FORESIGHT VCT PLC
• Total net assets £136.7 million.
• A final dividend of 3.3p per share was paid on 19 June 2020, costing £6.8 million.
• The portfolio has seen a decrease in valuation of £13.2 million in the last six months.
• Net Asset Value per share decreased by 14.0% from 76.5p at 31 December 2019 to 65.8p at 30 June 2020. Including the payment of a 3.3p dividend made on 19 June 2020, NAV total return per share was 69.1p, representing a decrease in total return of 9.7%.
• The offer for subscription launched in January 2020 was closed on 7 April 2020 and raised a total of £24.8 million before expenses.
I am pleased to present the Company’s Unaudited Half- Yearly Financial Report for the period ended 30 June 2020.
MATERIAL EVENTS DURING THE PERIOD
Before providing other details, I would like to draw attention to the two material events that have occurred during the period. The first is the continuing impact of Covid-19 on the Company and its portfolio and the second is the Company’s fundraising which closed on 7 April this year.
The Covid-19 virus has presented the Company and the management of every one of its portfolio companies with unprecedented challenges which it is anticipated will persist for a considerable time to come. The Manager has been working closely with the portfolio companies, in order to try to minimise any adverse impact of this virus, and it is a great credit to the quality of the management of the portfolio companies, that the fallout from the pandemic has not been even more significant. Until this virus is brought under worldwide control, it is impossible to assess its full impact. However, it is already clear that the value of every business in the Company’s portfolio has been materially affected, a minority have benefitted but most have not.
At the end of last year the Company held 13 investments, representing some 22% by value of its investment portfolio, in businesses involved in the travel, retail, entertainment and food and drink sectors. To date these sectors are amongst those most hard hit by the provisions of the lockdown imposed by the UK Government in response to the Covid-19 virus. I am pleased to report that since the recent easing of the lockdown provisions all the Company’s investments in these sectors are continuing to trade and, with one possible exception, they are already pursuing revised business strategies which hold the potential for a return to commercial viability in the short to medium term. It will, however, be some time before the value of most of these businesses is again at or above their pre-Covid levels.
The overall impact of the Covid virus during the first six months of this year can be seen in the material fall in the valuation of the Company’s portfolio. On a positive note, I can say that since the period end the trading position of many of these businesses has improved, some quite significantly. On behalf of the Board I would like to thank the Manager for the considerable work which it has done and is continuing to do alongside the management teams at each and every one of the companies within the portfolio.
At the start of this year some 90% of the Company’s assets were already invested and the Board believed it would be in the Company’s best interest to raise further funds to provide liquidity for its activities over the coming year and beyond. Despite the difficulties created by Covid-19, the Board is pleased that the Company was successful in raising additional funds to support both its current and future portfolio of investments. The Company closed its offer for subscription on 7 April and raised £24.8 million before expenses. The majority of the funds received were subscribed in the final allotments totalling £18.6 million, which took place on 3 April and 14 April based on a NAV of 66.5p per share, which compared with the NAV at the end of last year of 76.5p per share.
The Board, together with the Manager, continue to pursue a strategy for the Company which includes the following four key objectives:
• further development of the net assets of the Company to a level in excess of £150 million;
• payment of an annual dividend to shareholders of at least 5% of the NAV per share and at the same time endeavouring to maintain the NAV per share at around its current level;
• the implementation of a significant number of new and follow on qualifying investments every year; and
• maintaining a programme of regular share buy backs at a discount in the region of 10% to the prevailing NAV per share.
The Board and the Manager believe that these key objectives remain appropriate and the Company’s performance in relation to each of them over the period is reviewed more fully below.
NET ASSET VALUE
At 30 June 2020 the NAV of the Company stood at £136.7 million (31 December 2019: £133.1 million). The successful fundraising completed during the period under review added £24.2m to the NAV.
However, in the six months to 30 June 2020 the NAV per share decreased by 14.0% from 76.5p at 31 December 2019 to 65.8p at 30 June 2020. Including the payment of a 3.3p dividend made on 19 June 2020, which is detailed below, NAV total return per share was 69.1p, representing a decrease in total return of 9.7%.
The final dividend of 3.3p per share was paid on 19 June 2020 based on an ex-dividend date of 4 June 2020, with a record date of 5 June 2020. The total cost of this dividend was £6.8 million, including shares allotted under the dividend reinvestment scheme.
The total return per share from an investment made five years ago would be 3.7%, which is materially below the target return set by the Board. It is the future achievement of this target that is at the centre of the Company’s current and future portfolio management strategy.
INVESTMENT PERFORMANCE AND PORTFOLIO ACTIVITY
A detailed analysis of the investment portfolio performance over the period is given in the Manager’s Review.
The Company started the current period with nearly 90% of its assets invested in a range of unquoted growth capital investments; the Board and the Manager believe that despite recent events more fully described above, the majority of these investments will continue to mature and help improve the future rate of growth in NAV. During the period under review the Manager made no new investments, as it focused on supporting the current portfolio during the ongoing Covid-19 Coronavirus outbreak.
The Company and Foresight 4 VCT plc have the same Manager and share similar investment policies. The Board closely monitors the extent and nature of the pipeline of investment opportunities and is reassured by the Manager’s confidence in being able to deploy funds without compromising quality during 2020 and beyond, so as to be in a position to satisfy the investment needs of both companies. We do however anticipate that the impact of Covid-19 will continue to slow down the new investment process and will delay at least some of the anticipated realisation dates of existing investments.
During the period the Company repurchased 2.4 million shares for cancellation at an average discount of 9.9%. The Board and the Manager consider that the ability to offer to buy back shares at a target discount of approximately 10% is fair to both continuing and selling shareholders and is an appropriate way to help underpin the discount to NAV at which the shares trade. Share buybacks are timed to avoid the Company’s closed periods and will usually take place, subject to demand, during the following times of year:
• April, after the Annual Report has been published;
• June, prior to the Half-Yearly reporting date of 30 June;
• September, after the Half-Yearly Report has been published; and
• December, prior to the end of the financial year.
MANAGEMENT CHARGES, CO-INVESTMENT AND INCENTIVE ARRANGEMENTS
The annual management fee 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%. With the unforeseen impact of Covid-19, this has resulted in an ongoing charges ratio for the period ended 30 June 2020 of 2.4% of net assets, which is within the 2.4% cap. In line with the Management Agreement, any rebate for expenses above the expense cap will be assessed at the year end.
Since March 2017, co-investments made by the Manager and individual members of the Manager’s private equity team have totalled £0.7 million alongside the Company’s investments of £48.1 million. Under the terms of the Incentive Arrangements, the ‘Total NAV Return Hurdle’ has not yet been achieved and no performance incentive payment is due.
Recognising the importance of protecting shareholder interests the Board and the Manager agreed that it was appropriate to update the Incentive Arrangements and from 27 January 2020 a change to provide for an annual increase to the Total Return Hurdle (originally 100p) by the greater of RPI or 3.5% was added to the requirements.
The Board continues to review its own performance and undertakes succession planning to maintain an appropriate level of independence, experience, diversity and skills in order to be in a position to discharge all its responsibilities. It is not the present intention to alter the composition of the Board during the current year, however the Nomination Committee is embarking on the process of seeking a new non-executive director for appointment during 2021 and details will be communicated as and when appropriate.
As a result of the travel restrictions imposed due to Covid-19, the Manager’s popular investor forums have been temporarily put on hold. Once it is possible to do so, details of both a London event and regional events will be sent to shareholders resident in the locality as and when they are organised. The Manager held an investor webinar on 25 August 2020, details of which had been previously communicated to investors. It is the intention of the Manager to continue to hold investor webinars whilst the investor forums are on hold and details of any future events will be communicated to investors.
The persisting uncertainty over the full impact of Covid-19 and the negotiations in relation to Brexit create truly exceptional challenges for every business. The Company invests primarily in developing companies which by their nature benefit from general economic growth and the current environment places considerable demands upon them and their management teams. The Manager’s private equity team is well aware of the management and business needs of each of the companies within the investment portfolio and is working closely with them to help them progress during these testing times. Until the pandemic is brought under worldwide control there will inevitably be further, mainly unhelpful, implications for many UK based businesses. Notwithstanding this, the Board and the Manager have been impressed by the resilience shown by the significant majority of the Company’s investments and are optimistic that the existing portfolio has potential to add value once the virus has been successfully contained.
Telephone 01296 682751
4 September 2020