I am pleased to present to shareholders the Annual Report of the Company for the year
ended 30 September 2015.
Overview
This has been another good year for the Company, due to profitable realisations, strong
portfolio performance and a high level of new investment. Following on from the sizeable
disposal proceeds received in the previous financial year, the Company made further
successful realisations of three major investments in its portfolio, at substantial gains
over cost, in the early months of this financial year and two more after the year-end. In
addition, a number of investee companies have returned solid performances in the portfolio
contributing to increases in their valuations.
The returns earned as a result of the above events have been reflected in the Company's
dividend stream in respect of the year. The VCT is also performing well against its peer
group and it is very encouraging to see the Investment Adviser once again winning
significant industry awards.
Shareholders may have noted that the Finance Act 2015, which became legislation last
month, requires some changes to the type of investments that the VCT is now permitted to
make as set out in section 274 of the Income Tax Act 2007 ("the VCT Rules").
These changes will require the Company's current Investment Policy to be amended. For
further information please see Industry Developments and Changes to the Investment Policy
on page 4.
Performance
The Company's NAV total return per share was 8.5% for the year ended 30 September 2015
(2014: 9.4%), after adjusting for 18.00 pence per share of dividends paid in the year.
This further positive NAV return for the year was attributable to unrealised gains from
the strong performances of some of the portfolio companies, notably from increases in the
valuations of Entanet, Tessella and Virgin Wines, and to realised gains from the sale of
three investments, namely Focus Pharma, EMaC and Youngman. A number of other portfolio
companies have also continued to make steady progress and have increased their profits and
cashflow, which have in some cases enabled them to make early repayments of their loan
stock.
As a result of this year's performance, the cumulative NAV total return per share
(being the closing net asset value plus total dividends paid to date since launch) rose
during the year by 5.9% (2014: 6.9%) from 165.10 pence to 174.88 pence. Using the
benchmark of NAV cumulative total return, the VCT was ranked first over five years, and
tenth and fifteenth over three and ten years respectively, among generalist (including
planned exit) VCTs used by the Association of Investment Companies ("AIC")
(based on statistics prepared by Morningstar) to measure performance at 30 November 2015.
It is gratifying to be able to report such strong performance over the long-term as well
as in recent years.
For more detailed data on the performance of your investment, may I refer you to the
Performance Data Appendix on pages 81 - 82 of this Report. This is also available on the
Company's website at www.incomeandgrowthvct. co.uk and can be downloaded by clicking on
"table" in "Reviewing the performance of your investment". This
provides information by allotment date on NAVs and cumulative dividends paid per share for
each of the VCT's fundraisings.
Dividends
Your Directors are recommending a final dividend in respect of the year ended 30
September 2015 of 6.00 (2014: 4.00) pence per share. The dividend, comprising 5.00
pence from capital and 1.00 penny from income, will be proposed to shareholders at the
Annual General Meeting of the Company to be held on 10 February 2016, for payment to
shareholders on the register on 15 January 2016, on 15 February 2016. The Company's
Dividend Investment Scheme ("the Scheme") will apply to this dividend and
elections under the Scheme should be received by the Scheme administrator, Capita Asset
Services, by no later than Monday, 1 February 2016. Please see the paragraph on the
Dividend Investment Scheme section on pages 4-5 and the Shareholder Information section of
this Annual Report on page 75 for further details on the Scheme.
This final dividend is in addition to an interim dividend of 6.00 pence (2014: 14.00
pence) per share, comprising 5.00 pence from capital and 1.00 penny from income, paid on
30 June 2015.
If approved by shareholders, this forthcoming final dividend will bring dividends paid
per share in respect of the year ended 30 September 2015 to 12.00 pence (2014: 18.00
pence) and the Company will have paid dividends totalling 70.00 pence per share over the
last five years. However, as a result of the recent changes in legislation described in
more detail on page 4, I believe that the Company will find it a challenge to generate a
similar level of return over the next five years.
Unclaimed dividends
Shareholders are encouraged to ensure that the Registrars maintain up-to-date details
for themselves and to check whether they have received all dividends payable to them. This
is particularly important if they have recently moved house or changed their bank. We are
aware that a number of dividends remain unclaimed by shareholders and whilst we will
endeavour to contact them if this is the case we cannot guarantee that we will be able to
do so if the Registrars do not have an up-to-date address and/or email address.
Investment portfolio
For the year, the portfolio as a whole achieved a net increase of 2.05 million on
investments realised and an increase of 4.57 million on investments still held.
Investment proceeds over the original cost of the investment were 5.29 million. The
portfolio under management was valued at 60.42 million at the year-end representing 105%
of cost and an increase of 17.3% in valuation on a like-for-like basis over the year.
During the year 8.63 million was provided to support new investments into Ward Thomas
Group, Media Business Insight, Jablite and Tushingham Sails. Five follow-on investments,
totalling 2.77 million were made into existing portfolio companies, namely: ASL,
Entanet, CGI Creative Graphics International, Racoon and Gro-Group. Just after the
year-end an investment of 3.31 million was made to support the MBO of Access IS, a
leading provider of data capture and scanning hardware.
Cash proceeds totalling 11.47 million were received from sixteen companies, that were
either sold or which repaid loans. Of this total, 7.68 million was received as cash
proceeds from three substantial disposals of Focus Pharma, Youngman and EMaC. These
jointly realised total gains over cost of 5.01 million. The companies concerned achieved
significant growth during the time of the VCT's investment and developed their potential
such that the Investment Adviser judged that this was the optimum time for exit. In
addition, the Company received realisation proceeds from a number of other companies, such
as BG Training, Newquay Helicopters and Alaric Systems, totalling 0.76 million. The
balance of 3.03 million comprised loan repayments from companies still held in the
portfolio. Following the year-end, the VCT has disposed of two major investments, in
Tessella and Westway.
First, Tessella realised cash proceeds of 4.04 million, and a gain over current cost
of 2.68 million, being 3.80 pence per share. Total proceeds to date over the life of the
investment were 4.91 million, representing a return of 2.8 times the original cost of
the investment over the three and a half years that this investment was held.
Secondly, Westway realised cash proceeds of 2.57 million, and a gain over current
cost of 2.51 million being 3.56 pence per share. Total proceeds to date over the life of
the investment were 3.52 million, representing a return of 6.3 times the original cost
of the investment. Full details of the investment activity during the year and a summary
of the performance highlights can be found in the Investment Review on pages 11 - 15 of
this Annual Report.
Industry developments
The UK Finance Act 2015 became law on 18 November 2015. This has introduced rules
designed to ensure that VCTs comply with new European Union ("EU") State Aid
rules, while remaining able to provide finance to small and growing businesses.
The UK's VCT scheme must comply with the EU State Aid rules, as the tax relief given to
investors is deemed to be State Aid to the companies in which the VCTs invest.
These new rules have introduced new criteria regarding:
• the maximum age of companies that are eligible for investments (generally seven
years under the UK Finance Act);
• besides an annual limit of 5 million, already in place, there is now also a
lifetime cap on the total amount of state aided risk finance investment a company can
receive (generally 12 million under the UK Finance Act); and
• a requirement that VCT investment is to be used for growth and development
purposes only.
The practical consequences of the application of these EU State Aid rules by the UK
Finance Act 2015 are that the range and size of potential investments open to generalist
VCTs, such as The Income & Growth VCT plc, will reduce. In particular, the Government
has decided that VCT investments made to finance the purchase of existing business owners'
shareholdings and the acquisition of businesses will no longer be permitted. This is
likely to restrict significantly all VCTs' future participation in management buyout
("MBO") transactions. However, investments that have already been made remain
qualifying investments as part of our investment portfolio.
The UK Finance Act now requires the VCT to re-adjust its focus for new investments to
provide growth capital to younger companies, which is likely to alter the balance of the
portfolio of the Company over a number of years. The UK Government has also announced an
intention to permit VCTs to provide some replacement capital finance within investments,
subject to agreement with the EU State Aid authorities. If this comes to pass, it would
enlarge the pool of possible investment opportunities for VCTs compared to the more
restricted regime that now applies under the new Act.
In theory, the change in focus to smaller investments in companies requiring growth
(and possibly replacement) capital carries a higher risk, but also the prospect of higher,
but more variable, returns. Generating the level of consistently high returns achieved
over the last five years in particular is likely to be more challenging. That said,
shareholders should note that the existing portfolio contains MBO investments whose full
potential should be realised over the next five years. In future, the portfolio will also
add a number of smaller investments, from which the level of returns is less certain at
this stage. The Board has confidence in the Investment Adviser, justified by the past
strong returns to shareholders, to apply its measured approach to the new rules to
generate attractive returns in the future.
Changes to the Investment Policy
The new VCT legislation above requires revisions to this VCT's current Investment
Policy (the "Policy") which, in turn, will require the approval by shareholders
of an ordinary resolution that will be proposed at the AGM. Currently, the Policy makes
particular reference to investing in management buyout transactions. The principal change
proposed to the Policy is to remove this reference. The proposed Policy also retains
flexibility to enable the Board and the Investment Adviser to consider a wide range of
opportunities amongst established businesses to provide growth capital under the new VCT
legislative environment. The impact of the changes on the VCT's portfolio and investment
risk are set out above.
Your Directors are working closely with Mobeus and our other professional advisers to
understand the full implications of the new rules, so as to apply the revised Policy at a
detailed, practical level. Further details of the proposed changes to the Policy itself
are contained in the Report of the Directors, on page 34 explaining the ordinary
resolution to approve a revised Policy, which the Board will recommend shareholders
approve.
Dividend Investment Scheme
The Company's Dividend Investment Scheme ("the Scheme") is a convenient, easy
and cost effective way for shareholders to build up their shareholding in the Company.
Instead of receiving cash dividends they can elect to receive new shares in the Company.
For further information on the Scheme and instructions on how to join, shareholders are
referred to the Shareholder Information section of this Annual Report on page 75.
Shareholders who already participate, or are considering whether to participate, in the
Scheme should consider the preceding sections on Industry Developments and Changes to the
Investment Policy. There is an associated five year holding period required to secure
income tax relief when new shares are allotted under the Scheme. Shareholders may,
therefore, wish to review their participation until the implications of these changes,
outlined in the sections above, are clearer. If you are in any doubt about whether to
participate in the Scheme or not, you should consult your financial adviser.
Fundraising and Liquidity
The Company participated, with the other three Mobeus advised VCTs, in a successful
joint fundraising that closed early, on 10 March 2015, having raised the full amount
offered for subscription by the Company of 10 million.
Annual fundraisings by the Company have provided it with a satisfactory level of
liquidity sufficient to pursue its Objective and meet the Company's running costs. The
Company is not anticipating that there will be further fundraising until the Board has had
the opportunity to consider in full the implications of the VCT tax legislation published
in the Finance Act 2015.
Industry awards for the Investment Adviser
We are delighted to report that the Investment Adviser was named VCT Manager of the
Year for the fourth consecutive year at the unquote" British Private
Equity Awards 2015 and also received the award for Exit of the Year for Focus Pharma. This
was in addition to being awarded VCT Manager of the Year by Investor Allstars. These three
awards recognise the continuing high level of consistency achieved by the Investment
Adviser during the year under consideration in maintaining high standards in all areas of
its activity including deals, exits, portfolio management and fundraising.
Shareholder Event
The Investment Adviser holds an annual VCT event for shareholders in Central London.
These events include presentations on the Mobeus advised VCTs' investment activity and
performance. The Board and the Investment Adviser welcome feedback from shareholders. We
have been pleased to receive positive comments from those attending in previous years.
Many of the comments received have been taken into account as part of a process of
continual improvement. The next event will be held on Tuesday, 26 January 2016 at the
Royal Institute of British Architects in Central London. There will be a day-time and a
separate evening session. Shareholders have already been sent an invitation to this event
with further details. The Board looks forward to meeting those shareholders able to
attend.
Outlook
The economic prospects in the UK continue to look relatively favourable with economic
growth predicted to be 2.4% for the coming year. This should help the existing portfolio
continue to deliver solid performance. As mentioned earlier, in order to conform with the
Finance Act 2015, we are proposing changes to the Company's current Investment Policy at
the AGM. There may be a pause in new investment as the Investment Adviser identifies
opportunities that comply with the requirements of the new legislation. Nevertheless, the
Board remains cautiously optimistic that future investments will be executed that,
combined with the existing portfolio, should deliver attractive returns for shareholders.
Finally, I would like to take this opportunity to thank all shareholders for their
continued support.
Colin Hook
Chairman
17 December 2015