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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Vpc Specialty Lending Investments Plc | LSE:VSL | London | Ordinary Share | GB00BVG6X439 | ORD GBP0.01 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.30 | 0.62% | 48.30 | 48.40 | 49.90 | 48.30 | 48.30 | 48.30 | 104,051 | 12:31:22 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | -1.29M | -22.12M | -0.0795 | -6.08 | 134.41M |
From May 2019 to May 2024
TIDMVSL
RNS Number : 1675X
VPC Specialty Lending Invest. PLC
26 April 2019
26 April 2019
VPC SPECIALTY LING INVESTMENTS PLC
(the "Company" or "Parent Company" with its subsidiaries (together) the "Group")
Annual Financial Report for the year ended 31 December 2018
The Board of Directors (the "Board") of VPC Specialty Lending Investments PLC (ticker: VSL) present the Company's Annual Financial Report for the year ended 31 December 2018.
VPC Specialty Lending Investments PLC is a UK listed investment trust investing in opportunities in the alternative lending market through specialty lending platforms ("Portfolio Companies") globally and other related opportunities. This includes investing in assets originated by Portfolio Companies as well as through floating rate senior secured credit facilities ("Credit Facilities"), equity or other instruments. The Company enables its investors to access an illiquid asset class and earn an attractive risk adjusted return through a diversified, liquid vehicle traded on the Main Market.
The Company's investing activities have been delegated by the Directors to Victory Park Capital Advisors, LLC (the "Investment Manager" or "VPC").
Hot Features
Premium
ORDINARY SHARES ORDINARY SHARES
AS AT AS AT
31 DECEMBER 2018 31 DECEMBER 2017
========================================== ================== ==================
Total Net Assets attributable to equity GBP 327,733,367 GBP 339,401,017
shareholders of the Parent Company (on
a consolidated basis)
========================================== ================== ==================
Net Asset Value per share 91.01p 91.68p
========================================== ================== ==================
Share price 76.80p 78.00p
========================================== ================== ==================
Discount to Net Asset Value -15.61% -14.92%
========================================== ================== ==================
Total Shareholder Return (based on share
price) 8.46% 7.30%
========================================== ================== ==================
Net return on ordinary activities after GBP 28,952,340 GBP 6,569,904
taxation
========================================== ================== ==================
NAV (Cum Income) Return(1) 8.96% 3.07%
========================================== ================== ==================
Revenue Return on ordinary activities GBP 37,044,878 GBP 28,729,962
after taxation
========================================== ================== ==================
Revenue Return 11.41% 8.23%
========================================== ================== ==================
Dividends per Ordinary Share(2) 8.00p 6.80p
========================================== ================== ==================
Shares repurchased (in the period) (10,077,064) (10,927,718)
========================================== ================== ==================
1. Net of issue costs.
2. Dividends declared and paid relating to 31 December 2018 include the dividend declared in February 2019 relating to the three-month period ended 31 December 2018. Dividends declared and paid relating to 31 December 2017 include the dividend declared in February 2018 relating to the three-month period ended 31 December 2017.
SUMMARY AND HIGHLIGHTS FOR THE PERIOD
As at 31 December 2018, the Company had deployed 98% of its NAV into Portfolio Companies. During 2018, The Company generated an NAV return of 8.96% for the Ordinary Shares and distributed dividends of 8.00 pence per Ordinary Share relating to the income earned during the year ended 31 December 2018.
The financial and business highlights for the year ended 31 December 2018 are as follows:
v January 2018: announced the Company's balance sheet investments generated, at the time, an all-time monthly gross revenue return high of 1.08%.
v February 2018: announced an initial investment into Konfio, Ltd., a new balance sheet investment, and the repayment of the Company's balance sheet investment in Kreditech.
v March 2018: announced a dividend of 1.80 pence per Ordinary Share for the three-month period to 31 December 2017. Announced an initial investment into Integra Credit, a new balance sheet investment.
v April 2018: announced the Company, at the time, generated an all-time monthly NAV (Cum Income) return of 0.95%.
v May 2018: announced a dividend of 2.00 pence per Ordinary Share for the three-month period to 31 March 2018.
v July 2018: announced the repayment of Wheels Financial Group with the proceeds from the repayment reinvested in current balance sheet investments by the end of the month, along with a reduction of the look-through gearing ratio of the Company.
v August 2018: announced a dividend of 2.00 pence per Ordinary Share for the three-month period to 30 June 2018.
v September 2018: announced the fifth consecutive month of total NAV (Cum Income) returns of greater than 1.00%. Announced the repayment of the Company's balance sheet investments in Community Choice Financial Inc., Curo Financial Technologies Corp, and iZettle Capital AB.
v October 2018: announced new disclosures in the monthly reporting to provide specific regions where the Company's investments are held.
v November 2018: announced an initial investment into Caribbean Financial Group, a new balance sheet and equity investment. Announced the closing of a new Company level gearing facility with Capital Source. Announced a dividend of 2.00 pence per share for the three-month period to 30 September 2018.
SUBSEQUENT EVENTS
Since the year ended 31 December 2018:
v In February 2019, the Company declared a dividend of 2.00 pence per Ordinary Share relating to the three-month period ending 31 December 2018.
v From 1 January 2019 to 26 April 2019 a total of 10,872,029 shares had been repurchased under the buyback programme. The Investment Manager has purchased a total of 215,830 shares at an average price of 75.79 pence per Ordinary Share under the Investment Management Agreement.
FOR FURTHER INFORMATION, PLEASE CONTACT
Victory Park Capital via MHP (below) Brendan Carroll (Senior Partner and Co-Founder) Gordon Watson (Partner) Jefferies International Limited Tel: +44 20 7029 8000 Gary Gould Sandra Björck MHP (PR Adviser) Tel: +44 20 3128 8100 Kelsey Traynor Email: vpc@mhpc.com Tim Rowntree
ABOUT
VPC Specialty Lending Investments PLC (the "Company" or "VSL", Company No. 9385218) is a UK listed investment trust investing in opportunities in the specialty lending market through senior secured balance sheet facilities ("Portfolio Companies"). This includes investing in assets originated by Portfolio Companies as well as through floating rate senior secured credit facilities ("Credit Facilities"), equity or other instruments. Investing in VSL gives shareholders access to a diversified portfolio of high-growth financial technology companies, focused on the rapidly developing online lending sector.
The Company's investing activities have been delegated by the Directors to Victory Park Capital Advisors, LLC (the "Investment Manager" or "VPC"). VPC has great expertise in the sector and enables the Company to identify unique investment opportunities to add to the Portfolio. It has made investments and commitments across various financial services Portfolio Companies, spanning multiple geographies, products and structures, and is continuing to deploy capital into existing and new Portfolio Companies.
This annual report for the year to 31 December 2018 (the "Annual Report") includes the results of the Company (also referred to as the "Parent Company") and its consolidated subsidiaries (together the "Group"). The Company was admitted to the premium listing segment of the Official List of the U.K. Listing Authority (the "Official List") and to trading on the London Stock Exchange's main market for listed securities (the "Main Market") on 17 March 2015, raising GBP200 million by completing a placing and offer for subscription (the "Issue"). The Company raised a further GBP183 million via a C Share issue on 2 October 2015. The C Shares were converted into Ordinary Shares and were admitted to the Official List and to trading on the Main Market on 4 March 2016. The Company provides its investors access to an illiquid asset class and is committed to generating attractive risk-adjusted return through a diversified, liquid vehicle traded on the premium segment of the Main Market.
A summary of the principal terms of the Investment Manager's appointment can be found in the Company's full Annual Report and Financial Statements and a statement relating to their continuing appointment can also be found in the Company's full Annual Report and Financial Statements. The investment policy can be found below. Founded in 2007 and headquartered in Chicago, VPC is an SEC-registered investment adviser that has been actively involved in the financial services marketplace since 2010.
Further information on VPC Specialty Lending Investments PLC is available at https://vpcspecialtylending.com.
A copy of the Company's Annual Report will shortly be available to view and download from the Company's website, https://vpcspecialtylending.com. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.
The following text is extracted from the Annual Report and Financial Statements of the Company for the year ended 31 December 2018. All page numbers below refer to the Annual Report on the Company's website.
STRATEGIC REPORT
CHAIRMAN'S STATEMENT
COMPANY PROPOSITION
The Board believes that your Company offers shareholders a compelling investment proposition, especially in the current investment climate of low yields and volatile markets. The Company offers investors exposure to the specialty lending markets globally, with a concentration in the United States, through an Investment Manager who has a strong investment track record in the sector. The Company takes a platform approach and seeks to partner with industry experts in specialty lending with a focus on providing senior secured credit facilities to help facilitate portfolio growth. The market for specialty lending, particularly technology enabled lending, has expanded significantly since the financial crisis. This is a result of a combination of factors including developments in underwriting technology that allows effective underwriting to be done virtually, and the retrenchment of banks caused by the changes in regulation that followed the crisis.
The Company offers a combination of a strong dividend yield, 10.16%(3) as at 31 December 2018, and low volatility relative to the equity and high yield credit markets. These strong income characteristics are enhanced by strong risk management, including first loss credit protection and excess spread which provide downside protection in the case of increased credit losses. The Company also operates a policy on share price discount management, and as at 31 December 2018, the Company has repurchased 22,504,782 shares at an average discount to NAV (Cum Income) of 13.15%(4) . The combination of these features, the Board believes, makes our Company attractive to investors.
3. The trailing twelve-month dividend yield is calculated as the total dividends declared over the last twelve months as at 31 December 2018 divided by the 31 December 2018 closing share price. This is an Alternative Performance Measure as defined on page 127.
4. The discount to NAV is calculated as the difference in the NAV (Cum Income) as at 31 December 2018 and the average price per share repurchased, divided by the NAV (Cum Income) as at 31 December 2018.
TOTAL NAV RETURN
The total NAV (Cum Income) return for the year was 8.96%, a record for the Company and in line with the target return set at the IPO. The Total Shareholder Return (based on share price)(5) for the year was 8.46%, up from 7.30% in 2017. Comparisons of the returns to the FTSE All Share Index can be found on page 47, and to European and US high yield indices on page 14.
5. Calculated as the change in the traded share price from 31 December 2018 and 31 December 2017 plus dividends declared during 2018 divided by the traded share price from 31 December 2017.
EARNINGS AND DIVID
During the year the total gross revenue return was 13.53% and revenue return was 11.41%, both records for the Company. Capital returns were -2.45% driven by a variety of factors including currency hedging costs. Dividends approved for the year were 8.00 pence per share(6) , representing an 8.80%(7) yield on the average NAV (Cum Income) of the Company and a 10.42% yield on the 31 December 2018 market price of 76.80 pence per share. This represents a dividend in line with the target dividend set out in the 2015 Prospectus.
6. Includes the dividend for the three months ending 31 December 2018 that was declared and paid in 2019.
7. This return denotes the average return calculated by the dividends declared for 2018 divided by the average Net Asset Value (Cum Income) of the Company for the year. This is an Alternative Performance Measure as defined on page 126.
INVESTMENTS
As at 31 December 2018, the portfolio consisted of 85% balance sheet loans, 8% equity investments and 5% marketplace loans and securitisation residuals combined. The balance sheet loan portfolio is comprised of 24 Portfolio Companies that range in position size from 0.27% to 20.22% of the Company's NAV (Cum Income) as at 31 December 2018. The equity portfolio is comprised of 27 investments in Portfolio Companies, many of the investments being warrants and common stock that have come with the Company's balance sheet loan investments. The marketplace loans and securitisation residuals are in runoff and will continue to be amortised down over time.
The vast majority of the balance sheet investments are delayed draw, floating rate senior secured loans that have equity subordination contributed by the individual Portfolio Companies. The balance sheet investments are backed by underlying collateral consisting of consumer loans, small business loans and other types of collateral.
During the year the Company made initial investments in five new balance sheet loans and also had five existing balance sheet loans fully repaid. The repayments on the balance sheet loans were via refinancing and primarily in the case where the Company and Investment Manager had the right to match the terms via Rights of First Refusal, but instead chose not to because of the revised terms not being deemed adequate for the risk taken. The exits came with prepayment penalties that added 1.51% to the NAV (Cum Income) return for the year, and the proceeds from the refinancings were reinvested into new and existing deals, which have similar interest rates as the repaid balance sheet loans.
The Company's largest new investment during 2018 was in Caribbean Financial Group ("CFG"), which is the largest non-bank consumer lender in the Caribbean Islands. The CFG investment, which was funded in November 2018, consists of debt and equity and comprises 8.03% and 1.51% of NAV, respectively. The investment was made as part of the acquisition of the business with a consortium led by Bay Boston Partners, a private equity firm with significant experience in financial services investing in Latin America.
The Company's debt investment in Elevate grew during the year and as of year-end was the Company's largest investment at 20.22% of NAV. Credit performance at Elevate has remained strong and the position was recently restructured and extended to ensure it remains a core position of the Company's investments through 2022. The Investment Manager remains confident in the Elevate management team to execute on their growth plan while simultaneously remaining focused on strong underwriting.
During 2018 the total exposure to Borro was reduced via paydowns of GBP5.7 million as the Investment Manager continued to explore strategic options to maximise the equity value acquired during the pre-packaged administration in 2017. In late 2018 the decision was made to fully unwind the business and the Investment Manager expects paydowns to accelerate in the coming months as underlying assets are realised via portfolio sales. The year end NAV reflects the estimated liquidation value of the remaining collateral and associated costs.
After year end in February 2019 the London based consumer lender Oakam was placed into administration at the direction of the Investment Manager. Through 26 April 2019, the Company had received pay downs of GBP2.9 million reducing the exposure by 15.8% in 2019. As of the date of administration the effective loan to value against non-charged loans was 69% and while not without risk the Company is optimistic about recovering full interest and principal recovery during 2019.
I am particularly encouraged by the progress the Investment Manager has made in sourcing and executing on new deals that will drive the returns for the Company in the coming years. The strategy of partnering with entrepreneurs who have the strongest equity backing has continued to pay dividends, as the quality of executed deals has remained high. The Company continues to have balance sheet loan investments in 24 Portfolio Companies and VPC has significant unfunded capacity on existing terms, providing attractive investment opportunities for the Company, so I am confident the Company will continue to have ample reinvestment opportunities in the future.
COSTS
The Company's annualised ratio of ongoing charges for the calendar year 2018 stands at 1.49% (1.35% in 2017). After factoring in the change in the average NAV over 2018 as compared to 2017 the ratio is fairly similar. Ongoing charges comprises management fees, advisory, legal, professional and other operating costs of the Company. Expenses incurred at any investment fund or special purpose vehicle in which the Company invests are excluded from the ongoing charges calculation of the Company.
SHARE PRICE DISCOUNT MANAGEMENT POLICY
It is disappointing to report that the Company's shares moved from a discount of 14.92% as at 1 January 2018 to 15.61% as at 31 December 2018 especially given the improved revenue and dividend return of the Company during 2018. During the year, the Company continued to implement the share buyback programme in light of the significant disparity between the Company's share price and its NAV.
During 2018, a total of 10,077,064 shares were bought back accounting for 2.63% of the total issued shares of the Company. As at 31 December 2018, the Company has repurchased 5.88% of the Company's total issued shares through the share buyback programme. The Investment Manager, with a portion of their monthly management fee, also purchased 906,132 shares during 2018 and has purchased 2,130,189 shares as at 31 December 2018 with proceeds from management fees.
The Board continually monitors the share buyback programme, as well as the Company's premium or discount, and has the ability to issue or buy back shares to limit the volatility of the share price discount or premium. For more information on the Company's authorities in relation to its share capital, see page 31. Reducing the discount is the key focus for the Board during 2019.
GEARING
The Company's look-through gearing ratio has remained consistent during the year as the transition to balance sheet investments was substantially completed. The look-through gearing ratio was 0.17x as at 1 January 2018 and was 0.16x as at 31 December 2018. During the year, the last gearing facility on the marketplace loans was repaid, removing all gearing from the marketplace loans and securitisations. The Company also closed on a gearing facility with CapitalSource that I expect will enhance returns by modestly increasing the leverage ratio and reducing cash drag associated with the currency hedging program.
BOARD COMPOSITION
It is with sadness that we announced Andrew Adcock, Director and, up until recently Chairman of the Company, passed away in January 2019 following a period of illness. Andrew was a man of great integrity and was a valued leader of the Company's board. His contribution to the Company was enormous, and both the Board and the Investment Manager are grateful for the constructive manner in which he chaired the board.
The Board is pleased to announce the appointment of myself as Chairman of the Company, and Clive Peggram as Chairman of the Audit & Valuation Committee. Both Clive and myself had been appointed interim chairmen of the respective committee when Andrew Adcock stood down as Chairman. After reviewing our performance, the Board was pleased to approve the recommendation for our appointment by the Nominations Committee. We look forward to fulfilling our respective leadership roles.
In addition, the Board is delighted to announce that Mark Katzenellenbogen will be joining the board as an independent non-executive director on 1 May 2019. Mark has been involved in financial services for over 35 years. Since 2007 he has been CEO of Auden Capital LLP, a London based corporate finance advisory firm specialising in the investment and wealth management sector. He began his career with S.G Warburg in credit and banking, prior to working for the bank's mergers and acquisitions department. Since 2005 Mark has been a non-executive director of Oldfield, a long-only value equity manager. I will be proposing his election as a Director at the AGM.
ANNUAL GENERAL MEETING
This year's AGM, which will be held on 11 June 2019 at 3.00 p.m. at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London, EC2M 7SH, provides shareholders with an opportunity to receive a presentation from the Manager and to ask any questions they may have of both the Board and the Manager. I look forward to meeting shareholders at the AGM.
IFRS 9
IFRS 9 was adopted by the Group on 1 January 2018 and is implemented in the financial statements for the year ending 31 December 2018. The adoption of IFRS 9 reduced the Group's net assets at 1 January 2018 by 1.11% of the Group's NAV. The impact of the new accounting pronouncement can be found in Note 2 of the financial statements.
MARKET OUTLOOK
The market outlook for technology enabled lenders in the United States, as well as in other geographies, remains positive as it becomes broadly accepted as an institutional asset class and both lending and equity investment volumes continue to grow. Increased awareness amongst consumers and a competitive product offering are driving the demand side of the equation which has allowed the Company's investments to continue to grow without sacrificing credit quality. This growth validates the Investment Manager's thesis that technology will continue to disrupt the financial and lending industries in much the same way it has reshaped other industries over the past 30 years. By providing a better user experience and strong customer satisfaction the industry is filling a hole in the market that banks do not adequately serve. I believe the Company and the Investment Manager are playing a pivotal role in this change by providing capital to talented entrepreneurs to help them scale their businesses are driving positive change for consumers and small businesses across the world.
Kevin Ingram
Chairman
26 April 2019
INVESTMENT OBJECTIVES
The Company's investment objectives are to:
(i) generate an attractive total return for shareholders consisting of distributable income and capital growth through investments in specialty lending opportunities;
(ii) achieve portfolio diversification across Portfolio Companies, geographies, borrower types, credit quality, loan structures and investment models; and
(iii) enable our shareholders to benefit from equity upside through exposure to equity or equity-linked securities issued by Portfolio Companies.
The Company's Net Asset Value (the "NAV") as at 31 December 2018 was GBP327.7 million (cum income).
TOP TEN POSITIONS
The table below provides a summary of the top ten positions of the Group, excluding equity exposure, as at 31 December 2018. The summary includes a look-through of the Group's investment in VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. to illustrate the exposure to underlying Portfolio Companies as it is a requirement of the investment policy (set out on pages 123 to 124) to consider the application of the restrictions in this policy on a look-through basis. All balance sheet investments are disclosed as loans at amortised cost in accordance with the International Financial Reporting Standards within the Statement of Financial Position.
During the year, the Company received full principal paydowns on four of the top ten positions from 2017 and subsequently reinvested the capital into both new and existing balance sheet investments as the Company continued the deliberate and significant shift to balance sheet assets throughout 2018.
INVESTMENT COUNTRY INVESTMENT TYPE PERCENTAGE OF NAV =========================== ================ ================= ================== Elevate Credit, Inc. United States Balance Sheet 20.22% =========================== ================ ================= ================== Caribbean Financial Group Caribbean Balance Sheet 8.03% =========================== ================ ================= ================== LendUp, Inc. United States Balance Sheet 7.33% =========================== ================ ================= ================== Fundbox Ltd. United States Balance Sheet 7.24% =========================== ================ ================= ================== Applied Data Finance, LLC United States Balance Sheet 6.37% =========================== ================ ================= ================== Oakam Ltd. United Kingdom Balance Sheet 5.00% =========================== ================ ================= ================== Borro Ltd. United Kingdom Balance Sheet 4.95% =========================== ================ ================= ================== NCP Holdings, LP United States Balance Sheet 4.27% =========================== ================ ================= ================== Avant, Inc. United States Balance Sheet 3.73% =========================== ================ ================= ================== FastCash Caribbean Balance Sheet 3.01% --------------------------- ---------------- ----------------- ------------------
The table below provides a summary of the top ten positions of the Group, excluding equity exposure, as at 31 December 2017. The summary includes a look-through of the Group's investment in VPC Offshore Unleveraged Private Debt Fund Feeder, L.P.
INVESTMENT COUNTRY INVESTMENT TYPE PERCENTAGE OF
NAV
============================= ================ ================= ==============
Elevate Credit, Inc. United States Balance Sheet 15.04%
============================= ================ ================= ==============
Borro Ltd. United Kingdom Balance Sheet 8.38%
============================= ================ ================= ==============
Applied Data Finance, LLC United States Balance Sheet 6.25%
============================= ================ ================= ==============
Community Choice Financial,
Inc. United States Balance Sheet 5.70%
============================= ================ ================= ==============
iZettle Capital AB Sweden Balance Sheet 5.14%
============================= ================ ================= ==============
Wheels Financial Group,
LLC United States Balance Sheet 5.12%
============================= ================ ================= ==============
Avant, Inc. United States Balance Sheet 4.30%
============================= ================ ================= ==============
Oakam Ltd. United Kingdom Balance Sheet 4.18%
============================= ================ ================= ==============
LendUp, Inc. United States Balance Sheet 4.06%
============================= ================ ================= ==============
The Credit Junction, Inc. United States Balance Sheet 3.95%
----------------------------- ---------------- ----------------- --------------
INVESTMENT MANAGER'S REPORT
SUMMARY
VPC Specialty Lending Investments PLC ("VSL" or the "Company") finished the year with a total net revenue return of 11.41% and a total NAV (Cum Income) return of 8.96%. Both of these figures are records for the Company and reflect the results of a portfolio fully transitioned into primarily balance sheet investments. Capital returns of -2.45% were driven by a few factors, including the losses early in the year from the remaining marketplace loans and securitisations, from a drop in the stock price of the Company's equity position in Elevate Credit, Inc ("Elevate") (NYSE: ELVT) and from the cost of the hedging program for the Company.
Overall, the portfolio delivered strong credit performance and we do not see signs of a broad-based weakening in credit fundamentals at the underlying portfolio companies in which the Company is invested, despite the market volatility we saw across most asset classes during the fourth quarter of 2018. We are pleased with the results from a NAV return perspective but remain disappointed by the discount that the shares continue to trade to NAV (Cum Income). In order to address this, the Company continued to buy back shares and as of year-end, had purchased a total of 22,504,782 shares. We also continue to use 20% of our management fees to buy shares in the open market and to date, have purchased 2,200,217 shares, making sure our incentives are aligned with the shareholders. The Company's dividend was covered for the year by the revenue returns of the Company and as of year-end, the trailing twelve-month dividend yield was 10.16%(8) . While we prefer to judge the Company on an absolute return basis, as seen below, when compared against other fixed income asset classes, the Company also delivered strong relative value returns.
8. Calculated as the total dividends declared over the last twelve months, including the current reporting month, divided by the 31 December 2018 closing share price.
As a firm Victory Park has continued to invest heavily in both investment and operational resources to support the Company's growth as one of the largest and most active financial technology investors globally. Additionally, we continue to expand our relationships into new products and geographies to help foster innovation and growth in the financial technology ecosystem. We are committed to producing strong risk-adjusted returns by partnering with the best management teams and sponsors in the industry, while at the same time focusing on downside protection from credit losses through rigorous analysis and portfolio monitoring.
In summary, we are pleased with the Company's record NAV (Cum Income) return for 2018. However, we recognise that to close the discount on the Company's stock price, investors expect consistent strong performance and a covered dividend. As such, both the performance and dividend of the Company remain as our primary focus heading into 2019, and we feel strongly about the positive outlook for our existing portfolio.
Finally, while the Company had a record year in performance, we are very sorry to note the passing away of the Company's Chairman, Andrew Adcock. Andrew was a man of great integrity and was a valued leader of the Company's board.
COMPANY PERFORMANCE
NAV (Cum Income) Return Analysis
During the year, the Company generated a record NAV return of 8.96% for the Ordinary Shares and declared dividends relating to the period totalled 8.00 pence per Ordinary Share (up from 6.80 pence per Ordinary Share in 2017). The NAV per share (Cum Income) at year end 2018 was 91.01 pence per Ordinary Share.
The Company generated gross revenue returns of 13.53% as a percentage of NAV in 2018, a record in performance for the Company, of which 13.22% was derived from balance sheet investments and 0.21% from marketplace investments. Other revenue return of 0.26% comprises of interest earned on the Company's outstanding cash balances. Expenses were -2.39% for a net revenue return of 11.41%. Capital returns contributed -2.45%, comprised of -0.53% from balance sheet IFRS 9 reserves, -0.12% from marketplace investments, -0.38% from securitisation residuals, -0.42% from equity investments and -1.00% from other capital returns primarily relating to the cost of the Company's foreign exchange hedging program, for a net total return of 8.96%.
INVESTMENTS
The Company invests directly and/or indirectly into available opportunities, including investments in funds managed by the Investment Manager. Direct investments include consumer loans, SME loans and advances against corporate trade receivables originated by Portfolio Companies ("Debt Instruments"). Indirect investments include investments in Portfolio Companies (or in structures set up by Portfolio Companies) through the provision of credit facilities ("Credit Facilities"), equity or other instruments.
We allocate capital across different Portfolio Companies to meet the Company's investment objectives within the pre-defined portfolio limits and with a focus on portfolio level diversification. As at 31 December 2018, the Company's investments were diversified across 36 different Portfolio Companies, including companies supporting the financial services market across the US, UK, Caribbean Islands and Europe. Investments were made in 24 Portfolio Companies via balance sheet loans and the Company also had exposure to 27 Portfolio Companies through equity securities or convertible notes as at 31 December 2018.
During 2018, the Company's portfolio of balance sheet investments continued to generate strong risk-adjusted returns. These investments benefit from first loss protection and excess spread, which provides downside protection in the case of increased credit losses. The credit metrics on the underlying loans have continued to show strong performance across the portfolio with no signs of immediate macro weakness. Furthermore, the pipeline of available balance sheet investment opportunities is the strongest since inception.
There has been some turnover in the Company's top ten positions compared to 31 December 2017 as the Company exited several positions throughout the year. We were swiftly able to reinvest the proceeds into new and existing deals. A few highlights are below:
v We continued to increase the Company's balance sheet investment in Elevate as Elevate scales its portfolio, but as previously discussed, we feel comfortable with this position being outsized compared to the Company's other investments because of our longstanding relationship with this company and their long record of outstanding credit performance;
v The Company's position in Borro Ltd. decreased throughout the year as there were partial paydowns with proceeds of both portfolio realisations and asset sales as well as the previously disclosed IFRS 9 reserve on this investment. The investment remains on non-accrual status(9) ; and
v As discussed in the Company's November 2018 monthly report, we initiated a new position in both the debt and equity of Caribbean Financial Group. Caribbean Financial Group has a nearly 40-year history of strong credit performance and profitability through multiple credit cycles. At the time of closing, Caribbean Financial Group's Last Twelve Months ("LTM") November 2018 Adjusted EBITDA was $76.2 million. Pro forma for the Company's new capital structure following the acquisition, LTM November 2018 interest coverage was approximately 2.5x.
9. The Company stopped accruing interest in the accounts for the Borro investment when the initial IFRS 9 provision was made in January 2018.
Structuring Advantage Versus Other Credit Products
The Company's portfolio benefits from its composition of primarily floating rate senior secured loans, backed by pools of loans with short underlying duration and minimal gearing of 0.16x on a look-through basis for the Company. The benefits of this can be seen when comparing the Company's portfolio to other credit products such as Collateralised Loan Obligations ("CLO's"), which saw significantly increased volatility during the fourth quarter of 2018. Most of the 2016-2018 vintage CLO's are made up of primarily covenant-lite loans with a duration of four to five years and up to 15x look-through gearing for the equity holder. In fact, according to JP Morgan, 82% of geared loans originated in 2018 were covenant-lite, up from 12% in 2010(10) , even as issuance has exploded from US$157 billion to US$435 billion in 2018(11) . While CLO's have historically exhibited strong underlying performance, their behaviour in the next cycle might look very different than the prior cycle due to the overall weakening of investor protections. It is also worth noting that when you add large amounts of gearing even small changes in performance could have a big effect.
In contrast, VPC has continued to structure investments with tight covenant packages designed for downside protection in a variety of credit environments. VPC is able to do this because we operate in niche markets and do not participate in broadly syndicated deals, allowing us to control the exact make up the Company's portfolio and dictate the terms of investments. These structural protections combined with a disciplined and rigorous credit and diligence process, we believe, is the best form of risk management. We believe that remaining disciplined in our underwriting approach will result in success through multiple credit cycles. We continue to build a strong team, with sourcing and structuring focus, as our investment approach requires a higher touch than simply receiving allocations of broadly syndicated deals.
We believe that the culture and processes that we have developed at VPC are key to generating the positive outcomes for the Company. Our culture promotes teamwork, such that every employee at VPC works as one team, directly benefitting VSL as it is invested alongside our private investment vehicles into our underlying portfolio companies. The collective teamwork of the entire firm produces our results, instead of one or two portfolio managers. This includes not only our investment team, but also our risk management and operations professionals, who are integral to our overall investment process.
10. Source: JPMorgan Leveraged Loan Index Cov-Lite Market Weight 11. Source: Bank of America Merrill Lynch Cov-Lite Issuance data from S&P LCD
Stress Scenario Performance and Wind-down Analysis
Investors frequently ask how the Company's portfolio will perform during a recessionary environment. Our risk management team performs regular analysis to stress test individual company lending performance to determine what a downside scenario could look like at the portfolio level. The biggest risk mitigant in the downside scenarios is the first-loss protections that we structure into the Company's balance sheet investments, which ensures the portfolio company and their equity investors capital would have to be fully impaired before a balance sheet facility loses any interest income or principal invested. In the Company's recourse investments, this means the portfolio companies would also lose the cash and other assets that are outside of the borrowing base to cover the first-loss protections. We pride ourselves on our structural protections, risk management and portfolio monitoring as this is an important area of focus that we are constantly evaluating. Since most of the Company's portfolio companies are private, we are prohibited from sharing this analysis publicly, but there is macro data from the great recession that we would like to highlight below.
The Company is invested in numerous asset classes across the credit spectrum from prime to non-prime lenders including consumer, factoring and small business lending. However, through the Company's exposure to Elevate and other portfolio companies, it has a concentration of exposure in the non-prime consumer sector. While to most investors it seems counterintuitive, during the last recession this segment of consumer credit performed the strongest on a relative value basis.
Geographic Diversification
While a majority of the Company's investments are concentrated within the US, we continue to leverage our extensive sponsor network to build our international exposure and we expect this trend to continue over time. Furthermore, we are evaluating unique opportunities to partner with leading entrepreneurs in emerging markets. In addition to the Company's current exposure to Mexico, Continental Europe, and Kenya, we expanded the Company's investments to include the Caribbean Islands in 2018 with two new balance sheet investments.
PORTFOLIO COMPOSITION AS AT 31 DECEMBER 2018
We continue to implement our strategy of deploying capital across a broad range of Portfolio Companies with diversity of geographies, borrower types and credit quality. As at 31 December 2018, consumer exposure accounted for 91% of the investment portfolio, while SME exposure accounted for 9%. As referenced above, the Company has investments in the United States, United Kingdom, Europe, Mexico, Kenya and the Caribbean Islands.
Gross Asset Allocation(12) (%)
Marketplace Loans 2
----
Balance Sheet 85
----
Cash 2
----
Securitisation
Residuals 3
----
Equity 8
----
NAV (Cum Income) (%)
Allocation(12)
Marketplace Loans 2
----
Balance Sheet 85
----
Cash 2
----
Securitisation
Residuals 3
----
Equity 8
----
Investment Exposure (%)
Borrower Type (%)(13)
Consumer 91
----
SME 9
----
Investment Exposure (%)
Geography(13)
United States 74
-----
United Kingdom 9
-----
Caribbean 12
-----
Kenya 1
-----
Mexico 2
-----
Europe 2
-----
12. Percentages calculated on a look-through basis to the Company's investee entities and SPVs.
13. Calculations using gross asset exposure and not reduced for gearing. Excludes cash.
GEARING
At the beginning of 2018, the Company had a Look-Through Gearing Ratio of 0.17x and the Company finished the year with a Look-Through Gearing Ratio of 0.16x. The completion of the reallocation of capital into balance sheet investments while the remaining marketplace loans amortise has led to the ratio to remain consistent for a majority of the year.
On 30 November 2018, the Company also closed on a USD 75.0 million gearing facility with CapitalSource, a division of Pacific Western Bank. At close, the Company drew USD 25.0 million which was deployed with the initial Caribbean Financial Group funding. The Company had drawn USD 41.5 million under the facility as at 31 December 2018. Going forward, we expect that the facility will enhance returns by modestly increasing the leverage ratio and reducing cash drag associated with the currency hedging program.
MARKET UPDATE
VSL current yield versus high yield bonds
The Company's twelve month trailing current dividend yield was 10.16%(14) at the end of 2018 which compared favourably with returns available elsewhere in the fixed income market such as the European and United States High Yield Index(15) .
14. The trailing twelve-month dividend yield is calculated as the total dividends declared over the last twelve months as at 31 December 2018 divided by the 31 December 2018 closing share price. This is an Alternative Performance Measure as defined on page 126.
15. Source: VPC; Bloomberg; ICE Benchmark Administration Limited (IBA), ICE BofAML Euro High Yield Index Effective Yield [BAMLHE00EHYIEY], retrieved from FRED, Federal Reserve Bank of St. Louis; trailing twelve-month average dividend yield (based on ex div dates).
Volume growth
According to research done by PeerIQ the growth of online lending continued throughout 2018 as securitisation volume reached new records. Performance also remained strong as 66 consumer marketplace securitisation tranches were upgraded during the year(16) . The fourth quarter of 2018 saw approximately USD 2.8 billion in new issuances(16) , continuing an upward trend that was also seen in previous years.
16. Source: PeerIQ.
Macro update
Lending to SMEs has declined over the past few years in the UK, with the total outstanding borrowing facilities from banks to SMEs decreased slightly from GBP103.7 billion at the end of 2011 to GBP100 billion as at 31 December 2018(17) but has increased from GBP91 billion as at December 2017(17) .
Overall macro-economic conditions in the US and UK have been favourable for credit quality, with low unemployment and positive economic growth.
Credit assets have generally performed strongly as might be expected given the favourable underlying economic conditions. By way of illustration, credit card charge-offs are below their long term historical averages in both the US and UK.
The credit performance of the loans financed by the Company's balance sheet positions has been consistent with this generally benign credit environment.
17. Source: UK Finance SME Finance Update (March 2019).
OUTLOOK
Despite a strong 2018 for the US economy we are entering 2019 with a cautious approach amid some early signs of economic softening. Fourth quarter United States GDP growth slowed to 2.6% from 3.4% in the Third Quarter. Consumer spending and wage growth remained strong but a slowdown in housing investment proved a drag on the economy(18) .
Consumer confidence is near an 18 year high as unemployment dipped below 4%(18) , and personal income hit an all-time high of USD 51.6 thousand(19) . It is also encouraging that consumers continue to use less of their personal income on debt service, the level coming down to 10.2% during the in 2018(19) . The effects of the 2017 US tax cut proved beneficial to economy on an annual basis as 2018 grew at 2.9% versus 2.2% in 2017, but the slowdown in the Fourth Quarter may prove it was a short-term benefit as consumers and businesses adjust to the new rates.
The Fed remained hawkish during the 2018 with four consecutive rate hikes culminating in a December hike to a target range of 2.0% to 2.5%, the ninth rate hike since December 2015. However, amid the market turmoil of the Fourth Quarter the Fed Chairman signalled in January that there they may be a pause in rate hikes, deciding to leave them unchanged and stating that he believes the Fed can afford to be "patient" as inflation remains within the targeted range(20) . Markets have rallied into 2019 on the back of this revised forecast but the ultimate effect on the economy remains unknown.
At the Portfolio Company level, the Investment Manager has seen continued strong credit performance and does not see signs of any broad-based weakening in the consumer or small business market. The Investment Manager has a robust pipeline of unfunded commitments in its current portfolio which allows both the Investment Manager and the Company to take a cautious approach to new deals at this stage.
18. Source: Bloomberg; CNBC: Fourth-quarter GDP increases 2.6%. (https://www.cnbc.com/2019/02/28/gdp-q4-2018.html) 19. Source: St. Louis Fed; PeerIQ. 20. Source: Board of Governors of the Federal Reserve System (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130a.htm)
Market opportunity
Online lending continued to mature as an asset class as the market has grown and become more institutional. Globally fintech financing volume doubled from 2017 and reached a new all-time high of USD 53.8 billion(21) . The growth was broad based and included both developed and emerging markets as interest in Fintech investment from institutional investors remained strong.
21. Source: FT Partners Fintech Industry Research: 2018 Annual Fintech Almanac (March 2019)
Regulatory environment
In the US, the Trump administration has continued to promote a favourable regulatory environment for fintech investment and online lending. The two major developments during the year were the issuance of the long-expected US Treasury Report on Fintech, and the OCC beginning to accept applications for its national Fintech Charter which was previously announced in 2016. The OCC Charter would work to streamline the process of innovative Fintech companies being able to provide credit to a broader section of the US economy with the benefit of a national banking charter. The Treasury Report on Fintech was a detailed 222 page report which contained 80 recommendations cantered around four main policy goals:
1. Embrace the efficient and responsible use of consumer financial data and competitive technologies;
2. Streamline the regulatory environment to foster innovation and avoid fragmentation; 3. Modernise regulations for an array of financial products and activities; and 4. Facilitate "regulatory sandboxes" to promote innovation.
Further, in the United States, with the House of Representatives moving to Democratic control, and a slew of candidates already entering the 2020 Presidential race, the more likely outcome is that very little happens legislatively for the next two years. Overall, the deregulatory position of the Trump administration has been a marginal positive for the Company's portfolio, but we are not opposed to intelligent and thoughtful regulation in consumer markets. We strongly believe that we are backing the best and most ethical players in the industry, but there is no doubt that there are bad actors that smart regulation helps eliminate.
Overall, the Investment Manager and the Company feel developments in the US continue to be in line with favourable goal of working to expand access to credit for all consumers and small businesses, which is a positive development for the Fintech ecosystem and for the overall health of the US economy.
In the UK the news obviously continues to be dominated by the ongoing Brexit negotiations. When reviewing the Company's investment portfolio, we feel that it is fairly insulated to the impact of Brexit as the vast majority of the Company's credit exposure lies outside the UK, and most of the Company's risk lies in the margin requirements related to the Company's hedging program. With the closing of the Company's credit facility from CapitalSource, the Company now has a sufficient amount of revolver facility available such that the Company can sustain a further significant drop in the pound without affecting the Company's hedges. The cost of the hedges went up through the year as rates diverged between the US and the UK, but the floating rate nature of the Company's balance sheet deals helped offset a substantial portion of this.
Impact on the Group of rising rates
The Group's portfolio remains well positioned for a rising rate environment as substantially all of its balance sheet investments contain a floating rate interest component. The floating rate nature of the Company's balance sheet loans was a positive for the Company's performance during the year as the Federal Reserve continued its policy of normalising interest rates and did so four times during the year. From a starting point of 1.25% to 1.50% the Federal raised its target rate by a full percentage point during the year with the last rate hike in December taking the range to 2.25% to 2.50%. As at 31 December 2018, 85% of NAV was allocated to balance sheet investments. The runoff portion of our portfolio invested in marketplace loan portfolio and securitization residuals received fixed rate income, and as at 31 December 2018 represented 5% of NAV. The benefit of rising rates in USD was partially offset by increase hedging costs into GBP, which produced capital losses during the year of 1.36% of NAV.
Pipeline and execution
As at 26 April 2019, Victory Park Capital Advisors, LLC, as the Investment Manager, had committed and invested capital across 50 companies in the financial services sector. The Investment Manager's executed deals are primarily delayed draw term loans with only a portion of the capital funded at closing. This unique aspect to our portfolio provides a large pipeline of future funding's under existing deals at current terms, which substantially reduces the reinvestment risk in the portfolio. We are always evaluating new deals and continue to build the pipeline, but even assuming no new deals the unfunded portion of our current portfolio provides a large pipeline of funding's over the next 24 to 36 months. With capacity available from both existing and new Portfolio Companies, we will continue to pursue opportunities that can generate an attractive risk-adjusted return for shareholders and offer further diversification to the portfolio. In particular, the portfolio continued to diversify geographically for the Company during the year and as of year 26% of the Company's investments were located outside the US, up from 21% at the beginning of the year.
DIFFERENTIATED PROPOSITION
During 2018, the Company's strong returns were driven by the success of the Investment Manager's transition of the Company's assets from the marketplace loan model to the "Balance Sheet Model" for providing debt capital to Portfolio Companies (see descriptions below). Under the Balance Sheet Model, the Company provides a floating rate Credit Facility to the Portfolio Company via a Special-Purpose Vehicle ("SPV"), which retains Debt Instruments that are originated by the Portfolio Company. The debt financing is typically arranged in the form of a senior secured facility and the Portfolio Company injects junior capital in the SPV, which provides significant first loss protection to the Company and excess spread, which provides downside protection versus marketplace loans.
As a pioneer of financial services lending, VPC has structuring expertise and relationships, enabling it to secure preferential capacity to lock up attractive, long-term economics through structured facility upsizes and rights of first refusal. VPC primarily invests in financial services companies through delayed draw warehouse facilities.
EARLY ADOPTER ADVANTAGE
Although financial services lenders have operated successfully for decades, the sector has grown in prominence in the past few years, attracting interest from institutional investors. This has been due to a confluence of regulatory challenges for banks, increased use of technology by Portfolio Companies and a low interest rate environment. The Investment Manager has been an active investor in the sector since 2010 and has made investments and commitments across 50 Portfolio Companies, spanning multiple geographies, products and structures, and is continuing to deploy capital into existing and new Portfolio Companies.
The Investment Manager has experience in direct lending, purchasing marketplace loans and selectively investing in equity or equity-like instruments as well as having extensive knowledge of market participants and the complex regulatory requirements needed to operate within the sector. Having access to other significant pools of capital dedicated to investing in the financial services sector enables the Investment Manager to obtain gearing facilities on attractive terms. These are significant advantages for the Company as it navigates through a rapidly growing sector and it is well positioned to capture new opportunities.
PROPRIETARY SOURCING AND STRUCTURING
The Company has exposure to several proprietary investments in Portfolio Companies with attractive risk/reward characteristics that other investors in the sector are typically unable to access. We believe this is due to the Investment Manager's long experience in the sector as an early participant with an extensive sourcing network, having executed transactions partnering with more than 40 leading financial and venture capital sponsors in the specialty lending sector.
The Investment Manager also leverages its relationships with Portfolio Companies and financial sponsors to secure significant lending capacity and negotiate attractive equity kickers as well as mitigate prepayment and interest rate risks. The rapid growth of capital deployed in this sector since 2010 has also generated positive network effects and helps ensure that the Investment Manager has a first look at opportunities developing in the sector.
PORTFOLIO MANAGEMENT
With a strong focus on capital preservation, the Investment Manager structures its investments to minimise risk for the Company and augments this with a comprehensive risk management framework. This involves a rigorous, hands-on approach to post-investment monitoring of portfolio risk and performance. Assessing the balance of expected returns with inherent risks is an integral part of the Investment Manager's investment strategy and drives all aspects of portfolio construction. We believe that this approach and focus are a key driver in meeting the Company's investment objectives, particularly in a potentially more challenging future credit environment.
GEARING AND CAPITAL MARKETS
The Company selectively employs gearing to enhance returns generated by the underlying credit assets. This is structured to limit the borrowings to individual SPVs that hold the assets and the gearing providers have no recourse to the Company. As the online lending industry continues to grow and become more established, the Investment Manager has been approached by multiple large global banks to offer the Company attractive gearing facilities. Given the breadth of the Investment Manager's portfolio, we believe the Company has a distinct competitive advantage in securing these gearing facilities at attractive rates.
During 2018, the Investment Manager and the Company closed on a USD 75.0 million gearing facility with CapitalSource, a division of Pacific Western Bank. It is expected that the gearing facility will enhance returns by modestly increasing the look through gearing ratio and reducing cash drag associated with the Company's currency hedging program.
Victory Park Capital Advisors, LLC
Investment Manager
26 April 2019
PERFORMANCE MANAGEMENT
The Board uses the following KPIs to help assess progress against the Company's objectives. Further comments on these KPIs are contained in the Chairman's Statement and Investment Manager's Report sections of the Strategic Report respectively.
NAV AND TOTAL RETURN
The Directors regard the Company's NAV return as a key component to delivering value to shareholders over the long term. Furthermore, the Board believes that in accordance with the Company's objective, total return (which includes dividends) is the best measure for long term shareholder value.
At each meeting, the Board receives reports detailing the Company's NAV and total return performance, portfolio composition and related analyses. A full description of performance and the investments is contained in the Investment Manager's Report, commencing on page 11.
DIVID YIELD
The Company intends to distribute at least 85% of its distributable income earned in each financial year by way of dividends. Including the distribution made in April 2019, which related to the three-month period ended 31 December 2018 the Company has distributed 85% of its distributable income earned through the year ended 31 December 2018.
GEARING RATIO
As at 31 December 2018, the look-through gearing ratio was 0.16x for the Company. As disclosed in the investment policy starting on page 123, the aggregate gearing of the Company and any investee entity (on a look-through basis, including borrowing through securitisation using SPVs) shall not exceed 1.5 times its NAV (1.5x). The Board and Investment Manager monitor the look-through gearing ratio to ensure it is in line with the investment policy.
SHARE PRICE PREMIUM/DISCOUNT
As a closed-ended listed investment trust, the Company's share price can and does deviate from its NAV. This results in either a premium or a discount, which is another component of the long-term shareholder return. The Board continually monitors the Company's premium or discount and has the ability to issue or buy back shares to limit the volatility of the share price discount or premium. For more information on the Company's authorities in relation to its share capital, see page 31.
During the trading period, the Ordinary Shares moved in a discount range of 6.96% to 16.49%, which was a lower discount range than the trading in 2017. During the year, the Company continued the buyback programme in light of the significant disparity between the Company's share price and its NAV. During 2018 a total of 10,077,064 shares were bought back at an average price of 79.69 pence per share.
EXPENSES
The Board is conscious of the impact of expenses on returns and seeks to minimise expenses while ensuring that the Company receives strong service. The industry-wide measure for investment trusts is the ongoing charges ratio, which seeks to quantify the ongoing costs of running the Company. The ongoing charges ratio for 2018 was 1.49%, which is considered consistent with 1.35% in 2017, after factoring in the change in the average NAV over 2018 as compared to 2017, as referenced on page 9. This measures the annual normal ongoing costs of an investment trust, excluding performance fees, one-off expenses and dealing costs, as a percentage of the average shareholders' funds.
PRINCIPAL RISKS
Given that the Company operates globally, it is exposed to risks that are monitored and actively managed to meet its investment objectives. These include market risks related to interest rates, currencies and general availability of financing as well as credit and liquidity risks given the nature of the instruments in which the Company invests. In addition, the underlying Portfolio Companies are exposed to operational and regulatory risks as the financial services sector remains relatively nascent.
The Directors are ultimately responsible for identifying and controlling risks. Day-to-day management of the risks arising from the financial instruments held by the Group has been delegated to the Investment Manager of the Company.
The Investment Manager regularly reviews the investment portfolio and industry developments to ensure that any events impacting the Group are identified and considered. This also ensures that any risks affecting the investment portfolio are identified and mitigated to the fullest extent possible.
The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit and Valuation Committee on an ongoing basis.
This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving its strategic objectives. Both the principal risks and the monitoring system are subject to a robust assessment at least annually. The last review by the Board took place in February 2019.
Although the Board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.
A summary of the principal risks and uncertainties faced by the Company (also known as the "Parent Company") and its consolidated subsidiaries (together the "Group"), which have remained unchanged throughout the year, and actions taken by the Board and, where appropriate, its Committees, to manage and mitigate these risks and uncertainties, is set out below:
RISK MITIGATION
============================================= ===============================================
CREDIT RISK There is inherent credit risk in the
Credit risk is the risk that one Group's investments in credit assets.
party to a financial instrument However, this is typically mitigated
will cause a financial loss for by the significant first loss protection
the other party by failing to discharge provided by the Portfolio Company
an obligation. under the Balance Sheet Model and
The Group's credit risks arise principally the excess spread generated by the
through exposures to loans acquired underlying assets under both models.
by the Group, which are subject The Investment Manager performs a
to risk of borrower default. The robust analysis during the underwriting
ability of the Group to earn revenue process for all new investments of
is completely dependent upon payments the Group and monitors the eligibility
being made by the borrower of the of the collateral at least monthly
loan acquired by the Group through of the current assets in the Group's
a Portfolio Company. The Group (as portfolio. This process also includes
a lender member) will receive payments due diligence performed by a third-party
under any loans it acquires through reviewer during the underwriting process
a Portfolio Company only if the and subsequent reviews at least once
corresponding borrower through that per year for the Group's Portfolio
Portfolio Company (borrower member) Companies.
makes payments on the loan. The Group will invest across several
Consumer loans are unsecured obligations Portfolio Companies, asset classes,
of borrower members. They are not geographies (primarily the US and
secured by any collateral, not guaranteed Europe) and credit bands to ensure
or insured by any third party and diversification and to seek to mitigate
not backed by any governmental authority concentration risks.
in any way. The Portfolio Companies Beginning in October 2018, the Investment
and their designated third-party Manager expanded the monthly investment
collection agencies may be limited exposure geography chart to replace
in their ability to collect on loans. the "Other" category with the specific
Small business loans are typically regions to provide a more detailed
secured by either a blanket lien analysis of the geographies within
on business assets, specific collateral the investment portfolio.
and/or a personal guarantee from The Board and the Investment Manager
the proprietor. The Portfolio Companies review the investment portfolio to
and their designated third-party ensure it is in line with the investment
collection agencies have various policy, including restrictions, as
channels of recourse against the outlined on pages 123 and 124. The
relevant collateral which will depend Investment Manager monitors performance
on the specific circumstance of and underwriting on an ongoing basis.
the loan.
============================================= ===============================================
FINANCING RISK This risk is mitigated by limiting
Financing risk is the risk that borrowings to ring-fenced SPVs without
whilst the use of borrowings by recourse to the Group and employing
the Group should enhance the net gearing in a disciplined manner.
asset value of an investment when The Group has maintained a reduced
the value of an investment's underlying level of gearing through the year
assets is rising, it will, however, as the Group is now primarily invested
have the opposite effect where the in the Balance Sheet Model.
underlying asset value is falling. The CapitalSource gearing facility
In addition, if an investment's will modestly increase the Parent
income falls for whatever reason, Company's look through gearing ratio.
the use of borrowings will increase Including this facility, the gearing
the impact of such a fall on the was 0.16x as at 31 December 2018 compared
net revenue of the Group's investment to 0.17x as at 31 December 2017.
and accordingly will have an adverse The Board and the Investment Manager
effect on the ability of the investment review the investment portfolio to
to make distributions to the Group. ensure it is in line with the investment
The Group uses gearing to enhance policy, including restrictions, as
returns generated by the underlying outlined on pages 123 and 124.
credit assets and is exposed to
the availability of financing at
acceptable terms as well as interest
rate expenses and other related
costs.
============================================= ===============================================
LIQUIDITY RISK The Investment Manager manages the
Liquidity risk is defined as the Group's liquidity risk by investing
risk that the Group may not be able primarily in a diverse portfolio of
to settle or meet its obligations assets. At 31 December 2018, 20% of
on time or at a reasonable price. the loans have a stated maturity date
The Group may invest in the listed of less than a year. The Group has
or unlisted equity of any Portfolio no loans with a maturity date of more
Company. Investments in unlisted than five years.
equity, by their nature, involve In general, the weighted average maturity
a higher degree of valuation and profile of the Group's assets is lower
performance uncertainties and liquidity than or equal to the term of the Group's
risks than investments in listed corresponding debt facilities which
securities and therefore may be reduces liquidity risk. Refer to Note
more difficult to realise. 6 of the financial statements for
In the event of adverse economic the maturity profile of the Group's
conditions in which it would be assets and liabilities.
preferable for the Group to sell The Board and the Investment Manager
certain of its assets, the Group review the investment portfolio to
may not be able to sell a sufficient ensure it is in line with the investment
proportion of its portfolio as a policy, including restrictions, as
result of liquidity constraints. outlined on pages 123 and 124. The
In such circumstances, the overall Board reviews cash flow forecasts
returns to the Group from its investments to insure the group can meet its liabilities
may be adversely affected. as they fall due.
The Group is also exposed to liquidity The Group continuously monitors for
risk with respect to the requirement fluctuations in currency rates. The
to pay margin cash to collateralise Group performs stress tests and liquidity
forward foreign exchange contracts projections to determine how much
used for currency hedging purposes. cash should be held back to meet potential
future to obligations to settle margin
calls arising from foreign exchange
hedging.
The Capital Source gearing facility
will help the Group reduce cash drag
associated with the currency hedging
portfolio while also allowing the
Group to meet its liabilities as they
fall due.
============================================= ===============================================
MARKET RISK The Group has a diversified investment
Market risk is the risk of loss portfolio which significantly reduces
arising from movements in observable the exposure to individual asset price
market variables such as foreign risk. Detailed portfolio valuations
exchange rates, equity prices and and exposure analysis are prepared
interest rates. The Group is exposed monthly and form the basis for the
to market risk primarily through ongoing risk management and investment
its Financial Instruments. decisions. In addition, regular scenario
The Group is exposed to price risk analysis is undertaken to assess likely
arising from the investments held downside risks and sensitivity to
by the Group for which prices in broad market changes, as well as assessing
the future are uncertain. The investments the underlying correlations amongst
in funds are exposed to market price the separate asset classes.
risk. Refer to Note 3 in the Financial Exposure to interest risk is limited
Statements for further details on as the underlying credit assets are
the sensitivity of the Group's Level typically fully amortising with a
3 investments to price risk. maximum maturity of five years. Furthermore,
Interest rate risk arises from the generally the Group's Credit Facilities
possibility that changes in interest include a floating interest rate component
rates will affect future cash flows to the Portfolio Companies to account
or the fair values of financial for an increase in interest rate risk
instruments. and they also have a set floor in
Currency risk is the risk that the the instance that interest rates were
value of net assets will fluctuate to drop.
due to changes in foreign exchange The Group mitigates its exposure to
rates. Relevant risk variables are currency risk by hedging exposure
generally movements in the exchange between Pound Sterling and any other
rates of non-functional currencies currencies in which a significant
in which the Group holds financial portion of the Group's assets may
assets and liabilities. be denominated.
The Board reviews the price, interest
and currency risk with the Investment
Manager to ensure that exposure to
these risks are appropriately mitigated.
============================================= ===============================================
PORTFOLIO COMPANY RISK VPC has negotiated a significant number
The current market in which the of proprietary capital deployment
Group participates is competitive agreements with its existing balance
and rapidly changing. There is a sheet partners each of which typically
risk that the Group will not be ensures the ability to deploy capital
able to deploy its capital, re-invest on attractive terms for several years.
capital and interest of the proceeds In addition, VPC is one of the largest
of any future capital raisings in investors in the specialty lending
a timely or efficient manner given sector and therefore enjoys timely
the increased demand for suitable information and good access to emerging
investments. Portfolio Company opportunities. VPC
The Group may face increasing competition has a team of 45 investment and operational
for access to investments as the professionals which ensures that deployment
alternative finance industry continues opportunities with new and existing
to evolve. The Group may face competition Portfolio Companies can be executed
from other institutional lenders rapidly while minimising operational
such as fund vehicles and commercial risk.
banks that are substantially larger VPC's pipeline of deployment opportunities
and have considerably greater financial, remains strong with both existing
technical and marketing resources and new balance sheet lending Portfolio
than the Group. Other institutional Companies.
sources of capital may enter the
market in both the UK, US and other
geographies.
============================================= ===============================================
REGULATORY RISK The Parent Company provides debt capital
As an investment trust, the Parent to Portfolio Companies, which typically
Company's operations are subject must comply with various state and
to wide ranging regulations. The national level regulations. This includes
financial services sector continues some operating under interim permission
to experience significant regulatory and some now regulated from the FCA
change at national and international in the UK as well as consumer lending
levels. Failure to act in accordance and collections licenses in some US
with these regulations could cause states. This risk is limited via detailed
fines, censure or other losses including upfront due diligence of Portfolio
taxation or reputational loss. Companies' regulatory environments
In order to continue to qualify performed by the Investment Manager
as an investment trust, the Parent on behalf of the Board.
Company must comply with the requirements The Parent Company has procedures
of Section 1158 of the Corporation to monitor the status of its compliance
Tax Act 2010. with the relevant requirements to
maintain its Investment Trust status,
including receiving and reviewing
information and reporting from the
Company Secretary and other service
providers as appropriate.
============================================= ===============================================
The Directors have also considered Brexit's current and potential impact on the Group. Whilst the portfolio of the Group may not be facing any significant risk, the Group itself faces some uncertainty leading up to Brexit with regards to potential regulatory or tax changes. The majority of the Group's portfolio is denominated in United States Dollar and the Company has entered into derivative contracts to manage the exposure to foreign currency on existing assets. Therefore, the Board has concluded that this event does not represent a principal risk to the Company or the Group.
Discussion on the Group's risk management and internal controls is on page 44.
ENVIRONMENT, HUMAN RIGHTS, EMPLOYEE, SOCIAL AND COMMUNITY ISSUES
The Board recognises the requirement of the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 to provide details about environmental matters, employees, human rights, social and community issues, including information about any policies it has in relation to these matters and the effectiveness of these polices. As an investment trust, the Company does not have any employees, and most of its activities are performed by other outside organisations. In light of this, the Board considers that the Company does not have a direct impact on the community or environment and, as a result, does not maintain specific policies in relation to these matters. However, in carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly.
GER DIVERSITY
During 2018, the Board of Directors of the Company comprised of four Directors and one female Director. Further information in relation to the Board's policy on diversity can be found on pages 36 and 41.
The Strategic Report was approved by the Board of Directors on 26 April 2019 and signed on its behalf by:
Kevin Ingram
Chairman
26 April 2019
GOVERNANCE
RESPONSIBILITY FOR FINANCIAL STATEMENTS AND GOING CONCERN STATEMENT
As discussed in Note 2 to the financial statements, the Directors have reviewed the financial projections of the Group from the date of this report, which shows that the Group will be able to generate sufficient cash flows in order to meet its liabilities as they fall due. Accordingly, the Directors are satisfied that the going concern basis remains appropriate for the preparation of the financial statements. The Group also has detailed policies and processes for managing those risks as set out above and included in the Company's full Annual Report and Financial Statements.
VIABILITY STATEMENT
In accordance with provision C2.2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in April 2016, and as part of an ongoing programme of risk assessment, the Directors have assessed the prospects of the Company, to the extent that they are able, over a three-year period. This period is appropriate since the Company is a long-term investor, the Directors have chosen a three-year period as this is viewed as sufficiently long term to provide shareholders with a meaningful view, without extending the period so far into the future as to undermine the exercise.
Whilst the Company's Articles of Association (the "Articles") require an ordinary resolution for continuation of the Company to be proposed at the Company's Annual General Meeting in 2020 the Directors have a reasonable expectation that the continuation vote will be supported by shareholders, and thus have considered a three-year period from the date of this report, subject to shareholder approval in 2020, appropriate for the analysis instead of a one-year period up to the continuation vote.
The Directors confirm that they have a reasonable expectation that the Company will continue to operate and meet its liabilities as they fall due over the next three years. In making this assessment, the Directors have taken into consideration each of the principal risks and uncertainties on pages 23 to 26, their mitigants and the impact these might have on the business model, future performance, solvency and liquidity. In addition, the Directors considered the Company's current financial position and prospects, the composition of the investment portfolio, the level of outstanding capital commitments, the term structure and availability of borrowings and the ongoing costs of the business. As part of the approach, due consideration has been given to the uncertainty inherent in financial forecasts and, where applicable, reasonable sensitivities have been applied to the investment portfolio in stress situations.
The main risk to the Company's continuation is shareholder dissatisfaction through failure to meet the Company's investment objective, through poor investment performance or through the investment policy not being appropriate in prevailing market conditions.
The Board has given this particular consideration when assessing the longer-term viability of the Company. Performance and demand for the Company's shares are not things that can be forecast.
Based on the foregoing analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. 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 Group and the Parent Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:
v select suitable accounting policies and then apply them consistently;
v make judgements and accounting estimates that are reasonable and prudent;
v state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and IFRSs as adopted by the European Union have been followed for the Parent Company financial statements, subject to any material departures disclosed and explained in the financial statements; and
v prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Parent Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, about the Group financial statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the Group and the Parent Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the Directors' Report confirm that, to the best of their knowledge:
v the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group;
v the Parent Company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
v the Directors' Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
In the case of each Director in office at the date the Directors' Report is approved:
v so far as the director is aware, there is no relevant audit information of which the Group and Company's auditors are unaware; and
v they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group and Company's auditors are aware of that information.
For and on behalf of the Board:
Kevin Ingram
Chairman
26 April 2019
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2017 but is derived from those accounts. Statutory accounts for the year ended 31 December 2018 will be delivered to the Registrar of Companies 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 (ii) 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 Financial Statements on the Company's website at https://vpcspecialtylending.com/.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018
31 DECEMBER 31 DECEMBER
2018 2017
NOTES GBP GBP
===================================== ============ ============================== ==================================
Assets
===================================== ============ ============================== ==================================
Cash and cash equivalents 7 3,269,332 18,353,574
===================================== ============ ============================== ==================================
Cash posted as collateral 7 2,282,428 4,427,301
===================================== ============ ============================== ==================================
Derivative financial assets 3,4 1,241,936 3,297,847
===================================== ============ ============================== ==================================
Interest receivable 3,476,653 3,576,027
===================================== ============ ============================== ==================================
Dividend and distribution receivable 619,040 530,826
===================================== ============ ============================== ==================================
Other assets and prepaid expenses 772,749 798,169
===================================== ============ ============================== ==================================
Loans at amortised cost 3,9 306,781,153 306,446,357
===================================== ============ ============================== ==================================
Investment assets designated as held
at fair value through profit or
loss 3 66,644,557 59,583,265
===================================== ============ ============================== ==================================
Total assets 385,087,848 397,013,366
------------------------------------- ------------ ------------------------------ ----------------------------------
Liabilities
===================================== ============ ============================== ==================================
Management fee payable 10 153,301 420,339
===================================== ============ ============================== ==================================
Performance fee payable 10 2,277,215 -
===================================== ============ ============================== ==================================
Securities sold under agreements to
repurchase 1,341,981 8,941,557
===================================== ============ ============================== ==================================
Derivative financial liabilities 3,4 471,607 -
===================================== ============ ============================== ==================================
Unsettled share buyback payable - 194,682
===================================== ============ ============================== ==================================
Deferred income 544,585 776,514
===================================== ============ ============================== ==================================
Other liabilities and accrued
expenses 989,615 2,138,315
===================================== ============ ============================== ==================================
Notes payable 8 51,329,831 44,298,421
Total liabilities 57,108,135 56,769,828
------------------------------------- ------------ ------------------------------ ----------------------------------
Total assets less total liabilities 327,979,713 340,243,538
------------------------------------- ------------ ------------------------------ ----------------------------------
Capital and reserves
===================================== ============ ============================== ==================================
Called-up share capital 20,300,000 20,300,000
===================================== ============ ============================== ==================================
Share premium account 161,040,000 161,040,000
===================================== ============ ============================== ==================================
Other distributable reserve 14 171,731,558 179,761,790
===================================== ============ ============================== ==================================
Capital reserve (47,783,336) (35,643,747)
===================================== ============ ============================== ==================================
Revenue reserve 21,196,678 12,661,243
===================================== ============ ============================== ==================================
Currency translation reserve 1,248,467 1,281,731
===================================== ============ ============================== ==================================
Total equity attributable to shareholders of
the Parent Company 327,733,367 339,401,017
--------------------------------------------------- ------------------------------ ----------------------------------
Non-controlling interests 18 246,346 842,521
Total equity 327,979,713 340,243,538
------------------------------------- ------------ ------------------------------ ----------------------------------
Net Asset Value per Ordinary Share 12 91.01p 91.68p
===================================== ============ ============================== ==================================
Signed on behalf of the Board of
Directors
by:
Kevin Ingram
Chairman
26 April 2019
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31
DECEMBER
2018
REVENUE CAPITAL TOTAL
NOTES GBP GBP GBP
============================ ======= ============ ============================== ==================================
Revenue
============================ ======= ============ ============================== ==================================
Net gain (loss) on
investments 5 - (2,237,867) (2,237,867)
============================ ======= ============ ============================== ==================================
Foreign exchange gain
(loss) - (3,690,284) (3,690,284)
============================ ======= ============ ============================== ==================================
Interest income 5 45,018,101 818,323 45,836,424
============================ ======= ============ ============================== ==================================
Other income 5 3,020,243 - 3,020,243
Total return 48,038,344 (5,109,828) 42,928,516
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Expenses
============================ ======= ============ ============================== ==================================
Management fee 10 3,424,009 74,322 3,498,331
============================ ======= ============ ============================== ==================================
Performance fee 10 2,277,215 - 2,277,215
============================ ======= ============ ============================== ==================================
Credit impairment losses 9 - 2,566,435 2,566,435
============================ ======= ============ ============================== ==================================
Other expenses 10 2,540,943 292,783 2,833,726
Total operating expenses 8,242,167 2,933,540 11,175,707
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Finance costs 2,751,299 49,170 2,800,469
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Net return on ordinary
activities
before taxation 37,044,878 (8,092,538) 28,952,340
============================ ======= ============ ============================== ==================================
Taxation on ordinary 11 - - -
activities
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Net return on ordinary
activities
after taxation 37,044,878 (8,092,538) 28,952,340
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Attributable to:
============================ ======= ============ ============================== ==================================
Equity shareholders 37,044,878 (8,428,961) 28,615,917
============================ ======= ============ ============================== ==================================
Non-controlling interests 18 - 336,423 336,423
============================ ======= ============ ============================== ==================================
Return per Ordinary Share
(basic
and diluted) 13 10.13p -2.31p 7.83p
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Other comprehensive income
============================ ======= ============ ============================== ==================================
Currency translation
differences - 27,823 27,823
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Total comprehensive income 37,044,878 (8,064,715) 28,980,163
---------------------------- ------- ------------ ------------------------------ ----------------------------------
Attributable to:
============================ ======= ============ ============================== ==================================
Equity shareholders 37,044,878 (8,462,225) 28,582,653
============================ ======= ============ ============================== ==================================
Non-controlling interests 18 - 397,510 397,510
============================ ======= ============ ============================== ==================================
The total column of this statement represents the Group's statement
of comprehensive income, prepared in accordance with
International Financial Reporting Standards ("IFRS") as adopted by
the European Union. The supplementary revenue and capital
columns are both prepared under guidance published by the Association
of Investment Companies ("AIC"). All items in the
above Statement derive from continuing operations. Amounts in Other
comprehensive income may be reclassified to profit or loss in future
periods.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2017
REVENUE CAPITAL TOTAL
NOTES GBP GBP GBP
================== ====== ============================ ============================ ============================
Revenue
================== ====== ============================ ============================ ============================
Net gain (loss)
on investments 5 - (18,623,131) (18,623,131)
================== ====== ============================ ============================ ============================
Foreign exchange
gain (loss) - (2,201,214) (2,201,214)
================== ====== ============================ ============================ ============================
Interest income 5 35,751,011 23,695,267 59,446,278
================== ====== ============================ ============================ ============================
Other income 5 2,173,830 - 2,173,830
Total return 37,924,841 2,870,922 40,795,763
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Expenses
================== ====== ============================ ============================ ============================
Management fee 10 3,445,583 1,122,733 4,568,316
================== ====== ============================ ============================ ============================
Performance fee 10 844,773 - 844,773
================== ====== ============================ ============================ ============================
Impairment charge 9 - 15,462,723 15,462,723
================== ====== ============================ ============================ ============================
Other expenses 10 2,085,488 3,556,054 5,641,542
Total operating
expenses 6,375,844 20,141,510 26,517,354
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Finance costs 2,819,035 4,889,470 7,708,505
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Net return on
ordinary
activities
before taxation 28,729,962 (22,160,058) 6,569,904
================== ====== ============================ ============================ ============================
Taxation on 11 - - -
ordinary
activities
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Net return on
ordinary
activities
after taxation 28,729,962 (22,160,058) 6,569,904
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Attributable to:
================== ====== ============================ ============================ ============================
Equity
shareholders 28,729,962 (19,548,346) 9,181,616
================== ====== ============================ ============================ ============================
Non-controlling
interests 18 - (2,611,712) (2,611,712)
================== ====== ============================ ============================ ============================
Return per
Ordinary Share
(basic
and diluted) 13 7.76p -5.28p 2.48p
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Other
comprehensive
income
================== ====== ============================ ============================ ============================
Currency
translation
differences - 2,852,356) (2,852,356)
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Total
comprehensive
income 28,729,962 (25,012,414) 3,717,548
------------------ ------ ---------------------------- ---------------------------- ----------------------------
Attributable to:
================== ====== ============================ ============================ ============================
Equity
shareholders 28,729,962 (19,344,206) 9,385,756
================== ====== ============================ ============================ ============================
Non-controlling
interests 18 - (5,668,208) (5,668,208)
================== ====== ============================ ============================ ============================
The total column of this statement represents the Group's statement
of comprehensive income, prepared in accordance with
International Financial Reporting Standards ("IFRS") as adopted by
the European Union. The supplementary revenue and capital
columns are both prepared under guidance published by the Association
of Investment Companies ("AIC"). All items in the
above Statement derive from continuing operations. Amounts in Other
comprehensive income may be reclassified to profit or loss in future
periods.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2018
CALLED OTHER CURRENCY TOTAL NON-
UP SHARE
SHARE PREMIUM DISTRIBUTABLE CAPITAL REVENUE TRANSLATION SHAREHOLDERS' CONTROLLING TOTAL
CAPITAL ACCOUNT RESERVE RESERVE RESERVE RESERVE EQUITY INTERESTS EQUITY
GBP GBP GBP GBP GBP GBP GBP GBP GBP
----------------- ------------------ -------------------- ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
Opening balance
at
1 January 2018 20,300,000 161,040,000 179,761,790 (35,643,747) 12,661,243 1,281,731 339,401,017 842,521 340,243,538
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Changes on
initial
application
of IFRS 9 (See
Note 2) - - - (3,710,628) - - (3,710,628) (62,402) (3,773,030)
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Restated balance
at
1 January 2018 20,300,000 161,040,000 179,761,790 (39,354,375) 12,661,243 1,281,731 335,690,389 780,119 336,470,508
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Amounts paid
on buyback of
Ordinary Shares - - (8,030,232) - - - (8,030,232) - (8,030,232)
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Contributions
by
non-controlling
interests - - - - - - - - -
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Distributions
to
non-controlling
interests - - - - - - - (931,283) (931,283)
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Return on
ordinary
activities
after
taxation - - - (8,428,961) 37,044,878 - 28,615,917 336,423 28,952,340
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Dividends
declared
and paid - - - - (28,509,443) - (28,509,443) - (28,509,443)
----------------- ------------------ -------------------- ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
Other
comprehensive
income
================= ================== ==================== ========================= =================== =================== ====================== ========================== ======================= ====================
Currency
translation
differences - - - - - (33,264) (33,264) 61,087 27,823
----------------- ------------------ -------------------- ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
Closing balance
at
31 December
2018 20,300,000 161,040,000 171,731,558 (47,783,336) 21,196,678 1,248,467 327,733,367 246,346 327,979,713
----------------- ------------------ -------------------- ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2017
CALLED OTHER CURRENCY TOTAL NON-
UP SHARE
SHARE PREMIUM DISTRIBUTABLE CAPITAL REVENUE TRANSLATION SHAREHOLDERS' CONTROLLING TOTAL
CAPITAL ACCOUNT RESERVE RESERVE RESERVE RESERVE EQUITY INTERESTS EQUITY
GBP GBP GBP GBP GBP GBP GBP GBP GBP
----------------- ----------- ------------ ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
Opening balance
at
1 January 2017 20,300,000 161,040,000 188,394,286 (16,095,401) 8,340,831 1,077,591 363,057,307 34,910,616 397,967,923
================= =========== ============ ========================= =================== =================== ====================== ========================== ======================= ====================
Amounts paid
on buyback of
Ordinary Shares - - (8,632,496) - - - (8,632,496) - (8,632,496)
================= =========== ============ ========================= =================== =================== ====================== ========================== ======================= ====================
Contributions
by
non-controlling
interests - - - - - - - - -
================= =========== ============ ========================= =================== =================== ====================== ========================== ======================= ====================
Distributions
to
non-controlling
interests - - - - - - - (28,399,887) (28,399,887)
================= =========== ============ ========================= =================== =================== ====================== ========================== ======================= ====================
Return on
ordinary
activities
after
taxation - - - (19,548,346) 28,729,962 - 9,181,616 (2,611,712) 6,569,904
================= =========== ============ ========================= =================== =================== ====================== ========================== ======================= ====================
Dividends
declared
and paid - - - - (24,409,550) - (24,409,550) - (24,409,550)
----------------- ----------- ------------ ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
Other
comprehensive
income
================= =========== ============ ========================= =================== =================== ====================== ========================== ======================= ====================
Currency
translation
differences - - - - - 204,140 204,140 (3,056,496) (2,852,356)
----------------- ----------- ------------ ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
Closing balance
at
31 December
2017 20,300,000 161,040,000 179,761,790 (35,643,747) 12,661,243 1,281,731 339,401,017 842,521 340,243,538
----------------- ----------- ------------ ------------------------- ------------------- ------------------- ---------------------- -------------------------- ----------------------- --------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2018
31 DECEMBER 31 DECEMBER
2018 2017
NOTES GBP GBP
============================================ ====== ============================== =============================
Cash flows from operating activities:
============================================ ====== ============================== =============================
Total comprehensive income 28,980,163 3,717,548
============================================ ====== ============================== =============================
Adjustments for:
============================================ ====== ============================== =============================
- Interest income (45,836,424) (58,070,136)
============================================ ====== ============================== =============================
- Dividend and distribution income 5 (3,020,243) (2,173,830)
============================================ ====== ============================== =============================
- Finance costs 2,800,469 7,708,505
============================================ ====== ============================== =============================
- Exchange (gains) losses 3,690,284 2,852,356
-------------------------------------------- ------
Total (13,385,751) (45,965,557)
-------------------------------------------- ------ ------------------------------ -----------------------------
Unrealised (appreciation) depreciation
on investment assets designated as held
at fair value through profit or loss (3,742,589) 11,670,257
============================================ ====== ============================== =============================
Unrealised (appreciation) depreciation
on derivative financial assets 2,055,911 (3,297,847)
============================================ ====== ============================== =============================
Unrealised appreciation (depreciation)
on derivative financial liabilities 471,607 (6,932,184)
============================================ ====== ============================== =============================
Decrease in other assets and prepaid
expenses 25,420 2,146,183
============================================ ====== ============================== =============================
Decrease in management fee payable (267,038) (420,787)
============================================ ====== ============================== =============================
Increase (decrease) in performance fee
payable 2,277,215 (459,410)
============================================ ====== ============================== =============================
Decrease in dividend withholding tax
payable - (1,018,889)
============================================ ====== ============================== =============================
Increase (decrease) in deferred income (231,929) 3,005
============================================ ====== ============================== =============================
Decrease in accrued expenses and other
liabilities (1,398,061) (1,038,942)
============================================ ====== ============================== =============================
Impairment of loans 2,566,435 15,462,723
-------------------------------------------- ------
Net cash inflow (outflow) from operating
activities (11,628,780) (29,851,448)
-------------------------------------------- ------ ------------------------------ -----------------------------
Cash flows from investing activities:
============================================ ====== ============================== =============================
Interest received 45,935,798 59,834,325
============================================ ====== ============================== =============================
Dividends received 2,932,029 2,450,333
============================================ ====== ============================== =============================
Purchase of investment assets designated
as held at fair value through profit
or loss (15,969,370) (22,767,340)
============================================ ====== ============================== =============================
Sale of investment assets designated
as held at fair value through profit
or loss 9,644,595 13,150,939
============================================ ====== ============================== =============================
Purchase of loans (155,249,273) (192,846,433)
============================================ ====== ============================== =============================
Redemption or sale of loans 148,575,012 340,893,872
============================================ ====== ============================== =============================
Reduction of cash posted as collateral 2,144,873 6,279,109
-------------------------------------------- ------ ------------------------------ -----------------------------
Net cash inflow (outflow) from investing
activities 38,013,664 206,994,805
-------------------------------------------- ------ ------------------------------ -----------------------------
Cash flows from financing activities:
============================================ ====== ============================== =============================
Dividends distributed (28,509,443) (24,409,550)
============================================ ====== ============================== =============================
Treasury shares repurchased (8,224,914) (9,604,680)
============================================ ====== ============================== =============================
Distributions to non-controlling interests (931,283) (28,399,887)
============================================ ====== ============================== =============================
Increase (decrease) in amounts payable
under agreements to repurchase (7,773,133) (869,515)
============================================ ====== ============================== =============================
Increase (decrease) in note payable 6,065,331 (141,570,290)
============================================ ====== ============================== =============================
Finance costs paid (2,551,108) (7,386,132)
-------------------------------------------- ------ ------------------------------ -----------------------------
Net cash inflow (outflow) from financing
activities (41,924,550) (212,240,054)
-------------------------------------------- ------ ------------------------------ -----------------------------
Net change in cash and cash equivalents (15,539,666) (35,096,697)
============================================ ====== ============================== =============================
Exchange gains (losses) on cash and cash
equivalents 455,424 (2,852,356)
============================================ ====== ============================== =============================
Cash and cash equivalents at the beginning
of the period 18,353,574 56,302,627
-------------------------------------------- ------
Cash and cash at the end of the period 7 3,269,332 18,353,574
-------------------------------------------- ------ ------------------------------ -----------------------------
PARENT COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018
31 DECEMBER 31 DECEMBER
2018 2017
NOTES GBP GBP
Assets
======================================== ====== ============================== ==================================
Cash and cash equivalents 7 1,804,063 16,137,420
======================================== ====== ============================== ==================================
Cash pledged as collateral 7 2,282,428 4,427,301
======================================== ====== ============================== ==================================
Derivative financial assets 3,4 1,241,936 3,297,847
======================================== ====== ============================== ==================================
Interest receivable 3,804,526 3,769,894
======================================== ====== ============================== ==================================
Other current assets and prepaid
expenses 446,506 535,361
======================================== ====== ============================== ==================================
Investments in subsidiaries 17 280,381,196 286,614,455
======================================== ====== ============================== ==================================
Investment assets designated as held
at fair value through profit or loss 3 27,922,819 26,962,134
---------------------------------------- ------ ------------------------------ ----------------------------------
Total assets 317,883,474 341,744,412
---------------------------------------- ------ ------------------------------ ----------------------------------
Liabilities
======================================== ====== ============================== ==================================
Derivative financial liabilities 3,4 471,607 -
======================================== ====== ============================== ==================================
Performance fee payable 10 2,277,215 -
======================================== ====== ============================== ==================================
Management fee payable 10 153,301 377,252
======================================== ====== ============================== ==================================
Unsettled share buyback payable - 194,682
======================================== ====== ============================== ==================================
Deferred income 544,585 776,514
======================================== ====== ============================== ==================================
Other liabilities and accrued expenses 490,343 736,822
======
Total liabilities 3,937,051 2,085,270
---------------------------------------- ------ ------------------------------ ----------------------------------
Total assets less total liabilities 313,946,423 339,659,142
---------------------------------------- ------ ------------------------------ ----------------------------------
Equity attributable to Shareholders
of the Company
======================================== ====== ============================== ==================================
Called-up share capital 14 20,300,000 20,300,000
======================================== ====== ============================== ==================================
Share premium account 14 161,040,000 161,040,000
======================================== ====== ============================== ==================================
Other distributable reserve 14 171,731,558 179,761,790
======================================== ====== ============================== ==================================
Capital reserve (60,321,814) (34,103,892)
======================================== ====== ============================== ==================================
Revenue reserve 21,196,679 12,661,244
Total equity 313,946,423 339,659,142
---------------------------------------- ------ ------------------------------ ----------------------------------
Net return on ordinary activities
after taxation 10,826,956 40,902,993
---------------------------------------- ------ ------------------------------ ----------------------------------
Signed on behalf of the Board of Directors
by:
Kevin Ingram
Chairman
26 April 2019
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2018
CALLED-UP SHARE OTHER
SHARE PREMIUM DISTRIBUTABLE CAPITAL REVENUE
CAPITAL ACCOUNT RESERVE RESERVE RESERVE TOTAL
GBP GBP GBP GBP GBP GBP
Opening
balance at
1 January
2018 20,300,000 161,040,000 179,761,790 (34,103,892) 12,661,244 339,659,142
============= ======================= ========================= ========================= ======================== ======================== ======================
Amounts paid
on
repurchase
of Ordinary
Shares - - (8,030,232) - - (8,030,232)
============= ======================= ========================= ========================= ======================== ======================== ======================
Return on
ordinary
activities
after
taxation - - - (26,217,922) 37,044,878 10,826,956
============= ======================= ========================= ========================= ======================== ======================== ======================
Dividends
declared
and paid - - - - (28,509,443) (28,509,443)
------------- ----------------------- ------------------------- ------------------------- ------------------------ ------------------------ ----------------------
Closing
balance at
31 December
2018 20,300,000 161,040,000 171,731,558 (60,321,814) 21,196,679 313,946,423
------------- ----------------------- ------------------------- ------------------------- ------------------------ ------------------------ ----------------------
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2017
CALLED-UP SHARE OTHER
SHARE PREMIUM DISTRIBUTABLE CAPITAL REVENUE
CAPITAL ACCOUNT RESERVE RESERVE RESERVE TOTAL
GBP GBP GBP GBP GBP GBP
============ ================== ==================== ========================= =================== =================== ======================
Opening
balance at
1 January
2017 20,300,000 161,040,000 188,394,286 (46,276,922) 8,340,831 331,798,195
============ ================== ==================== ========================= =================== =================== ======================
Amounts
paid on
repurchase
of
Ordinary
Shares - - (8,632,496) - - (8,632,496)
============ ================== ==================== ========================= =================== =================== ======================
Return on
ordinary
activities
after
taxation - - - 12,173,030 28,729,963 40,902,993
============ ================== ==================== ========================= =================== =================== ======================
Dividends
declared
and paid - - - - (24,409,550) (24,409,550)
------------ ------------------ -------------------- ------------------------- ------------------- ------------------- ======================
Closing
balance at
31
December
2017 20,300,000 161,040,000 179,761,790 (34,103,892) 12,661,244 339,659,142
------------ ------------------ -------------------- ------------------------- ------------------- ------------------- ----------------------
PARENT COMPANY STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2018
31 DECEMBER 31 DECEMBER
2018 2017
NOTES GBP GBP
Cash flows from operating activities:
============================================ ====== ============================== ==============================
Net return on ordinary activities after
taxation 10,826,956 40,902,993
============================================ ====== ============================== ==============================
Adjustments for:
============================================ ====== ============================== ==============================
-- Interest income (37,216,928) (32,861,333)
============================================ ====== ============================== ==============================
-- Exchange (gains) losses 17,735,354 (3,896,049)
-------------------------------------------- ------ ------------------------------ ------------------------------
Total (8,654,618) 4,145,611
-------------------------------------------- ------ ------------------------------ ------------------------------
Unrealised appreciation (depreciation)
on investment assets designated as held
at fair value through profit or loss (1,403,469) 4,535,009
============================================ ====== ============================== ==============================
Unrealised appreciation (depreciation)
on investments in subsidiaries (10,087,294) 1,989,449
============================================ ====== ============================== ==============================
Unrealised (appreciation) depreciation
on derivative financial assets 2,055,911 (10,230,031)
============================================ ====== ============================== ==============================
Unrealised appreciation on derivative
financial liabilities 471,607 -
============================================ ====== ============================== ==============================
Decrease in other assets and prepaid
expenses 88,855 1,063,334 ============================================ ====== ============================== ============================== Decrease in management fee payable (223,951) (191,736) ============================================ ====== ============================== ============================== Increase (decrease) in performance fee payable 2,277,215 (459,410) ============================================ ====== ============================== ============================== Decrease in dividend withholding tax payable - (1,018,889) ============================================ ====== ============================== ============================== Increase (decrease) in deferred income (231,929) 3,005 ============================================ ====== ============================== ============================== Increase (decrease) in accrued expenses and other liabilities (246,479) 263,685 -------------------------------------------- ------ ------------------------------ ------------------------------ Net cash inflow (outflow) from operating activities (15,954,152) 100,027 -------------------------------------------- ------ ------------------------------ ------------------------------ Cash flows from investing activities: ============================================ ====== ============================== ============================== Interest received 37,182,296 31,762,742 ============================================ ====== ============================== ============================== Purchase of investment assets designated as held at fair value through profit or loss (3,172,672) (3,871,909) ============================================ ====== ============================== ============================== Sale of investment assets designated as held at fair value through profit or loss 3,615,456 3,673,097 ============================================ ====== ============================== ============================== Purchase of investments in subsidiaries (127,996,180) (196,067,355) ============================================ ====== ============================== ============================== Sales of investment in subsidiaries 126,125,955 166,226,619 ============================================ ====== ============================== ============================== Cash posted as collateral 2,144,873 6,279,109 Net cash inflow (outflow) from investing activities 37,899,728 8,002,303 -------------------------------------------- ------ ------------------------------ ------------------------------ Cash flows from financing activities ============================================ ====== ============================== ============================== Treasury Shares repurchased (8,224,914) (9,604,680) ============================================ ====== ============================== ============================== Dividends paid (28,509,443) (24,409,550) ============================================ ====== ============================== ============================== Net cash inflow (outflow) from financing activities (36,734,357) (34,014,230) -------------------------------------------- ------ ------------------------------ ------------------------------ Net change in cash and cash equivalents (14,788,781) (25,911,900) ============================================ ====== ============================== ============================== Exchange gains (losses) on cash and cash equivalents 455,424 3,896,049 ============================================ ====== ============================== ============================== Cash and cash equivalents as the beginning of the period 16,137,420 38,153,271 -------------------------------------------- ------ ------------------------------ ------------------------------ Cash and cash equivalents at the end of the period 7 1,804,063 16,137,420 -------------------------------------------- ------ ------------------------------ ------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARED 31 DECEMBER 2018
1. GENERAL INFORMATION
The investment objective of VPC Specialty Lending Investments PLC (the "Parent Company") with its subsidiaries (together "the Group") is to generate an attractive total return for shareholders consisting of distributable income and capital growth through investments in specialty lending opportunities. The Parent Company was incorporated in England and Wales on 12 January 2015 with the registered number 9385218. The Parent Company commenced its operations on 17 March 2015 and intends to carry on business as an investment trust within the meaning of Chapter 4 of Part 24 of the Corporation Tax Act 2010.
The Group's investment manager is Victory Park Capital Advisors, LLC (the "Investment Manager"), a US Securities and Exchange Commission registered investment adviser. The Investment Manager also acts as the Alternative Investment Fund Manager of the Group under the Alternative Investment Fund Managers Directive ("AIFMD"). The Parent Company is defined as an Alternative Investment Fund and is subject to the relevant articles of the AIFMD.
The Group will invest directly or indirectly into available opportunities, including by making investments in, or acquiring interests held by, third party funds (including those managed by the Investment Manager or its affiliates). Direct investments may include consumer loans, SME loans, advances against corporate trade receivables and/or purchases of corporate trade receivables ("Debt Instruments") originated by platforms which engage with and directly lend to borrowers ("Portfolio Companies"). Such Debt Instruments may be subordinated in nature, or may be second lien, mezzanine or unsecured loans. Indirect investments may include investments in Portfolio Companies (or in structures set up by Portfolio Companies) through the provision of credit facilities ("Credit Facilities"), equity or other instruments. Additionally, the Group's investments in Debt Instruments and Credit Facilities may be made through subsidiaries of the Parent Company or through partnerships or other structures. The Group may also invest in other specialty lending related opportunities through any combination of debt facilities, equity or other instruments.
As at 31 December 2018, the Parent Company held equity in the form of 382,615,665 Ordinary Shares, 360,110,883 Ordinary Shares in issue and 22,504,782 Ordinary Shares in Treasury (31 December 2017: 382,615,665 Ordinary Shares, 370,187,947 Ordinary Shares in issue and 12,427,718 Ordinary Shares in Treasury). The Ordinary Shares are listed on the premium segment of the Official List of the UK Listing Authority and trade on the London Stock Exchange's main market for listed securities.
Northern Trust Hedge Fund Services LLC (the "Administrator") has been appointed as the administrator of the Group. The Administrator is responsible for the Group's general administrative functions, such as the calculation and publication of the Net Asset Value ("NAV") and maintenance of the Group's accounting records.
For any terms not herein defined, refer to Part X of the IPO Prospectus. The Parent Company's IPO Prospectus dated 26 February 2015 is available on the Parent Company's website, http://vpcspecialtylending.com.
2. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies followed by the Group are set out below:
Basis of preparation
The consolidated financial statements present the financial performance of the Group for the year ended 31 December 2018. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). They comprise standards and interpretations approved by the International Accounting Standards Board and International Financial Reporting Committee, interpretations approved by the International Accounting Standard Committee that remain in effect, to the extent they have been adopted by the European Union. The financial statements are also in compliance with relevant provisions of the Companies Act 2006 as applicable to companies reporting under IFRS.
The financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the valuation of investments and derivative financial instruments at fair value. Having assessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements. The principal accounting policies adopted are set out below.
Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("AIC") in November 2014 and updated in January 2017 and February 2018 with consequential amendments is consistent with the requirements of IFRS, the Directors have sought to prepare the consolidated financial statements on a basis compliant with the recommendations of the SORP.
The Parent Company and Group's presentational currency is Pound Sterling (GBP). Pound Sterling is also the functional currency because it is the currency of the Parent Company's share capital and the currency which is most relevant to the majority of the Parent Company's Shareholders. The Group enters into forward currency Pound Sterling hedges where operating activity is transacted in a currency other than the functional currency.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Parent Company and its subsidiaries. Control is achieved where the Parent Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Parent Company controls an entity when the Parent Company is exposed to, or has rights to, variable returns from its investment and has the ability to affect those returns through its power over the entity. All intra-group transactions, balances, income and expenses are eliminated on consolidation. The accounting policies of the subsidiaries have been applied on a consistent basis to ensure consistency with the policies adopted by the Parent Company. The period ends for the subsidiaries are consistent with the Parent Company.
Subsidiaries of the Parent Company, where applicable, have been consolidated on a line by line basis as the Parent Company does not meet the definition of an investment entity under IFRS 10 because it does not measure and evaluate the performance of all of its investments on the fair value basis of accounting.
Changes in accounting policies
The Group has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1 January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. The Group did not early adopt any of IFRS 9 in previous periods.
As permitted by the transitional provisions of IFRS 9, the Group elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognised in the opening retained earnings and other reserves of the current period. The Group has also elected to continue to apply the hedge accounting requirements of IAS 30 on adoption of IFRS 9.
Consequently, for notes disclosures, the consequential amendments to IFRS 7 disclosures have also only been applied to the current period. The comparative period notes disclosures repeat those disclosures made in the prior year.
Adoption of IFRS 9 has resulted in changes in our accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 'Financial Instruments: Disclosures'.
Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the Group. Further details of the specific IFRS 9 accounting policies applied in the current period (as well as the previous IAS 39 accounting policies applied in the comparative period) are described in more detail below.
Classification and measurement of financial instruments
The Group has applied IFRS 9 which includes three principal classification categories for financial assets which must be designated at initial recognition. Financial assets are measured at fair value through profit or loss ("FVTPL"), fair value through other comprehensive income ("FVOCI") or amortised cost based on the nature of the cash flows of the assets and an entity's business model. These categories replace the existing IAS 39 classifications of fair value through profit and loss ("FVTPL"), available for sale ("AFS"), loans and receivables, and held-to-maturity.
For financial liabilities, most of the pre-existing requirements for classification and measurement previously included in IAS 39 were carried forward unchanged into IFRS 9.
The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 January 2018 are compared as follows:
IAS 39 IAS 39 IFRS 9 IFRS 9
MEASUREMENT CARRYING MEASUREMENT CARRYING
CATEGORY AMOUNT CATEGORY AMOUNT
===================== ============ =============== ============
Financial Assets
============================== ===================== ============ =============== ============
Amortised cost
Loans at amortised cost (Held-to-maturity) 306,446,357 Amortised Cost 302,673,327
============================== ===================== ============ =============== ============
Investment assets designated FVPL
as held at fair value (Held for
through profit or loss trading) 59,583,265 FVTPL 59,583,265
Amortised cost
(Loans and
Cash and cash equivalents receivables) 18,353,574 Amortised Cost 18,353,574
============================== ===================== ============ =============== ============
Amortised cost
(Loans and
Cash posted as collateral receivables) 4,427,301 Amortised Cost 4,427,301
============================== ===================== ============ =============== ============
FVPL
Derivative financial (Held for
assets trading) 3,297,847 FVTPL 3,297,847
============================== ============ ============
Amortised cost
(Loans and
Interest receivable receivables) 3,576,027 Amortised Cost 3,576,027
============================== ===================== ============ =============== ============
Amortised cost
Dividend and distribution (Loans and
receivable receivables) 530,826 Amortised Cost 530,826
============================== ===================== ============ =============== ============
Amortised cost
Other assets and prepaid (Loans and
expenses receivables) 798,169 Amortised Cost 798,169
============================== ===================== ============ =============== ============
Total assets 397,013,366 393,240,336
----------------------------------------------------- ------------ --------------- ------------
The introduction of IFRS 9 has had no impact on the classification of financial instruments, with no portfolios previously held at amortised cost failing the cashflow or business model tests. Movements in carrying values are driven by changes in impairment policy.
There were no changes to the classification and measurement of financial liabilities.
Reconciliation of statement of financial position balances from IAS 39 to IFRS 9
The total remeasurement of GBP3,773,030 was recognised in opening reserves at 1 January 2018. The remeasurement relates to the changes due to the new expected credit loss ("ECL") model.
The incurred loss model under IAS 39 is replaced with a new expected loss model. Impairment provisions are driven by changes in the credit risk of instruments, with a provision for lifetime expected credit losses recognised where the risk of default of an instrument has increased significantly since initial recognition. Risk of default and expected credit losses must incorporate forward-looking and macroeconomic information.
The following table reconciles the Group's carrying amounts of financial assets at amortised cost, from their previous measurement category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 January 2018:
31 DECEMBER 1 JANUARY
2017 2018
IAS 39 IFRS 9
CARRYING AMOUNT RECLASSIFICATION REMEASUREMENTS CARRYING AMOUNT
GBP GBP GBP GBP
Loans at
amortised
cost ================== ================================== ================================== ================================== ================================== Opening balance under IAS 39 308,789,378 - - 308,789,378 ================== ================================== ================================== ================================== ================================== Reclassification - - - - ================== ================================== ================================== ================================== ================================== ECL or equivalent (2,343,021) - (3,773,030) (6,116,051) Closing balance under IFRS 9 302,673,327 ------------------ ---------------------------------- ---------------------------------- ---------------------------------- ----------------------------------
The total remeasurement loss of GBP3,773,030 was recognised in opening reserves at 1 January 2018. There were no changes due to reclassification.
Reconciliation of impairment allowance balance from IAS 39 to IFRS 9
The new requirements of IFRS 9 have been applied by adjusting the Statement of Financial Position on 1 January 2018, the date of initial application. The Company has taken advantage of the exemption allowing it not to restate comparative information for prior periods with respect to financial information.
Under IFRS 9, no impairment loss is recognised on equity investments. IFRS 9 requires a loss allowance to be recognised at an amount equal to either 12 month expected credit loss ("ECL"), or lifetime ECL. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of the financial instrument, whereas 12-month ECLs are the portion of the ECL that result from default events that are possible within 12 months after the reporting date.
Under IFRS 9, credit loss allowances will be measured on each reporting date according with a three-stage ECL impairment model:
Stage 1 - from initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognised equal to the credit losses expected to result from defaults occurring over the next 12 months.
Stage 2 - Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognised equal to the credit losses expected over the remaining lifetime of the asset.
Stage 3 - When a financial asset is considered to be credit-impaired, a loss allowance equal to full lifetime expected credit losses will be recognised. Interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
Under IFRS 9, the population of financial assets and corresponding allowances disclosed as Stage 3 will not necessarily correspond to the amounts of financial assets currently disclosed as impaired in accordance with IAS 39. Consistent with IAS 39, loans are written off when there is no realistic probability of recovery.
Given that all financial assets within the scope of the IFRS 9 impairment model will be assessed for at least 12-months of expected credit losses, and the population of financial assets to which full lifetime expected credit losses applies is larger than the population of impaired loans for which there is objective evidence of impairment in accordance with IAS 39, loss allowances will be higher under IFRS 9 relative to IAS 39.
Changes in the required credit loss allowance, including the impact of movements between Stage 1 and Stage 2, will be recorded in the Consolidated Statement of Comprehensive Income. The impact of moving between 12 months and lifetime expected credit losses and the application of forward looking information, means provisions may be more volatile under IFRS 9 than IAS 39.
The following tables reconcile the prior period's closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new ECL allowance measured in accordance with the IFRS 9 expected loss model at 1 January 2018.
ECL allowance measured in accordance with IFRS 9 as at 1 January 2018:
IFRS 9 TOTAL
IMPAIRMENT
OF LOANS
INTERNAL UNSECURED SECURED UNSECURED SECURED RESERVED
GRADE UNITED STATES UNITED STATES OTHER OTHER AGAINST
========== ============================ ============================ ============================ ============================ ============================
A - 1 - - - - -
A - 2 760,741 19,224 - 661,604 1,441,569
B 179,272 977,688 - 3,083,442 4,240,402
C 49,532 54,578 - 329,970 434,080
Totals 989,545 1,051,490 - 4,075,016 6,116,051
========== ============================ ============================ ============================ ============================ ============================
Impairment allowance measured in accordance with IAS 39 as at 31 December 2017:
IAS 39 TOTAL
IMPAIRMENT
OF LOANS
INTERNAL UNSECURED SECURED UNSECURED SECURED RESERVED
GRADE UNITED STATES UNITED STATES OTHER OTHER AGAINST
========== ============================ ============================ ============================ ============================ ============================
A - 1 - - - - -
A - 2 61,786 18,726 - 419,819 500,331
B 97,254 154,981 - 1,276,351 1,528,586
C 14,612 53,164 - 246,328 314,104
Totals 173,652 226,871 - 1,942,498 2,343,021
========== ============================ ============================ ============================ ============================ ============================
INTERNAL
GRADE DEFINITION
========= ================================================================
Balance sheet loans structured with credit enhancement and
A - 1 strong operating liquidity positions
High credit quality borrowers or balance sheet loans structured
A - 2 with credit enhancement
High credit quality borrowers with some indicators of credit
risk or balance sheet loans with limited structural credit
B enhancement
C Borrowers with elevated levels of credit risk
========= ================================================================
Investments in subsidiaries
Investments in subsidiaries are carried at cost less impairment. The Parent Company assesses at each balance sheet date whether, as a result of one or more events that occurred after initial recognition, there is objective evidence that investments in subsidiaries are impaired. Investments in subsidiaries are non-monetary items and therefore the costs of investment in currencies other than Pound Sterling are translated to at the rate of exchange ruling on the date the investment is made.
The total net asset value shown on the Parent Company Statement of Financial Position is therefore lower than the consolidated net asset value shown for the Group by GBP13,786,944 as at 31 December 2018 (31 December 2017: greater than by GBP258,125).
Presentation of Consolidated Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in accordance with the guidance set out by the AIC, supplementary information which analyses the Consolidated Statement of Comprehensive Income between items of revenue and capital nature has been presented alongside the Consolidated Statement of Comprehensive Income.
The Directors have taken advantage of the exemption under Section 408 of the Companies Act 2006 and accordingly have not presented a separate Parent Company statement of comprehensive income. The net return on ordinary activities after taxation of the Parent Company was GBP10,826,956 (31 December 2017: GBP40,902,993).
Income
For financial instruments measured at amortised cost, the effective interest rate method is used to measure the carrying value of a financial asset or liability and to allocate associated interest income or expense in the revenue account over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.
In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider expected credit losses. The calculation includes all fees received and paid, costs borne that are an integral part of the effective interest rate and all other premiums or discounts above or below market rates.
Dividend income from investments is taken to the revenue account on an ex-dividend basis. Bank interest and other income receivable is accounted for on an effective interest basis. Dividend income from investments is reflected in Other income on the Statement of Comprehensive Income beginning in 2018 as a result of the new IFRS 9 standard updating the disclosure requirements of IAS 1. Further disclosure can be found in Note 5.
Distributions from investments in funds are accounted for on an accrual basis as of the date the Group is entitled to the distribution. The income is treated as revenue return provided that the underlying assets of the investments comprise solely income generating loans, or investments in lending platforms which themselves generate net interest income. Distributions from investments in funds is reflected in Other income on the Statement of Comprehensive Income beginning in 2018 as a result of the new IFRS 9 standard updating the disclosure requirements of IAS 1. Further disclosure can be found in Note 5.
Interest income from Investment assets designated as held at fair value through profit or loss are reflected in Other income on the Statement of Comprehensive Income beginning in 2018 as a result of the new IFRS 9 standard updating the disclosure requirements of IAS 1. Further disclosure can be found in Note 5.
Finance costs
Finance costs are recognised using the effective interest rate method. The Group currently charges all finance costs to either revenue or capital based on retained earnings of the investment that generates the fees from the prospective of the Parent Company.
Expenses
Expenses not directly attributable to generating a financial instrument are recognised as services are received, or on the performance of a significant act which means the Group has become contractually obligated to settle those amounts.
The Group currently charges all expenses, including investment management fees and performance fees, to either revenue or capital based on the retained earnings of the investment that generates the fees from the prospective of the Parent Company. All operating expenses of the Parent Company are charged to revenue as the current expectation is that the majority of the Group and Parent Company's return will be generated through revenue rather than capital gains on investments.
At 31 December 2018, management fees of GBP74,322 (31 December 2017: GBP1,122,733) have been charged to the capital return of the Group. No management or performance fees were charged to capital at the Parent Company. Refer to Note 10 for further details of the management and performance fees.
All expenses are accounted for on an accruals basis.
Dividends payable to Shareholders
Dividends payable to Shareholders are recognised in the Consolidated Statement of Changes in Equity when they are paid or have been approved by Shareholders in the case of a final dividend and become a liability to the Parent Company.
Taxation
The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the Consolidated Statement of Financial Position date.
In line with the recommendations of SORP for investment trusts issued by the AIC, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Consolidated Statement of Comprehensive Income is the "marginal basis".
Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Consolidated Statement of Comprehensive Income, then no tax relief is transferred to the capital return column.
Investment trusts which have approval as such under section 1158 of the Corporation Taxes Act 2010 are not liable for taxation on capital gains.
Financial assets and financial liabilities
The Group classifies its financial assets and financial liabilities in one of the following categories below. The classification depends on the purpose for which the financial assets and liabilities were acquired. The classification of financial assets and liabilities are determined at initial recognition.
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 introduces a principal-based approach and applies one classification approach for all types of financial assets. For Debt Instruments, two criteria are used to determine how financial assets should be classified and measured:
v The entity's business model (i.e. how an entity manages its financial assets in order to generate cash flows by collecting contractual cash flows, selling financial assets or both); and
v The contractual cash flow characteristics of the financial asset (i.e. whether the contractual cash flows are solely payments of principal and interest).
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:
v It is held within a business model whose objective is to hold assets to collect contractual cash flows; and
v Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured as described further in this note.
A financial asset is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:
v It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
v Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Movements in the carrying amount are taken through the Other Comprehensive Income ("OCI"), except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the investments amortised cost which is recognised in the Consolidated Statement of Comprehensive Income. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to the Consolidated Statement of Comprehensive Income and recognised in Income. Interest income from these financial assets in included in Income using the EIRM.
Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an irrevocable election can be made on initial recognition to measure them at FVOCI with no subsequent reclassification to the Consolidated Statement of Comprehensive Income. This election is made on an investment by investment basis.
All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. All equity positions are measured at FVTPL. Financial assets measured at FVTPL are recognised in the balance sheet at their fair value. Fair value gains and losses together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur. The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. In addition, on initial recognition the Company may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
For financial liabilities, most of the pre-existing requirements for classification and measurement previously included in IAS 39 were carried forward unchanged into IFRS 9.
Business model assessment
The Group will assess the objective of the business model in which a financial asset is held at a portfolio level in order to generate cash flows because this best reflects the way the business is managed, and information is provided to the Investment Manager. That is, whether the Group's objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these are applicable, then the financial assets are classified as part of the other business model and measured at FVTPL.
The information that will be considered by the Group in determining the business model includes:
v The stated policies and objectives for the portfolio and the operation of those policies in practice, including whether the strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of assets;
v Past experience on how the cash flows for these assets were collected;
v How the performance of the portfolio is evaluated and reported to the Investment Manager;
v The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and
v The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Investment Manager's stated objective for managing the financial assets is achieved and how cash flows are realised.
Assessment whether contractual cash flows are solely payments of principal and interest
For the purposes of this assessment, "principal" is defined as the fair value of the financial asset on initial recognition. "Interest" is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a reasonable profit margin.
In assessing whether the contractual cash flows are solely payments of principal and interest, the contractual terms of the instrument will be considered to see if the contractual cash flows are consistent with a basic lending arrangement. In making the assessment, the following features will be considered:
v Contingent events that would change the amount and timing of cash flows;
v Prepayment and extension terms;
v Terms that limit the Company's claim to cash flows from specified assets e.g. non-recourse asset arrangements; and
v Features that modify consideration for the time value of money, e.g. periodic reset of interest rates
The Group reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification that has taken place forms the start of the first reporting period following the change. Such changes are expected to be very infrequent.
Expected credit loss allowance for financial assets measured at amortised cost
IFRS 9 changes the basis of recognition of impairment on financial assets from an incurred loss to an expected credit loss (ECL) approach for amortised cost and FVOCI financial assets. This introduces a number of new concepts and changes to the approach to provisioning compared with the previous methodology under IAS 39.
The Credit impairment losses in the income statement includes the change in expected credit losses which are recognised for loans and advances to customers, other financial assets held at amortised cost and certain loan commitments.
At initial recognition, allowance is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase in credit risk, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are allocated to Stage 3.
The measurement of expected credit losses will primarily be based on the product of the instrument's probability of default ("PD"), loss given default ("LGD"), and exposure at default ("EAD"), taking into account the value of any collateral held or other mitigants of loss and including the impact of discounting using the effective interest rate ("EIR").
v The PD represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months ("12M PD"), or over the remaining lifetime ("Lifetime PD") of the obligation.
v EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months ("12M EAD") or over the remaining lifetime ("Lifetime EAD"). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur.
v LGD represents the Group's expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default. LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.
The estimated credit loss ("ECL") is determined by projecting the PD, LGD, and EAD for each future month and for each individual exposure. Movements between Stage 1 and Stage 2 are based on whether an instrument's credit risk as at the reporting date has increased significantly relative to the date it was initially recognised. Where the credit risk subsequently improves such that it no longer represents a significant increase in credit risk since origination, the asset is transferred back to Stage 1.
General expectations with regards to expected losses on loans at a given level of delinquency are assessed based on (a) an analysis of loan collateral and credit enhancement (for collateralised balance sheet investments), and (b) historical roll rates on the marketplace loans (marketplace loans). Impairments are recognised once a loan is deemed to have a non-trivial likelihood of facing a material loss. The expected credit loss allowance reflects the increasing likelihood of loss as (a) collateral and credit enhancement become diminished or impaired (for collateralised balance sheet investments), or (b) loans progress to more advanced stages of delinquency (marketplace loans) as more payments are missed and are calculated based on historical performance of similar loans within the Group's investment portfolio. As loans progress through the levels of delinquency, the Group applies a greater amount of expected credit loss allowance on the loan balance.
Unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. The Group does not rebut the presumption in IFRS 9 that all financial assets that are more than 30 days past due have experienced a significant increase in credit risk. The assessment as to when a financial asset has experienced a significant increase in the probability of default requires the application of management judgement.
In addition, the Group considers a financial instrument to have experienced a significant increase in credit risk when one of the following have occurred:
v Significant increase in credit spread;
v Significant adverse changes in business, financial and/or economic conditions in which the borrower operates;
v Actual or expected forbearance or restructuring;
v Actual or expected significant adverse change in operating results of the borrower;
v Significant change in collateral value which is expected to increase the risk of default; or
v Early signs of cashflow or liquidity problems.
Movements between Stage 2 and Stage 3 are based on whether financial assets are credit-impaired as at the reporting date. The determination of credit-impairment under IFRS 9 will be similar to the individual assessment of financial assets for objective evidence of impairment under IAS 39. Assets can move in both directions through the stages of the impairment model.
The criteria for determining whether credit risk has increased significantly will vary by portfolio and will include a backstop based on delinquency. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due which the Group does not rebut. For both collateralised balance sheet loans and marketplace loans, if a loan is delinquent for more than 90 days, has four missed payments or considered by management as unlikely to pay their obligations in full without realisation of collateral, the Group reserves at least 85% of the balance of the delinquent loan. A loan is normally written off, either partially or in full, when there is no realistic prospect of recovery (as a result of the customer's insolvency, ceasing to trade or other reason) and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded. The Company assesses at each reporting date whether there is objective evidence that a loan or group of loans is impaired. In performing such analysis, the Company assesses the probability of default based on the level of collateral and credit enhancement (collateralised balance sheet loans) and on the number of days past due, using recent historical rates of default on loan portfolios with credit risk characteristics similar to those of the Company or past history if sufficient data is available to demonstrate a reliable loss profile (marketplace loans).
Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.
Under IFRS 9, when determining whether the credit risk (i.e. the risk of default) on a financial instrument has increased significantly since initial recognition, reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on historical experience, credit assessment and forward-looking information is used.
The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk must consider information about past events and current conditions as well as reasonable and supportable forward-looking information. A "base case" view of the future direction of relevant economic variables and a representative range of other possible forecasts scenarios. The process will involve developing two or more additional economic scenarios and considering the relative probabilities of each outcome. The base case will represent a most likely outcome and be aligned with information used for other purposes, such as strategic planning and budgeting. The number of scenarios used and their attributes are reassessed at each reporting date by investment. The scenario weightings are determined by a combination of statistical analysis and expert credit judgement, taking account of the range of possible outcomes each chosen scenario is representative of.
The estimation and application of forward-looking information requires significant judgement. PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances, are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes and has analysed the non-linearities and asymmetries within the Group's different portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.
Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on a quarterly basis.
Collateral and other credit enhancements
The Group employs a range of policies to mitigate credit risk. The most common of these is accepting collateral for funds advanced. The Group has internal policies of the acceptability of specific classes of collateral or credit risk mitigation.
Modification of financial assets
The Group sometimes modifies the terms or loans provided to customers due to commercial renegotiations, or for distressed loans, with a view to maximising recovery.
Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring policies and practice are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review.
The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original assets. The Group monitors the subsequent performance of modified assets. The Group may determine that the credit risk has significantly improved after restructuring, so that the assets are moved from Stage 3 or Stage 2.
Modification of terms not an indicator of a change in risk.
Modification of loans
The Group sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors:
v If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay;
v Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan;
v Significant extension of the loan term when the borrower is not in financial difficulty;
v Significant change in the interest rate;
v Change in the currency the loan is denominated in; and
v Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan.
If the terms are substantially different, the Group derecognises the original financial asset and recognises a new asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining if a significant increase in credit risk has occurred. However, the Group also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amounts are also recognised in the Consolidated Statement of Comprehensive Income as a gain or loss on derecognition.
If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Group recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in the Consolidated Statement of Comprehensive Income. The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).
Derecognition other than a modification
Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control.
The Group enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as 'pass through' transfers that result in derecognition if the Group:
v Has no obligation to make payments unless it collects equivalent amounts from the assets;
v Is prohibited from selling or pledging the assets; and
v Has an obligation to remit any cash it collects from the assets without material delay.
Collateral furnished by the Group under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met.
Financial assets and financial liabilities designated as held at fair value through profit or loss
This category consists of forward foreign exchange contracts, common equity, preferred stock, warrants and investments in funds.
Assets and liabilities in this category are carried at fair value. The fair values of derivative instruments are estimated using discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties.
Investments in funds are carried at fair value through profit or loss and designated as such at inception. This is valued for the units at the balance sheet date based on the NAV where it is assessed that NAV equates to fair value.
Common equity, preferred stock and warrants are valued using a variety of techniques. These techniques include market comparables, discounted cash flows, yield analysis, and transaction prices. Refer to Note 3.
Gains and losses arising from the changes in the fair values are recognised in the Consolidated Statement of Comprehensive Income.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group's loan assets are classified as loans and receivables.
Loans are recognised when the funds are advanced to borrowers. Loans and receivables are carried at amortised cost using the effective interest rate method less provisions for impairment.
Purchases and sales of financial assets
Purchases and sales of financial assets are accounted for at trade date. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
Fair value estimation
The determination of fair value of investments requires the use of accounting estimates and assumptions that could cause material adjustment to the carrying value of those investments.
Financial liabilities
Borrowings, deposits, debt securities in issue and subordinated liabilities, if any, are recognised initially at fair value, being the issue proceeds net of premiums, discounts and transaction costs incurred.
All borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is adjusted for the amortisation of any premiums, discounts and transaction costs. The amortisation is recognised in interest expense and similar charges using the effective interest rate method.
Financial liabilities are derecognised when the obligation is discharged, cancelled or has expired.
Derivatives
Derivatives are entered into to reduce exposures to fluctuations in interest rates, exchange rates, market indices and credit risks and are not used for speculative purposes.
Derivatives are carried at fair value with movements in fair values recorded in the Consolidated Statement of Comprehensive Income. Derivative financial instruments are valued using discounted cash flow models using yield curves that are based on observable market data or are based on valuations obtained from counterparties.
Gains and losses arising from derivative instruments are credited or charged to the Consolidated Statement of Comprehensive Income. Gains and losses of a revenue nature are reflected in the revenue column and gains and losses of a capital nature are reflected in the capital column. Gains and losses on forward foreign exchange contracts are reflected in Foreign exchange gain/(loss) in the Consolidated Statement of Comprehensive Income.
All derivatives are classified as assets where the fair value is positive and liabilities where the fair value is negative. Where there is the legal ability and intention to settle net, then the derivative is classified as a net asset or liability, as appropriate.
Securities sold under agreement to repurchase
The Group entered into an agreement with a third party to sell its ownership of an equity security under an agreement to repurchase the equity security from the third party at a future date. The Group is entitled to receive an amount equal to all income paid or distributed in respect of the equity security to the full extent it would be so entitled if the equity security had not been sold to the third party. The Group is obligated to pay the third party monthly interest.
The underlying value of the repurchase agreement is valued under the sole discretion of the third party. Reductions in the value of the repurchase agreement could require the Group to make margin calls up to the value of the repurchase agreement purchase price. No margin was called during the year. As at 31 December 2018, the agreement was set to mature on 31 March 2019. On 15 January 2019, the repurchase agreement was repaid.
Securities sold under agreements to repurchase are accounted for at fair value based on the maximum of their purchase price or the current broker bid price on the sold security.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the Consolidated Statement of Financial Position if, and only if, there is currently enforceable legal right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously.
Investments in funds
Investments in funds are measured at fair value through profit or loss. Fair value through profit or loss is determined using the NAV of the fund. The NAV is the value of all the assets of the fund less its liabilities to creditors (including provisions for such liabilities) determined in accordance with applicable accounting standards. Refer to Note 3 and Note 19 for further information.
Equity securities
Equity securities are measured at fair value. These securities are considered either Level 1 or Level 3 investments. Further details of the valuation of equity securities are included in Note 3.
Other receivables
Other receivables do not carry interest and are short-term in nature and are accordingly recognised at fair value as reduced by appropriate allowances for estimated irrecoverable amounts.
Cash and cash equivalents
Cash comprises of cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments with a maturity of 90 days or less that readily convertible to known amounts of cash.
Accrued income
The Group and Parent Company defer draw fees received from investments and the deferred fees amortise into income on a straight-line basis over the life of the loan, which approximates the effective interest rate method.
Other liabilities
Other liabilities and accrued expenses are not interest-bearing and are stated at their nominal values. Due to their short-term nature this is determined to be equivalent to their fair value.
Shares
The Ordinary Shares (the "Shares") are classified as equity. The costs of issuing or acquiring equity are recognised in equity (net of any related income tax benefit), as a reduction of equity on the condition that these are incremental costs directly attributable to the equity transaction that otherwise would have been avoided.
The costs of an equity transaction that is abandoned are recognised as an expense. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties.
The Group's equity NAV per unit is calculated by dividing the equity - net assets attributable to the holder of Shares by the total number of outstanding shares.
Treasury shares have no entitlements to vote and are held by the Company.
Foreign exchange
Transactions in foreign currencies are translated into Pound Sterling at the rate of exchange ruling on the date of each transaction. Monetary assets, liabilities and equity investments in foreign currencies at the Consolidated Statement of Financial Position date are translated into Pound Sterling at the rates of exchange ruling on that date. Profits or losses on exchange, together with differences arising on the translation of foreign currency assets or liabilities, are taken to the capital return column of the Consolidated Statement of Comprehensive Income. Foreign exchange gains and losses arising on investment assets including loans are included within Net gain/(loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.
The assets and liabilities of the Group's foreign operations are translated using the exchange rates prevailing at the reporting date. Income and expense items are translated using the average exchange rates during the period. Exchange differences arising from the translation of foreign operations are taken directly as currency translation differences through the Consolidated Statement of Comprehensive Income.
Capital reserves
Capital reserve - arising on investments sold includes:
gains/losses on disposal of investments and the related foreign exchange differences;
exchange differences on currency balances;
cost of own shares bought back; and
other capital charges and credits charged to this account in accordance with the accounting policies above.
Capital reserve - arising on investments held includes:
increases and decreases in the valuation of investments held at the year-end;
increases and decreases in the IFRS 9 reserve of investments held at the year-end; and
investments in subsidiaries by the Parent Company where retained earnings is negative.
In the instance where the retained earnings of the Parent Company's investment in a subsidiary are negative, all income and expenses from that investment are allocated to the capital reserve for both the Group and the Parent Company.
All of the above are accounted for in the Consolidated Statement of Comprehensive Income except the cost of own shares bought back, if applicable, which would be accounted for in the Consolidated Statement of Changes in Equity.
Segmental reporting
The chief operating decision maker is the Board of Directors. The Directors are of the opinion that the Group is engaged in a single segment of business, being the investment of the Group's capital in financial assets comprising consumer loans, SME loans, corporate trade receivables and/or advances thereon. The Board focuses on the overall return from these assets irrespective of the structure through which the investment is made.
Critical accounting estimates
The preparation of financial statements in conformity with IFRS adopted in the EU requires the Company to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based on the Directors' best knowledge of the amount, actual results may differ ultimately from those estimates.
The areas requiring a higher degree of judgement or complexity and areas where assumptions and estimates are significant to the financial statements, are in relation to effective interest rate, expected credit losses and investments at fair value through profit or loss. These are detailed below.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Base case and stress case cash flow methodology under IFRS 9
Each loan in the Group's investment portfolio is analysed to assess the likelihood of the Group incurring any loss either (i) in the normal course of events, or (ii) in an stress scenario. Given that these positions are all secured by specific collateral, typically in the form of loan or lease receivables, and often further secured by guarantees from the operating business, the analysis looks at the impacts on both the specific collateral, as well as any obligations of the operating business to understand how the Group's investment would fair in each scenario. The loss rate assumptions for each transaction is established using all available historical loss performance data on the specific asset pool being assessed, supplemented by additional sources as needed.
The significant estimates within these scenarios used are:
v Impact on loss rates in a stress scenario - 1.39x to 2.60x; and
v Probability of a stress scenario occurring - 24%.
Further detail on these estimates and the methodology applied are set out below.
Base case
To establish the base case model, a representative portfolio is established based on the average portfolio parameters from the actual collateral pool (based on the most recent available reporting date). The APR and term of the representative portfolio are reflected as a weighted average of the actual pool, a simplifying assumption which should largely capture the dynamics of the dispersion in the underlying. Prepayment and loss curves are established using a combination of (1) historical performance, (2) management forecasts, (3) proxy data from comparable assets or businesses, and (4) judgement from the Investment Manager's investment professionals based on general research and knowledge. Emphasis is given to the loss curves because they have a significantly larger impact on the liquidation outcomes compared to prepayments (and prepayment data is more difficult to accurately monitor for many platforms).
The timing of the loss curve is first established using a flat constant default rate model, such that we arrive at the loss speeds which would correlate to the previously determined cumulative net loss amount. For products with terms in excess of five months, the loss curve is then shifted to front load losses by increasing the monthly default rate in the first three months by 25% above the ongoing rate. This reflects that (a) for many products, losses tend to occur earlier in the life of the product, and (b) since earlier losses will necessarily result in less total interest coverage (and worse outcomes for the Group, all else being constant), this was deemed a prudent approach to loss application.
The model is then burdened with the following costs: (1) servicing costs which broadly reflect the expected costs of either (i) engaging a backup servicer to wind down the portfolio, or (ii) of operating the business through a liquidation, (2) upfront liquidation costs to reflect potential expenses associated with moving into liquidation, and (3) ongoing liquidation costs to reflect incremental costs born to oversee the liquidation.
The last input component is the terms of the Group's investment, which includes the applicable advance rate and interest rate assuming that the facility is fully levered at the time of liquidation.
The representative portfolio is deemed to reflect the most reliable and relevant information available about the portfolio attributes and expected performance. As part of the ongoing investment monitoring and risk management process, the Investment Manager is monitoring performance on the underlying collateral on a monthly basis to identify whether performance indicators are trending positively or negatively, and how much cushion exists compared to contractual covenant trigger levels. Any such changes would be reviewed to determine whether an adjustment is required to the model assumptions.
Stress case
The stress case scenario for each investment is established by taking the base case, and stressing the inputs most directly tied to outcomes to an extent consistent with the "Severely Adverse" scenario ('CCAR Stress Scenario') used in the Federal Reserve's 2017 Comprehensive Capital Analysis and Review ('CCAR') as applied to large banking institutions. The shape of the loss curve is not adjusted in the stress scenarios, only the magnitude.
Under the CCAR Stress Scenario, US unemployment peaks at 10.0% and real disposable income shrinks to 4.0% over seven quarters, which are two of the indicators most highly correlated with consumer and small business credit performance. Looking back to the time from 2007 to 2009, unemployment peaked at 9.9% and real disposable income shrunk by 8.9% to 2.9% over seven quarters. Given these and other analogous data points between the CCAR Stress Scenario and the recession from 2007-2009, it was determined that historical performance data from 2007-2009 would be the best proxy for expected collateral performance during a stress case.
For nearly all of the investments being reviewed, the primary driver of collateral value is the loss rates on the underlying loans or leases, measured by cumulative net loss, which considers the total principal losses between a given point in time and the final repayment on the portfolio. While many of the companies and asset classes being reviewed do not have historical performance data going back to pre-2007, macro-economic data is available which can be used as a proxy for the specific asset classes being analysed. One of the most robust and relevant data sets available is from US consumer credit cards - which correlate highly with many of the assets being reviewed, and for which the available data serves as a useful benchmark. Data from the Federal Reserve of Philadelphia shows the following peak to trough increases in default rates in credit card receivables in the US from the benign credit environment of 2004-2006 through the credit crisis of 2009.
Risk Score 2004 - 2007 2008 2009 2010 2011 Peak-to-Trough
2006 Multiple
Sub Prime 20.4 22.5 27.3 28.4 21.6 16.7 1.39
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Near Prime 5.6 6.7 8.2 9.8 8.2 5.7 1.75
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Prime 1.5 1.7 2.4 3.9 3.6 2.1 2.60
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As seen in the above table, default rates on sub-prime and near prime consumers (the most heavily represented segments in the Group's portfolio) increased by 1.39x-1.75x. Each portfolio was assessed based on this stress factor range, with emphasis on the more relevant classification (1.39x for sub-prime and 1.75x for near prime). Prime consumer losses increased by up to 2.60x during the same time. This stress factor was considered for portfolios with significant prime borrower exposure, though this represents a minority of the portfolio.
IFRS 9 calls for an assessment of the probability of default over the upcoming 12 months, and thus the Investment Manager provides a view of the probability of such a severe scenario occurring in the next 12 months for each of the investments which are at risk of incurring a loss (as some of the variables will vary between investments). From a macro-economic perspective, the latest recession probability models suggest a low probability of such an imminent downturn. The Cleveland Fed model predicts an 24.0% probability of a recession within the 12 months ended December 2019, and while this does not indicate the severity of such recession, it should be considered that the 2008-2009 recession which is being used as a proxy was the most prolonged and severe in at least 25 years and would not be expected to reflect a typical recession. These macro factors will be considered in the transaction level analysis as well.
Once the model has been run at the stressed scenario, if the cash flows continue to support the payment of an investment's principal and interest, the portfolio is deemed to have adequate coverage. If there is a shortfall in principal payments, a further assessment is done to note whether there are any excluded variables that need to be considered in determining the need for reserves on the position, including taking into account other additional credit enhancements provided in each deal (i.e., corporate guarantees, etc.). Such assessment would consider the likelihood of a scenario that could pose a loss and the expected magnitude of such loss in order to determine the appropriate reserve level.
For balance sheet investments, two of the primary drivers of the impairment analysis are the underlying collateral loss rates and the likelihood of an economic recession in the upcoming 12-month period. Regarding the underlying collateral loss rates, these variables are stressed by 40% to 160% as part of the impairment analysis and the impacts of those stresses are reflected in the impairment amounts. Regarding the likelihood of an economic recession in the upcoming 12-month period, an increase of 5% in this variable would have had no impact on the IFRS 9 reserve of the Group as at 31 December 2018.
For marketplace loan investments, the IFRS 9 reserve provision is estimated using historical performance data about the Group's loans which is regularly updated and reviewed. A 5% increase in relation to the assumed delinquency and loss rates would increase the provision and the impairment charge shown in the Consolidated Statement of Comprehensive Income by GBP52,266. A decrease in these assumptions would have an opposite effect.
Measurement of the expected credit loss allowance
The calculation of the Group's ECL allowances and provisions against loan commitments and guarantees under IFRS 9 is highly complex and involves the use of significant judgement and estimation. This includes the formulation and incorporation of multiple forward-looking economic conditions into ECL to meet the measurement objective of IFRS 9. The most significant judgements that have been discussed above are considered to be the expected life of the financial instrument, what is considered to be a significant increase in credit risk to affect a movement between stages, and the effect of potential future economic scenarios.
Valuation of unquoted investments
The valuation of unquoted investments and investments for which there is an inactive market is a key area of judgement and may cause material adjustment to the carrying value of those assets and liabilities. The unquoted equity assets are valued on periodic basis using techniques including a market approach, costs approach and/or income approach. The valuation process is collaborative, involving the finance and investment functions within the Investment Manager with the final valuations being reviewed by the Board's Audit and Valuation Committee. The specific techniques used typically include earnings multiples, discounted cash flow analysis, the value of recent transactions, and, where appropriate, industry rules of thumb. The valuations often reflect a synthesis of a number of different approaches in determining the final fair value estimate. The individual approach for each investment will vary depending on relevant factors that a market participant would take into account in pricing the asset. Changes in fair value of all investments held at fair value are recognised in the Consolidated Statement of Comprehensive Income as a capital item. On disposal, realised gains and losses are also recognised in the Consolidated Statement of Comprehensive Income as a capital item. Transaction costs are included within gains or losses on investments held at fair value, although any related interest income, dividend income and finance costs are disclosed separately in the Consolidated Financial Statements.
Critical accounting judgments
Judgement is required to determine whether the Parent Company exercises control over its investee entities and whether they should be consolidated. Control is achieved where the Parent Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Parent Company controls an investee entity when the Parent Company is exposed to, or has rights to, variable returns from its investment and has the ability to affect those returns through its power over the entity. At each reporting date an assessment is undertaken of investee entities to determine control. In the intervening period assessments are undertaken where circumstances change that may give rise to a change in the control assessment. These include when an investment is made into a new entity, or an amendment to existing entity documentation or processes. When assessing whether the Parent Company has the power to affect its variable returns, and therefore control investee entities, an assessment is undertaken of the Parent Company's ability to influence the relevant activities of the investee entity. These activities include considering the ability to appoint or remove key management or the manager, which party has decision making powers over the entity and whether the manager of an entity is acting as principal or agent. The assessment undertaken for entities considers the Parent Company's level of investment into the entity and its intended long-term holding in the entity and there may be instances where the Parent Company owns less than 51% of an investee entity but that entity it consolidated. Further details of the Parent Company's subsidiaries are included in Note 17.
The Group's investments in associates all consist of limited partner interest in funds. There are no significant restrictions between investors with joint control or significant influence over the associates listed above on the ability of the associates to transfer funds to any party in the form of cash dividends or to repay loans or advances made by the Group. The Group holds 52% interest in Larkdale III, L.P. while the Group's ultimate ownership of the investment held by Larkdale III, L.P. is 34%. The Group has determined it does not have accounting control as the general partner has operating control over the vehicle and acts as an agent for a number of the Investment Manager's funds. Further details of the Parent Company's associates are included in Note 19.
Accounting standards issued but not yet effective or not material to the Group
IFRS 15 'Revenue from Contracts with Customers' requires revenue to be recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring services to a customer. This standard is effective from 1 January 2018. This standard does not have a material impact on the Group's financial statements.
IFRS 16 'Leases' eliminates the classification of leases as either operating leases or finance leases for a lessee and requires lease assets and lease liabilities to be recognised in the Statement of Financial Position, initially measured at present value of future lease payments. In addition, depreciation of the lease assets and interest on lease liabilities will be recognised in the Statement of Comprehensive Income. Cash payments will be separated into principal and interest in the Statement of Cash flows. This standard is effective from 1 January 2019. This will not have a material impact on the net assets or results given that the Group does not enter into leases.
3. FAIR VALUE MEASUREMENT
Financial instruments measured and reported at fair value are classified and disclosed in one of the following fair value hierarchy levels based on the significance of the inputs used in measuring its fair value:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities;
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 - Pricing inputs for the asset or liability that are not based on observable market data (unobservable inputs).
An investment is always categorised as Level 1, 2 or 3 in its entirety. In certain cases, the fair value measurement for an investment may use a number of different inputs that fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and is specific to the investment.
Valuation of investments in funds
The Group's investments in funds are subject to the terms and conditions of the respective fund's offering documentation. The investments in funds are primarily valued based on the latest available financial information. The Investment Manager reviews the details of the reported information obtained from the funds and considers: (i) the valuation of the fund's underlying investments; (ii) the value date of the NAV provided; (iii) cash flows (calls/distributions) since the latest value date; and (iv) the basis of accounting and, in instances where the basis of accounting is other than fair value, fair valuation information provided by the funds. If necessary, adjustments to the NAV are made to the funds to obtain the best estimate of fair value. The funds in which the Group invests are close-ended and unquoted. No adjustments have been determined to be necessary to the NAV as provided as at 31 December 2018 as this reflects fair value under the relevant valuation methodology. The NAV is provided to investors only and is not made publicly available.
Valuation of equity securities
Fair value is determined based on the Group's valuation methodology, which is either determined using market comparables, discounted cash flow models or recent transactions.
In using a valuation methodology based on the discounting of forecasted cash flows of the Portfolio Company, significant judgment is required in the development of an appropriate discount rate to be applied to the forecasted cash flows. The assumptions incorporated in the valuation methodologies used to estimate the enterprise value consists primarily of unobservable Level 3 inputs, including management assumptions based on judgment. For example, from time to time, a Portfolio Company has exposure to potential or actual litigation. In evaluating the impact on the valuation for such items, the amount that a market participant would consider in estimating fair value is considered. These estimates are highly subjective, based on the Group's assessment of the potential outcome(s) and the related impact on the fair value of such potential outcome(s). A change in these assumptions could have a material impact on the determination of fair value.
In using a valuation methodology based on comparable public companies or sales of private or public comparable companies, significant judgment is required in the application of discounts or premiums to the prices of comparable companies for factors such as size, marketability and relative performance.
Under the yield analysis approach, expected future cash flows are discounted back using a discount rate. The discount rate used incorporates market based yields for similar credits to the public market and the underlying risk of the individual credit.
Fair value disclosures
The following table analyses the fair value hierarchy of the Group's assets and liabilities measured at fair value at 31 December 2018:
Total Level 1 Level 2 Level 3
------------------------------
Investment assets designated
as held
at fair value GBP GBP GBP GBP
------------------------------ ---------------- ------------------------ ------------------------ ----------------
Investments in funds 27,922,819 - - 27,922,819
============================== ================ ======================== ======================== ================
Equity securities 38,721,738 3,554,496 - 35,167,242
Total 66,644,557 3,554,496 - 63,090,061
------------------------------ ---------------- ------------------------ ------------------------ ----------------
Total Level 1 Level 2 Level 3
------------------------------------
Derivative financial assets GBP GBP GBP GBP
------------------------------------ ---------- ------------------------ ---------- ------------------------
Forward foreign exchange contracts 1,241,936 - 1,241,936 -
Total 1,241,936 - 1,241,936 -
------------------------------------ ---------- ------------------------ ---------- ------------------------
Total Level 1 Level 2 Level 3
------------------------------------
Derivative financial liabilities GBP GBP GBP GBP
------------------------------------ -------- ------------------------ -------- ------------------------
Forward foreign exchange contracts 471,607 - 471,607 -
Total 471,607 - 471,607 -
------------------------------------ -------- ------------------------ -------- ------------------------
The following table analyses the fair value hierarchy of the Group's assets and liabilities measured at fair value at 31 December 2017:
Total Level 1 Level 2 Level 3
--------------------------------------
Investment assets designated as held
at fair value GBP GBP GBP GBP
-------------------------------------- ----------- ------------------------ ------------------------ -----------
Investments in funds 26,962,134 - - 26,962,134
====================================== =========== ======================== ======================== ===========
Equity securities 32,621,131 6,648,612 - 25,972,519
Total 59,583,265 6,648,612 - 52,934,653
-------------------------------------- ----------- ------------------------ ------------------------ -----------
Total Level 1 Level 2 Level 3
------------------------------------
Derivative financial assets GBP GBP GBP GBP
------------------------------------ ---------- ------------------------ ------------------------ ----------
Forward foreign exchange contracts 3,297,847 - - 3,297,847
Total 3,297,847 - - 3,297,847
------------------------------------ ---------- ------------------------ ------------------------ ----------
The following table analyses the fair value hierarchy of the Parent Company's assets and liabilities measured at fair value at 31 December 2018:
Total Level 1 Level 2 Level 3
--------------------------------
Investment assets designated as
held
at fair value GBP GBP GBP GBP
-------------------------------- --------------- ------------------------ ------------------------ ---------------
Investments in funds 27,922,819 - - 27,922,819
================================ =============== ======================== ======================== ===============
Total 27,922,819 - - 27,922,819
-------------------------------- --------------- ------------------------ ------------------------ ---------------
Total Level 1 Level 2 Level 3
------------------------------------
Derivative financial assets GBP GBP GBP GBP
------------------------------------ ---------- ------------------------ ---------- ------------------------
Forward foreign exchange contracts 1,241,936 - 1,241,936 -
Total 1,241,936 - 1,241,936 -
------------------------------------ ---------- ------------------------ ---------- ------------------------
Total Level 1 Level 2 Level 3
------------------------------------
Derivative financial liabilities GBP GBP GBP GBP
------------------------------------ -------- ------------------------ -------- ------------------------
Forward foreign exchange contracts 471,607 - 471,607 -
Total 471,607 - 471,607 -
------------------------------------ -------- ------------------------ -------- ------------------------
The following table analyses the fair value hierarchy of the Parent Company's assets and liabilities measured at fair value at 31 December 2017:
Total Level 1 Level 2 Level 3
--------------------------------------
Investment assets designated as held
at fair value GBP GBP GBP GBP
-------------------------------------- ----------- ------------------------ ------------------------ -----------
Investments in funds 26,962,134 - - 26,962,134
====================================== =========== ======================== ======================== ===========
Total 26,962,134 - - 26,962,134
-------------------------------------- ----------- ------------------------ ------------------------ -----------
Total Level 1 Level 2 Level 3
------------------------------------
Derivative financial assets GBP GBP GBP GBP
------------------------------------ ---------- ------------------------ ------------------------ ----------
Forward foreign exchange contracts 3,297,847 - - 3,297,847
Total 3,297,847 - - 3,297,847 ------------------------------------ ---------- ------------------------ ------------------------ ----------
There were no transfers into and out of Level 3 fair value measurements for either the Parent Company or the Group during the years ended 31 December 2018 and 31 December 2017.
The following table presents the movement in Level 3 positions for the year ended 31 December 2018 for the Group:
INVESTMENTS EQUITY
IN FUNDS SECURITIES
GBP GBP
================================================= ================================ ==============================
Beginning balance, 1 January 2018 26,962,134 25,972,519
================================================= ================================ ==============================
Purchases 3,172,672 12,507,648
================================================= ================================ ==============================
Sales (3,615,456) (3,945,611)
================================================= ================================ ==============================
Net change in unrealised foreign exchange gains
(losses) 1,788,304 1,488,243
================================================= ================================ ==============================
Net change in unrealised gains (losses) (384,835) (855,557)
Ending balance, 31 December 2018 27,922,819 35,167,242
================================================= ================================ ==============================
The net change in unrealised gains (losses) is recognised within gains (losses) on investments in the Consolidated Statement of Comprehensive Income.
The following table presents the movement in Level 3 positions for the year ended 31 December 2017 for the Group:
INVESTMENTS EQUITY
IN FUNDS SECURITIES
GBP GBP
================================================= ============================== =============================
Beginning balance, 1 January 2017 31,298,331 28,316,506
================================================= ============================== =============================
Purchases 3,871,909 11,725,606
================================================= ============================== =============================
Sales (3,673,097) (7,109,220)
================================================= ============================== =============================
Net change in unrealised foreign exchange gains
(losses) (1,977,116) (510,723)
================================================= ============================== =============================
Net change in unrealised gains (losses) (2,557,893) (6,449,650)
Ending balance, 31 December 2017 26,962,134 25,972,519
================================================= ============================== =============================
The following table presents the movement in Level 3 positions for the period ended 31 December 2018 for the Parent Company:
INVESTMENTS
IN FUNDS
GBP
========================================================== ==============================
Beginning balance, 1 January 2018 26,962,134
========================================================== ==============================
Purchases 3,172,672
========================================================== ==============================
Sales (3,615,456)
========================================================== ==============================
Net change in unrealised foreign exchange gains (losses) 1,788,304
========================================================== ==============================
Net change in unrealised gains (losses) (384,835)
Ending balance, 31 December 2018 27,922,819
========================================================== ==============================
The following table presents the movement in Level 3 positions for the period ended 31 December 2017 for the Parent Company:
INVESTMENTS
IN FUNDS
GBP
========================================================== ==============================
Beginning balance, 1 January 2017 31,298,331
========================================================== ==============================
Purchases 3,871,909
========================================================== ==============================
Sales (3,673,097)
========================================================== ==============================
Net change in unrealised foreign exchange gains (losses) (1,977,116)
========================================================== ==============================
Net change in unrealised gains (losses) (2,557,893)
Ending balance, 31 December 2017 26,962,134
========================================================== ==============================
Quantitative information regarding the unobservable inputs for Level 3 positions is given below:
FAIR VALUE
AT
31 DECEMBER
2018
DESCRIPTION GBP VALUATION TECHNIQUE UNOBSERVABLE INPUT RANGE
================== ============ ==================== ========================== ==============
Investments in 27,922,819 Net asset value N/A N/A
funds
================== ============ ==================== ========================== ==============
Equity securities 14,022,947 Market Comparables Price Per Share US$0.30 -
from Recent Transactions CHF 1,110.12
Rights and Preferences 0.0% - 20.0%
Discount
================== ============ ==================== ========================== ==============
Equity securities 7,075,826 Discounted Cash Discount Rate
Flows 16.0% - 40.0%
Projected Cumulative
Losses 33.7% - 34.5%
================== ============ ==================== ========================== ==============
Equity securities 5,439,322 Yield Analysis Market Yield 13.9% - 16.7%
================== ============ ==================== ========================== ==============
Equity securities 8,629,147 Transaction Price N/A N/A
================== ============ ==================== ========================== ==============
The investments in funds consist of investments in Larkdale III, L.P. and VPC Offshore Unleveraged Private Debt Fund, L.P. These are valued based on the NAV as calculated at the balance sheet date. No adjustments have been deemed necessary to the NAV as it reflects the fair value of the underlying investments, as such no specific unobservable inputs have been identified. The NAVs are sensitive to movements in interest rates due to the funds' underlying investment in loans.
If the price per share from recent transactions of the equity securities valued based on market comparables increased / decreased by 5% it would have resulted in an increase / decrease to the total value of those equity securities of GBP654,630 which would affect the Net gain / (loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.
If the rights and preferences discount of the equity securities valued based on market comparables increased / decreased by 5% it would have resulted in an increase / decrease to the total value of those equity securities of GBP461,272 which would affect the Net gain / (loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.
If the discount rate of the equity securities valued based on discounted cash flows increased / decreased by 2% it would have resulted in an increase / decrease to the total value of those equity securities of GBP88,014 which would affect the Net gain / (loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.
If the projected cumulative losses of the equity securities valued based on discounted cash flows increase / decreased by 1% it would have resulted in an decrease / increase to the total value of those equity securities of GBP165,264 which would affect the Net gain / (loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.
If the price of all the investment assets held at period end, including individually those mentioned above, had increased / decreased by 5% it would have resulted in an increase / decrease in the total value the investments in funds and equity securities of GBP3,154,503 which would affect the Net gain / (loss) on investments within the capital return column of the Consolidated Statement of Comprehensive Income.
Assets and liabilities not carried at fair value but for which fair value is disclosed
The following table presents the fair value of the Group's assets and liabilities not measured at fair value through profit and loss at 31 December 2018 but for which fair value is disclosed:
CARRYING FAIR MARKET
VALUE VALUE
GBP GBP
======== ====================== ======================
Assets
======== ====================== ======================
Loans 306,781,153 306,817,645
======== ====================== ======================
Total 306,781,153 306,817,645
======== ====================== ======================
For all other assets and liabilities not carried at fair value, the carrying value is a reasonable approximation of fair value.
The following table presents the fair value of the Group's assets and liabilities not measured at fair value through profit and loss at 31 December 2017 but for which fair value is disclosed:
CARRYING FAIR MARKET
VALUE VALUE
GBP GBP
======== ====================== ======================
Assets
======== ====================== ======================
Loans 306,446,357 306,307,203
======== ====================== ======================
Total 306,446,357 306,307,203
======== ====================== ======================
For all other assets and liabilities not carried at fair value, the carrying value is a reasonable approximation of fair value.
4. DERIVATIVES
Typically, derivative contracts serve as components of the Group's investment strategy and are utilised primarily to structure and hedge investments to enhance performance and reduce risk to the Group (the Group currently does not designate any derivatives as hedges for hedge accounting purposes as described under IFRS 9). Derivative instruments are also used for trading purposes where the Investment Manager believes this would be more effective than investing directly in the underlying financial instruments. The only derivative contracts that the Group currently holds or issues are forward foreign exchange contracts.
The Group measures its derivative instruments on a fair value basis. See Note 2 for the valuation policy for financial instruments.
Forward contracts
Forward contracts entered into represent a firm commitment to buy or sell an underlying asset, or currency at a specified value and point in time based upon an agreed or contracted quantity. The realised/unrealised gain or loss is equal to the difference between the value of the contract at the onset and the value of the contract at settlement date/year end date and is included in the Consolidated Statement of Comprehensive Income.
As at 31 December 2018, the following forward foreign exchange contracts were included in the Group's Consolidated Statement of Financial Position at fair value through profit or loss and the Parent Company's Statement of Financial Position at fair value through profit or loss:
PURCHASE PURCHASE FAIR VALUE
SETTLEMENT DATE CURRENCY AMOUNT SALE CURRENCY SALE AMOUNT GBP
============================= =========== ===================== ============== ============ ===========
22 February 2019 GBP 44,688,358 USD 57,000,000 413,409
============================= =========== ===================== ============== ============ ===========
22 February 2019 GBP 122,559,624 USD 156,324,800 802,721
============================= =========== ===================== ============== ============ ===========
22 February 2019 GBP 5,100,000 EUR 4,616,520 28,203
============================= =========== ===================== ============== ============ ===========
Unrealised gains on forward
foreign exchange contracts 1,244,333
========================================== ===================== ============== ============ ===========
PURCHASE PURCHASE FAIR VALUE
SETTLEMENT DATE CURRENCY AMOUNT SALE CURRENCY SALE AMOUNT GBP
============================== =========== ================ ============== ============ ===========
18 January 2019 GBP 101,136,809 USD 129,000,000 (471,607)
============================== =========== ================ ============== ============ ===========
22 February 2019 EUR 669,980 GBP 669,980 (2,397)
============================== =========== ================ ============== ============ ===========
Unrealised losses on forward
foreign exchange contracts (474,004)
=========================================== ================ ============== ============ ===========
As at 31 December 2017, the following forward foreign exchange contracts were included in the Group's Consolidated Statement of Financial Position at fair value through profit or loss and the Parent Company's Statement of Financial Position at fair value through profit or loss:
PURCHASE FAIR VALUE
SETTLEMENT DATE PURCHASE CURRENCY AMOUNT SALE CURRENCY SALE AMOUNT GBP
============================= =================== ============ ============== ============ ===================
19 January 2018 GBP 117,625,300 USD 159,000,000 2,936,398
============================= =================== ============ ============== ============ ===================
9 February 2018 GBP 877,384 USD 12,000,000 54,448
============================= =================== ============ ============== ============ ===================
9 February 2018 GBP 103,569,447 USD 140,000,000 557,818
============================= =================== ============ ============== ============ ===================
Unrealised gain on forward
foreign exchange contracts 3,548,664
================================================== ============ ============== ============ ===================
PURCHASE PURCHASE FAIR VALUE
SETTLEMENT DATE CURRENCY AMOUNT SALE CURRENCY SALE AMOUNT GBP
============================== =========== ================= ============== ============ ===================
9 February 2018 GBP 16,696,250 EUR 19,000,000 (201,590)
============================== =========== ================= ============== ============ ===================
19 January 2019 USD 10,000,000 GBP 7,397,817 (49,227)
============================== =========== ================= ============== ============ ===================
Unrealised losses on forward
foreign exchange contracts (250,817)
=========================================== ================= ============== ============ ===================
The following tables provide information on the financial impact of netting for instruments subject to an enforceable master netting arrangement or similar agreement at 31 December 2018 for both the Parent Company and the Group:
RELATED AMOUNTS
NOT ELIGBIBLE TO
BE SET-OFF IN THE
STATEMENT OF FINANCIAL
POSITION
---------------------------------------------------
GROSS AMOUNTS
GROSS OF FINANCIAL NET AMOUNTS
AMOUNTS LIABILITIES OF RECOGNISED
OF TO BE SET-OFF ASSETS PRESENTED
RECOGNISED IN THE STATEMENT IN THE STATEMENT
FINANCIAL OF FINANCIAL OF FINANCIAL FINANCIAL COLLATERAL
ASSETS POSITION POSITION INSTRUMENTS RECEIVED NET AMOUNT
AS AT 31
DECEMBER
2018 GBP GBP GBP GBP GBP GBP
============= =========== ============================= =============================== ======================== ========================= =====================
Bannockburn
Global 413,409 - 413,409 - - 413,409
============= =========== ============================= =============================== ======================== ========================= =====================
Goldman
Sachs 830,924 (2,397) 828,527 - - 828,527
============= =========== ============================= =============================== ======================== ========================= =====================
Morgan - - - - - -
Stanley
------------- ----------- ----------------------------- ------------------------------- ------------------------ ------------------------- ---------------------
Total 1,244,333 (2,397) 1,241,936 - - 1,241,936
------------- ----------- ----------------------------- ------------------------------- ------------------------ ------------------------- ---------------------
RELATED AMOUNTS
NOT ELIGBIBLE TO
BE SET-OFF IN THE
STATEMENT OF FINANCIAL
POSITION
---------------------------------------------------
GROSS AMOUNTS NET AMOUNTS
GROSS OF FINANCIAL OF RECOGNISED
AMOUNTS ASSETS TO LIABILITIES
OF BE SET-OFF PRESENTED
RECOGNISED IN THE STATEMENT IN THE STATEMENT
FINANCIAL OF FINANCIAL OF FINANCIAL FINANCIAL COLLATERAL
LIABILITIES POSITION POSITION INSTRUMENTS RECEIVED NET AMOUNT
AS AT 31
DECEMBER
2018 GBP GBP GBP GBP GBP GBP
============= ============ ============================= =============================== ======================== ========================= =====================
Bannockburn
Global - - - - - -
============= ============ ============================= =============================== ======================== ========================= =====================
Goldman
Sachs 2,397 (2,397) - - - -
============= ============ ============================= =============================== ======================== ========================= =====================
Morgan
Stanley 471,607 - 471,607 - - 471,607
Total 474,004 (2,397) 471,607 - - 471,607
------------- ------------ ----------------------------- ------------------------------- ------------------------ ------------------------- ---------------------
The following tables provide information on the financial impact of netting for instruments subject to an enforceable master netting arrangement or similar agreement at 31 December 2017 for both the Parent Company and the Group:
RELATED AMOUNTS
NOT ELIGBIBLE TO
BE SET-OFF IN THE
STATEMENT OF FINANCIAL
POSITION
---------------------------------------------------
GROSS
AMOUNTS NET
OF AMOUNTS
FINANCIAL OF
LIABILITIES RECOGNISED
TO BE ASSETS
GROSS SET-OFF PRESENTED
AMOUNTS IN THE IN THE
OF STATEMENT STATEMENT
RECOGNISED OF OF
FINANCIAL FINANCIAL FINANCIAL FINANCIAL COLLATERAL
ASSETS POSITION POSITION INSTRUMENTS RECEIVED NET AMOUNT
AS AT 31
DECEMBER
2017 GBP GBP GBP GBP GBP GBP
============ =========== ============ =========== ======================== ========================= ===========
Goldman
Sachs 612,266 (201,590) 410,676 - - 410,676
============ =========== ============ =========== ======================== ========================= ===========
Morgan
Stanley 2,936,398 (49,227) 2,887,171 - - 2,887,171
------------ ----------- ------------ ----------- ------------------------ ------------------------- -----------
Total 3,548,664 (250,817) 3,297,847 - - 3,297,847
------------ ----------- ------------ ----------- ------------------------ ------------------------- -----------
RELATED AMOUNTS NOT
ELIGBIBLE TO BE SET-OFF
IN THE STATEMENT
OF FINANCIAL POSITION
---------------------------------------------------
GROSS
AMOUNTS
OF
FINANCIAL
ASSETS TO NET AMOUNTS
GROSS BE SET-OFF OF RECOGNISED
AMOUNTS IN THE LIABILITIES
OF STATEMENT PRESENTED
RECOGNISED OF IN THE STATEMENT
FINANCIAL FINANCIAL OF FINANCIAL FINANCIAL COLLATERAL
LIABILITIES POSITION POSITION INSTRUMENTS RECEIVED NET AMOUNT
AS AT 31
DECEMBER
2017 GBP GBP GBP GBP GBP GBP
========== ============ =========== =============================== ======================== ========================= =====================
Goldman
Sachs 201,590 (201,590) - - - -
========== ============ =========== =============================== ======================== ========================= =====================
Morgan
Stanley 49,227 (49,227) - - - -
Total 250,817 (250,817) - - - -
---------- ------------ ----------- ------------------------------- ------------------------ ------------------------- ---------------------
5. INCOME AND GAINS ON INVESTMENTS AND LOANS
Interest income in the amount of GBP45,018,101 (31 December 2017: GBP35,751,011) has been allocated to revenue and GBP818,323 (31 December 2017: GBP23,695,267) has been allocated to capital in line with the Group's policy as set out in Note 2.
31 DECEMBER 31 DECEMBER
2018 2017
GBP GBP
=================================================== ============ ====================================
Other Income
=================================================== ============ ====================================
Distributable income from investments in funds 2,339,179 2,030,615
=================================================== ============ ====================================
Interest income from investment assets designated 567,629 -
as held at fair value through profit or loss
=================================================== ============ ====================================
Dividend income 113,435 143,215
=================================================== ============ ====================================
Total 3,020,243 2,173,830
--------------------------------------------------- ------------ ------------------------------------
31 DECEMBER 31 DECEMBER
2018 2017
GBP GBP
=============================================== ==================================== ===========================
Net gains (losses) on investments
=============================================== ==================================== ===========================
Realised loss on sale of investments - (11,992,291)
=============================================== ==================================== ===========================
Realised gain on sale of investments 1,504,722 1,875,039
=============================================== ==================================== ===========================
Unrealised gain (loss) on investment in funds (384,835) 246,939
=============================================== ==================================== ===========================
Unrealised gain (loss) on equity securities (3,357,754) (8,752,818)
----------------------------------------------- ------------------------------------ ---------------------------
Total (2,237,867) (18,623,131)
----------------------------------------------- ------------------------------------ ---------------------------
6. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS
Introduction
Risk is inherent in the Group's activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The Group is exposed to market risk (which includes currency risk, interest rate risk and other price risk), credit risk and liquidity risk arising from the financial instruments held by the Group.
Risk management structure
The Directors are ultimately responsible for identifying and controlling risks. Day to day management of the risk arising from the financial instruments held by the Group has been delegated to Victory Park Capital Advisors, LLC as Investment Manager to the Parent Company and the Group.
The Investment Manager regularly reviews the investment portfolio and industry developments to ensure that any events which impact the Group are identified and considered. This also ensures that any risks affecting the investment portfolio are identified and mitigated to the fullest extent possible.
The Group has no employees and the Directors have all been appointed on a Non-Executive basis. Whilst the Group has taken all reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations, the Group is reliant upon the performance of third party service providers for its executive function. In particular, the Investment Manager, the Custodian, the Administrator and the Registrar will be performing services which are integral to the operation of the Group. Failure by any service provider to carry out its obligations to the Group in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Group.
The principal risks and uncertainties that could have a material impact on the Group's performance have not changed from those set out in detail on pages 14 to 24 of the Parent Company's IPO Prospectus.
In seeking to implement the investment objectives of the Parent Company while limiting risk, the Parent Company and the Group are subject to the investment limits restrictions set out in the Credit Risk section of this note.
Market risk (incorporating price, interest rate risk and currency)
Market risk is the risk of loss arising from movements in observable market variables such as foreign exchange rates, equity prices and interest rates. The Group is exposed to market risk primarily through its Financial Instruments.
Market price risk
The Group is exposed to price risk arising from the investments held by the Group for which prices in the future are uncertain. The investment in funds and equity investments are exposed to market price risk. Refer to Note 3 for further details on the sensitivity of the Group's Level 3 investments to price risk.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments.
The Group is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Due to the nature of the investments at 31 December 2018, the Group has limited exposure to variations in interest rates as the key components of interest rates are fixed and determinable or variable based on the size of the loan.
While the Group is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows, the downside exposure of the Group is limited at 31 December 2018 due to the fixed rate nature of the investments or interest rate floors that are in place on most of the Group's variable interest rate loans. As at 31 December 2018, if interest rates had increased by 1%, with all other variables held constant, the change in one month of future cash flows on the current investment portfolio would have been GBP178,302. If interest rates had decreased by 1%, with all other variables held constant, the change in one month of future cash flows on the current investment portfolio would be GBP(159,852).
The Group does not intend to hedge interest rate risk on a regular basis. However, where it enters floating rate liabilities against fixed-rate loans, it may at its sole discretion seek to hedge out the interest rate exposure, taking into consideration amongst other things the cost of hedging and the general interest rate environment.
Currency risk
Currency risk is the risk that the value of net assets will fluctuate due to changes in foreign exchange rates. Relevant risk variables are generally movements in the exchange rates of non-functional currencies in which the Group holds financial assets and liabilities.
The assets of the Group as at 31 December 2018 are invested in assets which are denominated in US Dollars, Euros, Pound Sterling and other currencies. Accordingly, the value of such assets may be affected favourably or unfavourably by fluctuations in currency rates. The Group hedges currency exposure between Pound Sterling and any other currency in which the Group's assets may be denominated, in particular US Dollars, and Euros.
Brexit has been and could continue to be a driver for potential exchange rate volatility and the devaluation of Sterling. The Group's policy is to hedge exchange rate risk where appropriate, which could lead to the potential of large cash margin calls. The Group's new gearing facility with CapitalSource was put in place to mitigate this risk.
Micro and Small Cap Company Investing Risk
The Group will generally invest with companies that are small, not widely known and not widely held. Small companies tend to be more vulnerable to adverse developments than larger companies and may have little or no track records. Small companies may have limited product lines, markets, or financial resources, and may depend on less seasoned management. Their securities may trade infrequently and in limited volumes. It may take a relatively long period of time to accumulate an investment in a particular issue in order to minimise the effect of purchases on market price. Similarly, it could be difficult to dispose of such investments on a timely basis without adversely affecting market prices. As a result, the prices of these securities may fluctuate more than the prices of larger, more widely traded companies. Also, there may be less publicly available information about small companies or less market interest in their securities compared to larger companies, and it may take longer for the prices of these securities to reflect the full value of their issuers' earnings potential or assets.
Gearing and Borrowing Risk
Whilst the use of borrowings by the Group should enhance the net asset value of an investment when the value of an investment's underlying assets is rising, it will, however, have the opposite effect where the underlying asset value is falling. In addition, in the event that an investment's income falls for whatever reason, the use of borrowings will increase the impact of such a fall on the net revenue of the Group's investment and accordingly will have an adverse effect on the ability of the investment to make distributions to the Group. This risk is mitigated by limiting borrowings to ring-fenced SPVs without recourse to the Group and employing gearing in a disciplined manner.
Concentration of foreign currency exposure
The Investment Manager monitors the fluctuations in foreign currency exchange rates and may use forward foreign exchange contracts to hedge the currency exposure of the Parent Company and Group's non-GBP denominated investments. The Investment Manager re-examines the currency exposure on a regular basis in each currency and manages the Parent Company's currency exposure in accordance with market expectations.
The below table presents the net exposure to foreign currency at 31 December 2018. The table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded on the Group's Consolidated Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2018 2018 2018 2018
GBP GBP GBP GBP
============== ============ ================================= ================================= ============
Euro 5,263,556 - 5,244,545 19,011
=============== ============ ================================= ================================= ============
US Dollar 324,440,119 (52,671,812) 271,234,862 533,445
=============== ============ ================================= ================================= ============
Swiss Francs 1,766,279 - - 1,766,279
=============== ============ ================================= ================================= ============
If the GBP exchange rate simultaneously increased/decreased by 10% against the above currencies, the impact on profit would be an increase/decrease of GBP231,873. 10% is considered to be a reasonably possible movement in foreign exchange rates. The table above includes the exposure of the non-consolidated interest investment in the Group.
The below table presents the net exposure to foreign currency at 31 December 2017. The table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded on the Group's Consolidated Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2017 2017 2017 2017
GBP GBP GBP GBP
================= ============ ================================= ================================= ============
Euro 22,853,330 (5,195,513) 16,852,617 805,200
================== ============ ================================= ================================= ============
US Dollar 290,521,048 (48,044,465) 240,856,038 1,620,545
================== ============ ================================= ================================= ============
Swiss Francs 825,455 - - 825,455
============
Australian Dollar 1,769,337 - - 1,769,337
================== ============ ================================= ================================= ============
The table below presents the net exposure to foreign currency at 31 December 2018. The table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded on the Parent Company's Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2018 2018 2018 2018
GBP GBP GBP GBP
============== ============ ================================= ================================= ============
Euro 5,263,556 - 5,244,545 19,011
=============== ============ ================================= ================================= ============
US Dollar 271,521,961 - 271,234,862 287,099
=============== ============ ================================= ================================= ============
Swiss Francs 1,766,279 - - 1,766,279
=============== ============ ================================= ================================= ============
If the GBP exchange rate simultaneously increased/decreased by 10% against the above currencies, the impact on profit would be an increase/decrease of GBP207,239. 10% is considered to be a reasonably possible movement in foreign exchange rates.
The table below presents the net exposure to foreign currency at 31 December 2017. The table includes forward foreign exchange contracts at their notional exposure value and excludes all GBP assets and liabilities recorded on the Parent Company's Statement of Financial Position.
FORWARD NET
ASSETS LIABILITIES CONTRACTS EXPOSURE
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2017 2017 2017 2017
GBP GBP GBP GBP
================= ============ ================================= ================================= ============
Euro 17,657,817 - 16,852,617 805,200
================== ============ ================================= ================================= ============
US Dollar 241,634,063 - 240,856,038 778,025
================== ============ ================================= ================================= ============
Swiss Francs 825,455 - - 825,455
================================= ============
Australian Dollar 1,769,337 - - 1,769,337
================== ============ ================================= ================================= ============
Liquidity risk
Liquidity risk is defined as the risk that the Group may not be able to settle or meet its obligations on time or at a reasonable price. Ordinary Shares are not redeemable at the holder's option.
The maturities of the non-current financial liabilities are disclosed in Note 8. The following tables show the contractual maturity of the financial assets and financial liabilities of the Group as at 31 December 2018:
WITHIN ONE ONE TO FIVE OVER FIVE
YEAR YEARS YEARS TOTAL
GBP GBP GBP GBP
=================================== =========== ============ ========== ============
Assets
=================================== =========== ============ ========== ============
Loans 60,040,370 246,740,783 - 306,781,153
=================================== =========== ============ ========== ============
Cash and cash equivalents 3,269,332 - - 3,269,332
=================================== =========== ============ ========== ============
Cash posted as collateral 2,282,428 - - 2,282,428
=================================== =========== ============ ========== ============
Interest receivable 3,480,277 - - 3,480,277
=================================== =========== ============ ========== ============
Dividend receivable 615,416 - - 615,416
=================================== =========== ============ ========== ============
Other assets and prepaid expenses 772,749 - - 772,749
==========
Total 70,460,572 246,740,783 - 317,201,355
=================================== =========== ============ ========== ============
WITHIN ONE ONE TO FIVE OVER FIVE
YEAR YEARS YEARS TOTAL
GBP GBP GBP GBP
================================== =========== ============ ========== ===========
Liabilities
================================== =========== ============ ========== ===========
Notes payable - 51,329,831 - 51,329,831
================================== =========== ============ ========== ===========
Management fee payable 153,301 - - 153,301
================================== =========== ============ ========== ===========
Performance fee payable 2,277,215 - - 2,277,215
================================== =========== ============ ========== ===========
Amounts payable under agreements
to repurchase 1,341,981 - - 1,341,981
================================== =========== ============ ========== ===========
Deferred income 544,585 - - 544,585
================================== =========== ============ ========== ===========
Other liabilities and accrued
expenses 989,615 - - 989,615
================================== =========== ============ ========== ===========
Total 5,306,697 51,329,831 - 56,636,528
================================== =========== ============ ========== ===========
The following tables show the contractual maturity of the financial assets and financial liabilities of the Group as at 31 December 2017:
WITHIN ONE ONE TO FIVE OVER FIVE
YEAR YEARS YEARS TOTAL
GBP GBP GBP GBP
=================================== =========== ============ ========== ============
Assets
=================================== =========== ============ ========== ============
Loans 2,027,261 304,419,096 - 306,446,357
=================================== =========== ============ ========== ============
Cash and cash equivalents 18,353,574 - - 18,353,574
=================================== =========== ============ ========== ============
Cash posted as collateral 4,427,301 - - 4,427,301
=================================== =========== ============ ========== ============
Interest receivable 3,576,027 - - 3,576,027
=================================== =========== ============ ========== ============
Dividend receivable 530,826 - - 530,826
=================================== =========== ============ ========== ============
Other assets and prepaid expenses 798,169 - - 798,169
==========
Total 29,713,158 304,419,096 - 334,132,254
=================================== =========== ============ ========== ============
WITHIN ONE ONE TO FIVE OVER FIVE
YEAR YEARS YEARS TOTAL
GBP GBP GBP GBP
================================== =========== ============ ========== ===========
Liabilities
================================== =========== ============ ========== ===========
Notes payable - 44,298,421 - 44,298,421
================================== =========== ============ ========== ===========
Management fee payable 420,339 - - 420,339
================================== =========== ============ ========== ===========
Amounts payable under agreements
to repurchase 8,941,557 - - 8,941,557
================================== =========== ============ ========== ===========
Unsettled share buyback payable 194,682 - 194,682
================================== =========== ============ ========== ===========
Deferred income 776,514 - - 776,514
================================== =========== ============ ========== ===========
Other liabilities and accrued
expenses 2,138,315 - - 2,138,315
================================== =========== ============ ========== ===========
Total 12,471,407 44,298,421 - 56,769,828
================================== =========== ============ ========== ===========
The Investment Manager manages the Group's liquidity risk by investing primarily in a diverse portfolio of assets. At 31 December 2018, the Group has investments in 36 Portfolio Companies. At 31 December 2018, 20% of the loans have a stated maturity date of less than a year (31 December 2017: 1%). The Group has no loans with a maturity date of more than five years.
The Group and Parent Company continuously monitor for fluctuation in currency rates. The Parent Company performs stress tests and liquidity projections to determine how much cash should be held back to meet potential future to obligations to settle margin calls arising from foreign exchange hedging.
As at 31 December 2018, GBP18.8 million of the Group's liabilities relating to Notes payable are tied directly to investment assets that mature on or near the same date as the investment liability. Of the remaining GBP32.5 million, approximately 35% has been paid down as at 26 April 2019 and any future interest on this balance is not material for disclosure within this note. As such, the amounts above represent the values as at 31 December 2018 and do not project cash flows until maturity of the investment liabilities.
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
The Group's credit risks arise principally through exposures to loans acquired by the Group, which are subject to risk of borrower default. The ability of the Group to earn revenue is completely dependent upon payments being made by the borrower of the loan acquired by the Group through a Portfolio Company. The Group (as a lender member) will receive payments under any loans it acquires through a Portfolio Company only if the corresponding borrower through that Portfolio Company (borrower member) makes payments on the loan.
Consumer loans are unsecured obligations of borrower members. They are not secured by any collateral, not guaranteed or insured by any third party and not backed by any governmental authority in any way.
The Group will invest across various Portfolio Companies, asset classes, geographies (primarily United States and Europe) and credit bands in order to ensure diversification and to seek to mitigate concentration risks.
Under the Balance Sheet Model, the Group provides a floating rate Credit Facility to the Portfolio Company via a Special-Purpose Vehicle ("SPV"), which retains Debt Instruments that are originated by the Portfolio Company. The debt financing is typically arranged in the form of a senior secured facility and the Portfolio Company injects junior capital in the SPV, which provides significant first loss protection to the Company and excess spread, which provides downside protection versus marketplace loans. The Group's balance sheet investments are loans to SPVs that are capitalised and actively managed by the Portfolio Companies in their capacity as both the owner and managing partner of the SPVs and the SPVs are not considered structured entities under IFRS 12. Refer to page 19 for further details on the structuring of the balance sheet lending investments of the Group.
There are no loans past due which are not impaired. Refer to Note 9.
Credit quality
The credit quality of loans is assessed through the evaluation of various factors, including (but not limited to) credit scores, payment data, collateral and other information. Set out below is the analysis of the Group's loan investments by grade and geography:
UNSECURED SECURED TOTAL
INTERNAL UNITED UNITED UNSECURED SECURED 31 DECEMBER
GRADE STATES STATES OTHER OTHER 2018
========== ============ =========== ================================= ================================= ============
A - 1 92,643,891 17,975,778 6,222,888 - 116,842,557
========== ============ =========== ================================= ================================= ============
A - 2 121,796,046 7,650,752 38,032,986 1,524,756 169,004,540
========== ============ =========== ================================= ================================= ============
B 186,854 9,741,368 - 17,449,955 27,378,177
========== ============ =========== ================================= ================================= ============
C 110,324 77,156 - 631,007 818,487
214,737,115 35,445,054 44,255,874 19,605,718 314,043,761
========== ============ =========== ================================= ================================= ============
UNSECURED SECURED TOTAL
INTERNAL UNITED UNITED UNSECURED SECURED 31 DECEMBER
GRADE STATES STATES OTHER OTHER 2017
========== ============ =========== ================================= ================================= ============
A - 1 93,408,787 38,938,341 5,619,967 - 137,967,095
========== ============ =========== ================================= ================================= ============
A - 2 88,993,099 19,793,399 19,700,762 3,087,894 131,575,154
========== ============ =========== ================================= ================================= ============
B 771,973 11,950,149 - 24,486,998 37,209,120
========== ============ =========== ================================= ================================= ============
C 247,032 339,668 - 1,451,309 2,038,009
183,420,891 71,021,557 25,320,729 29,026,201 308,789,378
========== ============ =========== ================================= ================================= ============
INTERNAL
GRADE DEFINITION
========== ============ =========== ================================= ================================= ============
Balance sheet loans structured with credit enhancement and
A - 1 strong operating liquidity positions
High credit quality borrowers or balance sheet loans structured
A - 2 with credit enhancement
B High credit quality borrowers with some indicators
of credit risk or balance sheet loans with limited
structural credit enhancement
Borrowers with elevated levels of
C credit risk
========== ============================================================ ================================= ============
The following investment limits and restrictions shall apply to the Group, to ensure that the diversification of the Group's portfolio is maintained, and that concentration risk is limited:
Portfolio Company restrictions
The Group does not intend to invest more than 20% of its Gross Assets in Debt Instruments (net of any gearing ring-fenced within any special purpose vehicle which would be without recourse to the Group), originated by, and/or Credit Facilities and equity instruments in, any single Portfolio Company, calculated at the time of investment. All such aggregate exposure to any single Portfolio Company (including investments via a special purpose vehicle) will always be subject to an absolute maximum, calculated at the time of investment, of 25% of the Group's Gross Assets.
Asset class restrictions
The Group does not intend to acquire Debt Instruments for a term longer than five years. The Group will not invest more than 20% of its Gross Assets, at the time of investment, via any single investment fund investing in Debt Instruments and Credit Facilities. In any event, the Group will not invest, in aggregate, more than 60% of its Gross Assets, at the time of investment, in investment funds that invest in Debt Instruments and Credit Facilities.
The Group will not invest more than 10% of its Gross Assets, at the time of investment, in other listed closed-ended investment funds, whether managed by the Investment Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.
The following restrictions apply, in each case at the time of investment by the Group, to both Debt Instruments acquired by the Group via wholly-owned special purpose vehicles or partially-owned special purpose vehicles on a proportionate basis under the Marketplace Model, as well as on a look-through basis under the Balance Sheet Model and to any Debt Instruments held by another investment fund in which the Group invests:
No single consumer loan acquired by the Group shall exceed 0.25% of its Gross Assets.
No single SME loan acquired by the Group shall exceed 5.0% of its Gross Assets. For the avoidance of doubt, Credit Facilities entered into directly with Platforms are not considered SME loans.
No single trade receivable asset acquired by the Group shall exceed 5.0% of its Gross Assets.
Other restrictions
The Group's un-invested or surplus capital or assets may be invested in Cash Instruments for cash management purposes and with a view to enhancing returns to Shareholders or mitigating credit exposure.
7. CASH AND CASH EQUIVALENTS
GROUP GROUP PARENT COMPANY PARENT COMPANY
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2018 2017 2018 2017
GBP GBP GBP GBP
=================== ============ ============ ============================ ===========================
Cash held at bank 3,269,332 18,353,574 1,804,063 16,137,420
Total 3,269,332 18,353,574 1,804,063 16,137,420
=================== ============ ============ ============================ ===========================
The Parent Company has posted cash of GBP165,610 of collateral as at 31 December 2018 (31 December 2017: GBP2,060,000) with Goldman Sachs and cash of GBP2,116,818 (31 December 2017: GBP2,367,301) with Morgan Stanley in relation to the outstanding derivatives.
Below are the credit ratings of the banks where the Parent Company and Group hold cash as at 31 December 2018 from Moody's:
Bank Rating =============== ======= Northern Trust A2 =============== ======= Goldman Sachs A3 =============== ======= Morgan Stanley A3 =============== ======= US Bank A1 =============== ======= Wells Fargo A2 --------------- ------- 8. NOTES PAYABLE
The Group entered into contractual obligations with third parties to structurally subordinate a portion of the principal directly attributable to existing investments. The cash flows received by the Group from the underlying investments are used to pay the lender principal, interest, and draw fees based upon the stated terms of the Credit Facility. Unless due to a fraudulent act, as defined by the Credit Facilities, none of the Group's other investment assets can be used to satisfy the obligations of the Credit Facilities in the event that those obligations cannot be met by the subsidiaries. Each subsidiary with a Credit Facility is a bankruptcy remote entity.
The table below provides details of the outstanding debt of the Group at 31 December 2018:
OUTSTANDING
INTEREST PRINCIPAL
31 DECEMBER 2018 RATE GBP MATURITY
========================= ================== ============ ============
30 November
Credit Facility 11-2018 4.50% + 1M LIBOR 32,536,260 2023
========================= ================== ============ ============
Total 32,536,260
============================================= ============ ============
The table below provides details of the outstanding debt of the Group at 31 December 2017:
OUTSTANDING
INTEREST PRINCIPAL
31 DECEMBER 2017 RATE GBP MATURITY
------------------------- --------- ------------ ------------
15 December
Credit Facility 08-2016 3.00% 5,195,513 2025
========================= ========= ============ ============
Total 5,195,513
========================= ========= ============ ============
The Group entered into contractual obligations with a third party to structurally subordinate a portion of principal directly attributable to an existing loan facility. The Group is obligated to pay a commitment fee and interest to the third party on the obligation as interest is paid on the underlying loan facility. In the event of a default on the loan facility, the third party has first-out participation rights on the accrued and unpaid interest as well as the principal balance of the note.
The table below provides details of the outstanding first-out participation liabilities of the Group at 31 December 2018:
OUTSTANDING
PRINCIPAL
31 DECEMBER 2018 GBP MATURITY
--------------------------------- ------------ -------------
First-Out Participation 06-2015 10,995,688 13 June 2021
================================= ============ =============
30 January
First-Out Participation 03-2017 7,797,883 2021
================================= ============ =============
Total 18,793,571
================================== ============ =============
The table below provides details of the outstanding first-out participation liabilities of the Group at 31 December 2017:
OUTSTANDING
PRINCIPAL
31 DECEMBER 2017 GBP MATURITY
--------------------------------- ------------ -------------
First-Out Participation 06-2015 9,014,990 13 June 2021
================================= ============ =============
First-Out Participation 03-2016 17,384,871 3 March 2019
================================= ============ =============
17 November
First-Out Participation 12-2016 9,281,556 2021
================================= ============ =============
30 January
First-Out Participation 03-2017 3,421,491 2021
================================= ============ =============
Total 39,102,908
================================== ============ =============
The table below provides the movement of the notes payable and securities sold under agreements to repurchase for the year ended 31 December 2018 for the Group.
SECURITIES SOLD
UNDER AGREEMENTS NOTES
TO REPURCHASE PAYABLE
GBP GBP
============================================ ================================== ==============================
Beginning balance, 1 January
2018 8,941,557 44,298,421
============================================= ================================== ==============================
Purchases - 40,049,791
============================================== ================================== ==============================
Sales (7,773,133) (33,984,460)
============================================== ================================== ==============================
Net change in unrealised foreign exchange
gains (losses) 173,557 966,079
============================================== ================================== ==============================
Ending balance, 31 December
2018 1,341,981 51,329,831
============================================= ================================== ==============================
The table below provides the movement of the notes payable and securities sold under agreements to repurchase for the year ended 31 December 2017 for the Group.
SECURITIES SOLD
UNDER AGREEMENTS NOTES
TO REPURCHASE PAYABLE
GBP GBP
============================================= ================================== =============================
Beginning balance, 1 January
2017 9,811,072 185,868,711
============================================== ================================== =============================
Purchases - 5,691,412
=============================================== ================================== =============================
Sales - (150,632,807)
=============================================== ================================== =============================
Net change in unrealised foreign exchange
gains
(losses) (869,515) 3,371,105
=============================================== ================================== =============================
Ending balance, 31 December
2017 8,941,557 44,298,421
============================================== ================================== =============================
9. IMPAIRMENT OF FINANCIAL ASSETS AT AMORTISED COST
The table below provides details of the investments at amortised cost held by the Group for the year ended 31 December 2018 under IFRS 9:
COST BEFORE LOANS CARRYING
ECL ECL WRITTEN-OFF VALUE
GBP GBP GBP GBP
==================== ============ ========== ============ ============
Loans at amortised
cost 315,083,599 7,259,430 1,043,016 306,781,153
Total 315,083,599 7,259,430 1,043,016 306,781,153
==================== ============ ========== ============ ============
The table below provides details of the investments at amortised cost held by the Group restated as at 1 January 2018 under IFRS 9:
COST BEFORE LOANS CARRYING
ECL ECL WRITTEN-OFF VALUE
GBP GBP GBP GBP
==================== ============ ========== ============ ============
Loans at amortised
cost 335,077,673 6,116,051 26,288,295 302,673,327
Total 335,077,673 6,116,051 26,288,295 302,673,327
==================== ============ ========== ============ ============
The table below provides details of the investments at amortised cost held by the Group for the year ended 31 December 2017 under IAS 39:
COST BEFORE LOAN LOSS LOANS CARRYING
IMPAIRMENT RESERVE WRITTEN-OFF VALUE
GBP GBP GBP GBP
==================== ============ ========== ============ ============
Loans at amortised
cost 335,077,673 2,343,021 26,288,295 306,446,357
Total 335,077,673 2,343,021 26,288,295 306,446,357
==================== ============ ========== ============ ============
The Parent Company does not hold any loans.
Credit impairment losses
The credit impairment losses of the Group as at 31 December 2018 comprises of the following under IFRS 9:
CREDIT IMPAIRMENT
LOSSES
31 DECEMBER 2018
GBP
================================================ ============================================
Loans written off 1,043,016
================================================ ============================================
Change in expected credit losses 1,143,379
================================================ ============================================
Currency translation on expected credit losses 380,040
================================================ ============================================
Credit impairment losses 2,566,435
================================================ ============================================
The impairment charge of the Group as at 31 December 2017 comprises of the following under IAS 39:
IMPAIRMENT CHARGE
31 DECEMBER 2017
GBP
============================= ==================
Loans written off 26,288,295
============================= ==================
Change in loan loss reserve (10,456,673)
============================= ==================
Currency translation (368,899)
============================= ==================
Impairment charge 15,462,723
============================= ==================
Impairment of loans written off
Impairment charges of loans written off of GBP1,043,016 (31 December 2017: GBP26,288,295) have been recorded in the Group's Consolidated Statement of Financial Position and are included in credit impairment losses on the Consolidated Statement of Comprehensive Income.
Impairment of loans reserved against
As at 31 December 2018, the Group has created a reserve provision on the outstanding principal of the Group's loans of GBP7,259,430 (31 December 2017: GBP2,343,021), which have been recorded in the Group's Consolidated Statement of Financial Position and are included in credit impairment losses on the Consolidated Statement of Comprehensive Income.
The impairment of loans reserved against comprises the following:
31 DECEMBER 2018
GBP
=================================================== ============================================
Beginning balance 1 January 2018 2,343,021
=================================================== ============================================
IFRS 9 adjustment to balance as at 1 January 2018 3,773,030
=================================================== ============================================
Change in expected credit losses or equivalent 1,143,379
=================================================== ============================================
Ending balance 31 December 2018 7,259,430
=================================================== ============================================
Below is a breakout of the impairment of loans reserved against by stage of the ECL model as at 31 December 2018:
31
UNSECURED DECEMBER
UNITED SECURED UNSECURED SECURED 2018
STATES UNITED STATES OTHER OTHER GBP
========== ================================== ================================== ========== ==========
Stage 1 57,940 - - 655,206 713,146
========== ========== ================================== ================================== ========== ==========
Stage 2 32,737 1,649,190 - 2,773,213 4,455,140
========== ========== ================================== ================================== ========== ==========
Stage 3 15,323 536,455 - 1,539,366 2,091,144
Expected
credit
losses 106,000 2,185,645 - 4,967,785 7,259,430
========== ========== ================================== ================================== ========== ==========
Below is a breakout of the impairment of loans reserved against by stage of the ECL model as at 1 January 2018:
1 JANUARY
UNSECURED SECURED UNSECURED SECURED 2018
UNITED STATES UNITED STATES OTHER OTHER GBP
=============== =============== ================================== ========== ==========
Stage 1 835,242 4,925 - 1,088,807 1,928,974
================= =============== =============== ================================== ========== ==========
Stage 2 120,821 446,438 - 979,039 1,546,298
================= =============== =============== ================================== ========== ==========
Stage 3 33,482 600,127 - 2,007,170 2,640,779
Expected credit
losses 989,545 1,051,490 - 4,075,016 6,116,051
================= =============== =============== ================================== ========== ==========
Below is a breakout of the carrying value of loans by stage of the ECL model as at 31 December 2018:
UNSECURED SECURED 31 DECEMBER
UNITED UNITED UNSECURED SECURED 2018
STATES STATES OTHER OTHER GBP
============ =========== ================================== ================================== ============
Stage 1 214,626,344 25,582,375 26,230,874 4,053,612 270,493,205
=========== ============ =========== ================================== ================================== ============
Stage 2 4,174 7,029,157 18,025,000 10,568,700 35,627,031
=========== ============ =========== ================================== ================================== ============
Stage 3 597 660,320 - - 660,917
Loans at
amortised
cost 214,631,115 33,271,852 44,255,874 14,622,312 306,781,153
=========== ============ =========== ================================== ================================== ============
Below is a breakout of the carrying value of loans by stage of the ECL model as at 1 January 2018:
UNSECURED SECURED 1 JANUARY
UNITED UNITED UNSECURED SECURED 2018
STATES STATES OTHER OTHER GBP
============ =========== ================================== ================================== ============
Stage 1 184,182,650 50,616,731 30,852,155 10,065,559 275,717,095
=========== ============ =========== ================================== ================================== ============
Stage 2 31,230 10,330,686 - 15,585,693 25,947,609
=========== ============ =========== ================================== ================================== ============
Stage 3 1,783 1,006,840 - - 1,008,623
Loans at
amortised
cost 184,215,663 61,954,257 30,852,155 25,651,252 302,673,327
=========== ============ =========== ================================== ================================== ============
10. FEES AND EXPENSES
Investment management fees
Under the terms of the Management Agreement, the Investment Manager is entitled to a management fee and a performance fee together with reimbursement of reasonable expenses incurred by it in the performance of its duties.
The management fee is payable in Pound Sterling monthly in arrears and is at the rate of 1/12 of 1.0% per month of NAV (the "Management Fee"). For the period from Admission until the date on which 90% of the net proceeds of the Issue have been invested or committed for investment (other than in Cash Instruments), the value attributable to any Cash Instruments of the Group held for investment purposes will be excluded from the calculation of NAV for the purposes of determining the Management Fee.
The Investment Manager shall not charge a management fee twice. Accordingly, if at any time the Group invests in or through any other investment fund or special purpose vehicle and a management fee or advisory fee is charged to such investment fund or special purpose vehicle by the Investment Manager or any of its affiliates, the Investment Manager agrees to either (at the option of the Investment Manager): (i) waive such management fee or advisory fee due to the Investment Manager or any of its affiliates in respect of such investment fund or special purpose vehicle, other than the fees charged by the Investment Manager under the Management Agreement; or (ii) charge the relevant fee to the relevant investment fund or special purpose vehicle, subject to the cap set out in the paragraph below, and ensure that the value of such investment shall be excluded from the calculation of the NAV for the purposes of determining the Management Fee payable pursuant to the above. The management fee expense for the year is GBP3,498,331 (31 December 2017: GBP4,568,316), of which GBP153,301 (31 December 2017: GBP420,339) was payable as at 31 December 2018.
Notwithstanding the above, where such investment fund or special purpose vehicle employs gearing from third parties and the Investment Manager or any of its affiliates is entitled to charge it a fee based on gross assets in respect of such investment, the Investment Manager may not charge a fee greater than 1.0% per annum of gross assets in respect of any investment made by the Parent Company or any member of the Group.
Performance fees
The performance fee is calculated by reference to the movements in the Adjusted Net Asset Value since the end of the Calculation Period in respect of which a performance fee was last earned or Admission if no performance fee has yet been earned. The payment of any performance fees to the Investment Manager will be conditional on the Parent Company achieving at least a 5.0% per annum total return for shareholders relative to a 30 April 2017 High Water Mark.
The performance fee will be calculated in respect of each 12 month period starting on 1 January and ending on 31 December in each calendar year (a "Calculation Period") and provided further that if at the end of what would otherwise be a Calculation Period no performance fee has been earned in respect of that period, the Calculation Period shall carry on for the next 12 month period and shall be deemed to be the same Calculation Period and this process shall continue until a performance fee is next earned at the end of the relevant period.
The performance fee will be equal to the lower of (i) in each case as at the end of the Calculation Period, an amount equal to (a) Adjusted Net Asset Value minus the Adjusted Hurdle Value, minus (b) the aggregate of all Performance Fees paid to the Manager in respect of all previous Calculation Periods; and (ii) the amount by which (a) 15% of the total increase in the Adjusted Net Asset Value since the Net Asset Value as at 30 April 2017 (being the aggregate of the increase in the Adjusted Net Asset Value in the relevant Calculation Period and in each previous Calculation Period) exceeds (b) the aggregate of all Performance Fees paid to the Manager in respect of all previous Calculation Periods. In the foregoing calculation, the Adjusted Net Asset Value will be adjusted for any increases or decreases in the Net Asset Value attributable to the issue or repurchase of any Ordinary Shares in order to calculate the total increase in the Net Asset Value attributable to the performance of the Parent Company.
"Adjusted Net Asset Value" means the Net Asset Value plus (a) the aggregate amount of any dividends paid or distributions made in respect of any Ordinary Shares and (b) the aggregate amount of any dividends or distributions accrued but unpaid in respect of any Ordinary Shares, plus the amount of any Performance Fees both paid and accrued but unpaid, in each case after the Effective Date and without duplication. "Adjusted Hurdle Value" means the Net Asset Value as at 30 April 2017 adjusted for any increases or decreases in the Net Asset Value attributable to the issue or repurchase of any Ordinary Shares increasing at an uncompounded rate equal to the Hurdle. The "Hurdle" means a 5% per annum total return for shareholders.
The Investment Manager shall not charge a performance fee twice. Accordingly, if at any time the Group invests in or through any other investment fund, special purpose vehicle or managed account arrangement and a performance fee or carried interest is charged to such investment fund, special purpose vehicle or managed account arrangement by the Investment Manager or any of its affiliates, the Investment Manager agrees to (and shall procure that all of its relevant affiliates shall) either (at the option of the Investment Manager): (i) waive such performance fee or carried interest suffered by the Group by virtue of the Investment Manager's (or such relevant affiliate's/affiliates') management of (or advisory role in respect of) such investment fund, special purpose vehicle or managed account, other than the fees charged by the Investment Manager under the Management Agreement; or (ii) calculate the performance fee as above, except that in making such calculation the NAV (as of the date of the High Water Mark) and the Adjusted NAV (as of the NAV calculation date) shall not include the value of any assets invested in any other investment fund, special purpose vehicle or managed account arrangement that is charged a performance fee or carried interest by the Investment Manager or any of its affiliates (and such performance fee or carried interest is not waived with respect to the Group).The performance fee expense for the year is GBP2,277,215 (31 December 2017: GBP884,773), of which the entire amount was payable as at 31 December 2018 (31 December 2017: GBPNil) .
Administration
The Group has entered into an administration agreement with Northern Trust Hedge Fund Services LLC. The Group pays to the Administrator an annual administration fee based on the Parent Company's net assets subject to a monthly minimum charge.
The Administrator shall also be entitled to be repaid all its reasonable out-of-pocket expenses incurred on behalf of the Group. All Administrator fees are included in other expenses on the Consolidated Statement of Comprehensive Income.
Secretary
Under the terms of the Company Secretarial Agreement, Link Group is entitled to an annual fee of GBP72,000 (exclusive of VAT and disbursements). All Secretary fees are included in other expenses on the Consolidated Statement of Comprehensive Income.
Registrar
Under the terms of the Registrar Agreement, the Registrar is entitled to an annual maintenance fee of GBP1.25 per Shareholder account per annum, subject to a minimum fee of GBP2,500 per annum (exclusive of VAT). All Registrar fees are included in other expenses on the Consolidated Statement of Comprehensive Income.
Custodian
Under the terms of the Custodian Agreement, Merrill Lynch, Pierce, Fenner & Smith Incorporated is entitled to be paid a fee of between US$180 and US$500 per annum per holding of securities in an entity. In addition, the Custodian is entitled to be paid fees up to US$300 per account per annum and other incidental fees. All Custodian fees are included in other expenses on the Consolidated Statement of Comprehensive Income.
Auditors' remuneration
For the year ended 31 December 2018, the remuneration for work carried out for the by PricewaterhouseCoopers LLP, the statutory auditors, was as follows:
31 DECEMBER 31 DECEMBER
2018 2017
GBP GBP
=========================================================== ========================== ==========================
Fees charged by PricewaterhouseCoopers LLP:
=========================================================== ========================== ==========================
the audit of the Parent Company and Consolidated
Financial Statements; 140,000 150,000
=========================================================== ========================== ==========================
the audit of the Company's subsidiaries; 5,000 10,000
=========================================================== ========================== ==========================
audit related assurance services; and - -
=========================================================== ========================== ==========================
tax services; and - -
=========================================================== ========================== ==========================
other assurance services - -
=========================================================== ========================== ==========================
Amounts are included in other expenses on the Consolidated Statement of Comprehensive Income.
11. TAXATION ON ORDINARY ACTIVITIES
Investment trust status
It is the intention of the Directors to conduct the affairs of the Group so as to satisfy the conditions for approval as an investment trust under section 1158 of the Corporation Taxes Act 2010. As an investment trust the Parent Company is exempt from corporation tax on capital gains made on investments. Although interest income received would ordinarily be subject to corporation tax, the Parent Company will receive relief from corporation tax relief to the extent that interest distributions are made to shareholders. It is the intention of the Parent Company to make sufficient interest distributions so that no corporation tax liability will arise in the Parent Company.
Any change in the Group's tax status or in taxation legislation generally could affect the value of the investments held by the Group, affect the Group's ability to provide returns to Shareholders, lead to the loss of investment trust status or alter the post-tax returns to Shareholders.
The following table presents the tax chargeable on the Group for the year ended 31 December 2018:
REVENUE CAPITAL TOTAL
=============================== =========================== =========================== ===========================
Net return on ordinary
activities before
taxation 37,044,878 (8,092,538) 28,952,340
=============================== =========================== =========================== ===========================
Tax at the standard UK
corporation tax
rate of 19.00% 7,038,527 (1,537,582) 5,500,945
=============================== =========================== =========================== ===========================
Effects of:
=============================== =========================== =========================== ===========================
Non-taxable income (7,038,527) - (7,038,527)
=============================== =========================== =========================== ===========================
Capital items exempt from
corporation
tax - 1,537,582 1,537,582
=============================== =========================== =========================== ===========================
Total tax charge - - -
=============================== =========================== =========================== ===========================
The following table presents the tax chargeable on the Group for the year ended 31 December 2017:
REVENUE CAPITAL TOTAL
=============================== =========================== =========================== ===========================
Net return on ordinary
activities before
taxation 28,729,962 (22,160,058) 6,569,904
=============================== =========================== =========================== ===========================
Tax at the standard UK
corporation tax
rate of 19.25% 5,745,992 (4,432,012) 1,313,980
=============================== =========================== =========================== ===========================
Effects of:
=============================== =========================== =========================== ===========================
Non-taxable income (5,745,992) - (5,745,992)
=============================== =========================== =========================== ===========================
Capital items exempt from
corporation
tax - 4,432,012 4,432,012
=============================== =========================== =========================== ===========================
Total tax charge - - -
=============================== =========================== =========================== ===========================
Overseas taxation
The Parent Company and Group may be subject to taxation under the tax rules of the jurisdictions in which they invest, including by way of withholding of tax from interest and other income receipts. Although the Parent Company and Group will endeavour to minimise any such taxes this may affect the level of returns to Shareholders of the Parent Company.
12. NET ASSET VALUE PER ORDINARY SHARE
AS AT AS AT
31 DECEMBER 2018 31 DECEMBER 2017
GBP GBP
Net assets attributable to Shareholders
of the Parent Company 327,733,367 339,401,017
Shares in issue 360,110,883 370,187,947
Net asset value per Ordinary Share 91.01p 91.68p
13. RETURN PER ORDINARY SHARE
Basic earnings per share is calculated using the weighted average number of shares in issue during the year, excluding the average number of Shares purchased by the Parent Company and held as Treasury Shares.
31 DECEMBER 2018 31 DECEMBER 2017
GBP GBP
Profit for the year 28,615,917 9,181,616
Average number of shares in issue during
the year 365,669,532 376,212,613
Earnings per Share (basic and diluted) 7.83p 2.44p
The Parent Company has not issued any shares or other instruments that are considered to have dilutive potential.
14. SHAREHOLDERS' CAPITAL
Set out below is the issued share capital of the Company as at 31 December 2018:
NOMINAL
VALUE NUMBER
GBP OF SHARES
Ordinary Shares 0.01 360,110,883
Set out below is the issued share capital of the Company as at 31 December 2017:
NOMINAL
VALUE NUMBER
GBP OF SHARES
Ordinary Shares 0.01 370,187,947
Rights attaching to the Shares
The holders of the Shares are entitled to receive, and to participate in, any dividends declared in relation to the Shares. The holders of the Shares shall be entitled to all of the Parent Company's remaining net assets after taking into account any net assets attributable to other share classes in issue. The Shares shall carry the right to receive notice of, attend and vote at general meetings of the Parent Company. The consent of the holders of Shares will be required for the variation of any rights attached to the Shares. The net return per Share is calculated by dividing the net return on ordinary activities after taxation by the number of shares in issue.
Voting rights
Subject to any rights or restrictions attached to any shares, on a show of hands every shareholder present in person has one vote and every proxy present who has been duly appointed by a shareholder entitled to vote has one vote, and on a poll, every shareholder (whether present in person or by proxy) has one vote for every share of which he is the holder. A shareholder entitled to more than one vote need not, if he votes, use all his votes or cast all the votes he uses the same way. In the case of joint holders, the vote of the senior who tenders a vote shall be accepted to the exclusion of the vote of the other joint holders, and seniority shall be determined by the order in which the names of the holders stand in the Register.
No shareholder shall have any right to vote at any general meeting or at any separate meeting of the holders of any class of shares, either in person or by proxy, in respect of any share held by him unless all amounts presently payable by him in respect of that share have been paid.
Variation of Rights & Distribution on Winding Up
Subject to the provisions of the Act as amended and every other statute for the time being in force concerning companies and affecting the Parent Company (the "Statutes"), if at any time the share capital of the Parent Company is divided into different classes of shares, the rights attached to any class may be varied either with the consent in writing of the holders of three-quarters in nominal value of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate meeting of the holders of the shares of that class (but not otherwise) and may be so varied either whilst the Parent Company is a going concern or during or in contemplation of a winding-up.
At every such separate general meeting the necessary quorum shall be at least two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class in question (but at any adjourned meeting any holder of shares of the class present in person or by proxy shall be a quorum), any holder of shares of the class present in person or by proxy may demand a poll and every such holder shall on a poll have one vote for every share of the class held by him. Where the rights of some only of the shares of any class are to be varied, the foregoing provisions apply as if each group of shares of the class differently treated formed a separate class whose rights are to be varied.
The Parent Company has no fixed life but, pursuant to the Articles, an ordinary resolution for the continuation of the Parent Company will be proposed at the annual general meeting of the Parent Company to be held in 2020 and, if passed, every five years thereafter. Upon any such resolution, not being passed, proposals will be put forward within three months after the date of the resolution to the effect that the Parent Company be wound up, liquidated, reconstructed or unitised.
If the Parent Company is wound up, the liquidator may divide among the shareholders in specie the whole or any part of the assets of the Parent Company and for that purpose may value any assets and determine how the division shall be carried out as between the shareholders or different classes of shareholders.
The table below shows the movement in shares through 31 December 2018:
SHARES IN SHARES IN
ISSUE AT ISSUE AT
THE THE
FOR THE YEAR FROM 1 JANUARY 2018 BEGINNING SHARES OF
OF
TO 31 DECEMBER 2018 THE PERIOD REPURCHASED THE PERIOD
Ordinary Shares 370,187,947 (10,077,064) 360,110,883
The table below shows the movement in shares through 31 December 2017:
SHARES IN SHARES IN
ISSUE AT ISSUE AT
THE THE
FOR THE YEAR FROM 1 JANUARY 2017 BEGINNING SHARES OF
OF
TO 31 DECEMBER 2017 THE PERIOD REPURCHASED THE PERIOD
Ordinary Shares 381,115,665 (10,927,718) 370,187,947
Share buyback programme
All Shares bought back through the share buyback programme are held in treasury as at 31 December 2018. Details of the programme are as follows:
ORDINARY AVERAGE LOWEST HIGHEST TOTAL
SHARES PRICE PER PRICE PER PRICE PER TREASURY
DATE OF PURCHASE PURCHASED SHARE SHARE SHARE SHARES
January 2018 250,000 80.00p 80.00p 80.00p 12,677,718
February 2018 1,750,000 79.43p 78.00p 80.00p 14,427,718
March 2018 - - - - 14,427,718
April 2018 1,623,745 77.91p 77.00p 78.00p 16,051,463
May 2018 993,146 79.91p 78.00p 80.00p 17,044,609
June 2018 - - - - 17,044,609
July 2018 - - - - 17,044,609
August 2018 - - - - 17,044,609
September 2018 700,000 79.89p 80.20p 80.30p 17,744,609
October 2018 1,860,173 79.89p 79.50p 80.00p 19,604,782
November 2018 2,650,000 78.69p 76.80p 80.00p 22,254,782
December 2018 250,000 77.00p 77.00p 77.00p 22,504,782
Other distributable reserve
During 2018, the Company declared and paid dividends of GBPNil (2017: GBPNil) from the other distributable reserve. Further, the cost of the buy back of Shares as detailed above was funded by the other distributable reserve of GBP8,030,232 (2017: GBP8,632,496). The closing balance in the other distributable reserve has been reduced to GBP171,731,558 (31 December 2017: GBP179,761,790).
15. DIVIDS PER SHARE
The following table summarises the amounts recognised as distributions to equity shareholders in the period:
31 DECEMBER 31 DECEMBER
2018 2017
GBP GBP
================================================== =========== ===========
2016 interim dividend of 1.50 pence per Ordinary
Share paid on 7 April 2017 - 5,692,140
==================================================
2017 interim dividend of 1.50 pence per Ordinary
Share paid on 22 June 2017 - 5,667,482
==================================================
2017 interim dividend of 1.70 pence per Ordinary
Share paid on 21 September 2017 - 6,367,798
2017 interim dividend of 1.80 pence per Ordinary
Share paid on 24 November 2017 - 6,682,130
2017 interim dividend of 1.80 pence per Ordinary
Share paid on 5 April 2018 6,627,383 -
==================================================
2018 interim dividend of 2.00 pence per Ordinary
Share paid on 28 June 2018 7,330,421 -
==================================================
2018 interim dividend of 2.00 pence per Ordinary
Share paid on 20 September 2018 7,311,421 -
==================================================
2018 interim dividend of 2.00 pence per Ordinary
Share paid on 13 December 2018 7,240,218 -
==================================================
Total 28,509,443 24,409,550
================================================== =========== ===========
An interim dividend of 2.00 pence per Ordinary Share was declared by the Board on 28 February 2019 in respect of the period to 31 December 2018, was paid to shareholders on 4 April 2019. The interim dividend has not been included as a liability in these financial statements in accordance with International Accounting Standard 10: Events After the Balance Sheet Date.
16. RELATED PARTY TRANSACTIONS
Each of the Directors is entitled to receive a fee from the Parent Company at such rate as may be determined in accordance with the Articles. Save for the Chairman of the Board, the fees are GBP30,000 for each Director per annum. The Chairman's fee is GBP50,000 per annum. The chairman of the Audit and Valuation Committee may also receive additional fees for acting as the chairman of such a committee. The current fee for serving as the chairman of the Audit and Valuation Committee is GBP5,000 per annum.
All the Directors are also entitled to be paid all reasonable expenses properly incurred by them in attending general meetings, board or committee meetings or otherwise in connection with the performance of their duties. The Board may determine that additional remuneration may be paid, from time to time, to any one or more Directors in the event such Director or Directors are requested by the Board to perform extra or special services on behalf of the Parent Company.
At 31 December 2018, GBP164,564 (31 December 2017: GBP163,362) was paid to the Directors and GBP0 (31 December 2017: GBP0) was owed for services performed.
As at 31 December 2018, the Directors' interests in the Parent Company's Shares were as follows:
31 DECEMBER 31 DECEMBER
2018 2017
============================ ============
Andrew Adcock Ordinary Shares 50,000 50,000
Kevin Ingram Ordinary Shares 64,968 34,968
Richard Levy Ordinary Shares 1,300,000 1,300,000
Elizabeth
Passey Ordinary Shares 10,000 10,000
Clive Peggram Ordinary Shares 258,240 194,740
============================ ============
Investment management fees for the year ended 31 December 2018 are payable by the Parent Company to the Investment Manager and these are presented on the Consolidated Statement of Comprehensive Income. Details of investment management fees and performance fees payable during the year are disclosed in Note 10.
During 2018, as part of an amendment to its management agreement, the Investment Manager continued to purchase Shares of the Parent Company with 20% of the its monthly management fee. The Shares were purchased at the prevailing market price. As at 31 December 2018, the Investment Manager has purchased 2,130,189 (31 December 2017: 1,364,896) Shares.
As at 31 December 2018, Partners and Principals of the Investment Manager held 1,885,000 (31 December 2017: 1,885,000) Shares in the Parent Company.
The Group has invested in VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. The Investment Manager of the Parent Company also acts as manager to VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. The principal activity of VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. is to invest in alternative finance investments and related instruments with a view to achieving the Parent Company's investment objective. As at 31 December 2018 the Group owned 26% of VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. (31 December 2017: 26%) and the value of the Group's investment in VPC Offshore Unleveraged Private Debt Fund Feeder, L.P. was GBP24,582,851 (31 December 2017: GBP23,845,238). The Group received income of GBP2,339,179 from VPC Offshore Unleveraged Private Debt Fund Feeder, L.P., which is reflected in Income on the Consolidated statement of comprehensive income.
The Group has invested in Larkdale III, L.P. The Investment Manager of the Parent Company also acts as manager to Larkdale III, L.P. As at 31 December 2018, the Group owned 52% of Larkdale III, L.P. (31 December 2017: 52%) and the value of the Group's investment in Larkdale III, L.P. was GBP3,339,968 (31 December 2017: GBP3,116,896). The Group did not receive any income from Larkdale III, L.P. during the year.
The Investment Manager may pay directly various expenses that are attributable to the Group. These expenses are allocated to and reimbursed by the Group to the Investment Manager as outlined in the Management Agreement. Any excess expense previously allocated to and paid by the Group to the Investment Manager will be reimbursed to the Group by the Investment Manager. At 31 December 2018, GBP73,052 was due to the Investment Manager (31 December 2017: GBP41,686) and is included in the Accrued expenses and other liabilities balance on the Consolidated Statement of Financial Position.
17. SUBSIDIARIES
PERCENTAGE PERCENTAGE
OWNERSHIP OWNERSHIP
AS AT AS AT
PRINCIPAL COUNTRY OF NATURE 31 DECEMBER 31 DECEMBER
NAME ACTIVITY INCORPORATION OF INVESTMENT 2018 2017
VPC Specialty Lending Investment USA Limited Sole limited Sole limited
Investments Intermediate, vehicle partner partner partner
L.P. interest
VPC Specialty Lending General partner USA Membership Sole member Sole member
Investments Intermediate interest
GP, LLC
LIAB, L.P. Investment UK Limited Sole limited Sole limited
vehicle partner partner partner
interest
LIAB GP, LLC General partner UK Membership Sole member Sole member
interest
Fore London, L.P. Investment UK Limited Sole limited Sole limited
vehicle partner partner partner
interest
Fore London GP, General partner UK Membership Sole member Sole member
LLC interest
Limited
Investment partner
SVTW, L.P. vehicle USA interest 99% 99%
Membership
SVTW GP, LLC General partner USA interest 99% 99%
Limited
Duxbury Court I, Investment partner
L.P. vehicle USA interest 95% 95%
Duxbury Court I Membership
GP, LLC General partner USA interest 95% 95%
Limited
Investment partner
Drexel I, L.P. vehicle USA interest 52% 52%
Membership
Drexel I GP, LLC General partner USA interest 52% 52%
Limited
Investment partner
Larkdale I, L.P. vehicle USA interest 61% 61%
Membership
Larkdale I GP, LLC General partner USA interest 61% 61%
The subsidiaries listed above as investment vehicles are consolidated by the Group.
NAME REGISTERED ADDRESS
VPC Specialty Lending Investments 150 North Riverside Plaza, Suite 5200,
Intermediate, L.P. Chicago, IL 60606
VPC Specialty Lending Investments 150 North Riverside Plaza, Suite
Intermediate GP, LLC 5200, Chicago, IL 60606
LIAB, L.P. 150 North Riverside Plaza, Suite 5200,
Chicago, IL 60606
LIAB GP, LLC 150 North Riverside Plaza, Suite
5200, Chicago, IL 60606
Fore London, L.P. 6th Floor, 65 Gresham Street, London,
EC2V 7NQ United Kingdom
Fore London GP, LLC 150 North Riverside Plaza, Suite
5200, Chicago, IL 60606
SVTW, L.P. 150 North Riverside Plaza, Suite 5200,
Chicago, IL 60606
SVTW GP, LLC 150 North Riverside Plaza, Suite
5200, Chicago, IL 60606
Duxbury Court I, L.P. 150 North Riverside Plaza, Suite 5200,
Chicago, IL 60606
Duxbury Court I GP, 150 North Riverside Plaza, Suite
LLC 5200, Chicago, IL 60606
Drexel I, L.P. 150 North Riverside Plaza, Suite 5200,
Chicago, IL 60606
Drexel I GP, LLC 150 North Riverside Plaza, Suite
5200, Chicago, IL 60606
Larkdale I, L.P. 150 North Riverside Plaza, Suite 5200,
Chicago, IL 60606
Larkdale I GP, LLC 150 North Riverside Plaza, Suite
5200, Chicago, IL 60606
The table below illustrates the movement of the investment in subsidiaries of the Parent Company:
INVESTMENTS
IN SUBSIDIARIES
GBP
Beginning balance, 1 January 2018 286,614,455
===============================
Purchases 127,996,180
===============================
Sales (126,125,955)
===============================
Impairment of investments in subsidiaries (8,103,484)
Ending balance, 31 December 2018 280,381,196
18. NON-CONTROLLING INTERESTS
The non-controlling interests arises from investments in limited partnerships considered to be controlled subsidiaries into which there are other investors. The value of the non-controlling interests at 31 December 2018 represents the portion of the NAV of the controlled subsidiaries attributable to the other investors. As at 31 December 2018, the portion of the NAV attributable to non-controlling interests investments totalled GBP246,346 (31 December 2017: GBP842,521). In the Consolidated Statement of Comprehensive Income, the amount attributable to non-controlling interests represents the increase in the fair value of the investment in the period.
The following entities have been consolidated which have material non-controlling interests as at 31 December 2018:
PROFIT OR LOSS
OF
SUBSIDIARY
ALLOCATED
TO
NON-CONTROLLING
INTERESTS ACCUMULATED NON-CONTROLLING
DURING THE INTERESTS IN
PERIODED 31 SUBSIDIARY AS
DECEMBER AT 31 DECEMBER
2018 2018
PROPORTION OF
OWNERSHIP
INTERSTS HELD
BY
NON-CONTROLLING
INTERESTS
PRINCIPAL AS AT 31
NAME OF PLACE DECEMBER
SUBSIDIARY OF BUSINESS 2018 GBP GBP
Drexel I,
L.P. USA 48% 136,882 58,362
Duxbury Court
I, L.P. USA 5% (7,443) 23,488
Larkdale I,
L.P. USA 39% 206,063 161,811
SVTW, L.P. USA 1% 921 2,685
Totals 336,423 246,346
SUMMARISED FINANCIAL INFORMATION FOR SUBSIDIARY
31 DECEMBER 2018
NAME OF
SUBSIDIARY GBP
Distributions
to
non-controlling
Drexel I, L.P. interests 396,909
Profit/(loss)
of subsidiary
for
period ended 31
December 2018 266,863
Assets as at 31
December 2018 143,271
Liabilities as
at 31 December
2018 14,633
Distributions
to
Duxbury Court non-controlling
I, L.P. interests 23,802
Profit/(loss)
of subsidiary
for
period ended 31
December 2018 (178,930)
Assets as at 31
December 2018 703,372
Liabilities as -
at 31 December
2018
Distributions
to
Larkdale I, non-controlling
L.P. interests 510,324
Profit/(loss)
of subsidiary
for
period ended 31
December 2018 428,161
Assets as at 31
December 2018 432,514
Liabilities as
at 31 December
2018 19,546
Distributions
to
non-controlling
SVTW, L.P. interests 248
Profit/(loss)
of subsidiary
for
period ended 31
December 2018 291,801
Assets as at 31
December 2018 413,147
Liabilities as
at 31 December
2018 24,355
The following entities have been consolidated which have material non-controlling interests as at 31 December 2017:
PROFIT OR LOSS
OF
SUBSIDIARY
ALLOCATED
TO
NON-CONTROLLING ACCUMULATED
INTERESTS NON-CONTROLLING
DURING THE INTERESTS IN
PERIODED 31 SUBSIDIARY AS
DECEMBER AT 31 DECEMBER
2017 2017
PROPORTION OF
OWNERSHIP
INTERSTS HELD
BY
NON-CONTROLLING
INTERESTS
PRINCIPAL AS AT 31
NAME OF PLACE DECEMBER
SUBSIDIARY OF BUSINESS 2017 GBP GBP
Drexel I,
L.P. USA 47% (366,057) 312,414
Duxbury Court
I, L.P. USA 5% 18,231 52,514
Larkdale I,
L.P. USA 39% (2,183,021) 475,684
Larkdale II, USA 0%
L.P. (103,815) -
Larkdale IV, USA 0%
L.P. 40,754 -
SVTW, L.P. USA 1% (17,804) 1,909
Totals (2,611,712) 842,521
SUMMARISED FINANCIAL INFORMATION FOR SUBSIDIARY
31 DECEMBER 2017
NAME OF
SUBSIDIARY GBP
Distributions
to
non-controlling
Drexel I, L.P. interests 9,041,140
Profit/(loss)
of subsidiary
for
period ended 31
December 2017 (886,586)
Assets as at 31
December 2017 631,332
Liabilities as
at 31 December
2017 78,444
Distributions
to
Duxbury Court non-controlling
I, L.P. interests 1,034,165
Profit/(loss)
of subsidiary
for
period ended 31
December 2017 442,595
Assets as at 31
December 2017 1,378,763
Liabilities as -
at 31 December
2017
Distributions
to
Larkdale I, non-controlling
L.P. interests 16,278,719
Profit/(loss)
of subsidiary
for
period ended 31
December 2017 (5,348,609)
Assets as at 31
December 2017 1,373,627
Liabilities as
at 31 December
2017 157,210
Distributions
to
Larkdale II, non-controlling
L.P. interests 1,892,250
Profit/(loss)
of subsidiary
for
period ended 31
December 2017 (214,993)
Assets as at 31 -
December 2017
Liabilities as -
at 31 December
2017
Distributions
to
Larkdale IV, non-controlling
L.P. interests 112,615
Profit/(loss)
of subsidiary
for
period ended 31
December 2017 115,891
Assets as at 31 -
December 2017
Liabilities as -
at 31 December
2017
Distributions
to
non-controlling
SVTW, L.P. interests 40,998
Profit/(loss)
of subsidiary
for
period ended 31
December 2017 (5,427,126)
Assets as at 31
December 2017 925,171
Liabilities as
at 31 December
2017 758,477
19. INVESTMENTS IN FUNDS
The Group has been determined to exercise significant influence in relation to certain of its in funds and other entities, as such these investments are considered to be associates for accounting purposes and represent interests in unconsolidated structured entities. The following additional information is therefore provided as required by IFRS 12, Disclosure of Interests in Other Entities:
MAXIMUM
FAIR VALUE EXPOSURE
OF INTEREST TO LOSS
PROPORTION AS AT AS AT
PRINCIPAL OF OWNERSHIP 31 DECEMBER 31 DECEMBER
NAME OF PLACE PRINCIPAL INTERESTS BASIS OF 2018 2018
ASSOCIATE OF BUSINESS ACTIVITY HELD VALUATION GBP GBP
Designated
as held at
VPC Offshore fair value
Unleveraged through
Private Debt profit
Fund Cayman Investment or loss -
Feeder, L.P. Islands fund 26% using NAV 24,582,851 24,582,851
Designated
as held at
fair value
through
profit
Larkdale III, Investment or loss -
L.P. USA vehicle 52%* using NAV 3,339,968 3,339,968
SUMMARISED FINANCIAL INFORMATION FOR ASSOCIATE
NAME OF 31 DECEMBER 2018
ASSOCIATE GBP
VPC Offshore Profit/(loss) of associate for period ended
Unleveraged 31 December 2018 9,334,184
Private Debt
Fund
Feeder, L.P. Assets as at 31 December 2018 92,022,138
Liabilities at 31 December 2018 269,405
Larkdale III, Profit/(loss) of associate for period ended
L.P. 31 December 2018 (692,843)
Assets as at 31 December 2018 6,475,494
Liabilities at 31 December 2018 5,938
*The Group holds 52% interest in Larkdale III, L.P. while the Group's ultimate ownership of the investment held by Larkdale III, L.P. is 34%. The Group has determined it does not have accounting control as the general partner has operating control over the vehicle and acts as an agent for a number of the Investment Manager's funds.
MAXIMUM
FAIR VALUE EXPOSURE
OF INTEREST TO LOSS
PROPORTION AS AT AS AT
PRINCIPAL OF OWNERSHIP 31 DECEMBER 31 DECEMBER
NAME OF PLACE PRINCIPAL INTERESTS BASIS OF 2017 2017
ASSOCIATE OF BUSINESS ACTIVITY HELD VALUATION GBP GBP
Designated
VPC Offshore as held at
Unleveraged fair value
Private Debt through profit
Fund Cayman Investment or loss -
Feeder, L.P. Islands fund 26% using NAV 23,845,238 23,845,238
Designated
as held at
fair value
through profit
Larkdale III, Investment or loss -
L.P. USA vehicle 52%* using NAV 3,116,896 3,116,896
SUMMARISED FINANCIAL INFORMATION FOR ASSOCIATE
NAME OF 31 DECEMBER 2017
ASSOCIATE GBP
VPC Offshore Profit/(loss) of associate for period ended
Unleveraged 31 December 2017 8,331,707
Private Debt
Fund
Feeder, L.P. Assets as at 31 December 2017 92,238,948
Liabilities at 31 December 2017 486,215
Larkdale III, Profit/(loss) of associate for period ended
L.P. 31 December 2017 (4,230,000)
Assets as at 31 December 2017 6,053,052
Liabilities at 31 December 2017 15,589
The Group's investments in associates all consist of limited partner interest in funds. There are no significant restrictions between investors with joint control or significant influence over the associates listed above on the ability of the associates to transfer funds to any party in the form of cash dividends or to repay loans or advances made by the Group.
*The Group holds 52% interest in Larkdale III, L.P. while the Group's ultimate ownership of the investment held by Larkdale III, L.P. is 34%. The Group has determined it does not have accounting control as the general partner has operating control over the vehicle and acts as an agent for a number of the Investment Manager's funds.
20. SUBSEQUENT EVENTS AFTER THE REPORTING PERIOD
The Company declared a dividend of 2.00 pence per Ordinary Share for the three-month period ended 31 December 2018 and paid the dividend on 4 April 2019.
From 1 January 2019 to 26 April 2019, the Company had repurchased an additional 10,872,029 Ordinary Shares at an average price of75.92 pence per Ordinary Share under the share buyback programme bringing the cumulative total to 33,376,811 Ordinary Shares (8.72% of gross share issuance).
There were no other significant events subsequent to the year end.
SHAREHOLDER INFORMATION
INVESTMENT OBJECTIVE
The Company's investment objective is to generate an attractive total return for shareholders consisting of distributable income and capital growth through investments in financial services opportunities.
INVESTMENT POLICY
The Company seeks to achieve its investment objective by investing in opportunities in the financial services market through portfolio companies and other lending related opportunities.
The Company invests directly or indirectly into available opportunities, including by making investments in, or acquiring interests held by, third-party funds (including those managed by the Investment Manager or its affiliates).
Direct investments include consumer loans, SME loans, advances against corporate trade receivables and/or purchases of corporate trade receivables originated by portfolio companies ("Debt Instruments"). Such Debt Instruments may be subordinated in nature, or may be second lien, mezzanine or unsecured loans.
Indirect investments include investments in portfolio companies (or in structures set up by portfolio companies) through the provision of senior secured floating rate credit facilities ("Credit Facilities"), equity or other instruments. Additionally, the Company's investments in Debt Instruments and Credit Facilities are made through subsidiaries of the Company or through partnerships in order to achieve bankruptcy remoteness from the platform itself, providing an extra layer of credit protection.
The Company may also invest in other financial services related opportunities through a combination of debt facilities, equity or other instruments.
The Company may also invest (in aggregate) up to 10% of its Gross Assets (at the time of investment) in listed or unlisted securities (including equity and convertible securities or any warrants) issued by one or more of its portfolio companies or financial services entities.
The Company invests across several portfolio companies, asset classes, geographies (primarily US, UK and Europe) and credit bands in order to create a diversified portfolio and thereby mitigates concentration risks.
INVESTMENT RESTRICTIONS
The following investment limits and restrictions apply to the Company, to ensure that the diversification of the Company's portfolio is maintained, and that concentration risk is limited.
PLATFORM RESTRICTIONS
Subject to the following, the Company generally does not intend to invest more than 20% of its Gross Assets in Debt Instruments (net of any gearing ring-fenced within any SPV which would be without recourse to the Company), originated by, and/or Credit Facilities and equity instruments in, any single portfolio company, calculated at the time of investment. All such aggregate exposure to any single portfolio company (including investments via an SPV) will always be subject to an absolute maximum, calculated at the time of investment, of 25% of the Company's Gross Assets.
ASSET CLASS RESTRICTIONS
Single loans acquired by the Company will typically be for a term no longer than five years.
The Company will not invest more than 20% of its Gross Assets, at the time of investment, via any single investment fund investing in Debt Instruments and Credit Facilities. In any event, the Company will not invest, in aggregate, more than 60% of its Gross Assets, at the time of investment, in investment funds that invest in Debt Instruments and Credit Facilities.
The Company will not invest more than 10% of its Gross Assets, at the time of investment, in other listed closed-ended investment funds, whether managed by the Investment Manager or not, except that this restriction shall not apply to investments in listed closed-ended investment funds which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed-ended investment funds.
The following restrictions apply, in each case at the time of investment by the Company, to both Debt Instruments acquired by the Company via wholly-owned SPVs or partially-owned SPVs on a proportionate basis under the Marketplace Model, on a look-through basis under the Balance Sheet Model and to any Debt Instruments held by another investment fund in which the Company invests:
v No single consumer loan acquired by the Company shall exceed 0.25% of its Gross Assets.
v No single SME loan acquired by the Company shall exceed 5.0% of its Gross Assets. For the avoidance of doubt, Credit Facilities entered into directly with portfolio companies are not considered SME loans.
v No single trade receivable asset acquired by the Company shall exceed 5.0% of its Gross Assets.
OTHER RESTRICTIONS
The Company's un-invested or surplus capital or assets may be invested in Cash Instruments for cash management purposes and with a view to enhancing returns to shareholders or mitigating credit exposure.
Where appropriate, the Company will ensure that any SPV used by it to acquire or receive (by way of assignment or otherwise) any loans to UK consumers shall first obtain the appropriate authorisation from the FCA for consumer credit business.
BORROWING POLICY
Borrowings may be employed at the level of the Company and at the level of any investee entity (including any other investment fund in which the Company invests or any SPV that may be established by the Company in connection with obtaining gearing against any of its assets).
The Company may, in connection with seeking such gearing or securitising its loans, seek to assign existing assets to one or more SPVs and/or seek to acquire loans using an SPV.
The Company may establish SPVs in connection with obtaining gearing against any of its assets or in connection with the securitisation of its loans (as set out further below). It intends to use SPVs for these purposes to seek to protect the geared portfolio from group level bankruptcy or financing risks.
The aggregate leverage of the Company and any investee entity (on a look-through basis, including borrowing through securitisation using SPVs) shall not exceed 1.5 times its NAV (1.5x).
As is customary in financing transactions of this nature, the particular SPV will be the borrower and the Company may from time to time be required to guarantee or indemnify a third-party lender for losses incurred as a result of certain "bad boy" acts of the SPV or the Company, typically including fraud or wilful misrepresentation or causing the SPV voluntarily to file for bankruptcy protection. Any such arrangement will be treated as 'non-recourse' with respect to the Company provided that any such obligation of the Company shall not extend to guaranteeing or indemnifying Ordinary portfolio losses or the value of the collateral provided by the SPV.
SECURITISATION
The Company may use securitisation typically only for loans purchased directly from portfolio companies through the Marketplace Model in order to improve overall profitability by: (i) lowering the cost of financing; (ii) further diversifying its portfolio using the same amount of equity capital; and (iii) to lowering the credit risk to the Company.
In order to securitise certain assets, a bankruptcy remote SPV would be established, solely for the purpose of holding the underlying assets and issuing asset-backed securities ("ABS") secured only on these assets within the SPV. Each SPV would be portfolio company specific and would be owned by the Company, in whole or in part alongside Other VPC Funds or investors. Each SPV used for securitisation will be ring-fenced from one another and will not involve cross-collateralisation. The SPV will then aim to raise debt financing in the capital markets by issuing ABS that are secured only on assets within the SPV. The SPV will also enter into service agreements with the relevant portfolio companies to ensure continued collection of payments, pursuance of delinquent borrowers (end consumers) and otherwise interaction with borrowers in much the same manner as if the securitisation had not occurred.
SHARE REGISTER ENQUIRIES
For shareholder enquiries, please contact +44 (0) 871 664 0300. If you are outside the United Kingdom, please call +44 371 664 0300.
Calls cost 12p per minute plus your phone company's access charge. Calls outside the United Kingdom will be charged at the applicable international rate. We are open between 09:00 - 17:30, Monday to Friday excluding public holidays in England and Wales
SHARE CAPITAL AND NET ASSET VALUE INFORMATION
0BOrdinary GBP0.01 Shares 1B360,110,883 2BSEDOL Number 3BBVG6X43 4BISIN Number 5BGB00BVG6X439
SHARE PRICES
The Company's shares are listed on the London Stock Exchange.
ANNUAL AND HALF-YEARLY REPORTS
Copies of the Annual and Half-Yearly Reports are available from the Investment Manager on telephone +001 312 705 2789 and are available on the Company's website http://vpcspecialtylending.com.
PROVISIONAL FINANCIAL CALAR
11 June 2019 Annual General Meeting
June 2019 Payment of interim dividend to 31
March 2019
30 June 2019 Half-year End
September 2019 Announcement of half-yearly results
September 2019 Payment of interim dividend to 30
June 2019
December 2019 Payment of interim dividend to 30
September 2019
31 December Year End
2019
DIVIDS
The following table summarises the amounts recognised as distributions to equity shareholders relating to 2018:
GBP
2018 interim dividend of 2.00 pence per Ordinary Share
paid on 28 June 2018 7,330,421
2018 interim dividend of 2.00 pence per Ordinary Share
paid on 20 September 2018 7,311,421
2018 interim dividend of 2.00 pence per Ordinary Share
paid on 13 December 2018 7,240,218
2018 interim dividend of 2.00 pence per Ordinary Share
paid on 4 April 2019 7,077,273
Total 28,959,333
DEFINITIONS OF TERMS AND PERFORMANCE MEASURES
The Group uses the terms and alternative performance measures below to present a measure of profitability which is aligned with the requirements of our investors and potential investors, to draw out meaningful subtotals of revenues and earnings and to provide additional information not required for disclosure under accounting standards to assist users of the accounts in gauging the profit levels of the Group. All terms and performance measures relate to past performance:
Discount to NAV - Calculated as the difference in the NAV (Cum Income) as at 31 December 2018 and the average price per share repurchased divided during the year divided by the NAV Cum (Income) as at 31 December 2018.
Dividend Yield on Average NAV (Cum Income) - Calculated as the dividends declared during 2018 divided by the average Net Asset Value (Cum Income) of the Company for the year.
Gross Returns - Represents the return on shareholder's funds per share on investments of the Company before operating and other expenses of the Company.
Look-Through Gearing Ratio - The aggregate gearing of the Company and any investee entity (on a look through basis, including borrowing through securitisations using SPVs) shall not exceed 1.50 times its NAV (1.5x).
Market Capitalisation - Month-end closing share price multiplied by the number of shares outstanding at month end.
NAV (Cum Income) or NAV or Net Asset Value - The value of assets of the Company less liabilities determined in accordance with the accounting principles adopted by the Company.
NAV (Cum Income) Return - The theoretical total return on shareholders' funds per share reflecting the change in NAV assuming that dividends paid to shareholders were reinvested at NAV at the time dividend was announced.
2018 Calculation Inception to Date
Calculation
(A) Closing NAV (Cum Income)
per share 91.01p 91.01p
(B) Opening NAV (Cum Income)
per share 90.68p 98.00p
(C) Dividends declared
and paid 7.80p 23.59p
D = (A - B + C) / B 8.96% 16.94%
NAV (Ex Income) - The NAV of the Company, including current year capital returns and excluding current year revenue returns and unadjusted for dividends relating to revenue returns.
NAV (Ex Income) Return - The theoretical total return on shareholders' funds per share, excluding revenue returns, reflecting the change in NAV assuming that dividends paid to shareholders, unadjusted for dividends relating to revenue returns, were reinvested at NAV at the time dividend was announced.
2018 Calculation Inception to Date
Calculation
(A) Closing NAV (Ex Income)
per share 85.12p 85.12p
(B) Opening NAV (Ex Income)
per share 87.26p 98.00p
(C) Dividends declared
and paid 0.00p 1.26p
D = (A - B + C) / B -2.45% -11.85%
NAV per Share (Cum Income) - The NAV (Cum Income) divided by the number of shares in issue.
NAV per Share (Ex Income) - The NAV (Ex Income) divided by the number of shares in issue.
Net Returns - Represents the return on shareholder's funds per share on investments of the Company after operating and other expenses of the Company.
Ongoing Charges Ratio - Ongoing charges represents the management fee and all other operating expenses, excluding finance costs, transaction costs and any performance fee payable, expressed as a percentage of the average net asset values during the year.
Premium/(Discount) to NAV (Cum Income) - The amount by which the share price of the Company is either higher (at a premium) or lower (at a discount) than the NAV per Share (Cum Income), expressed as a percentage of the NAV per share.
Revenue Return - Represents the difference between the NAV (Cum Income) Return and the NAV (Ex Income) Return as defined above.
2018 Calculation Inception to Date
Calculation
(A) NAV (Cum Income) Return 8.96% 19.94%
(B) NAV (Ex Income) Return -2.45% -11.85%
C = A - B 11.41% 28.79%
Share Price - Closing share price at month end (excluding dividends reinvested).
Total Shareholder Return - Calculated as the change in the traded share price from 31 December 2018 to 31 December 2017 plus the dividends declared in 2018 divided by the traded share price as at 31 December 2017.
Trailing Twelve Month Dividend Yield - Calculated as the total dividends declared over the last twelve months as at 31 December 2018 divided by the 31 December 2018 closing share price.
CONTACT DETAILS OF THE ADVISERS
Directors Clive Peggram
Elizabeth Passey
Kevin Ingram
Richard Levy
all of the registered office below
Registered Office 6(th) Floor
65 Gresham Street
London EC2V 7NQ
United Kingdom
Company Number 9385218
Website Address https://vpcspecialtylending.com
Corporate Brokers Jefferies International Limited
Vintners Place
68 Upper Thames Street
London EC4V 3BJ
United Kingdom
Investment Manager and Victory Park Capital Advisors, LLC
AIFM 150 North Riverside Plaza, Suite 5200
Chicago
IL 60606
United States
Company Secretary Link Company Matters Limited
Beaufort House
51 New North Road
Exeter EX4 4EP
United Kingdom
Administrator Northern Trust Hedge Fund Services LLC
50 South LaSalle Street
Chicago
IL 60603
United States
Registrar Link Asset Services
The Registry
34 Beckenham Road Beckenham
Kent BR3 4TU
United Kingdom
Custodians Merrill Lynch, Pierce, Fenner & Smith
Incorporated
101 California Street
San Francisco
CA 94111
United States
Millennium Trust Company
2001 Spring Road
Oak Brook
IL 60523
United States
English Legal Adviser to Stephenson Harwood LLP
the Company 1 Finsbury Circus
London EC2M 7SH
United Kingdom
Independent Auditors PricewaterhouseCoopers LLP
7 More London Riverside
London SE1 2RT
United Kingdom
APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS
The Annual report and Financial Statements were approved and authorised for issue by the Directors on 26 April 2019.
The 2019 Annual General Meeting will be held on Tuesday, 11 June 2019.
Printed copies of the Annual Report, Notice of the Company's 2019 Annual General Meeting together with the Form of Proxy will be posted or made available to the Company's shareholders.
Copies of these documents will also be submitted shortly to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/nsm and will also available on the Company's website at https://vpcspecialtylending.com/.
ENDS
LEI: 549300UPEXC5DQB81P34
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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April 26, 2019 02:01 ET (06:01 GMT)
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