence
per share (2018: 0.9 pence), representing a total return of 4.8% on the
opening net asset value (NAV) per share. The NAV per share at 31 March
2019, after deducting dividends paid during the year of 5.5 pence, was
64.7 pence compared with 66.9 pence as at 31 March 2018. The cumulative
return to shareholders increased to 182.1 pence per share (2018: 178.8
pence) which marks the tenth consecutive year of growth. The company's
NAV total return over five years remains ahead of the UK equity market
total return index which we use as a comparator.
We remain committed to building a portfolio of investments in smaller
innovative UK companies across a diverse range of sectors with
significant growth potential. In keeping with the latest VCT rules, the
companies selected for investment require patient capital to enable job
creation or technological advancement. These investments are generally
structured with a view to achieving capital growth rather than income
generation and as a consequence the timing and quantum of potential
capital gains from realisations may be less predictable. As we
highlighted in our half-yearly report, your directors believe it is
important to set the annual dividend at a level which has regard to the
company's changing asset base and to its recurring income.
After careful consideration, the directors have proposed a final
dividend of 2.0 pence per share in respect of the year ended 31 March
2019, which if approved at the annual general meeting, will be paid on
19 July 2019 to shareholders on the register on 21 June 2019. Taken
with the interim dividend of 2.0 pence per share paid in January 2019,
this makes a total annual dividend of 4.0 pence per share, equivalent to
a tax-free yield of 6.0% by reference to the opening NAV per share.
Paying regular tax-free dividends whilst seeking to minimise or avoid
erosion of the NAV per share remains a priority for your directors.
Investment portfolio
Our investment manager, NVM, has continued to build its early stage
investment capability having hired five investment professionals during
the year and two sector specialists whose roles encompass value-adding
activities for portfolio companies. The investment team now works from
an expanded network of five regional offices. I am pleased to note that
NVM has continued to identify opportunities to support small and medium
businesses with good growth potential.
Following our rigorous investment process, ten new VCT-qualifying
investments were added to the venture capital portfolio at a cost of
GBP6.4 million. In addition, follow-on investments totalling GBP3.9
million were made in eight existing portfolio companies to support their
continued development. The total investment rate of GBP10.3 million
maintains the momentum established in the prior year (2018: GBP10.1
million). The investment rate is encouraging, as we continue to
identify opportunities to advance capital to growing businesses, many of
which are developing disruptive products or services. Whilst we are
still relatively near the beginning of the investment holding period for
the 25 investments acquired to date under the new rules, satisfactory
progress is being made by the portfolio as a whole. The earlier-stage
nature of the businesses we are investing in will typically lead to
greater fluctuations in short-term results and in longer periods before
a significant value creation event might occur. We remain confident in
our manager's skills in selecting attractive opportunities in which to
invest shareholders' funds for the long term.
Just over half of the value of the venture capital portfolio is
currently represented by investments made under previous iterations of
the VCT rules, which tend to be in more mature, profitable businesses.
The notable realisations of investments during the year were all from
this older portfolio and generated gains on disposal of GBP4.8 million
over cost or GBP2.7 million over their carrying value as at 31 March
2018. We hope that the remaining mature investments will continue to
provide an income yield and a series of profitable exits in the years to
come, supporting the overall returns of the company whilst the
earlier-stage portfolio matures.
Shareholder issues
Having reviewed the medium-term investment pipeline with NVM earlier in
the year, your board proposed a non-prospectus top-up share offer which
was launched in January 2019. We were very pleased that strong demand
was experienced for this offer and that it was fully subscribed within
eight days of being launched, raising gross proceeds of GBP6.6 million.
Your directors would like to express their appreciation of shareholders'
continuing support.
Recent legislative changes mean that VCTs will be required to invest 30%
of new funds by the end of the year following the year in which they are
raised, which is likely to lead us to make smaller and more frequent
share offers.
In addition to the public offer, gross proceeds of GBP1.3 million were
received during the year through the issue of new shares under our
dividend investment scheme. The scheme enables shareholders to
efficiently re-invest some or all of their dividends in new shares
attracting income tax relief and remains open to new participants.
The company's annual general meeting (AGM) will be held in London on
Thursday 11 July 2019 and the directors look forward to meeting and
engaging with shareholders.
Share buy-backs
The company has maintained its policy of buying back its own shares in
the market, at a discount of around 5% to NAV. During the year, a total
of 2,110,000 shares were repurchased for cancellation, equivalent to
approximately 1.6% of the opening share capital.
Board of directors
All the directors will be seeking re-election at the AGM, either in
accordance with the AIC Code of Corporate Governance or voluntarily.
VCT legislation and regulation
Following the significant amendments to the relevant legislation
announced in both 2015 and 2017, the past year has seen a welcome period
of regulatory stability. The main change still being phased into
practice is the increase in the minimum proportion of investments
required to be held by a VCT in VCT-qualifying holdings, from 70% to
80%. This will first apply to your company from 31 March 2020 and both
the board and NVM are monitoring progress towards this target closely.
Whilst there were no further amendments announced by the Chancellor in
his 2018 Autumn Budget statement, it is possible that further changes
will be made in the future. We will continue to work closely with our
investment manager to maintain compliance with the scheme rules at all
times.
HM Revenue and Customs (HMRC) launched a consultation in December 2016
to consider how to streamline the advanced assurance service, the
process whereby potential investments may be given an indicative opinion
of eligibility. The consultation conclusions called for a greater level
of self-assurance by VCTs however provided little guidance on how this
should work in practice. NVM has been in discussions with HMRC and
other market participants on this topic since the consultation and
progress has recently been made, with formal guidance on the
self-assurance process now available. Your board has therefore decided
to self-assure certain investments meeting a series of criteria, where
professional advice has been sought and expert opinion over the
eligibility of the investment opportunity has been received.
VCT qualifying status
The company has continued to meet the stringent and evolving qualifying
conditions laid down by HM Revenue & Customs for maintaining its
approval as a VCT. NVM monitors the position closely and reports
regularly to the board. Philip Hare & Associates LLP has continued to
act as independent adviser to the company on VCT taxation matters.
Outlook
Your board is encouraged by the further progress made by the company
over the past year, both in the implementation of the investment
strategy and the successful realisation of several investments.
Financial markets rarely react well to lack of political clarity and the
recently extended process of implementing the UK's decision to leave the
EU has provided much uncertainty. Our manager, NVM, continues to work
with portfolio companies to plan for a range of potential outcomes with
regard to the UK's future relationship with the EU. Following the
recent investment disposals and successful share offer, your company is
well-funded to capitalise on attractive investment opportunities and
will continue to maintain the highest standards in the selection of
investments to deploy capital effectively and ultimately drive
shareholder value.
David Gravells
Chairman
Extracts from the audited financial statements for the year ended 31
March 2019 are set out below.
INCOME STATEMENT
for the year ended 31 March 2019
Year ended 31 March 2019 Year ended 31 March 2018
Revenue Capital Total Revenue Capital Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Gain on
disposal of
investments - 2,827 2,827 - 709 709
Movements in
fair value
of
investments - 762 762 - (202) (202)
---------- ---------- ---------- ---------- ---------- ----------
- 3,589 3,589 - 507 507
Income 2,638 - 2,638 2,482 - 2,482
Investment
management
fee (399) (1,198) (1,597) (393) (1,180) (1,573)
Other
expenses (393) - (393) (350) (11) (361)
---------- ---------- ---------- ---------- ---------- ----------
Return on
ordinary
activities
before tax 1,846 2,391 4,237 1,739 (684) 1,055
Tax on
return on
ordinary
activities (275) 275 - (277) 277 -
---------- ---------- ---------- ---------- ---------- ----------
Return on
ordinary
activities
after tax 1,571 2,666 4,237 1,462 (407) 1,055
---------- ---------- ---------- ---------- ---------- ----------
Return per 1.2p 2.0p 3.2p 1.3p (0.4)p 0.9p
share
BALANCE SHEET
as at 31 March 2019
31 March 2019 31 March 2018
GBP000 GBP000
Fixed assets:
Investments 64,125 61,432
---------- ----------
Current assets:
Debtors 221 205
Cash and cash equivalents 26,431 25,540
---------- ----------
26,652 25,745
Creditors (amounts falling due within one year) (6,668) (134)
---------- ----------
Net current assets 19,984 25,611
---------- ----------
Net assets 84,109 87,043
---------- ----------
Capital and reserves:
Called-up equity share capital 6,502 6,505
Share premium 1,555 392
Capital redemption reserve 215 110
Capital reserve 67,341 71,629
Revaluation reserve 6,679 7,836
Revenue reserve 1,817 571
---------- ----------
Total equity shareholders' funds 84,109 87,043
---------- ----------
Net asset value per share 64.7p 66.9p
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2019
---------------Non-distributable reserves--------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2018 6,505 392 110 7,836 71,629 571 87,043
Return on
ordinary
activities
after tax - - - (1,157) 3,823 1,571 4,237
Dividends
paid - - - - (6,831) (325) (7,156)
Net proceeds
of share
issues 102 1,163 - - - - 1,265
Shares
purchased
for
cancellation (105) - 105 - (1,280) - (1,280)
---------- ---------- ---------- ---------- ---------- ---------- ----------
At 31 March
2019 6,502 1,555 215 6,679 67,341 1,817 84,109
---------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2018
---------------Non-distributable reserves--------------- Distributable reserves Total
Capital
Called up share Share redemption Revaluation Capital Revenue
capital premium reserve reserve* reserve reserve
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
At 1 April
2017 4,678 3,029 83 9,049 53,908 900 71,647
Return on
ordinary
activities
after tax - - - (1,213) 806 1,462 1,055
Dividends
paid - - - - (9,226) (1,791) (11,017)
Net proceeds
of share
issues 1,854 23,853 - - - - 25,707
Shares
purchased
for
cancellation (27) - 27 - (349) - (349)
Cancellation
of share
premium
reserve - (26,490) - - 26,490 - -
---------- ---------- ---------- ---------- ---------- ---------- ----------
At 31 March
2018 6,505 392 110 7,836 71,629 571 87,043
---------- ---------- ---------- ---------- ---------- ---------- ----------
*the revaluation reserve is generally non-distributable other than that
part of the reserve relating to gains/losses on readily realisable
quoted investments, which is distributable.
STATEMENT OF CASH FLOWS
for the year ended 31 March 2019
Year ended Year ended
31 March 2019 31 March 2018
GBP000 GBP000
Cash flows from operating activities:
Return on ordinary activities before tax 4,237 1,055
Adjustments for:
Gain on disposal of investments (2,827) (709)
Movement in fair value of investments (762) 202
(Increase)/decrease in debtors (16) 386
Increase/(decrease) in creditors 66 (582)
---------- ----------
Net cash inflow from operating activities 698 352
---------- ----------
Cash flows from investing activities:
Purchase of investments (17,730) (10,265)
Sale/repayment of investments 18,626 7,535
---------- ----------
Net cash inflow/(outflow) from investing
activities 896 (2,730)
---------- ----------
Cash flows from financing activities:
Issue of ordinary shares 1,304 26,248
Share issue expenses (39) (541)
Share subscriptions held pending allotment 6,468 (4,297)
Purchase of ordinary shares for
cancellation (1,280) (349)
Equity dividends paid (7,156) (11,017)
---------- ----------
Net cash (outflow)/inflow from financing
activities (703) 10,044
---------- ----------
Increase in cash and cash equivalents 891 7,666
Cash and cash equivalents at beginning of
year 25,540 17,874
---------- ----------
Cash and cash equivalents at end of year 26,431 25,540
---------- ----------
INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2019
% of
Cost Valuation net assets
GBP000 GBP000 by value
Fifteen largest venture capital
investments:
Sorted Holdings 2,716 3,625 4.3
MSQ Partners Group 1,672 3,486 4.2
Agilitas IT Holdings 1,638 3,266 3.9
No 1 Lounges 1,977 2,952 3.5
Lineup Systems 974 2,910 3.5
Volumatic Holdings 1,078 2,110 2.5
SHE Software Group 1,873 2,109 2.5
Entertainment Magpie Group 1,503 1,915 2.3
Biological Preparations Group 2,166 1,761 2.1
Currentbody.com 1,287 1,655 2.0
Avid Technology Group 1,287 1,634 1.9
It's All Good 1,145 1,618 1.9
Knowledgemotion 1,469 1,595 1.9
Intelling Group 1,143 1,540 1.8
Intuitive Holding 1,508 1,469 1.7
---------- ---------- --------
23,436 33,645 40.0
Other venture capital investments 25,981 22,674 27.0
---------- ---------- --------
Total venture capital investments 49,417 56,319 67.0
Listed equity investments 6,687 6,438 7.7
Listed interest-bearing investments 1,342 1,368 1.6
---------- ---------- --------
Total fixed asset investments 57,446 64,125 76.3
----------
Net current assets 19,984 23.7
---------- --------
Net assets 84,109 100.0
---------- --------
RISK MANAGEMENT
The board carries out a regular and robust review of the risk
environment in which the company operates. The principal risks and
uncertainties identified by the board which might affect the company's
business model and future performance, and the steps taken with a view
to their mitigation, are as follows:
Investment and liquidity risk: investment in smaller and unquoted
companies, such as those in which the company invests, involves a higher
degree of risk than investment in larger listed companies because they
generally have limited product lines, markets and financial resources
and may be more dependent on key individuals. The securities of smaller
companies in which the company invests are typically unlisted, making
them illiquid, and this may cause difficulties in valuing and disposing
of the securities. The company may invest in businesses whose shares are
quoted on AIM -- the fact that a share is quoted on AIM does not mean
that it can be readily traded and the spread between the buying and
selling prices of such shares may be wide. Mitigation: the directors aim
to limit the risk attaching to the portfolio as a whole by careful
selection, close monitoring and timely realisation of investments, by
carrying out rigorous due diligence procedures and maintaining a wide
spread of holdings in terms of financing stage and industry sector. The
board reviews the investment portfolio with the manager on a regular
basis.
Financial risk: most of the company's investments involve a medium to
long-term commitment and many are relatively illiquid. Mitigation: the
directors consider that it is inappropriate to finance the company's
activities through borrowing except on an occasional short-term basis.
Accordingly they seek to maintain a proportion of the company's assets
in cash or cash equivalents in order to be in a position to pursue new
unquoted investment opportunities and to make follow-on investments in
existing portfolio companies. The company has very little direct
exposure to foreign currency risk and does not enter into derivative
transactions.
Economic risk: events such as economic recession or general fluctuation
in stock markets, exchange rates and interest rates may affect the
valuation of investee companies and their ability to access adequate
financial resources, as well as affecting the company's own share price
and discount to net asset value. Mitigation: the company invests in a
diversified portfolio of investments spanning various industry sectors,
and maintains sufficient cash reserves to be able to provide additional
funding to investee companies where appropriate.
Stock market risk: some of the company's investments are quoted on the
London Stock Exchange or AIM and will be subject to market fluctuations
upwards and downwards. External factors such as terrorist activity can
negatively impact stock markets worldwide. In times of adverse sentiment
there may be very little, if any, market demand for shares in smaller
companies quoted on AIM. Mitigation: the company's quoted investments
are actively managed by specialist managers, including NVM in the case
of AIM-quoted investments, and the board keeps the portfolio and the
actions taken under ongoing review.
Credit risk: the company holds a number of financial instruments and
cash deposits and is dependent on the counterparties discharging their
commitment. Mitigation: the directors review the creditworthiness of the
counterparties to these instruments and cash deposits and seek to ensure
there is no undue concentration of credit risk with any one party.
Legislative and regulatory risk: in order to maintain its approval as a
VCT, the company is required to comply with current VCT legislation in
the UK, which reflects the European Commission's State-aid rules.
Changes to the UK legislation or the State-aid rules in the future could
have an adverse effect on the company's ability to achieve satisfactory
investment returns whilst retaining its VCT approval. Mitigation: the
board and the manager monitor political developments and where
appropriate seek to make representations either directly or through
relevant trade bodies.
Internal control risk: the company's assets could be at risk in the
absence of an appropriate internal control regime. Mitigation: the board
regularly reviews the system of internal controls, both financial and
non-financial, operated by the company and the manager. These include
controls designed to ensure that the company's assets are safeguarded
and that proper accounting records are maintained.
VCT qualifying status risk: while it is the intention of the directors
that the company will be managed so as to continue to qualify as a VCT,
there can be no guarantee that this status will be maintained. A failure
to continue meeting the qualifying requirements could result in the loss
of VCT tax relief, the company losing its exemption from corporation tax
on capital gains, to shareholders being liable to pay income tax on
dividends received from the company and, in certain circumstances, to
shareholders being required to repay the initial income tax relief on
their investment. Mitigation: the investment manager keeps the company's
VCT qualifying status under continual review and its reports are
reviewed by the board on a quarterly basis. The board has also retained
Philip Hare & Associates LLP to undertake an independent VCT status
monitoring role.
DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the annual report and the
financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for
each financial year. Under that law they have elected to prepare the
financial statements in accordance with UK Accounting Standards,
including FRS 102 "The Financial Reporting Standard applicable in the UK
and Republic of Ireland".
Under company law the directors must not approve the financial
statements unless they
are satisfied that they give a true and fair view of the state of
affairs of the company and of
its profit or loss for the year.
In preparing the financial statements, the directors are required to (i)
select suitable accounting policies and then apply them consistently;
(ii) make judgements and estimates that are reasonable and prudent;
(iii) state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and explained in
the financial statements; (iv) assess the company's ability to continue
as a going concern, disclosing, as applicable, matters related to going
concern; and (v) prepare the financial statements on the going concern
basis unless they either intend to liquidate the company or to cease
operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the company's transactions and
disclose with reasonable accuracy at any time the financial position of
the company and enable them to ensure that the financial statements
comply with the Companies Act 2006. They are responsible for such
internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the company and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the directors are also responsible
for preparing a strategic report, directors' report, directors'
remuneration report and corporate governance statement that comply with
that law and those regulations.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
The directors have confirmed that to the best of their knowledge (i) the
financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the company; and
(ii) the directors' report and strategic report include a fair review of
the development and performance of the business and the position of the
company, together with a description of the principal risks and
uncertainties that they face.
The directors consider that the annual report and accounts, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the company's position and
performance, business model and strategy.
The directors of the company at the date of this announcement were Mr D
P A Gravells (Chairman), Mr A M Conn, Mr S P Devonshire, Miss C A
McAnulty and Mr F L G Neale.
OTHER MATTERS
The above summary of results for the year ended 31 March 2019 does not
constitute statutory financial statements within the meaning of Section
435 of the Companies Act 2006 and has not been delivered to the
Registrar of Companies. Statutory financial statements will be filed
with the Registrar of Companies in due course; the independent auditor's
report on those financial statements under Section 495 of the Companies
Act 2006 is unqualified, does not include any reference to matters to
which the auditor drew attention by way of emphasis without qualifying
the report and does not contain a statement under Section 498 (2) or (3)
of the Companies Act 2006.
The calculation of the return per share is based on the return on
ordinary activities after tax for the year of GBP4,237,000 (2018:
GBP1,055,000) and on 130,606,159 (2018: 112,186,377) shares, being the
weighted average number of shares in issue during the year.
The calculation of the net asset value per share as at 31 March 2019 is
based on the net assets of GBP84,109,000 (2018: GBP87,043,000) divided
by the 130,044,260 (2018: 130,089,490) ordinary shares in issue at that
date.
If approved by shareholders, the proposed final dividend of 2.0p per
share for the year ended 31 March 2019 will be paid on 19 July 2019 to
shareholders on the register at the close of business on 21 June 2019.
The full annual report including financial statements for the year ended
31 March 2019 is expected to be posted to shareholders on 14 June 2019
and will be available to the public at the registered office of the
company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and
on the NVM Private Equity LLP website, www.nvm.co.uk.
Neither the contents of the NVM Private Equity LLP website nor the
contents of any website accessible from hyperlinks on the NVM Private
Equity LLP website (or any other website) is incorporated into, or forms
part of, this announcement.
(END) Dow Jones Newswires
May 17, 2019 03:31 ET (07:31 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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