Foresight VCT PLC : Publication of Prospectus and Circular
2 February 2017
Foresight VCT PLC ("Company")
Publication of Prospectus and Circular
Publication of a Prospectus relating to an Offer for Subscription to raise in aggregate up to £20,000,000 by issue of Ordinary Shares ("Offer") and publication of Circular in relation to a general meeting
The board of the Company ("Board") is pleased to announce the publication of a Prospectus relating to the Offer to raise up to £20 million*. Shareholders will shortly receive a copy of a securities note (which, together with a summary and registration document dated 2 February 2017, form the "Prospectus") and a copy of the circular.
Background and reasons for the offer
Over the past five years the Company's Ordinary Shares fund has been refocused and significantly expanded and currently comprises in excess of £97 million of assets, with investments in 27 UK based businesses across a wide spread of sectors. The directors of the Company ("Directors") believe that it is in the best interests of Ordinary Shareholders for the Company to continue to pursue a strategy which includes the following four key objectives:
- Further development of the net assets of the Ordinary Shares fund to a level substantially in excess of £100 million.
- The implementation of a significant number of new and follow on qualifying investments every year.
- Payment of an annual dividend to shareholders of at least 5p per share, whilst at the same time aiming to maintain the net asset value per share at around £1.00.
- Implementing a programme of regular share buybacks at a discount in the region of 10% to the prevailing net asset value.
The Directors believe that central to the Company being able to achieve these objectives in the future is the ability of Foresight Group, the Company's manager (the "Manager"), to source and complete attractive new qualifying investment opportunities. This task has not been made easier by the changes to VCT legislation which (amongst other requirements) place greater emphasis on growth or development capital investment into younger companies. However, the Company is fortunate in that it has pursued a policy of seeking growth capital investments for several years and the Manager has an established track record in this area. Foresight Group was recently awarded 'VCT House of the Year 2016' at the Unquote British Private Equity awards in recognition of investments made and the achievements of team members and the Manager as a whole throughout 2016.
In addition to its established reputation in the area of growth and development capital investment, the Manager has been developing a number of UK regional funds for supporting early stage businesses. These funds in Nottingham and Manchester are already proving a useful source of attractive new investment opportunities to the Company. The Company completed two new investments amounting to in excess of £4 million in the last quarter of 2016 and has a significant pipeline of new opportunities. It is the Manager's expectation that it will be able to maintain the current level of new investments over the coming year and beyond.
The regular outgoings of the Ordinary Shares fund, made up chiefly of dividends payments, management fees and the cost of buying back shares, amount to approximately £9 million per annum. The Ordinary Shares fund also seeks to make new investments totalling approximately £5 million per quarter. Against this background, the Directors are confident that the current cash resources of the Company, together with funds raised from this Offer, will be substantially fully deployed over the coming 18 to 24 months. This confidence is reflected in the Manager having agreed to lower its annual management charge to 1% in respect of any cash above £20 million held within the fund following the launch of this Offer. This reduced rate will be reviewed by the Board on an annual basis.
The Board has today announced that it has declared a dividend of 5p per Ordinary Share to be paid on 3 April 2017 and which will be payable to existing holders of Ordinary Shares and Investors under the Offer who submit their application in time to have shares allotted on the register by the record date (17 March 2017). Investors wishing to receive this dividend must ensure their applications are received by the Receiving Agent by no later than 5.00pm on 16 March 2017. Please note that investors who submit an application before the record date but opt to have shares allotted in the 2017 / 2018 tax year will not be entitled to receive the dividend, but will benefit from a reduction in the Net Asset Value, and therefore receive a greater number of Offer Shares, once the dividend has been paid.
Following a 7p per Ordinary Share dividend paid on 1 April 2016, the Company has now paid out over £48 million of dividends to investors since launch. The Ordinary Shares fund, when measured by IRR since launch, is the best performing VCT having delivered, to the Company's original investors who have retained their shares, a 23% IRR (including initial tax relief) since it was launched in 1997 according to TaxEfficientReview.com (January 2017).
The total amount paid in dividends over the previous six years (30 September 2010 to 30 September 2016) stands at £21 million or 40.5p per Ordinary Share, an average of 6.8p per year, equating to a 14.5% IRR. In addition, the latest dividend of 5p per Ordinary Share has been declared but not yet paid.
The Board is pleased that the Company has been able to maintain its annual dividend payments at or above its target of 5.0p per Ordinary Share during that period and the Board will continue to pursue this in the future. The Company's dividend policy is, and will remain wherever practical, to maintain a steady flow of tax-free dividends, generated from income or capital profits realised on the sale of investments.
The Manager has an established, robust and proven investment process developed over 30 years' of activity and continues to experience particularly strong deal flow at this time. During 2016, the Manager's Private Equity team reviewed over 800 investment opportunities for the Company across a broad variety of sectors which was a 68% increase on the prior year, reflecting the benefits of a larger team with greater regional presence and a continued significant level of activity in the SME market.
The Manager looks to invest in growing UK headquartered companies with enterprise values typically between £5 million and £15 million. Key requirements include strong management teams, attractive market characteristics and a defensible competitive position and with investments made in the most attractive opportunities without sector bias. The Company typically invests in businesses which are at least break-even at EBITDA level but does make exceptions in situations where there is a compelling growth story and historically invested across a variety of transaction types including management buyouts, growth capital and equity release transactions, but following the recently amended VCT legislation is now focused on growth capital investments.
The Board is committed to keeping the Company's operating costs as low as possible and funds raised under the Offer will serve to increase the Company's net assets overall and allow the Company's fixed administrative costs to be spread across a wider asset base, reducing costs per Share.
One of the key benefits of the 2015 merger with Foresight 2 VCT plc ("F2"), and the Company's ability to regularly raise new funds, was the Board's ability to negotiate a reduction in the total expenses ratio cap from 2.6% to 2.4%, one of the lower fee caps of any generalist VCT with total assets over £20 million.
Pursuant to a sponsor and promoter agreement dated 23 January 2017 relating to the Offer between, among others, the Company and Foresight Group LLP the ("Promoter"), Promoter will receive a fee of an amount up to a maximum of 5.5% of the amount subscribed under the Offer by Investors who apply through a financial intermediary, where permissible, (subject to a maximum aggregate payment of £1.1 million, unless the Offer is increased) for acting as promoter of the Offer.
As the Promoter is a related party of the Company under the Listing Rules, the payment of the fee by the Company to the Promoter is a transaction to which Listing Rule 11.1.10R applies.
The Offer is now open and will close at noon on 3 April 2017 for the 2016/2017 tax year and 31 August 2017 for the 2017/2018 tax year or earlier if the Offer is fully subscribed or otherwise at the Board's discretion.
*The Board may increase the size of the Offer by a further £20,000,000 at its discretion.
Full details of the Offer will be set out in the Registration Document, Summary and Securities Note which together comprise a Prospectus in accordance with the Prospectus Rules made under Section 84 of FSMA, and which is published as at today's date.
The Company has also today posted a circular to Shareholders (the "Circular") and form of proxy in relation to a general meeting of the Company in connection with the Offer.
The Circular contains, inter alia, an explanation of the resolutions required to implement the Offer, and details of proposed co-investment and performance incentive arrangements with the Manager and notice of a General Meeting which will be held at 10.30 am on 8 March 2017 at the offices of Foresight Group LLP, The Shard, 32 London Bridge Street, London SE1 9SG.
The Offer is conditional on the passing of certain of the Resolutions to be proposed at the General Meeting.
Proposed co-investment and performance incentive arrangements with the Manager
At the time the Company merged with Foresight 2 VCT plc in 2015 (the "Merger"), the performance incentive arrangements which had previously been in place with the Manager, in respect of the Ordinary Shares fund, were terminated. Pursuant to these arrangements, the Manager had been entitled to subscribe at par for such number of Ordinary Shares as represented 15% (at the prevailing NAV) of each distribution made to Ordinary Shareholders. This right was subject to a total return hurdle of 180.4p per Ordinary Share. At the point at which the previous arrangements were terminated, the total return stood at 151.7p per Ordinary Share, approximately 15.9% short of the target. The new arrangements proposed, which are detailed below, now require the Manager to achieve two separate performance hurdles and also to co-invest with the Ordinary Shares fund to further align its interests with those of Shareholders.
The Board is of the opinion, as stated at the time of the Merger, that suitable incentive arrangements can act to align the interests of the Manager with Shareholders and to incentivise it to generate enhanced returns to Shareholders. It is therefore proposed, subject to Shareholders' approval, that the new co-investment and performance incentive scheme described below be entered into
In order to align the interests of the Manager and its staff with those of the Shareholders, it is proposed that the Manager and individual members of its private equity team ("management team") will co-invest, alongside the Ordinary Shares fund, for equity shares in each new investee company at the same price per share paid by the Company.
The number of shares the management team will subscribe for in each investment will represent 1.5% of the total value of the Company's investment, up to a maximum of 5% of the holding of ordinary shares subscribed by the Company. This 1.5% allocation will be split as to 75% to the individual members of the Manager's private equity team and 25% to the Manager itself.
The Directors believe that these arrangements will align the interests of the management team with the Company through their personal investment in each company in which the Ordinary Shares fund invests.
In order to incentivise the Manager to generate enhanced returns for Shareholders, once the Company has received back at least £1 for each £1 invested in ordinary shares in an investee company, the Manager and the management team will potentially be entitled to a performance incentive payment. Such payments will only be available on new investments made after these arrangements have been approved by Shareholders at the General Meeting.
The proposed performance fee entitlement will only arise subject to two performance hurdles, one calculated on an 'Ordinary Shares fund as a whole' basis and one on a 'per investment' basis.
Hurdle A: The 3-year NAV Total Return of the overall Ordinary Shares fund being at least 100p per Ordinary Share
Hurdle B: For each individual investment, the achievement of an annual growth rate of 4% (adjusted, upwards only, for RPI) from the date of investment.
Hurdles A and B must be met both before and after any performance incentive payments are made. In addition, Hurdle A will be increased over time by amounts equal to any performance incentive payments made to the Manager under the scheme.
Should both these hurdles be met, profits which exceed Hurdle B on each such new investment from full and/or partial realisations at that time will be split 80% to the Company and 20% to the Manager and management team.
| The Manager and the Promoter, as its agent and associate, are regarded as related parties of the Company under the Listing Rules. Therefore the entering into of the co-investment and performance incentive arrangements constitutes a related party transaction for the purpose of the Listing Rules and requires Shareholders' approval. |
A copy of the Prospectus and Circular has also been submitted to the Financial Conduct Authority and will be shortly available for inspection on both the Promoter's website (www.foresightgroup.eu) as well as at the National Storage Mechanism (www.morningstar.co.uk/uk/nsm).
All documents comprising the Prospectus will also available from the offices of the Promoter, The Shard, 32 London Bridge Street, London SE1 9SG and the following website: http://www.foresightgroup.eu.
For further information, please contact:
Foresight Group LLP
Telephone: 020 3667 8159
 If 1.5% of the total investment would result in the co-investment exceeding 5% of the Company's ordinary share holding, the excess will be invested in the next levels of financial instrument (e.g. preference shares) which are subscribed by the Company.
 The NAV Total Return for Hurdle A is calculated from the starting NAV of 88.0p per Ordinary Share, which was the NAV at the time of the Merger with Foresight 2 VCT plc completed in December 2015.