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|
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.