12 NOVEMBER 2019
NORTHERN 2 VCT PLC
UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2019
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by NVM Private Equity LLP. 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 highlights (comparative figures as at 30 September 2018 and 31 March 2019)
|
|
Six months ended 30 September 2019 |
Six months ended 30 September 2018 |
Year ended |
| Net assets
|
£88.0m | £85.0m | £84.1m |
| Net asset value per share
|
63.0p | 64.9p | 64.7p |
| Return per share: Revenue Capital Total
|
0.1p 0.3p 0.4p |
0.5p 1.0p 1.5p |
1.2p 2.0p 3.2p |
| Dividend per share declared in respect of the period
|
2.0p |
2.0p |
4.0p |
| Cumulative returns to shareholders since launch: Net asset value per share Dividends paid per share* Net asset value plus dividends paid per share
|
63.0p |
64.9p |
64.7p |
| Mid-market share price at end of period
|
59.0p | 60.0p | 59.0p |
| Share price discount to net asset value
|
6.3% | 7.6% | 8.8% |
| Tax-free dividend yield (based on net asset value per share)** | 6.2% | 8.0% | 6.0% |
*Excluding interim dividend not yet paid
**The annualised dividend yield is calculated by dividing the dividends in respect of the 12 month period ended on each reference date by the net asset value per share at the start of the period
For further information, please contact:
NVM Private Equity LLP
Simon John/James Bryce 0191 244 6000
Website: www.nvm.co.uk
HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS
Results and dividend
The unaudited net asset value (NAV) per share at 30 September 2019 was 63.0 pence (64.7 pence (audited) at 31 March 2019) and is stated after deducting the final dividend of 2.0 pence per share in respect of the 2018/19 financial year which was paid in July 2019.
The return per share as shown in the income statement for the six months ended 30 September 2019 was 0.4 pence, compared with 1.5 pence in the corresponding period last year.
In keeping with the latest VCT rules, the companies we select for investment require development capital to deliver their growth plans. Our early stage investee companies have collectively created over 300 jobs since March 2018 and have helped to deliver innovation in a range of sectors. The progress charted by a typical portfolio of venture capital investments is rarely linear and whilst the total return for the first six months of the year has been broadly flat, your directors take confidence from the overall diversification of the portfolio across many attractive sectors. Just under 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. We expect that these mature investments will continue to provide an income yield and series of profitable exits in the years to come, supporting the overall returns of the company whilst the earlier-stage portfolio matures.
After careful consideration, the board has declared an unchanged interim dividend for the year ending 31 March 2020 of 2.0 pence per share, which will be paid on 24 January 2020 to shareholders who are on the register on 3 January 2020.
Portfolio
Further progress was made on the development of the portfolio during the period. Three new investments were added to the venture capital portfolio for a total consideration of £2.0 million:
- Voxpopme (£891,000) – video based consumer insight software, Birmingham
- Quotevine (£706,000) – asset and automotive management software platform provider, Bedford
- Duke & Dexter (£388,000) – supplier of premium men’s footwear, London
In addition, £2.6 million of capital was provided to nine existing investee companies to support further growth ambitions, representing around 57% by value of investment activity during the period.
Proceeds from investment sales and repayments from the venture capital portfolio amounted to £4.6 million during the period, producing a realised gain over cost of £1.9 million. The most significant transaction related to MSQ Partners Group which was the subject of a secondary management buy-out financed by LDC. This represented an excellent result for Northern 2 VCT, delivering a return of over 2.5 times the original cost over the life of the investment. The transaction was close to completion at the date of announcement of our last annual report and consequently the level of exit proceeds was reflected in the valuation which had been marked up as at 31 March 2019.
Shareholder issues
As a result of the top-up share offer launched in January 2019, 10,259,000 shares were issued during the period for gross proceeds of £6.6 million. In addition a total of £0.5 million was received during the period through the issue of new shares under our dividend investment scheme.
Most of the earlier stage businesses we are backing will require further capital in order to mature and we continue to channel an increasing proportion of our investment activity into follow-on funding rounds. In addition to the capital requirements of the existing portfolio, we have also reviewed the pipeline of new investments with NVM and expect that the volume of attractive investment opportunities will be sustained in the near term. Having carefully considered the current level of liquid resources available to the company and the potential investment demand in the coming years, the board proposes to launch a prospectus share offer in January 2020 in order to raise up to £13.3 million. If approved, it is intended that all shares to be issued under the offer will be allotted in the 2019-20 tax year.
Your directors are mindful of the potential drag on overall returns caused by holding liquidity and have weighed this cost against the benefit of securing sufficient funding to support our early stage investee companies to realise their potential. NVM has agreed that the reduced management fee we pay on liquid assets in excess of a specified level will continue for at least another 12 months after the new shares are allotted.
The company has maintained its policy of buying back its own shares in the market from time to time, at a discount of 5% to NAV. During the period, 1,527,000 shares were repurchased for cancellation, for a total consideration of £901,000.
VCT qualifying status
The company has continued to meet the stringent qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. Our investment manager, 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.
VCT legislation
As previously reported, the VCT rules have continued to evolve to meet the UK Government’s aim of driving investment towards the smaller companies most in need of capital to grow. One of the most significant changes 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.
Prospects
Financial markets rarely react well to political instability and the extended process of implementing the UK’s decision to leave the EU has caused much uncertainty. Whilst limited clarity has thus far been obtained as to the likely nature of the UK’s future relationship with the European Union, NVM continues to work closely with portfolio companies in order to plan for a range of potential outcomes.
In addition to planning for the proposed share offer, NVM is also working with several investee companies with a view to achieving a profitable exit in the next 12 months. Access to capital is one of the most important factors contributing to the success of early stage businesses and your board believes that the company is well placed to provide that vital support with a view to increasing long term shareholder value.
On behalf of the Board
David Gravells
Chairman
The unaudited half-yearly financial statements for the six months ended 30 September 2019 are set out
below.
INCOME STATEMENT
(unaudited) for the six months ended 30 September 2019
| Six months ended 30 September 2019 |
Six months ended 30 September 2018 |
|||||
| Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
| Gain on disposal of investments | – | 46 | 46 | – | 1,773 | 1,773 |
| Movements in fair value of investments | – | 954 | 954 | – | 27 | 27 |
| ———- | ———- | ———- | ———- | ———- | ———- | |
| – | 1,000 | 1,000 | – | 1,800 | 1,800 | |
| Income | 609 | – | 609 | 1,194 | – | 1,194 |
| Investment management fee | (206) | (617) | (823) | (195) | (584) | (779) |
| Other expenses | (191) | – | (191) | (200) | – | (200) |
| ———- | ———- | ———- | ———- | ———- | ———- | |
| Return on ordinary activities before tax | 212 | 383 | 595 | 799 | 1,216 | 2,015 |
| Tax on return on ordinary activities | (15) | 15 | – | (125) | 125 | – |
| ———- | ———- | ———- | ———- | ———- | ———- | |
| Return on ordinary activities after tax | 197 | 398 | 595 | 674 | 1,341 | 2,015 |
| ———- | ———- | ———- | ———- | ———- | ———- | |
| Return per share | 0.1p | 0.3p | 0.4p | 0.5p | 1.0p | 1.5p |
| Year ended 31 March 2019 | ||||||
| Revenue £000 |
Capital £000 |
Total £000 |
||||
| Gain on disposal of investments | – | 2,827 | 2,827 | |||
| Movements in fair value of investments | – | 762 | 762 | |||
| ———- | ———- | ———- | ||||
| – | 3,589 | 3,589 | ||||
| Income | 2,638 | – | 2,638 | |||
| Investment management fee | (399) | (1,198) | (1,597) | |||
| Other expenses | (393) | – | (393) | |||
| ———- | ———- | ———- | ||||
| Return on ordinary activities before tax | 1,846 | 2,391 | 4,237 | |||
| Tax on return on ordinary activities | (275) | 275 | – | |||
| ———- | ———- | ———- | ||||
| Return on ordinary activities after tax | 1,571 | 2,666 | 4,237 | |||
| ———- | ———- | ———- | ||||
| Return per share | 1.2p | 2.0p | 3.2p | |||
BALANCE SHEET
(unaudited) as at 30 September 2019
| 30 September 2019 £000 |
30 September 2018 £000 |
31 March 2019 £000 |
|
| Fixed assets: Investments |
65,040 |
62,450 |
64,125 |
| ———- | ———- | ———- | |
| Current assets: | |||
| Debtors | 1,088 | 129 | 221 |
| Cash and cash equivalents | 21,890 | 22,494 | 26,431 |
| ———- | ———- | ———- | |
| 22,978 | 22,623 | 26,652 | |
| Creditors (amounts falling due | |||
| within one year) | (64) | (76) | (6,668) |
| ———- | ———- | ———- | |
| Net current assets | 22,914 | 22,547 | 19,984 |
| ———- | ———- | ———- | |
| Net assets | 87,954 | 84,997 | 84,109 |
| ———- | ———- | ———- | |
| Capital and reserves: | |||
| Called-up equity share capital | 6,980 | 6,544 | 6,502 |
| Share premium | 7,958 | 1,132 | 1,555 |
| Capital redemption reserve | 291 | 135 | 215 |
| Capital reserve | 66,054 | 69,916 | 67,341 |
| Revaluation reserve | 6,061 | 6,351 | 6,679 |
| Revenue reserve | 610 | 919 | 1,817 |
| ———- | ———- | ———- | |
| Total equity shareholders’ funds | 87,954 | 84,997 | 84,109 |
| ———- | ———- | ———- | |
| Net asset value per share | 63.0p | 64.9p | 64.7p |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2019
| —————–Non-distributable reserves—————– | Distributable reserves | Total | |||||
| Called up share capital |
Share |
Capital redemption reserve |
Revaluation |
Capital |
Revenue |
||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| At 1 April 2019 | 6,502 | 1,555 | 215 | 6,679 | 67,341 | 1,817 | 84,109 |
| Return on ordinary activities | |||||||
| after tax | – | – | – | (618) | 1,016 | 197 | 595 |
| Dividends paid | – | – | – | – | (1,404) | (1,404) | (2,808) |
| Net proceeds of share issues | 554 | 6,403 | – | – | – | – | 6,957 |
| Shares purchased for cancellation |
(76) |
– |
76 |
– |
(899) |
– |
(899) |
| ———- | ———- | ———- | ———- | ———- | ———- | ———- | |
| At 30 September 2019 | 6,980 | 7,958 | 291 | 6,061 | 66,054 | 610 | 87,954 |
| ———- | ———- | ———- | ———- | ———- | ———- | ———- | |
STATEMENT OF CHANGES IN EQUITY
(unaudited) for the six months ended 30 September 2018
| —————–Non-distributable reserves—————– | Distributable reserves | Total | |||||
| Called up share capital |
Share |
Capital redemption reserve |
Revaluation |
Capital |
Revenue |
||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| At 1 April 2018 | 6,505 | 392 | 110 | 7,836 | 71,629 | 571 | 87,043 |
| Return on ordinary activities | |||||||
| after tax | – | – | – | (1,485) | 2,826 | 674 | 2,015 |
| Dividends paid | – | – | – | – | (4,228) | (326) | (4,554) |
| Net proceeds of share issues | 64 | 740 | – | – | – | – | 804 |
| Shares purchased for cancellation |
(25) |
– |
25 |
– |
(311) |
– |
(311) |
| ———- | ———- | ———- | ———- | ———- | ———- | ———- | |
| At 30 September 2018 | 6,544 | 1,132 | 135 | 6,351 | 69,916 | 919 | 84,997 |
| ———- | ———- | ———- | ———- | ———- | ———- | ———- | |
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2019
| —————–Non-distributable reserves—————– | Distributable reserves | Total | |||||
| Called up share capital |
Share |
Capital redemption reserve |
Revaluation |
Capital |
Revenue |
||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| 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 |
| ———- | ———- | ———- | ———- | ———- | ———- | ———- | |
*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
(unaudited) for the six months ended 30 September 2019
| Six months ended | Six months ended | Year ended | |
| 30 September 2019 | 30 September 2018 | 31 March 2019 | |
| £000 | £000 | £000 | |
| Cash flows from operating activities: | |||
| Return on ordinary activities before tax | 595 | 2,015 | 4,237 |
| Adjustments for: | |||
| Gain on disposal of investments | (46) | (1,773) | (2,827) |
| Movement in fair value of investments | (954) | (27) | (762) |
| (Increase)/decrease in debtors | (867) | 76 | (16) |
| (Decrease)/increase in creditors | (136) | (58) | 66 |
| ———- | ———- | ———- | |
| Net cash (outflow)/inflow from operating activities | (1,408) | 233 | 698 |
| ———- | ———- | ———- | |
| Cash flows from investing activities: | |||
| Purchase of investments | (5,985) | (12,373) | (17,730) |
| Sale/repayment of investments | 6,072 | 13,155 | 18,626 |
| ———- | ———- | ———- | |
| Net cash inflow from investing activities | 87 | 782 | 896 |
| ———- | ———- | ———- | |
| Cash flows from financing activities: | |||
| Issue of ordinary shares | 7,072 | 823 | 1,304 |
| Share issue expenses | (115) | (19) | (39) |
| Share subscriptions held pending allotment | (6,468) | – | 6,468 |
| Purchase of ordinary shares for cancellation | (905) | (311) | (1,280) |
| Equity dividends paid | (2,804) | (4,554) | (7,156) |
| ———- | ———- | ———- | |
| Net cash outflow from financing activities | (3,220) | (4,061) | (703) |
| ———- | ———- | ———- | |
| Net (decrease)/increase in cash and cash equivalents | (4,541) | (3,046) | 891 |
| Cash and cash equivalents at beginning of period | 26,431 | 25,540 | 25,540 |
| ———- | ———- | ———- | |
| Cash and cash equivalents at end of period | 21,890 | 22,494 | 26,431 |
| ———- | ———- | ———- |
INVESTMENT PORTFOLIO SUMMARY
as at 30 September 2019
| Cost £000 |
Valuation £000 |
% of net assets by valuation |
|
| Lineup Systems | 975 | 4,504 | 5.1 |
| Agilitas IT Holdings | 1,284 | 4,317 | 4.9 |
| Sorted Holdings | 2,715 | 3,625 | 4.1 |
| Currentbody.com | 1,286 | 2,140 | 2.4 |
| SHE Software Group | 1,873 | 2,109 | 2.4 |
| Volumatic Holdings | 906 | 2,038 | 2.3 |
| No 1 Lounges | 1,977 | 1,906 | 2.2 |
| Knowledgemotion | 1,778 | 1,905 | 2.2 |
| Entertainment Magpie Group | 1,503 | 1,730 | 2.0 |
| Biological Preparations Group | 2,166 | 1,698 | 1.9 |
| It’s All Good | 1,145 | 1,648 | 1.9 |
| AVID Technology Group | 1,287 | 1,647 | 1.9 |
| Intelling Group | 1,142 | 1,541 | 1.8 |
| Soda Software Labs | 1,499 | 1,499 | 1.7 |
| Medovate | 1,450 | 1,450 | 1.6 |
| ———- | ———- | ——- | |
| Fifteen largest venture capital investments | 22,986 | 33,757 | 38.4 |
| Other venture capital investments | 27,391 | 23,252 | 26.4 |
| ———- | ———- | ——- | |
| Total venture capital investments | 50,377 | 57,009 | 64.8 |
| Listed equity investments | 6,392 | 6,683 | 7.6 |
| Listed interest-bearing investments | 1,242 | 1,348 | 1.5 |
| ———- | ———- | ——- | |
| Total fixed asset investments | 58,011 | 65,040 | 73.9 |
| ———- | |||
| Net current assets | 22,914 | 26.1 | |
| ———- | ——- | ||
| Net assets | 87,954 | 100.0 | |
| ———- | ——- | ||
BUSINESS RISKS
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, within the range permitted by the VCT scheme rules. 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.
OTHER MATTERS
The unaudited half-yearly financial statements for the six months ended 30 September 2019 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company’s independent auditor and have not been delivered to the Registrar of Companies. The comparative figures for the year ended 31 March 2019 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies. The auditor’s report on those financial statements (i) was unqualified, (ii) did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2019.
Each of the directors confirms that to the best of his or her knowledge the half-yearly financial statements have been prepared in accordance with the Statement “Half-yearly financial reports” issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.
The directors of the company at the date of this statement 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.
The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the period and on 140,139,010 (2018: 130,595,942) ordinary shares, being the weighted average number of shares in issue during the period.
The calculation of the net asset value per share is based on the net assets at 30 September 2019 divided by the 139,594,502 (2018: 130,872,145) ordinary shares in issue at that date.
The interim dividend of 2.0 pence per share for the year ending 31 March 2020 will be paid on 24 January 2020 to shareholders on the register at the close of business on 3 January 2020.
A copy of the half-yearly financial report for the six months ended 30 September 2019 is expected to be posted to shareholders by 27 November 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.