Downing FOUR VCT plc: Half-year report
Downing FOUR VCT plc
LEI: 21380035MV1VRYEXPR95
Half-Yearly Report for the six months ended 30 September 2019FINANCIAL HIGHLIGHTS* Based on the Total Return to Shareholders at 30 September 2019, a Performance Incentive is expected to become due to management. The Performance Incentive has been estimated at 4.1p per DSO D Share.A full explanation of the Performance Incentive arrangements for each Share Pool is shown in the Half-Yearly Report.CHAIRMAN’S STATEMENTIntroductionI am pleased to present the Company’s Half-Yearly Report for the six months ended 30 September 2019.Share PoolsThe Company now has four active Share Pools, two of which evergreen share pools and two are planned exit pools that are winding down. Two further planned exit share pools completed the task of returning funds to Shareholders during the period. This report includes sections covering each of the Share Pools which were active during the period.Planned exit Share PoolsOf the planned exit share pools, two completed returning funds to investors during the period and two further pools remain.DP2011 General Share Pool
The DP2011 General Share Pool paid a final dividend of 13.595p per DP2011 General A Share on 27 September 2019 to bring the pool to a close.Shareholders who invested under the original offer received total dividends of 105.595p for a combined holding of one Ordinary Share and one A Share, compared to an initial cost, net of tax relief, of 70.0p. In line with the structure of the performance incentive arrangements members of the management team received dividends equivalent to 5.1p per DP2011 General Ordinary Shares. Both the DP2011 General Ordinary Shares and A Shares were cancelled on 15 November 2019.DP2011 Structured Share PoolThe DP2011 General Share Pool paid a final dividend of 10.059p per DP2011 Structured A Share on 27 September 2019 to bring the pool to a close.Shareholders who invested under the original offer received total dividends of 105.059p for a combined holding of one Ordinary Share and one A Share, compared to an initial cost, net of tax relief, of 70.0p. In line with the structure of the performance incentive arrangements members of the management team received dividends equivalent to 5.1p per DP2011 Structured Ordinary Shares. Both the DP2011 Structured Ordinary Shares and A Shares were cancelled on 15 November 2019.DSO D Share PoolThe DSO D Share Net Asset Value (“NAV”) stood at 28.9p at 30 September 2019, an increase of 1.1p per share or 4.0% over the period. Total Return now stands at 101.3p per share, compared to the cost for Shareholders who invested in the DSO D Share offer, net of income tax relief, of 70.0p. A performance fee equivalent to 4.1p per DSO D Share is estimated to become payable to the Manager on the final exit, which has been provided for in the above figures.Realisation plans are progressing in respect of the remaining investments and we expect that this process will be completed during the first quarter of 2020, after which the Company will declare distribution of the remaining value.DP67 Share PoolAs at 30 September 2019, the NAV of the DP67 Shares stood at 47.4p per share, a decrease of 1.1p or 2.3% over the period. Total Return for DP67 shareholders now stands at 97.2p per share, compared to the cost for Shareholders who invested in the original offers, net of income tax relief, of 70.0p.There are plans in place to exit from each of the remaining investments in the DP67 portfolio and we anticipate that this process will be completed during the middle of 2020, after which the Company will announce a final dividend.DP2011 Structured Share PoolAs no value is now attributable to the DP2011 General Ordinary Shares and DP2011 General A Shares in issue, these Shares were cancelled on 15 November 2019.Evergreen Share Pools
The changes to the VCT regulations that took place in 2017 heavily refocussed VCTs on young growth companies. The new share pools that the Company launched that year are consequently investing in a very different sector from that in which the older planned exit share pools invested. As a result, the Generalist and Healthcare Share pools have a much higher risk and reward profile and are expected to exhibit different features from the relatively stable planned exit share pools.The Generalist and Healthcare Share pools are focused on investments in young growth companies, which typically reinvest any surplus cash back into their business. Therefore, as is to be expected, the costs of running the share pools exceeds the revenue income generated from the portfolio. Returns from the Generalist and Healthcare share pools are instead expected to be predominantly generated by capital gains on the eventual disposal of successful investments.Generalist Share PoolAs at 30 September 2019, the Generalist Share NAV and Total Return stood at 77.6p, a decrease of 5.9p per share or 7.1% over the period. The reduction in the NAV during the period is attributable to unrealised reductions in the carrying values of the quoted and unquoted investments held by the Generalist Share pool, as well as the impact of VCT running costs and the “cash-drag” of holding uninvested funds. Whilst a reduction in NAV is disappointing in is not untypical of a portfolio like this where failures often come to light earlier than successes.Further detail on the movements in the valuations of the investments held by the Generalist Share pool can be found in the Investment Manager’s Report below.Healthcare Share Pool
As at 30 September 2019, the Healthcare Share NAV and Total Return stood at 77.7p, a decrease of 5.6p per share or 6.7% over the period. The reduction in the NAV during the period is attributable to unrealised reductions in the carrying values of the quoted and unquoted investments held by the Healthcare Share pool, as well as the impact of VCT running costs and the “cash-drag” of holding uninvested funds.In the course of seeking to expand, it is expected that some of the businesses in the Healthcare portfolio will underperform against their plans in the short term, or ultimately fail. Whilst this is a typical feature of investing in young growth companies, for the businesses in the Healthcare portfolio there is the added challenge of operating in the complex and highly-regulated healthcare industry. The weaker businesses will tend to present themselves first, before the stronger businesses have had time to establish themselves as such. The Manager continues to support the management teams of all the Healthcare Share pool’s unquoted investments and is confident that several of businesses have the potential to deliver good rewards for Shareholders.Further detail on the movements in the valuations of the investments held by the Healthcare Share pool can be found in the Investment Manager’s Report below.Dividends
Planned exit Share pools dividends
On 22 November 2019, the Company paid the following dividends to its planned exit Shareholders:DSO D Share pool – 18.0p per DSO D Share
DP67 Share pool – 18.0p per DP67 ShareFurther dividends in respect of the planned exit Share Pools will be announced as and when sufficient realisations have taken place.Evergreen Share pools dividends
No dividends have been declared with respect to Generalist and Healthcare Share Pools, due to the effective restriction on paying dividends in the first three years following a share issue. The first Generalist and Healthcare dividends are expected to be paid during the summer of 2020.Share buybacksThe Company has a policy of buying in any Generalist and Healthcare Shares that become available in the market and will usually expect to do so at a price approximately equal to the latest NAV of the shares, subject to regulatory restrictions and other factors such as availability of liquid funds.The Board does not intend to buy in any DSO D or DP67 Shares, as the Company will continue to distribute funds to investors by way of dividends.During the period the Company purchased 73,944 Generalist Shares and 19,704 Healthcare Shares, at an average price of 81.8p per Generalist Share and 80.8p per Healthcare Share. The Shares were subsequently cancelled.Fundraising
The 2018 Generalist and Healthcare Offers closed on 31 October 2019, having raised gross proceeds of £12.0 million for the Generalist Share pool and £5.4 million for the Healthcare Share pool.The Company has now launched a further Offer for subscription, to allow the Company to continue to issue Shares in the tax year to 5 April 2020.Outlook
Over the remainder of this financial year, the Board and Manager will continue to work towards exiting from all the remaining investments held by the DSO D and DP67 Share pools, ahead of distributing the remaining proceeds to investors.The Board and Manager will also continue the process of building the Generalist and Healthcare portfolios, and Shareholders should expect to see a similar level of investment activity in the period to 31 March 2020.The difficulties with Brexit combined with the imminent general election have created significant political and economic uncertainty which have made it difficult period for public companies, particularly smaller ones. Once the outcome of the election is known we may see a period of greater stability for the economy which would be helpful.Sir Aubrey Brocklebank Bt
ChairmanINVESTMENT MANAGER’S REPORT
DSO D SHARE POOLPortfolio valuation
As at 30 September 2019, the DSO D Share Pool had a portfolio of five investments with a value of £0.7 million.The DSO D Share pool portfolio was reduced in value by £7,000 during the period, this being the result of a £11,000 reduction in the carrying value of Pearce and Saunders Limited and a £4,000 increase in the carrying value of Green Energy Production UK LimitedPortfolio activity
One realisation took place during the period. Lambridge Solar Limited, the owner of a 9MW ground-mounted photovoltaic system in Lincolnshire, was sold for £716,000, representing a gain over cost of £216,000.Results and Net Asset Value
The Net Asset Value (“NAV”) per DSO D Share at 30 September 2019 stood at 28.9p, a decrease of 1.1p or 4.0% over the period. Total Return stands at 103.0p per Share compared to initial cost to Shareholders, net of income tax relief, of 70.0p per share.The profit on ordinary activities after taxation for the period was £93,000 comprising a revenue loss of £3,000 and a capital gain of £96,000.Dividends
On 22 November 2019 the Company paid a dividend of 18.0p per DSO D Share, bringing the cumulative dividends total to 94.5p per DSO D Share as at the date of this report.We expect that the realisations of the remaining investments will be completed during the first quarter of 2020, after which it is expected that the Company will declare a further dividend.Downing LLPSUMMARY OF INVESTMENT PORTFOLIO
DSO D SHARE POOL
as at 30 September 2019* non-qualifying investment SUMMARY OF INVESTMENT MOVEMENTS
DSO D SHARE POOL
for the period ended 30 September 2019DIVIDEND HISTORY
DSO D SHARE POOL
LEI: 21380035MV1VRYEXPR95
Half-Yearly Report for the six months ended 30 September 2019FINANCIAL HIGHLIGHTS* Based on the Total Return to Shareholders at 30 September 2019, a Performance Incentive is expected to become due to management. The Performance Incentive has been estimated at 4.1p per DSO D Share.A full explanation of the Performance Incentive arrangements for each Share Pool is shown in the Half-Yearly Report.CHAIRMAN’S STATEMENTIntroductionI am pleased to present the Company’s Half-Yearly Report for the six months ended 30 September 2019.Share PoolsThe Company now has four active Share Pools, two of which evergreen share pools and two are planned exit pools that are winding down. Two further planned exit share pools completed the task of returning funds to Shareholders during the period. This report includes sections covering each of the Share Pools which were active during the period.Planned exit Share PoolsOf the planned exit share pools, two completed returning funds to investors during the period and two further pools remain.DP2011 General Share Pool
The DP2011 General Share Pool paid a final dividend of 13.595p per DP2011 General A Share on 27 September 2019 to bring the pool to a close.Shareholders who invested under the original offer received total dividends of 105.595p for a combined holding of one Ordinary Share and one A Share, compared to an initial cost, net of tax relief, of 70.0p. In line with the structure of the performance incentive arrangements members of the management team received dividends equivalent to 5.1p per DP2011 General Ordinary Shares. Both the DP2011 General Ordinary Shares and A Shares were cancelled on 15 November 2019.DP2011 Structured Share PoolThe DP2011 General Share Pool paid a final dividend of 10.059p per DP2011 Structured A Share on 27 September 2019 to bring the pool to a close.Shareholders who invested under the original offer received total dividends of 105.059p for a combined holding of one Ordinary Share and one A Share, compared to an initial cost, net of tax relief, of 70.0p. In line with the structure of the performance incentive arrangements members of the management team received dividends equivalent to 5.1p per DP2011 Structured Ordinary Shares. Both the DP2011 Structured Ordinary Shares and A Shares were cancelled on 15 November 2019.DSO D Share PoolThe DSO D Share Net Asset Value (“NAV”) stood at 28.9p at 30 September 2019, an increase of 1.1p per share or 4.0% over the period. Total Return now stands at 101.3p per share, compared to the cost for Shareholders who invested in the DSO D Share offer, net of income tax relief, of 70.0p. A performance fee equivalent to 4.1p per DSO D Share is estimated to become payable to the Manager on the final exit, which has been provided for in the above figures.Realisation plans are progressing in respect of the remaining investments and we expect that this process will be completed during the first quarter of 2020, after which the Company will declare distribution of the remaining value.DP67 Share PoolAs at 30 September 2019, the NAV of the DP67 Shares stood at 47.4p per share, a decrease of 1.1p or 2.3% over the period. Total Return for DP67 shareholders now stands at 97.2p per share, compared to the cost for Shareholders who invested in the original offers, net of income tax relief, of 70.0p.There are plans in place to exit from each of the remaining investments in the DP67 portfolio and we anticipate that this process will be completed during the middle of 2020, after which the Company will announce a final dividend.DP2011 Structured Share PoolAs no value is now attributable to the DP2011 General Ordinary Shares and DP2011 General A Shares in issue, these Shares were cancelled on 15 November 2019.Evergreen Share Pools
The changes to the VCT regulations that took place in 2017 heavily refocussed VCTs on young growth companies. The new share pools that the Company launched that year are consequently investing in a very different sector from that in which the older planned exit share pools invested. As a result, the Generalist and Healthcare Share pools have a much higher risk and reward profile and are expected to exhibit different features from the relatively stable planned exit share pools.The Generalist and Healthcare Share pools are focused on investments in young growth companies, which typically reinvest any surplus cash back into their business. Therefore, as is to be expected, the costs of running the share pools exceeds the revenue income generated from the portfolio. Returns from the Generalist and Healthcare share pools are instead expected to be predominantly generated by capital gains on the eventual disposal of successful investments.Generalist Share PoolAs at 30 September 2019, the Generalist Share NAV and Total Return stood at 77.6p, a decrease of 5.9p per share or 7.1% over the period. The reduction in the NAV during the period is attributable to unrealised reductions in the carrying values of the quoted and unquoted investments held by the Generalist Share pool, as well as the impact of VCT running costs and the “cash-drag” of holding uninvested funds. Whilst a reduction in NAV is disappointing in is not untypical of a portfolio like this where failures often come to light earlier than successes.Further detail on the movements in the valuations of the investments held by the Generalist Share pool can be found in the Investment Manager’s Report below.Healthcare Share Pool
As at 30 September 2019, the Healthcare Share NAV and Total Return stood at 77.7p, a decrease of 5.6p per share or 6.7% over the period. The reduction in the NAV during the period is attributable to unrealised reductions in the carrying values of the quoted and unquoted investments held by the Healthcare Share pool, as well as the impact of VCT running costs and the “cash-drag” of holding uninvested funds.In the course of seeking to expand, it is expected that some of the businesses in the Healthcare portfolio will underperform against their plans in the short term, or ultimately fail. Whilst this is a typical feature of investing in young growth companies, for the businesses in the Healthcare portfolio there is the added challenge of operating in the complex and highly-regulated healthcare industry. The weaker businesses will tend to present themselves first, before the stronger businesses have had time to establish themselves as such. The Manager continues to support the management teams of all the Healthcare Share pool’s unquoted investments and is confident that several of businesses have the potential to deliver good rewards for Shareholders.Further detail on the movements in the valuations of the investments held by the Healthcare Share pool can be found in the Investment Manager’s Report below.Dividends
Planned exit Share pools dividends
On 22 November 2019, the Company paid the following dividends to its planned exit Shareholders:DSO D Share pool – 18.0p per DSO D Share
DP67 Share pool – 18.0p per DP67 ShareFurther dividends in respect of the planned exit Share Pools will be announced as and when sufficient realisations have taken place.Evergreen Share pools dividends
No dividends have been declared with respect to Generalist and Healthcare Share Pools, due to the effective restriction on paying dividends in the first three years following a share issue. The first Generalist and Healthcare dividends are expected to be paid during the summer of 2020.Share buybacksThe Company has a policy of buying in any Generalist and Healthcare Shares that become available in the market and will usually expect to do so at a price approximately equal to the latest NAV of the shares, subject to regulatory restrictions and other factors such as availability of liquid funds.The Board does not intend to buy in any DSO D or DP67 Shares, as the Company will continue to distribute funds to investors by way of dividends.During the period the Company purchased 73,944 Generalist Shares and 19,704 Healthcare Shares, at an average price of 81.8p per Generalist Share and 80.8p per Healthcare Share. The Shares were subsequently cancelled.Fundraising
The 2018 Generalist and Healthcare Offers closed on 31 October 2019, having raised gross proceeds of £12.0 million for the Generalist Share pool and £5.4 million for the Healthcare Share pool.The Company has now launched a further Offer for subscription, to allow the Company to continue to issue Shares in the tax year to 5 April 2020.Outlook
Over the remainder of this financial year, the Board and Manager will continue to work towards exiting from all the remaining investments held by the DSO D and DP67 Share pools, ahead of distributing the remaining proceeds to investors.The Board and Manager will also continue the process of building the Generalist and Healthcare portfolios, and Shareholders should expect to see a similar level of investment activity in the period to 31 March 2020.The difficulties with Brexit combined with the imminent general election have created significant political and economic uncertainty which have made it difficult period for public companies, particularly smaller ones. Once the outcome of the election is known we may see a period of greater stability for the economy which would be helpful.Sir Aubrey Brocklebank Bt
ChairmanINVESTMENT MANAGER’S REPORT
DSO D SHARE POOLPortfolio valuation
As at 30 September 2019, the DSO D Share Pool had a portfolio of five investments with a value of £0.7 million.The DSO D Share pool portfolio was reduced in value by £7,000 during the period, this being the result of a £11,000 reduction in the carrying value of Pearce and Saunders Limited and a £4,000 increase in the carrying value of Green Energy Production UK LimitedPortfolio activity
One realisation took place during the period. Lambridge Solar Limited, the owner of a 9MW ground-mounted photovoltaic system in Lincolnshire, was sold for £716,000, representing a gain over cost of £216,000.Results and Net Asset Value
The Net Asset Value (“NAV”) per DSO D Share at 30 September 2019 stood at 28.9p, a decrease of 1.1p or 4.0% over the period. Total Return stands at 103.0p per Share compared to initial cost to Shareholders, net of income tax relief, of 70.0p per share.The profit on ordinary activities after taxation for the period was £93,000 comprising a revenue loss of £3,000 and a capital gain of £96,000.Dividends
On 22 November 2019 the Company paid a dividend of 18.0p per DSO D Share, bringing the cumulative dividends total to 94.5p per DSO D Share as at the date of this report.We expect that the realisations of the remaining investments will be completed during the first quarter of 2020, after which it is expected that the Company will declare a further dividend.Downing LLPSUMMARY OF INVESTMENT PORTFOLIO
DSO D SHARE POOL
as at 30 September 2019* non-qualifying investment SUMMARY OF INVESTMENT MOVEMENTS
DSO D SHARE POOL
for the period ended 30 September 2019DIVIDEND HISTORY
DSO D SHARE POOL
