Annual Financial Report

12 NOVEMBER 2019NORTHERN VENTURE TRUST PLCANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2019Northern Venture Trust PLC is a Venture Capital Trust (VCT) whose investment adviser is NVM Private Equity LLP.  The trust was one of the first VCTs launched on the London Stock Exchange in 1995.  It invests mainly in UK unquoted companies and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.Financial highlights (comparative figures as at 30 September 2018):*Excluding proposed final dividend payable on 20 December 2019For further information, please contact:NVM Private Equity LLP
Simon John/James Bryce                    0191 244 6000
Website: per share for the year of 2.1 pence per share, representing 3.0% of opening NAV
NAV per share at year-end of 68.9 pence (2018: 70.8 pence) after paying dividends of 4.0 pence
Successful public share offer raising £6.6 million
£10.3 million of proceeds from realisations, representing a gain of £3.4 million on original cost (2018: £4.9 million)
Seven new and 11 follow-on investments in innovative earlier stage companies added to the portfolioCHAIRMAN’S STATEMENTOverview
I am pleased to report on another productive year for our company during which good progress has been made in the development of the venture capital portfolio.  The investment rate has been strong throughout the period, with a total of seven new venture capital investments being completed.  Three significant investment exits were achieved, supporting the total return for the year.  The profile of the unquoted portfolio is evolving as we continue to acquire investments in earlier stage innovative UK companies with high growth potential.  As previously indicated, the profile of the new investments will lead to greater volatility in the timing and quantum of returns, and continuing to pay regular dividends whilst seeking to avoid erosion of the NAV per share in the medium term remains a priority for your board.
Results and dividend
In the year ended 30 September 2019 the company achieved a return on ordinary activities of £2,848,000 (2018: £4,281,000) or 2.1 pence per share (2018: 3.3 pence), representing a total return of 3.0% on the opening net asset value (NAV) per share.  The NAV per share at 30 September 2019, after deducting dividends paid during the year of 4.0 pence, was 68.9 pence compared with 70.8 pence as at 30 September 2018.  The cumulative total return to shareholders increased to 237.4 pence (2018: 235.3 pence) per share, which marks the fourteenth consecutive year of growth.  Investment income was slightly lower than in the prior year at £2.2 million (2018: £2.5 million), reflecting the disposal of some income-yielding investments.
Your directors are aware of the importance to shareholders of receiving a steady stream of tax-free dividends.  After careful consideration, the board has proposed a final dividend of 2.0 pence per share, bringing the total dividend for the year to 4.0 pence.  This represents a tax-free yield of 5.6% on the opening net asset value per share of 70.8 pence.  The full year dividend once again has not been covered by the total return for the period, however your directors have confidence in the potential of the current portfolio to increase NAV per share in the medium to long term and our aim remains to pay a tax-free dividend yield of approximately 5% of opening net assets each year.  The final dividend, if approved, will be paid on 20 December 2019 to shareholders on the register on 22 November 2019.Investment portfolio
The investment rate is encouraging, as we continue to identify opportunities to provide capital to growing businesses, many of which are developing disruptive products or services.  During the past year, the company invested £10.9 million in the venture capital portfolio, with seven new VCT-qualifying investments added for total consideration of £5.6 million and £5.3 million provided by way of follow-on funding to 11 existing portfolio companies.  Most of the earlier stage businesses we are backing will require further capital to realise their growth potential fully and we will continue to channel a significant proportion of our investment activity into our existing portfolio.   Whilst we are still near the start of the investment cycle for the earlier stage portfolio, we are encouraged by how stable the portfolio has been thus far when taken as a whole.  The performance profile of the portfolio is expected to be more volatile than in the past as the investments which are less successful tend to be identified as such and written down in value before the more successful investments mature and generate significant value appreciation.  Whilst linear progress across a typical venture capital portfolio is rarely achieved, we take confidence from diversification of the investments held across various attractive sectors. 
Just under 50% by value of our venture capital portfolio at the year-end comprised investments in more mature businesses acquired under previous VCT rules.  This portfolio produced three good investment exits during the period under review, contributing total disposal proceeds of £10.3 million and a realised gain of £3.4 million on original cost.  We expect that the remaining mature investments will continue to provide an income yield and a series of profitable exits in the years to come, supporting the overall return of the company whilst the earlier-stage portfolio develops.Share offers and liquidity
We launched a top-up offer of new ordinary shares in January 2019, to raise up to £6.6 million.  Strong demand was experienced and the offer was fully subscribed by existing shareholders approximately one week after opening.   In addition to the public offer, 1,602,296 shares were issued during the year via our dividend investment scheme for overall proceeds of £1.1 million.  Around 20% of shares in issue are registered to participate in the dividend investment scheme.
In conjunction with NVM we have undertaken a strategic review of the unquoted portfolio, considering progress achieved to date and the likely further capital required to enable our investee companies to flourish.  The exercise concluded with a review of the liquidity dynamics of the company over the coming years, both in light of the follow-on requirements and the strong pipeline of new investment opportunities that NVM has developed.  As a result of the review, your directors intend to launch a share offer early in 2020 to raise up to £13.3 million.Interest rates in the UK remain low and we are mindful of the potential drag on overall returns caused by holding significant levels of liquidity.  We consider that this downside is a necessary feature of sustainable early stage investing, and is outweighed by the benefit of obtaining sufficient capital to execute our investment strategy in the coming years in order to drive long-term shareholder value.  We seek to mitigate the cash drag by holding a portion of our liquid funds in readily realisable quoted investment funds, with a view to generating a higher return than by holding all liquid resources in cash deposits alone.  NVM has agreed that the reduced management fee we pay on liquid assets in excess of a specified level will continue for at least another 12 months after the new shares are allotted. NVM has also continued to augment its resources, having hired five additional investment professionals during the year to join the VCT team.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 year ended 30 September 2019 a total of 4,907,101 shares were repurchased by the company for cancellation, representing 3.7% of the opening issued share capital.
VCT qualifying status
The company has maintained its approved venture capital trust status with HM Revenue & Customs.  The company’s compliance with the VCT qualifying conditions is closely monitored by the board, who receive regular reports from NVM and from our VCT taxation advisers, Philip Hare & Associates LLP.
VCT legislation and regulation
The latest updates to the relevant VCT legislation were announced in November 2017 and a number of measures have applied to the company for the first time in the current financial year.  From 6 April 2019, the grace period available before the proceeds of investment disposals become non-qualifying has been increased from six months to 12 months, which may prove helpful in the event of a significant disposal.  In addition, the minimum proportion of investments required to be held in VCT-qualifying holdings has been increased from 70% to 80% with effect from 30 September 2019.  I am pleased to say that NVM has been monitoring this target closely since it was announced and the company has complied fully in the year just ended and to date.  
The VCT scheme rules have been subject to regular legislative changes in recent years and whilst there were no further amendments announced by the Chancellor in the last Autumn Budget statement, it is possible that further changes will be made in the future.  We will continue to work closely with NVM to maintain compliance with the scheme rules at all times.Annual general meeting
The 2019 annual general meeting will take place in London on Wednesday 18 December 2019.  Details of the formal business of the meeting are set out in a separate circular which is being sent to shareholders with the annual report.  We look forward to meeting shareholders on that occasion.
The political and economic environment has remained uncertain over the past few years with the postponed date for Britain to leave the EU now not likely to be confirmed until after the general election to be held on 12 December 2019.  Whilst little clarity has yet been obtained as to the eventual result of the ongoing negotiations between Britain and the rest of the EU, we do not expect that it will have a significant impact on the operations of the company. 
Demand for patient capital remains strong and NVM reports a healthy flow of promising investment opportunities.  Your board is encouraged by the continued progress made by the company in implementing the updated investment policy approved by shareholders in 2016.  The earlier stage portfolio represents an increasingly important component of the overall net asset value and will take time to mature.  In the meantime, we have confidence in the overall diversity of the portfolio and believe it has the potential to generate long term shareholder value.Simon Constantine
Extracts from the audited financial statements for the year ended 30 September 2019 are set out below.INCOME STATEMENT
for the year ended 30 September 2019
as at 30 September 2019
for the year ended 30 September 2019
for the year ended 30 September 2018
*the revaluation reserve is generally non-distributable other than that part of the reserve relating to gains/losses on readily realisable quoted investments, which is distributable.STATEMENT OF CASH FLOWS
for the year ended 30 September 2019
as at 30 September 2019
Risk management
The board carries out a regular and robust review of the risk environment in which the company operates.  The principal 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 range permitted by the VCT scheme rules.  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 relatively 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.  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 appropriate.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 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 advisers, including NVM in the case of 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, which reflects the European Commission’s State-aid rules.  Changes to the UK legislation or the State-aid rules 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.  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’ RESPONSIBILITIESThe 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 that year. In preparing these financial statements, the directors are required to (i) select suitable accounting policies and then apply them consistently; (ii) make judgements and estimates that are reasonable and prudent; (iii) state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; (iv) assess the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and (v) 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 have confirmed that to the best of their knowledge (i) 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 (ii) 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 announcement were Mr S J Constantine (Chairman), Mr N J Beer, Mr R J Green, Mr T R Levett, Mr D A Mayes and Mr H P Younger.OTHER MATTERSThe above summary of results for the year ended 30 September 2019 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 the revenue and capital return per share is based on the return on ordinary activities after tax for the year and on 135,869,327 (2018: 130,205,209) ordinary shares, being the weighted average number of shares in issue during the year.The calculation of the net asset value per share is based on the net assets at 30 September 2019 divided by the 138,773,612 (30 September 2018: 132,567,448) ordinary shares in issue at that date.The proposed final dividend of 2.0 pence per share for the year ended 30 September 2019 will, if approved by shareholders, be paid on 20 December 2019 to shareholders on the register at the close of business on 22 November 2019.The full annual report including financial statements for the year ended 30 September 2019 is expected to be posted to shareholders on 18 November 2019 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.

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