Annual Financial Report for the Period Ended 31 March 2023

15 JUNE 2023

NORTHERN VENTURE TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE PERIOD ENDED 31 MARCH 2023

Northern Venture Trust PLC is a Venture Capital Trust (VCT) whose investment adviser is Mercia Fund Management Limited. The trust was one of the first VCTs launched on the London Stock Exchange in 1995. It invests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.

This report covers the eighteen month period to 31 March 2023.

Financial highlights (comparative figures as at 31 March 2022 and 30 September 2021):

*Excluding proposed final dividend payable on 18 August 2023 
** Based on net asset value per share at the start of the period 

Enquiries:
James Sly / Sarah Williams, Mercia Asset Management PLC – 0330 223 1430
Website: www.mercia.co.uk/vcts/nvt/

CHAIR’S STATEMENT

Overview
Following our change of year end from 30 September to 31 March, this report covers the 18 months ended 31 March 2023.

A great deal has changed in the UK’s macroeconomic climate over the past 18 months. At the start of the period, the impact of COVID-19 lingered over supply chains, and as the period progressed the rate of inflation increased rapidly, as did interest rates. This has not come without its challenges to the portfolio, and while our investment adviser has spent considerable time working with management teams, our portfolio valuations in this report reflect how the financial markets have shifted over this period, in particular the re-rating of technology-based and consumer-facing stocks.

Against this backdrop, the portfolio has remained relatively robust, with few failures, and there have been several strong realisations in the past 18 months. The Company has also experienced a record investment period, with £25.0 million deployed including £17.0 million into new opportunities.

The Company raised £12.0 million before fees in the period from two separate offers and intends to raise further funds in the 2023/24 tax year to enable us to continue to invest over the next three years.

Results and dividend
In the 18 months ended 31 March 2023 the Company suffered a negative return on ordinary activities of minus 6.0 pence per share (year ended 30 September 2021: gain of 13.9 pence), representing a total return of minus 8.1% on the opening net asset value (NAV) per share. The majority of this reduction can be attributed to just two holdings, musicMagpie and Oddbox, which over the period saw reductions in their holding values due to poorer than expected trading and the change in market sentiment towards consumer facing companies. The NAV per share as at 31 March 2023, after deducting dividends paid during the period of 6.0 pence, was 62.1 pence, compared with 74.1 pence at 30 September 2021.

Investment income was lower than the prior year at £0.9 million (2021: £1.4 million), reflecting the move away from income-yielding investments as the portfolio mix continued to pivot towards earlier stage ventures. However, after more than a decade of record-low interest rates, the Company has recently allocated part of its liquidity to a money market fund to diversify its risk and seek a higher return compared to that which is available from traditional banks; this will increase investment income over the coming financial years for as long as interest rates remain higher.

In 2018 we revised our dividend policy in the light of the new VCT rules for investment introduced in 2015 and 2017, which we expected to result in more volatile returns. We introduced an annualised target dividend yield of 5% of opening NAV, which has been exceeded in every period since.

After careful consideration, the Board has proposed a final dividend of 2.0 pence per share, bringing the total dividend for the period to 6.0 pence per share, which represents an annualised tax-free yield of 5.4% on the opening net asset value per share of 74.1 pence. The final dividend, if approved, will be paid on 18 August 2023 to shareholders on the register on 21 July 2023.

Our dividend investment scheme, under which dividends can be re-invested in new ordinary shares free of dealing costs and with the benefit of the tax reliefs available on new VCT share subscriptions, continues to operate with around 17% participation during the period. Instructions on how to join the scheme are included within the dividend section of our website, which can be found here: mercia.co.uk/vcts/nvt/.

Investment Portfolio

Investment activity has reached record levels over the period, with £17.0 million of capital provided to fifteen new venture capital investments and £8.0 million of follow on capital invested into the existing portfolio. The investments into new portfolio companies were made across a variety of sectors including technology and life sciences. We also made strong progress in realising the Company’s mature portfolio acquired under the previous VCT rules with the remaining such investments now representing 22% by value of the total venture capital portfolio (30 September 2021: 37%).

The value of the portfolio fell by £9.8 million (6.1 pence per share) in the 18 months, suffering two significant write-downs; the value of musicMagpie, which is listed on AIM fell by £6.2 million (3.8 pence per share) and the value of Oddbox was written down by £4.2 million (2.6 pence per share). The portfolio was further exposed to the volatility of markets with its listed investments reducing by £0.9 million (0.5 pence per share). This is clearly a disappointing result, but it is worth noting that both musicMagpie and Oddbox generated significant realised returns for the portfolio in the preceding period, which exceed the write-downs in this period, through their partial realisations in cash.

In the unquoted portfolio, while we experienced reductions in the valuations of other consumer-facing portfolio companies, which represent only 16% of the total, we also experienced strong performances from others, with Evotix in particular growing rapidly over the period. In this report we have valued Evotix at the value realised shortly after the balance sheet date, resulting in a gain of £8.3 million (5.1 pence per share) in the period and £9.9 million overall, 4.6x our original investment.

It was a busy period for other realisation activity, with several notable transactions. The highlights during the period included the sales of Currentbody.com, Intelling Group and Lineup Systems for lifetime returns of 2.9x, 3.6x and 7.8x respectively. In total £26.1 million was generated in sales proceeds over the period, representing a blended 1.9x multiple on cost.

Share offers and liquidity

In the period gross proceeds of £6.0 million were received from the fully subscribed 2021/2022 share offer. Additionally, following the public share offer launched in January 2023, 9,741,182 new ordinary shares were issued just after the period end in April 2023 for gross proceeds of a further £6.0 million.

Following the smaller top-up offers in the 2021/22 and 2022/23 tax years, and taking into account the increased rate of investment, the Board is pleased to announce that the Company will launch a prospectus top-up offer in the 2023/24 tax year for £14.0 million, with an over-allotment facility of £6.0 million. This offer will launch in September 2023, and full details will be published shortly.

Share buy-backs

We have maintained our policy of being willing to buy back the Company’s shares in the market when necessary, in order to maintain liquidity, at a 5% discount to NAV. During the 18 month period ended 31 March 2023 a total of 7,335,532 (year ended 30 September 2021: 2,620,797) shares were repurchased by the Company for cancellation at an average price of 61.2 pence (year ended 30 September 2021: 70.2 pence), representing 4.6% (2021: 1.6%) of the opening issued share capital.

Changes to the performance-related management fee (‘performance fee’)

Following a review of current arrangements by the Board, a resolution is included in the Circular for the General Meeting proposing changes to the investment advisory agreement in relation to the performance fee with the investment adviser. The changes in VCT legislation in 2015 required the Company to focus new investments on earlier stage companies which, by their nature, are higher risk and therefore likely to deliver more volatile investment returns. It has become clear in recent years that the current arrangements no longer work either for the investment adviser or for the Company.

In order to align future performance fees better with shareholder returns and harmonise the methodology and fee rates across the Northern VCTs, a number of changes are proposed. In particular, the definition and operation of the high-water mark, the lowering of both the hurdle rate to 5% and the amount earned above this rate to 14%, will ensure that strong returns delivered consistently, and not just in a single year, will be rewarded appropriately.

As part of these changes the Board has agreed with the investment adviser that 80% of any performance fee generated will be paid to members of the VCT investment team, thereby aligning the personal interests of the investment team directly with those of shareholders. Full details of the changes are set out in the accompanying Circular for the upcoming General Meeting.

Responsible Investment

The Company is mindful of its Environmental, Social and Governance (ESG) responsibilities and we have outlined our evolving approach in the annual report.

Geopolitical and other macroeconomic risks

The Company’s investments may be affected by regional events or politics. A recent example of this is the high-inflation environment in the aftermath of COVID-19 and the conflict in Ukraine. The Board has no control over such macro events, and as the Company’s investments are domiciled in the UK with only a limited presence in the rest of the world, risks are primarily localised to those facing the UK economy. As a result of the conflict in Ukraine, during the period our investment adviser undertook a review of the entire portfolio for links to sanctioned individuals and companies, took appropriate action where required, and continues to monitor the situation carefully. A review of portfolio company exposure to Silicon Valley bank was also performed during the period and appropriate action taken in the days before the bank’s UK subsidiary was acquired by HSBC.

VCT legislation and qualifying status

The Company has continued to meet the stringent and complex qualifying conditions laid down by HM Revenue & Customs for maintaining its approval as a VCT. The investment adviser monitors the position closely and reports regularly to the Board. Philip Hare & Associates LLP has continued to act as independent adviser to the Company on VCT taxation matters.

The upcoming 2025 ‘sunset clause’ was a European state aid requirement when the VCT scheme received state aid approval in 2015, which means that without a change in legislation investors will not receive upfront tax relief when investing in VCTs after this date. While the government has signalled that it will extend the scheme, to date no formal legislation has been introduced to enact this commitment. The Company and the investment adviser will continue to monitor progress in this area. The Board considers that the Company, and VCTs more generally, are successfully delivering in-line with the Government’s mandate, which is to channel money into higher-risk, early-stage businesses.

Whilst no further amendments to the VCT legislation were announced by the Chancellor in his 2023 Budget statement, it is possible that further changes will be made in the future. We will continue to work closely with our investment adviser to maintain compliance with the scheme rules at all times. HMRC has recently clarified the rules relating to the financial health of companies at the time of any investment, which may limit VCTs’ ability to make investments in some cases. However a recent review demonstrated that very few of the Company’s current investments are likely to be affected in the near term, concluding that our portfolio is not exposed significantly to this.

Annual General Meeting

The Company’s AGM will be held at 12.30pm on 21 July 2023. The AGM provides an excellent opportunity for shareholders, Directors and the investment adviser to meet in person, exchange views and comment. We will hold the AGM in person at Reed Smith LLP, Broadgate Tower, 20 Primrose Street, London, EC2A 2RS. Following positive feedback received from the last three years, we also intend to offer remote access for shareholders through an online webinar facility for those who would prefer not to travel. Full details and formal notice of the AGM are set out in a separate document. The General Meeting regarding the proposed changes to the performance-related management fee will be held immediately after the conclusion of the AGM.

Board Retirement

Tim Levett is retiring from the Board and so will not be standing for re-election at the AGM in July. Tim founded our Company almost 30 years ago, having established Northern Venture Managers as one of the leading regional investors in the eighties. He has been instrumental in promoting venture capital trusts in general and the Northern Venture Trusts in particular to government and financial advisers for decades. He was a founding member and recent chairman of the Venture Capital Trust Association, which represents more than 90% of the VCT industry by value. His contribution to the Board has been immeasurable and we will miss his deep knowledge and insight. On behalf of the Board and all shareholders, I would like to thank Tim for his exceptional service to the Company over so many years and wish him well in his retirement.

Outlook

The geopolitical and economic conditions for the next twelve months are likely to continue to be challenging and this provides a good opportunity to invest for the longer term and support our existing portfolio companies. Failure rates remain low and despite some reductions in valuations this year, the Directors remain encouraged by the resilience of the wider portfolio. We remain committed to supporting the development of entrepreneurial early-stage businesses in the UK.

Simon Constantine
Chair
15 June 2023

Extracts from the audited financial statements for the 18 month period ended 31 March 2023 are set out below.

INVESTMENT PORTFOLIO SUMMARY
as at 31 March 2023

* Quoted on AIM
**This percentage change in ‘like for like’ valuations is a comparison of the 31 March 2023 valuations with the 30 September 2021 valuations (or where a new investment has been made in the period, the investment amount), having adjusted for any partial disposals, loan stock repayments or new and follow-on investments in the period.

RISK MANAGEMENT

The Board carries out a regular and robust assessment of the risk environment in which the Company operates and seeks to identify new risks as they emerge. The principal and emerging risks and uncertainties identified by the Board which might affect the Company’s business model and future performance, and the steps taken with a view to their mitigation, are as follows: 

Investment and liquidity risk: investment in smaller and unquoted companies, such as those in which the Company invests, involves a higher degree of risk than investment in larger listed companies because they generally have limited product lines, markets and financial resources and may be more dependent on key individuals. The securities of smaller companies in which the Company invests are typically unlisted, making them illiquid, and this may cause difficulties in valuing and disposing of the securities. The Company may invest in businesses whose shares are quoted on AIM – the fact that a share is quoted on AIM does not mean that it can be readily traded and the spread between the buying and selling prices of such shares may be wide.
Mitigation: the Directors aim to limit the risk attaching to the portfolio as a whole by careful selection, close monitoring and timely realisation of investments, by carrying out rigorous due diligence procedures and maintaining a wide spread of holdings in terms of financing stage and industry sector within the rules of the VCT scheme. The Board reviews the investment portfolio with the investment adviser on a regular basis. 

Financial risk: most of the Company’s investments involve a medium to long-term commitment and many are illiquid.
Mitigation: the Directors consider that it is inappropriate to finance the Company’s activities through borrowing except on an occasional short-term basis. Accordingly they seek to maintain a proportion of the Company’s assets in cash or cash equivalents in order to be in a position to pursue new unquoted investment opportunities and to make follow-on investments in existing portfolio companies. The Company has very little direct exposure to foreign currency risk and does not enter into derivative transactions. 

Economic risk: events such as economic recession or general fluctuation in stock markets, exchange rates and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the Company’s own share price and discount to net asset value. The level of economic risk has been elevated most recently by inflationary pressures, interest rate increases, and supply shortages.
Mitigation: the Company invests in a diversified portfolio of investments spanning various industry sectors, and maintains sufficient cash reserves to be able to provide additional funding to investee companies where it is appropriate and in the interests of the Company to do so. The investment adviser typically provides an investment executive to actively support the Board of each unquoted investee company. At all times, and particularly during periods of heightened economic uncertainty, the investment executives share best practice from across the portfolio with investee management teams in order to mitigate economic risk. 

Stock market risk: some of the Company’s investments are quoted on the London Stock Exchange or AIM and will be subject to market fluctuations upwards and downwards. External factors such as terrorist activity, political activity or global health crises, can negatively impact stock markets worldwide. In times of adverse sentiment there may be very little, if any, market demand for shares in smaller companies quoted on AIM.
Mitigation: the Company’s quoted investments are actively managed by specialist managers, including Mercia in the case of the AIM-quoted investments, and the Board keeps the portfolio and the actions taken under ongoing review.  

Credit risk: the Company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment.
Mitigation: the Directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party. 

Legislative and regulatory risk: in order to maintain its approval as a VCT, the Company is required to comply with current VCT legislation in the UK. Changes to UK legislation in the future could have an adverse effect on the Company’s ability to achieve satisfactory investment returns whilst retaining its VCT approval.
Mitigation: the Board and the investment adviser monitor political developments and where appropriate seek to make representations either directly or through relevant trade bodies.  

Internal control risk: the Company’s assets could be at risk in the absence of an appropriate internal control regime which is able to operate effectively even during times of disruption.
Mitigation: the Board regularly reviews the system of internal controls, both financial and non-financial, operated by the Company and the investment adviser. These include controls designed to ensure that the Company’s assets are safeguarded and that proper accounting records are maintained. 

VCT qualifying status risk: while it is the intention of the Directors that the Company will be managed so as to continue to qualify as a VCT, there can be no guarantee that this status will be maintained. A failure to continue meeting the qualifying requirements could result in the loss of VCT tax relief, the Company losing its exemption from corporation tax on capital gains, to shareholders being liable to pay income tax on dividends received from the Company and, in certain circumstances, to shareholders being required to repay the initial income tax relief on their investment.
Mitigation: the investment adviser keeps the Company’s VCT qualifying status under continual review and its reports are reviewed by the Board on a quarterly basis. The Board has also retained Philip Hare & Associates LLP to undertake an independent VCT status monitoring role. 

DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations. 

Company law requires the Directors to prepare financial statements for each financial year.  Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for the period.  In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
• assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006.  They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.  

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.  Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.  

The Directors confirm that to the best of their knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
• the Strategic Report and Directors’ Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

The Directors consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

The Directors of the company at the date of this statement were Mr S J Constantine (Chair), Mr R J Green, Ms D N Hudson, Mr T R Levett, and Mr D A Mayes.

OTHER MATTERS

The above summary of results for the 18 month period ended 31 March 2023 does not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006 and has not been delivered to the Registrar of Companies. Statutory financial statements will be filed with the Registrar of Companies in due course; the independent auditor’s report on those financial statements under Section 495 of the Companies Act 2006 is unqualified, does not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the report and does not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The calculation of return per share is based on the loss after tax for the 18 months ended 31 March 2023 of £9,923,000 (12 months to 30 September 2021: profit of £22,086,000) and on 165,209,895 (12 months to 30 September 2021: 159,349,187) ordinary shares, being the weighted average number of shares in issue during the period.

The calculation of the net asset value per share as at 31 March 2023 is based on the net assets of £102,497,000 (12 months to 30 September 2021: 119,298,000) divided by the 164,920,166 (12 months to 30 September 2021: 161,070,303) ordinary shares in issue at that date.

If approved by shareholders, the proposed final dividend of 2.0 pence per share for the period ended 31 March 2023 will be paid on 18 August 2023 to shareholders on the register at the close of business on 21 July 2023.

The full annual report including financial statements for the 18 month period ended 31 March 2023 is expected to be made available to shareholders on or around 26 June 2023 and will be available to the public at the registered office of the company at Forward House, 17 High Street, Henley-in-Arden B95 5AA and on the company’s website.

Neither the contents of the Mercia Asset Management PLC website, nor the contents of any website accessible from hyperlinks on the Mercia Asset Management PLC website (or any other website), are incorporated into, or form part of, this announcement.