Baronsmead VCT AGMs and VCT Prospects

Today (1/2/2023) I attended the two Baronsmead VCT AGMs (BMD and BVT) via a Zoom webinar, partly because of the train strikes today but partly because I did not expect any momentous events or questions to take place, and so it turned out. But they did get a number of shareholders attending in person despite the train strikes.

However despite me registering for the event some weeks ago I did not receive a zoom invite and had to chase that up just before the meeting.

Just looking at BVT results, their total return last year was -19.20% which was very similar to my overall portfolio return. They achieved a similar return on both quoted and unquoted holdings which is probably not surprising because the valuations of quoted companies will have been used as benchmarks for the latter (they claim to be the only “hybrid” VCTs with a mix of quoted and unquoted holdings). Both BVT and BMD run very similar portfolios). The result was much better in the previous year at a total return of 29.3%.

There were 6p in dividends paid last year which equates to a yield of 7.1% (tax free remember).

There were a number of good realisations last year including listed company Ideagen which I also held directly. That achieved a return on initial investment by the VCT of 13 times.  

But the Chairperson of BVT, Sarah Fromson, warned that returns are likely to be more volatile in future due to the change in VCT investment rules in 2015. They are having to invest in more immature businesses in essence.

Voting took place on a poll but on-line attendees could not vote so you had to submit your votes in advance which I did. For example, I voted against the remuneration report as did 1.37 million shareholders because pay in the Baronsmead VCTs seems to be going up substantially.

There were few questions from the audience. One issue that was raised was the fees paid by investee companies for directors nominated by the VCT or Gresham House which seemed to be increasing – now over £1million possibly. It was suggested that having nominated directors on boards assisted with control of the companies.   

Is it a good time to invest in VCTs? I think the jury is still out on that. We have not yet seen the result of the changes to the VCT investment rules and it is unclear whether the investment in more early stage companies will be successful. The valuation of such companies still seems high to me but it may be some years before we see whether the valuations are justified.

However VCTs are still raising funds so they must see opportunities to invest them. There may be a high demand by investors due to the high tax reliefs and good dividend yields but they need to be aware of possible changes to the taxation of VCTs due to the “sunset” clause in the legislation which was mentioned briefly in the BVT AGM.

There may be problems revising the legislation because, as reported in the FT today, the Government has a problem in that it has committed to revoking EU imposed legislation in the UK but has just added another 1,000 pieces of such legislation that have been discovered that will need reviewing. That means the total is now 3,700 laws and regulations to be considered and amended or discarded. That surely shows how bureaucratic we have become of late because of our former membership of the EU and there are so many obscure laws that even identifying them has proved to be a problem!

But the good news is that if they have not been reviewed by the end of 2023 then they are likely to be automatically dropped because of the   Retained EU Law (Revocation and Reform) Bill 2022 which is in the House of Lords at the moment. What that might mean for VCT legislation is not clear.

The AIC held a seminar on VCTs recently and you can see a report on it here:  https://www.theaic.co.uk/aic/news/press-releases/vct-managers-still-seeing-strong-investor-appetite

As I already have substantial VCT holdings I have not been adding to them recently as the returns achieved I do not consider that good (mainly due to high management costs including the hated performance fees) and I would prefer to see how these issues play out. The Government may have made statements supporting VCTs but we need definite commitments and no threats to remove the high tax reliefs on VCTs which is the only thing that makes them good investments.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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EDGE Performance VCTs, REITs and Paypoint

I am glad to read that Edge Performance VCT (EDGH) is planning to wind-up. I have written about this VCT several times in the past despite never holding it and I always considered it a basket case which seemed to be run more in the interests of the management and advisors than shareholders. ShareSoc ran a campaign on the company to try and get it reformed, but ultimately without success.

It has now been revealed that they paid dividends illegally for which they are asking shareholders to vote through a “whitewash”. The latest announcement also says: “As Shareholders will be aware, the Company’s net asset value has significantly reduced in recent months, with, among other things, market-related reductions in the portfolio valuation, a dividend paid on 6 May 2022, share buy-backs and the payment of advisers’ fees having substantially depleted the Company’s cash. As a result, the Board and the Investment Manager are of the opinion that the Company is sub-scale and that the Company’s ongoing charges ratio will be too high at approximately 14.89 per cent.

Following lengthy discussions with the Investment Manager as to the Company’s current position and the overall market outlook, the Board does not foresee any reasonable opportunity for the Company to grow in the short term. Accordingly, after careful consideration the Board believes that it is in Shareholders’ best interests that the Company be placed into a members’ solvent voluntary liquidation, with the intention that there will be an orderly winding down of the Company, realisation for cash of the Company’s assets and a return of that cash to Shareholders in a manner which will be intended to preserve VCT tax-reliefs”.

This decision is several years too late in my view while in the meantime managers and advisors have extracted large amounts of cash.

On another subject, my portfolio is down again today mainly because the share prices of property funds/trusts including REITs have fallen sharply. This is no doubt due to the rise, and prospective more rises, in interest rates. This might impact property companies when their debts need to be refinanced. This has affected all property companies, even those who have fixed their interest on debt at low levels and have many years to run before they need refinancing.

In a few years time, the position on interest rates may be very different as inflation is forecast to fall rapidly next year. Property companies should be long-term holding so I won’t be panicking over the latest share price falls.

Another share that has fallen today is Paypoint (PAY) which I hold. That’s despite recent director share buying including another deal today. What do they know that I don’t is the question one asks oneself in such circumstances. Perhaps they are convinced that the recently announced bid for another company is really a good deal when the market seems to think otherwise.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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VCT Investor Workshop

Today I attended a VCT Investor Workshop on-line run by the British Smaller Companies VCTs (BSV and BSC). These are two of the better performing generalist VCTs managed by YFM. It was a disappointing event.

There were presentations from investee companies Unbiased and SharpCloud which gave a general overview of the businesses but no financial information – such as sales, profits and what the VCT’s valuation is based upon. In other words, the key information about a business that any investor needs.

As I got the impression from other VCT managers that a year or two back the valuations of new deals were rising to levels that might reduce future returns I asked this simple question: “Are you paying less for new investments as I get the impression the market had become over-heated?”

The question was not answered. In fact few questions were answered, perhaps because the time allotted was minimal – perhaps 10 minutes which turned into 5 minutes in reality as other sessions overran.

I really don’t see the point of running events when not enough time is allowed for questions and key issues are ignored.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Dividend Tax Rate Cuts and VCT/EIS Schemes

Two little noticed changes in today’s Chancellor’s announcements are reductions in dividend tax rates and support for enterprise schemes. I quote from the announcements:

“In addition, the government will reverse the 1.25 percentage point increase in dividend tax rates from April 2023. This will benefit 2.6 million dividend taxpayers with an average saving of £345 in 2023-24 and additional rate taxpayers will further benefit from the abolition of the additional rate of dividend tax. This will support entrepreneurs and investors across the UK to drive economic growth”; and:

“The government is supporting companies to raise money and attract talent by increasing the generosity and availability of the Seed Enterprise Investment Scheme (SEIS) and Company Share Option Plan (CSOP). The government remains supportive of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) and sees the value of extending them in the future”.

Does this mean that the “sunset” clause for dividend tax relief on VCTs will be removed after 2025? It is not clear.

See https://www.gov.uk/government/publications/the-growth-plan-2022-documents for details of the Chancellor’s Announcements.

There have been some adverse comments on the removal of the additional income tax rate of 45% but simplifying tax rates and structures has clearly been a priority so that is welcomed. The net cost to the Treasury of that change in 2023-24 is only £625 million. Not that I will personally benefit it is worth stating as I have very little “earned” income.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Record Fund Raising for VCTs

The AIC have published a note that says that a record amount of money was raised by Venture Capital Trust (VCTs) in the last tax year. It passed the £1 billion mark for the first time.

This may not be surprising given that investors may have realised gains from stock market investment in last year and VCTs have been looking attractive because of good reported profits and the available tax benefits. But one issue that has yet to become clear is the impact on the long-term performance of VCTs under the new investment rules. The investment rules for VCTs changed so they now have to invest in early-stage companies rather than asset-backed companies or management buy-outs of mature businesses. This has meant that they are now investing mainly in immature technology businesses whose valuation is often problematic. And the valuations often depend on the last fund raising round rather than on the profits of the business.

The problem is that the valuations of juvenile technology businesses have been rising and you can see that from the comments of fund managers who have been finding the valuations of such businesses have been rising. They have been competing harder for new investments. If they are paying more for companies this might affect their long-term returns in due course.

More money piling into VCTs actually makes the situation worse as the cash has to be invested rapidly.

In the meantime, the reported profits of VCTs often depend on unrealised gains rather than realised ones based on fund raising rounds and comparable companies. They have been able to achieve a few good realisations which enables them to pay good dividends but that simply reflects the enthusiasm for technology businesses in the last couple of years.

I am not saying that VCTs are necessarily a bad investment at this point in time – I did purchase a few more VCT shares last year. They do provide some diversification in a portfolio and have good tax benefits even if there is a risk that the Government might reduce the latter in future. But investors do need to consider them as long-term investment vehicles and do need to be wary of the above issues.   

The AIC Press Release is here: https://www.theaic.co.uk/aic/news/press-releases/smes-to-benefit-from-record-funding-as-vcts-raise-over-a-billion-in-202122

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Northern Venture Trust AGM Report

I attended the Northern Venture Trust (NVT) AGM this morning via Zoom. This trust gave a good performance last year and the AGM was well organised in some ways with shareholders both attending physically and via Zoom (i.e. it was a hybrid meeting but all votes had to be submitted in advance).

Tim Levett representing the fund manager gave a presentation on the historic results and covered one or two other points. He specifically mentioned the “sunset clause” on dividend income tax relief which is due to be removed in 2025 due to EU regulations but he said he believed it was likely to be retained. This is an important issue for VCT investors because the zero tax on VCT dividend income is one of the major attractions and is one of the few things that make them attractive to investors as otherwise the overall returns are no great shakes. This issue really needs to be resolved while VCTs are attracting such high levels of funding at present while many investors are not aware of the issue.

Note that Tim Levett has been on the board a very long time but is retiring from the fund manager. However he is remaining on the board which I do not consider good corporate governance as I don’t think managers or ex-managers should be on the board. I voted against him therefore as usual. He got 443,000 votes against and the Chairman, Simon Constantine, also received 375,000 votes against his re-election.

Questions could be submitted before the meeting or during the meeting (both on-line and by shareholders present of which there were a few apparently).

But the Chairman did not read out the pre-submitted questions in full or give the name of the submitter. He also did not answer my question directly which I had submitted in writing which was “Last year the trust paid a performance fee to the fund manager of over £2.5 million. On my calculations this resulted in the overall total of expenses and fees of 4.5% of closing net asset value. In my view this is way too high even allowing for the work involved in managing a portfolio of small, unlisted investments.

Could the board please consider reverting to the arrangement when the trust was first launched; in other words no performance fee being payable at all as there is no evidence that performance fees improve the performance of investment trusts. Other VCTs such as Amati manage without them”.

All that was said was that 76% of shareholders had voted for the introduction of the performance fee in 2013 and all of the top 20 VCTs have performance fees. That’s hardly a justification for the excessive level of fees. [Postscript: The Amati AIM VCT has a total return per annum over ten years of 13.9% according to the AIC while Northern has a total return of 9.4% p.a. so I do not believe the claim about top 20 VCTs is true].

Just to reinforce that point, a shareholder physically present suggested that after taking into account other fees collected via the manager such as arrangement and monitoring fees from investee companies, the total percentage was 7% of assets (I have not verified that claim but it was not denied by the directors).

Summary comments: Like other VCTs this company is doing very well from investing in technology and software companies with substantial realisations being achieved. The market is hot for such businesses but whether that will continue to be the case I am not sure as valuations are getting very high. This is of course also driving up the cost of new investments.

There were questions about the payment of performance fees (in cash of course) when the declared profits include unrealised gains as well as realised ones. But that that was discounted as being a concern. This is an issue however as unrealised gains can disappear in future.

The key problem with this and other VCTs as I see it is that the company is run more for the benefit of the fund managers and the directors, rather than shareholders.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Baronsmead VCT – More Corporate Governance Issues

I mentioned in a previous blog post that covered Northern Venture Trust that “VCTs are a perpetual problem in relation to excessive management fees, poor corporate governance, and general behaviour prejudicial to the interests of shareholders”.

Now we have an AGM for Baronsmead VCT (BVT) in prospect on the 16th February. As a holder I will be expressing the following concerns to the Chairman:

  • In the last year the board has appointed two new directors, Michael Probin and Fiona Miller Smith. Michael Probin undoubtedly knows a lot about the VCT sector because for many years he was the Investor Relations Manager at Livingbridge. But they were the investment manager for the Baronsmead VCTs until Livingbridge sold its investment management business to Gresham House so Michael Probin can hardly be considered to be “independent”. Even Fiona Miller Smith’s appointment is questionable because the Annual Report says she worked for Murray Johnson Private Equity in the past. Now Murray Johnson used to manage VCTs but their track record was atrocious, they lost the management contracts as a result and Murray VCTs subsequently changed their names. I will therefore be voting against the appointment of both Michael Probin and Fiona Miller Smith.
  • Another concern is that the AGM is to be a physical only meeting not a hybrid one. So people like me who are particularly vulnerable to Covid infection are very unlikely to attend. Bearing in mind the average age of VCT shareholders, this is certainly going to deter many shareholders from attending. It is quite unreasonable not to provide an electronic attendance option for investors while the Covid epidemic is still prevalent.
  • Lastly, the Chairman of the company, Peter Lawrence, was first appointed a director of one of the Baronsmead VCTs in November 1999 and has been so ever since, i.e. that’s over 22 years’ service. That is an excessive length of time and is contrary to the principles embodied in the UK Corporate Governance Code. He cannot be considered independent. This length of service is even contrary to the “Tenure Policy” of the company stated at the top of page 51 of the Annual Report. I will therefore yet again be voting against his reappointment as I have done in prior years for a number of reasons.

In summary, although the company like many VCTs reported a good financial performance last year (total return up 25.8%) this does not offset the questionable corporate governance. It also means that the company paid out a performance fee of £1.9 million thus increasing the overall expenses of the company to 3.0% of closing net assets. An excessive figure in my view when performance fees are simply unnecessary in VCTs.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Northern Venture Trust and Other VCTs

Northern Venture Trust (NVT) recently published their Annual Report. It shows that the manager (now Mercia) collected a performance fee of £2.5 million which on my calculation raised the overall fees and expenses as a percentage of closing net asset value to 4.5%.

This is way too high in my opinion even allowing for the work involved in managing a portfolio of small, unlisted investments. When launched back in 1995 Northern did not have a performance fee but it was added later despite the opposition of myself and many other shareholders.

There is of course no evidence that performance fees in investment trusts improve performance

I will be submitting a question and comments to the AGM on the 7th January on this issue and I would encourage other shareholders to do the same. It would be best to remove the performance fee. Other VCTs such as the Amati AIM VCT do not have one and they outperformed Northern last year in terms of Total Return.

VCTs are a perpetual problem in relation to excessive management fees, poor corporate governance, and general behaviour prejudicial to the interests of shareholders. Shareholders in the Edge Performance VCTs and Core VCTs should vote in support of campaigns for change – see https://www.sharesoc.org/campaigns/edge-vct-campaign/ and https://www.sharesoc.org/blog/vcts/core-vct-another-messy-vct/  . Note: I have never held shares in either of those VCTs but they are typical examples of problems in VCTs over the years.

Oddly enough a person who shall remain nameless has suggested that ShareSoc has become more active in campaigns against incumbent management since I departed as I was often too sympathetic or supportive of management. This is a gross distortion. Just considering VCTs, the following is a list of VCTs where I made representations or ran full blown campaigns while I was a director of ShareSoc or UKSA in the last 25 years:

Acuity VCT, Albion VCT, Baronsmead VCTs, Bluehone VCT, British Smaller Companies VCT, Chrysalis VCT, Downing Income 3 VCT, Foresight 1+3+4 VCT, Murray VCTs, Northern Venture Trust, Oxford Technology VCTs, Rensburg AIM VCT, Singer & Friedlander VCT and Quester/Spark VCT (some have since changed their names).

In some cases, this resulted in major board changes and changes to the fund manager. The results were positive in most cases which shows how important it is for shareholders to take action when things are going wrong.

It is good to see that since ShareSoc was founded 10 years ago by me and others it has become more active recently in promoting campaigns against companies. With a new Chair they are also seeking a new General Manager to take the organisation forward.

I wish them the best of luck in the New Year as it is certainly important for ShareSoc to continue to increase membership to act as a representative voice for private shareholders.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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General Meeting Requisition at Edge Performance VCT

I am glad to see that ShareSoc is supporting a General Meeting at Edge Performance VCT to remove three existing directors and appoint a new one.

I have never held shares in this company or the multiple funds it has managed but as it regularly came up in conversations at ShareSoc I have watched from the side-lines. I considered it to be a basket case of the first order from what I learned some years ago – particularly the large investment in Coolabi and the valuation of that holding plus the general standard of corporate governance and management of the company. The performance of the funds has generally been the exact opposite of what the company name was intended to suggest.

In such situations I generally consider it best to aim for a revolution including a complete change of the board and a change of manager. But it’s never too late to start anew as I have learned from other VCT problem cases in the past. Although Robin Goodfellow was appointed to the board last year to bring a fresh voice it remains dominated by others. This needs to change so I hope readers who hold the shares will support the proposed changes.  

Incidentally there is a good article on VCTs entitled “VCT lessons I have learnt” by Paul Jackson in the latest edition of Investors’ Chronicle. It covers some of the wrinkles of investing in VCTs which is certainly a complex subject.

VCTs are complicated enough without the complex structure of multiple share classes embodied in the Edge Performance VCT.

For more details see https://www.sharesoc.org/sharesoc-news/edge-shareholders-requisition-general-meeting-to-remove-3-directors-and-appoint-richard-roth-as-a-director/ . It is good that ShareSoc is actively encouraging and supporting action in such cases.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Long Serving Directors and Maven VCT

I have long complained about directors serving on boards for longer than 9 years. The UK Corporate Governance Code (which you can easily find on the web) says any director who serves for more than 9 years cannot be considered “independent” and there should be a majority of independent directors.

When the UK Corporate Governance Code was drafted this principle of avoiding long-serving directors was introduced and I consider it a very sound principle. But investment trusts (including Venture Capital Trust) continue to ignore this rule. An extreme example of this is that of Maven Income & Growth VCT 4 (MAV4).

In the latest Annual Report (the AGM is on the 12th May), it appears that two of the five directors (Malcolm Graham-Wood and Steven Scott) were first appointed to the board in 2004 and another director (Bill Nixon) is a managing partner of the fund manager. Clearly a breach of the Code therefore and the explanation given to excuse this is feeble (see page 57 of the Annual Report).

I did raise this issue before the last AGM and got a response that the FRC considers compliance with the AIC Code as sufficient, but I have never seen any official pronouncement on this. As the AIC represents the fund managers effectively and certainly not the shareholders in trusts, it is hardly an unbiased body either.

No action was taken to refresh the board since the last AGM so we have the same cosy arrangement continuing. I have therefore voted against the aforementioned directors and also against the Chairman, Peter Linthwaite, for allowing this situation to persist. I recommend other shareholders do the same.

The company’s AGM is being held in Glasgow but no shareholders are permitted to attend and no alternative on-line or hybrid meeting is being provided. All you can do is submit written questions so here again the board is avoiding accountability to shareholders in a proper manner.

This is clearly a good example of how investment trusts (particularly VCTs) can become poodles of the fund manager and ignore good corporate governance principles.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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