Downing THREE VCT plc - Half-Yearly Report

Downing THREE VCT plc

Half-Yearly Report

for the six months ended 30 June 2018

LEI: 2138008V2JDU2K6ZHF80

Performance summary

CHAIRMAN’S STATEMENT

Introduction

I am pleased to present the Half-Yearly Report for the six months ended 30 June 2018. The Company has a number of share pools, each of which is in a different stage in its planned exit life. Generally progress has been satisfactory over the period for the share pools that have recently passed or are approaching their planned exit date.

Net asset values and overview

‘F’ Share pool

The ‘F’ Share pool launched in 2012 and began exiting from its investments earlier this year. In April the share class paid its first dividends in its realisation phase of 19.0p per share.

At 30 June 2018 the net asset value (“NAV”) for a holding of one ‘F’ Share was 53.6p, an increase of 3.0p (4.3%) over the period. Total Return (NAV plus dividends paid to date) is now 102.6p for a combined holding, compared to the original cost, net of income tax relief, of 70p per share.

The pool still holds 12 investments, but plans are being progressed for exits from each of them.

Since the period end one further exit has been achieved. As a result, the Share pool will pay a further dividend of 18.0p per ‘F’ Share on 9 November 2018. This will bring total distributions to 67.0p and leave a remaining NAV of 35.6p.

The task of exiting the remaining investments is likely to take some time to complete, although we expect significant progress to be made over the remainder of the year. The Manager does not, however, expect to be in a position to make the final distribution until 2019.

‘H’ Share pool

The ‘H’ Share pool raised funds in 2014 and has now completed its initial investment phase. The target date to start realising investments is 2019.

At 30 June 2018, the net asset value (“NAV”) for a holding of one ‘H’ Share was 78.7p which represents a net decrease of 1.1p (1.3%) over the period after adjusting for the dividends paid out. Total Return (NAV plus dividends paid to date) is now 101.2p, compared to the initial NAV, before income tax relief, of 100.0p.

‘J’ Share pool

The ‘J’ Share pool raised funds in 2015 and is continuing to build its initial investment portfolio. The target date to start realising investments is 2020.

At 30 June 2018, the net asset value (“NAV”) and total return for a holding of one ‘J’ Share was 91.2p which represents a net decrease of 3.5p (3.7%) over the period, compared to the initial NAV, before income tax relief, of 100.0p. This deficit has arisen partly due to a provision that has been required against one investment.

Due to the VCT regulations, the ‘J’ Share pool is effectively prohibited from paying dividends in its first three years. The Share pool will therefore commence returning funds to shareholders in 2019.

The Investment Manager’s Report will provide more detail on each of the share pools.

Dividends

In line with the Company’s stated policies, interim dividends will be paid as follows:

‘F’ Shares 18.0p per share

‘H’ Shares 2.5p per share

The ‘F’ Share dividend will be paid on 9 November 2018 to Shareholders on the register at 19 October 2018. The ‘H’ Share dividend will be paid on 14 December 2018 to Shareholders on the register at 23 November 2018

Share buybacks

The Company has a general policy in the first five years after the launch of a share class, of buying in its own shares that become available in the market for cancellation. As a result, the Company will currently buy ‘H’ Shares and ‘J’ Shares that become available in the market and will, subject to liquidity and regulatory constraints, buy at prices approximately equal to net asset value i.e. with no discount.

During the period to 30 June 2018, the Company repurchased and subsequently cancelled 19,400 'H' Shares and 19,725 ‘J’ Shares for an aggregate consideration of £15,940 and £18,677 respectively, being an average price of 82.0p per ‘H’ Share and 94.5p per ‘J’ Share.

No share buybacks in respect of any other share classes were undertaken during the period.

Outlook

Over the remainder of the year we expect to see significant headway made in realising most of the remaining investments in the ‘F’ Share pool. As the process of realising investments usually includes transactions with third parties, timings can be unpredictable, and Shareholders should note that the exit process will take time to complete. While the Manager is focussing on delivering exits in a timely manner, the Board is keen to see that full value is achieved for all investments even if this may sometimes take longer to deliver.

In respect of the ‘H’ Share pool and ‘J’ Share pool, we expect this to be a stable period with the Manager focussing on nurturing the investments such that they will be well positioned to deliver successful exits when the time comes.

I look forward to updating Shareholders on progress in my statement with the year end report to 31 December 2018 but will also communicate additionally with ‘F’ Shareholders as and when there is any news of further distributions.

Michael Robinson

Chairman

INVESTMENT MANAGER’S REPORT

‘F’ SHARE POOL

As at 30 June 2018, the ‘F’ Share pool holds 12 investments and focus has now shifted to the process of realising its investments in order to return funds to ‘F’ Shareholders.

Investment activity

During the period, the full exit of Goonhilly Earth Station Limited completed and resulted in a good outcome for ‘F’ Shareholders generating proceeds of £1.2 million and an uplift over cost of £216,000.

Partial disposals also completed in two of the smaller portfolio companies. There was a partial loan note redemption in the Scottish licensed leisure company, Fubar Stirling Limited which generated a total gain over carrying value of £4,000.

There was also a partial loan note redemption in Fresh Green Power Limited, the domestic rooftop solar company, which was redeemed at par.

The majority of the portfolio investments remain valued at or above cost with there being several valuation movements in the period which generated an uplift over opening value of £104,000.

The most significant increase in valuation was in Merlin Renewables Limited, the anaerobic digestion plant in Norfolk. In August 2018, the plant was exited and the carrying value was uplifted to reflect the sale price at the period end.

An uplift of £20,000 was recognised in Atlantic Dogstar Limited, which owns a group of London pubs, following a revaluation of the sites.

Downing Pub EIS One Limited, which acquired the holdings of Pabulum Pubs Limited and Augusta Pub Company Limited in the prior year, was uplifted by £18,000 supported by independent sales valuations from industry specialists.

Other smaller movements in the portfolio included an uplift of £10,000 in Lambridge Solar Limited and £3,000 in Fresh Green Power Limited.

One valuation write down took place in the period. Green Energy Production UK Limited, the operator of rooftop solar assets in Lincolnshire, had a reduction in value of £24,000 following a period of recurring operational issues.

Realisation plans

The pool’s second most significant investment holding is Merlin Renewables Limited, the anaerobic digestion plant in Norfolk. Following the period end, an exit was achieved which delivered a significant return to the pool.

Plans are in place for the successful exit of the remaining portfolio companies however we anticipate that the exercise will take some time to complete in full.

Net asset value, results and dividend

At 30 June 2018, the net asset value (“NAV”) for a holding of one ‘F’ Share was 53.6p, an increase of 3.0p (4.3%) over the period. Total Return (NAV plus dividends paid to date) is now 102.6p for a combined holding.

The gain on ordinary activities for the ‘F’ Shares, after taxation was £333,000 for the period, comprising a revenue profit of £9,000 and a capital gain of £324,000.

The Company will pay an interim dividend of 18.0p per ‘F’ Share on 9 November 2018 to ‘F’ Shareholders on the register at 19 October 2018.

Outlook

The focus for the ‘F’ Share portfolio remains on exiting from its remaining investments. Progress continues to be made however exact timing on the final exit is dependent on transactions involving third parties.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO

‘F’ SHARE POOL

as at 30 June 2018

SUMMARY OF INVESTMENT MOVEMENTS

‘F’ SHARE POOL

as at 30 June 2018

INVESTMENT MANAGER’S REPORT

‘H’ SHARE POOL

The ‘H’ Share pool raised funds in 2014 and has made good progress in building its VCT qualifying portfolio and is now fully qualifying.

Investment activity

With the pool being fully invested, no new investments were made in the period.

Valuations movements during the period totalled an unrealised loss of £318,000, mainly due to the significant write down in value in Quadrate Spa Limited. The non qualifying investment owns and operates a health club business in The Cube complex in Birmingham and has been written down by £458,000 at the period end as a result of poor performance.

This movement has been partially offset by the valuation uplifts in the period that totalled £140,000.

Atlantic Dogstar Limited, which owns a group of London Pubs, was uplifted by £102,000 following a revaluation of the sites.

Oak Grove Renewables Limited, which operates an anaerobic digestion plant in Norwich, was exited during the period, however is awaiting the receipt of deferred consideration from the sale. As the likelihood of receiving this payment has now increased, the carrying value was uplifted by £21,000.

Net asset value and results

At 30 June 2018, the net asset value per ‘H’ Share was 78.7p, a net decrease of 1.1p (1.3%) over the period. Total Return (NAV plus dividends paid to date) is now 101.2p.

Results and dividend

The loss on ordinary activities for the ‘H’ Shares, after taxation, for the period was £146,000, comprising a revenue profit of £172,000 and a capital loss of £318,000.

The Company will pay an interim dividend of 2.5p per ‘H’ Share, on 14 December 2018 to Shareholders on the register at 23 November 2018.

Outlook

The ‘H’ Share pool is now fully invested and our focus is now on close monitoring and support of the portfolio companies in order to nurture growth before reaching its five year anniversary at the end of 2019.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO

‘H’ SHARE POOL

as at 30 June 2018

INVESTMENT MANAGER’S REPORT

‘J’ SHARE POOL

The fundraising for the ‘J’ Share pool was launched in December 2014 and raised £11 million prior to closing in 2015. The majority of these funds have now been invested and the focus for this share pool is on the close monitoring of the investee companies.

Investment activity

During the period, three adjustments were made to the valuations, leading an unrealised loss totalling £288,000.

Oak Grove Renewables Limited, which operates an anaerobic digestion plant in Norwich, was fully exited after the period end. As a result, the carrying value was uplifted by £22,000 to reflect the pending exit proceeds.

Ormsborough Limited, who own several pubs and restaurants across Yorkshire, had a reduction in value of £312,000 due to overspend on recent developments.

Net asset value and results

At 30 June 2018, the net asset value per ‘J’ Share was 91.2p, a net decrease of 3.5p (3.7%) over the period.

The loss on ordinary activities for the ‘J’ Shares, after taxation, was £369,000 for the period, comprising a revenue loss of £81,000 and a capital loss of £288,000.

Outlook

The emphasis for the ‘J’ share pool now gradually shifts to the close monitoring of the Share pool’s investments as we seek to optimise growth over the planned exit life, however we also expect there to be a small number of further additions to utilise the remaining cash of the pool.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO

‘J’ SHARE POOL

as at 30 June 2018

UNAUDITED SUMMARISED BALANCE SHEET

as at 30 June 2018

STATEMENT OF CHANGES IN EQUITY

for the period ended 30 June 2018



INCOME STATEMENT

for the six months ended 30 June 2018

Company Total

INCOME STATEMENT

for the six months ended 30 June 2018

INCOME STATEMENT

for the six months ended 30 June 2018

INCOME STATEMENT

for the six months ended 30 June 2018

INCOME STATEMENT

for the six months ended 30 June 2018

UNAUDITED CASH FLOW STATEMENT

for the six months ended 30 June 2018

NOTES TO THE UNAUDITED CASH FLOW STATEMENT

for the six months ended 30 June 2018

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1. General information

Downing THREE VCT plc (“the Company”) 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.

2. Accounting policies - Basis of accounting

The unaudited half-yearly results cover the six months to 30 June 2018 and have been prepared in accordance with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” revised January 2009 and in accordance with the accounting policies set out in the statutory accounts for the year ended 31 December 2017, which were prepared 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”).

3. All revenue and capital items in the Income Statement derive from continuing operations.

4. The Company has only one class of business and derives its income from investments made in shares, securities and bank deposits.

5. The comparative figures are in respect of the six month period ended 30 June 2017 and the year ended 31 December 2017 respectively.

6. Dividends

No dividends have been paid or declared in respect of the ‘J’ Shares.

7. Basic and diluted return per share

8. Net asset value per share

9. Reserves

The Special reserve, Capital reserve - realised and Revenue reserve are all distributable reserves. The Revaluation reserve includes losses of £1,423,000 which are included in the calculation of distributable reserves. Total distributable reserves are £335,000 (31 Dec 2017: £3,148,000).

10. The fair value of investments is determined using the detailed accounting policy set out in the statutory accounts for the year ended 31 December 2017.

The Company 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).

11. The unaudited condensed financial statements set out herein do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 and have not been delivered to the Registrar of Companies. The figures for the year ended 31 December 2017 have been extracted from the financial statements for that year, which have been delivered to the Registrar of Companies; the Auditor’s report on those financial statements was unqualified.

12. The Directors confirm that, to the best of their knowledge, the half-yearly financial statements have been prepared in accordance with the “Statement: Half-Yearly Financial Reports” issued by the UK Accounting Standards Board as well as in accordance with FRS 104 Interim Financial Reporting and the half-yearly financial report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

13. Risks and uncertainties

Under the Disclosure and Transparency Directive, the Board is required, in the Company’s half-yearly results, to report on principal risks and uncertainties facing the Company over the remainder of the financial year.

The Board concluded that the key risks facing the Company over the remainder of the financial period are as follows:

(i) Compliance risk of failure to maintain approval as a VCT; and

(ii) Investment risk associated with investing in small and immature businesses.

The Company’s compliance with the VCT regulations is continually monitored by the Manager, who reports regularly to the Board on the current position. The Company has also reappointed Philip Hare & Associates LLP to provide regular reviews and advice in this area. In order to make VCT qualifying investments, the Company has to invest in small businesses which are often immature. It also has a limited period in which it must invest the majority of its funds. The Manager follows a rigorous process in vetting and carefully structuring new investments, including taking a charge over the assets of the business wherever possible and, after an investment is made, closely monitoring the business. The Board is satisfied that these approaches provide satisfactory management of the key risks.

14. Going concern

The Directors have reviewed the Company’s financial resources at the period end and conclude that the Company is well placed to manage its business risks.

The Board confirms that it is satisfied that the Company has adequate resources to continue in business for the foreseeable future. For this reason, the Board believes that the Company continues to be a going concern and that it is appropriate to apply the going concern basis in preparing the financial statements.

15. Copies of the unaudited half-yearly report will be sent to Shareholders shortly. Further copies can be obtained from the Company’s registered office or will be available for download from