Kings Arms Yard VCT PLC: Annual Financial Report
Kings Arms Yard VCT PLC
LEI Code 213800DK8H27QY3J5R45As required by the UK Listing Authority’s Disclosure Guidance and Transparency Rules 4.1 and 6.3, Kings Arms Yard VCT PLC today makes public its information relating to the Annual Report and Financial Statements for the year ended 31 December 2019.The announcement was approved for release by the Board of Directors on 26 March 2020.This announcement has not been audited.The Annual Report and Financial Statements for the year ended 31 December 2019 (which have been audited), will shortly be sent to shareholders. Copies of the full Annual Report and Financial Statements will be shown via the Albion Capital Group LLP website by clicking www.albion.capital/funds/KAY/31Dec2019.pdf.The information contained in the Annual Report and Financial Statements will include information as required by the Disclosure Guidance and Transparency Rule’s, including Rule 4.1.Investment policyKings Arms Yard VCT PLC is a Venture Capital Trust and the investment policy is intended to produce a regular and predictable dividend stream with an appreciation in capital value.The Company will invest in a broad portfolio of higher growth businesses across a variety of sectors of the UK economy including higher risk technology companies. Allocation of assets will be determined by the investment opportunities which become available but efforts will be made to ensure that the portfolio is diversified both in terms of sector and stage of maturity of company.Funds held pending investment or for liquidity purposes are held as cash on deposit or similar instruments with banks or other financial institutions with high credit ratings assigned by international credit rating agencies.Risk diversification and maximum exposuresRisk is spread by investing in a number of different businesses within venture capital trust qualifying industry sectors using a mixture of securities. The maximum amount which the Company will invest in a single portfolio company is 15 per cent. of the Company’s assets at cost, thus ensuring a spread of investment risk. The value of an individual investment may increase over time as a result of trading progress and it is possible that it may grow in value to a point where it represents a significantly higher proportion of total assets prior to a realisation opportunity being available.The Company’s maximum exposure in relation to gearing is restricted to the amount equal to its adjusted capital and reserves.Financial calendarFinancial highlights
The Directors have declared a first dividend of 0.60 pence per share for the year ending 31 December 2020, which will be paid on 30 April 2020 to shareholders on the register on 14 April 2020.The above financial summary is for the Company, Kings Arms Yard VCT PLC only. Details of the financial performance of the various Quester, SPARK and Kings Arms Yard VCT 2 PLC companies, which have been merged into the Company, can be found at www.albion.capital/funds/KAY under the ‘Financial summary for previous funds’ section.Chairman’s statementIntroduction
2019 was a less active year for realisations by our Company than those that preceded it, and portfolio capital gains have been more muted, but our total return on net assets has again progressed and a number of potentially exciting new technology investments have been made.Covid-19
Since the Company’s year end the world has been plunged into a healthcare emergency the possible extent of which cannot yet be assessed. It is too early to gauge the full economic consequences but the possibility of global recession has been widely predicted.In these circumstances it is unlikely that any investment company will remain unaffected.Our Manager is now assessing what might be the impact of the crisis on the value of each of our portfolio companies and we hope that by the end of April 2020 we will be able to publish our views on this and our Company’s unaudited net asset value as at 31 March 2020.Investment policyShareholders will recall the changes in the rules applying to permissible investments by venture capital trusts which were heralded by the Autumn Budget of November 2017. In our Annual Report for 2017 we characterised these changes as being intended “to encourage more high growth investment through VCTs rather than low risk, heavily asset-backed investments.”Accordingly, we proposed changing the Company’s investment policy to that shown on above, which was adopted at the Annual General Meeting in May 2018. Two years after these changes it is appropriate to examine the effect they have had on our portfolio, and how this is likely to develop in the future.At the end of 2016, 51% of the value of our investment portfolio comprised asset-backed or publicly quoted businesses. By 31 December 2019 this proportion had shrunk to 42%, while the proportion of value in higher growth businesses including higher risk technology companies had grown from 49% to 58%. Going forward, this shift is likely to increase as maturing investments are sold and more higher growth investments are made.While we have seen no material adverse change in any of the investments made since 2017, it is undeniable that investing in new technology carries a higher risk than that associated with some of the heavily asset-backed businesses that formed the majority of our portfolio in 2016, and this will inevitably increase volatility over time.This risk is, however, mitigated by two factors. Firstly, our Manager has expanded its resources to increase the number of investment professionals with experience of new technologies, and secondly, it is tending to select businesses that have already received and successfully deployed at least one round of external finance from other proven investment professionals.Results and performance
The total return for the year was 0.42 pence per share, which is a 1.8% return on opening net asset value. Realised and unrealised gains on investments amounted to £1m for the year, mainly driven by a significant uplift of £1.5m in our valuation of Proveca, in light of a recent funding round, offset by write downs of Anthropics Technology (£1m) and Elateral Group (£0.4m).Net asset value per share decreased by 0.76 pence to 22.02 pence over the year to 31 December 2019, after allowing for the payment of dividends totalling 1.20 pence per share.We sold our holding in Bravo Inns II generating proceeds of £1.3m and a realised gain of £0.5m. Over the life of our investment, including interest received, we generated a return on cost of 2.0 times. The divestment of the legacy portfolio continues with the complete disposal of our holding in ErgoMed and The Wentworth Wooden Jigsaw Company, generating realised gains of £0.4m and £0.2m respectively. Total proceeds for the full disposal of ErgoMed now amount to £1.8m, representing a return on cost of 1.2 times. Further details can be found in the realisations table below.PortfolioThe Company holds a widely diversified selection of businesses, with key investments in the healthcare, renewable energy and technology sectors. The majority of our investment portfolio comprises companies whose annual sales are growing.In line with the Company’s investment policy of investing in a broad range of higher growth businesses and technology companies, software and other technology represents 33% of our portfolio and is expected to continue to increase going forward. During the year a total of £2.0m was invested in 6 new portfolio companies, the majority of which are software and other technology businesses. Follow on investments were made into 19 existing portfolio companies and accounted for £3.6m of cash.The portfolio now comprises a total of 63 companies of which 14 are legacy investments made before the present Manager was appointed in January 2011. These now account for 14% of the net asset value of the Company.The Board has reassessed the carrying value of all portfolio investments and has reduced those wherever trading performance or market conditions made this necessary. The overall outcome shows a net positive gain on investments of £1m.For a detailed review of these additions, disposals and other developments in the business please see the Strategic report below.Dividend
The Board are pleased to declare a first dividend of 0.60 pence per share to be paid on 30 April 2020 to shareholders on the register on 14 April 2020. Further dividends must depend upon the outcome of the current healthcare emergency and the resources that may be required to support our portfolio companies and investment policy. If a second dividend of 0.60 pence per share were paid in line with the annual dividend target of 1.20 pence per share then, based on the closing net asset value at 31 December 2019 of 22.02 pence per share, this would equate to a yield of 5.4%.Manager
The Board continues closely to monitor the Manager’s performance and reporting and remains encouraged by progress.VCT qualifying status
As at 31 December 2019, the HMRC value of qualifying investments (which includes a 12 month disregard for disposals since 6 April 2019) was 100% (2018: 93%). The Board continues to monitor this and all the VCT qualification requirements very carefully in order to ensure that all requirements are met and that qualifying investments comfortably exceed the current minimum threshold, which from 1 January 2020 is 80% (previously 70%) required for the Company to continue to benefit from VCT tax status.Albion VCTs Prospectus Top Up Offers
In January 2019, the Company announced the launch of the Albion VCTs Prospectus Top Up Offers 2018/19 and was pleased to announce on 5 April 2019 that it had reached its £8 million limit under its Offer which was fully subscribed and closed early, as shown in note 14.On 22nd October 2019 your Board, in conjunction with the boards of four of the other VCTs managed by Albion Capital Group LLP, launched a further Prospectus Top Up Offer of new Ordinary shares. The Board was pleased to announce the Offer had received its target of £10m and therefore closed to further applications on 16 January 2020.The first allotment of shares under the Offer was on 31 January 2020 and a further allotment of shares in the 2020/21 tax year is anticipated in April 2020. Further details can be found in note 18.Share buy-backs
Given uncertainty on valuations caused by the Coronavirus and its impact on financial markets in recent times, the Board agreed to suspend the Company’s buy back operation on 18 March 2020, until after the Company has provided an updated valuation as at 31 March 2020 of the portfolio and the Company’s net asset value. The Board does not intend to resume the Company’s buyback programme until after the announcement of the 31 March 2020 unaudited net asset value.Annual General Meeting
As a Board, we have been deliberating the potential impact of the COVID-19 outbreak on the arrangements for our upcoming Annual General Meeting (“AGM”). These arrangements will evolve and we will keep shareholders updated of any changes on our Manager’s website at www.albion.capital/funds/KAY.We are required by law to hold an AGM within six months of our financial year end. Our AGM is therefore provisionally scheduled to be held at noon on 15 June 2020, at the offices of Albion Capital Group LLP, 1 Benjamin Street, London, EC1M 5QL unless changes in legislation or government guidelines dictate otherwise. We are putting in place contingency arrangements which mean that the meeting is unlikely to follow the same format as in previous years but will still meet the minimum legal requirements for an AGM. As a result, there will be no presentation from the Manager or from a portfolio company, and we will not be providing lunch after the AGM.Full details of the business to be conducted at the Annual General Meeting are given in the Notice of the Meeting on pages 69 and 70 of the full Annual Report and Financial Statements.This year, we would strongly encourage shareholders to consider whether attendance in person is necessary, especially given the public health advice. Shareholders’ views are important and the Board encourages shareholders’ to vote on the resolutions within the Notice of Annual General Meeting on pages 69 and 70 of the full Annual Report and Financial Statements using the proxy form enclosed with this Annual Report and Financial Statements, or electronically at www.investorcentre.co.uk/eproxy. The Board has carefully considered the business to be approved at the Annual General Meeting and recommends shareholders to vote in favour of all the resolutions being proposed. We encourage shareholders to submit their votes by proxy, rather than attending in person. If circumstances improve and you have submitted a proxy, you can still attend the meeting.We always welcome questions from our shareholders at the AGM but this year, we request that shareholders submit their questions to the Board before the AGM.
You can submit questions up until noon on 12 June 2020 in the following ways:By email: send your questions to KAYchair@albion.capital By telephone: contact Shareholder relations on 020 7601 1850Continuation as a venture capital trust
At the 2020 Annual General Meeting members will have the opportunity to confirm that they wish the Company to continue as a venture capital trust. If this resolution is not passed the Board is required to make proposals for the reorganisation, reconstruction or the orderly liquidation and winding up of the Company and present these to the members at a general meeting. Those shareholders who have deferred a capital gain by investing in the VCT should note that, on a return of capital, that gain would become chargeable at the prevailing rate of capital gains tax.Your Board believes that Kings Arms Yard VCT PLC has the potential to be a highly effective long-term investment vehicle, with strong tax-free dividend streams. Therefore, the Board recommends that shareholders should vote in favour of the Company continuing as a venture capital trust for a further five years, as they intend to vote in respect of their own shares.Risks and uncertainties
The outlook for the UK and global economies, including the implications of the current global healthcare emergency, any disruption from the departure of the UK from the EU, and the effects of recent quoted market turmoil, are the key risks affecting the Company and are under constant review. The Manager has performed an assessment on a portfolio company basis to assess our exposure to these risks and appropriate actions, where possible, are being implemented.The Manager has a clear focus to allocate resources to those sectors and opportunities where it believes growth can be both resilient and sustainable, with provision of cash to assist some portfolio companies in these extreme market conditions being a priority.A detailed analysis of the other risks and uncertainties facing the business is shown in the Strategic report below.Fraud warningWe note over recent months an increase in the number of shareholders being contacted in connection with increasingly sophisticated but fraudulent financial scams. This is often by a phone call or an email which normally originates from outside of the UK, often claiming or appearing to come from a corporate finance firm and typically offering to buy your VCT shares at an inflated price. If you are contacted, we recommend that you do not respond with any personal information and say you are not interested.The Manager maintains a page on their website in relation to fraud advice at www.albion.capital/investor-centre/fraud-advice.If you are in any doubt, we recommend that you seek financial advice before taking any action. You can also call Shareholder relations on 020 7601 1850, or email info@albion.capital, if you wish to check whether any claims made are genuine.Outlook and prospects
We live in an uncertain world in which there are no guarantees of future prosperity. The only thing of which we can be reasonably sure is continued and very possibly accelerating technological change. Against this background we are fortunate if we can afford to invest, as our Company is doing, in new ideas and new technologies.Your Board continues to believe that adding to and diversifying our portfolio of small unquoted businesses in varying stages of maturity offers superior value, and we remain confident of the long term prospects for our Company.Robin Field
Chairman
26 March 2020Strategic reportInvestment policyKings Arms Yard VCT PLC is a Venture Capital Trust and the investment policy is intended to produce a regular and predictable dividend stream with an appreciation in capital value.The Company will invest in a broad portfolio of higher growth businesses across a variety of sectors of the UK economy including higher risk technology companies. Allocation of assets will be determined by the investment opportunities which become available but efforts will be made to ensure that the portfolio is diversified both in terms of sector and stage of maturity of company.The full investment policy can be found above.Review of business and future changes
As outlined below, the Company has recorded a capital uplift during the year as a result of realised and unrealised gains of £1.0m. Key individual investment movements included a £1.5m uplift in Proveca Limited, a £0.3m uplift in OmPrompt Holdings Limited and a realised gain of £0.3m on the disposal of the remaining shares in ErgoMed PLC. This was offset by a reduction in the valuation of Anthropics Technology Limited of £1.0m and a further write down in the valuation of Elateral Group Limited of £0.4m.Details of significant events which have occurred since the end of the financial year are listed in note 18. Details of transactions with the Manager are shown in note 4.Results and dividendsThe Company paid dividends of 1.20 pence per share during the year ended 31 December 2019 (2018: 1.20 pence per share). The Directors have declared a first dividend of 0.60 pence per share for the year ending 31 December 2020, which will be paid on 30 April 2020 to shareholders on the register on 14 April 2020.As shown in the Income statement, investment income has increased to £2,144,000 (2018: £1,834,000) due to higher dividends received and loan stock income increasing to £1,855,000 (2018: £1,625,000). The capital loss of £90,000 for the year (2018: gain of £6,159,000) was primarily due to the valuation write downs of Anthropics Technology and Elateral Group, and the portion of the management fee charged to capital, offset by the increase in valuation of Proveca due to a recent funding round.The return for the year has decreased to £1,359,000 (2018: £7,190,000), equating to a return of 0.42 pence per share (2018: 2.38 pence per share).The Balance sheet shows that the net asset value has decreased over the last year to 22.02 pence per share (2018: 22.78 pence per share).There has been a net cash inflow of £2,382,000 for the year (2018: £785,000), mainly due to the disposal of fixed asset investments and fundraising, offset by the purchase of new investments, the payment of dividends and buyback of shares. Cash and liquid assets at the year-end increased to £9.9 million (2018: £7.5 million), representing 13% of net asset value.Current portfolio sector allocationThe pie charts at the end of this announcement show the split of the portfolio valuation as at 31 December 2019 by: sector; stage of investment; and number of employees. Details of the principal investments made by the Company are shown in the Portfolio of investments on pages 22 to 24 of the full Annual Report and Financial Statements.Direction of portfolioAs at 31 December 2019 the portfolio is well balanced in terms of sectors and stage of maturity, with software and other technology being the largest element of the portfolio. In line with the recent changes to VCT legislation and the Company’s investment policy as outlined above, future investments will continue to be focused on higher growth businesses across a variety of sectors.Future prospectsThe Company’s performance record reflects the success of the strategy outlined above and has enabled the Company to maintain a predictable stream of dividend payments to shareholders. As detailed in the Chairman’s statement, since the Company’s year end the world has been plunged into a healthcare emergency and it is unlikely that any investment company will remain unaffected. Although it is too early to gauge the full economic consequences, the Company’s portfolio is well balanced across sectors and risk classes and the Board believes that the Company has the potential to continue to deliver returns to shareholders. Further details on the Company’s outlook and prospects can be found in the Chairman’s statement.Key Performance Indicators (“KPIs”) and Alternative Performance Measures (“APMs”)
The Directors believe that the following KPIs and APMs, which are typical for venture capital trusts, used in their own assessment of the Company, will provide shareholders with sufficient information to assess how effectively the Company is applying its investment policy to meet its objectives. The Directors are satisfied that the results shown in the following KPIs and APMs give a good indication that the Company is achieving its investment objective and policy. These are:1. Total shareholder return relative to FTSE All-Share Index total return
The graph on page 4 of the full Annual Report and Financial Statements shows the strong performance of the Company’s total shareholder return against the FTSE All-Share Index total return, with dividends reinvested, from the appointment of Albion Capital Group LLP on 1 January 2011. The Directors consider the FTSE All-Share Index to be the most appropriate indicative benchmark for the Company as it contains a large range of sectors within the UK economy similar to a generalist VCT. Investors should, however, be reminded that shares in VCTs generally trade at a discount to their net asset values.2. Net asset value per share and total shareholder return
Total shareholder return since inception increased by 0.44 pence per share (1.8% on opening NAV) to 89.75 pence per share for the year ended 31 December 2019.3. Shareholder return in the year†† Methodology: Shareholder return is calculated by the movement in total shareholder value for the year divided by the opening net asset value.Source: Albion Capital Group LLP4. Dividend distributions
Dividends paid in respect of the year ended 31 December 2019 were 1.20 pence per share (2018: 1.20 pence per share), in line with the Board’s dividend objective for 2019. The annual dividend target for the 2020 financial year is 1.20 pence per share as outlined in the Chairman’s statement. The cumulative dividend paid since inception is 67.73 pence per share.5. Ongoing charges
The ongoing charges ratio for the year to 31 December 2019 was 2.4% (2018: 2.4%). The ongoing charges ratio has been calculated using The Association of Investment Companies (“AIC”) recommended methodology. This figure shows shareholders the total recurring annual running expenses (including investment management fees charged to capital reserve) as a percentage of the average net assets attributable to shareholders. The Directors expect the ongoing charges ratio for the year ahead to be approximately 2.4%.6. VCT regulation*
The investment policy is designed to ensure that the Company continues to qualify and is approved as a VCT by HMRC. In order to maintain its status under Venture Capital Trust legislation, a VCT must comply on a continuing basis with the provisions of Section 274 of the Income Tax Act 2007, details of which are provided in the Directors’ report on page 31 of the full Annual Report and Financial Statements.The relevant tests to measure compliance have been carried out and independently reviewed for the year ended 31 December 2019. These showed that the Company has complied with all tests and continues to do so.*VCT compliance is not a numerical measure of performance and thus cannot be defined as an APM.Investment progress
During the year, £5.6 million of cash was invested in new and existing portfolio companies, predominantly in the healthcare and technology sectors. New investments were made in 6 companies and totalled £2.0 million during the year and included:Avora (£510,000), a developer of software to improve decision making through augmented analytics and machine learning;Elliptic Enterprises (£488,000), a provider of Anti Money Laundering services to digital asset institutions;Cantab Research (T/A Speechmatics) (£460,000), provider of a low footprint automated speech recognition software which can be deployed in the cloud, on premise or on device across 29 languages;Limitless Technology (£260,000), a provider of a customer service platform powered by the crowd and machine learning technology;Clear Review (£203,000), a provider of Human Resources software to mid-market enterprises; andImandra (£91,000), a provider of automated software testing and an enhanced learning experience for artificial neural networks.Follow-on investments were made in 19 portfolio companies and totalled £3.6 million during the year. The three largest being: £955,000 into Proveca, a company which reformulates medicines for paediatric use; £762,000 into Perpetuum, a provider of vibration harvester powered wireless sensing systems for the rail and industrial sectors; and £400,000 into Elateral Group, a provider of digital marketing software.During the year the Company sold its entire holding in Bravo Inns II realising proceeds of £1.3 million with a realised gain on cost of £0.5 million. The Company also sold its remaining holding in ErgoMed generating proceeds of £1.2 million and a realised gain on cost of £0.4m. Other realisations can be found in the realisations table on page 24 of the full Annual Report and Financial Statements.The pie chart at the end of this announcement outlines the different sectors in which the Company’s assets, at carrying value, are currently invested.Operational arrangements
The Company has delegated the investment management of the portfolio to Albion Capital Group LLP, which is authorised and regulated by the Financial Conduct Authority. Albion Capital Group LLP also provides company secretarial and other accounting and administrative support to the Company.Management agreement
Under the Investment Management Agreement, Albion Capital Group LLP provides investment management, company secretarial and administrative services to the Company. Albion Capital Group LLP is entitled to an annual management fee of 2% of net asset value of the Company, payable quarterly in arrears, along with an annual administration fee of £50,000. The aggregate payable for management and administration (normal running costs) are subject to an aggregate annual cap of 3% of the year end closing net asset value, for accounting periods commencing after 31 December 2011.The Investment Management Agreement can be terminated by either party on 12 months’ notice and is subject to earlier termination in the event of certain breaches or on the insolvency of either party.The Manager is also entitled to an arrangement fee on investment, payable by each portfolio company, of approximately 2% of each investment made and monitoring fees where the Manager has a representative on the portfolio company’s board. Further details of the Manager’s fee can be found in note 4.Performance incentive fee
As an incentive to maximise the return to investors, the Manager is entitled to charge an incentive fee in the event that the returns exceed minimum target levels.The performance hurdle is equal to the greater of the Starting NAV of 20 pence per share, increased by the increase in RPI plus 2% per annum from the Start Date of 1 January 2014 (calculated on a simple and not compound basis) and the highest Total Return for any earlier period after the Start Date (the ‘high watermark’). An annual fee (in respect of each share in issue) of an amount equal to 15% of any excess of the Total Return (this being NAV per share plus dividends paid after the Start Date) as at the end of the relevant accounting period over the performance hurdle will be due to the Manager.There was no management performance incentive payable during the year (2018: £637,000). As at 31 December 2019, the total return of the Company since 1 January 2014 (the performance incentive fee start date) was 28.42 pence per share, compared to a performance hurdle rate of 28.82 pence per share, resulting in a shortfall of 0.40 pence per share. This amount needs to be made up in future accounting periods in order for an incentive fee to become payable.Evaluation of the Manager
The Board has evaluated the performance of the Manager based on the returns generated by the Company from the management and sale of existing investments, the continuing achievement of the 70% (80% from 1 January 2020 for the Company) qualifying investment holdings requirement for the Venture Capital Trust status, the making of new investments in accordance with the investment policy, the long term prospects of current investments, a review of the Investment Management Agreement and the services provided therein and benchmarking the performance of the Manager to other service providers.The Board believes that it is in the interests of shareholders as a whole, and of the Company, to continue the appointment of the Manager for the forthcoming year.Alternative Investment Fund Managers Directive (“AIFMD”)
The Board appointed Albion Capital Group LLP as the Company’s AIFM in June 2014 as required by the AIFMD. The Manager became a full-scope Alternative Investment Fund Manager under the AIFMD on 1 October 2018. As a result, from that date, Ocorian (UK) Limited was appointed as Depositary to oversee the custody and cash arrangements and provide other AIFMD duties with respect to the Company.Companies Act 2006 Section 172 Reporting
Under Section 172 of the Companies Act 2006, the Board has a duty to promote the success of the Company for the benefit of its members as a whole, having regard to the interests of other stakeholders in the Company, such as suppliers, and to do so with an understanding of the impact on the community and environment and with high standards of business conduct, which includes acting fairly between members of the Company.
The Board is very conscious of these wider responsibilities in the ways it promotes the Company’s culture and ensures, as part of its regular oversight, that the integrity of the Company’s affairs is foremost in the way the activities are managed and promoted. This includes regular engagement with the wider stakeholders of the Company and being alert to issues that might damage the Company’s standing in the way that it operates. The Board works very closely with the Manager in reviewing how stakeholder issues are handled, ensuring good governance and responsibility in managing the Company’s affairs, as well as visibility and openness in how the affairs are conducted.
LEI Code 213800DK8H27QY3J5R45As required by the UK Listing Authority’s Disclosure Guidance and Transparency Rules 4.1 and 6.3, Kings Arms Yard VCT PLC today makes public its information relating to the Annual Report and Financial Statements for the year ended 31 December 2019.The announcement was approved for release by the Board of Directors on 26 March 2020.This announcement has not been audited.The Annual Report and Financial Statements for the year ended 31 December 2019 (which have been audited), will shortly be sent to shareholders. Copies of the full Annual Report and Financial Statements will be shown via the Albion Capital Group LLP website by clicking www.albion.capital/funds/KAY/31Dec2019.pdf.The information contained in the Annual Report and Financial Statements will include information as required by the Disclosure Guidance and Transparency Rule’s, including Rule 4.1.Investment policyKings Arms Yard VCT PLC is a Venture Capital Trust and the investment policy is intended to produce a regular and predictable dividend stream with an appreciation in capital value.The Company will invest in a broad portfolio of higher growth businesses across a variety of sectors of the UK economy including higher risk technology companies. Allocation of assets will be determined by the investment opportunities which become available but efforts will be made to ensure that the portfolio is diversified both in terms of sector and stage of maturity of company.Funds held pending investment or for liquidity purposes are held as cash on deposit or similar instruments with banks or other financial institutions with high credit ratings assigned by international credit rating agencies.Risk diversification and maximum exposuresRisk is spread by investing in a number of different businesses within venture capital trust qualifying industry sectors using a mixture of securities. The maximum amount which the Company will invest in a single portfolio company is 15 per cent. of the Company’s assets at cost, thus ensuring a spread of investment risk. The value of an individual investment may increase over time as a result of trading progress and it is possible that it may grow in value to a point where it represents a significantly higher proportion of total assets prior to a realisation opportunity being available.The Company’s maximum exposure in relation to gearing is restricted to the amount equal to its adjusted capital and reserves.Financial calendarFinancial highlights
The Directors have declared a first dividend of 0.60 pence per share for the year ending 31 December 2020, which will be paid on 30 April 2020 to shareholders on the register on 14 April 2020.The above financial summary is for the Company, Kings Arms Yard VCT PLC only. Details of the financial performance of the various Quester, SPARK and Kings Arms Yard VCT 2 PLC companies, which have been merged into the Company, can be found at www.albion.capital/funds/KAY under the ‘Financial summary for previous funds’ section.Chairman’s statementIntroduction
2019 was a less active year for realisations by our Company than those that preceded it, and portfolio capital gains have been more muted, but our total return on net assets has again progressed and a number of potentially exciting new technology investments have been made.Covid-19
Since the Company’s year end the world has been plunged into a healthcare emergency the possible extent of which cannot yet be assessed. It is too early to gauge the full economic consequences but the possibility of global recession has been widely predicted.In these circumstances it is unlikely that any investment company will remain unaffected.Our Manager is now assessing what might be the impact of the crisis on the value of each of our portfolio companies and we hope that by the end of April 2020 we will be able to publish our views on this and our Company’s unaudited net asset value as at 31 March 2020.Investment policyShareholders will recall the changes in the rules applying to permissible investments by venture capital trusts which were heralded by the Autumn Budget of November 2017. In our Annual Report for 2017 we characterised these changes as being intended “to encourage more high growth investment through VCTs rather than low risk, heavily asset-backed investments.”Accordingly, we proposed changing the Company’s investment policy to that shown on above, which was adopted at the Annual General Meeting in May 2018. Two years after these changes it is appropriate to examine the effect they have had on our portfolio, and how this is likely to develop in the future.At the end of 2016, 51% of the value of our investment portfolio comprised asset-backed or publicly quoted businesses. By 31 December 2019 this proportion had shrunk to 42%, while the proportion of value in higher growth businesses including higher risk technology companies had grown from 49% to 58%. Going forward, this shift is likely to increase as maturing investments are sold and more higher growth investments are made.While we have seen no material adverse change in any of the investments made since 2017, it is undeniable that investing in new technology carries a higher risk than that associated with some of the heavily asset-backed businesses that formed the majority of our portfolio in 2016, and this will inevitably increase volatility over time.This risk is, however, mitigated by two factors. Firstly, our Manager has expanded its resources to increase the number of investment professionals with experience of new technologies, and secondly, it is tending to select businesses that have already received and successfully deployed at least one round of external finance from other proven investment professionals.Results and performance
The total return for the year was 0.42 pence per share, which is a 1.8% return on opening net asset value. Realised and unrealised gains on investments amounted to £1m for the year, mainly driven by a significant uplift of £1.5m in our valuation of Proveca, in light of a recent funding round, offset by write downs of Anthropics Technology (£1m) and Elateral Group (£0.4m).Net asset value per share decreased by 0.76 pence to 22.02 pence over the year to 31 December 2019, after allowing for the payment of dividends totalling 1.20 pence per share.We sold our holding in Bravo Inns II generating proceeds of £1.3m and a realised gain of £0.5m. Over the life of our investment, including interest received, we generated a return on cost of 2.0 times. The divestment of the legacy portfolio continues with the complete disposal of our holding in ErgoMed and The Wentworth Wooden Jigsaw Company, generating realised gains of £0.4m and £0.2m respectively. Total proceeds for the full disposal of ErgoMed now amount to £1.8m, representing a return on cost of 1.2 times. Further details can be found in the realisations table below.PortfolioThe Company holds a widely diversified selection of businesses, with key investments in the healthcare, renewable energy and technology sectors. The majority of our investment portfolio comprises companies whose annual sales are growing.In line with the Company’s investment policy of investing in a broad range of higher growth businesses and technology companies, software and other technology represents 33% of our portfolio and is expected to continue to increase going forward. During the year a total of £2.0m was invested in 6 new portfolio companies, the majority of which are software and other technology businesses. Follow on investments were made into 19 existing portfolio companies and accounted for £3.6m of cash.The portfolio now comprises a total of 63 companies of which 14 are legacy investments made before the present Manager was appointed in January 2011. These now account for 14% of the net asset value of the Company.The Board has reassessed the carrying value of all portfolio investments and has reduced those wherever trading performance or market conditions made this necessary. The overall outcome shows a net positive gain on investments of £1m.For a detailed review of these additions, disposals and other developments in the business please see the Strategic report below.Dividend
The Board are pleased to declare a first dividend of 0.60 pence per share to be paid on 30 April 2020 to shareholders on the register on 14 April 2020. Further dividends must depend upon the outcome of the current healthcare emergency and the resources that may be required to support our portfolio companies and investment policy. If a second dividend of 0.60 pence per share were paid in line with the annual dividend target of 1.20 pence per share then, based on the closing net asset value at 31 December 2019 of 22.02 pence per share, this would equate to a yield of 5.4%.Manager
The Board continues closely to monitor the Manager’s performance and reporting and remains encouraged by progress.VCT qualifying status
As at 31 December 2019, the HMRC value of qualifying investments (which includes a 12 month disregard for disposals since 6 April 2019) was 100% (2018: 93%). The Board continues to monitor this and all the VCT qualification requirements very carefully in order to ensure that all requirements are met and that qualifying investments comfortably exceed the current minimum threshold, which from 1 January 2020 is 80% (previously 70%) required for the Company to continue to benefit from VCT tax status.Albion VCTs Prospectus Top Up Offers
In January 2019, the Company announced the launch of the Albion VCTs Prospectus Top Up Offers 2018/19 and was pleased to announce on 5 April 2019 that it had reached its £8 million limit under its Offer which was fully subscribed and closed early, as shown in note 14.On 22nd October 2019 your Board, in conjunction with the boards of four of the other VCTs managed by Albion Capital Group LLP, launched a further Prospectus Top Up Offer of new Ordinary shares. The Board was pleased to announce the Offer had received its target of £10m and therefore closed to further applications on 16 January 2020.The first allotment of shares under the Offer was on 31 January 2020 and a further allotment of shares in the 2020/21 tax year is anticipated in April 2020. Further details can be found in note 18.Share buy-backs
Given uncertainty on valuations caused by the Coronavirus and its impact on financial markets in recent times, the Board agreed to suspend the Company’s buy back operation on 18 March 2020, until after the Company has provided an updated valuation as at 31 March 2020 of the portfolio and the Company’s net asset value. The Board does not intend to resume the Company’s buyback programme until after the announcement of the 31 March 2020 unaudited net asset value.Annual General Meeting
As a Board, we have been deliberating the potential impact of the COVID-19 outbreak on the arrangements for our upcoming Annual General Meeting (“AGM”). These arrangements will evolve and we will keep shareholders updated of any changes on our Manager’s website at www.albion.capital/funds/KAY.We are required by law to hold an AGM within six months of our financial year end. Our AGM is therefore provisionally scheduled to be held at noon on 15 June 2020, at the offices of Albion Capital Group LLP, 1 Benjamin Street, London, EC1M 5QL unless changes in legislation or government guidelines dictate otherwise. We are putting in place contingency arrangements which mean that the meeting is unlikely to follow the same format as in previous years but will still meet the minimum legal requirements for an AGM. As a result, there will be no presentation from the Manager or from a portfolio company, and we will not be providing lunch after the AGM.Full details of the business to be conducted at the Annual General Meeting are given in the Notice of the Meeting on pages 69 and 70 of the full Annual Report and Financial Statements.This year, we would strongly encourage shareholders to consider whether attendance in person is necessary, especially given the public health advice. Shareholders’ views are important and the Board encourages shareholders’ to vote on the resolutions within the Notice of Annual General Meeting on pages 69 and 70 of the full Annual Report and Financial Statements using the proxy form enclosed with this Annual Report and Financial Statements, or electronically at www.investorcentre.co.uk/eproxy. The Board has carefully considered the business to be approved at the Annual General Meeting and recommends shareholders to vote in favour of all the resolutions being proposed. We encourage shareholders to submit their votes by proxy, rather than attending in person. If circumstances improve and you have submitted a proxy, you can still attend the meeting.We always welcome questions from our shareholders at the AGM but this year, we request that shareholders submit their questions to the Board before the AGM.
You can submit questions up until noon on 12 June 2020 in the following ways:By email: send your questions to KAYchair@albion.capital By telephone: contact Shareholder relations on 020 7601 1850Continuation as a venture capital trust
At the 2020 Annual General Meeting members will have the opportunity to confirm that they wish the Company to continue as a venture capital trust. If this resolution is not passed the Board is required to make proposals for the reorganisation, reconstruction or the orderly liquidation and winding up of the Company and present these to the members at a general meeting. Those shareholders who have deferred a capital gain by investing in the VCT should note that, on a return of capital, that gain would become chargeable at the prevailing rate of capital gains tax.Your Board believes that Kings Arms Yard VCT PLC has the potential to be a highly effective long-term investment vehicle, with strong tax-free dividend streams. Therefore, the Board recommends that shareholders should vote in favour of the Company continuing as a venture capital trust for a further five years, as they intend to vote in respect of their own shares.Risks and uncertainties
The outlook for the UK and global economies, including the implications of the current global healthcare emergency, any disruption from the departure of the UK from the EU, and the effects of recent quoted market turmoil, are the key risks affecting the Company and are under constant review. The Manager has performed an assessment on a portfolio company basis to assess our exposure to these risks and appropriate actions, where possible, are being implemented.The Manager has a clear focus to allocate resources to those sectors and opportunities where it believes growth can be both resilient and sustainable, with provision of cash to assist some portfolio companies in these extreme market conditions being a priority.A detailed analysis of the other risks and uncertainties facing the business is shown in the Strategic report below.Fraud warningWe note over recent months an increase in the number of shareholders being contacted in connection with increasingly sophisticated but fraudulent financial scams. This is often by a phone call or an email which normally originates from outside of the UK, often claiming or appearing to come from a corporate finance firm and typically offering to buy your VCT shares at an inflated price. If you are contacted, we recommend that you do not respond with any personal information and say you are not interested.The Manager maintains a page on their website in relation to fraud advice at www.albion.capital/investor-centre/fraud-advice.If you are in any doubt, we recommend that you seek financial advice before taking any action. You can also call Shareholder relations on 020 7601 1850, or email info@albion.capital, if you wish to check whether any claims made are genuine.Outlook and prospects
We live in an uncertain world in which there are no guarantees of future prosperity. The only thing of which we can be reasonably sure is continued and very possibly accelerating technological change. Against this background we are fortunate if we can afford to invest, as our Company is doing, in new ideas and new technologies.Your Board continues to believe that adding to and diversifying our portfolio of small unquoted businesses in varying stages of maturity offers superior value, and we remain confident of the long term prospects for our Company.Robin Field
Chairman
26 March 2020Strategic reportInvestment policyKings Arms Yard VCT PLC is a Venture Capital Trust and the investment policy is intended to produce a regular and predictable dividend stream with an appreciation in capital value.The Company will invest in a broad portfolio of higher growth businesses across a variety of sectors of the UK economy including higher risk technology companies. Allocation of assets will be determined by the investment opportunities which become available but efforts will be made to ensure that the portfolio is diversified both in terms of sector and stage of maturity of company.The full investment policy can be found above.Review of business and future changes
As outlined below, the Company has recorded a capital uplift during the year as a result of realised and unrealised gains of £1.0m. Key individual investment movements included a £1.5m uplift in Proveca Limited, a £0.3m uplift in OmPrompt Holdings Limited and a realised gain of £0.3m on the disposal of the remaining shares in ErgoMed PLC. This was offset by a reduction in the valuation of Anthropics Technology Limited of £1.0m and a further write down in the valuation of Elateral Group Limited of £0.4m.Details of significant events which have occurred since the end of the financial year are listed in note 18. Details of transactions with the Manager are shown in note 4.Results and dividendsThe Company paid dividends of 1.20 pence per share during the year ended 31 December 2019 (2018: 1.20 pence per share). The Directors have declared a first dividend of 0.60 pence per share for the year ending 31 December 2020, which will be paid on 30 April 2020 to shareholders on the register on 14 April 2020.As shown in the Income statement, investment income has increased to £2,144,000 (2018: £1,834,000) due to higher dividends received and loan stock income increasing to £1,855,000 (2018: £1,625,000). The capital loss of £90,000 for the year (2018: gain of £6,159,000) was primarily due to the valuation write downs of Anthropics Technology and Elateral Group, and the portion of the management fee charged to capital, offset by the increase in valuation of Proveca due to a recent funding round.The return for the year has decreased to £1,359,000 (2018: £7,190,000), equating to a return of 0.42 pence per share (2018: 2.38 pence per share).The Balance sheet shows that the net asset value has decreased over the last year to 22.02 pence per share (2018: 22.78 pence per share).There has been a net cash inflow of £2,382,000 for the year (2018: £785,000), mainly due to the disposal of fixed asset investments and fundraising, offset by the purchase of new investments, the payment of dividends and buyback of shares. Cash and liquid assets at the year-end increased to £9.9 million (2018: £7.5 million), representing 13% of net asset value.Current portfolio sector allocationThe pie charts at the end of this announcement show the split of the portfolio valuation as at 31 December 2019 by: sector; stage of investment; and number of employees. Details of the principal investments made by the Company are shown in the Portfolio of investments on pages 22 to 24 of the full Annual Report and Financial Statements.Direction of portfolioAs at 31 December 2019 the portfolio is well balanced in terms of sectors and stage of maturity, with software and other technology being the largest element of the portfolio. In line with the recent changes to VCT legislation and the Company’s investment policy as outlined above, future investments will continue to be focused on higher growth businesses across a variety of sectors.Future prospectsThe Company’s performance record reflects the success of the strategy outlined above and has enabled the Company to maintain a predictable stream of dividend payments to shareholders. As detailed in the Chairman’s statement, since the Company’s year end the world has been plunged into a healthcare emergency and it is unlikely that any investment company will remain unaffected. Although it is too early to gauge the full economic consequences, the Company’s portfolio is well balanced across sectors and risk classes and the Board believes that the Company has the potential to continue to deliver returns to shareholders. Further details on the Company’s outlook and prospects can be found in the Chairman’s statement.Key Performance Indicators (“KPIs”) and Alternative Performance Measures (“APMs”)
The Directors believe that the following KPIs and APMs, which are typical for venture capital trusts, used in their own assessment of the Company, will provide shareholders with sufficient information to assess how effectively the Company is applying its investment policy to meet its objectives. The Directors are satisfied that the results shown in the following KPIs and APMs give a good indication that the Company is achieving its investment objective and policy. These are:1. Total shareholder return relative to FTSE All-Share Index total return
The graph on page 4 of the full Annual Report and Financial Statements shows the strong performance of the Company’s total shareholder return against the FTSE All-Share Index total return, with dividends reinvested, from the appointment of Albion Capital Group LLP on 1 January 2011. The Directors consider the FTSE All-Share Index to be the most appropriate indicative benchmark for the Company as it contains a large range of sectors within the UK economy similar to a generalist VCT. Investors should, however, be reminded that shares in VCTs generally trade at a discount to their net asset values.2. Net asset value per share and total shareholder return
Total shareholder return since inception increased by 0.44 pence per share (1.8% on opening NAV) to 89.75 pence per share for the year ended 31 December 2019.3. Shareholder return in the year†† Methodology: Shareholder return is calculated by the movement in total shareholder value for the year divided by the opening net asset value.Source: Albion Capital Group LLP4. Dividend distributions
Dividends paid in respect of the year ended 31 December 2019 were 1.20 pence per share (2018: 1.20 pence per share), in line with the Board’s dividend objective for 2019. The annual dividend target for the 2020 financial year is 1.20 pence per share as outlined in the Chairman’s statement. The cumulative dividend paid since inception is 67.73 pence per share.5. Ongoing charges
The ongoing charges ratio for the year to 31 December 2019 was 2.4% (2018: 2.4%). The ongoing charges ratio has been calculated using The Association of Investment Companies (“AIC”) recommended methodology. This figure shows shareholders the total recurring annual running expenses (including investment management fees charged to capital reserve) as a percentage of the average net assets attributable to shareholders. The Directors expect the ongoing charges ratio for the year ahead to be approximately 2.4%.6. VCT regulation*
The investment policy is designed to ensure that the Company continues to qualify and is approved as a VCT by HMRC. In order to maintain its status under Venture Capital Trust legislation, a VCT must comply on a continuing basis with the provisions of Section 274 of the Income Tax Act 2007, details of which are provided in the Directors’ report on page 31 of the full Annual Report and Financial Statements.The relevant tests to measure compliance have been carried out and independently reviewed for the year ended 31 December 2019. These showed that the Company has complied with all tests and continues to do so.*VCT compliance is not a numerical measure of performance and thus cannot be defined as an APM.Investment progress
During the year, £5.6 million of cash was invested in new and existing portfolio companies, predominantly in the healthcare and technology sectors. New investments were made in 6 companies and totalled £2.0 million during the year and included:Avora (£510,000), a developer of software to improve decision making through augmented analytics and machine learning;Elliptic Enterprises (£488,000), a provider of Anti Money Laundering services to digital asset institutions;Cantab Research (T/A Speechmatics) (£460,000), provider of a low footprint automated speech recognition software which can be deployed in the cloud, on premise or on device across 29 languages;Limitless Technology (£260,000), a provider of a customer service platform powered by the crowd and machine learning technology;Clear Review (£203,000), a provider of Human Resources software to mid-market enterprises; andImandra (£91,000), a provider of automated software testing and an enhanced learning experience for artificial neural networks.Follow-on investments were made in 19 portfolio companies and totalled £3.6 million during the year. The three largest being: £955,000 into Proveca, a company which reformulates medicines for paediatric use; £762,000 into Perpetuum, a provider of vibration harvester powered wireless sensing systems for the rail and industrial sectors; and £400,000 into Elateral Group, a provider of digital marketing software.During the year the Company sold its entire holding in Bravo Inns II realising proceeds of £1.3 million with a realised gain on cost of £0.5 million. The Company also sold its remaining holding in ErgoMed generating proceeds of £1.2 million and a realised gain on cost of £0.4m. Other realisations can be found in the realisations table on page 24 of the full Annual Report and Financial Statements.The pie chart at the end of this announcement outlines the different sectors in which the Company’s assets, at carrying value, are currently invested.Operational arrangements
The Company has delegated the investment management of the portfolio to Albion Capital Group LLP, which is authorised and regulated by the Financial Conduct Authority. Albion Capital Group LLP also provides company secretarial and other accounting and administrative support to the Company.Management agreement
Under the Investment Management Agreement, Albion Capital Group LLP provides investment management, company secretarial and administrative services to the Company. Albion Capital Group LLP is entitled to an annual management fee of 2% of net asset value of the Company, payable quarterly in arrears, along with an annual administration fee of £50,000. The aggregate payable for management and administration (normal running costs) are subject to an aggregate annual cap of 3% of the year end closing net asset value, for accounting periods commencing after 31 December 2011.The Investment Management Agreement can be terminated by either party on 12 months’ notice and is subject to earlier termination in the event of certain breaches or on the insolvency of either party.The Manager is also entitled to an arrangement fee on investment, payable by each portfolio company, of approximately 2% of each investment made and monitoring fees where the Manager has a representative on the portfolio company’s board. Further details of the Manager’s fee can be found in note 4.Performance incentive fee
As an incentive to maximise the return to investors, the Manager is entitled to charge an incentive fee in the event that the returns exceed minimum target levels.The performance hurdle is equal to the greater of the Starting NAV of 20 pence per share, increased by the increase in RPI plus 2% per annum from the Start Date of 1 January 2014 (calculated on a simple and not compound basis) and the highest Total Return for any earlier period after the Start Date (the ‘high watermark’). An annual fee (in respect of each share in issue) of an amount equal to 15% of any excess of the Total Return (this being NAV per share plus dividends paid after the Start Date) as at the end of the relevant accounting period over the performance hurdle will be due to the Manager.There was no management performance incentive payable during the year (2018: £637,000). As at 31 December 2019, the total return of the Company since 1 January 2014 (the performance incentive fee start date) was 28.42 pence per share, compared to a performance hurdle rate of 28.82 pence per share, resulting in a shortfall of 0.40 pence per share. This amount needs to be made up in future accounting periods in order for an incentive fee to become payable.Evaluation of the Manager
The Board has evaluated the performance of the Manager based on the returns generated by the Company from the management and sale of existing investments, the continuing achievement of the 70% (80% from 1 January 2020 for the Company) qualifying investment holdings requirement for the Venture Capital Trust status, the making of new investments in accordance with the investment policy, the long term prospects of current investments, a review of the Investment Management Agreement and the services provided therein and benchmarking the performance of the Manager to other service providers.The Board believes that it is in the interests of shareholders as a whole, and of the Company, to continue the appointment of the Manager for the forthcoming year.Alternative Investment Fund Managers Directive (“AIFMD”)
The Board appointed Albion Capital Group LLP as the Company’s AIFM in June 2014 as required by the AIFMD. The Manager became a full-scope Alternative Investment Fund Manager under the AIFMD on 1 October 2018. As a result, from that date, Ocorian (UK) Limited was appointed as Depositary to oversee the custody and cash arrangements and provide other AIFMD duties with respect to the Company.Companies Act 2006 Section 172 Reporting
Under Section 172 of the Companies Act 2006, the Board has a duty to promote the success of the Company for the benefit of its members as a whole, having regard to the interests of other stakeholders in the Company, such as suppliers, and to do so with an understanding of the impact on the community and environment and with high standards of business conduct, which includes acting fairly between members of the Company.
The Board is very conscious of these wider responsibilities in the ways it promotes the Company’s culture and ensures, as part of its regular oversight, that the integrity of the Company’s affairs is foremost in the way the activities are managed and promoted. This includes regular engagement with the wider stakeholders of the Company and being alert to issues that might damage the Company’s standing in the way that it operates. The Board works very closely with the Manager in reviewing how stakeholder issues are handled, ensuring good governance and responsibility in managing the Company’s affairs, as well as visibility and openness in how the affairs are conducted.
