15 June 2022
NORTHERN 2 VCT PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2022
Northern 2 VCT PLC is a Venture Capital Trust (VCT) managed by Mercia Fund Management Limited. It invests mainly in unquoted venture capital holdings and aims to provide long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.
Financial Summary (comparative figures as at 31 March 2021):
|Net asset value per share||64.4p||71.3p|
|Return per share:|
|Dividend per share for the year:|
|Second interim (special) dividend||–||4.0p|
|Proposed final dividend||1.6p||1.5p|
|Cumulative return to shareholders since launch:|
|Net asset value per share||64.4p||71.3p|
|Dividends paid per share*||132.4p||124.9p|
|Net asset value plus dividends paid per share||196.8p||196.2p|
|Mid-market share price at end of year||61.5p||61.0p|
|Share price discount to net asset value||4.5%||14.5%|
|Tax-free dividend yield (based on net asset value per share at the start of year)|
|Excluding special dividend||5.0%||6.5%|
|Including special dividend||N/A||14.0%|
*Excluding proposed final dividend payable on 19 August 2022
James Sly / Graham Venables, Mercia Asset Management PLC – 0330 223 1430
The past year’s economic landscape has been dominated by two main drivers – the lingering impact of COVID-19 measures and, in the second half of the year, supply side shortages and inflationary pressures, which have introduced volatility into the financial markets.
Nonetheless I am pleased to report that despite a degree of macroeconomic turbulence over the past 12 months, our investment portfolio has not been materially impacted overall and has continued to see strong realisation activity, consolidating the excellent performance reported in the preceding year. The proceeds of investments sold during the period totalled £26.2 million, compared with an initial cost of £11.6 million. Investment activity increased in the year, with £14.7 million invested across 22 investee companies. The cash generated from investment disposals, together with the proceeds of our fully subscribed £17.0 million public share offer, means that 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 2022 the company achieved a return of 0.6 pence per share (2021: 21.8 pence), equivalent to 0.8% of the opening net asset value (NAV) per share as a result of several profitable disposals. The NAV per share as at 31 March 2022, after deducting dividends paid during the year totalling 7.5 pence, was 64.4 pence compared with 71.3 pence as at 31 March 2021.
Several investment realisations were completed during the year, with a number of notable transactions either completed or in progress as at the balance sheet date. Highlights were the partial disposal of Oddbox, generating a return of 10.9 times the original cost, and the sales of Currentbody.com and Intelling Group which registered returns of 2.9 times and 3.6 times cost respectively over their lifetimes (inclusive of loan interest received). The part disposal of MusicMagpie on the company’s flotation on AIM generated a return of 11.6 times the original cost of the investment, although the value of the retained shareholding fell sharply in early 2022 reducing the lifetime return on the entire investment as at 31 March 2022 to 7.2 times cost.
Net realised gains of £14.6 million underpinned the annual performance. The return for the year also included a carefully considered reduction of £2.3 million in the directors’ valuation of the unquoted portfolio. It is right to recognise where unquoted investments do not perform as anticipated. The very significant reduction in the number of air passengers during the pandemic resulted in the liquidation of No 1 Lounges, resulting in a loss of our investment, although the cost of this investment had already been provided against in the preceding financial year. In addition the company’s investment in Avid was sold at a loss against original cost following a decision not to provide further funding to the company.
In 2018 we set an objective of paying an annual dividend representing a yield of at least 5% of the opening NAV per share in each year whilst endeavouring to protect the NAV from erosion over the medium term. Over the three years since 31 March 2019 the NAV per share has decreased by 0.5% from 64.7 pence to 64.4 pence, after taking account of dividend payments totalling 15.0 pence over the same period. We have therefore broadly continued to meet our objective.
Having already declared an interim dividend of 2.0 pence per share which was paid in January 2022, your directors now propose a final dividend of 1.6 pence. The total of 3.6 pence is equivalent to 5.0% of the opening NAV of 71.3p per share. The proposed final dividend will, subject to approval by shareholders at the annual general meeting, be paid on 19 August 2022.
The target dividend yield will remain subject to regular review and the level of future dividend distributions will continue to reflect the level of returns generated by the company in the medium term, the timing of investment realisations, the availability of distributable reserves and continuing compliance with the VCT scheme rules.
While COVID-19 continued to provide challenges to some of our portfolio companies, the changes it has driven in consumer habits and working practices provided opportunities for others. The software and electronics sub-sectors have broadly remained resilient throughout the pandemic and investments in these areas represent a little over 20% by cost of the portfolio. sub-sectors have broadly remained resilient throughout the pandemic and investments in these areas represent a little over 20% by cost of the portfolio. Your directors take great care when considering the valuations of the unquoted venture portfolio and have updated valuations to reflect current market conditions where appropriate.
In the first quarter of 2022 stock markets fell sharply in reaction to the news of inflationary pressures and the conflict in Ukraine. Despite this our portfolio of listed investments ended the year marginally ahead, rising by 3.9% compared to March 2021.
In response to the conflict in Ukraine, our investment manager undertook a review of the entire portfolio for links to sanctioned individuals and companies, and continues to monitor the situation carefully.
After the restrictions caused by COVID-19 in the year to March 2021, investment levels have recovered this year and have exceeded pre-pandemic levels, with £9.6 million of capital provided to nine new venture capital investments and £5.1 million of follow on capital invested into the existing portfolio.
Since the year end we have also disposed of our holding in another recent early stage investment, Knowledgemotion, for initial net proceeds of £3.0 million, representing a 1.7 times return on the original cost.
As of March 2022 33% by value of our venture capital portfolio at the year-end comprised “legacy” investments in more mature businesses acquired under the previous (pre-2015) VCT rules. This mature portfolio will continue to reduce as a percentage of overall capital invested as we realise our holdings in these investments, and we expect that it will continue to provide a series of profitable exits in the years to come, supporting the overall return of the company.
Your company is mindful of its Environmental, Social and Governance (ESG) responsibilities and we have outlined our evolving approach in the annual report which will be made available on Mercia’s website.
The transitional services agreement, covering the transfer of the company’s administrative, accounting and company secretarial services, terminated on 31 March 2022. Mercia Fund Management now performs the functions in respect of the post-2015 investments, accounting and company secretarial services which were previously undertaken by NVM Private Equity prior to the novation of the company’s investment management agreement in December 2019. NVM will continue to play an important role in managing part of the legacy portfolio of more mature investments. I would like to thank the directors and staff of both organisations for their hard work during the transitional period.
At the end of March 2022 Tim Levett retired from his position leading the fund manager’s VCT investment team. Tim leaves behind an experienced team, led by the newly promoted VCT partners and overseen by Peter Dines, with whom he has worked closely since Mercia took over the fund management agreement. I would like to take this opportunity to thank Tim for his immense contribution to Northern 2 VCT over the past 23 years, and we wish him a happy retirement.
Share offer and liquidity
As a result of the public share offer launched in January 2022, 25,597,510 new ordinary shares were issued in April 2022 for gross proceeds of £17.0 million.
Our dividend investment scheme, which enables shareholders to invest their dividends in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate, with around 16% of total dividends reinvested by shareholders during the year.
Following the increase in the rate of investment in the past year, we will continue to monitor liquidity prior to taking a view on possible fundraising in the 2022/23 tax year.
We have maintained our policy of being willing to buy back the company’s shares in the market when necessary in order to maintain liquidity, at a 5% discount to NAV. During the year, a total of 2,089,334 shares were repurchased for cancellation, equivalent to approximately 1.3% of the opening share capital.
Annual general meeting
The company’s annual general meeting (AGM) will take place on 10 August 2022. The AGM usually provides an excellent opportunity for shareholders, directors and the manager to meet in person and exchange views and comment, but in 2020 and 2021 we held the meetings remotely in view of Government advice concerning non-essential travel and social distancing. Subject to any subsequent restrictions being enforced, we intend to hold the 2022 AGM in person at The Royal College of General Practitioners, 30 Euston Square, London NW1 2FB. Following positive feedback received from the last two years, we also intend to offer remote access for shareholders through an online webinar facility for those who would prefer not to travel. Full details and formal notice of the AGM are set out in a separate document.
Board of directors
Your board recognises the need to consider succession planning and with due regard to developing its diversity. We are determined to only ever appoint when we have found high quality, value adding and experienced people who will contribute to the board in the interests of shareholders. As previously announced, Alastair Conn will retire as a director at the AGM in August 2022 and it is envisaged that two other directors will retire over the next two years.
On behalf of the board I would like to thank Alastair for his invaluable contribution during his period on the board. He co-founded NVM Private Equity along with Tim Levett and Michael Denny, and was managing director during the formative first decade of the VCT sector from 1995. He has worked with us through some very significant changes, notably in recent years the re-framing of the investing rules in 2015 and more recently the transfer of our management agreement from NVM to Mercia in 2019. We shall miss his expertise and guidance.
I am delighted to report that Ranjan Ramparia was appointed to the board on 27 May 2022. Ranjan has extensive experience in advising management teams, corporate finance, including valuations, and investment management. We look forward to benefiting from her significant experience over the coming years.
As reported in previous years, the board goes through a rigorous appraisal process both collectively and individually during which it considers the independence of each director in the light of their performance at, and between, board meetings and when engaging with the manager. Shareholders can be assured that with the benefit of their wide experience and expertise your directors, individually and collectively, can be, and are, frequently extremely challenging to the manager in respect of the strategic direction of the company, their view of each investment, and the important issues around such matters as the valuation of unquoted assets, performance fees and fund raising.
All the directors who served throughout the year, with the exception of Alastair Conn, will be seeking re-election at the 2022 AGM in accordance with the AIC Code of Corporate Governance. Ranjan Ramparia will be seeking election as a director following her recent appointment.
VCT legislation and qualifying status
The company has continued to meet the stringent and complex qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. Mercia 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.
Whilst no further amendments to the VCT legislation were announced by the Chancellor in his 2022 Spring Budget statement, it is possible that further changes will be made in the future.
The upcoming 2025 ‘sunset clause’ was a European state aid requirement when the VCT scheme received state aid approval, which means that without a small change in legislation investors will not receive upfront tax relief when investing in VCTs after this date. The Treasury Select Committee has already issued a call for evidence on the venture capital market and we expect a review of all current tax advantaged schemes by the Government in the period up to 2025. The board considers that the company, and VCTs more generally, are successfully delivering against the Government’s mandate, which is to channel money into higher-risk, early-stage businesses. Mercia is represented on the relevant committees of the various trade bodies working to demonstrate to Government the positive contribution that VCTs make to the UK economy.
We will continue to work closely with Mercia to maintain compliance with the scheme rules at all times.
Despite macroeconomic headwinds caused by domestic inflation and the residual impact of COVID-19 measures and the possibility that the UK economy may slip into recession, your directors remain encouraged by the resilience of the portfolio to date.
We remain committed to supporting early stage businesses in the UK and believe that your company is set up and well placed to support both its existing portfolio and the exciting selection of new companies that are currently in the investment pipeline.
We thank our investors for their continuing support.
Chairman 15 June 2022
Extracts from the audited financial statements for the year ended 31 March 2022 are set out below.
for the year ended 31 March 2022
|Year ended 31 March 2022||Year ended 31 March 2021|
|Gain/(loss) on disposal of investments||–||4,491||4,491||–||8,998||8,998|
|Movements in fair value of investments||–||(2,265)||(2,265)||–||28,956||28,956|
|Investment management fee||(541)||(1,621)||(2,162)||(460)||(3,052)||(3,512)|
|Return before tax||318||605||923||516||34,902||35,418|
|Tax on return||(3)||3||–||(83)||83||–|
|Return after tax||315||608||812||433||34,985||35,418|
|Return per share||0.2p||0.4p||0.6p||0.3p||21.5p||21.8p|
as at 31 March 2022
|31 March 2022
|31 March 2021
|Cash and cash equivalents||27,086||28,567|
|Creditors (amounts falling due within one year)||(153)||(1,807)|
|Net current assets||26,976||28,422|
|Capital and reserves:|
|Called-up equity share capital||8,145||8,102|
|Capital redemption reserve||615||511|
|Total equity shareholders’ funds||104,854||115,500|
|Net asset value per share||64.4p||71.3p|
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2022
|—————Non-distributable reserves—————||Distributable reserves||Total|
|Called up share
|At 1 April 2021||8,102||20,175||511||22,343||63,547||822||115,500|
|Return after tax||–||–||–||(12,578)||13,186||315||923|
|Net proceeds of share issues||147||1,837||–||–||–||–||1,984|
|Shares purchased for cancellation||(104)||(60)||104||–||(1,388)||–||(1,448)|
|At 31 March 2022||8,145||21,952||615||9,765||63,642||735||104,854|
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2021
|—————Non-distributable reserves—————||Distributable reserves||Total|
|Called up share
|At 1 April 2020||6,945||8,401||367||(2,993)||61,247||389||74,356|
|Return after tax||–||–||–||25,336||9,649||433||35,418|
|Net proceeds of share issues||1,301||11,774||–||–||–||–||13,075|
|Shares purchased for cancellation||(144)||–||144||–||(1,659)||–||(1,659)|
|At 31 March 2021||8,102||20,175||511||22,343||63,547||822||115,500|
*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 2022
|Year ended||Year ended|
|31 March 2022||31 March 2021|
|Cash flows from operating activities:|
|Return before tax||923||35,418|
|(Gain)/loss on disposal of investments||(4,491)||(8,998)|
|Movements in fair value of investments||2,265||(28,956)|
|(Increase)/decrease in debtors||1,619||(460)|
|Increase/(decrease) in creditors||(1,654)||1,690|
|Net cash outflow from operating activities||(1,338)||(1,306)|
|Cash flows from investing activities:|
|Purchase of investments||(16,414)||(9,973)|
|Sale/repayment of investments||27,840||18,917|
|Net cash inflow/(outflow) from investing activities||11,426||8,944|
|Cash flows from financing activities:|
|Issue of ordinary shares||1,984||13,427|
|Share issue expenses||(60)||(352)|
|Purchase of ordinary shares for cancellation||(1,388)||(1,659)|
|Equity dividends paid||(12,105)||(5,690)|
|Net cash inflow/(outflow) from financing activities||(11,569)||5,726|
|Increase/(decrease) in cash and cash equivalents||(1,481)||13,364|
|Cash and cash equivalents at beginning of year||28,567||15,203|
|Cash and cash equivalents at end of year||27,086||28,567|
INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2022
|Fifteen largest venture capital investments:|
|Evotix (formerly SHE Software Group)||2,518||5,395||5.1|
|Grip-UK (T/A Climbing Hangar)||3,213||3,213||3.1|
|Biological Preparations Group||2,166||1,947||1.9|
|Tutora (T/A Tutorful)||1,843||1,765||1.7|
|Project Glow Topco (T/A Currentbody.com)||1,544||1,544||1.5|
|Other venture capital investments||37,612||25,836||24.9|
|Total venture capital investments||60,238||68,656||65.9|
|Listed equity investments||6,549||7,932||7.6|
|Listed interest-bearing investments||1,326||1,290||1.2|
|Total fixed asset investments||68,113||77,878||74.7|
|Net current assets||26,976||25.3|
The board carries out a regular and robust assessment of the risk environment in which the company operates and seeks to identify new risks as they emerge. The principal and emerging 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 rules of the VCT scheme. 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 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. The level of economic risk has been elevated by the lingering impact of the COVID 19 pandemic, inflationary pressures, and conflict in Ukraine. 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 it is appropriate and in the interests of the company to do so. The manager typically provides an investment executive to actively support the board of each unquoted investee company. At all times, and particularly during periods of heightened economic uncertainty, the investment executives share best practice from across the portfolio with investee management teams in order to mitigate economic risk.
UK’s ongoing relationship with the European Union risk: following the UK’s withdrawal from the European Union in January 2020, the ongoing relationship is evolving which may impact on the trading activities of some investee companies. Mitigation: whilst we do not expect any significant impact on the operations of Northern 2 VCT itself, the board and the manager follow developments closely with a view to identifying changes which might affect the company’s investment portfolio. The manager works closely with investee companies in order to plan for a range of possible outcomes.
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 the conflict in Ukraine, terrorist activity or global health crises, such as the COVID-19 pandemic, 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 Mercia in the case of the 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 UK legislation 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 which is able to operate effectively even during times of disruption, such as that caused by COVID-19. 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.
The directors are responsible for preparing the annual report and 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 are required 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 these 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) use the going concern basis of accounting 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 its 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 complies 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 issuer, 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, Mr F L G Neale and Miss R Ramparia.
The above summary of results for the year ended 31 March 2022 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 profit after tax for the year of £923,000
(2021: £35,418,000) and on 162,327,382 (2021: 162,830,534) 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 2022 is based on the net assets of £104,854,000 (2021: £115,500,000) divided by the 162,907,914 (2021: 162,026,501) ordinary shares in issue at that date.
If approved by shareholders, the proposed final dividend of 1.6 pence per share for the year ended 31 March 2022 will be paid on 19 August 2022 to shareholders on the register at the close of business on 29 July 2022.
The full annual report including financial statements for the year ended 31 March 2022 is expected to be made available to shareholders on or around 8 July 2022 and will be available to the public at the registered office of the company at Forward House, 17 High Street, Henley-in-Arden B95 5AA and on the company’s website.
Neither the contents of the Mercia Asset Management PLC website, nor the contents of any website accessible from hyperlinks on the Mercia Asset Management PLC website (or any other website), are incorporated into, or form part of, this announcement.