Latest Investment Manager's Report

Performance during the period

Ordinary Shares Fund

The net asset value per Ordinary Share increased by 2.4% (after adding back the interim dividend of 7.0p per Ordinary Share paid on 1 April 2016) to 82.6p per share as at 30 June 2016, from 87.5p at 31
December 2015. The Ordinary Shares fund benefitted during the period from good performances by several portfolio companies, most notably Datapath, Protean and Specac which performed particularly strongly, resulting in an increase in their aggregate valuation of £4.7 million, or 4.1p per share.

Having completed seven investments during the previous year, the Ordinary Shares fund continues to focus on new opportunities.

However, uncertainty following the recent changes to VCT rules and more recently the EU referendum have delayed completing further deals. We are currently in exclusivity and in due diligence on two new investments for the Ordinary Shares fund with offers on funding under negotiation on several other investments.

Further details can be found in the Ordinary Shares Portfolio Review later in this report.

Planned Exit Shares Fund

The net asset value per Planned Exit Share increased during the period to 30 June 2016 by 23.9% to 45.6p per share from 36.8p at 31 December 2015. This reflected the successful sale of Trilogy

Communications Limited after the period end, providing an uplift of over £1.3 million for the fund. We are working to realise the two remaining investments. Further details can be found in the Planned Exit Shares Portfolio Review later in this report.

Infrastructure Shares Fund

During the period, the net asset value per Infrastructure Share increased by 1.3% (after adding back the 2.5p interim dividend paid on 11 March 2016) to 91.1p per share as at 30 June 2016, from 92.4p at 31 December 2015.

On 1 July 2016, the Infrastructure Shares fund successfully completed the sale of FS Pentre Limited, the holding company of the Pentre solar farm project, for £4.3 million which represented a premium of £0.4 million above book value.

The portfolio which, following the Pentre sale comprises investments in three ground mounted solar plants and eight operating PFI projects in the health and education sectors, performed in line with expectations during the period.

Further details can be found in the Infrastructure Shares Portfolio Review later in this report.

Fund raising for the Ordinary Shares Fund

We continue to see a number of high quality private equity investment opportunities. In order to take advantage of current opportunities, on 18 January 2016, the Board launched a full prospectus to raise up to £30 million through the issue of new Ordinary Shares. The issue has been well received by both new and existing investors, with £25.3 million raised through the issue of 27.5 million new Ordinary Shares in the period. The offer currently remains open.

We believe that, with the UK and US economies slowly recovering and reducing UK uncertainty post Brexit, investing in growing, well managed private companies in this phase of the economic cycle should, based on past experience, generate attractive returns over the longer term.

Consequential Changes to certain Infrastructure Share Class investments

A consequence of the merger of the Company and Foresight 2 VCT in December 2015 meant that the Infrastructure Share Class had

controlling positions in four of its five qualifying investments. Under VCT rules, the Company benefits from a 12 month grace period within which to reduce its holdings in each asset to below 50% which could be achieved through partial or full disposals by December 2016.

On 1 July 2016, the Infrastructure Shares fund successfully completed the sale of FS Pentre Limited, the holding company of the Pentre solar farm project, for £4.3 million which represented a premium of £0.4 million above book value. Pentre was sold to another Foresight managed investment vehicle for an attractive premium reflecting an independent third party valuation. Pentre was one of the qualifying investments in which the Company held a controlling position.

The whole or part disposal of three of the remaining qualifying holdings is likely to be made to either a third party investor or to another fund managed by Foresight Group at an independently verified valuation. In order to continue to generate yield, any such part disposals would be expected to take place towards the end of 2016.

To bring the VCT’s holding down to 49.9% or less of each investment and satisfy this control test, a whole or part disposal of each of the three remaining controlled investments is required, as set out in the table below.

Estimated value to be disposed as at 30 June 2016:

Investee Company Holding (£)
Fully Diluted Ownership
Required Disposal (£)
FS Hayford Farm Ltd 2,785,424 55% 241,958
FS Tope Ltd 2,763,548 87% 1,160,341
Drumglass HoldCo Ltd 3,424,163 79% 1,244,803
Total     2,647,102

The Board and Manager have given consideration to other current investment opportunities and whether any sale proceeds should be reinvested or paid out as dividends to Shareholders, and concluded that any sales proceeds should (subject to VCT implications for both the Company and Shareholders and any other statutory and regulatory constraints) be paid out as dividends to Shareholders. The rationale behind this decision is that the asset type which can be held within the fund is of a nature suited to longer term investment and the Board and Manager believe that Shareholders individually are in the best position to decide on what form of future investment is most suited to their needs.

Shareholders are, therefore, likely to receive back a substantial proportion of their investment sooner than originally anticipated, and the total return from an investment in the fund is expected to be lower because of the shorter period that a part of their funds would be earning a return from infrastructure investments.

Impact of recent changes to VCT legislation

The budget in July 2015 introduced a number of significant changes to VCT legislation. Following EU State Aid approval, these regulatory changes took effect from 18 November 2015, the date of Royal Assent to the Finance Act 2015. Two of these changes in particular are expected to impact the future management of all VCTs. First the restriction on the age of a company that is eligible for investment by a VCT (generally no more than seven years from the date of the company’s first commercial sale) and second, restrictions on VCT funds being used in acquiring an interest in another company or existing business. By precluding replacement capital transactions, such as shareholder recapitalisations, management buy-outs and buy-ins and funding acquisitions by investee companies, the restrictions are designed to encourage more development capital transactions and investment in generally younger, less mature companies.

The Foresight VCTs already invest in all these types of transactions so, although the proposed changes will result in a change of investment emphasis, they are not expected to have a material impact. Foresight VCTs will continue to focus on investing in established, growing, profitable companies with an attractive risk/return profile. The emphasis will change from replacement capital transactions to development capital investments, including investing in earlier stage companies with a clear path to profitability. It will not be the policy, except in exceptional circumstances, to invest in start-up companies.

Foresight Group has a strong track record in development capital transactions, having invested in both growth capital and replacement capital transactions since its formation over 30 years ago. For example, 40% of all investments made since 2010 were development capital transactions. Since then, 14 of these investments have been successfully realised, generating an average return of 2.2 times original cost.

With this long, successful, track record, Foresight’s marketing efforts have already been refocused towards finding more suitable, later stage development capital investment opportunities, with the aim of accelerating their growth. A number of such opportunities are currently under active consideration. Foresight Group remains confident that sufficient, suitable, new and attractive investment opportunities can be sourced which will meet its return criteria and comply with the VCT rules.

While all the implications of the new rules have yet to be clarified, it is clear that, over the medium term, as existing investments are realised, the change in investment emphasis and the nature of new investments will lead to an increase in the VCTs’ risk profile. Over the medium term, however, any such increase in risk profile could be tempered by a favourable outcome to the proposed VCT policy review, as mentioned below. The rule changes will, however, make the VCTs’ operating environment more complicated and could limit the number of opportunities available for investment. Similarly, the Company may not necessarily be able to provide further investment funds for companies already in its portfolio.

Proposed VCT Policy Review

Although the recent rule changes preclude VCTs investing in replacement capital transactions, the Treasury and HMRC have agreed to review this policy following representations from inter alia the British Venture Capital Association, the Association of Investment Companies and a number of legal firms. We hope that in due course the current rules to enable VCTs to invest will be relaxed to allow an element of replacement capital alongside a significant element of growth capital in any particular transaction. At this early stage, it is not possible to forecast the ultimate outcome of the review and Shareholders will be kept informed of any significant developments.

If this review concludes satisfactorily, the range of potential investment opportunities for VCTs would be widened, compared to the more restrictive regime that currently applies.

Click here to see a more in depth portfolio review.

Restricted Disclaimer

Terms and Conditions

Please read this important information before accessing the website.
These Terms and Conditions were last revised in December 2015.

Please Scroll Down to Accept These Terms

About Us

The information contained on these website pages (this "Site”) is communicated and issued by Foresight Group LLP and Foresight Group CI Limited (details below) in accordance with the following terms and conditions. By accessing any part of this Site, you will be deemed to have accepted these Terms and Conditions in full. If you do not accept these Terms and Conditions please do not continue to access this Site.


Foresight Group LLP

Foresight Group LLP is authorised and regulated by the Financial Conduct Authority ("FCA”). FCA firm reference number 198020. The website of the FCA can be accessed at www.fca.org.uk.

Foresight Group LLP is a limited liability partnership incorporated in England and Wales (registered number 0C300878). Its registered office is at The Shard, 32 London Bridge Street, London, SE1 9SG.


Foresight Group CI Limited

Foresight Group CI Limited is licensed by the Guernsey Financial Services Commission (reference number 2006518) to undertake controlled investment business as defined in The Protection of Investors (Bailiwick of Guernsey) Law 1987.

Foresight Group CI Limited is a private company registered in Guernsey (registered number 51471). Its registered office is Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 2HT.

Save as mentioned below, references to "Foresight”, "Foresight Group”, "The Manager”, "we” and "our” are to Foresight Group LLP and/or Foresight Group CI Limited as the context dictates.


Intended Audience and Purpose of Information

The information contained within this Site does not constitute an offer to invest or an invitation to apply for securities:

The information has been issued and approved by Foresight Group LLP and Foresight Group CI Limited and does not in any way constitute investment, tax, legal or other advice. Investors should not rely on any information or opinions contained in this Site in making an investment or other decision but should obtain appropriate and specific professional advice.

Nothing contained on this Site constitutes or should be construed to constitute investment, legal, tax or other advice. The information contained on this Site shall in no way be construed to constitute a recommendation with respect to the purchase or sale of any investment.

The website is provided for the main purpose of providing generic information on Foresight Group LLP and Foresight Group CI Limited and on the products and funds we currently manage. Persons accessing specific information about the funds and investment products referred to on this website are strongly advised to refer to the relevant terms and conditions of access, including any relevant risk warnings and disclaimers, and in the event that they do not accept them, should not proceed to access the material to which they are applicable.

Certain products or investment services managed by Foresight are not generally considered suitable for private investors. Therefore, certain areas of the website are password protected or require additional confirmation that you are an appropriately experienced or qualified investor. This website also contains links that lead to other websites. These links are provided solely for your convenience and do not constitute any endorsement, sponsorship or approval of the materials appearing in such sites.

You should note that investment in any of the Foresight Funds or Foresight Products should ONLY be made on the basis of reading any applicable Documentation (including any Brochure, Fund Prospectus, Offer Documents and Disclosure Documentation) or Terms and Conditions of Investment as appropriate.


Risk Factors

The following list of risk factors is provided as an indication of the variety of risks which exist with investment in the funds and products featured on this website ("Foresight Funds”, "Foresight Products”). Not all risks as stated will necessarily apply to each of the Foresight Funds or Foresight Products. Investors' attention is nevertheless drawn to these risks as investments in the Foresight Funds or Foresight Products may not be suitable for all investors.

Risks Applicable to All Foresight Funds and Products


Risks Applicable to Venture Capital Funds (VCTs)

Existing and prospective investors should consider carefully the following VCT-specific risk factors. If any of the risks described below were to occur, it could have a material effect on a VCT's business, financial condition or results of operations. The risks and uncertainties described below are not the only ones that VCT and investors may face. Additional risks not currently known to the Foresight, or that the Foresight currently believes are not material, may also adversely affect its business, financial condition and results of operations and those of the VCTs it manages or operates. The value of shares in Foresight Funds could decline due to any of these risk factors, and investors could lose part or all of their investment.

Prospective investors should be aware that the value of shares and the income from them can fluctuate and that they may not get back the amount they invested. In addition, there is no certainty that the market price of a VCT's shares will fully reflect the underlying net asset value of the VCT in question, that shareholders will be able to realise their shareholding, or that dividends will be paid. Investment in a VCT should be seen as a long term investment. Investors who are in doubt should consult their independent financial adviser. The attention of prospective investors is drawn to the following risks:


Disclaimers and Exclusion of Liability

Foresight Group LLP and Foresight Group CI Limited act for the funds and clients they manage or advise and not for anyone else. They will not act for, advise or be responsible for providing the protections afforded to their customers to anyone other than such funds and clients. Entrepreneurs and others working for Foresight should be aware of this and should not expect that they will be treated as customers of Foresight.

Please do not send us any confidential or proprietary material using this website and without first contacting us as we do not agree to obligations of nondisclosure or non-use of material which is sent to us. We receive numerous business plans and other proposals, and reserve the right to review only those which appear to us to fit our investment criteria from time to time and to reject proposals without giving a reason or returning material sent to us. We are not restricted in any way from pursuing opportunities with others. Foresight and funds and clients under its management or advice invest in many companies, some of which may compete with one another.

Whilst we aim to update the Site regularly, its content is provided in good faith "as is” for information purposes only with no representation or warranty, express or implied by Foresight or by any of its members or employees as to its accuracy or completeness or that it is up to date, and it should not be relied on as such.

To the fullest extent allowed by law, Foresight and its members and employees shall not be liable, whether in tort (including negligence) or otherwise howsoever, for any losses, damages, costs or expenses of whatever nature (including (without limitation) any consequential, indirect or unforeseeable loss or loss of bargain, opportunity or profit) incurred or suffered by you or any third party arising out of or in connection with the access to or use of, or linking to other Sites from, this Site or reliance on any information contained on this Site. Nothing in this legal notice shall limit our liability for death or personal injury resulting from any negligence of Foresight.

Nothing in this legal notice excludes or restricts any duty or liability that Foresight may have under the regulatory system (as defined in the glossary to FCA's Handbook of Rules and Guidance) and which may not be excluded or restricted thereunder.


Intellectual Property Rights

All intellectual property rights in the Site are owned or licensed by Foresight and are protected by law. We reserve all such rights save that you may print off and download extracts from any part of the Site for your personal reference or to bring to the attention of others within your organisation. You may not use any illustrations, photographs, video or audio sequences or any graphics separately from any accompanying text and the status of Foresight Group LLP, Foresight Group CI Limited and our contributors as the authors of material on the Site must always be acknowledged. You may not modify or use any content from the Site for commercial purposes without obtaining a licence to do so from us or our licensors.


Content and Access

We may withdraw or change Site content at any time without notice and, if the need arises, we may suspend access to the Site, close it indefinitely or restrict access to users who have registered with us.

You agree to treat any user identification code, password or other piece of information used as part of our security procedures as confidential and not disclose it to any third party. We may disable your access if in our opinion you have failed to comply with any of these Terms and Conditions.


Your information, Privacy and Cookies

Any personal data provided by you through this site is accurate to the best of your knowledge and you consent to us processing such information for the purpose you have requested. We will process such information only for this purpose.

The Site does not automatically capture or store your personal data, other than to record your IP address and session information (such as the duration of your visit and the browser used) for administration and compilation of Site use statistics.


Links

Links to other websites and resources provided by third parties are provided for your information only; we have no control over the contents of those sites or resources, and accept no responsibility for them or for any loss or damage that may arise from your use of them.

You may link to the Site home page, provided you do so in a way that is fair and legal and does not damage or take advantage of our reputation, or suggest any form of association, approval or endorsement on our part where none exists. You may not create a link to any part of the Site other than the home page, establish a link from any website that is not owned by you or frame the Site in any other website. We reserve the right to withdraw linking permission without notice.
If you wish to make use of material on the Site other than that set out above, please address your request to Marketing department, Foresight Group LLP, The Shard, 32 London Bridge Street, London, SE1 9SG.


Viruses

We will not be liable for any loss or damage caused by a distributed denial-of-service attack, virus, worm, Trojan horse or other harmful material that may infect your computer equipment, computer programs, data or other proprietary material due to your use of the Site or to your downloading of any material from it.


Governing Law

This Site including these Terms and Conditions and all matters arising from or connected with them shall be governed by and construed in accordance with English law and shall be subject to the exclusive jurisdiction of the English courts.


Variations

Some of these Terms and Conditions may be superseded by specific provisions published elsewhere on the Site. We reserve the right to vary these terms from time to time by amending this page and you should check it from time to time to note any changes made.


Contact Details for Further Information and Queries

If you have any queries regarding this website, or would like further information about Foresight Group, you may send an email to info@foresightgroup.eu or telephone 020 3667 8100. Full contact details for Foresight Group are available on the "Contact Us" page of this website.