| MOBEUS INCOME & GROWTH 2 VCT PLC LEI: 213800LY62XLI1B4VX35
ANNUAL FINANCIAL RESULTS OF THE COMPANY FOR THE YEAR ENDED 31 MARCH 2023
Mobeus Income & Growth 2 VCT plc (the "Company") announces the final results for the year ended 31 March 2023. These results were approved by the Board of Directors on 12 July 2023.
You may, in due course, view the Annual Report & Financial Statements, comprising the statutory accounts of the Company by visiting www.mig2vct.co.uk.
FINANCIAL HIGHLIGHTS
For the year ended 31 March 2023 As at 31 March 2023: Net assets: £70.43 million Net asset value ("NAV") per share: 71.54 pence
- Net Asset Value ("NAV") total return1 per share was (12.3)%. - Share Price total return1 per share of (6.9)%.3 - Dividends paid and declared of 13.00 pence per share. Cumulative dividends paid1 since inception amount to 147.00 pence per share. - £3.32 million was invested into five new growth capital investments and five existing portfolio companies during the year. - Net unrealised losses were £(9.14) million. - Sale of investments generated £8.05 million of cash proceeds and a net loss of £(0.28) million
1 Definitions of key terms and alternative performance measures("APMs") Key Performance Indicators ("KPIs") shown above and throughout are provided in the Glossary of terms within the Annual Report & Financial Statements.
CHAIR'S STATEMENT
I am pleased to present the annual results of Mobeus Income & Growth 2 VCT plc for the year ended 31 March 2023.
Overview The Company's financial year took place during a period of significant political and economic disruption. A high point for many technology and growth markets occurred at the end of 2021 before the impact of global events including the Russian invasion of Ukraine, political turmoil in the UK and across Europe as well as rising inflation and associated increase in interest rates. Stock markets continue to be volatile and there has been a substantial downward re-rating of growth stock valuations across global markets. Recently inflation has moderated, albeit remaining relatively high, and the UK economy narrowly avoided recession. However, the IMF forecast for 2023 warns of an ongoing threat of recession which would likely result in additional challenges for your portfolio companies, particularly in respect of input cost inflation and dampened customer demand. Nevertheless, we believe your Company is well prepared for most scenarios with strong liquidity available to support the portfolio and through extensive planning and preparation by each of the portfolio companies' management teams with the assistance of Gresham House. The Company has continued to provide finance to new and existing investee companies and delivered three notable exits during the year in the form of Media Business Insight (MBI), Equip Outdoor Technologies (EOTH) and Tharstern Group Limited (Tharstern). Looking forward we anticipate a quieter exit environment in the current year. The Board was pleased to learn of the commitment from the UK Government to extend the VCT 'sunset clause' beyond the end date of 5 April 2025, although Shareholders should note the VCT industry has seen no further detail provided to date and any extension will most likely require parliamentary approval. If the clause had not been extended, investor income tax relief on new VCT subscriptions would not have been available.
Performance NAV total return, expressed on a pence per share basis, was derived as follows:
The Company's NAV total return per share decreased by (12.3)% for the year ended 31 March 2023 (2022: 13.3%), calculated as the closing NAV per share of 71.54 pence plus 13.00 pence of dividends paid in the year, divided by the opening NAV per share of 96.37 pence. The share price total return was down (6.9)% (2022: 23.4%). The difference between the share price and NAV total returns arises principally due to the timing of NAV announcements which are usually made on a date following the date to which they relate and is explained more fully under Performance in the Strategic Report of the Annual Report. The negative NAV total return for the year was principally the result of unrealised losses in the value of investments in the portfolio, driven initially by lower benchmark market comparables and, more recently, by the weaker trading performance of investee companies as the impact of inflation and higher interest rates on consumer spending and business investment began to bite. In the Association of Investment Companies' analysis of Cumulative NAV Total Returns at 31 March 2023, the Company was ranked 7th out of 36 Generalist VCTs over five years and 1st out of 31 Generalist VCTs over ten years. Shareholders should note that the AIC's rankings are based on the latest available published NAVs and therefore do not reflect NAV per share movements up to 31 March 2023. For further details on the performance of the Company, please refer to the Strategic Report within the Annual Report.
Target Return The Board's current target is to achieve an average NAV total return of 8.0% per annum. Although this year's NAV total return decreased by (12.3)% (2022: 13.3%) the average over five years of 11.3% per annum, is well in excess of the target. The Board reminds Shareholders that investment portfolio returns and dividend payments should always be viewed over the longer term.
Dividends The Board continues to be committed to providing an attractive dividend stream to Shareholders. In respect of the year ended 31 March 2023, the Company paid Shareholders two interim dividends totalling 13.00 pence per share comprising 6.00 pence per share on 7 November 2022 and a further dividend of 7.00 pence per share paid on 30 March 2023 to Shareholders on the register on 30 September 2022 and 3 March 2023 respectively. To date, cumulative dividends paid since inception total 147.00 pence per share. The Company has now met or exceeded the Board's dividend target of paying at least 5.00 pence per share in respect of the last thirteen financial years. The continuing change in the portfolio to younger growth capital investments, as the older, more mature companies with higher income yields are sold, is likely to make it more difficult to maintain a consistently high level of dividends from income and capital returns alone in any given year. This year the Company experienced a reduction in income from portfolio companies and investments but was able to exceed the dividend target as it had sufficient distributable reserves from past realised profits. Shareholders should also note that there may be circumstances where the Company is required to pay dividends in order to maintain its regulatory status as a VCT, for example, to stay above the minimum percentage of assets required to be held in qualifying investments. It should also be noted that the payment of dividends causes the Company's NAV per share to reduce by a corresponding amount. The Board takes all of these variables into account when setting the level of dividends and continues to monitor the sustainability of the annual dividend target. On 20 June 2023 by order of the Court, the share premium account and capital redemption reserve of the Company was reduced (as approved at the General Meeting of the Company held on 12 October 2022) and has been transferred to a special distributable reserve. The purpose of this reserve is to fund market purchases of the Company's own shares as and when it is considered by the Board to be in the interests of the shareholders, make dividend payments and to write-off existing and future losses as the Company must take into account capital losses in determining distributable reserves.
Investment and portfolio performance The portfolio valuation movements for the year were as follows:
During the year, the Company invested a total of £3.32 million into five new and five existing portfolio companies (2022: £4.61 million; three and seven respectively). New investments totalling £1.88 million were made into: · Bidnamic - a marketing technology business; · FocalPoint - a GPS enhancement software supplier; · Orri - an intensive day care provider for adults with eating disorders; · Connect Earth - an environmental data provider; and · Cognassist - education and neuro-inclusion solutions.
Additional funding of £1.44 million was provided across five existing portfolio companies: · Northern Bloc - a dairy and allergen-free ice cream brand; · Rotageek - a workforce management software system; · Andersen EV - a provider of premium EV chargers; · Vivacity - an AI and Urban Traffic Control business; and · Bleach London - a hair colourants brand.
Post the year-end, £0.39 million was invested into a new portfolio company, Dayrize , a provider of a rapid sustainability impact assessment tool.
Additionally, £0.30 million was further invested into Legatics, an existing portfolio company. Further details of the new investments can be found in the Investment Adviser's Report below. The Company generated a total of £8.05 million in proceeds from full and partial realisations alongside loan repayments and other capital receipts in the year ended 31 March 2023 as detailed below. In June 2022, the Company realised its investment in Media Business Insight (MBI), a publishing and events business focussed on the production industries, generating proceeds of £2.80 million (including deferred proceeds and loan repayments made earlier in the year) resulting in a realised gain in the year of £0.16 million. Returns received over the life of the investment amounted to £4.50 million, a 2.2x multiple of cost and an IRR of 13.8 %. In November 2022 we were delighted by the sale of the equity in EOTH, trading as Rab and Lowe Alpine, receiving £4.34 million including preference share dividends on completion which generated a realised gain in the year of £0.70 million. To date total proceeds received amount to £5.64 million providing a 6.9x multiple of cost and an IRR of 23.2%. The Company has retained interest bearing loan stock to continue to generate future income. In March 2023, the sale of Tharstern completed generating a realised gain of £0.35 million. Over the life of this investment a 2.6x return and IRR of 15.0% was achieved.
Unfortunately in October 2022, Andersen EV, an electric charger provider, was compelled to enter into administration as a result of a substantial deterioration in its trading environment, which resulted in a realised loss of £(0.65) million in the year. This was particularly disappointing as the Company, alongside the other Mobeus VCTs, made a follow-on investment into the company in May 2022. The company had secured some impressive clients and funding was provided to drive product development in a premium brand operating in the emerging electric car charging market. However, over the summer months, a combination of global supply issues, inflationary cost increases and the removal of Government consumer support for the purchase of EV chargers quickly impacted its ability to continue trading and so necessitated the appointment of administrators. On 22 December 2022, Parsley Box Group PLC delisted from the AIM market and its shares were cancelled. It has subsequently re-registered as a private company.
Also in the year, Tapas Revolution, the Spanish restaurant chain, went into administration. Under the HMRC Financial Health Test (more detail below), the Company was unable to invest further into this portfolio company and as a result it was necessary for an Administrator to be appointed. It is likely that other company failures will be seen during the rest of the financial year as we are unable to invest and assist some portfolio companies further. Including Andersen EV above, a total of £1.49 million has been recognised as a realised loss across three companies which are experiencing significant trading issues. The portfolio's valuation at the year-end demonstrates the impact of slowing consumer and business spending on consumer facing portfolio companies, in particular Virgin Wines. Virgin Wines is an AIM-listed investment, which has also suffered from the negative sentiment of its sector, in spite of broadly positive news flows from the company itself and relative outperformance versus its peers. It contributed £2.68 million of the unrealised portfolio reduction of £9.14 million. Other smaller valuation decreases were registered by Buster & Punch and Wetsuit Outlet, which were also marked down as a result of experiencing challenging trading conditions. The impact of the decline in consumer confidence on the portfolio companies operating in the consumer sector has therefore contributed to the overall realised and unrealised reduction in the value of the portfolio by £(9.42) million in the year ended 31 March 2023 (2022: increase of £12.09 million), or a fall of (18.1)% on a like-for-like basis compared to the value of the portfolio at the start of the year. During these uncertain times, the management of the portfolio is absolutely critical and the Investment Adviser is, and has been, focused on deploying its Talent Management team to support its investments. We continue to expect follow-on investments to remain a significant feature of our portfolio companies as they seek to achieve scale and move to profitability. Follow-on investment requests are subject to the same scrutiny as new deals and both rely on certain criteria being met, including the HMRC Financial Health Test. Shareholders should be aware that this test is an effective tightening of the interpretation of HMRC policy and practice in a technical aspect of the VCT financing rules, now resulting in the restriction of potential follow-on investments to support certain companies, where more than half their subscribed share capital has been lost.
In a small number of cases, this may result in the Company not being able to make follow-on investments, even where a compelling business case exists, which in turn could impact the prospects of the portfolio company. The Board continues to monitor developments in the interpretation of this area of legislation carefully. Further details of the Company's investment activity and the performance of the portfolio are contained in the Investment Adviser's Review and the Investment Portfolio Summary within the Annual Report.
Liquidity and Fundraising Cash and cash equivalents held by the Company as at 31 March 2023 amounted to £32.51 million, or 46.2% of net assets. In October 2022, on considering the future cash requirements of the Company and the potential demand for the Company's shares following the successful fundraise in January 2022, the Board approved a further fundraise for the 2022/23 tax year. Having provided a period of time between the launch of the prospectus and acceptance of applications, the Board was pleased that the initial amount of £8 million (as well as an over-allotment facility of a further £8 million), launched early in October 2022, was fully subscribed by 8 November 2022. Shares were allotted in November 2022 and February 2023 and your Company extends a warm welcome to an equal mix of both new and existing Shareholders. The fundraising launched in October 2022 was to ensure that the Company retained adequate levels of liquidity to take advantage of new investment opportunities; fund further expansion of existing portfolio companies; facilitate attractive Shareholders returns, including the payment of dividends; and to buy back its shares from Shareholders who wish to sell. Currently, the Board do not anticipate a fundraise in 2023.
Share Buybacks During the year, the Company bought back and cancelled 1,464,956 of its own shares (2022: 697,498), representing 1.8% of the shares in issue at the beginning of the year (2022: 1.0%), at a total cost of £1.15 million, inclusive of expenses (2022: £ 0.64 million). It is the Company's policy to cancel all shares bought back in this way. The Board regularly reviews its buyback policy and currently seeks to maintain the discount at which the Company's shares trade at no more than 5% below the latest published NAV.
Shareholder Communications and Annual General Meeting May I remind you that the Company has its own website containing useful information for Shareholders at:
The Investment Adviser held a virtual Shareholder Event on the afternoon of 23 March 2023 with a live Q&A session which we hope you were able to join. We are pleased that double the number of attendees joined the meeting this year. A recording of the event is available via a link on the Company's website. Your Board is pleased to be able to hold the next Annual General Meeting ("AGM") of the Company at 11.00 am on Wednesday, 13 September 2023 at the offices of Shakespeare Martineau, 6th Floor, 60 Gracechurch Street, London, EC3V 0HR. A webcast will also be available at the same time for those Shareholders who cannot attend in person. However, please note that you will not be able to vote via this method and so are encouraged to return your proxy form before the deadline of 11:00 am on Monday 11 September 2023. Information setting out how to join the meeting by virtual means will be shown on the Company's website. For further details, please see the Notice of the Meeting which can be found at the end of Annual Report & Financial Statements.
Board Composition & Succession Throughout the year the Board comprised three directors. Following the retirement of Adam Kingdon in September 2022, whom we thank for his services to the Company, we were delighted that Sarah Clark joined as a director on 4 November 2023. Sarah brings new skills and depth of knowledge to the Company and will be standing for election at the forthcoming AGM. Sarah was also appointed as the Chair of the Investment Committee and is a member of all other Company's Committees. After considering and reviewing its composition, the Board agreed that the directors have the breadth and depth of relevant knowledge and experience plus the appropriate skill sets. The Board now consists of one male and two female directors.
Fraud Warning We are aware that Shareholders are being contacted in connection with sophisticated but fraudulent financial scams which purport to come from the Company or to be authorised by it. This is often by a phone call or an email usually originating from outside of the UK, claiming or appearing to be from a corporate finance firm offering to buy your shares at an inflated price.
The Board strongly recommends Shareholders take time to read the Company's Fraud warning section, including details of who to contact, contained within the Information for Shareholders section within the Annual Report.
Environmental, Social and Governance ("ESG") The Board and the Investment Adviser believe that the consideration of environmental, social and corporate governance ("ESG") factors throughout the investment cycle will contribute towards enhanced Shareholder value. Gresham House has a team which is focused on sustainability and the Board views this as an opportunity to enhance the Company's existing protocols and procedures through the adoption of the highest industry standards. The future FCA reporting requirements consistent with the Task Force on Climate-related Financial Disclosures, which commenced on 1 January 2021, do not currently apply to the Company but will be kept under review, the Board being mindful of any recommended changes.
Consumer Duty The Financial Conduct Authority (FCA) has introduced the concept of Consumer Duty, the rules and principles of which come into effect in July 2023. Consumer Duty is an advance on the existing concept of 'treating customers fairly'. It sets higher and clearer standards of consumer protection across financial services and requires all firms to put their customers needs first. As the Company is not regulated by the FCA it does not directly fall into the scope of Consumer Duty. However, Gresham House as the Investment Adviser alongside any IFAs or financial platforms used to distribute future fundraising offers are subject to Consumer Duty. It is incumbent on all parties to uphold the principles behind Consumer Duty and to that end we are working with the Investment Adviser to review the information we should provide to assist consumers and their advisers to discharge their obligations under Consumer Duty.
Outlook The geopolitical and macroeconomic background conditions are likely to remain uncertain in the near future. Interest rates are set to remain relatively high to combat inflation around the world. This background will continue to provide trading challenges for our portfolio companies, although historically these conditions have also provided an opportunity for the Company to make high quality investments and build strategic stakes in businesses with great potential. The issues affecting the banking sector may also mean that debt markets continue to be constrained which may, notwithstanding the recent successful sales of EOTH and Tharstern, keep the exit environment subdued compared to recent years. However, as the Company is not time-limited this is not expected to be a significant issue. The combined impact of inflation, interest rates and restrictions in Government spending are expected to continue to weigh down on UK consumer and business confidence. Therefore, we anticipate that further market stresses will become evident as the year progresses with all sectors vulnerable. However, the Company has a reasonably large and diverse portfolio, managed by a professional and capable investment team, which will mitigate the challenges that lie ahead. Allied to our strong balance sheet, the Board remains confident that it will be able to continue paying an attractive dividend.
I would like to take this opportunity once again to thank all Shareholders for your continued support and to extend a warm welcome to new Shareholders.
Ian Blackburn Chair 12 July 2023
INVESTMENT ADVISER'S REVIEW
Portfolio Review The continuing harsh economic conditions continue to create challenging circumstances for portfolio companies. UK business has seen both demand and operating margins come under pressure in the face of increases in inflation, interest rates and the associated threat of recession, unprecedented in recent years and not experienced by a generation of management teams. Whilst markets have somewhat stabilised, the impact of this is now being seen on consumer confidence and business investment. Gresham House, as Investment Adviser views portfolio value change in the first half of the financial year characterised as by declining market multiples with relatively stable company level trading performance carried over in part from the momentum gained during the prior financial year. However, in the latter months of 2022 and into 2023, the situation has reversed with trading performance beginning to suffer somewhat. Although markets remain buoyant and less volatile, in large part this is attributable to the weighting of tech giants such as Alphabet and Meta who are not directly representative of the real UK growth economy. Against this backdrop, the latest US data suggests growth rates have more than halved to 1.1%. Whilst inflation is expected to be moderating following the rises in base rates, it is still at a very high level and has impacted economic growth expectations. There are also early signs that supply chains are returning to normality, that the labour shortage is easing and that there are pockets of positive market sentiment. The outlook is therefore mixed, and the emphasis is thus on robust funding structures and on being prepared for all eventualities. The Company's investment values have been insulated partially from market movements and lower revenue growth by the preferred investment structures employed in many of the portfolio companies. This acts to moderate valuation swings and the net result is a more modest decline in portfolio value. The Gresham House non-executive directors who sit on each portfolio company board have responded by working with their boards to ensure that appropriate scenario planning has been done to achieve the best results during these uncertain times. Furthermore, the direct impact high interest rates on the Company's portfolio is negligible as most portfolio companies do not have any significant third-party debt. There is also now a greater focus on cash management and capital efficiency. With ample liquidity following the recent fund raise, the Company is also well placed to support portfolio companies with follow-on funding where it is appropriate and can be done on attractive terms. Strong liquidity will also benefit the attractive new investment environment for the Company which, in our view is strong and we are seeing a number of interesting business propositions. There are some specific highs in the portfolio such as Preservica which continues to see strong trading and is out-performing budget. The partial exit from EOTH was also an excellent result after a long running process which had to negotiate numerous economic and geo-political hurdles and shortly before the end of the year was the exit of Tharstern. By contrast, there were also some significant falls. The largest was at Virgin Wines, where market sentiment shifted heavily against the whole sector despite Virgin Wines itself outperforming its peers. MyTutor was also impacted by declining sector multiples combined with slower than anticipated growth over the year and Tapas has entered administration since the year-end with no expected recovery for the VCTs.
New investments during the year A total of £1.88 million was invested into five new investments during the year, as detailed below:
Further investments during the year A total of £1.44 million was invested into five existing portfolio companies during the year, as detailed below:
Portfolio valuation movements Across the portfolio, comparable market multiples that are used as the basis of valuation have declined over the year, some by over 30%, but the levels at the year-end reflect a degree of stabilisation over the final quarter. Together with several downward revisions to trading forecasts in the latter half of the year, this has driven a general decline in investee company values. As noted, the preference investment structures used in many of the portfolio companies serve to moderate the impact of such company value movements on VCT value. The need to protect and develop value going forwards in such an uncertain environment underlines the need for portfolio readiness and planning, robust funding and close monitoring by the Gresham House team.
The main reductions within total valuation decreases of £(9.81) million, were:
Virgin Wines has suffered from negative sentiment across its sector despite outperforming its peers although more recently, it also experienced some short term operational difficulties particularly in the last quarter of 2022. MyTutor's growth has slowed post COVID coupled with a decline in market multiples. Buster and Punch and Wetsuit Outlet are both consumer facing businesses that have experienced challenging trading conditions which resulted in profit downgrades. Connect Childcare has struggled to grow revenues as rapidly as hoped and is managing its cash carefully.
The uplifts within the total valuation increase of £0.67 million were:
Master Removers continues to trade well despite an uncertain housing market across much of the period under review. Preservica is performing well and increasing its recurring revenues. Finally, Orri has been valued on a revenue multiple and the VCT has benefitted from an increase in value due to the investment structuring.
Portfolio Realisations during the year The Company completed three full or partial exits during the year, as detailed below:
Also during the year, the Company received a loan repayment from Jablite Holdings Limited. Portfolio income and yield In the year under review, the Company received the following amounts in loan interest and dividend income:
1 Total portfolio income for the year is generated solely from investee companies within the portfolio.
New investment made after the year-end The Company made one new investment of £0.39 million after the year-end, as detailed below:
Further investments made after the year-end The Company made a further investment of £0.30 million into an existing portfolio company after the year-end as detailed below:
Environmental, Social and Governance considerations The Board and the Investment Adviser believe that the consideration of environmental, social and corporate governance ("ESG") factors throughout the investment cycle should contribute towards enhanced shareholder value. The Investment Adviser has a team which is focused on sustainability as well as the Investment Adviser's Sustainability Committee who provide oversight and accountability for the Investment Adviser's approach to sustainability across its operations and investment practices. This is viewed as an opportunity to enhance the Company's existing protocols and procedures through the adoption of the highest industry standards. Each investment executive is responsible for setting and achieving their own individual ESG objectives in support of the wider overarching ESG goals of the Investment Adviser. The Investment Adviser's Private Equity division has its own Sustainable Investment Policy, in which it commits to: · Ensuring its team understands the imperative for effective ESG management and is equipped to carry this out through management support and training. · Conduct regular monitoring of ESG risks, opportunities and performance in its investments. · Incorporate ESG into its monitoring processes. Outlook Whilst the year under review has once again been marked with volatility and uncertainty as a result of a number of factors affecting both the global and UK economy, the portfolio has continued to trade well under the circumstances. Rising costs and recessionary pressures will place further strains on the portfolio however, the Investment Adviser with its wealth of team experience will provide all additional help and advice to portfolio company management to help weather this storm. In terms of new investment, evidence shows that investing through the economic cycle has the potential to yield strong returns and Gresham House is seeing a number of opportunities, which although not without some risk, have the potential to drive shareholder value.
Gresham House Asset Management Limited Investment Adviser 12 July 2023
Annual General Meeting
The AGM will be held at 11.00 am on Wednesday, 13 September 2023 at the offices of Shakespeare Martineau LLP, 6th floor, 60 Gracechurch Street, London EC3V 0HR and will also be webcast for those Shareholders who are unable to attend in person. Details of how to join the meeting by virtual means will be shown on the Company's website. Shareholders joining virtually should note you will not be able to vote at the meeting and therefore you are encouraged to lodge your proxy form. For further details, please see the Notice of the Meeting which can be found at the end of the Annual Report & Financial Statements.
Further Information
The Annual Report and Accounts for the year ended 31 March 2023 will be available shortly on Mobeus Income & Growth 2 VCT plc. It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
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