British Smaller Companies VCT2 plc

Unaudited Interim Results and Interim Management Report

for the six months ended 30 June 2023

British Smaller Companies VCT2 plc (the "Company") today announces its unaudited interim results for the six months ended 30 June 2023.

HIGHLIGHTS

·    Net Asset Value at 30 June 2023 of 57.95p per share (31 December 2022: 61.6p) following payment of dividends of 3.75p during the period

·      Total Return increased by 0.1p to 142.7p per share

·      Fully subscribed offer raised net proceeds of £27.5 million

·    The Board has declared a third interim dividend of 1.5p per share in respect of the year ending 31 December 2023, which will bring total dividends paid in the current financial year to 5.25p per share, which equates to 8.5 per cent of the opening net asset value per share

·    Three new investments and two follow-on investments totalling £7.4 million were completed during the period. Subsequent to the period end, one follow-on investment totalling £0.2 million has been completed, bringing the total invested this year to £7.6 million, following the £16.3 million invested in the full year to 31 December 2022

Chairman's Statement

I am pleased to present the interim results of British Smaller Companies VCT2 plc (the "Company") for the six months to 30 June 2023.  This reflects a period where the UK has seen persistently high inflation, accompanied by rising interest rates, which have acted as a drag on economic activity and growth-focused share prices.

Despite these challenges, the Company has achieved a positive total return in the period, increasing by 0.1 pence to 142.7 pence per ordinary share at 30 June 2023.  In contrast the FTSE Small Cap fell by 2.3 per cent over the same period. The Company continues to be ranked second across all generalist VCTs when considering a blended average performance ranking over 1, 3, 5, 7 and 10 years.

The positive performance has been driven by the resilience of underlying portfolio companies, which continue to see growing revenues, with companies increasingly focused on longer term sustainability by balancing growth with a path to profitability.

Due to the nature of the Company's investments, there is limited direct exposure to rising interest rates.  Conversely, these conditions, accompanied by a contraction in the debt markets following the failure of Silicon Valley Bank, present opportunities across the existing portfolio for the Company to deploy further capital.

Over the past six months, the Company has completed three new investments to the portfolio, totalling £5.3 million, and made two follow-on investments, totalling £2.1 million. Subsequent to the period end, a further £0.2 million has also been invested, taking the total invested so far this year to £7.6 million, following the £16.3 million invested in the full year to 31 December 2022.

Realisations in the Period

Realisations of portfolio investments generated total proceeds of £1.7 million in the period.

The Company realised its investment in Wakefield Acoustics in January, generating proceeds of £0.6 million and an overall return of 1.5x cost. This was a pleasing result, given the investment was valued at nil at the beginning of the previous financial year, emphasising the Company's commitment to portfolio companies at all stages through their growth journey.

The Company realised its investment in Ncam in April, generating initial proceeds of £0.9 million. There is the potential for additional receipts of up to £0.8 million depending on the achievement of certain milestones over the coming years, which would see the Company fully recover its investment. £0.2 million of deferred proceeds have been recognised at the period end.

Financial Results

The investment portfolio generated a return of £2.0 million in the period, driven by positive revaluations from a number of companies. The movement in net asset value ("NAV") per ordinary share and the dividends paid are set out in the table below. 

Dividends

Following the realisations of Springboard and Intelligent Office in the previous financial year, a special dividend of 2.25 pence was paid on 11 January 2023.

An interim dividend of 1.5 pence per ordinary share for the year ending 31 December 2023 was paid on 26 June 2023, bringing the cumulative dividends paid to date to 84.75 pence per ordinary share. 

Your Board has proposed an interim dividend of 1.5 pence per ordinary share for the year ending 31 December 2023 which, when combined with the above dividends, will bring total dividends paid in the current financial year to 5.25 pence per ordinary share (2022: 3.0 pence per ordinary share). The dividend will be paid on 3 November 2023 to shareholders on the register on 6 October 2023. 

Shareholder Relations

The shareholder workshop held on 20 June 2023 was well attended. Attendees heard from Tom Dunlop, CEO of Summize, and Philip Hunt, Chair of Vuealta. 

The Company will be hosting an online webinar in November 2023 to provide an update to shareholders; invites will be sent out in September.

Documents such as the annual report are now received electronically by 81 per cent of shareholders, rather than by post, which helps to meet the Board's impact objectives and reduces printing costs. The Board continues to encourage all shareholders to take up this option.

The Company's website is refreshed on a regular basis and provides a comprehensive level of information in what I hope is a user-friendly format.

Fundraising

On 4 April 2023 the Company allotted shares from its fully subscribed 2022/23 share offer. £27.5 million was raised by the Company, resulting in the allotment of 46,357,328 ordinary shares.

On 2 August 2023, the Company announced its intention to launch a new joint offer for subscription for the tax year 2023-24 later this year, alongside British Smaller Companies VCT plc.  A prospectus with full details of the proposed offer is expected to be published in mid-to-late September.

Outlook

The Company's portfolio continues to be resilient, with businesses delivering good growth, driven by the Company's backing of companies in sectors with long-term favourable trends, such as those driving digital transformation.  The Board remains watchful of economic conditions and its knock-on impact to the portfolio, while also noting that such conditions often prove to be an opportune time to invest long term capital in fast growing businesses.

I thank shareholders for their continued support.

Peter Waller

Chairman

Objectives and Strategy

Investment Strategy

The Company seeks to build a broad portfolio of investments in early-stage companies focused on growth with the aim of spreading the maturity profiles and maximising return, as well as ensuring compliance with the VCT guidelines.

The Company predominantly invests in unquoted smaller companies and expects that this will continue to make up the significant majority of the portfolio. It will also retain holdings in cash or near-cash investments to provide a reserve of liquidity which will maximise the Company's flexibility as to the timing of investment acquisitions and disposals, dividend payments and share buybacks.

Unquoted investments are structured using various investment instruments, including ordinary preference shares, convertible securities and very occasionally loan stock, to achieve an appropriate balance of income and capital growth, having regard to the VCT legislation. The portfolio is diversified by investing in a broad range of industry sectors. The normal investment period into the portfolio companies is expected to be typically between the range of five to seven years.

Investment policy

The investment policy of the Company is to invest in UK businesses across a broad range of sectors that blends a mix of businesses operating in established and emerging industries that offer opportunities in the application and development of innovation in their products and services.

These investments will all meet the definition of a Qualifying Investment and be primarily in unquoted UK companies. It is anticipated that the majority of these will be re-investing their profits for growth and the investments will comprise mainly equity instruments.

The Company seeks to build a broad portfolio of investments in early-stage companies focused on growth with the aim of spreading the maturity profiles and maximising return as well as ensuring compliance with the VCT guidelines.

Investment Review

At 30 June 2023 the Company's portfolio was valued at £89.2 million.  The top ten investments represent 44.2 per cent of the net asset value with the largest representing 15.8 per cent of the net asset value.

The movements in the investment portfolio are set out below:

Table A

Investment Portfolio

The Company's portfolio delivered a positive performance over the period, generating a return of £2.1 million, of which £2.2 million arose from the residual portfolio, offset by a small loss of £0.1 million from realisations. As noted above, there was also a fall in value of £0.1 million from the listed investment portfolio, which forms part of the Company's treasury management.

There were upward revaluations from Unbiased, Displayplan, Traveltek and Wooshii, offset by decreases from ACC and Relative Insight. Matillion's valuation also reduced due to decreases in valuation multiples of comparable public companies.

Realisation of Investments

During the six months to 30 June 2023, the portfolio generated £1.7 million from disposals, a loss of £0.1 million over the opening carrying value and a loss of £0.6 million on cost. Further details, including movements from listed funds, are given in note 6.

Investments

During the six months ended 30 June 2023, the Company completed five investments, totalling £7.4 million. This comprised three new investments, totalling £5.3 million, and two follow-on investments, totalling £2.1 million. The breakdown of these investments is shown below:

Following the initial investment into Quality Clouds in May 2022, the Company participated in a further capital raise in March, providing £1.6 million of additional funding to enable the company to expand its team and execute on a growing sales pipeline. The Company also invested a further £0.5 million into Relative Insight.

Cash Deposits and other Liquid Funds

In the current market of rising interest rates the Company is taking an active approach to cash management, while ensuring its primary aim of capital preservation is met.  This is managed through the use of a diversified pool of money market funds (which can be converted back to cash with immediate notice), cash deposits with tier one banking institutions, and a small, diversified portfolio of listed investment funds. At 30 June 2023 this listed portfolio was valued at £1.7 million, or 1.3 per cent of net assets; this reduced in value by £0.1 million in the period, predominantly driven by a reduction in the valuation of its bond investments.

Portfolio

The top 10 investments had a combined value of £58.7 million, 65.8 per cent of the total portfolio.

* Represents recognised income and proceeds received to date plus the unrealised valuation at 30 June 2023

OUR PORTFOLIO AT A GLANCE

The charts on page 13 of the interim report illustrate the broad range of the investment portfolio.

Principal Risks and Uncertainties

In accordance with DTR 4.2.7, the Board confirms that the principal risks and uncertainties facing the Company have not materially changed from those identified in the Annual Report and Accounts for the year ended 31 December 2022. The Board acknowledges that there is regulatory risk and continues to manage the Company's affairs in such a manner as to comply with section 274 of the Income Tax Act 2007.

In summary, the principal risks are:

>             VCT Qualifying Status;

>             Economic;

>             Investment and Strategic;

>             Regulatory;

>             Legislative;

>             Reputational;

>             Operational;

>             Cyber Security and Information Technology;

>             ESG; and

>             Liquidity.

Full details of the principal risks can be found in the financial statements for the year ended 31 December 2022 on pages 32 to 34, a copy of which is available at www.bscfunds.com.

Directors' Responsibilities Statement

The directors of British Smaller Companies VCT2 plc confirm that, to the best of their knowledge, the condensed set of financial statements in this interim report have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the UK, and give a true and fair view of the assets, liabilities, financial position and profit and loss of British Smaller Companies VCT2 plc, and that the interim management report includes a true and fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

The directors of British Smaller Companies VCT2 plc are listed in note 11 of these interim financial statements.

By order of the Board

Peter Waller

Chairman

Unaudited Statement of Comprehensive Income

for the six months ended 30 June 2023

The Total column of this statement represents the Company's Unaudited Statement of Comprehensive Income, prepared in accordance with UK adopted international accounting standards. The supplementary Revenue and Capital columns are prepared under the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in July 2022 - "SORP") published by the Association of Investment Companies.

Unaudited Balance Sheet

as at 30 June 2023

Signed on behalf of the Board

Peter Waller

Chairman

Unaudited Statement of Changes in Equity

for the six months ended 30 June 2023

* Other reserves includes the capital redemption reserve, the merger reserve and the other reserve, which are non-distributable.

Reserves available for distribution

Under the Companies Act 2006, the capital reserve and the revenue reserve are distributable reserves.  The table below shows amounts that are available for distribution.

*subject to filing these interim financial statements at Companies House.

The capital reserve and the revenue reserve are both distributable reserves.  These reserves total £43,164,000, representing a decrease of £10,456,000 in the period since 31 December 2022.  The directors also consider the level of the investment holding gains and losses reserve and the future requirements of the Company when determining the level of dividend payments.

Of the potentially distributable reserves of £43,164,000 shown above, £1,403,000 relates to income/proceeds not yet receivable.

Total share premium cancelled is available for distribution from the following dates:

Unaudited Statement of Cash Flows

for the six months ended 30 June 2023

*Issue costs include both fundraising costs and expenses incurred from the Company's DRIS.

Explanatory Notes to the Unaudited

Condensed Financial Statements

1              General Information, Basis of Preparation and Principal Accounting Policies

These half year statements have been approved by the directors whose names appear at note 11, each of whom has confirmed that to the best of their knowledge:

>             the interim management report includes a fair review of the information required by rules 4.2.7 and 4.2.8 of the Disclosure Rules and the Transparency Rules; and

>             the half year statements have been prepared in accordance with IAS 34 'Interim financial reporting' and the Disclosure and Transparency Rules of the Financial Conduct Authority.

The half year statements are unaudited and have not been reviewed by the auditors pursuant to the International Standard on Review Engagements (UK and Ireland) 2410 guidance on Review of Interim Financial Information performed by the independent Auditor of the entity. They do not constitute full financial statements as defined in section 435 of the Companies Act 2006. The comparative figures for the year ended 31 December 2022 do not constitute full financial statements and have been extracted from the Company's financial statements for the year ended 31 December 2022. Those accounts were reported upon without qualification by the auditors and have been delivered to the Registrar of Companies.

The accounting policies and methods of computation followed in the half year statements are the same as those adopted in the preparation of the audited financial statements for the year ended 31 December 2022. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 2022 annual report.

The accounts have been prepared on a going concern basis as set out below and in accordance with UK adopted international accounting standards.

The accounts have been prepared under the historical cost basis as modified by the measurement of investments at fair value through profit or loss.

The accounts have been prepared in compliance with the recommendations set out in the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies (issued in July 2022 - "SORP") to the extent that they do not conflict with UK adopted international accounting standards.

The financial statements are prepared in accordance with UK adopted international accounting standards (IFRSs) and interpretations in force at the reporting date.  New standards coming into force during the period and future standards that come into effect after the period-end have not had a material impact on these financial statements.

The Company has carried out an assessment of accounting standards, amendments and interpretations that have been issued by the IASB and that are effective for the current reporting period. The Company has determined that the transitional effects of the standards do not have a material impact.

The financial statements are presented in sterling and all values are rounded to the nearest thousand (£000), except where stated.

Going Concern: The directors have carefully considered the issue of going concern and are satisfied that the Company has sufficient resources to meet its obligations as they fall due for a period of at least twelve months from the date these half year statements were approved. As at 30 June 2023 the Company held cash balances, money market funds, listed investment funds and fixed term deposits with a combined value of £43,630,000. Cash flow projections show the Company has sufficient funds to meet both its contracted expenditure and its discretionary cash outflows in the form of share buy-backs and the dividend policy.  In the year ended 31 December 2022 the Company's costs and discretionary expenditures were:

The directors therefore believe that it is appropriate to continue to apply the going concern basis of accounting in preparing these half year statements.

2                Income

3                Taxation                        

The Company has no provided, or unprovided, deferred tax liability in either period.

Deferred tax assets in respect of losses have not been recognised as the directors do not currently believe that it is probable that sufficient taxable profits will be available against which the assets can be recovered.

Due to the Company's status as a venture capital trust, and the continued intention to meet the conditions required to comply with Chapter 3 Part 6 of the Income Tax Act 2007, the Company has not provided deferred tax on any capital gains or losses arising on the revaluation or realisation of investments.

4                Dividends

Amounts recognised as distributions to equity holders in the period:

The first interim dividend of 2.25 pence per ordinary share was paid on 11 January 2023 to shareholders on the register as at 18 November 2022.

The second interim dividend of 1.5 pence per ordinary share was paid on 26 June 2023 to shareholders on the register as at 12 May 2023.

A third interim dividend of 1.5p per ordinary share amounting to approximately £3.4 million is proposed. This dividend has not been recognised in these half year financial statements as the obligation did not exist at the balance sheet date.

5             Basic and Diluted Earnings per Ordinary Share

The basic and diluted earnings per ordinary share is based on the profit after tax attributable to equity shareholders of £253,000 (30 June 2022: £1,163,000) and 204,822,093 (30 June 2022: 180,486,872) ordinary shares being the weighted average number of ordinary shares in issue during the period.

The basic and diluted revenue earnings per ordinary share is based on the revenue profit attributable to equity shareholders of £149,000 (30 June 2022: loss of £225,000) and 204,822,093 (30 June 2022: 180,486,872) ordinary shares being the weighted average number of ordinary shares in issue during the period.

The basic and diluted capital earnings per ordinary share is based on the capital profit attributable to equity shareholders of £104,000 (30 June 2022: £1,388,000) and 204,822,093 (30 June 2022: 180,486,872) ordinary shares being the weighted average number of ordinary shares in issue during the period.

During the period the Company allotted 46,357,328 new ordinary shares from the fundraising, and 2,534,656 new ordinary shares in respect of its DRIS.

The Company has also repurchased 875,911 of its own shares in the period and these shares are held in the capital reserve. The total of 19,542,723 treasury shares has been excluded in calculating the weighted average number of ordinary shares during the period.

The Company has no dilutive shares and consequently, basic and diluted earnings per ordinary share are equivalent at 30 June 2023, 31 December 2022 and 30 June 2022.

6             Financial Assets at Fair Value through Profit or Loss

IFRS 13 and IFRS 7, in respect of financial instruments that are measured in the balance sheet at fair value, require disclosure of fair value measurements by level within the following fair value measurement hierarchy:

>             Level 1: quoted prices in active markets for identical assets or liabilities. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The quoted market price used for financial assets held by the Company is the current bid price. These instruments are included in Level 1 and comprise listed investment funds classified as held at fair value through profit or loss.

>             Level 2: the fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. The Company held no such instruments in the current or prior year.

>             Level 3: the fair value of financial instruments that are not traded in an active market (for example, investments in unquoted companies) is determined by using valuation techniques such as earnings or revenue multiples. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. The majority of the Company's investments fall into this category.

Each investment is reviewed at least quarterly to ensure that it has not ceased to meet the criteria of the level in which it was included at the beginning of each accounting period. There have been no transfers between these classifications in the period (2022: none).

The change in fair value for the current and previous year is recognised through profit or loss. All items held at fair value through profit or loss were designated as such upon initial recognition.

Valuation of Investments

Unquoted investments are valued in accordance with IFRS 13 "Fair Value Measurement" and using the International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines ("the Guidelines") issued in December 2022.

Initial measurement

The best estimate of the initial fair value of an unquoted investment is the cost of the investment. Unless there are indications that this is inappropriate, an unquoted investment will be held at this value within the first three months of investment.

Subsequent measurement

Based on the Guidelines we have identified six of the most widely used valuation methodologies for unquoted investments. The Guidelines advocate that the best valuation methodologies are those that draw on external, objective market-based data in order to derive a fair value.

Full details of the methods used by the Company were set out on pages 66 and 67 of the financial statements for the year ended 31 December 2022, a copy of which can be found at www.bscfunds.com.

The primary methods used for valuing non-quoted investments, and the key assumptions relating to them are:

Unquoted Investments

>             revenue multiple. An appropriate multiple, given the risk profile and revenue growth prospects of the underlying company, is applied to the revenue of the company. The multiple is adjusted to reflect any risk associated with lack of marketability and to take account of the differences between the investee company and the benchmark company or companies used to derive the multiple.

>             earnings multiple. An appropriate multiple, given the risk profile and earnings growth prospects of the underlying company, is applied to the maintainable earnings of the company. The multiple is adjusted to reflect any risk associated with lack of marketability and to take account of the differences between the investee company and the benchmark company or companies used to derive the multiple.

Movements in investments at fair value through profit or loss during the six months to 30 June 2023 are summarised as follows:

Level 3 valuations include assumptions based on non-observable data, such as discounts applied either to reflect changes in the fair value of financial assets held at the price of recent investment, or to adjust revenue or earnings multiples.

IFRS13 requires disclosure, by class of financial instruments, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to fair value measurement. Each unquoted portfolio company has been reviewed and both downside and upside alternative assumptions have been identified and applied to the valuation of each of the unquoted investments. Applying the downside alternative the value of the unquoted investments would be £4,322,000 (4.8 per cent) lower. Using the upside alternative the value would be increased by £4,443,000 (5.0 per cent).

98 per cent of the Company's investments are in unquoted companies held at fair value. The valuation methodology for these investments includes the application of externally produced revenue and earnings multiples. Therefore the value of the unquoted element of the portfolio is also indirectly affected by price movements on the listed market. Those using revenue and earnings multiple methodologies include judgements regarding the level of discount applied to that multiple. The effect of changing the level of discounts applied to the multiples is considered above.

2 per cent of the Company's investments are investment funds listed on the main market of the London Stock Exchange (including FCA authorised and regulated UCITS funds). A 5 per cent increase in stock prices as at 30 June 2023 would have increased the net assets attributable to the Company's shareholders and the total profit by £87,000. An equal change in the opposite direction would have decreased the net assets attributable to the Company's shareholders and the total profit by an equal amount.

There have been no individual fair value adjustments downwards during the period that exceeded 5 per cent of the total assets of the Company (31 December 2022: none).

The following disposals took place during the period.

The total from disposals in the table above is £1,913,000 whereas that shown in the Statement of Cash Flows is £1,715,000. This is due to the timing differences between the recognition of the deferred income arising on realisations and its receipt in cash.

7              Provisions for Liabilities and Charges

Incentive fee

Under the terms of the Subscription Rights Agreement, the Manager and Chord Capital are entitled to a performance-related incentive fee if the cumulative dividends per ordinary share paid or payable as at the last business day of December in any year, plus the average of the middle market price per ordinary share of the five dealing days prior to that day, exceeds a Hurdle. The Hurdle for the year ending 31 December 2023 is 137.25 pence per ordinary share.  The value of the incentive fee is 20 per cent of the excess to the Hurdle, multiplied by the number of ordinary shares issued.  At 30 June 2023 the total of cumulative cash dividends paid and the mid-market price was 140.45 pence per ordinary share.  In accordance with the Company's accounting policy, an accrual of £1,180,000 has been recognised based on the number of shares in issue at 30 June 2023.

8             Basic and Diluted Net Asset Value per Ordinary Share

The basic and diluted net asset value per ordinary share is calculated on attributable assets of £133,027,000 (30 June 2022 and 31 December 2022: £109,636,000 and £111,869,000 respectively) and 229,484,783 (30 June 2022 and 31 December 2022: 181,720,724 and 181,468,710 respectively) ordinary shares in issue at 30 June 2023.

Treasury shares have been excluded in calculating the number of ordinary shares in issue at 30 June 2023.

The Company has no potentially dilutive shares and consequently, basic and diluted net asset values are equivalent at 30 June 2023, 31 December 2022 and 30 June 2022.

9             Total Return

Total Return per ordinary share is calculated on cumulative dividends paid of 84.75 pence per ordinary share (30 June 2022: 79.5 pence per ordinary share and 31 December 2022: 81.0 pence per ordinary share) plus the net asset value as calculated in note 8.

10           Post Balance Sheet Events

Subsequent to the period end the Company has invested a further £0.2 million into Elucidat.

11            Directors

The directors of the Company are Peter Waller, Barbara Anderson and Roger McDowell.

12           Interim Dividend for the year ending 31 December 2023

The directors are pleased to announce the payment of a third interim dividend for the year ending 31 December 2023 of 1.5 pence per ordinary share ("Interim Dividend").

The Interim Dividend will be paid on 3 November 2023 to those shareholders on the Company's register at the close of business on 6 October 2023. The ex-dividend date will be 5 October 2023.

13           Dividend Re-investment Scheme ("DRIS")

The Company operates a DRIS.  The latest date for receipt of DRIS elections so as to participate in the DRIS in respect of the Interim Dividend is the close of business on 20 October 2023.

14           Inside Information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU No. 596/2014). Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

For further information, please contact:

                David Hall          YFM Private Equity Limited        Tel: 0113 244 1000

               Alex Collins         Panmure Gordon (UK) Limited  Tel: 0207 886 2767