Downing ONE VCT plc : Final Results


DOWNING ONE VCT PLC
LEI: 213800R88MRC4Y3OIW86
Report & Accounts for the year ended 31 March 2018
FINANCIAL SUMMARYCHAIRMAN'S STATEMENTI am pleased to present the Company's Annual Report for the year ended 31 March 2018.The year saw a reasonable amount of investment activity along with the completion of a successful offer for subscription which has provided the Company with further funds for investment and increased the size of the Company.Net asset value and results
As at 31 March 2018, the net asset value per share ("NAV") stood at 87.5p, an increase of 4.6p (5.1%) after adding back dividends of 7.5p per share which were paid during the year.
The Income Statement shows a return attributable to equity shareholders for the year of £4.8 million comprising a revenue gain of £2.1 million and a capital return of £2.7 million.Fundraising
The Company launched an offer for subscription in September 2017, which closed in April 2018 having reached the full capacity of £30 million. With the size of the Company now increased, the burden of the fixed running costs on all Shareholders is reduced and the task of starting to invest the new funds is now underway.
Investment activity and performance
At the year end, the Company held a portfolio of 79 investments. Of these, 31 are either quoted on AIM or the NEX Exchange Growth Market and have a value of £30.0 million (36.8% of the portfolio). The 48 unquoted investments have a value of £51.6 million and represent 63.2% of the portfolio.
Further details on the investment activity are included in the Investment Adviser's Reports.Dividends
The Company has a policy of seeking to pay annual dividends of at least 4% of net assets per annum.
The Board is again proposing to pay a final dividend higher than the target level in view of the level realisations achieved. A final dividend of 3.0p per share to be paid on 24 August 2018, subject to Shareholder approval at the forthcoming AGM, to Shareholders on the register at 3 August 2018. This will bring total dividends in respect of the year ended 31 March 2018 to 6.0p per share (2017: 7.5p), which represents a yield based on opening NAV of 6.6% pa.Shareholders are reminded that the Company operates a Dividend Reinvestment Scheme for those investors that wish to reinvest their dividends and obtain further income tax relief on the reinvested dividend. A Dividend Reinvestment Form is available on Downing's website or further information can be obtained by contacting Downing.Share buybacks
The Company continues to operate a policy of buying in its own shares that become available in the market at a 5% discount to NAV (subject to liquidity and any regulatory restrictions).
During the year, the Company purchased 2,099,238 shares at an average price of 83.8p per share.The Company retains Panmure Gordon as its corporate broker to assist in operating the share buyback process and ensuring that the quoted spread on the Company's shares remains at a reasonable level.Annual General Meeting
The Company's next Annual General Meeting ("AGM") will be held at Downing LLP, 6th floor, St. Magnus House, 3 Lower Thames Street, London, EC3R 6HD at 10:45 a.m. on 22 August 2018.
Three items of special business are proposed at the AGM:
- one in respect of the authority to buy back shares as noted above, and.
- two in respect of authority to allotment of shares.
The offer for subscription mentioned above gave investors the opportunity to make regular monthly subscriptions in the company. The authority to allot shares ensures the Company will be able to allot shares to monthly investors and also give the Board the opportunity to consider further fundraising options without having to necessarily incur the expense of seeking separate approval via a circular. Any decision on future fundraising will, of course, give consideration to the level of uninvested funds already held by the Company and the rate of investment.Outlook
Shareholders will likely be aware that the Government has made significant changes to the VCT scheme in the last two years in order to refocus it towards young growth companies. A feature of Downing ONE is that it holds a substantial portfolio of investments, in both the growth and income focussed categories, made before the latest rule changes. The Company can continue to benefit from holding this broader range of assets, however additions made in the future will mainly now be growth investments. The Board is pleased to report that that the Investment Adviser is generating a steady flow of suitable investment opportunities that fall within the new parameters. Over time, as the available funds are invested, we expect the balance of the portfolio to shift gradually towards growth investments. This will increase the risk profile of the portfolio but also provides the opportunity for greater rewards.
Against this background, the Board has had some initial discussions with the Investment Adviser about the possibility of introducing a performance incentive scheme. Such schemes are common in the VCT industry and are a helpful tool in assisting the Adviser to attract and retain talented and experienced executives.  This is particularly important now that the investment focus has shifted to growth investing and the environment is becoming increasingly competitive.  The Board will work with the Adviser to seek to design a scheme which it believes to be in the best interests of Shareholders and expects to be able to circulate formal proposals to Shareholders for approval in the coming months.In summary, the Board feels the Company is well positioned in holding a diversified existing portfolio and further developing the portfolio of growth investments with the new funds.I look forward to meeting Shareholders at the AGM and to reporting developments in my statement with the Half Year Report to 30 September 2018.Chris Kay
Chairman
INVESTMENT ADVISER'S REPORT - OVERVIEWIntroduction
We are pleased to present a review of the investment portfolio and activity over the last financial year. Our review is split into three parts comprising this overview, a detailed report on the unquoted investments and a report on quoted investments.
Portfolio Overview
At 31 March 2018, the Company held a portfolio with a value of £81.6 million comprising 79 quoted and unquoted companies, across a diverse range of sectors in both growth and income-focussed investments.
A significant proportion of the portfolio is in maturing investments.Portfolio Performance
The performance of the portfolio over the year has been positive with unrealised gains of £2.3 million (2017: £2.1 million) evenly split between the quoted and unquoted portfolios. Overall 79% of the portfolio is held at a valuation either at or above cost.
The net unrealised gains in the quoted portfolio totalled £1.2 million. The largest unrealised gains in the quoted portfolio were Craneware PLC (£950,000), Tracsis PLC (£732,000) and Anpario PLC (£711,000). These were partially offset by unrealised losses on Universe Group PLC (£567,000) and Downing Strategic Micro Cap Investment Trust PLC (£400,000). Other smaller gains and losses amounted to a net loss of £219,000.The unrealised gains in the unquoted portfolio totalled £1.1 million. Within the unquoted portfolio the largest unrealised gains were on Data Centre Response Limited (£281,000) and Downing Care Home Limited (£245,000).Realised profits in the period mostly came from the unquoted portfolio with £510,000 generated from the sale of the Anaerobic Digestion plant, Vulcan Renewables Limited and £464,000 on the full exit from Giving Limited.Further details on these and other movements can be found within the quoted and unquoted Investment Adviser Reports.Increased focus on growth investments
The proportion of the portfolio represented by growth investments has increased over the last year. This is mainly due to newer investments made being mostly in the growth category in line with the changes in the VCT regulations that have taken place over the last two years.
Several of the recent unquoted growth investments have been completed alongside funds from the Downing EIS funds which invest in early-stage UK technology companies. As these investee companies become more mature, they generally require further funding rounds to support their growth and this provides a good pipeline of investment opportunities for the Company.It is our expectation that the proportion of growth investments in the portfolio will steadily increase over the coming years. This will result in a gradual increase of the overall risk profile of the portfolio over time but also provides the Company with greater prospects of benefitting from the higher rewards that can arise from backing such businesses.Reliable income generation
Whilst the proportion of income-focussed investments by value in the portfolio has declined to 57% (2017:69%), it is comforting to see that income generated in 2018 at over £3.5m across the portfolio is higher than it has been in any year since the merger date (2013)
Portfolio Composition
Following the 2017/18 fundraising and some significant realisations, 30% of the net assets of the Company are currently held in cash. Focus for the coming year is on deploying these funds in to qualifying investments within our investment pipeline.
The diversified portfolio of the Company shows that the main sectors in which the Company has invested are Leisure, Alternative Energy and Software and Computer Services albeit the maximum exposure to any sector is 15%.Net asset value and results
The net asset value per Share ("NAV") at 31 March 2018 stood at 87.5p, compared to the NAV at 31 March 2017 of 90.4p. Total Return (NAV plus cumulative dividends paid since the merger in 2013) is 113.0p.
The return on ordinary activities after taxation for the year was £4.8 million, comprising a revenue profit of £2.1 million and a capital profit of £2.7 million.Outlook
The recent changes to the VCT regulations have ensured that any new investment activity is now focussed on growth investments, being the area where the Government wishes to incentivise the investment of capital. Downing has made adjustments to its investment team as these changes have come into force to ensure that we are able to generate high quality deal flow to meet the Company's demands. Our pipeline of suitable investments is now developing well and should allow us to invest a significant proportion of the available funds over the coming year.
We are reasonably satisfied with the existing portfolio which comprises a significant number of investments. Close monitoring and support of these businesses will continue to be a primary activity for the team over the next year, as well as pursuing exit opportunities from the more mature businesses as and when they arise.Downing LLP
INVESTMENT ADVISER'S REPORT - UNQUOTED PORTFOLIO
We present a review of the unquoted investment portfolio for the year ended 31 March 2018.Investment activity
At 31 March 2018, the unquoted portfolio of 48 investments was valued at £51.6 million.  
During the period, the Company invested a total of £5.1 million in unquoted companies comprising five new opportunities and three follow-on investments.  In addition, there was a £490,000 share for share restructure of two pub investments (Pabulum and Augusta), which are now both held through Downing Pub EIS One Limited.The five new investments were as follows: -Empiribox Holdings Limited (£750,000) provides equipment and training to enable teachers to deliver engaging and practical science lessons to pupils in primary schools across the UK.Volo Commerce Limited (£567,000) has created an SAAS-based Enterprise Resource Planning platform to support online merchants and brands selling through market places such as Amazon and eBay.BridgeU Corporation (£394,000) is an educational technology business focussing on student university applications by working to enhance students' decision making and application processes.E Fundamentals (Group) Limited (£278,000) has developed a Software as a Service (SaaS) analytics tool sold to companies which own consumer brands to enable them to accurately assess the performance of their products when being sold through third party e-commerce sites.Limitless Technology Limited (£174,000) is a technology company which sells software to enable customer service inquiries to be answered by "ambassadors" - people who don't work for the company, but earn money based on the number of questions they answer and the quality of answers. Follow on investments totalling £2.5 million were made into Xupes Limited (£1.2 million), Leytonstone Pub Limited (£850,000) and Curo Compensation Limited (£400,000).Details of the realisations of investments in the year are set out on below. Total proceeds of £17.7 million were generated, producing profits over holding value of £1.2 million.Vulcan Renewables Limited, the anaerobic digestion plant near Doncaster, was the biggest disposal during the year and was sold during the summer at a profit of £510,000. Giving Limited, which operates the leading online platform for charitable sponsorship in the UK, justgiving.com, in which the Company held a minority interest, was bought out by a US based software developer for 5.5 times the amount invested, a profit of £464,000 for the VCT.The Scottish licenced leisure companies (City Falkirk Limited, Cheers Dumbarton Limited, Lochrise Limited, and Fubar Stirling Limited) were also disposed of in full, exiting at a modest profit of £121,000 against holding value, after recent years of difficult trading.Gatewales Limited and Tramps Night Club Limited continue to repay loan notes in line with their agreed repayment schedules.Rhodes Solutions Limited, Brownfields Trading Limited and Vectis Alpha Limited were set up in 2016 to seek investment opportunities in specific sectors.  No appropriate deals were identified and so the companies have been wound up, returning £7.5 million to the Company in order to invest in new qualifying investments.Gara Rock Resort Limited (previously Aminghurst Limited) loan notes were redeemed in full and generated proceeds of £672,000.Loan notes from Mosaic Spa and Health Clubs were partially redeemed generating realised losses recognised in previous year's valuation write downs.Portfolio valuation
The unquoted portfolio performance for the year was positive, with an uplift in value of £1.1 million (2.0% of opening value).
Data Response Centre Limited has recently completed a bolt-on acquisition and the group is continuing to outperform its budget. There are significant expected synergies from the new partnership which have been ignored for valuation purposes, but give us reason to be positive about the future outlook of the business. A valuation increase of £281,000 has been recognised in the year.Downing Care Homes Limited, which owns four care homes, was uplifted in value by £245,000 following good performance in the year when occupancy levels at all four homes have continued to improve. We expect the budget will be achieved for this financial year.The underlying value of the property held in Leytonstone Pub Limited has resulted in a further uplift of £186,000.FCT No.1 Limited was formerly known as First Care Limited. The Company holds a small interest in the business and an offer was recently received for the shares that was turned down because it is believed that it undervalued the potential value of the company. The valuation has been uplifted to the offer price and this resulted in an uplift of £171,000 (75% uplift over the opening value).Kimbolton Lodge Limited, the care home in Bedford was valued up by £121,000 in the year on the back of stronger trading.These gains were partially offset by some valuation write downs in the period totalling £200,000. The most significant decrease in value was Tramps Night Club Limited, the owner of three nightclub sites in central Worcester which reduced in value by £74,000 following a challenging period of trading.Outlook
Following a series of new investments during the period, we are satisfied with the composition of the portfolio for the year to 31 March 2018 and are confident that the current deal flow will provide the opportunity to build further. In addition, we shall continue to closely monitor the current portfolio companies as they reach maturity.
Downing LLPINVESTMENT ADVISER'S REPORT - QUOTED PORTFOLIOInvestment activity
As at 31 March 2018, the quoted portfolio was valued at £30.0 million comprising of 31 holdings. Over 48% of the quoted portfolio is accounted for in the top 10 holdings.
The quoted portfolio saw relatively little change in the year. One partial and two full disposals were made, realising gains (versus cost) of £182,000. Hornby plc, the international hobby products group, was a full disposal from the portfolio resulting in a loss against cost of £384,000 and a loss against the brought forward valuation of £43,000. The position was exited prior to a profit warning due to a lack of confidence in new management and the strategy it was seeking to deploy. There were two new quoted holdings in the year, the largest being an investment of £5 million into the Downing Strategic Micro-Cap Investment Trust.Portfolio Movements
The main positive contributors to performance were Craneware plc, the market leader in Value Cycle solutions for the US healthcare market, which contributed £950,000 of unrealised gains. Growing market opportunities, a record sales pipeline and increasing long-term revenue visibility supports Craneware's continued future growth.
Tracsis plc, a traffic data software company, delivered strong revenue growth over the period. All key financial and operational metrics were comfortably ahead of the previous year, with good progress being made on a number of strategic initiatives. Tracsis' core target markets of rail technology and traffic and transport data services continue to be supported by a favourable market backdrop and positive growth drivers. Tracsis contributed £732,000 of unrealised gains to the portfolio.Negative contributors to the portfolio included Universe Group plc, a company that develops and supports point of sale, payment and online loyalty solutions for the UK petrol forecourt and convenience store markets. Universe reduced the value of the portfolio by £567,000. The company's performance was dependant on a small number of high value contracts being executed, and delays to these projects drove down the share price. However, Universe has had a solid start to 2018, with a contract extension with a large food retailer as well as the prospect of new business from a major international forecourt operator. Management report that take-up of next generation products and feed-back from customers bodes well for the future.The Company holds a non-qualifying investment in Downing Strategic Micro-Cap Investment Trust which is a focused portfolio of UK micro-cap investments with the target to achieve compound returns of 15% per year over the long term. The Trust, which is currently trading at a premium, is managed by the Downing team who manage the quoted portfolio of the Company.This holding was also a negative contributor, reducing the value of the portfolio by £400,000. While the net asset value per share fell, management reported the investment rate is encouraging. The Trust overlays various strategic mechanisms meaning that it seeks definable catalysts to realise the underlying value of portfolio holdings. However, these mechanisms take time to deploy and typically even longer to mature, hence the average investment horizon is around five to seven years.As the Trust's portfolio matures and these strategic mechanisms evolve, the investment strategy should deliver returns regardless of prevailing market sentiment.Generally, we are confident of the longer-term prospects for the quoted portfolio.Downing LLPREVIEW OF INVESTMENTSPortfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 March 2018:
The Company also invested into Imagelinx plc and Invocas Group plc. These investments were acquired at negligible value and continued to be valued at the same level.All venture capital investments are unquoted unless otherwise stated.* Quoted on AIM
** Quoted on the NEX Exchange Growth Market
*** Quoted on the Main Market of the London Stock Exchange
(1) Other funds also managed by Downing LLP as Investment Manager or Adviser as at 31 March 2018:- Downing TWO VCT plc
- Downing THREE VCT plc
- Downing FOUR VCT plc
- MI Downing UK Micro-Cap Growth Fund
- Downing AIM Estate Planning Service and Downing AIM NISA
Investment movements for the year ended 31 March 2018AdditionsDisposals* Adjusted for purchases in the year where applicableDirectors' responsibilities statement
The Directors are responsible for preparing the Strategic Report, the Report of the Directors, the Directors' Remuneration Report, the separate Corporate Governance Statement and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the annual report includes information required by the Listing Rules of the Financial Conduct Authority.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of
Ireland (FRS 102). 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 the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether the financial statements have been prepared in accordance with applicable UK Accounting Standards, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements and the Directors Remuneration Report comply with the Companies Act 2006.They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and undertakes and provides the information necessary to assess the Company's position, performance, business model and strategy.INCOME STATEMENT
for the year ended 31 March 2018