Ordinary Shares Fund
The Directors, together with the Manager, have an agreed long term strategy for the Fund which includes the following four key objectives:
• Increasing and then maintaining the net assets significantly above £150 million
• Paying an annual dividend to shareholders of at least 5.0p per Ordinary Share and endeavouring to maintain, or increase, NAV per Ordinary Share year on year
• Completing a significant number of new and follow on qualifying investments every year
• Offering a programme of regular share buy backs at a discount in the region of 10%to the prevailing NAV.
Net Asset Value
Following a successful fundraising period at the end of the 2016/17 tax year, the net assets of the Ordinary Shares Fund increased to £140.4 million as at 31 December 2017, from £107.0 million as at 31 December 2016. It remains the Board’s belief that to support the other key objectives, it would be beneficial to increase the Fund’s net assets over the coming years. With some £61 million of funds currently available for investment, however, it is not the Board’s intention to raise more money in the near future.
During the year ended 31 December 2017 the net asset value (“NAV”) per Ordinary Share rose by 5.4p, representing an annual increase of 6.5%. After deducting the dividends of 9.0p per share paid during the year, NAV per Ordinary Share as at
31 December 2017 was 80.0p compared with 83.6p as at 31 December 2016.
In line with the objective of paying regular annual dividends of at least 5p per share, an interim dividend of 5.0p per Ordinary Share was paid on 3 April 2017 based on an ex-dividend date of 16 March 2017, with a record date of 17 March 2017.
Following successful sales of several portfolio investments, in particular Simulity Labs in July 2017, a second interim dividend of 4.0p per Ordinary Share was paid on 29 September 2017 based on an ex-dividend date of 14 September 2017, with a record date of 15 September 2017.
The Board is pleased to declare an interim dividend for the year ending 31 December 2017 of 5.0p per Ordinary Share, to be paid on 4 May 2018 based on an ex-dividend date of 19 April 2018, with a record date of 20 April 2018.
The Board notes that the Company has achieved its target of paying an annual dividend of at least 5p per share for each of the past seven years. During this period, however, the total return per Ordinary Share has remained relatively static, rising 5.4% from 207.5p per share on 1 January 2011 to 218.7p per share at 31 December 2017. It is this performance which the Board wishes to improve in future years.
Investment Performance and Portfolio Activity
A detailed analysis of the investment portfolio performance over the past year is given in the Manager’s Review. At the year end, the Fund held a diversified portfolio of qualifying investments in UK businesses, across a broad range of sectors.
The Board believes it is important for the long term performance of the Fund to identify a regular flow of new investments. The Manager completed eight new investments for the Fund during 2017. These new investments absorbed £17.6 million of funds held for investment and reflects the Manager’s success
in sourcing attractive growth capital investments in qualifying companies. The Board closely monitors the extent and nature of the pipeline of investment opportunities and anticipates that the Manager will be able to increase the level of new investments during 2018.
In July 2017, the Fund successfully sold three investments, generating total proceeds of £16.9 million compared to an original total investment cost of £8.0 million and a combined book value at date of disposal of £11.6 million. The sale of Simulity Labs is particularly pleasing since, after an investment period of only eight months, it generated a return of almost three times cost, with disposal proceeds of £11.4 million compared to an original investment cost of £4 million. In addition, following our year end, the deferred consideration for Simulity was received in full, generating a further £0.3m.
Since the end of the year, the Fund has sold ICA, generating proceeds of £1.3 million compared to an original investment cost of £0.9 million.
The Board took the opportunity to raise new funds in the Ordinary Shares Fund at the start of 2017. In just six weeks, £39.9 million of new capital was raised from new and existing shareholders. On behalf of the Board and the Manager, I would like to thank shareholders for their support. We believe that this demonstrates the improving investor support for the Ordinary Shares Fund and will assist the Fund to achieve its key objectives.
The Board appreciates that in order for the Fund to be able to achieve its key objectives, the Manager needs to source and complete attractive new qualifying investment opportunities. Over the past two calendar years, new investments have amounted to £22.4 million and at 31 December 2017, the Fund held £62 million
of funds available for investment. After allowing for a cash margin to meet annual operating requirements, the Board and the Manager believe that the Fund is well positioned to take advantage of attractive investments being sourced across the UK by the Manager for at least the coming 24 months.
During the year, the Company repurchased 2 million Ordinary Shares for cancellation at an average discount of 10.1%. The Board and the Manager consider that the ability to offer to buy back Ordinary Shares at a target discount in the region of 10% is fair to both continuing and selling shareholders, and is an appropriate way to help underpin the discount to NAV at which the Ordinary Shares trade.
Management Charges, Co-Investment and Incentive Arrangements
The annual management fee on the Ordinary Shares Fund is an amount equal to 2.0% of net assets, excluding cash balances above £20 million which are charged at a reduced rate of 1.0%. This has produced an ongoing charges ratio for the year ended 31 December 2017 of 2.2% of net assets, which is among the lower when compared to competitor VCTs.
The Board believes it to be advantageous to align, as far as may be practical, the interests of the Manager with those of shareholders. To that end, new co-investment and incentive arrangements were approved by shareholders on 8 March 2017. These oblige Foresight Group and individual members of their private equity team to
co-invest alongside the Ordinary Shares Fund in exchange for entitlement to performance incentive payments, which are subject to the achievement of ‘per investment’ and ‘fund as a whole’ performance hurdles. Details of these arrangements can be found in note 14 to the accounts.
Since March 2017, co-investments have totalled £0.3 million alongside the Company’s investment of £16.5 million. Currently the ‘fund as a whole’ threshold has not been achieved and no incentive payment is due.
The Board and the Manager intend to continue to build on the progress achieved during 2017. We believe that the investments currently held within the Fund should grow further through 2018 and that the current pipeline will provide worthwhile new investment opportunities in the months ahead. Provided the current level and quality of new investment is maintained, the Board believes that the Fund will be well positioned to meet its key objectives, providing shareholders with regular dividends and maintained capital growth.
Planned Exit Shares Fund
Following the full realisation of the Fund’s assets, a dividend of 7.71p per Planned Exit Share was paid on 29 December 2017 based on an ex-dividend date of 21 December 2017, with a record date of 22 December 2017. This brought the Fund’s total return for Shareholders to 82.71p, which represents a decrease of 0.2% on the total return per Planned Exit Share as at 31 December 2016 of 82.9p.
The original objective of the Planned Exit Shares Fund was to provide investors with a return of 110p per share through a combination of dividends and share buybacks by the sixth anniversary of the closure of the original offer, due in June 2016. The final outcome for Planned Exit Shareholders was very
far from that anticipated at its inception. The reasons have been summarised in previous annual reports during the life of the Fund. Both the Board and the Manager recognise that the final return represented poor overall performance and regret that this was significantly behind the original target.
Infrastructure Shares Fund
Following the full realisation of the Fund’s assets, a dividend of 93.05p per Infrastructure Share was paid on 29 December 2017 based on an ex-dividend date of 21 December 2017, with a record date of 22 December 2017. This brought the Fund’s total return for Shareholders to 115.05p, which represents an increase of 10.9% on the total return per Infrastructure Share as at 31 December 2016 of 103.7p. While behind the return objectives contained in the original prospectus, the Board believes the overall performance of the Infrastructure Shares Fund to be reasonable, particularly when viewed against the background of significant changes in both market conditions and VCT qualification rules during the life of the Fund.
This total return is net of a performance incentive fee paid to the Manager in accordance with the arrangements set out in the prospectus. Details of these arrangements can be found in note 14 to the accounts.
The Board regularly reviews its own performance and undertakes succession planning to maintain an appropriate level of independence, experience and skills in order for it to be in a position to discharge its responsibilities. Peter Dicks, a founder member of the Board and a past Chairman, has served the Company with great commitment and distinction throughout this period. He has, however, decided to retire at this year’s Annual General Meeting.
After commissioning an independent professional search, the Board was delighted to secure the services of Margaret Littlejohns as a Director of the Company. Margaret, who was appointed a Non-Executive Director of the Company in October last year, is an experienced fund director. She currently sits on the Boards of the Henderson High Income Trust, JPMorgan Mid Cap Investment Trust and UK Commercial Property Trust. Her earlier career was largely with Citigroup followed by a period from 2004 during which, with her husband, she set up and ran a self storage business which she successfully sold in 2016. A short biography of each of the Directors is contained on pages 32 to 34.
Annual General Meeting
The Company’s Annual General Meeting will take place on 22 May 2018 at 2.00pm. I look forward to welcoming you to the Meeting, which will be held at the offices of Foresight Group in London. Details can be found on page 78.
10 April 2018
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