Tag: Baronsmead Venture Trust

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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Equals Trading, Bango Results, Finablr Suspension, Baronsmead VCT and Closing the Stock Market

As share prices of almost every share on the market collapses, should all trading be suspended? The argument for this is that as the impact of the coronavirus on the economy is not certain, although it looks more dire every day, shares cannot be valued with any certainty. Indeed there seems to be no hiding place as there never is in a bear market – almost all share prices have fallen. The editor of the FT thinks the market should not be closed and I agree with her. Closing the market is very prejudicial to private shareholders, particularly those who absolutely need to move into cash even if it means some sell into an unrealistic market – but that is their choice. If the market closes you have no choice. If there was to be a closure, it should only be for a few days as at the start of World War II.

I have been trend following in the market as I have mentioned before but it has proved difficult to keep up in the last few days. At least brokers’ systems seem to be robust this time around.

The major sectors affected by the virus, or soon will be, are hospitality businesses, hotels, pubs, entertainment venues and airlines. One symptom is that I just cancelled our holiday in June as I am supposed to be hibernating for 12 weeks according to the Prime Minister and I doubt the epidemic will have passed by June. But you can see that there will be many staff lay-offs in such businesses and airlines are already asking to be bailed out by the Government because if airplanes don’t fly they cannot cover their aircraft lease costs.

Meanwhile the virus is causing businesses to get their staff to work from home, including one of my brokers. Payment company Equals Group (EQLS) issued a statement this morning giving their response to the virus and a trading update. They say they have 50% of their staff working remotely in shifts and can move to 100% when required. As regards trading, group revenues to the end of February were up 33% but there has been a marked slowdown in travel cash and retail card revenues in the last week due to the adverse impact on travel. But corporate revenues are still robust so far and account for the majority of revenues. Clearly the business will be impacted to some extent so they are cutting costs to conserve cash. The share price had anticipated this and had already fallen a long way in previous days and weeks – it fell again today.

Another company in the payments sector is Finablr (FIN) which announced yesterday that the shares were suspended. The company suggests that problems with liquidity are making it difficult to manage the business. They have also discovered some cheques dating back to before their IPO which have been used as security for the benefit of third parties – a small matter of $100 million is involved! The CEO has resigned and the board is looking for a new one. This company was founded by B.R.Shetty who also founded NMC Health and whose accounting and financing arrangements are also under scrutiny. It looks like Finablr is yet another financial disaster I have managed to avoid to look on the bright side. I would not bet on shareholders recovering anything. Temporary suspensions very frequently turn into permanent ones.

Another company that operates in the mobile commerce and payment sector is Bango (BGO) who issued their final results today. Group revenue was up 41% and they say “Adjusted EBITDA” for the year was a positive £0.45 million. However cash declined because of the large expenditure on intangible assets and there was still an overall financial loss. They expect the “payments business to continue to grow exponentially” and they forecast the coronavirus to have a positive impact on End User Spend as from experience they see consumer spending rise during “stay-at-home” periods such as Ramadan and Christmas. The share price rose slightly today by the time of writing this note, but investors are still unsure about the future of the company it seems. Investors are either taking their money off the table altogether or moving out of businesses likely to be impacted by self-isolation and quarantining and this is having a very wide impact.

My portfolio is now over 25% in cash which is very unusual but I am picking up the odd few shares in companies where the panic seems overdone – in none of the sectors likely to be affected that are mentioned above though.

One of the few companies I hold whose share price rose in the last 2 days has been Ocado (OCDO) as the popularity of on-line ordering and delivery rises. Getting delivery slots with them is now difficult for customers and other supermarkets are having similar problems and when you do get a delivery a lot of items are missing. There is clearly some panic buying going on for certain items which may subside if logistics turns out not to be a major problem after all. But surely all the workers who pack and delivery from supermarkets are going to be affected if the virus becomes rampant, even if they are in the younger and healthier group.

I mentioned some issues at the Baronsmead Venture Trust (BVT) AGM in a previous blog post (see https://roliscon.blog/2020/02/27/venture-capital-trusts-the-baronsmead-vct-agm-and-political-turmoil/). I wrote to the Chairman of the company, Peter Lawrence, after the meeting and have received a response. He confirms that the chart of returns in the last ten years in the Annual Report on page 3 was wrong. It showed a decline in NAV Total Return in 2018 when there was in fact an increase and the 2019 point was also wrong– a corrected graphic is below.

Baronsmead Venture Trust Corrected Chart 2020--03-17

It always surprises me that there are so many errors in Annual Reports that shareholders find easy to spot when the directors have not. This seems to be a particular problem in VCTs – perhaps too many jobs and not enough time allocated to each role with some VCT board directors considering their directorship a sinecure that requires little thought or effort. I suspect those are the problems. Perhaps they need reminding to read the Annual Report in detail before approving it!

Mr Lawrence rejected my complaint about the lack of time allocated to public questions at the AGM Meeting (only 15 minutes) and also rejected my complaint about the length of time he has been on the board which is contrary to the UK Corporate Governance Code. I will send him a stiff reply. To my mind this looks like one of those VCTs where a revolution is long overdue. It needs a fresh board and a good examination of the investment policy, the fund manager and the fees paid to the manager.

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

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Venture Capital Trusts, the Baronsmead VCT AGM and Political Turmoil

Yesterday (26/2/2020) I attended the Annual General Meeting of the Baronsmead Venture Trust (BVT) held at Saddlers Hall in the City of London. It was reasonably well attended. I will just report on the major issues:

The Net Asset Value Total Return for last year I calculate to be -2.7% which is certainly disappointing. Note that it is annoying that they do not provide this figure in the Annual Report which is a key measure of the performance of any VCT and which I track for all my VCT holdings. I tried to get in a question on this issue but the Chairman (Peter Lawrence) only allowed 15 minutes for questions which is totally inadequate so I will be writing to him on that subject.

The company does give a chart on page 3 of the Annual Report showing the NAV Total Return for the last ten years. There was also a fall in 2018 according to that chart although I am not sure it is correct as my records show a 6.9% Total Return. I will query that as well.

The main reason for the decline in the return was a disappointing result from the listed company holdings – mainly AIM shares. However it was noted that there was an upturn after the year end and it is now up 17.2%. Major AIM company losses last year were in Crawshaw and Paragon Entertainment – both written off completely now – and a bigger loss in Staffline which was one of their major holdings. However they did realise some profits on Ideagen and Bioventix which were still their largest AIM holdings even so at the year end.

There was criticism from two shareholders about the collapse in Staffline with one asking why they did not exit from Staffline and Netcall (another loser) instead of following them down, i.e. they should have invoked a “stop-loss”. The answer from Ken Wotton who manages the listed portfolio was that there were prospects of recovery and they had sold some Staffline in the past so were still making 4 times the original cost. Comment: Losing money on an AIM portfolio in 2019 is not a great result – certainly my similar portfolio was considerably up last year. They seem to be selling the winners while holding onto the losers – not a sound approach. However it would certainly have been difficult to sell their large holding in Staffline after the company reported accounting/legal problems. Selling such a stake in an AIM company when there are no buyers due to uncertainty about the financial impact is simply impossible at any reasonable price.

One shareholder did question the poor returns from AIM companies when they might have made more from private equity deals. The certainly seem to have ended up with a rag-bag of AIM holdings which could do with rationalising in my opinion. The fact that the new VCT rules will impose more investment in early stage companies may affect the portfolio balance over time anyway.

Robin Goodfellow, who is a director of another VCT, asked why they are holding 20% in cash, and paying a management fee on it. Effectively asking why shareholders should be paying a fee on cash when the manager is paid to invest the cash in businesses. The Chairman’s response was basically to say that this is the deal and he did not provide a reasoned response. This is a typical approach of the Chairman to awkward questions at this company and I voted against his reappointment for that and other reasons. The Chairman is adept at providing casual put-downs to serious questions from shareholders as I have seen often in the past.

Another reason to vote against him was the fact that he has been a director of this company and its predecessor before the merger since 1999 (i.e. twenty-one years). Other directors are also very long serving with no obvious move to replace them. This is contrary to the UK Corporate Governance Code unless explained and likewise for the AIC Corporate Governance Code which says “Where a director has served for more than nine years, the board should state its reasons for believing that the individual remains independent in the annual report”. There is no proper justification given in the Baronsmead Annual Report for this arrangement.

I have complained to the Chairman in the past about them ignoring the UK Corporate Governance Code in this regard so that’s another item to put in a letter to him.

All resolutions were passed on a show of hands.

ShareSoc VCT Meeting

In the afternoon I attended a meeting organised by ShareSoc for VCT investors – they have a special interest group on the subject. VCTs have generally provided attractive and reasonably stable returns (after tax) since they were introduced over twenty years ago and I hold a number of them. In the early days there were a number of very poorly performing and mismanaged funds and I was involved in several shareholder actions to reform them by changes of directors and/or changes of fund managers. Since them the situation has generally improved as the management companies became more experienced but there are still a few “dogs” that need action.

Current campaigns promoted by ShareSoc on the Ventus and Edge VCTs were covered with some success, although they are still “works in progress” to some extent. But they did obtain a change to a proposed performance fee at the Albion VCT.

However there are still too many VCTs where the directors are long serving and seem to have a close relationship with the manager. Baronsmead is one example. It is often questionable whether the directors are acting in the interests of shareholders or themselves. There are also problems with having fund managers on the boards of directors, with unwise performance incentive fees and several other issues. I suggested that ShareSoc should develop some guidelines on these matters and others and there are many other minor issues that crop up with VCTs.

There also needs to be an active group of people pursuing the improvements to VCTs. Cliff Weight of ShareSoc is looking for assistance on this matter and would welcome volunteers – see https://www.sharesoc.org/campaigns/vct-investors-group/ for more information on the ShareSoc VCT group.

Political Turmoil Ongoing

Apart from the disruption to markets caused by the Covid-19 virus which is clearly now having a significant impact on supply chains and consumption of alcohol as reported by Diageo, another issue that might create economic chaos is the decision by Prime Minister Boris Johnson to ditch the political declaration which the Government previously agreed as part of the EU Withdrawal Agreement, i.e. that part which was not legally binding.

The Government has today published a 36 page document that outlines its approach to negotiations on a future trade deal and its ongoing relationship with the EU – see https://tinyurl.com/tlhr3pk . It’s worth a read but there are clearly going to be major conflicts with the EU position on many issues and not just over fish! Needless to say perhaps, but the Brexit Party leaders are happy.

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

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