Gresham House Renewable Energy VCT 2 plc
(the "VCT" or the "Company")

 

Final results for the year ended 30 September 2020

 

The VCT is pleased to announce its final results for the year ended 30 September 2020.

 

The Company's Annual Report and Financial Statements for the year ended 30 September 2020 are linked to this announcement http://www.rns-pdf.londonstockexchange.com/rns/5438J_1-2020-12-22.pdf, available on the Company's website at: https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/gresham-house-renewable-energy-vct-2-plc/ and can be found at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

 

LEI: 213800GQ3JQE2M214C75

 

For further information, please contact:

Gresham House Asset Management	t.hayes@greshamhouse.com
Tania Hayes	Tel: 020 3875 9860
JTC (UK) Limited - Company Secretary	GreshamVCTs@jtcgroup.com
Ruth Wright	Tel: 44 203 846 9774

 

FINANCIAL HIGHLIGHTS

	30 September 2020 Pence	30 September 2019 Pence
Net asset value per Ordinary Share and 'A' Share	105.6	115.9
Cumulative Dividends paid	51.3	45.5
Total return per Ordinary Share and 'A' Share	156.9	161.4

 

CHAIR'S STATEMENT

From March 2020 the global economy has been rocked by the extraordinary events of the coronavirus pandemic. The reduction in economic activity has led to a material fall in power prices whilst lockdowns have led to large changes in the way businesses function. In spite of this, the Board has been able to meet virtually to review the investments as well as go about its normal business, whilst the Investment Adviser, Administrator and other key service providers have been able to operate effectively with robust systems and staff working from home.

 

Renewables remains an asset class which offers investors exposure to highly defensive earnings, with a low correlation to other asset classes. This has become increasingly important during challenging market conditions such as those we have experienced since the onset of the pandemic. The VCT continues to be well positioned in this regard, given its large proportion of contracted revenues, subsidies and diversified asset base.

 

Overall performance, both technical and in terms of income received in the year has been slightly below budget as maintenance issues occurred at some of the older assets, and these could not be quickly resolved due to the restrictions on movements during lockdown.

I am delighted to say that these problems are in the course of being rectified and we expect the assets in question to perform well in the future having been technically upgraded.

 

The valuation of the portfolio has fallen by 2.4% or 2.7p per share before the payment of dividends. There are a number of factors that affect the valuation of the portfolio and these are described in more detail below and in the Investment Adviser's report. The VCT has continued to offer investors a mature, steady-yielding environmentally-friendly infrastructure investment and has delivered the best total returns since inception when compared to other Clean Energy VCTs launched in the same year, and is in the top 40% of all VCTs of that vintage, on a NAV Total Return basis.

 

Investment portfolio

At the year end, the VCT held a portfolio of 16 investments, which were valued at £30.6 million. There were two additions to the portfolio during the year, being a new investment of £0.6 million into bio- bean Limited in October 2019 and a new investment of £1.0 million into Rezatec Limited in January 2020. The VCT invested into these non-renewable energy assets to ensure that the VCT continued to meet all the HMRC rules relating to qualifying status which is clearly vital to protect shareholders' tax relief on both dividends and investment. There have been no exits during the year. The portfolio is analysed (by value) between the different types of assets as follows:

Ground-mounted Solar	81.8%
Rooftop Solar	8.8%
Small Wind	3.9%
Non-renewable assets	5.5%

 

The Board has reviewed the investment valuations at the year end, with a particular focus on ensuring the discount factors applied in the discounted cash flow model are in line with the industry standard. By way of reminder, the NAV represents the fair market valuation of the VCT's portfolio and, in the case of the renewable energy assets, is based on a discounted cash flow analysis over the life of each of the VCT's assets. The assumptions which underpin the valuation are provided by the Investment Adviser and the Board has satisfied itself as to the calculation methodology and assumptions.

 

Focusing on the key assumptions a 50 to 75 basis point reduction was applied to the discount rate used in the valuation of the assets compared with the rate used last year, resulting in a range of discount rates from 5.50% to 6.75% used across the portfolio (2019: 6.0% to 6.75%). This reduction in discount rates increases the holding value of the assets by £1.0 million, or 3.7p per share. Offsetting the benefit of the lower discount rates is a reduction in inflation expectations and as mentioned previously, power prices. This has resulted in a net unrealised decline in the value of the portfolio totalling £0.6 million, or 2.7p per share. The Board considers that this is the fair value for the portfolio, having discussed it at length with the Investment Adviser and having compared the valuation metrics to those used by other market participants. In addition, the Board commissioned an independent valuation of the assets by a leading professional adviser experienced in advising on renewables transactions in the UK which confirmed the Board's judgement. The non-renewable energy investments have been valued in line with the International Private Equity Valuation ("IPEV") Guidelines and are held at a value of £1.7 million.

 

Net asset value and results

At 30 September 2020, the Net Asset Value ("NAV") per Ordinary Share stood at 105.5p and the NAV per 'A' Share stood at 0.1p, producing a combined total of 105.6p per "pair" of Shares (2019: NAV per Ordinary Share of 115.8p, NAV per A Share of 0.1p and a combined total of 115.9p). This represents a decrease of 4.5p (2.9%) per share, before the deduction of dividends. Following the dividend payment of 5.3133p per Ordinary Share and 0.4867p per 'A' Share in December 2019, this has resulted in an overall decrease of 10.3p (8.9%) per share.

 

Total dividends paid to date for a combined holding of one Ordinary Share and one 'A' Share stand at 51.3p (2019: 45.5p). The NAV Total Return (NAV plus cumulative dividends) has decreased by 2.8% in the last year and now stands at 156.9p, compared to the cost to investors in the initial fundraising of £1.00 or 70.0p net of income tax relief of 30%.

 

The loss on ordinary activities after taxation for the year was £1.1 million (2019: profit of £798,000), comprising a revenue loss of £338,000 (2019: £419,000) and a capital loss of £755,000 (2019: capital gain of £1,217,000) as shown in the Income Statement.

 

Dividends

On 3 December 2020, the Board declared dividends in respect of the year ended 30 September 2020 of 5.3133p per Ordinary Share and 0.4867p per 'A' Share. These dividends will be paid on 31 December 2020 to Shareholders on the register at 11 December 2020.

 

Fundraising and investment activities

In March and September 2018, the VCT undertook two small top-up offers for subscription and raised a total of £5.7 million. As stated above the reason for raising these funds was to enable the VCT to make a small number of new VCT qualifying investments to protect its qualifying ratio in the face of changes to VCT rules.

 

In October 2019, the VCT invested a portion of this funding into bio-bean Limited, a company that recycles used coffee grounds into efficient, sustainable products for both consumer and industrial applications. In January 2020, the VCT invested a further £1.0 million into Rezatec Limited, a geospatial data analytics company. Both companies have weathered the pandemic relatively well. bio-bean lost its initial supply of waste coffee grounds, however due to a large stockpile of waste coffee grounds and efforts by management to diversify supply, the impact on the business is not expected to be significant in the long term. Rezatec has continued to win new clients and has not been materially affected by the pandemic. bio-bean and Rezatec are being held at cost and slightly above cost respectively.

 

The VCT continues to meet its VCT compliance tests and following these investments does not need to make any further investments in order to retain VCT qualifying status.

 

Continuation Vote

At the forthcoming Annual General Meeting in March 2021 the Directors are required to put an ordinary resolution to Shareholders that the VCT should continue as a venture capital trust for a further five year period.

 

The Board highlights the fact that this VCT has performed very well when compared to its peers in the VCT market. The VCT owns a portfolio of assets that benefit from Government-backed incentive schemes within a VCT wrapper providing tax-free dividends for investors. Since the VCT was established, the VCT Regulations have been changed so that they now preclude VCTs from investing in these types of assets and it is, therefore, no longer possible to replicate this portfolio, making renewable energy assets, with index- linked revenue streams benefitting from a tax-free wrapper increasingly rare. The duration of the structure is also attractive, in that the  returns are earned over almost 15 years. If the VCT were to continue as a VCT, it is expected that it would continue to offer Shareholders a steady tax free income stream around the current level for a few more years, rising to higher levels during the second half of the VCT's 25-year lifetime. The current projections indicate cumulative dividends of between 150p and 160p over the lifetime.

 

The Board therefore recommends a vote in support of the resolution allowing the continuation of the VCT as a venture capital trust for a further five years. If the resolution is carried the Board will continue to operate the VCT in the existing manner, although the Directors will review the investment strategy and management arrangements at regular intervals with a particular focus on the management of ageing assets to ensure that the maximum possible return to shareholders is achieved.

 

A vote in favour of continuing does not preclude the VCT from making arrangements to support the disposal of shares by some Shareholders. However, Shareholders should be aware that the VCT has little capacity to buy shares back and the investment therefore has limited liquidity. This is expanded upon later in the statement.

 

If the resolution is not passed, the Directors will be required to draw up proposals for the voluntary liquidation, reconstruction or other reorganisation of the VCT for submission to the members of the VCT at a general meeting to be convened by the Directors for a date not more than four months after the date of the Annual General Meeting. The time frame for a liquidation, winding up or reconstruction could be lengthy as the assets are held in a complex structure with substantial loans embedded within it, making a rapid sale unlikely. Shareholders should not expect any distribution of funds for some time following any decision to discontinue the VCT. Should a decision to wind up the VCT be taken, the Directors will pay particular attention to those Shareholders who will still be in their initial five-year holding period and arrange matters so as to ensure that their income tax relief is not withdrawn.

 

In the event that the VCT votes to continue and VCT 1 not to continue or vice versa, the Board of the VCT voting to continue would consider what options were available to them. One of the Directors' main priorities is to retain VCT status and it will be very challenging to find a solution for one VCT to continue as a qualifying VCT by itself.

 

Share Buybacks

The Board has decided that the VCT will not be buying in Shares for the foreseeable future as highlighted in the Interim Results, as the VCT needs to conserve such cash as it generates for the running of the VCT and the payment of dividends.

 

The Board is however aware that from time to time some Shareholders may wish to realise part or all of their investment and has therefore taken steps to try to ensure that there is a liquid market in the VCT's shares. Shareholders considering selling their Shares should contact the broker for the VCT.

 

Board composition

At the year end the Board comprised three Non-executive directors with a broad range of experience, and we continue to work closely with the Board of the sister company, VCT1. The Board of VCT 2 has recently appointed Andrew Donovan as a new non executive director. He has in depth experience in the solar industry which will be of great benefit to the Board.

 

2020 Annual General Meeting

The VCT's 2020 Annual General Meeting ("AGM") was materially affected by the COVID-19 pandemic. The VCT's AGM was originally intended to proceed on 17 March 2020, but, in response to the Government's guidance at the time and with the wellbeing of Shareholders and other attendees in mind, the Directors resolved to postpone the AGM.

 

The AGM was then rescheduled for 11:30 a.m. on 25 June 2020 at the offices of Dickson Minto W.S., 16 Charlotte Square, Edinburgh EH2 4DF. Given the risks posed by the COVID-19 pandemic and in accordance with the Government's guidance that everyone should avoid non-essential contact with others and unnecessary travel, the VCT implemented special measures, including the imposition of entry restrictions. The Board did not take this decision easily, but considered this to be in our Shareholders' best interests.

 

In order to respect the Shareholder's wishes, where resolutions received overwhelming support for a resolution, these resolutions were passed on a show of hands. Further, where material votes against a resolution were received, these resolutions were voted on by way of a poll vote. All resolutions proposed to the meeting were duly passed at the AGM.

 

2021 Annual General Meeting

The continuing COVID-19 pandemic has led to the imposition of severe restrictions on public gatherings. In light of the UK Government's current guidance the Board has concluded that Shareholders will therefore not be permitted to attend the AGM in person for this financial year. The VCT understands and respects the importance of the AGM to Shareholders however the health and safety of our Shareholders and the broader community is of paramount importance.

 

The AGM will instead be held online, and Shareholders will be able to access the AGM by electronic means. To register to attend the AGM, Shareholders can click here: https:// greshamhouse.com/gresham-house- renewable-vcts-agm-registration/. The AGM will take place on 4 March 2021 at 11.30 a.m. and will include a question and answer session with the Board and the Investment Adviser. The live stream of the AGM will include a facility for questions to be submitted, however in order to cover as many questions as possible we would appreciate it if Shareholders submit their questions to the Board before the meeting. Shareholders are invited to submit questions via email at renewablevcts@greshamhouse.com or by contacting Gresham House Investor Relations by telephone on 020 3875 9862 by no later than noon on 3 March 2021.

 

Shareholders are being asked to participate in the meeting and ensure their votes are counted by submitting their proxy electronically or by post as soon as possible, and these must be received by no later than 11.30 a.m. on 2 March 2021.

 

We will continue to monitor the evolving impact of the COVID-19 pandemic and if it becomes necessary to make changes to the proposed format of the AGM we will inform Shareholders as soon as possible.

 

Outlook

Looking ahead to Brexit we do not expect this to have a significant impact on the VCT's operations. The nature of the investments held by the VCT, fixed assets with long term contracts and subsidies, not reliant on significant human or other resources for daily operations, limits the vulnerability to disruption. The Investment Adviser and the Administrator are both well- resourced and UK based. Key subcontractors and suppliers have been reviewed to assess their robustness under any restrictions that might arise under a no deal Brexit scenario and risks have been found to be minimal and manageable. Power prices could rise in the event of supply disruption from Europe but this event would generally be positive for the VCT.

 

The Board and the Investment Adviser are mindful of all aspects of Environmental, Social and Governance ("ESG") as they affect the operation of the VCT. A report on ESG and how it is monitored by the Investment Adviser is given as part of the Strategic Report. The Board reviews this regularly and is delighted that the VCT was recently awarded the London Stock Exchange Green Economy Mark.

 

While COVID-19 presents an unprecedented challenge to the country and to the economy, any impact of COVID-19, and the government's response to it, should remain relatively limited under normal operations. The Board believes that the long-term outlook for the portfolio as a whole remains positive, with returns from the installed base of assets expected to continue to generate steady cash flows, so enabling the payment of steady or rising dividends.

 

 

Christian Yates

Chairman

21 December 2020

 

 

INVESTMENT ADVISER'S REPORT

Portfolio Highlights

Gresham House Renewable Energy VCT2 plc (the "VCT", formerly Hazel Renewable Energy VCT2 plc) remains principally invested in the renewable energy projects that it has owned for nine years on average, with the value of these projects representing well over 90% of the value of the portfolio. The total generation capacity of assets owned by the VCT is 34.8MWp. The VCT also has two venture capital investments.

 

The vast majority of the assets held by the VCT generate solar power. The solar assets are relatively old compared to other solar farms across the UK - they are older than 95% of total solar capacity in the UK. This means that the VCT's solar farms have secured higher incentives than 95% of the solar installations in the UK.

 

The total revenue from renewable energy generation was £11,070,969 and of this, £10,041,130 was from government incentives and inflation-linked contracts. The total revenue from the renewable assets was 93% of budget, stemming from both lower generation (97% of budget) and lower power prices (95% of budget).

 

The downside of having older assets is that they break down and require more maintenance to keep them operating effectively. Technical issues at two of the sites which required significant repair were exacerbated by delays in repairs in part caused by COVID-19, whilst the economic impacts of the pandemic on the wider economy reduced the revenue at two other sites which have exposure to the wholesale power price. Both these issues are being resolved, with the impacted sites undergoing significant works over Winter 2020 to replace older, obsolete equipment with newer designs whilst the sales price for power is being locked-in at higher rates as older variable price power purchase agreements expire.

 

In terms of performance, the solar irradiation has been stronger than projected during the year but not all of the increase was captured by the assets. The efficiency of solar photovoltaic panels is lower in the heat and some of the older inverters, which are approaching the end of their intended working life, have suffered technical problems, including failures in cooling systems in the hot weather associated with high-irradiation days. The VCT has built up cash reserves in order to replace older or failed equipment, mainly expected to be the inverters, after 10 years. With some assets demonstrating poor performance and given the challenges to maintain these sites during the COVID-19 lockdowns, projects to repair or replace certain components have been accelerated.

 

The COVID-19 pandemic began having a serious impact on the UK economy in March 2020. This has had the following effects on the value and operations of the portfolio:

-       Power prices, which were already weakening towards the end of 2019, have fallen further and significantly since early 2020 and remain subdued compared to both last year and budget. The VCT is, however, to a great extent protected from this as only 9% of revenues come from wholesale power sales. This relatively low exposure to power prices for a renewable generating portfolio is considered to be a benefit that outweighs the corresponding challenges of having an older asset base that requires increased attention and maintenance.

-       Government safe working guidelines caused delays in performing repairs and Operations and Maintenance ("O&M") work. Whilst solar generating assets can normally perform with relatively little day-to-day human interaction, the age of the portfolio means human intervention is required regularly. The portfolio has suffered performance issues with some of this older equipment during the year, and with certain suppliers and contractors having to travel from overseas to make repairs, the travel restrictions have impacted on output and performance, as repairs to failed equipment were delayed substantially. The Investment Adviser ensured that the O&M contractors adhered to safe working protocols and has worked with them to mitigate the impacts of travel restrictions and safe working obligations.

-       In addition, all works had to be suspended on solar installations on residential roof-mounted installations as engineers were not permitted to enter properties during lockdown.

-       As a result of the expenditure required to combat the pandemic, the Government reversed the cuts in Corporation Tax that were set to apply from 1 April 2020, negatively impacting on future distributable profits and cash flows from the underlying investments.

-       With much of the portfolio's revenue (as well as the third-party debt owed by the portfolio) being inflation linked, higher inflation increases the profitability of the assets and therefore their value. With the significant economic shock and the resulting Government actions to mitigate any long-term impacts, there are likely to be effects on inflation. In the short term, the inflation expectations have been reduced, having a negative impact on valuation, with the long term remaining at the levels previously projected.

 

During the year, the VCT made two new investments. £615,000 was invested in October 2019 into bio-bean Limited, the world's largest recycler of waste coffee grounds, which produces sustainable, clean fuels as well as advanced biochemical for use in the food industry.

 

In January 2020, £1,000,000 was invested into Rezatec Limited, a software developer that applies Artificial Intelligence based algorithms to a range of earth observation data sources (satellite imagery, soil data, weather data, topographic data etc.) to generate an information services platform to help monitor land-based assets in the forestry, agriculture and infrastructure verticals.

 

The payment of an annual dividend of 5.8p (5.3133p per Ordinary Share and 0.4867p per A Share) was announced on 3 December 2020, and this will be paid on 31 December 2020.

 

Portfolio Composition

Portfolio Composition by Asset Type and Impact on NAV

		30 September 2020		30 September 2019
Asset Type	kWp	Value ('000)	% of Portfolio Value	Value ('000)	% of Portfolio Value
Ground-mounted Solar (FIT)	20,325	£22,580	73.8%	£22,387	75.4%
Ground-mounted Solar (ROC)	8,699	£2,440	8.0%	£3,179	10.7%
Total ground-mounted Solar	29,024	£25,020	81.8%	£25,566	86.1%
Rooftop Solar (FIT)	4,314	£2,696	8.8%	£2,920	9.8%
Total Solar	33,338	£27,716	90.6%	£28,486	95.9%
Wind Assets (FIT)	1,420	£1,188	3.9%	£1,221	4.1%
Total renewable generating assets	34,758	£28,904	94.5%	£29,707	100.0%
Venture Capital Investments TOTAL	N.A. 34,758	£1,689 £30,593	5.5% 100.0%	- £29,707	0.0%
					100.0%

 

The 34.8MWp of renewable energy projects in the portfolio generated 32,860,999 kilowatt-hours of electricity over the year, sufficient to meet the annual electricity consumption of 9,500 homes. The Investment Adviser estimates that the carbon dioxide savings achieved by generating this output from solar and wind versus gas-fired power, are equivalent to what 19,000 mature trees would remove from the atmosphere.

 

Portfolio Summary

Almost 95% of the portfolio value, and over 99% of the income for the portfolio, is derived from the renewable energy generation assets.

 

The performance against budget is shown below:

Portfolio Revenues by Asset Type (£ Sterling)

Asset Type	Forecast Revenue	Actual Revenue	Revenue Performance
Ground-mounted Solar (FIT)	8,985,321	8,247,893	91.8%
Ground-mounted Solar (ROC)	1,287,266	1,285,459	99.9%
Rooftop Solar	1,239,757	1,174,688	94.8%
Wind Assets TOTAL	453,385 11,965,729	362,928 11,070,968	80.1%
			92.52%

 

The revenue is affected by:

-       Renewable energy resources (solar irradiation or wind, as relevant);

-       The performance of the assets in converting the resources into revenue (i.e. how the assets are performing, any technical issues, etc); and

-       The revenue per unit of energy generated.

 

It is clear from the table above that the variance at the ground-mounted solar farms was most material, given their size, accounting for £739,235 of the £894,760 revenue shortfall compared to budget. The causes are shown in the chart below:

 

Ground-mounted Solar Revenues Variation of from Forecast to Actual Revenue (£ Sterling)

Asset Type	Forecast Revenue	Impact of Price changes	Impact of Output changes	Actual Revenue
Ground-mounted Solar (FIT)	8,985,321	(43,925)	(693,503)	8,247,893
Ground-mounted Solar (ROC)	1,287,266	(160,664)	158,857	1,285,459
TOTAL	10,272,587	(204,589)	(534,646)	9,533,352

 

Overall, 91% of income is inflation linked (either through the FIT, ROC or contracts for the sale of electricity), with those assets having price exposure being the ROC projects. Thus, they suffered a larger impact of the significant reduction in market pricing for power. However, it was the high revenue FIT projects that suffered the technical issues that caused significant fall in output despite the high irradiation during the year.

These themes will be expanded on below.

Renewable energy resources

The portfolio is heavily weighted to solar (96% by capacity of the renewable assets, and 91% of total portfolio).

During the year, the assets benefited from more solar resources than budgeted, with solar irradiation being 107% of forecast for the full year. Irradiation was below forecast from October 2019 to February 2020, followed by a very strong spring, with the overall outperformance partially surrendered through poor July and August irradiation.

Technical Performance

The table below shows the technical performance for each of the groups of assets.

Portfolio Technical Performance by Asset Type (kWh)

Asset Type	Forecast Output	Actual Output	Technical Performance
Ground-mounted Solar (FIT)	20,373,397	18,800,941	92.3%
Ground-mounted Solar (ROC)	8,481,640	9,528,330	112.3%
Total Ground-mounted Solar	28,855,037	28,329,271	98.2%
Rooftop Solar	3,620,429	3,475,577	96.0%
Total Solar	32,475,466	31,804,848	97.9%
Wind Assets TOTAL	1,319,387 33,794,853	1,056,151 32,860,999	80.0%
			97.2%

The old equipment that caused the reduction in output is being replaced over winter 2020/21 which should improve both the performance and reliability whilst removing the reliance on overseas contractors.

It is worth noting that the impact of pricing and output was not the same across the assets. This is shown by splitting the impacts between the FIT and ROC assets, below.

The key variance in the technical performance is from the Ground-mounted solar (FIT) performance that was significantly behind budget. This is largely the result of technical issues at Kingston Farm and Lake Farm (each solar farm with 4.98MW capacity). Both of these assets have central inverters that were state- of-the art when built in 2011, but which are now no longer the best technical solution for solar farms. These inverters suffered significant component breakdowns during the spring lock- down, when irradiation was high. The supplier is not based in the UK and the pandemic led to significant delays in being able to get their specialist engineers and components on site in order to effect repairs. This has significantly reduced the ability of the plants to operate over the summer months. There were already projects ongoing to replace these older inverters with newer, more efficient and easier to maintain string inverters at these sites.  Contractors have been engaged to complete the repair and replacement works this winter.

The performance at Kingston Farm was 84% of budget, with Lake Farm at 79%. Between them, these assets represent over 27% of forecast generation and so this poor technical performance has been material overall.

As solar installations age some of the key components, e.g. inverters, need to be replaced as they reach the end of their expected useful life. All of the assets are now approaching this stage and have experienced some loss of generation due to faults in this older equipment. The Investment Adviser reviews the performance of these components on a regular basis and is working with contractors to arrange for the renewal and replacement of the less reliable parts across all sites as required.

The work will be funded using cash reserves that have been built up under the debt facility agreements to fund this type of work.

During the pandemic, the Investment Adviser issued updated health and safety guidance to contractors reflecting guidelines and directives issued by the UK Government. There was a negative impact on corrective and preventative maintenance work schedules as a result of this. Some of these restrictions have been eased and where possible, contractors have been instructed to find other solutions that can be implemented without breaching health and safety policies and Government directives.

Generation of the rooftop solar portfolio was 4% lower than forecast. Irradiation cannot be measured at roof-mounted solar installations as it is not cost effective to install pyranometers, but there is no reason to assume that the irradiation at these sites was materially below forecast. However, no access was possible to any residential properties during the periods of lockdown, unless it was for health and safety reasons (this was not required). The Investment Adviser is working with the O&M contractors to get access to the rooftop installations that are underperforming, to effect repairs as soon as possible.

The small wind portfolio performed 20% lower than forecast, continuing the poor performance experienced in recent years. Small wind accounts for only 4.1% of the portfolio in terms of capacity. There is an ongoing repair programme for this portfolio focused on retaining the best assets in terms of future cashflow expectations.

Revenue per kilowatt hour of renewable energy generated

The UK government has used several mechanisms to encourage investment into renewable energy generation, including the Feed in Tariff ("FIT") and Renewables Obligation Certificate ("ROC") support mechanisms.

The VCT's renewable assets benefit from these schemes which provide revenues predominantly linked to the Retail Price Index ("RPI"). As the costs, and perceived risks, of building new renewable energy generating capacity have fallen, so have the value of the incentives offered for new installations. For example, an asset that generates electricity from solar power that was commissioned and accredited for the FIT before the end of July 2011 currently receives over 39 pence for every kilowatt hour (kWh) of electricity it produces (with the added extra of a floor price support to ensure it may also sell this power at a reasonable price). The incentives for new capacity have fallen consistently since the assets owned by the VCT were commissioned, and new solar installations built today receive no such incentives and must rely on selling power for their income. In the 9 months to the end of September 2020 the average spot price (day ahead) price of power was 3.1 pence per kWh so a new asset selling power at the spot price would earn 3.1 pence whereas an older solar asset, like some of those owned by the VCT, could earn 3.9 pence per kWh for exporting the power (given the FIT export price floor) plus 39.28 pence per kWh FIT generation revenue.

The significance of these government backed incentives is shown by the following chart. VCT Portfolio, Revenue profile during period 1 October 2019 - 30 September 2020

This shows that of the total revenues of £11,070,968 in the year, £9,551,418 or 86% was earned from government backed incentives for generating renewable electricity (£8,731,619 of generation revenue provided under the FIT and £819,799 from ROCs). A further £489,712 is inflation linked, either through the FIT export floor price for selling electricity or contracts for the sale of electricity, taking the government backed and RPI linked revenues to 91% of total.

Such a high proportion of income that is fixed by Government, is RPI linked and is not exposed to wholesale power prices, is a significant driver of value in this portfolio. This has enabled it to be largely insulated from the very significant reduction in the wholesale price of electricity experienced since the new year, and greatly exacerbated by the COVID-19 pandemic.

The majority of the price variance occurred in the Ground-mounted Solar (ROC) plants at Ayshford Farm (5.47 MW capacity) and Priory Farm (3.23 MW). Whilst the Ground- mounted (FIT) assets have achieved their projected revenue of 44 pence per kWh, the ROC assets only achieved 13 pence per kWh which was 89% of the 15 pence per kWh budgeted. These assets were exposed to the market prices and, when the pandemic hit (combined with historically low gas prices), the power price fell significantly to under 2 pence per kWh, compared to the budgeted price of over 4 pence per kWh. Ayshford Farm has now fixed its price at 4.4 pence per kWh until mid-2021; Priory is already in a long term contract but with market price exposure and a floor price for power.

 

Operating Costs

The vast majority of the cost base is fixed and/ or contracted and includes rent, business rates, and regular O&M costs as the major categories.

The main cost item that shows variability from year-to-year is repair and maintenance costs. Repair and maintenance spend involving solar panels and inverters, the key components of a solar project, is covered by the maintenance reserves. These reserves totalled £3.1 million and are in place for all the ground-mounted solar assets and for the majority of the roof-mounted solar assets. The other significant maintenance cost is for the small wind portfolio that continues to suffer performance issues. The cost of this maintenance has increased during the year as there are few contractors capable of maintaining the turbines and the effort to do so has increased with the age of the fleet.

 

New Investments

In October 2019, the VCT made a new investment of £615,000 into bio-bean Limited, the world's largest recycler of waste coffee grounds. This investment represented 15% of the £4 million funding round announced by bio-bean in April 2019. The VCTs' investment formed the final part of that round, and valued bio-bean at £7.6 million on an Enterprise Value basis. The investment comprised of £400,000 of equity and £215,000 of debt.

Bio-bean sources waste coffee grounds from major retail coffee chains by offering the cheapest and most sustainable avenue for disposing of them. bio-bean then converts these into pellets for combustion in biomass- fed energy generators or coffee logs for use in wood burning stoves, which it sells through large supermarket and home improvement chains as well as online. Natural Coffee Extract for use in the food industry is also produced from the waste coffee grounds.

The COVID-19 pandemic has had a negative impact on bio-bean as the company is dependent on the continuous supply of waste coffee grounds from major coffee retail chains. The lockdown meant that these deliveries were completely suspended for a while and were at reduced volumes afterwards. However, due to a large stockpile of waste coffee grounds, efforts by management to diversify supply (albeit at an increased acquisition price), robust demand for its clean fuels, and a careful approach by management with a focus on minimising cash burn, this has meant that the impact on the business is not expected to be significant in the long term.

At the time of the VCT's investment, its advanced biochemicals business centred around producing Natural Coffee Extract and Natural Coffee Flavour (advanced biochemicals for use in the food chain). This business was in its early stages of development, but with significant growth projected following the investment as the products and markets are developed. Natural Coffee Extract, made from waste coffee grounds, has successfully gone through the regulatory approval process that permits its use in the food chain, and bio- bean has successfully made its first sale of the product to a global flavour and fragrances company. This is a significant milestone for the long-term development of the business.

In January 2020, the VCT invested £1 million into Rezatec Limited, a software developer  that applies Artificial Intelligence based algorithms to a range of earth observation data sources (satellite imagery, soil data, weather data, topographic data etc.) to infrastructure verticals. Access to the platform is sold, on a subscription-basis, to commercial forestry operators for inventory management (analysis of current state of forest assets) and as an ongoing monitoring tool, to utility infrastructure owners for water pipeline, hydroelectric dam and power transmission network risk analyses, and to agriculture companies processing crops, for yield and logistics optimisation.

Rezatec has won over key industry players in countries around the world that include the USA, Canada and India which have large forestry and agricultural sectors as well as infrastructure over a large physical footprint.

The VCT's investment was part of a £5.0 million round into which the Baronsmead VCTs, managed by Gresham House Asset Management Ltd, also invested.

Rezatec has not seen a meaningful impact on its business as a result of the COVID-19 pandemic. Its platform is designed to help its customers increase efficiency, and sales pipeline conversion does not require physical meetings. It has sufficient funding in place not to necessitate further fundraising until the end of 2021, even if pipeline conversion slows down. The management team nevertheless took the prudent approach of suspending new hiring.

The pandemic and the uncertainty it brought has resulted in an extended sales conversion time, but Rezatec has successfully won new deals since the time of the investment.

 

Portfolio Valuation

The Net Asset Value ("NAV") of the renewable portfolio is comprised of the valuation of future projected cash flows generated by the renewable energy assets, as wel as the cash held by the companies in the portfolio and the cash held by the VCT. The NAV of the overall portfolio also includes the value of new investments in bio-bean and Rezatec. The total return is the value of net assets and the cash that has been distributed to shareholders since launch.

The future cash flow projections for renewable assets are impacted by:

-       Renewable  resources.  Despite  this year having higher solar irradiation than budgeted, we have not changed the assumptions on irradiation.

-       Technical performance. As noted above, there were significant performance issues at two of the ground-mounted FIT solar farms. The failed inverters are to be replaced over the winter period and so the output is projected to improve back to budgeted levels going forward.

-       Prices. Power price forecasts have been impacted by COVID-19 and so the forecasts have been updated to reflect this.

-       Costs. Up-to-date costs for the assets are included, reflecting all commercial negotiations and also expectations for lower maintenance costs after the older assets are repaired.

-       Corporation tax. The previously announced reduction in corporation tax has been reversed, so the projections have also reflected this.

-       Inflation. With most of the revenues being linked to RPI, any increase in inflation projections increases the overall profitability, and therefore valuation of the assets. The short-term projections for inflation have fallen, largely as a result of COVID-19.

Once the free cash projected to be generated by the assets is calculated, the value of these cash flows has to be estimated. The Investment Adviser notes that these cash flows are supported by a very high proportion of government backed and index linked revenues. In the current financial market, such cash flows are dependable and therefore valuable. This has resulted in a slight reduction in the discount rates used (increasing the valuations) which reflects the Investment Adviser's experience in the market and evidence of third party transactions.

In particular, the discount rates used to value the future cash flows from the ground mounted solar assets have been reduced by 50 to 75 basis points (0.5% - 0.75%) compared to the rates used last year. These are the assets that have the highest levels of FiT and ROC income and so the Investment Adviser believes that the stable and predictable cash flows generated by these assets are very attractive, justifying the lower discount rate. The discount rates used to value the renewable assets are now in the range of 5.50% to 6.75% (2019: 6.0% to 6.75%). This reduction in discount rates increases the holding value of the assets by £1.0 million. The Investment Adviser notes that the VCT commissioned an independent review of the valuation of the renewable assets to consider both the Investment Adviser's valuation of the assets and the potential realisation proceeds should the portfolio be sold. This exercise, performed by a leading adviser involved with the sale of many renewable assets in the UK, confirmed that valuation is reasonable, in light of conservative asset life assumptions as well as uncertain timings and costs to realise a portfolio that includes long term, third party debt.

The value of new investments in bio-bean and Rezatec has been determined using International Private Equity Valuation Guidelines and are held at a valuation of £1.7 million, marginally higher (£70,000) than the cost of investment.

 

Outlook

The Investment Adviser's immediate focus is to ensure that the underperforming assets are repaired as quickly and cost effectively as possible, despite the restrictions imposed by the COVID-19 pandemic.

Wholesale power prices, which have a small representation in the portfolio's  revenues, are outside the Investment Adviser's control, however opportunities will be sought to enter long-term power purchase agreements (contracts to sell the power) if prices spike up in a quicker than anticipated fashion.

Contractors will continue to be monitored to assess whether they are doing everything that is allowable within the rules and regulations to improve performance at the older ground- mounted sites that have suffered from a drop in technical performance, as well as all the other sites that have continued to perform well. Any changes to safe working regulations are monitored closely so that generation can be restored at the small percentage of rooftop solar installations that are offline as and when restrictions are relaxed.

The COVID-19 pandemic is likely to have a long-lasting impact. The renewable generation business, particularly assets with a high degree of government subsidies, have only suffered a minor impact. In the event of a prolonged economic slump, these assets may be favoured to a higher degree than they have been to date by financial markets, particularly if the unprecedented level of government stimulus eventually triggers inflation.

 

Gresham House Asset Management Limited

21 December 2020

 

STRATEGIC REPORT

The Directors present the Strategic Report for the year ended 30 September 2020. The Board have prepared this report in accordance with the Companies Act 2006.

 

Business model

The VCT acts as an investment company, investing in a portfolio of businesses within the renewable and clean energy sectors and operating as a VCT to ensure that its Shareholders can benefit from the tax reliefs available.

 

Business review and developments

The VCT's business review and developments during the year are set out in the Chairman's Statement, Investment Adviser's Report, and the Review of Investments.

During the year to 30 September 2020, the investments held increased by a net value of £886,000, due to additions of £1,615,000 offset by net unrealised

losses of £629,000. Net gains arising on investment realisations totalling £5,000.

The total operating loss for the year was £1,093,000 (2019: £798,000 profit) and net assets at the year end were £27.6 million (2019: £30.3 million). The annual dividend for the year to 30 September 2019 was paid on 20 December 2019. The annual dividend for the year to 30 September 2020 was announced on 3 December 2020 and will be paid on 31 December 2020.

The Directors initially obtained provisional approval for the VCT to act as a Venture Capital Trust from HM Revenue & Customs. The Directors consider that the VCT has continued to conduct its affairs in a manner such that it complies with Part 6 of the Income Tax Act 2007.

Investment advisory and administration fees
Gresham House Asset Management Limited ("Gresham House") provides investment advisory services to the VCT, at a fee equivalent to 1.15% of net assets. The agreement is for a minimum term of two years, effective from 7 November 2017, with a nine month notice period on either side thereafter.

 

The Board has reviewed the services to be provided by Gresham House and has concluded that it is satisfied with the strategy, approach and procedures which are to be implemented in providing investment advisory services to the VCT. The Board is also of the opinion that the allocation of the investment advisory fee between capital and revenue of the VCT, as described in Note 2 to the financial statements, is still appropriate.

 

On 22 May 2019 the Board engaged JTC (UK) Limited ("JTC") as Administrator and Company Secretary, replacing Downing LLP. JTC provides administration and accounting services to the VCT for a fee of £40,000 (plus VAT, if applicable) per annum. It also provides company secretarial services for a fee of £40,000 (plus VAT, if applicable) per annum. The agreement, effective from 22 May 2019 shall continue in force until determined by either party, with a six month notice period on either side.

 

Trail commission

Historically the VCT had an agreement to pay trail commission annually to Hazel Capital LLP, in connection with the funds raised under the Offers for subscription. This was calculated at 0.4% of the net assets of the VCT at each year end. Out of these funds Hazel Capital LLP was liable to pay trail commission to financial intermediaries. The trail commission was payable to Hazel Capital LLP until the earlier of (i) the sixth anniversary of the closing of the Offers and (ii) the Investment Advisory Agreement being terminated. Upon the appointment of Gresham House as Investment Adviser on 7 November 2017, the agreement with Hazel Capital LLP was reissued and the new Investment Adviser has agreed to pay further trail commission to Haibun Partners LLP ("Haibun") and CH1 Investment Partners LLP ("CH1") with an agreement in place effective 11 July 2019. Payment of trail commission under this agreement is not deemed to be a related party transaction and is therefore not disclosed in Note 20 to the financial statements.

 

Pursuant to historic financial intermediary arrangements with Hazel Capital LLP, Haibun Partners LLP ("Haibun"), of which Stuart Knight (Director of Gresham House Renewable VCT1 plc) is a Designated Member, and CH1 Investment Partners LLP ("CH1"), of which Matthew Evans is a Designated Member, will continue to receive trail commission from Gresham House Asset Management Limited. The trail commission payable is equal to 0.15% of the net asset value of the Shares issued by the VCT and its sister company, Gresham House Renewable Energy VCT1 plc ("VCT1"), to Haibun and CH1 clients under each of the 2010, 2012 and 2014 Offers. The amounts payable to Haibun and CH1 by Gresham House Asset Management, in aggregate across both the VCT and VCT2, are as follows:

 

	Year ended 30 September 2020
	Haibun £	CH1 £	Total £
2010 Offer	19,505	27,015	46,520
2020 Offer	1,980	1,980	3,960
2014 Offer Total	1,022 22,507	2,219 31,214	3,241
			53,721

 

Investment policy

General

The VCT's objectives are to maximise tax free capital gains and income to Shareholders from dividends and capital distributions by investing the VCT's funds in:

-       a portfolio of clean technology and environmentally sustainable investments, primarily in the UK and the EU, that have attractive income and growth characteristics, with investments in existing asset-backed renewable generation projects as the core of the portfolio; and

 

-       a range of non-qualifying investments, comprised from a selection of cash deposits, fixed income funds, securities and secured loans and which will have credit ratings of not less than A minus (Standard & Poor's rated)/A3 (Moody's rated). In addition, as the portfolio of VCT qualifying investments will involve smaller start-up companies, loans could be made to these companies to negate the need to borrow from banks and, therefore, undermine the companies' security within the conditions imposed on all VCTs under current and future VCT legislation applicable to the VCT.

 

Investment strategy

Investee companies generally reflect the following criteria:

-       a well-defined business plan and ability to demonstrate strong demand for its products and services;

-       products or services which are cash generative;

-       objectives of management and shareholders which are similarly aligned;

-       adequate capital resources or access to further resources to achieve the targets set out in its business plan;

-       high calibre management teams;

-       companies where the Adviser believes there are reasonable prospects of an exit, either through a trade sale or flotation in the medium term; and

-       a focus on small and long term renewable energy projects that utilise proven technology.

Asset allocation

During the period the VCT was required to hold 80% of its funds in VCT qualifying investments. At 30 September 2020, the VCT had a significant margin over the 80% qualifying holdings requirement. The VCT aims to maintain a level of up to 90% and therefore its maximum exposure to qualifying investments will be 90%. The VCT intends to retain the remaining funds in non-qualifying investments to fund the annual running costs of the VCT to reduce the risk profile of the overall portfolio of its fund and to provide investments which can be realised to fund any follow-on investments in the investee companies.

It is expected that the VCT shall hold at least eight investments to provide diversification and risk protection. In relation to the VCT, no single investment (including most loans to investee companies) will represent more than 15% of the aggregate net asset value of its fund save where such investment is in an investee company which has acquired or is to acquire, whether directly or indirectly, securities in the following companies: AEE Renewables UK 3 Limited, AEE Renewables UK 26 Limited, South Marston Solar Limited, Beechgrove Solar Limited, New Energy Era Limited and Vicarage Solar Limited.

Risk diversification

The structure of the VCT's funds, and its investment strategies, have been designed to reduce risk as much as possible.

The main risk management features include:

-       portfolio of investee companies - the VCT seeks to invest in at least eight different companies, thereby reducing the potential impact of poor performance by any individual investment;

-       monitoring of investee companies - the Adviser will closely monitor the performance of all the investments made by the VCT in order to identify any issues and to enable necessary corrective action to be taken; and

-       the VCT will ensure that it has sufficient influence over the management of the business of the investee companies, in particular, through rights contained in the relevant investment agreements and other shareholder/constitutional documents.

 

In respect of the VCT's investment in Lunar 1 Limited and Lunar 2 Limited the VCT has followed the above risk diversification strategy with regard to their investments in AEE Renewables UK 3 Limited, AEE Renewables UK 26 Limited, South Marston Solar Limited, Beechgrove Solar Limited, New Energy Era Limited and Vicarage Solar Limited.

 

Gearing

The VCT has the ability to borrow up to 15% of its net asset value* save that this limit shall not apply to any loan monies used to facilitate the acquisition by the VCT, whether directly or indirectly, of any shares or securities in certain operational asset/holding companies**.

 

It is not intended that the VCT will borrow (other than from investee companies). As at 30 September 2020, the VCT had the ability to borrow £4.5 million (2019: £4.5 million) in accordance with the articles, and had actual borrowings of £nil (2019: £nil). The long-term creditors shown on the Balance Sheet represent amounts owed to investee companies used to fund dividend payments. The Board expect these creditors to be repaid in the future by way of dividends being declared from these companies.

 

External debt is held by several of the VCT's investee companies. The VCT has ensured that Lunar 1 Limited and Lunar 2 Limited have borrowed no more than 90% of their respective net asset values to facilitate the acquisition, whether directly or indirectly, of any shares or securities in certain operational asset/holding companies**.

* Following the 2018 AGM the articles of the VCT were amended such that amounts borrowed from investee companies are now excluded from the calculation of the 15% borrowing restriction.

** AEE Renewables UK 3 Limited, AEE Renewables UK 26 Limited, South Marston Solar Limited, Beechgrove Solar Limited, New Energy Era Limited and Vicarage Solar Limited.

 

Listing rules

In accordance with the Listing Rules:

(i)            the VCT may not invest more than 10%, in aggregate, of the value of the total assets of the VCT at the time an investment is made in other listed closed-ended investment funds except listed closed- ended investment funds which have published investment policies which permit them to invest no more than 15% of their total assets in other listed closed- ended investment funds;

(ii)           the VCT must not conduct any trading activity which is significant in the context of the VCT; and

(iii)          the VCT must, at all times, invest and manage its assets in a way which is consistent with its objective of spreading investment risk and in accordance with its published investment policy set out in this document. This investment policy is in line with Chapter 15 of the Listing Rules and Part 6 of the Income Tax Act.

 

The Listing Rules have been complied with for the year ended 30 September 2020.

 

Directors and senior management

At the year end the VCT had three Non- executive Directors, each of whom is male. The VCT has no employees.

 

Key performance indicators 

At each Board meeting, the Directors consider a number of performance measures to assess the VCT's success in meeting its objectives.The Board believes the VCT's key performance indicators are Net Asset Value (NAV) Total Return and dividends per share. These are defined as follows:

 

Net Asset Value Total Return: the sum of NAV per Ordinary Share, NAV per 'A' Share and cumulative dividends paid.

 

Net Asset Value per Ordinary Share: The closing total net asset position of the VCT as at the reporting date less the total par value of all 'A' Shares in issue at the reporting date divided by the total number of Ordinary Shares in issue at the reporting date.

 

Net Asset Value per 'A' Share: Par value per 'A' Share.

 

Cumulative dividends paid: The gross total of all dividends paid for both Ordinary and 'A' Shares from inception up to the reporting date.

 

The VCT aims to increase NAV Total Return each year. As at 30 September 2020, NAV Total Return was 156.9p per share; representing a decrease of 2.8% (4.5p per share) since 30 September 2019 (NAV Total Return of 161.4p) which the Directors are disappointed by, but reflects the challenges faced by the VCT during the year. Please refer to the Investment Adviser's Report for further explanation on the movement in NAV during the year.

 

The VCT's dividend policy is to distribute surplus funds generated by the underlying investments, subject to maintaining an appropriate cash reserve within the VCTs to meet anticipated future requirements. The VCT has an objective of paying dividends of 5p per share per annum. In the year ended 30 September 2020, the VCT paid a dividend of 5.8p per share, therefore exceeding this KPI.

 

Brexit

There continues to be uncertainty surrounding the future effects of Brexit, which has deflated Sterling thus far, and has the potential to impose restrictions on the free movement of people and goods. However, as the VCT has, to date, invested solely in UK assets which generate revenues from contracts with parties based in the UK, the Board and Investment Adviser believe that, subject to major economic disruption taking place, the potential impact of Brexit on the VCT is limited.

 

COVID-19

COVID-19 has presented an unprecedented challenge to the country and the economy in 2020, causing a significant drop in power prices since February and likely long-term inflationary effects are still to be seen.

Despite this challenging environment, the VCT's assets have continued to generate steady cashflows and have not suffered any significant operational disruptions as a result of the government-imposed restrictions both locally and nationally. The majority of the VCT's assets are concentrated in solar farms, which, by their nature, require a relatively low level of human presence. Furthermore, the VCT has been largely insulated from the drop in power prices as only 9% of its revenues are generated by wholesale power sales. As such, the Board and Investment Adviser believe that COVID-19 will continue to have only a limited impact on the VCT.

 

Principal risks and uncertainties

The principal financial risks faced by the VCT, which include interest rate, market price, investment valuation, credit and liquidity risks, are summarised within Note 17 to the financial statements.

 

Note 17 includes an analysis of the sensitivity of the valuation of the portfolio to changes in each of the key inputs to the valuation model.

 

Other principal risks faced by the VCT have been assessed by the Board and grouped into the key categories outlined below:

-       Underperformance;

-       Loss of VCT status;

-       VCT Regulations

-       Regulatory and compliance;

-       Operational; and

-       Economic, political and other external factors.

 

The Board considers the COVID-19 pandemic to be a factor which exacerbates existing risks, rather than being a new emerging risk itself. Its impact has been considered within the relevant risks below.

 

Schedule of principal risks

The other principal risks faced by the VCT, along with the steps taken to mitigate these risks, are shown in the table below.

Principal Risk	Context	Specific risks	Possible impact	Mitigation
Investment Performance	The VCT holds investments in unquoted UK businesses in the renewable energy sector.	Poor investment decisions or strategy or poor monitoring, management and realisation of investments. Adverse weather conditions, low inflation rates and/or low power prices due to the COVID-19 pandemic resulting in below forecast investment returns.	Reduction in the NAV of the VCT and the inability of the VCT to pay dividends.	The Investment Adviser has significant experience in the renewable energy sector. The Investment Adviser also actively manages the portfolio, engaging reputable and experienced Operations and Maintenance (O&M) contractors. The assets have limited exposure to power prices, due to the use of the Feed in Tariff (FiT) and Renewable Obligation Certificate (ROC) regimes. The Board regularly reviews the performance of the portfolio, alongside the Board of the sister company.
Loss of VCT status	The VCT must maintain continued compliance with the VCT Regulations, which prescribe a number of tests and conditions.	Breach of any of the rules could result in the loss of VCT status.	The loss of VCT status would result in dividends becoming taxable and new Shareholders losing their initial tax relief.	The VCT Qualification is actively monitored by the Investment Adviser and the Administrator, who liaise with the designated VCT Status Adviser. The VCT Status Adviser also produces twice yearly reports for the Board.
Legislative	In recent years, the changes to VCT Regulations have narrowed the breadth of permitted investments. VCTs were established to encourage private individuals to invest in early stage companies that are considered to be risky and have limited funding options. The state provides these investors with tax relief.	Increasing difficulty for the VCT in making new Qualifying investments. A change in government policy could result in a cessation of tax reliefs or reduction of the amount of tax relief available to investors which would make them less attractive to investors.	The VCT is not able to make new Qualifying investments. The VCT may not be able to raise any further funds.	Both the Investment Adviser and the Administrator closely monitor developments and attend AIC conferences. The VCT Status Adviser also has significant experience in this field and works closely with HMRC. The Investment Adviser engages with HMT and industry representative bodies to demonstrate the cost benefit of VCTs to the economy in terms of employment generation and taxation revenue.
Regulatory and compliance	As a listed entity, the VCT is subject to the UK Listing Rules and related regulations.	Any breaches of relevant regulations could result in suspension of trading in the VCT's shares or financial penalties.	Reduction in the NAV of the VCT due to financial penalties and a suspension of trading in its Shares, also leading to loss of VCT status.	The VCT Secretary and Administrator have a long history of acting for VCTs. The Board, Investment Adviser and Administrator also employ the services of reputable lawyers, auditors and other advisers to ensure continued compliance with its regulatory obligations.
Operational - VCT level	The VCT relies on the Investment Adviser, Administrator and other third parties to provide many of its services at the VCT level.	Inferior provision of these services, for example due to working remotely during the COVID-19 pandemic, thereby leading to inadequate systems and controls or inefficient management of the VCT's assets and its reporting requirements. Service providers, predominantly the Registrar, hold Shareholders' personal data and there is a risk of a cyber attack on a provider.	Errors in Shareholder records, a loss of Shareholders' personal data, incorrect mailings, misuse of data, non- compliance with key legislation, loss of assets, breach of legal duties and inadequate financial reporting.	The VCT, the Investment Adviser and the Administrator engage experienced and reputable service providers, the performance of which is reviewed on an annual basis. As a result of the COVID-19 pandemic the Investment Adviser reviewed all major service providers to confirm they could operate as usual through government restrictions. The Directors and the Investment Adviser regularly review the service providers and the procedures and policies they have in place for preventing cyber attacks.
Operational - portfolio level	At the portfolio level, the VCT uses third party O&M contractors to manage the various sites.	Inferior provision of these services, thereby leading to inadequate systems and controls or inefficient management of the VCT's assets. Maintenance and repairs not carried out in a timely manner as a result of travel restrictions and social distancing rules put in place due to the COVID-19 pandemic.	Poor investment performance due to assets being offline and non-revenue generating.	The VCT, the Investment Adviser and the Administrator engage experienced and reputable service providers, the performance of which is reviewed on an ongoing basis. At the portfolio level, technical reviews and studies are conducted on the assets as appropriate. Repair and reconfiguration work is carried out and O&M procedures are revised to reduce dependence on overseas contractors and specialists.
Economic, political and other external factors	The VCT's investments are heavily exposed to the Feed in Tariff (FiT) and Renewable Obligation Certificate (ROC) regimes.	Retrospective changes to the regimes.	A significant negative impact on performance.	The Investment Adviser and Board members closely monitor policy developments. However, the UK Government has a general policy of not introducing retrospective legislation. The Investment Adviser and Board regularly review the valuation model and its inputs.

 

Viability statement

In accordance with Provisions 33 and 36 of the 2019 AIC Code of Corporate Governance, the Directors have carried out a robust assessment of the emerging and principal risks facing the VCT that would threaten its business model, future performance, solvency or liquidity, and have assessed the prospects of the VCT over a longer period than the 12 months required by the 'Going Concern' provision.

 

The Board has conducted this review for a period of five years from the balance sheet date as developments are considered to be reasonably foreseeable over this period. This is also the minimum recommended holding period for new investors. If the continuation vote at the March 2021 AGM were to result in a decision to wind up the VCT, the Board still consider that the VCT would remain viable up until the point at which its assets were sold, or the voluntary liquidation completed, and as such the Board are satisfied that a five-year viability assessment remains applicable.

 

In making the viability assessment, the Board has taken the following factors into consideration:

-       The nature and liquidity of the VCT's portfolio (long-term, revenue-generating fixed assets);

-       The potential impact of the Principal Risks & Uncertainties, including the potential impact of COVID-19 on these risks; Maintaining VCT approval status;

-       New investment activity;

-       Operating expenditure; and

-       Future dividends and share buybacks.

 

The Board paid particular attention to the impact of the COVID-19 pandemic on the economic, regulatory and political environment as well as its direct impact upon the VCT.

 

The Board has also evaluated the ability of third-party suppliers to continue to deliver services to the VCT during COVID-19.

 

The Board is satisfied that the underlying assets held by the SPVs have been built to a sufficient quality and there is an appropriate level of ongoing repairs and maintenance to prevent substantial degradation. It is also considered highly unlikely that the portfolio would suffer from such poor irradiation and severe degradation that it would be unable to generate income over the period. Asset life, along with the other inputs to the valuation model, are discussed further in Note 17.

 

The Board also noted that the SPVs have sufficient debt cover and that there are significant cash reserves at the SPV level, available to be paid up to the VCT through dividends, reverse loans or the repayment of existing shareholder loans.

 

The Board have assessed the VCT's ability to cover its annual running costs under several scenarios, in which sensitivity analysis has been performed over the value of the investment portfolio. The Directors note that under none of these scenarios was the VCT unable to cover its costs.

 

The Directors believe that the VCT is well placed to manage its business risks successfully. Based upon this viability assessment, the Board confirms that, taking into account the VCT's current position and subject to the principal risks faced by the business, the VCT will be able to continue in operation and meet its liabilities as they fall due for a period of at least five years from the balance sheet date.

 

Directors' remuneration

It is a requirement under The Companies Act 2006 for Shareholders to vote on the Directors' remuneration every three years, or sooner if the VCT wants to make changes to the policy.

 

Annual running costs cap

The annual running costs for the year are capped at 3.0% of net assets; any excess will either be paid by the Investment Adviser or refunded by way of a reduction of the Investment Adviser's fees. Annual running costs for the year to 30 September 2020 were 2.3% (2019: 2.0%) and therefore less than 3.0% of net assets.

 

Performance Incentive

The structure of the 'A' Shares, whereby Management owns one third of the 'A' Shares in issue (known as the "Management 'A' Shares"), acts as a Performance Incentive mechanism. 'A' Share dividends will be increased if, at the end of each year, the hurdle is met, which is illustrated below:

i)              Shareholders who invested under the offer for subscription receive dividends in excess of 5.0p per Ordinary Share in any one financial period; and

ii)             one Ordinary Share and one 'A' Share has a combined net asset value of at least 100.0p.

 

The Performance Incentive is calculated each year and is not based on cumulative dividends paid.

 

A summary of how proceeds are allocated between Shareholders and Management, before and after the hurdle is met, and as dividends per Ordinary Share increase is as follows:

 

Hurdle criteria:
Annual dividend per Ordinary Share	0-5p	5-10p	>10p
Combined NAV Hurdle	N/A	>100p	>100p
Allocation of dividend proceeds:
Shareholders	99.97%	80%	70%
Management	0.03%	20%	30%

 

As the NAV hurdle was met and the annual dividend to be paid on 31 December 2020 will exceed the dividend hurdle, Management will receive a Performance Incentive in respect of the year ended 30 September 2020. The Performance Incentive will be equivalent to 0.1713p per Ordinary Share, or approximately £45,000 (2019: 0.1713p  per Ordinary Share, or approximately £45,000). Payment of the performance incentive fee is not deemed to be a related party transaction and is therefore not disclosed in Note 20 to the financial statements.

 

Pursuant to historic financial intermediary arrangements with Hazel Capital LLP, Haibun Partners LLP ("Haibun"), of which Stuart Knight (Director of Gresham House Renewable VCT1 plc) is a Designated Member, and CH1 Investment Partners LLP ("CH1"), of which Matthew Evans is a Designated Member, will receive a proportion of the Performance Incentive payments made to Management by the VCT and its sister company, Gresham House Renewable Energy VCT1 plc ("VCT1"). Haibun and CH1 will share an amount equal to approximately 8.0% of the Performance Incentive paid to Management in respect of the "Management 'A'  Shares" issued by the VCT and VCT2 in connection with the Ordinary Shares issued to Haibun and CH1 clients under the 2010, 2012 and 2014 Offers. The agreements were put in place prior to the appointment of Matthew Evans and Stuart Knight as Directors of the VCT and VCT1 respectively.

 

The Directors, with the help of the Investment Adviser, actively monitor and ensure the investee companies have less than £5 million state backed financing in a 12-month period listed in order to remain compliant with the VCT regulations.

 

Share buybacks

The VCT has a policy of buying shares that become available in the market if liquidity and regulatory constraints permit. The VCT is not currently buying in shares as the VCT needs to conserve such cash as it generates for the running of the VCT and the payment of dividends. The Board reviews the buyback policy from time to time and may make changes if it considers that to be in the best interests of Shareholders as a whole.

 

There were no share buybacks during the financial year. A special resolution to renew the authority to repurchase Shares is proposed for the forthcoming AGM.

 

VCT status

The VCT has reappointed Philip Hare & Associates LLP ("Philip Hare") to advise it on compliance with VCT requirements, including evaluation of investment opportunities as appropriate and regular review of the portfolio. Although Philip Hare works closely with the Investment Adviser, they report directly to the Board.

 

Compliance with the VCT regulations for the year under review is summarised as follows:

 

	Position at the year ended 30 September 2020
1. To ensure that the VCT's income in the period has been derived wholly or mainly (70% plus) from shares or securities;	100.0%
2. To ensure that the VCT has not retained more than 15% of its income from shares and securities;	0.0%
3. To ensure that the VCT has not made a prohibited payment to Shareholders derived from an issue of shares since 6 April 2014;	Complied
4. To ensure that at least 80% by value of the VCT's investments has been represented throughout the period by shares or securities comprised in qualifying holdings of the VCT;	83.9%
5. To ensure that at least 70% by value of the VCT's qualifying holdings has been represented throughout the period by holdings of eligible shares (disregarding investments made prior to 6 April 2018 from funds raised before 6 April 2011);	92.7%
6. To ensure that of funds raised on or after 1 October 2018, at least 30% has been invested in qualifying holdings by the anniversary of the end of the accounting period in which the shares were issued;	30.0%
7. To ensure that no holding in any company has at any time in the period represented more than 15% by value of the VCT's investments at the time of investment;	Complied
8. To ensure that the VCT's ordinary capital has throughout the period been listed on a regulated European market;	Complied
9. To ensure that the VCT has not made an investment in a company which causes it to receive more than the permitted investment from State Aid sources;	Complied
10. To ensure that since 17 November 2015, the VCT has not made an investment in a company which exceeds the maximum permitted age requirement;	Complied
11. To ensure that since 17 November 2015, funds invested by the VCT in another company have not been used to make a prohibited acquisition; and	Complied
12. To ensure that since 6 April 2016, the VCT has not made a prohibited non-qualifying investment.	Complied

 

REPORT OF THE DIRECTORS

The Directors present the tenth Annual Report and Accounts of the VCT for the year ended 30 September 2020. The Corporate Governance Report forms part of this report.

 

Share capital

At the year end, the VCT had in issue 26,133,036 Ordinary Shares and 39,463,845 'A' Shares.

There are no other share classes in issue.

 

All shares have voting rights; each Ordinary Share has 1,000 votes and each 'A' Share has one vote. Where there is a resolution in respect of a variation of the rights of 'A' Shareholders or a Takeover Offer, the voting rights of the 'A' Shares rank pari-passu with those of Ordinary Shares.

 

Pursuant to the articles and subject to a special resolution, the VCT is able to make market purchases of its own shares, up to a maximum number of shares equivalent to 14.99% of the total number of each class of issued shares from time to time.

 

At the Annual General Meeting ("AGM") that took place on 25 June 2020, the VCT was authorised to make market purchases of its Ordinary Shares and 'A' Shares, up to a limit of 4,369,885 Ordinary Shares and 6,368,286 'A' Shares which represented approximately 14.9% of the issued Ordinary Share capital and 'A' Share capital at the date of the AGM. At the current date, authority remains for 883,596 Ordinary Shares and 2,722,436 'A' Shares. A resolution to renew this authority will be put to Shareholders at the AGM taking place on 4 March 2021.

 

The payment of an annual dividend of 5.8p (5.3133p per Ordinary Share and 0.4867p per 'A' Share) was announced on 3 December, and this will be paid on 31 December 2020.

 

The minimum price which may be paid for an Ordinary Share or an 'A' Share is 0.1p, exclusive of all expenses, and the maximum price which may be paid for an Ordinary Share or an 'A' Share is an amount, exclusive of all expenses, equal to 105% of the average of the middle market quotations.

 

Substantial interests

As at 30 September 2020, and the date of this report, the VCT had not been notified of any beneficial interest exceeding 3% of the issued share capital.

 

Results and dividends

	£'000	Pence per Ord Share	Pence per 'A' Share
(Loss)/Profit for the year	(1,093)	4.2	-
20 Dec 2019 Dividend	1,581	5.3133	0.4867
31 Dec 2020 Dividend	1,581	5.3133	0.4867

 

Directors

The Directors of the VCT during the year and their beneficial interests in the issued Ordinary Shares and 'A' Shares at 30 September 2020 and at the date of this report were as follows:

Directors		As at the date of this report	As at 30 Sept 2020	As at 30 Sept 2019
	Ord	27,789	27,789	27,789
Christian Yates
	'A'	2,624,185	2,624,185	2,624,185
	Ord	-	-	-
Matthew Evans
	'A'	-	-	-
	Ord	-	-	-
Giles Clark
	'A'	-	-	-

 

It is the Board's policy that Directors do not have service contracts, but each Director is provided with a letter of appointment. The Directors' letters of appointment, which were refreshed during the year and are terminable on three months' notice by either side. They are available on request at the VCT's registered office during business hours and will be available for 15 minutes prior to and during the forthcoming AGM.

 

The Articles of Association require that each Director retires by rotation every three years and being eligible, offer themselves for re-election. Accordingly, none of the directors are due to stand for re-election. The Directors' appointment dates and the date of their last election are shown below:

Director	Date of original appointment	Most recent date of re-election
Christian Yates (Chairman)	28/09/2010	21/03/2018
Matthew Evans Giles Clark	07/11/2017	25/06/2020
	31/01/2017	21/03/2018

 

The Directors believe that the Board has an appropriate balance of skills, experience, independence and knowledge of the VCT and the sector in which it operates to enable it to provide effective strategic leadership and proper guidance of the VCT. The Board confirms that, following the evaluation process set out in the Corporate Governance Statement, the performance of each of the Directors is, and continues to be, effective and demonstrates commitment to the role. Each Director is required to devote such time to the affairs of the VCT as the Board reasonably requires.

 

Annual general meeting

The VCT's tenth Annual General Meeting ("AGM") will be held on Thursday 4 March 2021. The Notice of the Annual General Meeting and Form of Proxy will be circulated with this Annual Report.

 

The Board has considered all options for the upcoming AGM in 2021 and in particular how best to manage the potential impact of the COVID-19 pandemic and minimise disruption in convening the AGM. The Board has taken into account Government guidance, including evolving rules on staying at home, social distancing and avoiding public gatherings ("COVID-19 Measures"). Given the possibility that some level of restriction on public gatherings and maintaining social distancing will remain in place in March 2021, the Board may decide to amend the format of the AGM. Any change of format will be notified via the VCT's website and Regulatory Information Service.

 

Auditor

There is a requirement to undertake an audit tender for the year ended 30 September 2021, and BDO LLP has indi-cated its willingness to retender. Separate resolutions will be proposed at the AGM to appoint the new auditor, or to re-appoint BDO LLP, and to authorise the Directors to determine their remuneration.

 

Directors' responsibilities

The Directors are responsible for preparing the Strategic Report, the Report of the Directors, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

 

Company law requires the Directors to prepare financial statements for each financial year.

Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the VCT and of the profit or loss of the VCT for that period.

 

In preparing these financial statements the Directors are required to:

-       select suitable accounting policies and then apply them consistently;

-       make judgments and accounting estimates that are reasonable and prudent;

-       state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

-       prepare the financial statements on the going concern basis unless it is inappropriate to presume that the VCT will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the VCT's transactions, to disclose with reasonable accuracy at any time the financial position of the VCT and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the VCT and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the VCT's performance, business model and strategy.

 

Directors' statement pursuant to the disclosure and transparency rules Each of the Directors confirms that to the best of each person's knowledge:

-       the financial statements, which have been prepared in accordance with UK Generally Accepted Accounting Practice and the 2014 Statement of Recommended Practice, 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' give a true and fair view of the assets, liabilities, financial position and profit or loss of the VCT; and

-       that the management report, comprising the Chairman's Statement, Investment Adviser's Report, Review of Investments, Strategic Report, and Report of the Directors includes a fair review of the development and performance of the business and the position of the VCT together with a description of the principal risks and uncertainties that it faces.

 

Insurance cover

Directors' and Officers' liability insurance cover is held by the VCT in respect of the Directors.

 

Website publication

The Directors are responsible for ensuring the Annual Report and the Financial Statements are made available on a website. Financial statements are published on the website of the Investment Adviser (https://greshamhouse. com/real-assets/new-energy-sustainable- infrastructure/) in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The Directors' responsibility also extends to the on-going integrity of the financial statements contained therein.

 

Other matters

During the year, the VCT did not have any employees (2019: nil) and therefore there is no comparison data available for the change in the Directors' remuneration to average change in employee remuneration.

 

Events after the end of the reporting period

Following the period end the VCT will pay dividends in respect of the year ended 30 September 2020, of 5.3133p per Ordinary Share and 0.4867p per 'A' Share. These dividends will be paid on 31 December 2020 to Shareholders on the register at 11 December 2020.

 

The VCT invested £12,500 into bio-bean Limited in October 2020 as part of a follow-on funding round alongside other investors, including its sister company, VCT1.

 

Statement as to disclosure of information to the auditor

The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

 

For and on behalf of the Board

 

Christian Yates

Chairman

21 December 2020

 

NON-STATUTORY ACCOUNTS

 

The financial information set out below does not constitute the Company's statutory accounts for the years ended 30 September 2019 and 2020 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 will be delivered in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at https://greshamhouse.com/real-assets/new-energy-sustainable-infrastructure/gresham-house-renewable-energy-vct-2-plc/

 

 

INCOME STATEMENT

 

For the year ended 30 September 2020

 

		Revenue	Capital	Total	Revenue	Capital	Total
	Note	£'000	£'000	£'000	£'000	£'000	£'000
Income	3	264	-	264	94	-	94
(Loss)/gain on investments	10	-	(624)	(624)	-	1,305	1,305
		264	(624)	(360)	94	1,305	1,399
Investment advisory fees	4	(243)	(81)	(324)	(264)	(88)	(352)
Other expenses	5	(359)	(50)	(409)	(249)	-	(249)
		(602)	(131)	(733)	(513)	(88)	(601)
(Loss)/profit on ordinary activities before tax		(338)	(755)	(1,093)	(419)	1,217	798
Tax on total comprehensive loss)/income and ordinary activities	7	-	-	-	-	-	-
(Loss)/profit for the year and total comprehensive (loss)/income		(338)	(755)	(1,093)	(419)	1,217	798
Basic and diluted (loss)/earnings per share:
Ordinary Share	9	(1.3p)	(2.9p)	(4.2p)	(1.7p)	4.9p	3.2p
'A' Share	9	-	-	-	-	-	-

 

All Revenue and Capital items in the above statement derive from continuing operations. No operations were discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the VCT prepared in accordance with Financial Reporting Standards ("FRS 102"). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 (updated in October 2019) by the Association of Investment Companies ("AIC SORP").

 

Other than revaluation movements arising on investments held at fair value through the profit or loss, there were no differences between the return/ loss as stated above and at historical cost.

 

The accompanying notes form an integral part of these financial statements.

 

BALANCE SHEET

As at 30 September 2020

 

		2020		2019
	Note	£'000	£'000	£'000	£'000
Fixed assets			30,593		29,707
Investments	10
Current assets		289		305
Debtors	11	54		1,336
Cash at bank and in hand		343		1,641
		(233)		(163)
Creditors: amounts falling due within one year	12		110		1,478
Net current (liabilities)/assets		(3,087)		(895)
Creditors: amounts falling due after more than one year	13		27,616		30,290
Net assets
Capital and reserves			29		29
Called up Ordinary Share capital	14		42		42
Called up 'A' Share capital	14		9,734		9,734
Share premium account	15		(3,403)		(3,403)
Treasury Shares	15		6,394		7,975
Special reserve	15		16,891		17,522
Revaluation reserve	15		1		1
Capital redemption reserve	15		(1,433)		(1,309)
Capital reserve - realised	15		(639)		(301)
Revenue reserve	15		27,616		30,290
Total Shareholders' funds
Basic and diluted net asset value per share			105.5p		115.8p
Ordinary Share	16		0.1p		0.1p
'A' Share	16		30,593		29,707

 

The financial statements of Gresham House Renewable Energy VCT2 plc were approved and authorised for issue by the Board of Directors and were signed on its behalf by:

 

Christian Yates

Chairman

Company number: 07378395

 

Date: 21 December 2020

 

The accompanying notes form an integral part of these financial statements.

 

STATEMENT OF CHANGES IN EQUITY

For the year ended 30 September 2020

 

	Called up share capital	Share Premium Account	Treasury Shares	Funds held in respect of Shares not yet allotted	Special reserve	Reevaluation reserve	Capital redemption reserve	Capital reserve realised	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2018	68	7,531	(2,792)	1,035	9,724	16,257	-	(1,261)	118	30,680
Total comprehensive income	-	-	-	-	-	1,217	-	-	(419)	798
Transfer of net realised loss to Capital reserve-realised	-	-	-	-	-	48	-	(48)	-	-
Transactions with owners
Dividend paid	-	-	-	-	(1,668)	-	-	-	-	(1,668)
Repurchase of Shares	-	-	(611)	-	-	-	1	-	-	(610)
Issue of Shares	3	2,203	-	-	(81)	-	-	-	-	2,125
Unallotted Shares	-	-	-	(1,035)	-	-	-	-	-	(1,035)
At 30 September 2019	71	9,734	(3,403)	-	7,975	17,522	1	(1,309)	(301)	30,290
Total comprehensive loss	-	-	-	-	-	(755)	-	-	(338)	(1,093)
Transfer of net realised loss to Capital reserve-realised	-	-	-	-	-	124	-	(124)	-	-
Transactions with owners
Dividend paid	-	-	-	-	(1,581)	-	-	-	-	(1,581)
At 30 September 2020	71	9,734	(3,403)	-	6,394	16,891	1	(1,433)	(639)	27,616

 

The accompanying notes form an integral part of these financial statements.

 

CASH FLOW STATEMENT

For the year ended 30 September 2020

 

		Year ended 30 September	Year ended 30 September
		2020	2019
	Note	£'000	£'000
Cash flows from operating activities (Loss)/profit for the financial year		(1,093)	798
Losses/(gains) on investments		624	(1,305)
Decrease/(increase) in debtors		16	(31)
Decrease in creditors		(17)	(15)
Net cash outflow from operating activities		(470)	(553)
Cash flows from investing activities Proceeds from sale of investments/loan note redemptions
Investments purchased at cost		105	546*
Net cash (outflow)/inflow from investing activities		(1,615)	(5)
Net cash outflow before financing activities		(1,510)	541
Cash flows from financing activities Equity Dividends paid	8	(1,980)	(12)
Proceeds from/(repayment of) loans Issue of Shares Purchase of own shares
Net cash inflow/(outflow) from financing activities		(1,581)	(1,668)
Net decrease in cash		2,279	(501)*
Cash and cash equivalents at start of year		-	1,090^
Cash and cash equivalents at end of year		-	(611)
Cash and cash equivalents comprise Cash at bank and in hand		698	(1,690)
Total cash and cash equivalents		(1,282)	(1,702)

 

*In December 2018 the loan note investment made in Lunar 2 Limited by the VCT was repaid. Instead of the VCT receiving the cash proceeds from this repayment, the amount was instead credited to various outstanding loans due to investee companies, including Lunar 2 Limited, from the VCT and included within amounts falling due after more than one year. Please refer to note 13.

 

^ In October 2018 the VCT issued additional shares to participating investors. A portion of the cash proceeds for these share subscriptions were received during the prior year and accounted for as Funds held in respect of Shares not yet allotted in the prior year. The remaining balance of the cash proceeds due to the VCT for these share subscriptions was received during the year ended 30 September 2019.

 

The accompanying notes form an integral part of these financial statements.

 

NOTES TO THE ACCOUNTS

 

For the year ended 30 September 2020

 

1.             General Information

Gresham House Renewable Energy VCT2 plc ("the VCT") is a Venture Capital Trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales under the Companies Act 2006.

 

2.             Accounting policies
Basis of accounting

The VCT has prepared its financial statements under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies ("AIC") in November 2014 and revised in October 2019 ("SORP") as well as the Companies Act 2006.

 

The VCT implements new Financial Reporting Standards ("FRS") issued by the Financial Reporting Council when they become effective. The financial statements are presented in Sterling (£).

 

Presentation of income statement

In order to better reflect the activities of a Venture Capital Trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue is the measure the Directors believe appropriate in assessing the VCT's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

 

Investments

All investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, in accordance with the VCT's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 102 Sections 11 and 12.

 

For unquoted investments and subsequent to acquisition, fair value is established by using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

-       Multiples;

-       Net assets;

-       Discounted cash flows or earnings (of underlying business);

-       Discounted cash flows (from the investment); and

-       Industry valuation benchmarks.

 

Effective 1 January 2019, the IPEV guidelines to establish fair value were updated whereby the cost or price of a recent investment are no longer considered valid valuation methodologies for establishing the fair value of an investment. The VCT along with its Investment Adviser may, under orderly market conditions, deem the cost or recent price paid for an investment as an appropriate fair value for an investment at the time of acquisition but subsequent to recognition must reconsider the assigned fair value based on up-to-date market conditions and performance of the underlying investee company in order to assign a fair value in line with the IPEV guidelines.

 

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

 

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership or liquidation, or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.

 

The investee companies held by the VCT are treated as a portfolio of investments and are therefore measured at fair value in accordance with section 9 of FRS 102. The results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.

 

Income

Dividend income from investments is recognised when the Shareholders' rights to receive payment have been established, normally the ex-dividend date.

 

Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection in the foreseeable future.

 

Expenses

All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

 

·      Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment; and

 

·      Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The VCT has adopted a policy of charging 75% of the investment advisory fees to the revenue account and 25% to the capital account to reflect the Board's estimated split of investment returns which will be achieved by the VCT over the long term.

 

Taxation

The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate, using the VCT's effective rate of tax for the accounting period.

 

Due to the VCT's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the VCT's investments which arises.

 

Deferred taxation, which is not discounted, is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts.

 

Other debtors, other creditors and loan notes

Other debtors (including accrued income), other creditors and loan notes (other than those held as part of the investment portfolio as set out in Note 10) are included within the accounts at amortised cost.

 

Issue costs

Issue costs in relation to the shares issued for each share class have been deducted from the special reserve.

 

3.             Income

 

	Year ended 30 September 2020 £'000	Year ended 30 September 2019 £'000
Income from investments
Loan stock interest	79	94
Dividend income	185	-
	264	94

 

4.             Investment advisory fees

The investment advisory fees for the year ended 30 September 2020, which were charged quarterly to the VCT, were based on 1.15% of the net assets as at the previous quarter end.

 

	Year ended 30 September 2020			Year ended 30 September 2019*
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment advisory fees	243	81	324	264	88	352

* With effect from 7 November 2017, the Investment Advisory fee percentage was reduced from 2.0% of net assets per annum to 1.4%, for the period to 6 November 2018. With effect from 7 November 2018, the Investment Advisory fee has reduced further, to 1.15% of net assets per annum.

 

5.             Other expenses

 

	Year ended 30 September 2020			Year ended 30 September 2019
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Administration services	137	-	137	50	-	50
Directors' remuneration	76	-	76	77	-	77
Social security costs	3	-	3	5	-	5
Auditor's remuneration for audit	34	-	34	29	-	29
Transaction costs	-	50	50	-	-	-
Other	109	-	109	88	-	88
	359	50	409	249	-	249

 

The annual running costs of the VCT for the year are subject to a cap of 3.0% of the net assets of the VCT. During the year ended 30 September 2020, the annual running costs came to 2.3% of net assets (2019: 2.0%), therefore this cap has not been breached.

 

6.             Directors' remuneration

Details of remuneration (excluding employer's NIC) are given in the audited part of the Directors' Remuneration Report.

 

The VCT had no employees during the year. Costs in respect of the Directors are referred to in Note 5 above. No other emoluments or pension contributions were paid by the VCT to, or on behalf of, any Director.

 

7.             Tax on ordinary activities

 

	Year ended 30 September	Year ended 30 September
	2020 £'000	2019 £'000
(a) Tax charge for the year
UK corporation tax at 19% (2019: 19%)	-	-
Charge for the year	-	-
(b) Factors affecting tax charge for the year
(Loss)/profit on ordinary activities before taxation	(1,093)	798
Tax (credit)/charge calculated on (loss)/return on ordinary activities before taxation at the applicable rate of 19% (2019: 19%)	(208)	152
Effects of:
UK dividend income	(35)	-
Losses/(gains) on investments	119	(248)
Excess management expenses on which deferred tax not recognised	124	96
Total tax charge	-	-

Excess management fees, which are available to be carried forward and set off against future taxable income, amounted to £4,487,000 (2019:£3,942,000). The associated deferred tax asset of £852,000 (2019: £670,000) has not been recognised due to the fact that it is unlikely that the excess management fees will be set off against future taxable profits in the foreseeable future.

 

8.             Dividends

 

	Year ended 30 September 2020			Year ended 30 September 2019
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Payable 2020 Interim Ordinary - 5.3133p	-	1,389	1,389	-	-	-
2020 Interim A - 0.4867p	-	192	192	-	-	-
Paid 2019 Interim Ordinary - 5.3133p	-	-	-	-	1,389	1,389
2019 Interim A - 0.4867p	-	-	-	-	192	192
	-	1,581	1,581	-	1,581	1,581

 

The Interim 2019 dividends were paid on 20 December 2019, to Shareholders on the register as at 29 November 2019. The Interim 2020 dividends will be paid on 31 December 2020 to Shareholders on the register as at 11 December 2020.

 

9.             Basic and diluted earnings per share

 

	Weighted average number of shares in issue	Revenue loss £'000	Pence per share	Capital (loss)/ return £'000	Pence per share
Year ended 30 September 2020	Ordinary Shares               26,133,036	(338)	(1.3)	(755)	(2.9)
	'A' Shares            39,463,845	-	-	-	-
Year ended 30 September 2019	Ordinary Shares                24,975,311	(419)	(1.7)	1,217	4.9
	'A' Shares             37,269,105	-	-	-	-

 

As the VCT has not issued any convertible securities or share options, there is no dilutive effect on earnings per Ordinary Share or 'A' Share. The earnings per share disclosed therefore represents both the basic and diluted return per Ordinary Share or 'A' Share.

 

10.          Fixed assets - investments

 

	2020 Unquoted investments	2019 Unquoted investments
	£'000	£'000
Opening cost at start of the year	12,185	14,331
Net unrealised gains at start of the year	17,522	16,257
Opening fair value at start of the year	29,707	30,588
Movement in the year: Purchased at cost	1,615	5
Disposals proceeds/redemption of loan notes	(105)	(2,191)
Realised gains on disposals	5	40
Net unrealised (losses)/gains in the income statement	(629)	1,265
Closing fair value at year end	30,593	29,707
Closing cost at year end	13,700	12,185
Net unrealised gains at year end	16,893	17,522
Closing fair value at year end	30,593	29,707

 

 

During the year, the VCT received £105,000 (2019: £2,191,000) from the disposal of investments comprising of both equity and loan notes. The cost of these investments at the start of the year was £100,000 (2019: £2,151,000). These investments have been revalued and measured at fair value over time, and up until the point of disposal any unrealised gains or losses were included in the fair value of the investments.

 

The VCT has categorised its financial instruments using the fair value hierarchy as follows:

 

Level 1 Reflects financial instruments quoted in an active market;

 

Level 2 Reflects financial instruments that have prices that are observable either directly or indirectly; and

 

Level 3 Reflects financial instruments that use valuation techniques that are not based on observable market data (unquoted equity investments and loan note investments).

 

	Level 1	Level 2	Level 3	2020	Level 1	Level 2	Level 3	2019
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Unquoted loan notes	-	-	2,096	2,096	-	-	906	906
Unquoted equity	-	-	28,497	28,497	-	-	28,801	28,801
	-	-	30,593	30,593	-	-	29,707	29,707

 

During the years ended 30 September 2020 and 30 September 2019 there were no transfers between levels.

 

A reconciliation of fair value for Level 3 financial instruments held at the year end is shown below:	Unquoted loan notes	Unquoted equity	Total
	£'000	£'000	£'000
Balance at 30 September 2019	906	28,801	29,707
Movements in the income statement:
Unrealised gains/(losses) in the income statement	75	(704)	(629)
Realised gains in the income statement	5	-	5
	80	(704)	(624)
Additions at cost	1,215	400	1,615
Sales proceeds/redemption of loan notes	(105)	-	(105)
Balance at 30 September 2020	2,096	28,497	30,593

 

FRS 102 sections 11 and 12 require disclosure to be made of the possible effect of changing one or more of the inputs to reasonable possible alternative assumptions where this would result in a significant change in the fair value of the Level 3 investments. There is an element of judgement in the choice of assumptions for unquoted investments and it is possible that, if different assumptions were used, different valuations could have been attributed to some of the VCT's investments.

 

Investments which are reaching maturity or have an established level of maintainable earnings are valued on a discounted cash flow basis. This was also the case in the prior year.

 

The Board and the Investment Adviser believe that the valuation as at 30 September 2020 reflects the most appropriate assumptions at that date, giving due regard to all information available from each investee company. Consequently, the variation in the spread of reasonable, possible, alternative valuations is likely to be within the range set out in Note 17.

 

11.          Debtors

	2020 £'000	2019 £'000
Prepayments and accrued income	289	305
	289	305

 

12. Creditors: amounts falling due within one year

		2020 £'000	2019 £'000
Other loans*		152	65
Taxation and social security		7	4
Accruals and deferred income		74	94
		233	163
* Other loans falling due within one year:
Investee company	Repayment date	2020 £'000	2019 £'000
Hewas Solar Limited	n/a^	65	65
	30 April 2021	66(1)	-
		131	65
St Columb Solar Limited	30 April 2021	21	-
		21	-

 

^ In September 2015, the VCT and Hewas Solar Limited (the "lender") entered into a loan agreement whereby the lender may demand full repayment of all amounts outstanding at any time after 5 years and 1 day from the date of the initial drawdown of the loan. The loan is interest free.

(1) The above loan amounts were included within amounts falling due after one year in the prior year financial statements.

 

13. Creditors: amounts falling due after more than one year  

 

	2020 £'000	2019 £'000
Other loans	3,087	895
	3,087	895

The balance of other loans is made up of amounts borrowed from the underlying portfolio companies. An analysis of the maturity dates of each of the loans is shown below. Whilst each loan has an applicable repayment date, the VCT has the right to repay all or any part of the loans at any time. All loans are interest free.

 

Creditors falling due after more than one year are repayable as follows:

 

Investee company	Repayment date	2020 £'000	2019 £'000
Hewas Solar Limited	30 April 2021	-*	66
		-	66
St Columb Solar Limited	30 April 2021	-*	21
	2 February 2023	40	40
		40	61
Amounts repayable in up to five years		40	127
Lunar 2 Limited	17 December 2043	768	768
	18 December 2024	1,581	-
	14 January 2025	373	-
		2,722	768
Gloucester Wind Limited	14 January 2025	200	-
		200	-
Penhale Solar Limited	14 January 2025	75	-
		75	-
Minsmere Power Limited	14 January 2025	50	-
		50	-
Amounts repayable after more than five years		3,047	768
Other loans		3,087	895
Hewas Solar Limited	30 April 2021	-*	66
		-	66
St Columb Solar Limited	30 April 2021	-*	21
	2 February 2023	40	40
		40	61
Amounts repayable in up to five years		40	127
Lunar 2 Limited	17 December 2043	768	768
	18 December 2024	1,581	-
	14 January 2025	373	-
		2,722	768
Gloucester Wind Limited	14 January 2025	200	-
		200	-
Penhale Solar Limited	14 January 2025	75	-
		75	-
Minsmere Power Limited	14 January 2025	50	-
		50	-
Amounts repayable after more than five years		3,047	768
Other loans		3,087	895

 

*              For the current year these amounts have been included within amounts falling due within one year.

 

14. Called up share capital

	2020 £'000	2019 £'000
Allotted, called up and fully-paid:
25,515,242 (2019: 25,515,242) Ordinary Shares of 0.1p each	29	29
38,512,032 (2019: 38,512,032) 'A' Shares of 0.1p each	42	42
	71	71

 

The VCT's capital is managed in accordance with its investment policy as shown in the Strategic Report, in pursuit of its principal investment objectives. There has been no significant change in the objectives, policies or processes for managing capital from the previous period.

 

The VCT has the authority to buy back shares as described in the Report of the Directors. During the year ended 30 September 2020 the VCT did not repurchase any Ordinary Shares or any 'A' Shares (2019: 552,738 Ordinary Shares and 552,738 'A' Shares, at an average price per combined holding of 111.8p). All shares repurchased are currently held in treasury.

 

During the year ended 30 September 2020 the VCT issued no Ordinary Shares (2019: 1,820,137 Ordinary Shares at an average price of 123.5p) and no

'A' Shares (2019: 2,857,421 'A' Shares at an average price of 0.1p).

 

The holders of Ordinary Shares and 'A' Shares shall have rights as regards to dividends and any other distributions or a return of capital (otherwise than on a market purchase by the VCT of any of its shares) which shall be applied on the following basis:

 

1)     Unless and until Ordinary Shareholders receive a dividend of at least 5.0p per Ordinary Share, and one Ordinary Share and one 'A' Share has a combined net asset value of 100p (the Hurdle), distributions will be made as to 99.9% to Ordinary Shares and 0.1% to 'A' Shares;

 

2)     After (and to the extent that) the Hurdle has been met, and subject to point 3 below, the balance of such amounts shall be applied as to 40% to Ordinary Shares and 60% to 'A' Shares; and

 

3)     Any amount of a dividend which, but for the entitlement of 'A' Shares pursuant to point 2 above, would have been in excess of 10p per Ordinary Share in any year shall be applied as to 10% to Ordinary Shares and 90% to 'A' Shares.

 

If, on the date on which a dividend is to be declared on the Ordinary Shares, the amount of any dividend which would have been payable to the 'A' Shares (the ''A' Dividend Amount'), together with any previous amounts which were not paid as a result of this clause (the ''A' Share Entitlement'), would together:

 

a)     in aggregate be less than £5,000; or

 

b)     be less than an amount being equivalent to 0.25p per 'A' Share

 

then the 'A' Dividend amount shall not be declared and paid, but shall be aggregated with any 'A' Share Entitlement and retained by the VCT until either threshold is reached. No interest shall accrue on any 'A' Share Entitlement.

 

The VCT does not have any externally imposed capital requirements.

 

15.          Reserves

 

	2020 £'000		2019 £'000
Share premium account	9,734		9,734
Treasury shares	(3,403)		(3,403)
Special reserve	6,394		7,975
Revaluation reserve	16,891		17,522
Capital redemption reserve	1		1
Capital reserve - realised	(1,433)	(1,309)
Revenue reserve	(639)	(301)
	27,545	30,219

 

The Special reserve is available to the VCT to enable the purchase of its own shares in the market without affecting its ability to pay dividends. The Special reserve, Capital reserve - realised and Revenue reserve are all distributable reserves. At 30 September 2020, distributable reserves were £4,322,000 (2019: £6,365,000).

 

Share premium account

This reserve accounts for the difference between the prices at which shares are issued and the nominal value of the shares, less issue costs and transfers to the other distributable reserves.

 

Treasury shares

This reserve represents the aggregate consideration paid for the Shares repurchased by the VCT.

 

Revaluation reserve

Increases and decreases in the valuation of investments held at the year end against cost are included in this reserve.

 

Capital redemption reserve

This reserve accounts for amounts by which the issued share capital is diminished through the repurchase and cancellation of the VCT's own shares.

 

Capital reserve - realised

The following are disclosed in this reserve:

 

-       gains and losses compared to cost on the realisation of investments; and

-       expenses, together with the related taxation effect, charged in accordance with the above accounting policies

 

Revenue reserve

This reserve accounts for movements from the revenue column of the Income Statement, the payment of dividends and other non-capital realised movements.

 

16.          Basic and diluted net asset value per share

 

	2020	2019	2020		2019
	Shares in issue		Net asset value		Net asset value
			Pence per share	£'000	Pence per share	£'000
Ordinary Shares	26,133,036	26,133,036	105.5	27,577	115.8	30,251
'A' Shares	39,463,845	39,463,845	0.1	39	0.1	39

 

The Directors allocate the assets and liabilities of the VCT between the Ordinary Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights as described in Note 14.

 

As the VCT has not issued any convertible shares or share options, there is no dilutive effect on net asset value per Ordinary Share or per 'A' Share. The net asset value per share disclosed therefore represents both the basic and diluted net asset value per Ordinary Share and per 'A' Share.

 

17. Financial Instruments
The VCT held the following categories of financial instruments at 30 September 2020:

 

	2020 Cost	2020 Value	2019 Cost	2019 Value
	£'000	£'000	£'000	£'000
Assets at fair value through profit or loss	13,700	30,593	12,185	29,707
Other financial (liabilities)/assets	(69)	(69)	(66)	(66)
Cash at bank	54	54	1,336	1,336
Other loans	(3,239)	(3,239)	(960)	(960)
Total	10,446	27,339	12,495	30,017

 

The VCT's financial instruments comprise investments held at fair value through profit or loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits and financial liabilities being creditors arising from its operations. Other financial liabilities and assets include operational debtors and prepaid expenses and short term creditors which are measured at amortised cost. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the VCT's operations. The VCT has no gearing or other financial liabilities apart from short and long-term creditors and does not use any derivatives.

 

The fair value of investments is determined using the detailed accounting policy as shown in Note 2. The composition of the investments is set out in Note 10.

 

The VCT's investment activities expose the VCT to a number of risks associated with financial instruments and the sectors in which the VCT invests. The principal financial risks arising from the VCT's operations are:

-       Market risks;

-       Credit risk; and

-       Liquidity risk.

 

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the VCT was expected to be exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

 

The risk management policies used by the VCT in respect of the principal financial risks and a review of the financial instruments held at the year end are provided overleaf.

 

Market risks

As a Venture Capital Trust, the VCT is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Adviser and overseen by the Board. The Adviser monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Adviser to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various operating sites across several asset classes.

 

The key investment risks to which the VCT is exposed are:

-       Investment price risk; and

-       Interest rate risk.

 

Investment price risk

The VCT's investments which comprise both equity and debt financial instruments in unquoted investments are concentrated in renewable energy projects with predetermined expected returns. Consequently, the investment price risk on these assets arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the VCT's investment objectives which can be influenced by many macro factors such as changes in interest rates, electricity power prices and movements in inflation. It represents the potential loss that the VCT might suffer through changes in the fair value of unquoted investments that it holds.

 

At 30 September 2020, the unquoted portfolio was valued at £30,593,000 (2019: £29,707,000). The key inputs to the renewable assets' valuation model are discount rates, inflation, irradiation, degradation, power prices and asset life. The Board has undertaken a sensitivity analysis into the effects of fluctuations in these inputs.

 

The analysis below is provided to illustrate the sensitivity of the fair value of these investments to an individual input, while all other variables remain constant. The Board considers these changes in inputs to be within reasonable expected ranges. This is not intended to imply the likelihood of change or that possible changes in value would be restricted to this range. The possible effects are quantified below:

Input	Base case	Change in input	Change in fair value of investments £'000	Change in NAV per share pence
Discount rate	5.75% - 6.75%	+0.5%	(760)	(2.9)
		-0.5%	806	3.1
Inflation	1.20% - 3.00%	+0.5%	877	3.4
		-0.5%	(930)	(3.6)
Irradiation	785 - 1,270kWh/m2	+1.0%	638	2.4
		-1.0%	(638)	(2.4)
Degradation	0.30% - 0.40%	+0.1%	(707)	(2.7)
		-0.1%	716	2.7
Power prices	£34 - £53/MWh	+10.0%	563	2.2
		-10.0%	(534)	(2.0)

 

Asset life

The Board has also considered the potential impact of changes to the anticipated lives of assets in the portfolio. Close to ninety percent of the VCT's value is in assets refinanced by debt, and under the debt facility agreements, substantial reserves are in place for renewing key equipment as and when required. Furthermore, the underlying assets have leases that are valid for the lifetime of the VCT, which cannot be terminated early, and any extensions to the leases would require further planning permission. Accordingly, the asset life assumption has been kept at 25 years and the Board does not consider it appropriate to disclose a sensitivity analysis in respect of asset life.

 

Non-renewable assets

Investment price risk has been considered separately for the non-renewable energy investments, bio-bean and Rezatec, as these have been valued using private-equity principles and in accordance with the International Private Equity Valuation ("IPEV") Guidelines. The estimation uncertainty for these unquoted investments has been further increased by the COVID-19 pandemic and associated government intervention.

 

In determining what level of risk applies to these investments a range of factors have been considered, such as the availability and extent of cash resources, the impact of COVID-19 on the relevant industry, and operational impacts on the business. Based upon this assessment, a sensitivity of +/- 20% has been applied to the valuation of Rezatec and bio-bean as at 30 September 2020. This would result in an increase or decrease of £161,500 to the fair value of these investments and reflects both the potential positive and negative impacts of COVID-19 on these businesses.

 

Interest rate risk

The VCT accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The VCT receives interest on its cash deposits at a rate agreed with its bankers. Where investments in loan stock attract interest, this is predominately charged at fixed rates. A summary of the interest rate profile of the VCT's investments is shown below.

 

There are three categories in respect of interest which are attributable to the financial instruments held by the VCT as follows:

-       "Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments and preference shares;

-       "Floating rate" assets predominantly bear interest at rates linked to The Bank of England base rate or LIBOR and comprise cash at bank; and

-       "No interest rate" assets do not attract interest and comprise equity investments, certain loan note investments, loans and receivables and other financial liabilities.

-      

	Average interest rate	Average period until maturity	2020 £'000	2019 £'000
Fixed rate	8%	770 days	921	567
Floating rate	0%		54	1,336
No interest rate			26,364	28,114
			27,339	30,017

 

The VCT monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

 

It is estimated that an increase of 1% in interest rates would have increased profit before tax for the year by £540 (2019: £13,000). The Bank of England base rate increased from 0.5% to 0.75% on 2 August 2018; on 11 March 2020, the Bank of England opted to reduce the base rate to 0.25%. On 19 March 2020, the base rate was reduced further to 0.1%. Any potential change in the base rate, at the current level, would have an immaterial impact on the net assets and total return of the VCT.

 

Credit risk

Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the VCT made under that instrument. The VCT is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors. Credit risk relating to loan stock in investee companies is considered to be part of market risk as the performance of the underlying SPVs impacts the carrying values.

 

The VCT's financial assets that are exposed to credit risk are summarised as follows:

 

	2020 £'000	2019 £'000
Investments in loan stocks	2,096	906
Cash and cash equivalents	54	1,336
Interest, dividends and other receivables	284	295
	2,434	2,537

 

The Adviser manages credit risk in respect of loan stock with a similar approach as described under "Market risks". Similarly, the management of credit risk associated with interest, dividends and other receivables is covered within the investment advisory procedures. The level of security is a key means of managing credit risk. Additionally, the risk is mitigated by the security of the assets in the underlying investee companies.

 

Cash is held by the Royal Bank of Scotland plc which is an investment grade rated financial institution. Consequently, the Directors consider that the credit risk associated with cash deposits is low.

 

There have been no changes in fair value during the year that are directly attributable to changes in credit risk. Any balances that are past due are disclosed further under liquidity risk.

 

There have been no loan investments for which the terms have been renegotiated during the year.

 

Liquidity risk

Liquidity risk is the risk that the VCT encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the VCT has a relatively low level of short term creditors being £81,000 (2019: £98,000) and has long term loans from investee companies (see Note 13 for an analysis of the repayment terms), which have either been repaid at the date of this report or are expected to be repaid by future dividends from these companies, being £3,239,000 (2019: £960,000), the Board believes that the VCT's exposure to liquidity risk is low. The VCT always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons the Board believes that the VCT's exposure to liquidity risk is minimal.

 

The VCT's liquidity risk is managed by the Investment Adviser in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

 

The following table analyses the VCT's loan payables by contractual maturity date:

 

	Due in less than 1 year	Due between 1 year and 5 years	Due after 5 years	Total
As at 30 September 2020	£'000	£'000	£'000	£'000
Loans payable to investee companies	152	40	3,047	3,239
	152	40	3,047	3,239
	Due in less than	Due between 1 year and	Due after
As at 30 September 2019	1 year £'000	5 years £'000	5 years £'000	Total £'000
Loans payable to investee companies	65	127	768	960
	65	127	768	960

 

Although the VCT's investments are not held to meet the VCT's liquidity requirements, the table below shows an analysis of the assets, highlighting the length of time that it could take the VCT to realise its assets if it were required to do so.

 

The carrying value of loan stock investments held at fair value through the profit or loss account at 30 September 2020 as analysed by the expected maturity date is as follows:

 

	Not later than 1 year	Between 1 and 2 years	Between 2 and 3 years	Between 3 and 5 years	More than 5 years	Total
As at 30 September 2020	£'000	£'000	£'000	£'000	£'000	£'000
Fully performing loan stock	-	-	-	1,100	996	2,096
Past due loan stock	-	-	-	-	-	-
	-	-	-	1,100	996	2,096
	Not later than 1 year	Between 1 and 2 years	Between 2 and 3 years	Between 3 and 5 years	More than 5 years	Total
As at 30 September 2019	£'000	£'000	£'000	£'000	£'000	£'000
Fully performing loan stock	-	-	-	-	906	906
Past due loan stock	-	-	-	-	-	-
	-	-	-	-	906	906

 

18.          Capital management

The VCT's objectives when managing capital are to safeguard the VCT's ability to continue as a going concern, so that it can continue to provide returns for Shareholders and to provide an adequate return to Shareholders by allocating its capital to assets commensurately with the level of risk.

 

By its nature, the VCT has an amount of capital, at least 80% (as measured under the tax legislation; and for the VCT, effective 1 October 2019) of which is and must be, and remain, invested in the relatively high risk asset class of small UK companies within three years of that capital being subscribed. The VCT accordingly has limited scope to manage its capital structure in the light of changes in economic conditions and the risk characteristics of the underlying assets. Subject to this overall constraint upon changing the capital structure, the VCT may adjust the amount of dividends paid to Shareholders, return capital to Shareholders, issue new shares, or sell assets if so required to maintain a level of liquidity to remain a going concern.

 

As the Investment Policy implies, the Board would consider levels of gearing. As at 30 September 2020 the VCT had loans from investee companies of £3,239,000 (2019: £960,000). It regards the net assets of the VCT as the VCT's capital, as the level of liabilities are small and the management of them is not directly related to managing the return to Shareholders. There has been no change in this approach from the previous period.

 

19.          Contingencies, guarantees and financial commitments

At 30 September 2020, the VCT had no contingencies, guarantees or financial commitments.

 

20.          Controlling party and related party transactions

In the opinion of the Directors there is no immediate or ultimate controlling party. For total Directors' remuneration during the year, please refer to note 5 as well as the Directors' Remuneration Report.

 

21.          Significant interests

Details of shareholdings in those companies where the VCT's holding, as at 30 September 2020, represents more than 20% of the nominal value of any class of shares issued by the portfolio company are predominantly disclosed in the Review of Investments. Relevant companies which do not feature in the Review of Investments are listed below. All of the companies named are incorporated in England and Wales. The percentage holding in each class of shares also reflects the percentage voting rights in each company as a whole.

 

Company	Registered office	Class of shares	Number held	Proportion of class held	Capital and reserves	Profit/(loss) for the year
bio-bean Limited	PE28 4WX	Ordinary	615,384	12%	£1,661,000	(£2,490,000)
St Columb Solar Limited	EC4A 3TW	Ordinary	649,999	50%	£1,100,000	(£36,000)
Minsmere Power Limited	EC4A 3TW	Ordinary	200,001	50%	£191,000	(£122,000)
Penhale Solar Limited	EC4A 3TW	Ordinary	299,601	50%	£545,000	£15,000
Small Wind Generation Limited	EC4A 3TW	Ordinary	840,001	50%	(£485,000)	(£28,000)
Lunar 3 Limited	EC4A 3TW	Ordinary	100	50%	£nil	£nil

 

22.          Events after the end of the reporting period

The Board is fully aware of the severity of the current COVID-19 pandemic and its significant impact on economic activity and the ability of companies to continue to do business. The Board in conjunction with the Investment Adviser continues to monitor the current situation and its potential long term impact on the VCT's investments. For more information please refer to the Strategic Report.

 

The VCT invested £12,500 into bio-bean Limited in October 2020 as part of a follow-on funding round alongside other investors, including its sister company, VCT1.

 

On 3 December 2020, the Board declared dividends in respect of the year ended 30 September 2020 of 5.3133p per Ordinary Share and 0.4867p per 'A' Share. These dividends will be paid on 31 December 2020 to Shareholders on the register at 11 December 2020.

 

There are no other significant events which require disclosure in these financial statements.