Half-year report
13 June 2023
*HARGREAVE HALE AIM VCT PLC*
(the “*Company*”)
*Unaudited Interim Results*
The Company announces its half-year results for the six months ended 31 March 2023.
These half-year results will be available on the Company's website at https://www.hargreaveaimvcts.co.uk/document-library/.
In accordance with Listing Rule 9.6.1, a copy of this document will also be submitted to the UK Listing Authority via the National Storage Mechanism and will be available for viewing shortly at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
For further information, please contact:
*JTC (UK) Limited*
Susan Fadil
Uloma Adighibe HHV.CoSec@jtcgroup.com
+44 20 3893 1005
+44 20 7409 0181
LEI: 213800LRYA19A69SIT31
*Financial highlights* *for the six month period ending 31 March 2023*
*Net asset value (NAV) per share* *NAV total return* *Tax free dividends paid in the period* *Share price total return* *Ongoing charges ratio*
*52.84p*^*(1)* *-5.57%*^*(1)* *4.00p* *-13.94%*^*(1)* *2.17%*^*(1)*
• £9.2 million invested in Qualifying Companies in the period.
• 95.79% invested by VCT tax value in Qualifying Investments at 31 March 2023.
• Offer for subscription closed to further applications by the Company on 10 February 2023, having raised £40 million.
• Special dividend of 2.00 pence and final dividend of 2.00 pence per share paid 10 February 2023.
• Interim dividend of 1 penny approved by the Board.
*Summary financial data* *Six months ending *
*31-Mar-23* *Six months ending *
*31-Mar-22* *Year ending *
*30 Sept-22*
NAV (£m) 174.72 206.37 160.51
NAV per share (p)^(1) 52.84 77.13 60.19
NAV total return (%)^(1) -5.57 -17.54 -33.42
Market capitalisation (£m) 165.35 200.00 167.32
Share price (p) 50.00 74.75 62.75
Share price premium/discount to NAV per share (%)^(1) (2) -5.37 -3.09 +4.25
Share price 5 year average discount to NAV per share (%)^(1) (2) -5.56 -6.02 -5.65
Share price total return (%)^(1) -13.94 -16.24 -28.06
Loss/gain per share for the period (p) -3.72 -18.74 -33.42
Dividends paid per share (p) 4.00 5.65 6.65
Ongoing charges ratio (%)^(1) 2.17 2.10 2.06
(1) Alternative performance measure illustrations and definitions can be found in this interim report.
(2) The discount/premium is a function of the closing mid-price and the Net Asset Value per share on the balance sheet date which is typically published 5 business days after the period end.
*Financial Calendar*
Record date for interim dividend 30 June 2023
Payment of interim dividend 28 July 2023
Announcement of annual results for the year ending 30 September 2023 December 2023
Annual General Meeting February 2024
Payment of annual dividend (subject to approval by shareholders at the AGM) February 2024
*Chair’s statement*
*Introduction*
May I start by welcoming the many new shareholders who have joined us by way of the recent successful fundraise and of course by thanking all shareholders for their continuing support, which is greatly appreciated.
I do not think it is too much of an exaggeration to say that we started the financial year with some significant headwinds, including a forecast by the Bank of England that the United Kingdom would endure the longest recession of the last 100 years. Whilst we would not wish to downplay the hardship that many had to endure over the winter as the cost of living crisis bit hard, nor the impact on many companies as they sought to navigate falling demand and higher input costs, it is also true to say that the outlook is much improved with the United Kingdom now expected to avoid falling into recession this year.
Uncertainty is a theme that we have all learned to live with these past few years; that is not likely to change in the short-term. Whilst we are more encouraged by the improving outlook, we remain mindful of the macro-economic backdrop and alert to the potential for further upset as the impact of significantly tighter credit conditions continues to work its way through financial markets and the wider economy.
When launching the 2022 offer for subscription, we spoke about the opportunity for value creation over the medium term, which we take to mean 5 years. We were cautious about the short-term outlook over the course of the current financial year; our experience over the period under review is consistent with that view. Generating short-term performance is difficult with the market applying asymmetrical responses to news flow – positive updates are not getting full recognition whilst those that disappoint are often treated harshly. Stock market liquidity is a factor in performance. With many active managers now deep into their second year of outflows, there are few institutional buyers of shares in small UK companies. Taken together, this has left the sector in deep value territory. Private equity has taken note and M&A has picked up. This is not something we particularly welcome; we would prefer to see exciting companies with bright futures remain in public ownership for the long term.
Primary issuance has declined. Over the 6 months to 31 March 2023, the number of VCT qualifying deals on AIM has fallen by 33% to 12. The value invested by AIM VCTs over the same period has declined by 58% to £23.1m. IPO activity on AIM is also down very significantly. This is broadly in line with our assumptions at the start of the year. Despite this, we are pleased to report that we have deployed capital ahead of budget. We continue to expect deal flow to pick up later this year. Although only a hypothesis at this stage, it is possible that the failure of Silicon Valley Bank will drive increased demand for equity funding as young companies find banks and shadow banks less willing to lend on terms that are acceptable to them. To be clear, we are not seeing evidence of this yet but it will be interesting to see how this plays out.
Finally, there is a flipside to these difficult markets. As a consequence of the deep value now in evidence, we are being presented with opportunities to invest on favourable terms that we hope will set us up for improved performance in future years.
*Performance*
At 31 March 2023, the NAV per share was 52.84 pence which, after adjusting for the dividends paid in the half year of 4.00 pence, gives a NAV total return for the period of -5.57%. The NAV total return (dividends reinvested) for the half year was -5.98% compared with +1.09% for the FTSE AIM All-Share Index Total Return (also calculated on a dividends reinvested basis). The Directors consider this to be the most appropriate benchmark from a shareholder’s perspective, however, due to the investment restrictions placed on a VCT it is not wholly comparable.
*Rolling Returns to end March 2023* *Six months* *1Y* *3Y* *5Y* *10Y*
NAV total return -5.57% -25.01% 21.50% -2.39% 56.51%
Share price total return -13.94% -26.42% 29.51% -1.35% 55.12%
NAV total return (dividends reinvested)^(1) (2) -5.98% -25.56% 14.47% -8.19% 53.94%
Share price total return (dividends reinvested)^(1) (2) -14.42% -27.06% 21.89% -7.15% 52.28%
FTSE AIM All-Share Index Total Return 1.09% -21.16% 22.53% -15.30% 25.20%
Source: Canaccord Genuity Asset Management/Bloomberg
(1) Alternative performance measure illustrations and definitions can be found in this interim report.
(2) The NAV total return (dividends reinvested) and Share price total return (dividends reinvested) measures have been included to improve comparability with the FTSE AIM All-Share index Total Return which is also calculated on that basis.
The earnings per share total return for the year was a loss of 3.72 pence (comprising a revenue gain of 0.04 pence and a capital loss of 3.76 pence). Revenue income in the period increased by 173% to £1.0m following increases in the bank interest rate, additional investment into high yielding equities and material new investment into investment grade corporate bonds.
The share price decreased from 62.75 pence to 50.00 pence over the reporting period which, after adjusting for dividends paid, gives a share price total return of -13.94%.
*Investments*
The Investment Manager invested £9.2 million into 6 Qualifying Companies during the period. The fair value of Qualifying Investments at 31 March 2023 was £101.6 million (58.2% of NAV), invested across 62 AIM companies and 4^1 unquoted companies. At the half-year end, the fair value of non-qualifying equities and the Marlborough Special Situations Fund were £20.1 million (11.5% of NAV) and £14.3 million (8.2% of NAV) respectively, with most of the non-qualifying equities listed within the FTSE 350 index and offering good levels of liquidity should the need arise. £17.7 million (10.1% of NAV) was held in short-dated investment grade corporate bonds, £2.0 million (1.1% of NAV) was invested in a UK Government bond exchange traded fund and £19.1 million (10.9% of NAV) held in cash at the period end.
1 Excluding companies in administration or at risk of administration with zero value
*Dividend*
The Directors continue to maintain their policy of targeting a tax free dividend yield equivalent to 5% of the year end NAV per share.
A special dividend of 2.00 pence and a final dividend for the year ending 30 September 2022 of 2.00 pence was paid on 10 February 2023.
An interim dividend of 1 penny (2022: 1 penny) will be paid on 28 July 2023, with an ex-dividend date of 29 June 2023 and a record date of 30 June 2023. The final dividend will be determined at the year end.
*Dividend reinvestment scheme*
Shareholders may elect to reinvest their dividends by subscribing for new shares in the Company. Further information can be found in the shareholder information section.
On 10 February 2023, 1,836,516 ordinary shares were allotted at a price of 54.95 pence per share, which was calculated in accordance with the terms and conditions of the dividend reinvestment scheme (DRIS), on the basis of the last reported NAV per share as at 20 January 2023, to shareholders who elected to receive shares as an alternative to the final dividend for the year ended 30 September 2022 and special dividend announced on 19 December 2022.
*Buybacks*
In total, 2,660,431 shares (nominal value: £26,604) were repurchased during the six month period ending 31 March 2023 at a cost of £1,454,426 (average price: 54.67 pence per share). As at 9 June 2023, a further 1,481,360 shares have been repurchased at a cost of £750,823 (average price of 50.68 pence per share).
*Share price discount*
The Company aims to improve liquidity and to maintain a discount of approximately 5 per cent. to the last published NAV per share (as measured against the mid-price) by making secondary market purchases of its shares in accordance with parameters set by the Board.
We continued to operate the discount control and management of share liquidity policy effectively during the period. The Company has 1 and 5 year average share price discounts of -4.19% and -5.56% respectively.
The share price discount as at 31 March 2023 was -5.37% compared to a premium of +4.25% at 30 September 2022. The share price premium as reported for the period ending 30 September 2022 was a consequence of decreases in the valuation of several private companies incorporated into the 30 September 2022 Net Asset Value per share as published on 10 October 2022.
As at 9 June 2023 the discount to NAV is 5.26% of the last published NAV per share.
*Offer for subscription*
The Directors of the Company announced on 5 September 2022 the launch of an offer for subscription for shares to raise up to £20 million, together with an over-allotment facility of up to a further £30 million. On 10 February 2023, the Company announced it had received valid applications of approximately £40 million. The Board decided not to utilise any further sums under the over-allotment facility and therefore the offer for subscription was closed to further applications.
The offer resulted in gross funds being received of £40 million and the issue of 66 million shares.
*Cancellation of share premium*
At the general meeting of the Company held on 7 October 2022, a special resolution was passed approving the cancellation of the Company’s share premium account in order to create a pool of distributable reserves.
We are pleased to confirm the cancellation of the share premium account of the Company has been approved by the High Court of Justice in England and Wales and accordingly, the amount standing to the credit of the share premium account (£133.2m) of the Company as at 9 May 2023 has been cancelled.
*Cost efficiency*
Your Board reviews costs incurred by the Company on a regular basis and is focused on maintaining a competitive ongoing charges ratio. The period end ongoing charges ratio was 2.17% (30 Sept 2022: 2.06%) when calculated in accordance with the AIC’s “Ongoing Charges” methodology, the increase primarily being a result of the fall in average net assets in the period under review.
*Shareholder events*
Both your Board and the Investment Manager are keen to improve interaction with our shareholders. On 23 November 2022, the Company held a well-attended shareholder event at Everyman Cinema, Broadgate, City of London. The event included presentations from several portfolio companies, a panel discussion and a presentation from the Investment Manager’s VCT team before concluding with the screening of a feature film. A summary recording of the Investment Manager’s presentation is available to view on the Company’s website https://www.hargreaveaimvcts.co.uk.
The 2023 shareholder event will be held at 2pm, Wednesday 29 November at Everyman Broadgate.
Following feedback from shareholders, we plan to trial a series of shorter and more regular in person events, which will be more focussed on performance. These are likely to be held over breakfast or at the end of the day to assist those who cannot attend the lengthier annual review held in November or who would like more frequent access to the Investment Manager and members of the Board. The first event will be at 8am on Wednesday 21 June 2023 at 88 Wood Street, London, EC2V 7QR. Further information on this event and future events will be published on the Company’s website and via email.
Shareholders are asked to register their attendance at events via email at aimvct@canaccord.com.
*Electronic communications*
As ever, we are respectfully asking shareholders to opt into electronic communications and update their dividend payment preference from cheque to bank transfer. Switching to the digital delivery of shareholder communications and dividend distributions is more cost efficient and more secure whilst also helping to reduce our environmental footprint.
To assist with this transition, and as highlighted in the September 2022 annual report and accounts, the Company will no longer print and distribute the interim report to shareholders, unless specifically requested by shareholders.
To support the digital experience, the Company is investing in an upgraded website that will improve the experience and include more regular updates to the content, including recorded updates from the manager and portfolio companies.
The interim results will continue to be available for download on our website https://www.hargreaveaimvcts.co.uk and a summary of the results is also published via a Regulatory Information Service on the London Stock Exchange.
*Regulatory update*
There were no major changes to VCT legislation during the period under review.
On 23 September 2022, the Government announced that it intended to extend the sunset clause that, if not otherwise repealed or extended, would result in the withdrawal of the upfront 30% income tax relief for new investment into VCTs from 6 April 2025.
The sunset clause, introduced as part of the 2015 EU State aid review, does not affect the Capital Gains Tax relief or tax free dividend payments, nor does it affect investors’ income tax relief on VCT investments made before 6 April 2025.
The extension of the sunset clause will require legislation to be laid before Parliament.
*Consumer Duty*
The Financial Conduct Authority (FCA) is introducing a new Consumer Duty from 31 July 2023 to improve the standard of care provided by firms that are involved in the manufacture or supply of products and services to retail clients. Consumer Duty will compromise a new principle and suite of other rules and guidance to be followed by firms involved in the manufacture and distribution of a product to put consumers in a better position to take responsibility for meeting their financial needs and objectives. For consumers, this should:
• give confidence that firms are acting in good faith, in line with their interests;
• allow them to make informed choices about products and services that are fit for purpose and designed to meet a designated target market;
• improve the information available to assist with the review of the products and services most likely to meet their needs;
• support the correct delivery of benefits that consumers should reasonably expect from the product and services they subscribe to;
• improve the standard of customer service; and
• help them obtain fair value from financial products and services.
Canaccord Genuity Asset Management (CGAM) is the designated manufacturer of the Company. Canaccord Genuity Wealth Limited (CGWL) is the distributor for the Company. In its capacity as manufacturer, CGAM has conducted a fair value assessment and a target market assessment. Having reviewed both pieces of work, the Board is satisfied that CGAM and CGWL have complied with their obligations.
Two of the four pillars that underpin Consumer Duty relate to consumer understanding and consumer support. Although the Board is satisfied that these obligations are met in full, we intend to upgrade the Company’s website to enhance the services and benefits derived from an investment in the Company.
*VCT status*
I am pleased to report that we continue to perform well against the requirements of the legislation and at the period end, the investment test was 95.79% (2022: 85.63%) against an 80% requirement when measured using HMRC’s methodology. The Company met all other tests relevant to its status as a Venture Capital Trust.
*Key information document*
In accordance with the Packaged Retail Investment and Insurance Products (PRIIPs) regulations, the Company’s Key Information Document (KID) is published on the Company’s website at https://www.hargreaveaimvcts.co.uk.
*Risk review*
Your Board has reviewed the risks facing the Company. Further detail can be found in the principal risks and uncertainties section.
*Outlook*
Trading continues to vary quite widely by sector.
The fallout from SVB has been most acutely felt by the life sciences sector. Those companies serving the media industry have noted disruption as content creators review budgets. Technology companies are reporting mixed trading, varying by application and the industry served. The UK consumer continues to spend, albeit selectively, drawing down on accumulated savings. Spending on retail and dining out has stabilised, whilst demand for overseas travel is high. Industrials are reporting stronger end markets as supply chain restrictions continue to ease, whilst the defence sector is trading well and reporting strong growth in order books. We expect these trends to persist through to the year end.
Deal flow remains very quiet. There is a growing pipeline of deal flow that is being held back until the market environment improves. We do not expect a material pick up in activity before the summer recess, perhaps a quarter later than we have previously guided to.
Although the larger benchmark indices are trading well, AIM continues to grind lower. It is difficult to see this dynamic changing until we have more clarity on when and where interest rates will peak and further evidence emerges of improving business and consumer confidence. Given the clear evidence of the value on offer and the gradually improving outlook, we remain optimistic about the opportunity in 2024 and beyond.
*David Brock*
Chair
Date: 13 June 2023
*Investment Manager’s report*
*Introduction*
This report covers the first half of the Company’s 2022/23 financial year, 1 October 2022 to 31 March 2023. The Investment Manager’s report contains references to movements in the NAV per share and NAV total return per share for the period. Movements in the NAV per share do not necessarily mirror the earnings per share total return reported in the accounts and elsewhere, which convey the profit after tax of the Company within the reported period as a function of the weighted average number of shares in issue for the period.
Investment performance measures contained in this report are calculated on a pence per share basis and include realised and unrealised gains and losses.
*Investment report*
Investor sentiment improved through the first half of the 2023 financial year, as investors became more confident that inflation was close to peaking and, with it, the interest rate tightening cycle that had done so much damage to risk assets in 2022.
A change of Prime Minister and Chancellor helped to restore confidence in UK fiscal policy, allowing the currency to recover and credit markets to stabilise. The economy has withstood the pressure better than many had predicted. All the same, companies and households have had to navigate an immensely difficult period of high inflation and stagnating economic activity. For UK households, real wage growth was strongly negative and budgets came under pressure from higher energy bills and sharp increases in the cost of food. Companies came under pressure too, with weak business and consumer sentiment and higher input costs reflected in company updates. The number of companies reducing guidance was sharply higher year on year.
UK consumers, very short of confidence, drew down on household savings to support spending over the key Christmas trading period. In-store retail bounced back and pubs, bars and restaurants traded marginally ahead of 2019, the most recent non-COVID comparator, in part helped by the 2022 World Cup. Those industries and channels most impacted by COVID (travel, leisure, high street retail) continued to recover whilst COVID beneficiaries (housing, home improvements, consumer tech, durable goods, online retail) reported more difficult trading.
Much of the deep pessimism that dominated the early part of the financial year has moderated. The UK economy continues to outperform against low expectations. The Office of Budget Responsibility and the Bank of England (BoE) raised their real GDP forecasts for 2023 in the quarter and again post period end. In its May 2023 Monetary Policy Report, the BoE significantly upgraded its guidance with the UK economy now expected to grow by 0.9% over the 12 months to June 2024.
UK inflation remains stubbornly high at 10.1% in March 2023, defying predictions that it would fall below 10% in March. In response, the BoE has continued to raise the base rate with market participants predicting a terminal rate of 4.8% in Q4’23 with inflation expected to fall back to around 5% by the end of 2023.
Sentiment was further buoyed by the reopening of the Chinese economy in early 2023, the last of the major economies to relax COVID restrictions. Towards the end of the period under review, concerns started to surface that some mid and large sized US regional banks (subject to a lighter touch regulatory regime than the larger globally systemically important banks) might struggle to operate profitably in the high interest rate environment that emerged in 2022, leading to depositor flight. Silicon Valley Bank (SVB) was the first of several significant bank failures. There were problems in Europe, too, with a hastily arranged distressed sale of Credit Suisse to UBS. For now, the fallout appears well-contained with deposits and taxpayers protected by the actions of the regulators and other market participants.
Terminal interest expectations and the bond market have been unusually volatile as investors responded to fresh economic data, adjusted for the tighter credit conditions and assessed the implications for monetary policy. By some estimates, the failure of SVB might tighten financial conditions by the equivalent of a 1.5% increase in US base rates.
Amidst such uncertainty, monetary policy committees and market participants are scrutinising each employment report, inflation and economic survey for evidence of falling inflation and leading indicators of economic activity. Future monetary policy is now very data dependent, placing enormous weight on each announcement, setting us up for further periods of heightened volatility. Meanwhile, the bond markets continue to forecast a US recession later this year or early next year.
UK stock markets were positive for most of the period under review. Sentiment turned in early March 2023 as investors took increasing note of signs of distress within the US banking industry. AIM (+1.09%) continued to underperform the FTSE 100 (+12.55%) and FTSE 250 (+11.63%) indices as investors continued to favour larger more established companies over smaller, higher risk and less liquid companies.
*Performance*
In the six months to 31 March 2023, the unaudited NAV per share decreased from 60.19 pence to 52.84 pence. A special dividend of 2.0 pence per share and a final dividend of 2.0 pence per share was paid on 10 February 2023, giving a NAV total return to investors of -3.35 pence per share, which translates to a loss of -5.57%. The NAV total return (dividends reinvested) for the period was -5.98% compared with +1.09% in the FTSE AIM All-Share Index Total Return and +12.25% in the FTSE All-Share Index Total Return (also calculated on a dividends reinvested basis).
The Qualifying Investments made a net contribution of -2.98 pence per share whilst the Non-Qualifying Investments returned -0.13 pence per share. The adjusting balance was the net of running costs and investment income. The contribution to NAV performance is split out in further detail below.
Zoo Digital (+50%, +0.99 pence per share) announced a second strategically significant platform contract with a major Hollywood studio to support the localisation and preparation of content for distribution through its streaming platform. Post period end, the company raised funds and acquired a minority stake in a Japanese localisation company. At the same time, Zoo reported that a temporary disruption at its largest client would leave revenues for the 12 months to March 2023 behind previously upgraded forecasts. Profit guidance was unchanged.
In a January trading update, Learning Technologies Group (+22.9%, +0.36 pence per share) announced FY22 revenues of £595m and adjusted EBIT of at least £100m, in line with market expectations. Margin outperformance was driven by a combination of efficiency gains and organic growth in GP Strategies. Net debt of £119.8m was in line with consensus. The company confirmed that it remained confident of delivering its 2025 targets of £850m run-rate revenue and £175m EBIT.