Downing ONE VCT plc: Publication of Prospectus and Circular
Downing ONE VCT plc (“the Company")
19 September 2019
Publication of Prospectus & Circular
The Company has today issued a prospectus relating to an offer for subscription for ordinary shares of 1p each in the Company ("New Shares") to raise up to £15 million (the "Offer") (equivalent to approximately 18,225,190 Shares), following the approval of the prospectus from the Financial Conduct Authority. The Offer also includes an overallotment facility to issue up to a further £25 million worth of New Shares.
The Offer will open at 9.00 a.m. on 20 September 2019 and will close at 3.00 pm on 3 April 2020 for the 2019/2020 tax year and 3.00 pm on 30 April 2020 for the 2020/2021 tax year, or earlier if the Offer is fully subscribed. The board of the Company reserves the right to close the Offer earlier or to extend the Offer (to no later than 31 August 2020).
In addition, the Company has also published a Circular (the “Circular”) seeking shareholders’ approval for matters in connection with the Offer, and the related party transactions described below, at a general meeting to be held at 11.00 a.m. on 6 November 2019 convened in accordance with a notice contained in the Circular (the “General Meeting”).
Related Party Transactions
The Company has entered into a number of related party transactions under Listing Rule 11.1.7 with Downing LLP, the Company’s investment adviser. These transactions are conditional upon shareholders’ approval of resolutions to be considered at a general meeting to be held at 11.00 a.m. on 6 November 2019.
1. Promotion Agreement
In respect of the proposed Offer, it is proposed that Downing LLP will be appointed by the Company as promoter pursuant to an agreement (“Promoter’s Agreement”) as has been the case under previous offers made by the Company.
Under the proposed Promoter’s Agreement, the Company will pay to Downing LLP a promoter’s fee of (i) 2.5% of the NAV per Offer Share for each Offer Share subscribed under the Offer by, and issued to, investors where no Adviser commission is payable (ii) 4.5% of the NAV per Offer Share for each Offer Share subscribed under the Offer where Adviser commission is payable (save to the extent this is rebated in full). The Company shall also be responsible for paying 0.25% per annum of the Net Asset Value of the Offer Shares to Downing LLP for a maximum of five years, from which Downing LLP will pay annual trail commission to those intermediaries entitled to receive it. At Downing LLP’s discretion, the trail commission may be waived in favour of additional upfront commission of 0.75%.
2. Amendments to the Investment Advisory arrangements
The following amendments to the existing Investment Advisory Agreement with Downing LLP are proposed.
(a) Investment advisory fee
The basic investment advisory fee charged by Downing LLP to the Company has been 1.8% of net assets per annum since the Merger in 2013. This level is below the standard fees in the VCT market which typically range between 2.0% and 2.5% per annum. While the Board is mindful that Shareholders will not welcome an increased basic advisory fee, the Board recognises the considerable additional workload that comes with operating in the younger growth business sector and believes that it is in the best interest of the Company that it has an investment adviser that is remunerated at proper market rates as this will help it to attract highest quality investment executives.
It is therefore proposed that Downing LLP’s annual management charge is increased from 1.8% to 2.0% per annum with effect from 1 October 2019.
(b) Reduction in running costs cap
It is proposed that the existing annual expenses cap, above which Downing LLP will bear the running costs of the Company (including irrecoverable VAT but excluding any amount payable in respect of the Performance Incentive), is reduced from 2.75% to 2.6% of the Company’s net assets. The Board believes that level this is one of the lowest running costs caps currently provided by any VCT adviser/manager to a VCT and gives Shareholders comfort that the annual running costs can never rise to an unreasonable level.
The running costs of the Company for the past three years have been as set out in the table below:
|Year Ended |
31 March 2019
|Year Ended |
31 March 2018
|Year Ended |
31 March 2017
|Running Costs||£2.7 million||£2.4 million||£2.4 million|
|% of NAV||2.4%||2.4%||2.5%|
Whilst in previous years the running costs have not reached the level of the current annual expenses cap, the Board considers the certainty afforded to Shareholders by the further reduction to be a positive benefit. Subject to Shareholders’ approval the new cap will come into effect from 1 October 2019.
(c) Arrangement and Monitoring fees
It is customary in the venture capital industry that companies receiving investments pay arrangement fees on completion of fundraising. For investments made by the Company, some of these fees are likely to be paid to third parties and some to Downing LLP. These fees will be borne by all the shareholders of the investee company and so some will ultimately be borne by the Company’s Shareholders. The Board has put in place limits on the level of arrangement fees, and ongoing monitoring fees, that Downing LLP can charge to the Company’s investee businesses.
An amendment is proposed regarding the structure of arrangement fees charged by Downing LLP to investee companies on new investments. Under the Company’s existing Investment Advisory Agreement, Downing LLP is entitled to charge arrangement and monitoring fees to investee companies subject to certain caps. It is proposed that those caps be amended as set out below in order to eliminate charges that are disproportionality borne by Shareholders and to ensure a better fit for the variety of current transactions.
As stated within the existing Investment Advisory Agreement, Downing LLP is entitled to receive arrangement fees (capped at 3.0% of amounts invested unless specifically approved by the Board) and monitoring fees (capped at the higher of (a) 0.75% of the sum invested per annum and (b) £10,000 per annum, in respect of each of the Company’s investments) from investee companies.
This was previously modified between the Board and Downing to the extent that Downing LLP is entitled to receive arrangement fees (capped at 2.0% of the sums invested by the Company, with any excess paid to the Company) and monitoring fees (capped at the higher of £10,000 per annum or 0.5% of the cost of the investment, in respect of each of the Company’s investments) from investee companies.
It is proposed that the arrangement be updated going forward, such that Downing LLP will receive arrangement fees up to a maximum of 3.0% of sums invested in any one investee company subject to an average overall cap of 2.0% across all investee companies of sums invested at the time of investment and a basic monitoring fee of 0.5%. To the extent an arrangement fee of less than 2.0% is charged to a particular investee company, Downing LLP will be entitled to an additional monitoring fee equal to 50% of the shortfall up to a maximum of 0.5%.
Average arrangement and monitoring fee percentages charged to investee companies in the previous three years are set out below:
|Year Ended 31 March 2019||Year Ended 31 March 2018||Year Ended 31 March 2017|
Subject to Shareholders’ approval, these new arrangements will come into effect from 1 October 2019.
3. Performance Incentive Scheme
The Board proposes that Downing LLP is entitled to receive a performance incentive fee equal to 20% of the realised gains on any exit from new investments made since 1 April 2019 (“New Investments”) where, and to the extent that, the following conditions are met:
(a) The Internal Rate of Return (“IRR”) of all New Investments at the year-end exceeds the hurdle rate of 5% per annum (based on audited valuations and including realised and unrealised gains and losses and all investment income, measured from 1 April 2019) (“IRR Hurdle”); and
(b) The Total Return per share at the year-end exceeds the Base Value per share (“Base Value Hurdle”). The Base Value per Share is set at the Total Return per share (NAV plus dividends paid since the date of the merger) as at 31 March 2019, being 109.8p per Share.
If any amount is not paid in a year when an investment is realised because the IRR Hurdle and/or Base Value Hurdle are not met, such amounts are deferred and can be paid in a future year if and when the IRR Hurdle and Base Value are both met again. Additionally, the amounts payable under this proposed scheme are only paid to the extent that the IRR Hurdle and Base Level are exceeded, and no payment will be made which would cause either hurdle to cease to be met.
It is intended that Downing LLP will allocate a substantial proportion of these potential fees to specific individuals within the Downing LLP organisation. The Board will monitor this to ensure that it is the case.
If a similar performance incentive arrangement had been in place since 1 April 2016, it is unlikely that a performance incentive fee would have been paid to date.
The Board considers this arrangement to be typical of the venture capital industry, having reviewed a number of alternative structures in place in the VCT market and believes it should achieve the intended goal of incentivising the Investment Adviser whilst representing value for money for the Company through the requirement to meet challenging year-on-year hurdles.
Downing LLP, as a related party of the Company under the Listing Rules, cannot vote (and, as it does not hold any Shares in the Company, would not be entitled to vote) on Resolutions 4 and 6, which approves the above arrangements, to be proposed at the General Meeting. Downing LLP will take all reasonable steps to ensure that its associates (including any of its members, partners or employees) will also not vote on Resolutions 4 and 6 to be proposed at the General Meeting.
The Prospectus has been approved by the Financial Conduct Authority and will shortly be available to view at the online viewing facility of the National Storage Mechanism at the following website address: http://www.morningstar.co.uk/uk/NSM
Copies of the Prospectus and Circular are available, free of charge from the Company's registered office, St. Magnus House, 3 Lower Thames Street, London EC3R 6HD and on Downing's website at https://www.downing.co.uk/assets/d1-prospectus