"Despite the setbacks in the environmental sector, Foresight Group remains
positive about the prospects for a number of the remaining investments in this
In the year to 31 March 2016, the net asset value per Ordinary Share decreased by 11.3% to 70.4p from 83.9p at 31 March 2015, after allowing for the 4.0p per share dividend paid in December 2015.
Overall, the Board is pleased with the composition of the portfolio, particularly the prospects for the recent addition of seven new investments for a total consideration of £7.2 million. Of these new investments made during the year, several are already making encouraging progress, particularly Itad and Specac. Reflecting the Board and Manager’s confidence in the current portfolio, the performance in the last quarter of the year under review showed an increase in underlying NAV of 2.5%. We believe the portfolio is well placed to deliver growth, underpin future dividends and enhance shareholder returns.
The overall fall in the year is, however, disappointing and was largely due to the performance of one portfolio company, Aerospace Tooling, which saw a reduction or delay in orders as some of its customers were severely impacted by the significant drop in the price of oil. Although it did not feel the impact as acutely as Aerospace Tooling, TFC Europe also suffered a drop in revenues from market driven factors related to the fall in the price of oil. Aerospace Tooling was reduced by £4.6 million or 7.9p per share. Some encouraging progress has been made in winning orders and acquiring new customers but this process and the related sales cycles inevitably takes time. A new, experienced, CEO was appointed in January 2016 and the company is now returning to profitability. Despite the further provisions against the valuation following the period of sustained difficult trading conditions, I would like to remind Shareholders that the Company has previously repaid the entire cost of the original investment to the VCT.
Derby-based Datapath Group is the largest holding in the portfolio, being valued at £8.7 million and is a world leading innovator in the field of computer graphics and video-wall display technology utilised in a number of international markets. The company is increasing market share in control rooms, betting shops and signage and entering other new areas such as the medical market. For the year to 31 March 2015, an operating profit of £6.8 million was achieved on sales of £20.3 million, with the North American division trading ahead of budget. The Board and Manager continue to focus on derisking large portfolio exposures such as Datapath and, in November 2015, Datapath paid a special dividend of £2.1 million to the Company. This was met principally from the company’s own cash resources and management loans which are expected to be repaid from internally generated cash flow over the next year.
Please click here for the full report.
Prior to the merger, on 6 August 2015, a special dividend of 25.0p per C Share was paid to C Shareholders, following good performance of the portfolio including the sale of Defaqto Group Limited on 30 March 2015 for £9.5 million, as announced on 31 March 2015. Holders of C Shares receiving this dividend were also given the opportunity to reinvest their dividend proceeds into new Ordinary Shares by way of a
top up offer.
An interim dividend of 4.0p per Ordinary Share for the year ended 31 March 2016 was paid on 18 December 2015 to the Shareholders on the register on 3 December 2015. It continues to be the Company’s policy to provide a flow of tax-free dividends, generated from income and from capital profits realised on the sale of investments. Distributions will, however, inevitably be dependent on cash being generated from portfolio investments and successful realisations.
The recent and continuing success in generating cash from portfolio investments within the fund gives the Board confidence that it will be able to maintain the future payment of dividends to Shareholders.
Merger, Top-up Share Issues and Share Buy-backs
On 10 August 2015 the O and C share funds were merged, based on the net asset value of the Company’s C Shares as at 31 March 2015 of 85.8p per C Share (being the audited NAV per C Share of 110.8p as at 31 March 2015, adjusted to take account of the 25.0p per C Share dividend paid on 6 August 2015) and the NAV of the Company’s Ordinary Shares as at 31 March 2015 of 83.9p. The conversion ratio was 1.022646. On the basis of this conversion ratio, 19,101,896 new Ordinary Shares were allotted.
In accordance with the terms of the dividend reinvestment offer referred to above, on 11 August 2015, 423,717 Ordinary Shares were allotted at 83.9p per share.
During the period under review 434,528 Ordinary Shares were repurchased for cancellation at a cost of £266,000. These were purchased at a discount to NAV ranging from 20.9% to 30.1%.
As part of its ongoing commitment to improving shareholder communication the Board has solicited shareholder views by means of a survey in 2016 and has also held a successful Shareholder Forum in June 2016. As the event was oversubscribed we will be in touch later this year about opportunities to attend similar events.
As previously discussed, changes to VCT regulations were finally confirmed on 18 November 2015. There were no material changes to those detailed in my interim report. One of the principal purposes of the
changes was to prevent VCT investment being used to acquire existing shares or the principal trade or assets of businesses.
The key aspects of the proposed new rules are as follows:
- Introducing an ‘age of company’ restriction of a maximum of
seven years at the time of first VCT investment;
- Introducing a lifetime state aided investment limit of £12 million;
- Prohibiting VCT investment financing acquisitions (as mentioned
Although the recent rule changes preclude VCTs investing in replacement capital transactions, the Treasury and HMRC have since agreed to review this policy following representations from inter alia the British Venture Capital Association, the Association of Investment Companies, a number of legal firms and VCT managers, including Foresight Group.
Rather than an absolute restriction on replacement capital transactions, this review will consider relaxing the current rules to enable VCTs to invest an element of replacement capital alongside a significant element of growth capital in any particular transaction, possibly up to a maximum of 50% of the total amount invested. Agreement for the change is currently expected to take up to two years and shareholders will be kept informed of any significant developments.
If concluded satisfactorily, the range of potential investment opportunities for VCTs would be widened, compared to the more restrictive regime that currently applies.
There are two principal areas where the implementation of Brexit could impact the VCT:
- Investee Companies – there has been much debate on the possible impact on trade between Europe and the UK following the Brexit vote and how this will impact UK corporates. Although it is much too early to say how large or small the impact may ultimately be, we do not believe that the impact will be material in the short to medium term; and
- Regulation – many parts of the current VCT legislation has been cast from EU State Aid Directives, however, we do not believe that even following Brexit that changing VCT legislation will be a priority for the UK Government and therefore we do not expect any changes to the existing legislation in the short to medium term.
The Board has been closely monitoring the successful merger of Foresight VCT plc and Foresight 2 VCT plc following Shareholder approval in December 2015. Although the Board has not formally engaged with another company at this time, it is considering whether a merger and the benefits therefrom would be in Shareholders long term interests and hopes to provide a further update in that regard in due course.
Restatement of reserves
The Company completed a cancellation of £30,963,251 and £1,750,587 of the amounts standing to the credit of share premium account and capital redemption reserve respectively on 29 November 2012. The amounts so cancelled created additional distributable reserves which could be used to support dividend payments or distributions, buy-backs, set off losses against and for other corporate purposes. The cancellation has not been reflected in the financial statements for the years ended 31 March 2013 to 31 March 2015 and has now been corrected in the enclosed financial statements.
Annual General Meeting
The Company’s Annual General Meeting will take place on 30 September 2016 at 1.00pm. I look forward to welcoming you to the Meeting, which will be held at the offices of Shakespeare Martineau LLP in London. Details can be found on page 62 of the Annual Report and Accounts.
Prior to the formal business of the Annual General Meeting, Foresight Group, the investment Manager and two investee companies will give presentations between 12.00pm and 1.00pm.
Although there is still considerable uncertainty in continental Europe as a result of stresses within the Euro area the UK economy is in reasonable health and many businesses are making steady progress. The recent decision resulting from the referendum on 23 June, for the UK to begin negotiations to leave the European Union has also given rise to further uncertainty and it will take time to gauge the full effect that this may have for the Company. Many of the familiar risks, both financial and political, remain and there can be no grounds for complacency as all of our investments operate in competitive environments.
We hope that the effect of the improvement in the economy over the last few years continues, as this has been reflected in the improving performance of the private equity part of the portfolio. Within the portfolio, there is an ongoing focus on performance and realisations refinancings, dividends and loan repayments which underpin the Board’s dividend commitment to Shareholders. It has also enabled several new investments to be made which we anticipate will further enhance Shareholder returns.
29 July 2016