Northern 3
VCT PLC
Annual Report and Financial Statements
31 March 2023
Contents
03
Financial summary
05
Venture capital portfolio summary
08
Chairman’s statement
10
Directors and Advisers
12
Shareholder Information
14
Strategic Report
21
Investment portfolio
24
Fiſteen largest venture capital investments
32
Responsible investment
38
Directors’ report
42
Directors’ remuneration report
44
Corporate Governance
49
Directors’ Responsibilities Statement
50
Independent Auditor’s Report
55
Income Statement
56
Balance Sheet
57
Statement of changes in equity
58
Statement of cash flows
59
Notes to the financial statements
78
Glossary of terms
Northern 3 VCT PLC is a Venture Capital Trust
(VCT) managed by Mercia Fund Management
Limited.
It invests mainly in unquoted venture capital
holdings and aims to provide long-term tax-free
returns to shareholders through a combination
of dividend yield and capital growth.
Welcome
Northern 3 VCT PLC
Annual Report and Financial Statements
02
summary
Year ended
31 March
2023
Year ended
31 March
2022
Net assets
£113.0m
£106.9m
Net asset value per share
91.6p
97.9p
Return per share
Revenue
(0.1)p
0.4p
Capital
(1.5)p
(0.5)p
Total
(1.6)p
(0.1)p
Dividend per share declared in respect of the period
Interim dividend
2.0p
2.0p
Proposed final dividend
2.5p
3.0p
Total
4.5p
5.0p
Cumulative return to shareholders since launch
Net asset value per share
91.6p
97.9p
Dividends paid per share*
113.4p
108.4p
Net asset value plus dividends paid per share
205.0p
206.3p
Mid-market share price at end of period
84.5p
94.5p
Share price discount to net asset value
7.8%
3.5%
Annualised tax-free dividend yield (based on net asset value per share)
4.6%
4.7%
*
Excluding proposed final dividend payable on 18 August 2023
Definitions of the terms and alternative performance measures used in this report can be found in the Glossary of terms on page 78.
Financial
Northern 3 VCT PLC
Annual Report and Financial Statements
03
Results announced
15 June
Shares quoted ex dividend
20 July
Record date for final dividend
21 July
Annual General Meeting*
27 July 11:30am
Final dividend paid
18 August
Key dates during 2023
For additional
information
visit our investor
area online
* To be convened at Reed Smith LLP, Broadgate Tower,
20 Primrose Street, London EC2A 2RS with optional remote access for
shareholders through an online webinar facility
Northern 3 VCT PLC
Annual Report and Financial Statements
04
61
Portfolio
companies
5.1
years
Average age
of
investment
£74.0m
Portfolio valuation at
31 March 2023
£15.4m
Proceeds from all
realisations in year
£70.9m
Cost of investments
6
Number of full
realisations
this year
9
Number of new
investments this year
£1.2m
Average cost
of investment
19
Number of portfolio
companies that received
follow on capital this year
£16.2m
Invested in new and
follow on investments
portfolio summary
capital
Venture
Northern 3 VCT PLC
Annual Report and Financial Statements
05
Asset allocation
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
31 March 2023
Cash and short-term deposits
Listed equity
Venture capital - quoted
Venture capital - unquoted
24.1%
10.4%
4.9%
60.6%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
31 March 2022
20.3%
11.6%
8.5%
59.6%
0
+
+
9
+
5
+
6
+
E
N
+
*
+
,
+
E
]
+
7
+
E
2
+
3
+
.
+
+
1
E
Venture capital portfolio summary
continued
Age of investment
Up to 1 year
16%
1-3 years
15%
3-5 years
25%
5-7 years
21%
7+ years
22%
Industry sector
Soſtware/electronics
50%
Healthcare/biotechnology
19%
Consumer
14%
Services
11%
Industrial/manufacturing
5%
Other
1%
Financing stage
Venture capital –
post November 2015
78%
Venture capital –
pre November 2015
10%
Management buyout
– pre November 2015
12%
Quotation
Unquoted
92%
AIM
8%
Note these charts are calculated by value of investments.
Northern 3 VCT PLC
Annual Report and Financial Statements
06
4
Scotland
3
North East
4
Yorkshire/
Humberside
1
East Midlands
2
Anglia
17
London
12
South East
12
North West
1
Wales
3
West Midlands
2
South West
61
Total
venture
capital
holdings
Investment
Reach
Bristol
Office Locations
Tees Valley
London
Bristol
Henley-in-Arden
Birmingham
Newcastle
Sheffield
Leeds
Hull
Manchester
Preston
Northern 3 VCT PLC
Annual Report and Financial Statements
07
James Ferguson BA
Chairman
“
New investments have exceeded the previous year’s level, with
£10.3 million provided to nine new venture capital investments
and £5.9 million of follow on capital invested into existing
investments.
to approval by shareholders at the
Annual General Meeting, be paid on
18 August 2023.
Sales in the venture portfolio realised
£15.4 million on an initial cost of
£6.7 million, producing a gain of £8.7
million. There was a decrease in the
valuation of the Company’s listed
venture holdings of £1.2 million.
The volatility in the listed portfolio
was primarily caused by a fall in the
musicMagpie PLC share price (see
page 22 for further detail).
Our dividend investment scheme,
under which dividends can be re-
invested in new ordinary shares free
of dealing costs and with the benefit
of the tax reliefs available on new
VCT share subscriptions, continues to
operate.
Instructions on how to join
the scheme are included within the
dividend section of our website, which
can be found here:
mercia.co.uk/vcts/n3vct/.
Investment portfolio
The realisation of
the older
investments made under the ‘pre
2015’ rules continues and constituted
22% of the Company’s investments
as at 31 March 2023. We expect this to
provide a number of profitable future
sales. Overall, it was a busy year, with
a number of notable transactions
Chairman’s
Statement
either completed or in progress at our
year end. The highlights during the
year were the sales of Lineup Systems
and Ideagen plc which provided
returns of 7.8 times and 9.7 times cost
respectively over the course of the
investment.
Despite some reductions in the
Directors’ valuations of the unquoted
investments, particularly in consumer
businesses, gains in Evotix (realised
shortly aſter our year-end) and
strong performances by several other
portfolio companies resulted in an
unchanged valuation.
New investments have exceeded
the previous year’s level, with £10.3
million provided to nine new venture
capital investments and £5.9 million
of follow on capital invested into
existing investments.
Share offers and liquidity
Liquidity increased as a result of
the £17 million share offer in April
2022 and, as a result of the public
share offer launched in January
2023, 6,597,040 new ordinary shares
were issued in April 2023 for gross
proceeds of £6.0 million. Following
this offer in 2022/23, and taking
into account the increased rate of
investment, the Board is pleased
to announce that the Company will
produce a prospectus for an offer in
the 2023/24 tax year of £14.0 million,
with an over-allotment facility of £6.0
million. This offer will be launched in
September 2023.
We have maintained our policy of
buying back our shares in the market,
where necessary to maintain market
liquidity.
During the year 3,383,207
shares, equivalent to approximately
3.1% of the opening share capital,
were purchased for cancellation.
Changes to the performance-
related management fee
Following a review of current
arrangements by the Board, a
resolution proposing changes to
the Management Agreement in
relation to the performance-related
management fee is included in the
circular for the General Meeting.
If approved, these changes will be
implemented by a deed of variation to
the Company’s existing Management
Agreement.
The changes in VCT legislation in
2015 required the Company to focus
new investment on earlier stage
companies which, by their nature,
are higher risk and therefore likely
to deliver more volatile investment
returns. Consequently, an adjustment
is proposed to the scheme to ensure
that strong returns above a hurdle
are delivered consistently, not just
Results and dividend
The net asset value (NAV) per share
at 31 March 2023 was 91.6 pence
compared with 97.9 pence as at
31 March 2022. The total return per
share for the year as shown in the
income statement was minus 1.6
pence (2022: minus 0.1 pence).
Last year we increased the target
annual dividend yield to 4.5% of
opening NAV per share. Having
already declared an interim dividend
of 2.0 pence per share which was paid
in January 2023, your Directors now
propose a final dividend of 2.5 pence.
These payments totalling 4.5 pence
(2022 : 5.0 pence) are equivalent
to 4.6% of the opening NAV. The
proposed final dividend will, subject
Northern 3 VCT PLC
Annual Report and Financial Statements
08
01
in a single year,
with a requirement
that any decline in shareholder
NAV must be made good before a
performance fee is payable to the
Manager. As part of these changes,
the Board and the Manager have
agreed that at least 80% of any
performance fee generated is paid to
the VCT investment team. Full details
of the changes are set out in the
accompanying circular.
Responsible Investment
The Company’s approach to
Environmental, Social and
Governance (ESG) responsibilities is
set out on pages 32 to 37.
Geopolitical and other
macroeconomic risks
The Company’s investments may
be affected by regional events or
politics. A recent example of this is
the high-inflation environment in
the aſtermath of COVID-19 and the
conflict in Ukraine. The Board has
no control over such macro events,
and as the Company’s investments
are domiciled in the UK with only a
limited presence in the rest of the
world, risks are somewhat localised
to those facing the UK economy. As
a result of the conflict in Ukraine,
in the year the Manager undertook
a review of the entire portfolio for
links to sanctioned individuals and
companies, took appropriate action
where required, and continues to
monitor the situation carefully.
VCT legislation and
qualifying status
The Company has continued to meet
the stringent and complex qualifying
conditions laid down by HM Revenue
& Customs for maintaining its
approval as a VCT.
Mercia monitors
the position closely and reports
regularly to the Board.
The ‘sunset clause’ was a European
state aid requirement when the VCT
scheme received state aid approval,
which means that without a
change in legislation, investors will
not receive upfront tax relief
when investing in VCTs from
6 April 2025. While the government
has signalled that it will extend
the scheme, no formal legislation
has been introduced to enact this
commitment. The Company and the
Manager will continue to monitor
progress in this area. The Board
considers that the Company, and
VCTs more generally, are successfully
delivering against the Government’s
mandate, which is to channel
money into higher-risk, early-stage
businesses.
“
The highlights during the
year were the sales of Lineup
Systems and Ideagen which
provided returns of 7.8 times
and 9.7 times cost respectively
over the course of each
investment.
Annual General Meeting
The Company’s Annual General
Meeting (AGM) will take place on
27 July 2023. We intend to hold the
2023 AGM in person at Reed Smith
LLP, Broadgate Tower, 20 Primrose
Street, London, EC2A 2RS. Following
positive comments received from
the last meetings, we also intend to
offer remote access for shareholders
through an online webinar facility.
Full details and formal notice of the
AGM will be provided separately.
The General Meeting regarding
the proposed changes to the
performance-related management
fee will be held immediately aſter the
AGM.
Outlook
Access to capital is one of the most
important factors contributing to the
success of early stage businesses;
we believe that the Company is
well placed to provide that. We
are encouraged by the investment
opportunities that we are seeing
despite the various economic
concerns.
James Ferguson
Chairman
15 June 2023
Northern 3 VCT PLC
Annual Report and Financial Statements
09
02
Anna Brown, LLB (Hons),
Dip LP
is a partner with international law firm,
Addleshaw Goddard LLP specialising in
mergers & acquisitions, investments and
equity capital markets work. Prior to that
she was a partner at Pinsent Masons LLP
and McGrigors LLP (until its merger with
Pinsent Masons). She was appointed to the
Board in 2020.
Directors
and Advisers
James Ferguson BA
(Chairman)
was chairman and managing director
of Stewart Ivory Limited from 1989 until
2000. He is chairman of The Scottish
Oriental Smaller Companies Trust PLC
and a non-executive director of The
Independent Investment Trust PLC. He
is the former deputy chairman of the
Association of Investment Companies and
former chairman of Value & Income Trust
PLC, North American Income Trust PLC.
He was appointed to the Board in 2001
and became Chairman in 2009.
Chris Fleetwood BA FCA
(Chairman of Audit Committee)
was managing partner of io solutions
(e-business strategy advisers). He was also
formerly chairman of Darlington Building
Society, group chief executive of Whessoe
PLC and, governor of Teesside University
and a non-executive director of NCFE
Limited. He was appointed to the Board in
2001.
Tim Levett MBA
is non-executive chairman of NVM Private
Equity LLP, which he co-founded in
1988. He is a a non-executive director of
Northern Venture Trust PLC and several
unquoted companies and a member of
the Association of Investment Companies’
VCT Forum. He ceased to be a consultant
to Mercia Fund Management Limited on
31 March 2022. He was appointed to the
Board in 2001.
Northern 3 VCT PLC
Annual Report and Financial Statements
10
Secretary and registered office
Mercia Company Secretarial
Services Limited
Forward House
17 High Street
Henley-in-Arden B95 5AA
Telephone: 0330 223 1430
E-mail: vctshareholderenquiries@mercia.co.uk
Website: mercia.co.uk/vcts/n3vct/
Registered number
04280530
Investment manager
Mercia Fund Management Limited
Forward House
17 High Street
Henley-in-Arden B95 5AA
Listed investment adviser
Brewin Dolphin Limited
Time Central
32 Gallowgate
Newcastle upon Tyne NE1 4SR
Independent auditor
Mazars LLP
The Pinnacle
160 Midsummer Boulevard
Milton Keynes MK9 1FF
Taxation advisers
Philip Hare & Associates LLP
6 Snow Hill
London EC1A 2AY
Solicitors
Reed Smith LLP
Broadgate Tower
20 Primrose Street
London EC2A 2RS
Stockbrokers
Panmure Gordon (UK) Limited
One New Change
London EC4M 9AF
Bankers
Barclays Bank PLC
25 Gresham Street
London EC2V 7HN
Santander UK PLC
2 Triton Square
Regent’s Place
London NW1 3AN
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing BN99 6DA
Shareholder helpline: 0800 028 2349
John Waddell LLB FRSE
was until 2015 chief executive of Archangel
Investors Limited, a Scottish based
syndicate of individual private investors,
and sits on the boards of numerous
unquoted companies. He also advises two
early stage funds and was previously a
director of Noble Grossart Limited. He was
appointed to the Board in 2007.
i
Northern 3 VCT PLC
Annual Report and Financial Statements
11
Shareholder
Information
The Company
listed on the London Stock Exchange
since September 2001.
invests mainly in unquoted venture
capital holdings, with its remaining
assets invested in a portfolio of equity
investments, quoted investment
funds and bank deposits.
Northern 3 VCT PLC is managed by
Mercia Fund Management Limited
(Mercia), a wholly owned subsidiary
of Mercia Asset Management PLC
Mercia is a specialist alternative
asset manager with over 15 years’
experience of providing capital to
high-growth UK SMEs, meeting a
large, growing and under-served need
for long-term investment capital.
Mercia offers high-growth UK SMEs a
complete capital solution including
private equity, debt, seed and venture
capital (the latter category accounting
for the majority of its investment
activity). In being managed by Mercia,
the VCTs have the opportunity to
invest alongside Mercia’s own funds
that are able to provide replacement
capital.
Mercia also acts as manager or adviser
of Northern Venture Trust PLC and
Northern 2 VCT PLC, in addition to
various other investment funds.
The
Company, Northern Venture Trust PLC
and Northern 2 VCT PLC are generally
known in the market as the Northern
VCTs and are the only VCTs which
Mercia manages or advises.
Mercia Asset Management PLC is
quoted on AIM.
Northern 3 VCT PLC is a member
of the Association of Investment
Companies (AIC).
Venture Capital Trusts
Venture Capital Trusts (VCTs) were
introduced by the Chancellor of the
Exchequer in the November 1994
Budget, the relevant legislation now
being contained in the Income Tax Act
2007.
VCTs are intended to provide
a means whereby private individuals
can invest in small unquoted trading
companies in the UK, with an
incentive in the form of a range of
tax benefits.
With effect from 6 April
2006, the benefits to eligible investors
include:
•
income tax relief at up to 30% on
new subscriptions of up to £200,000
per tax year, provided the shares are
held for at least five years;
•
exemption from income tax on
dividends paid by VCTs (such
dividends may include the VCT’s
capital gains as well as its income);
and
•
exemption from capital gains tax
on disposals of shares in VCTs.
Subscribers for shares in VCTs
between 6 April 2004 and 5 April 2006
were entitled to income tax relief at
40% rather than 30% and the shares
had to be held for at least three
years rather than five years.
Prior to
6 April 2004, subscribers for shares
in VCTs were entitled to income tax
relief at 20% and could also obtain
capital gains deferral relief.
Capital
gains deferred by pre-6 April 2004
subscriptions are not affected by the
subsequent changes in VCT tax reliefs.
In order to maintain approved status,
a VCT must comply on a continuing
basis with the provisions of Section
274 of the Income Tax Act 2007;
in
particular, a VCT is required at all
times to hold at least 80% by value of
its investments in qualifying holdings,
of which at least 70% must comprise
eligible shares.
For this purpose a
‘qualifying holding’ is an investment
in new shares or securities of an
unquoted company (which may
however be quoted on AIM) which has
a permanent establishment in the UK,
is carrying on a qualifying trade, and
whose gross assets and number of
employees at the time of investment
do not exceed prescribed limits.
The definition of ‘qualifying
trade’ excludes certain activities
such as property investment and
development, financial services
and asset leasing.
The Finance
(No 2) Act 2015 contained a number
of significant changes to the VCT
rules for investments completed aſter
its introduction, designed to secure
approval of the VCT scheme by the
European Commission. A company
whose trade is more than seven
years old (ten years for ‘knowledge
intensive’ companies) will generally
only qualify for VCT investment if it
has previously received State-aided
risk finance before the end of the
initial investing period or the new
investment exceeds 10% of the total
turnover for the past five years and
the funds are used for new products
and/or geographical markets; there
is a lifetime limit of £12 million (£20
million for ‘knowledge intensive’
companies) on the amount of State-
aid funding receivable by a company;
and VCT funds may not be used by a
company to acquire shares in another
company or to acquire a business. A
breach of the requirements may lead
to a loss of VCT status.
The Finance Act 2018 contained
further changes to the conditions
for a VCT to maintain its approved
status.
The changes were designed
to increase the level of qualifying
investments made by VCTs. A non-
exhaustive list of the main points is as
follows:
•
investments made from 15 March
2018 are only qualifying if they
meet the risk-to-capital condition.
This principles-based condition
broadly requires the investee
company to be an early-stage,
higher risk, entrepreneurial
company which has the potential
to grow in the long term;
•
debt finance provided by VCTs
must be made on an unsecured
basis;
•
a VCT must invest at least 30% of
any funds raised in an accounting
period commencing on or aſter
6 April 2018 in qualifying holdings
within 12 months of the period
end; and
•
investments made from 6 April
2019 in qualifying holdings must
comprise, in aggregate, at least
70% of eligible shares, regardless
of when the money used to fund
the investment was raised.
Northern 3 VCT PLC
Annual Report and Financial Statements
12
Share price
The Company’s share price is carried
daily in the Financial Times and the
Daily Telegraph. The Company’s FTSE
Actuaries classification is ‘Investment
Companies – VCTs’.
A range of shareholder information
is provided on the internet at
www.shareview.co.uk by the
Company’s registrars, Equiniti
Limited, including details of
shareholdings, indicative share
prices and information on recent
dividends (see page 11 for contact
details for Equiniti Limited).
Share price information can also be
obtained via the Company’s website.
Dividend investment scheme
The Company operates a dividend
investment scheme, giving
shareholders the option of investing
their dividends in new ordinary
shares in the Company with the
benefit of the tax reliefs currently
available to VCT subscribers.
Information about the dividend
investment scheme can be obtained
from the Company Secretary (see
page 11 for contact details).
Electronic communications
The Company continues to provide
the option to shareholders to
receive communications from the
Company electronically rather
than by paper copy. A letter is
attached alongside this report for all
shareholders currently receiving their
annual report in print, requesting
confirmation of their preferences.
Shareholders who wish to change
their preferences should visit
www.shareview.co.uk (operated by
the Company’s registrars, Equiniti
Limited), register for a Shareview
portfolio and select their preferred
method of delivery of company
communications.
Financial calendar
Subject to regular review by the Directors, the Company’s financial calendar for the
year ending 31 March 2024 is as follows:
November 2023
Half-yearly financial report for the six months ending
30 September 2023 published
January 2024
Interim dividend paid
June 2024
Final dividend and results for year ending 31 March 2024 announced
June 2024
Annual report and financial statements published
August 2024
Annual General Meeting
August 2024
Final dividend paid
Northern 3 VCT PLC
Annual Report and Financial Statements
13
This report has been prepared by
the Directors in accordance with the
requirements of Section 414 of the
Companies Act 2006. The Company’s
independent auditor is required
by law to report on whether the
information given in the Strategic
Report and Directors’ Report
is consistent with the financial
statements. The auditor’s report is
set out on pages 50 to 54.
Corporate objective
The Company’s objective is to
provide high long-term tax-free
returns to investors through a
combination of dividend yield and
capital growth, by investing primarily
in unquoted UK manufacturing,
service and technology businesses
which meet the Manager’s key
criteria of good
growth potential,
strong management and ability to
generate cash in the medium to long
term.
Investment policy
The Company’s investment policy
has been designed to enable the
Company to achieve its objective
whilst complying with the qualifying
conditions set out in the VCT rules, as
amended by HM Government from
time to time.
The Directors intend that the long-
term disposition of the Company’s
assets will be approximately 80% in a
portfolio of VCT-qualifying unquoted
and AIM-quoted investments
and 20% in other investments
selected with a view to producing
an enhanced return while avoiding
undue capital volatility, 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 buy-backs.
Within the VCT-qualifying portfolio,
investments will be structured using
various investment instruments,
including ordinary and preference
shares, loan stocks and convertible
securities, to achieve an appropriate
balance of income and capital
growth. The selection of new
investments will necessarily have
regard to the VCT rules, which are
designed to focus investment on
earlier stage
development capital
opportunities. The portfolio will
be diversified by investing in a
broad range of VCT-qualifying
industry sectors and by holding
investments in companies at
different stages of maturity in the
corporate development cycle.
The
normal investment holding period
is expected to be in the range from
three to ten years.
No single investment will normally
represent an excess of 3% of the
Company’s total assets at the time
of initial investment. As investments
are held with a view to long-term
capital growth as well as income, it
is possible that individual holdings
may grow in value to the point where
they represent a significantly higher
proportion of total assets prior to
a realisation opportunity being
available.
Investments will normally be
made using the Company’s equity
shareholders’ funds and it is not
intended that the Company will take
on any long-term borrowings.
Investment management
Mercia acts as investment manager
and has done so since the Company
consented to the novation of its
existing investment management
agreement from NVM Private Equity
LLP (NVM) effective on 23 December
2019.
The Board’s Management
Engagement Committee reviews
the terms of Mercia’s appointment
as investment manager on a regular
basis. Further information about the
terms of the management agreement
with Mercia and the remuneration
payable to Mercia is set out in the
Directors’ Report on pages 38 to
41 and in Note 3 to the financial
statements.
Co-investment arrangements
The Company operates within a
co-investment and allocation policy
that applies to all funds managed
by Mercia. Under the terms of
this policy, where an investment
opportunity is VCT qualifying and
the funding requirement is in excess
of £2 million, the Company and the
other VCTs managed by Mercia are
the preferred and lead investors. For
these opportunities the Company is
entitled to participate pro rata to net
assets alongside the other VCT funds
managed by Mercia; save where the
investment opportunity is located
in Yorkshire, Humberside, Teesside
or the North East, where minimum
syndication requirements mean
that certain other funds managed by
Mercia can participate in the funding
round alongside the Northern VCTs;
with an allocation of up to (but not
exceeding) 20% (10% in the North
East). Where the funding round for a
new opportunity is under £2 million
the VCTs will not be the lead investors;
but if any such deal is in excess of £1.5
million, the Northern VCT funds have
the right to participate at a de minimis
level of £0.5 million.
In relation to follow-on rounds of
investment where the Company and
other Northern VCTs are existing
investors, the Company, alongside the
other Northern VCT funds, shall have
priority to determine how much they
wish to invest, with no requirement
to offer such investment opportunity
to the other funds managed or
advised by Mercia (although they are
free to do so if so determined by the
Manager).
Under a co-investment scheme,
members of the VCT investment
team and certain key Mercia
executives are required to invest
personally alongside the funds in
each VCT-qualifying investment on a
predetermined basis.
Strategic
Report
Northern 3 VCT PLC
Annual Report and Financial Statements
14
Overview of the year
During the year under review the
Company achieved a total return,
before dividends, of minus 1.6 pence
per share, equivalent to minus 1.6% of
the opening net asset value per share
of 97.9 pence. The movement in NAV
is largely due to a fall in the fair value
of quoted venture investments of £1.2
million. This has been mitigated by
some good exits which contributed
£1.4 million profit on 31 March 2022
values. The movement in total net
assets and net asset value per share is
summarised in Table 2.
Total income from investments during
the year decreased to £0.7 million
(2022: £1.4 million).
As the proportion
of earlier stage investments in
the unquoted portfolio increases
as intended, it is expected that
investment income will decrease as
the potential returns targeted become
more focused on capital growth rather
than income generation. The basic
investment management fee payable
to the Manager was £2.1 million
(2022: £2.3 million); the decrease is
due to an decrease in the average NAV
across the year versus the prior year.
There was no performance-related
management fee payable in respect of
the current or prior years.
The net cash outflow from the venture
capital portfolio was £0.8 million,
comprising investments of £16.2
million less total disposal proceeds of
£15.4 million. The venture portfolio’s
cash flow over the past five years is
summarised in Table 1.
Table 1: Venture capital portfolio cash flow
Year ended 31 March
New
investment
£000
Disposal
proceeds
£000
Net cash
inflow/
(outflow)
£000
2019
12,353
10,781
(1,572)
2020
10,877
10,268
(609)
2021
8,813
1,635
(7,178)
2022
11,707
31,118
19,411
2023
16,208
15,447
(761)
Total
59,958
69,249
9,291
Table 2: Movements in net assets and net asset value per share
£000
Pence per
ordinary
share
Net asset value at 31 March 2022
106,860
97.9
Net revenue (investment income less revenue
expenses and tax)
(161)
(0.1)
Capital surplus arising on investments:
Realised net gains on disposals
1,414
1.1
Movements in fair value of investments
(1,540)
(1.2)
Expenses allocated to capital account
(net of tax relief)
(1,680)
(1.4)
Total return for the year as shown in income
statement
(1,967)
(1.6)
Proceeds of issue of new shares (net of expenses)
17,314
0.3
Shares re-purchased for cancellation
(2,973)
–
Net movement for the year before dividends
12,374
(1.3)
Net asset value at 31 March 2023 before
dividends recognised
119,234
96.6
Dividends recognised in the financial statements
for the year
(6,241)
(5.0)
Net asset value at 31 March 2023 aſter
dividends recognised
112,993
91.6
Aſter taking account of other cash
flows, including the fundraise of
£17 million gross and dividend
payments of £6.2 million, the
Company’s total cash balances
increased over the year by £5.6
million to £27.3 million. In addition,
the Company holds quoted equity
investments and interest-bearing
investments valued at £11.8 million,
compared with £12.4 million at 31
March 2022.
Dividends
The Directors have declared or
proposed dividends totalling 4.5
pence per share in respect of the year.
Venture capital investment
portfolio
The last twelve months have been
impacted by the lingering impact
of COVID-19 measures, supply side
shortages, inflationary pressures,
rising interest rates and a global
economic slowdown. During this
period our investment manager has
worked with portfolio management
teams to navigate the fast-evolving
landscape. In all cases, Mercia has
been working very closely with
investee management teams to
support them to overcome liquidity,
operational and other business
challenges.
Venture capital investment
activity
During the year ended 31 March 2023,
nine new venture capital investments
were completed at a
cost of £10.3
million, and additional funding
totalling £5.9 million was invested in
19 existing portfolio companies, by
way of follow-on-funding rounds. The
proportion of follow on investments
is increasing in line with the shiſt in
focus to earlier stage companies,
which oſten require multiple rounds
of growth finance to realise their
potential.
A summary of the venture capital
holdings at 31 March 2023 is given
on pages 21 to 23, with information
on the fiſteen largest investments on
pages 24 to 31.
Northern 3 VCT PLC
Annual Report and Financial Statements
15
Axial Systems
is a provider of security
and data solutions. The Company
originally invested in 2008 and exited
this year for a lifetime return of 0.7x.
Channel Mum
was a parenting
focused video website which entered
liquidation during the period.
Strategic report
continued
New investments
The new investments completed during the year were:
Turbine Simulated Cell Technologies (£1,542,000)
Simulation of cell reaction to the treatment of complex disease
Social Value Portal
(£1,722,000)
Platform to enable corporate and public sector organisations to measure,
report and enhance the social value they create
Centuro Global
(£1,136,000)
Technology platform to enable companies’ international expansion plans
Optellum (£1,250,000)
AI platform to diagnose and treat early-stage lung cancer
Send Technology Solutions
(£1,049,000)
Platform for insurers, reinsurers and managing general agents
Wonderush (t/a HowNow)
(£1,029,000)
Platform for workplace learning
Axis Spine Technologies (£1,028,000)
Developer of next generation spinal implants
LMC Soſtware (£850,000)
Provider of social care management soſtware for care homes for the elderly or
disabled
Sen Corporation (£667,000)
Live streaming of high quality video from space
Investment realisations
Details of investment disposals during
the year are given in Note 9 on page
67. The most significant disposals
(original cost or proceeds in excess
of £1.0 million) are summarised in
Table 3.
Lineup Systems
is a multi channel
advertising and media company.
The Company exited its investment
in March 2023 for proceeds of £7.3
million, representing a return of 7.8x
including interest received during the
life of the investment.
Ideagen
is a provider of quality,
audit and risk management soſtware
solutions. The AIM-listed business
experienced considerable growth
over the investment lifetime and in
July 2022 was acquired by private
equity firm HG Pooled Management.
The Company realised its investment
for proceeds of £3.4 million, which
represented a 9.7x return on cost.
Intechnica
is a cyber security
consultancy, which demerged into two
entities in May 2022 – Intechnica, and
Netacea, a provider of cyber security
through AI-powered consultancy. In
January 2023, Intechnica was acquired
by Crosslake Technologies. The initial
proceeds received by the Company
of £0.6 million represented an initial
return of 2.3x.
Knowledgemotion Ltd (t/a Boclips)
is an online educational video and
podcast platform. In June 2022 the
Company realised its investment for
an initial £3 million, representing a
return of 1.7x.
Table 3: Significant investment realisations
Company
Date of
original
investment
Original
cost
£000
Sales
proceeds
£000
Realised
surplus/
(deficit)
£000
Lineup Systems
2011
974
7,288
6,314
Ideagen plc
2015
352
3,404
3,052
Knowledgemotion
2017
1,740
3,004
1,263
Axial Systems Holdings
2008
1,293
51
(1,242)
Channel Mum
2016
1,314
–
(1,314)
Northern 3 VCT PLC
Annual Report and Financial Statements
16
Table 4: Investment valuation by category
Number of
investments
Valuation
£000
% of
portfolio
by value
Unquoted investments at directors’ valuation
Revenue/earnings multiple
17
20,525
28%
Price of a recent investment
subsequently calibrated as appropriate
34
47,920
64%
Quoted investments at bid price
Quoted on AIM
10
5,568
8%
Total
61
74,013
100%
Valuation policy
Unquoted investments are valued
in accordance with the accounting
policy set out on page 59, which
follows the International Private
Equity and Venture Capital Valuation
(IPEV) guidelines, being the industry
accepted best practice.
Where valuations are based on
company earnings, audited historic
results will be taken into account
along with more recent unaudited
information and projections where
these are considered sufficiently
reliable. For investments in earlier
stage businesses, where a material
arm’s length transaction has recently
been concluded, this is usually taken
as the starting point for fair value, and
subsequently tested and recalibrated
to reflect changes in market
conditions or company specific
performance. Performance is typically
considered using a range of metrics
such as annual recurring revenue,
customer wins, cash runway and
budget accuracy. Provision against
cost is made where an investment is
under-performing significantly.
As at 31 March 2023 the number of
venture capital investments falling
into each valuation category was as
shown in Table 4.
Northern 3 VCT PLC
Annual Report and Financial Statements
17
Key performance indicators
The Directors regard the following as
the key indicators pertaining to the
Company’s performance:
Net asset value and total return to
shareholders:
the chart opposite
shows the movement in net asset
value and total return (net asset value
plus cumulative dividends) per share
over the past five financial years.
Dividend distributions:
the chart
opposite shows the dividends
(including proposed final dividend)
declared in respect of each of the
past five financial years and on a
cumulative basis since inception.
Ongoing charges:
the charts opposite
show total annual running expenses
as a percentage of the average net
assets attributable to shareholders for
each of the past five financial years.
2.32%
2.39%
4.12%
2.27%
2.16%
2019
2020
2021
2022
2023
2.32%
2.39%
2.39%
2.27%
2.16%
2019
2020
2021
2022
2023
Ongoing charges excluding performance
fees (% of average net assets)
Ongoing charges including performance
fees (% of average net assets)
Strategic report
continued
185.6
173.5
206.4
206.3
205.0
Net asset value plus cumulative
dividends paid per share (pence)*
2019
2020
2021
2022
2023
94.2
78.1
107.0
97.9
91.6
91.4
95.4
99.4
108.4
113.4
*excludes dividends proposed but not yet paid
NAV per share
Cumulative dividends paid per share
Dividends per share (pence)*
2019
2020
2021
2022
2023
* includes dividends proposed but not yet paid
**special dividend
4.5
4.5**
4.0
4.0
5.0
4.5*
Northern 3 VCT PLC
Annual Report and Financial Statements
18
Maintenance of VCT
qualifying status
The Directors believe that the
Company has at all times since
inception complied with the VCT
qualifying conditions laid down by HM
Revenue & Customs.
Risk management
The Board carries out a regular
and robust assessment of the risk
environment in which the Company
operates and seeks to identify new
risks as they emerge.
The principal
and emerging risks and uncertainties
identified by the Board which might
affect the Company’s business
model and future performance, and
the steps taken with a view to their
mitigation, are as follows:
Investment and liquidity risk:
investment in smaller and unquoted
companies, such as those in which
the Company invests, involves a
higher degree of risk than investment
in larger listed companies because
they generally have limited product
lines, markets and financial resources
and may be more dependent on key
individuals. The securities of smaller
companies in which the Company
invests are typically unlisted, making
them illiquid, and this may cause
difficulties in valuing and disposing
of the securities. The Company may
invest in businesses whose shares are
quoted on AIM – the fact that a share
is quoted on AIM does not mean that
it can be readily traded and the spread
between the buying and selling prices
of such shares may be wide.
Mitigation:
the Directors aim to limit
the risk attaching to the portfolio as
a whole by careful selection, close
monitoring and timely realisation
of investments, by carrying out
rigorous due diligence procedures and
maintaining a wide spread of holdings
in terms of financing stage and
industry sector, within the rules of the
VCT scheme. The Board reviews the
investment portfolio with the Manager
on a regular basis.
Financial risk:
most of the
Company’s investments involve a
medium to long-term commitment
and many are relatively illiquid.
Mitigation:
the Directors consider
that it is inappropriate to finance
the Company’s activities through
borrowing except on an occasional
short-term basis. Accordingly they
seek to maintain a proportion of the
Company’s assets in cash or cash
equivalents in order to be in a position
to pursue new unquoted investment
opportunities and to make follow-
on investments in existing portfolio
companies. The Company has very
little direct exposure to foreign
currency risk and does not enter into
derivative transactions.
Economic risk:
events such as
economic recession or general
fluctuation in stock markets,
exchange rates and interest rates
may affect the valuation of investee
companies and their ability to access
adequate financial resources, as
well as affecting the Company’s
own share price and discount to net
asset value. The level of economic
risk has been elevated recently by
inflationary pressures, interest rate
increases, and supply shortages.
Mitigation:
the Company invests in a
diversified portfolio of investments
spanning various industry sectors,
and maintains sufficient cash
reserves to be able to provide
additional funding to investee
companies where it is appropriate
and in the interests of the Company
to do so.
The Manager typically
provides an investment executive to
actively support the board of each
unquoted investee company.
At
all times, and particularly during
periods of heightened economic
uncertainty, the investment
executives share best practice from
across the portfolio with investee
management teams in order to
mitigate economic risk.
Stock market risk:
some of the
Company’s investments are quoted
on the London Stock Exchange
or AIM and will be subject to
market fluctuations upwards and
downwards. External factors such
as the conflict in Ukraine, terrorist
activity or global health crises can
negatively impact stock markets
worldwide. In times of adverse
sentiment there may be very little,
if any, market demand for shares in
smaller companies quoted on AIM.
Mitigation:
the Company’s quoted
investments are actively managed
by specialist managers, including
Mercia in the case of the AIM-quoted
investments, and the Board keeps
the portfolio and the actions taken
under ongoing review.
Credit risk:
the Company holds a
number of financial instruments and
cash deposits and is dependent on
the counterparties discharging their
commitment.
Mitigation:
the Directors review
the creditworthiness of the
counterparties to these instruments
and cash deposits and seek to ensure
there is no undue concentration of
credit risk with any one party.
Legislative and regulatory risk:
in
order to maintain its approval as a VCT,
the Company is required to comply
with current VCT legislation in the UK.
Changes to the UK legislation in the
future could have an adverse effect
on the Company’s ability to achieve
satisfactory investment returns whilst
retaining its VCT approval.
Mitigation:
the Board and the
Manager monitor political
developments and where
appropriate seek to make
representations either directly or
through relevant trade bodies.
Internal control risk:
the Company’s
assets could be at risk in the absence
of an appropriate internal control
regime which is able to operate
effectively even during times of
disruption.
Mitigation:
the Board regularly
reviews the system of internal
controls, both financial and non-
financial, operated by the Company
and the Manager. These include
controls designed to ensure that the
Company’s assets are safeguarded
and that proper accounting records
are maintained.
VCT qualifying status risk
: while
it is the intention of the Directors
that the Company will be managed
so as to continue to qualify as a
VCT, there can be no guarantee
that this status will be maintained.
A failure to continue meeting the
qualifying requirements could result
in the loss of VCT tax relief, the
Company losing its exemption from
corporation tax on capital gains,
to shareholders being liable to pay
income tax on dividends received
from the Company and, in certain
circumstances, to shareholders being
required to repay the initial income
tax relief on their investment.
Mitigation:
the investment manager
keeps the Company’s VCT qualifying
status under continual review and its
reports are reviewed by the Board on
a quarterly basis. The Board has also
retained Philip Hare & Associates LLP
to undertake an independent VCT
status monitoring role.
Northern 3 VCT PLC
Annual Report and Financial Statements
19
Additional disclosures required
by the Companies Act
Section 172 Statement
Section 172 of the Companies Act
2006 requires a director to promote
the success of the Company. In doing
this they must act in the way that
they consider, in good faith, would be
most likely to promote the success
of the Company for the benefit of its
members as a whole. In doing this
our Directors are required to have a
regard, amongst other matters, to the:
•
likely consequences of any
decisions in the long term
•
need to foster the Company’s
business relationships with
suppliers and others
•
desirability of the Company
maintaining a reputation for high
standards of business conduct
•
need to act fairly as between
members of the Company
In discharging their duties each
director has regard to the factors set
out above and to other factors which
they consider relevant to the decision
being made. Those factors may
include, for example, the interests and
views of our shareholders, suppliers
and regulators. The Board’s aim
is to make sure that decisions are
consistent and predictable. Details on
how the Board operates and the way
directors reach decisions, including
some of the matters discussed and
debated during the year, the key
stakeholder considerations that
were central to those discussions
and the way in which directors had
regard to the need to foster the
Company’s long-term relationship
with shareholders and other
stakeholders, are included in the
Corporate Governance section of
this report on pages 44 to 48. An
example of a key decision reached
by the Board during the year is the
level of dividends paid or proposed.
In reaching their final decision on
this matter, the Board considered
the level of returns generated
by the Company, the potential
timing of investment realisations,
the potential future capital
requirements of portfolio companies
and continuing compliance with the
VCT scheme rules.
Key stakeholders
Employees
The Company had no employees
during the year and there are five
directors.
Shareholders
The Directors recognise
the value of maintaining
regular communications with
shareholders. Formal reports are
published at the half-year and year-
end stages, and an opportunity
is given to shareholders at the
Annual General Meeting to question
the Board and the investment
manager on matters relating to
the Company’s operation and
performance. The Manager holds
an annual VCT investor seminar to
which shareholders are invited and
the Directors attend.
The Directors’ decisions are
intended to achieve the Company’s
corporate objective. Maintaining the
Company’s status as a VCT is a critical
element of this.
Investment manager
The Company’s most critical business
relationship is with the investment
manager, Mercia. There is regular
contact with Mercia and members
of Mercia’s executive committee
attend all of the Company’s Board
meetings. The content discussed at
each meeting is over a wide range of
topics from company operations to
issues faced by portfolio companies.
Portfolio companies
The Company holds minority
investments in its portfolio
companies and it has appointed
Mercia to manage the portfolio.
Whilst day to day interaction with
portfolio companies is delegated
via the investment management
agreement to Mercia, updates
are received by the Board at least
quarterly.
The Directors take an
active interest in the challenges faced
by portfolio companies. More details
can be found on page 37.
Key decisions in year
Payment of dividend: despite
reporting a total return loss in the
year, the Board maintained the
annual dividend in excess of its target
as realisation proceeds more than
exceeded the value of dividends paid.
In doing so, the Board considered
commitments previously made to
Shareholders, and assessed its short
term liquidity requirements. New
performance related management
fee: A detailed review of the existing
performance related management
fee arrangements have been carried
out by the Board and a number of
changes agreed with the Manager.
The new proposed arrangements
favour long term sustainable growth
over short term volatility and seek
to align more closely the interests
of the Manager and shareholders.
Shareholders will be consulted on
plans at the next General Meeting.
Environmental, Social
and Governance (‘ESG’)
considerations
For full details on the Company’s
approach to ESG and mandatory
reporting requirements, please see
page 32.
Strategic report
continued
Future prospects
The slowdown of the domestic and
global economy, increased interest
rates and supply side pressures
continue to present challenges for UK
businesses, however your Directors
have been encouraged by the
resilience exhibited by the portfolio
as a whole.
The Directors regularly
monitor the service received from
the Company’s Manager, registrars
and custodians who all continue to
operate effectively.
We remain committed to supporting
the development and prosperity
of entrepreneurial early stage
businesses in the UK and believe that
your Company remains well placed
to do so.
By order of the Board
Mercia Company Secretarial
Services Limited
Secretary
15 June 2023
Northern 3 VCT PLC
Annual Report and Financial Statements
20
Fiſteen largest venture capital investments (see pages 24 to 31)
Cost
£000
Valuation
£000
Like for like valuation
increase/(decrease)
over year**
% of net assets
by value
1
Evotix (formerly SHE)
2,487
11,383
113.7%
10.1%
2
Volumatic Holdings
216
3,275
(1.9)%
2.9%
3
Grip-UK (t/a Climbing Hangar)
3,174
3,174
0.0%
2.8%
4
IDOX*
530
2,728
(1.3)%
2.4%
5
Tutora (t/a Tutorful)
2,449
2,552
7.6%
2.3%
6
Rockar
1,660
2,471
34.7%
2.2%
7
Newcells Biotech
2,229
2,265
(10.9)%
2.0%
8
Adludio
1,950
1,950
0.0%
1.7%
9
Biological Preparations Group
1,915
1,820
(15.2)%
1.6%
10
Gentronix
805
1,805
109.3%
1.6%
11
Clarilis
1,772
1,772
(4.4)%
1.6%
12
Netacea
1,744
1,744
0.0%
1.5%
13
Social Value Portal
1,722
1,722
0.0%
1.5%
14
Administrate
2,143
1,716
7.0%
1.5%
15
Pure Pet Food
1,601
1,665
0.3%
1.5%
Other venture capital investments
16
Turbine Simulated Cell Technologies
1,542
1,542
0.0%
1.4%
17
Project Glow Topco (t/a Currentbody.com)
1,519
1,519
0.0%
1.3%
18
Buoyant Upholstery
907
1,464
(36.7)%
1.3%
19
Forensic Analytics
1,382
1,382
0.0%
1.2%
20
Enate
1,373
1,373
0.0%
1.2%
21
Broker Insights
1,366
1,366
0.0%
1.2%
22
Ridge Pharma
1,345
1,347
0.2%
1.2%
23
Optellum
1,250
1,250
0.0%
1.1%
Investment portfolio
Northern 3 VCT PLC
Annual Report and Financial Statements
21
Other venture capital investments
Cost
£000
Valuation
£000
Like for like valuation
increase/(decrease)
over year**
% of net assets
by value
24
Centuro Global
1,136
1,136
0.0%
1.0%
25
Duke & Dexter
1,113
1,121
0.7%
1.0%
26
VoxPopMe
1,096
1,084
(11.2)%
1.0%
27
Send Technology Solutions
1,049
1,049
0.0%
0.9%
28
Wonderush Ltd (t/a Hownow)
1,029
1,029
0.0%
0.9%
29
Axis Spine Technologies
1,028
1,028
0.0%
0.9%
30
musicMagpie*
201
938
(50.0)%
0.8%
31
Pimberly
935
935
0.0%
0.8%
32
LMC Soſtware
910
910
0.0%
0.8%
33
Locate Bio
813
813
0.0%
0.7%
34
Moonshot
801
801
0.0%
0.7%
35
Fresh Approach (UK) Holdings
841
784
3.5%
0.7%
36
Naitive Technologies
721
721
0.0%
0.6%
37
Oddbox
986
677
(81.6)%
0.6%
38
Northrow
1,322
676
(46.0)%
0.6%
39
Sen Corporation
666
666
0.0%
0.6%
40
Atlas Cloud
638
638
1.0%
0.6%
41
Eckoh*
528
595
(12.5)%
0.5%
42
Intuitive Holding
1,293
530
5.1%
0.5%
43
Synthesized
500
500
0.0%
0.4%
44
Netcall*
273
490
(9.3)%
0.4%
45
Medovate
1,591
480
(67.5)%
0.4%
46
Thanksbox (t/a Mo)
1,407
468
(42.5)%
0.4%
47
Rego Technologies (t/a Upp) (formerly Volo)
2,182
431
(18.8)%
0.4%
48
Seahawk Bidco
433
395
(15.9)%
0.4%
Investment portfolio
Northern 3 VCT PLC
Annual Report and Financial Statements
22
Other venture capital investments
Cost
£000
Valuation
£000
Like for like valuation
increase/(decrease)
over year**
% of net assets
by value
49
Nutshell
665
349
(32.5)%
0.3%
50
Adept Telecom
235
332
22.2%
0.3%
51
ECO Animal Health*
497
219
(40.6)%
0.2%
52
Arnlea Holdings
1,138
197
9.4%
0.2%
53
Haystack Dryers
1,284
187
59.3%
0.2%
54
Sorted Holdings
2,542
178
7.4%
0.2%
55
Customs Connect Group
1,347
107
4.5%
0.1%
56
Synectics*
171
98
(15.4)%
0.1%
57
Angle*
131
73
(61.0)%
0.1%
58
Pebble Beach Systems*
564
70
0.0%
0.1%
59
Velocity Composites*
61
23
76.4%
0.0%
60
Quotevine
1,184
–
(100.0)%
0.0%
61
Ablatus Therapeutics
551
–
(100.0)%
0.0%
Total venture capital investments
70,943
74,013
65.5%
Listed equity investments
10,278
11,762
10.4%
Total fixed asset investments
81,221
85,775
75.9%
Net current assets
27,218
24.1%
Net assets
112,993
100.0%
* Quoted on AIM
**This percentage change in ‘like for like’ valuations is a comparison of the 31 March 2023 valuations with the 31 March 2022 valuations (or where a new investment has been made in the year, the investment
amount), having adjusted for any partial disposals, loan stock repayments or new and follow-on investments in the year.
Northern 3 VCT PLC
Annual Report and Financial Statements
23
15 largest
venture capital investments
Evotix (formerly SHE Software)
1
£2,487,000
|
£11,383,000
Cost
Valuation
Basis of valuation
Revenue multiple
Equity held
9.9% (Mercia funds total 31.2%)
Business/location
Health & Safety platform provider,
East Kilbride
History
Investment in February 2018, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 March
2022
£m
2021
£m
Sales
8.5
6.7
EBITDA
(0.1)
(2.8)
Loss before tax
(1.0)
(3.0)
Loss aſter tax
(0.7)
(2.9)
Net assets
0.9
1.7
Volumatic Holdings
£216,000
|
£3,275,000
Cost
Valuation
Basis of valuation
Earnings multiple
Equity held
24.8% (Mercia funds total 77.7%)
Business/location
Manufacturer of intelligent cash
handling equipment, Coventry
History
Management buy-out, March 2012, led
by NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 March
2022
£m
2021
£m
Sales
15.5
10.6
EBITDA
3.3
2.5
Profit before tax
3.2
2.4
Profit aſter tax
2.9
2.2
Net assets
11.7
8.8
2
Northern 3 VCT PLC
Annual Report and Financial Statements
24
Grip UK (t/a Climbing Hangar)
£3,174,000
|
£3,174,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
18.7% (Mercia funds total 61.4%)
Business/location
Operator of indoor climbing and
leisure facilities, London
History
Development capital financing, July 2018, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
30 September
2021
£m
2020
£m
Sales
2.3
2.0
EBITDA
(1.5)
(1.0)
Loss before tax
(1.5)
(1.0)
Loss aſter tax
(1.5)
(0.9)
Net assets
6.7
4.2
3
Idox
4
£530,000
|
£2,728,000
Cost
Valuation
Basis of valuation
Bid price (AIM)
Equity held
1.0% (Merica funds total 1.7%)
Business/location
Document content soſtware, London
History
Holding acquired through a share placing on AIM in 2000
Other Mercia funds investing
Northern Venture Trust
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 October
2022
£m
2021
£m
Sales
66.2
62.2
EBITDA
22.5
19.5
Profit before tax
6.6
7.2
Profit aſter tax
5.5
11.8
Net assets
67.4
60.8
Northern 3 VCT PLC
Annual Report and Financial Statements
25
Tutora (t/a Tutorful)
5
£2,449,000
|
£2,552,000
Cost
Valuation
Basis of valuation
Revenue multiple
Equity held
12.0% (Mercia funds total 31.1%)
Business/location
Online platform for private tutors, Sheffield
History
Development capital financing, October 2019, led by
Mercia Fund Management
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Unudited financial information:
Year ended
31 December
2021
£m
2020
£m
Sales
3.1
2.5
EBITDA
(3.6)
(1.0)
Loss before tax
(2.7)
(1.0)
Loss aſter tax
(2.6)
(0.9)
Net (liabilities)/assets
(0.5)
2.1
15 largest venture capital investments
continued
Rockar
6
£1,660,000
|
£2,471,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
7.2% (Mercia funds total 23.0%)
Business/location
E-Commerce & fulfilment platform for the new car sales
industry, Hull
History
Management buy-out financing, July 2016, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest £43,000
Audited financial information:
Year ended
31 December
2022
£m
2021
£m
Sales
7.5
6.2
EBITDA
1.1
1.3
Profit before tax
0.8
0.8
Profit aſter tax
1.2
1.0
Net assets
4.2
3.0
Northern 3 VCT PLC
Annual Report and Financial Statements
26
Newcells Biotech
7
£2,229,000
|
£2,265,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
13.2% (Mercia funds total 41.4%)
Business/location
Supplies assay products to the drug and chemical
development markets, Newcastle
History
Development capital financing, June 2018, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 January
2022
£m
2021
£m
Sales
1.3
1.3
EBITDA
(2.0)
(1.2)
Loss before tax
(2.4)
(1.3)
Loss aſter tax
(2.1)
(1.1)
Net assets
2.8
4.9
Adludio
8
£1,950,000
|
£1,950,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
13.2% (Mercia funds total 40.5%)
Business/location
Marketing services provider helping brands run online
campaigns, London
History
Development capital financing, August 2021, led by
Mercia Fund Management
Other Mercia funds
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 December
2022
£m
2021
£m
Sales
7.4
6.9
EBITDA
(1.3)
(1.6)
Loss before tax
(1.4)
(1.7)
Loss aſter tax
(1.5)
(2.0)
Net assets
2.7
4.0
Northern 3 VCT PLC
Annual Report and Financial Statements
27
15 largest venture capital investments
continued
Biological Preparations Group
9
£1,915,000
|
£1,820,000
Cost
Valuation
Basis of valuation
Earnings multiple
Equity held
21.0% (Mercia funds total 71.2%)
Business/location
Developer and supplier of products based on microbial,
antimicrobial, plant extract and enzyme technology, Cardiff
History
Management buy-out financing, March 2015, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 December
2021
£m
2020
£m
Sales
7.0
8.6
EBITDA
(0.4)
1.1
Loss before tax
(0.5)
(0.4)
Loss aſter tax
(0.4)
(0.5)
Net assets
2.2
(3.3)
Gentronix
10
£805,000
|
£1,805,000
Cost
Valuation
Basis of valuation
Revenue multiple
Equity held
21.2% (Mercia funds total 86.6%)
Business/location
Technology for carcinogenic drug identification, Manchester
History
Development capital financing, February 2007, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 August
2022
£m
2021
£m
Sales
3.7
2.5
EBITDA
(0.6)
(0.3)
Loss before tax
(0.7)
(0.1)
Loss aſter tax
(0.7)
(0.1)
Net assets
1.5
1.5
Northern 3 VCT PLC
Annual Report and Financial Statements
28
Clarilis
11
£1,772,000
|
£1,772,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
8.9% (Mercia funds total 28.0%)
Business/location
Provides automated legal document preparation soſtware,
Leamington Spa
History
Development capital financing, June 2018, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Unaudited financial information:
Year ended
31 December
2021
£m
2020
£m
Sales
1.8
1.6
EBITDA
(1.9)
(1.3)
Loss before tax
(1.9)
(1.3)
Loss aſter tax
(1.7)
(1.1)
Net assets
3.4
5.1
Netacea
12
£1,744,000
|
£1,744,000
Cost
Valuation
Basis of valuation
Revenue multiple
Equity held
3.4% (Mercia funds total 34.6%)
Business/location
Protects websites, mobile apps and APIs using an intelligent detection
engine. Manchester
History
Development capital financing into Intechnica, December 2021,
subsequent de-merger into Netacea, May 2022, led by Mercia Fund
Management
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT, Mercia Investment Plan LP.
Northern Powerhouse Investment Fund, North West Fund for Venture
Capital
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 March
2022
£m
2021
£m
Sales
N/A
N/A
EBITDA
N/A
N/A
Profit (loss) before tax
N/A
N/A
Profit (loss) aſter tax
N/A
N/A
Net assets
N/A
N/A
Northern 3 VCT PLC
Annual Report and Financial Statements
29
Social Value Portal
13
£1,722,000
|
£1,722,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
4.7% (Mercia funds total 15.0%)
Business/location
Platform to enable corporate and public sector organisations to
measure, report and enhance the social value they create, London
History
Development capital financing, February 2023, led by
Mercia Fund Management
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT, Mercia EIS Fund
Income in year
Dividends nil, loan stock interest nil
Unaudited financial information:
Year ended
31 December
2022
£m
2021
£m
Sales
5.5
3.1
EBITDA
(3.0)
(2.5)
Loss before tax
(3.3)
(2.3)
Loss aſter tax
(3.3)
(2.3)
Net liabilities
(3.8)
(0.4)
15 largest venture capital investments
continued
Administrate
14
£2,143,000
|
£1,716,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
9.3% (Mercia funds total (29.0%)
Business/location
SaaS training management and LMS platform, Edinburgh
History
Development capital financing, December 2018, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 December
2022
£m
2021
£m
Sales
4.3
3.6
EBITDA
(5.0)
(3.4)
Loss before tax
(5.0)
(3.4)
Loss aſter tax
(4.8)
(3.0)
Net (liabilities)/assets
(1.3)
0.2
Northern 3 VCT PLC
Annual Report and Financial Statements
30
Pure Pet Food
15
£1,601,000
|
£1,665,000
Cost
Valuation
Basis of valuation
Price of a recent investment
Equity held
23.9% (Mercia funds total 74.4%)
Business/location
Production of organic pet food, Halifax
History
Development capital financing, March 2019, led by
NVM Private Equity
Other Mercia funds investing
Northern Venture Trust, Northern 2 VCT
Income in year
Dividends nil, loan stock interest nil
Audited financial information:
Year ended
31 March
2022
£m
2021
£m
Sales
3.4
1.8
EBITDA
(1.7)
(0.9)
Loss before tax
(1.7)
(0.9)
Loss aſter tax
(1.7)
(0.9)
Northern 3 VCT PLC
Annual Report and Financial Statements
31
Responsible
investment
Environment,
social and
governance
The Company is committed to
conducting its affairs responsibly and,
alongside the Manager, considers
environmental, social and governance
(ESG) issues as part of its operations.
In addition to its commitment to
financial performance, the Board
is mindful of the impact of the
Company and its investments on the
environment alongside its social and
corporate governance responsibilities.
We recognise that the ESG regulatory
and reporting landscape is subject
to rapid change, and therefore the
Company works closely with the
Manager to ensure compliance and
develop initiatives.
The Company is required, under
the Companies Act 2006, to
provide details of environmental
performance, social, human rights,
employee, community issues;
including information about any
policies it has in relation to these
matters and the effectiveness of
these policies. As the Company does
not have any employees, nor its own
premises, the Company does not
maintain specific policies in relation
to these matters, however the
Manager maintains its own policies as
appropriate.
KPI:
Percentage of
shareholders signed
up for electronic
communications
Impact:
Reducing the
Company’s carbon
emissions from its own
operation
Theme:
Environmental
KPI:
Percentage of post-2015
portfolio companies
that completed the
ESG_VC questionnaire
Impact:
Increasing engagement
with ESG issues within
the company’ portfolio
Theme:
Governance
KPI:
The carbon emissions of the
Manager were measured in
the year to 31 March 2023 and
a long-term reduction plan is
being enacted
Impact:
Reducing the carbon
impact of our
operations performed
through the Manager
Theme:
Environmental
KPI:
Number of portfolio
companies where the
Manager has a member
of staff as a statutory
director
Impact:
Encouraging best
practice directly at board
level of each portfolio
company
Theme:
Governance
KPI:
Proportion of the Board
identifying as female
Impact:
Promoting diversity in
leadership
Theme:
Social
KPI:
Percentage of portfolio
companies that have
formally raised ESG on
the Board agenda in
the year
Impact:
Encouraging portfolio
engagement with ESG
principles
Theme:
Governance
KPI:
Investments made
outside of London
Impact:
Improving access to
capital across the
UK, benefitting local
communities
Theme:
Social
KPI:
Number of portfolio
companies where
we have assisted in
identifying board / c-suite
members in the year
Impact:
Improving governance in
portfolio companies
Theme:
Governance
76%
52%
Impact
Assessed
36
20%
70%
72%
11
Responsible Investment ESG KPIs
Northern 3 VCT PLC
Annual Report and Financial Statements
32
Below is a summary of some of the
progress made this year:
Portfolio Engagement
Aſter a successful pilot scheme in
2021, this was the second year that
the Manager worked with portfolio
companies to complete ESG surveys
using the venture capital specific
framework developed by ESG_VC.
The questionnaire is designed
to assist unquoted portfolio
companies respond to ESG risks and
opportunities and how these are
considered as part of their operations.
The survey asks portfolio companies
a range of questions across key
environmental, social and governance
factors. It also asks them to indicate
the relevance of those to their
business, as well as their ability to
influence those factors.
The Manager believes that this
engagement with the portfolio is
important due to the following
reasons:
•
It encourages early-stage portfolio
companies to begin to engage with
ESG, or if later-stage, map their
current position and flag potential
focus areas.
•
It produces a data set for tracking
our performance in influencing
ESG factors within the portfolio,
and changes on a portfolio basis
over time.
•
It enables comparison between
portfolio companies, and when
aggregated with the anonymised
data of other venture capital
portfolio companies, allows the
Manager to determine how best to
target its support.
Over time the Manager will use
the insights gained from these
questionnaires to inform how
we target support for portfolio
companies, and the types of
investments it makes.
Highlights and Initiatives
Shareholder communications
As part of the Board’s ongoing
commitment to reducing the
Company’s carbon emissions, and
in line with the process performed
in late 2021, letters requesting that
shareholders confirm their mailing
preferences are included alongside
all distributed printed copies of
this annual report. By reducing the
number of hard copy documents the
Board aims to reduce the Company’s
emissions from printing and postage.
As of the signing date of this report,
76% of shareholders are signed up
for electronic communications. If a
shareholder has elected to receive
paper communications, the Company
is no longer printing the interim report
but will advise them when this report
is available on the Manager’s website.
Further investments into
sustainability-focused
companies
The Company continued to invest in
a number of sustainability-focused
and purpose-led companies in the
year and follow on investments were
also made into existing portfolio
companies. More detail on the
investment into Social Value Portal is
provided on page 36.
Northern 3 VCT PLC
Annual Report and Financial Statements
33
Environmental, social and governance
continued
Sustainable
economic
growth
•
Provide support for
entrepreneurship and SME growth
•
Support and promote job creation
and talent development
•
Focus on technological innovation
Reducing inequalities
within our
communities
•
Reduce inequalities across the UK and within UK regions
•
Empower and promote diversity and inclusion
Health &
wellbeing for all
•
Promote health and well-being
•
Support R&D of effective and essential treatments and other
healthcare services
The Manager is committed to responsible investment, which is an investment approach that considers environmental,
social, and governance (ESG) factors in the investment decision-making process.
The Manager provides growth capital
and tailored investment solutions to thriving regional businesses to create long-term shareholder value. It has formed
a responsible investment committee, which meets monthly and comprises a number of employees from across the
business, including a number from the VCT investment team.
The Manager’s responsible investment committee ensures delivery against three guiding principles, inspired by the UN’s
Sustainable Development Goals (‘SDGs’):
Policies
The Manager has a number of ESG-
focused policies, including:
•
Origination and Investment Policy
•
Portfolio Value Creation Policy
•
Internal Values and Culture Policy
These policies guide the way in which
we invest and engage with portfolio
companies outlining best practice.
The Manager is currently in the
process of refreshing these policies
with a view to publishing them in the
next financial year.
Investment Process
ESG matters are considered when
reviewing investment opportunities.
Every investment paper has a section
where the investment team consider
any relevant ESG matters, which are
then discussed, where relevant, by the
investment committee before each
investment is approved.
The Manager’s approach to responsible investment
Embedding an ‘ESG mindset’
All of the Manager’s staff have ESG
objectives that are agreed with their
line manager as part of the annual
performance appraisal process,
and regular training sessions are
organised to develop the investment
team’s awareness of key issues.
Outlook
The Manager will continue to support
the Company to develop initiatives
and support the Board’s ESG agenda.
Northern 3 VCT PLC
Annual Report and Financial Statements
34
The Company is committed to
investing in companies that are
aware of their impact on the
environment. As part of the Manager’s
investment process, environmental
risks associated with potential
portfolio companies are evaluated.
The Manager encourages portfolio
companies to adopt environmentally
friendly practices where possible by
using the influence of its investment
team on each of the portfolio
company’s boards.
Carbon emission reporting
and SECR
The Streamlined Energy and Carbon
Reporting (SECR) is a UK regulation
that requires some large companies
to report on their energy use,
greenhouse gas emissions, and
energy efficiency measures in their
annual reports. The Company does
not own or lease its own premises
and does not employ any staff directly
and as the Company consumes
under 40MWh of energy per year, it
is deemed a ‘low energy user’ and
is therefore out of scope for SECR
reporting. The Company’s registered
office is at the Manager’s head office,
who have measured their carbon
emissions and offset them in the most
recent financial year.
Environmental
Manager’s
carbon emissions
The Manager’s parent company,
Mercia Asset Management PLC, is in
the process of finalising its second
annual review of corporate carbon
emissions, in collaboration with
Positive Planet. It offset its emissions
for the year to March 2022, and will
look to do so again in 2023. More
information can be found in its annual
report.
Task Force on Climate-related
Financial Disclosures
The Company is not in scope for TCFD
and the Manager, due to its total
assets under management being
under £5 billion, is also out of scope.
The Company will seek to voluntarily
adopt any recommendations made
by the Task Force on Climate-related
Financial Disclosures (TCFD) which
fall within its investment mandate as
soon as reasonably practical.
Portfolio carbon
emissions reporting
Your Board is acutely aware of
the importance of measuring
and reporting the impact of the
Company’s complete carbon
impact, including the impact of its
investments in portfolio companies.
Due to the early stage of its investee
companies, many do not have the
systems or resources in place to
accurately record emissions. The
Manager is therefore currently focused
on engaging with management teams
directly, raising engagement and
awareness through initiatives such
as the ESG_VC questionnaire. Instead
of providing emissions data based
on a large number of assumptions,
the Manager will continue to monitor
developments in carbon reporting
frameworks and engage with third
parties with the aim of reporting
on portfolio company activity once
meaningful, auditable data can be
provided for the majority of the
portfolio.
Northern 3 VCT PLC
Annual Report and Financial Statements
35
Environmental, social and governance
continued
Diversity
Your Directors understand the
importance of promoting diversity of
the Company’s board. The ongoing
board succession plan seeks to
create a diverse group of experienced
individuals. The Board has 20%
representation from female directors.
The Manager has also committed to
encouraging diversity, with several
initiatives in place such as:
•
Signing up to the Investing in
Women Code, a commitment to
support the advancement of female
entrepreneurship in the United
entrepreneurs’ access to tools,
resources and finance from the
financial services sector.
•
Committing to improving diversity
in its hiring practices, this has
resulted in two new female hires to
its dedicated VCT investment team
in the year to 31 March 2023.
•
It adheres to an Equal
Opportunities policy which values
and respects all employees,
irrespective of role, gender, race,
age, sexual orientation or religious
belief.
Social
National focus
The Manager has offices across
the UK, enabling local access to its
investment team by management
teams. This enables the Company to
invest in companies spread across the
country, not just in London and the
South East of England. In total, 72% of
the Company’s investment, measured
by value, is outside of London.
Other initiatives
The Manager has a number of
programmes designed to support
social initiatives:
•
It actively encourages employees
to become involved in volunteering
and charitable community projects
through initiatives such as Mercia
Spirit.
•
It seeks to engage with outreach
programmes to promote diversity
& inclusion within communities.
It seeks input from all of its employees
to ensure ongoing balanced
representation through a formal
committee structure.
Social Value Portal is a soſtware business that enables organisations to measure
their social value, using its proprietary framework and technology platform.
Social value is defined as the positive value businesses create for the economy,
communities and society as a whole. Quantification of social value is now
mandatory for those bidding for public sector work, however the ‘S’ in ESG
reporting has oſten been overlooked due to challenges in ascribing a pounds
and pence value to this nuanced, multi-faceted and oſten complex area.
Amount invested
The Northern VCTs invested £5.0 million in February 2023 alongside a
£1.5 million of co-investment from Mercia’s EIS funds.
Use of funds
Funding from this round will enable the business to expand on its efforts in the
UK private sector and capitalise on the in-bound demand it has seen from its
customers to offer its framework internationally.
Case Study:
Social Value Portal
Northern 3 VCT PLC
Annual Report and Financial Statements
36
As providers of Venture Capital with
a dedicated investment team of 15
professionals that attend portfolio
company board meetings, governance
is the area that your Board and
the Manager strongly believe the
Company can make the biggest
difference.
Investment process
As part of our standard investment
process we look for companies with
independent and diverse boards,
robust internal controls, and a
commitment to ethical behaviour
and transparency. Management due
diligence is performed as part of the
investment process, feeding into
the decision process on whether to
invest. In addition, each investment
recommendation from the Manager
includes a dedicated section
discussing ESG specific risks and value
creation opportunities, encouraging
the Manager’s investment team and
management teams to engage.
Governance
Portfolio talent and operating
partners
The Manager has appointed a Head
of Portfolio Talent to its dedicated
VCT investment team, which will
strengthen the team’s credentials
appointing and retaining the most
appropriate people in portfolio
companies. This forms part of a
wider strategy to create value, and
aligns the Board’s view that strong
corporate governance is essential
for long-term success. By supporting
portfolio companies and surrounding
them with experienced individuals
we seek to strengthen each portfolio
company’s internal governance
framework and provide a strong
culture to ‘do the right thing’.
Encouraging best practice and
value creation
By attending board meetings and
engaging with management teams,
the Manager aims to encourage best
practice. Examples of this over the
past 12 months have been:
•
working with management teams
to ensure they had support during
the recent banking sector issues,
including strengthening their
treasury policies
•
enacting the Manager’s KPI for the
year to 31 March 2023 to ensure
that ESG was raised at least once
on a formal board agenda for all
companies
•
bringing portfolio CEOs together
for events to network and learn
from each other
As the Company’s investment
manager Mercia will continue to
work with your Directors to develop
initiatives and support the Company’s
ESG targets.
Northern 3 VCT PLC
Annual Report and Financial Statements
37
The Directors present their
report and the audited
financial statements for the
year ended 31 March 2023.
Activities and status
The principal activity of the Company
during the year was the making
of long-term equity and loan
investments, mainly in unquoted
companies.
The Directors have managed the
affairs of the Company with the
intention of maintaining its status as
an approved venture capital trust for
the purposes of Section 274 of the
Income Tax Act 2007.
The Directors
consider that the Company was not at
any time up to the date of this report a
close company within the meaning of
Chapter 2 of Part 10 of the Corporation
Tax Act 2010. The Company’s
registered number is 04280530.
The Directors are required by the
articles of association to propose an
ordinary resolution at the Company’s
Annual General Meeting in 2027 that
the Company should continue as
a venture capital trust for a further
five year period, and at each fiſth
subsequent Annual General Meeting
thereaſter. Shareholders will be asked
to approve an amendment to the
Company’s articles of association to
extend the date of the Annual General
Meeting at which such ordinary
resolution will be proposed to 2029.
This will postpone the continuation
resolution until a period of five years
has elapsed from the allotment of
shares pursuant to the proposed
prospectus top-up offer in the tax year
2023/24.
If any such resolution is not
passed, the Directors shall within four
months convene an extraordinary
general meeting to consider proposals
for the reorganisation or winding-up
of the Company.
A consideration of the environmental
impact of the Company’s activities is
set out on pages 32 to 37.
Corporate governance
The statement on Corporate
Governance set out on pages 44 to 48
is included in the Directors’ Report by
reference.
Results and dividend
The return aſter tax for the year
of minus £1,967,000 (2022: return
of minus £119,000) has been
transferred to reserves.
The final dividend of 3.0 pence per
share in respect of the year ended
31 March 2022 and interim dividend of
2.0 pence per share in respect of the
year ended 31 March 2023 were paid
during the year at a cost of £6,241,000
and have been charged to reserves.
The Directors have proposed a final
dividend of 2.5 pence per share
for the year ended 31 March 2023.
Subject to approval of the final
dividend at the Annual General
Meeting, the final dividend will
be paid on 18 August 2023 to
shareholders on the register on
21 July 2023.
Provision of information to the
auditor
Each of the Directors who held
office at the date of approval of this
Directors’ Report confirms that, so
far as they are aware, there is no
relevant audit information of which
the Company’s auditor is unaware
and that they have taken all the
steps that they could reasonably be
expected to have taken as a director
in order to make themself aware of
any relevant audit information and
to establish that the Company’s
auditor is aware of that information.
Statement on long-term
viability
In accordance with the requirements
of the AIC Code of Corporate
Governance, the Directors have
assessed the prospects of the
Company over the three year period
to March 2026. The Directors consider
that for the purpose of this exercise
it is not practical or meaningful to
look forward over a period of more
than three years and that the period
is appropriate for a business of the
Company’s nature and size.
In making their assessment the
Directors have carried out a robust
review of the risk environment
in which the Company operates,
including those risks which might
threaten its business model or future
performance and the steps taken
with a view to their mitigation (see
page 19 for further details on risk
management). The Directors have
considered the ability of the Company
Directors’
Report
to comply on an ongoing basis with
the conditions for maintaining VCT
approved status. The Directors
have also considered the nature of
the Company’s business, including
its substantial reserve of cash and
near-cash investments, the potential
of its venture capital portfolio to
generate future income and capital
proceeds and the ability of the
Directors to control the level of future
cash outflows arising from share-buy
backs, dividends and investments.
When assessing the potential future
cashflows of the Company, the
Directors have considered various
scenarios including a ‘downside
case’ where potential cash inflows
are severely impacted by economic
disruption. As detailed on page 46, the
Management Engagement Committee
has also considered the Company’s
relationship with the investment
manager, Mercia, by reference to
the performance of the venture
capital portfolio and the expertise
demonstrated by Mercia in venture
capital investment.
Taking into account the Company’s
current position and principal risks,
the Directors have concluded that
there is a reasonable expectation
that the Company will be able to
continue in operation over the three
year period and meet its liabilities as
they fall due over that period.
Northern 3 VCT PLC
Annual Report and Financial Statements
38
Going concern
The financial statements have been
prepared on a going concern basis.
The Directors performed an
assessment of the Company’s ability
to meet its liabilities as they fall due.
In performing this assessment, the
Directors took into consideration the
uncertain economic outlook including:
•
the investments and liquid
resources held by the Company;
•
the fact that the Company has no
debt or capital commitments;
•
the ability of the Company to meet
all of its liabilities and ongoing
expenses from its assets, including
its year-end cash balance;
•
revenue and operating cost
forecasts for the forthcoming year;
•
the ability of third-party service
providers to continue to provide
services; and
•
potential downside scenarios
including a fall in the valuation of
the investment portfolio or levels
of investment income.
Based on this assessment, the
Directors are confident that the
Company will have sufficient funds
to continue to meet its liabilities as
they fall due for at least 12 months
from the date of approval of the
financial statements, and therefore
determine the going concern basis to
be appropriate.
Number of
Board members
Percentage of
the Board
Number of
senior positions
on the Board
(CEO, CFO, SID
and Chair)
Number in
executive
management
Percentage
of executive
management
Men
4
80%
100%
N/A
N/A
Women
1
20%
–
N/A
N/A
Non-binary
N/A
N/A
All other gender identities
N/A
N/A
Prefer not to say
N/A
N/A
Number of
Board members
Percentage of
the Board
Number of
senior positions
on the Board
(CEO, CFO, SID
and Chair)
Number in
executive
management
Percentage
of executive
management
White British or other White
(including minority white groups)
5
100%
1
N/A
N/A
Mixed/multiple ethnic groups
N/A
N/A
Asian/Asian British
N/A
N/A
Black/African/Caribbean/Black British
N/A
N/A
Other ethnic group, including Arab
N/A
N/A
Prefer not to say
N/A
N/A
In accordance with Listing Rules 9.8.6R(9) and 14.4.33R(1), the Company confirms that it has not met the following targets:
•
At least 40% of the Board are women.
•
At least one of the senior Board positions (Chair, Chief Executive Officer, Senior Independent Director or Chief
Financial Officer) is a woman.
•
At least one member of the Board is from a minority ethnic background, excluding those listed as coming from a
white ethnic background.
The Board recognises the importance, value and strength of having a diverse membership.
Although the key objective
with any board appointment is to recruit the best person for the job, the Board has strengthened its diversity in the most
recent Board appointment(s) and will continue to do so by ensuring the candidate search process utilises proven methods
of appealing to a diverse mix of applicants. The Board is exclusively non-executive and as such only the position of Chair is
relevant to the Board. Further the Company has not elected to appoint a Senior Independent Director.
An explanation of the significant
post-balance sheet events are given
in the investment realisations section
of the Strategic Report and in note 20
of the financial statements.
Directors
None of the Directors has a contract
of service with the Company and,
except as mentioned below under
the heading ‘Management’ no
contract or arrangement subsisted
during or at the end of the year in
which any director was materially
interested and which was significant
in relation to the Company’s
business. A list of each director who
has served during the year is given on
page 42.
Directors’ and officers’
liability insurance
The Company has, as permitted by
the Companies Act 2006, maintained
insurance cover on behalf of the
Directors and secretary indemnifying
them against certain liabilities which
may be incurred by any of them in
relation to the Company.
Director Diversity
In accordance with Listing Rules
9.8.6R(10), 9.8.6I G, 14.3.33R(2) and
14.3.36G, the Company confirms that
each of the Directors of the Company
was asked to confirm the gender that
they identify with and their ethnicity,
as of 31 March 2023.
The responses
have been collated and reflect the
following data:
Northern 3 VCT PLC
Annual Report and Financial Statements
39
Directors’ report
continued
Management
Mercia took over management of
the Company’s investment affairs on
23 December 2019 aſter the novation
of the pre-existing management
agreement between the Company and
NVM Private Equity LLP (NVM), who had
acted as manager since the Company’s
inception. The principal terms of the
Company’s management agreement
with Mercia are set out in Note 3 to the
financial statements. Prior to
31 March 2022 Mercia had contractually
delegated certain of its duties to
provide financial, administrative
and company secretarial advice
and services to NVM. As of 31 March
2022 this agreement ceased and all
previously delegated functions are now
performed by employees of Mercia.
The Management Engagement
Committee carries out a regular review
of the terms of Mercia’s appointment
with a view to ensuring that Mercia’s
remuneration is set at an appropriate
level, having regard to the nature of the
work carried out and general market
practice.
As required by the Listing Rules,
the Directors confirm that in their
opinion the continuing appointment
of Mercia as investment manager on
the terms agreed is in the interests
of the Company’s shareholders as a
whole. In reaching this conclusion
the Directors have taken into account
the performance of the investment
portfolio and the efficient and effective
service provided by Mercia to the
Company.
Remuneration receivable by the
Manager
The remuneration receivable by the
Manager by virtue of the management
agreement with the Company
comprises the following:
Remuneration payable by
the Company
Basic management fee:
the Manager
is entitled to receive a basic annual
management fee equivalent to 2.06%
of net assets, calculated half-yearly
as at 31 March and 30 September.
In consenting to the novation of the
management agreement to Mercia in
December 2019, it was agreed that the
fee due on the value of liquid assets
above the threshold of £20 million
will continue to attract a reduced rate
of 1% per annum on a permanent
basis. In the year ended 31 March
2023 the basic annual management
fee was £2,077,000 (preceding year:
£2,253,000).
Performance-related management
fee:
the Manager is entitled to receive
an annual performance-related
management fee equivalent to 14.2%
of the total return in excess of a
formula-driven hurdle rate, details
of whose composition are set out in
Note 3 to the financial statements.
The hurdle rate for the year
ended 31 March 2023 was 5.6%
(preceding year: 5.7%). There was no
performance-related management
fees due for the year ended 31
March 2023 (preceding year: nil). The
performance-related management fee
is subject to an overall cap of 2.25%
of net assets. There are amendments
proposed to the operation of the fee,
which are described in the Chairman’s
statement and the accompanying
general meeting circular.
Accounting and secretarial fee:
the
Manager is responsible for providing
accounting, administrative and
secretarial services to the Company
for an annual fee of £66,000,
(preceding year: £60,000), linked to
the movement in the RPI.
The total remuneration payable in
aggregate to the Manager by the
Company in respect of the year,
comprising the basic management
fee, the performance-related
management fee and the accounting
and secretarial fee, was £2,143,000,
(preceding year: £2,313,000).
Under current tax legislation the fees
paid by the Company to the Manager
are not subject to VAT. The total
annual running costs of the Company,
including the basic management fee
and the accounting and secretarial
fee but excluding the performance-
related management fee, are capped
at 2.9% of average net assets and
any excess will be refunded to the
Company by way of a reduction in the
Manager’s basic management fee. The
annual running costs of the Company
for the year ended 31 March 2023
were equivalent to 2.16% of average
net assets (preceding year: 2.27%).
Remuneration payable by
investee companies
Under the management agreement,
the Manager is entitled to receive fees
from investee companies in respect
of the arrangement of investments
and the provision of non-executive
directors and other advisory services.
The Manager is responsible for paying
the due diligence and other costs
incurred in connection with proposed
investments which for whatever
reason do not proceed to completion.
In the year ended 31 March 2023
the arrangement fees receivable
by the Manager from investee
companies which were attributable to
investments made by the Company
amounted to £414,000 (preceding
year: £354,000), and directors’
and monitoring fees amounted to
£344,000 (preceding year: £351,000).
Executive co-investment
scheme
Since 2006 the Company has, together
with the other VCT funds managed
by Mercia, participated in a co-
investment scheme with the objective
of enabling the investment adviser
to recruit, retain and incentivise its
key investment personnel. Under the
scheme executives are required to
invest personally (and on the same
terms as the Company and other
VCT funds managed by Mercia) in
the ordinary share capital of every
unquoted investee company in
which the Company invests. Since
the novation of the management
agreement to Mercia, Mercia has
managed a new co-investment
scheme. The shares held by executives
can only be sold at such time as the
VCT funds advised by Mercia sell their
shares and any prior ranking loan
notes or preference shares held by
the funds having been repaid. The
executives participating in the scheme
jointly subscribe for 5.0% of the non-
yielding ordinary shares available to
the Northern VCT funds, except in the
case of investments where there is no
class of yielding securities, in which
case the executives jointly subscribe
for 1.0% of the non-yielding ordinary
shares available to the Northern
VCT funds. At 31 March 2023 the
Mercia co-investment scheme held
investments in 42 investee companies
acquired at a total cost of £567,000,
of which £197,000 was attributable to
investments made by the Company.
Share capital – purchase of
shares
During the year the Company
purchased for cancellation 3,383,207
of its own shares, representing 3.1%
of the called-up share capital of the
Company at the beginning of the year,
for a total consideration of £2,973,000.
Purchases were made in line with
the Company’s policy of purchasing
available shares at a discount to
net asset value. At the 2022 Annual
General Meeting, held on 9 August
2022, shareholders authorised the
Company to purchase in the market
up to 12,534,389 ordinary shares
(equivalent to approximately 10% of
Northern 3 VCT PLC
Annual Report and Financial Statements
40
the then issued ordinary share capital)
at a minimum price of 5 pence per
share and a maximum price per share
of not more than 105% of the average
market value for the ordinary shares
in the Company for the five business
days prior to the date on which the
ordinary shares were purchased. As at
31 March 2023 this authority remained
effective in respect of 9,623,610
shares; the authority will lapse at
the conclusion of the 2023 Annual
General Meeting of the Company on
27 July 2023. The rights attached to
shares are detailed in the Corporate
Governance section on page 47.
Share capital – issue of shares
During the year the Company issued
17,587,625 new ordinary shares for
a cash consideration of £17,367,000
or £17,314,000 net of DRIS costs.
At the 2022 Annual General Meeting,
held on 9 August 2022, shareholders
authorised the Company to allot
shares up to a maximum nominal
value of £1,253,438 (being 25,068,760
ordinary shares) as if any rights of
pre-emption did not apply to such
allotment.
As at 31 March 2023
this authority remained effective
in respect of 7,481,135 shares; the
authority will lapse at the conclusion
of the 2023 annual general meeting
of the Company on 27 July 2023.
The
rights attaching to shares are detailed
in the Corporate Governance section
on page 47.
Fixed assets
Movements in fixed asset investments
during the year are set out in Note 8 to
the financial statements.
Financial Instruments
The Company’s financial instruments
comprise its investment portfolio,
cash balances, debtors and creditors
that arise directly from its operations
such as sales and purchases awaiting
settlement and accrued income. The
financial risk management objectives
and policies arising from its financial
instruments and the exposure of the
Company to risk are disclosed in Note
17 to the financial statements.
Energy and carbon
The Company consumes under
40MWh of energy per year and is
deemed a ‘low energy user’ for the
Streamlined Energy and Carbon
Reporting (SECR) UK regulation, see
page 35 for more details.
Events aſter the balance
sheet date
Details of events aſter the balance
sheet date are in note 20 of the
financial statements on page 77.
Annual General Meeting
Notice of the 2023 Annual General
Meeting to be held on 27 July 2023
is set out in a separate circular to
shareholders along with explanatory
comments on the resolutions.
Substantial shareholdings
No disclosures of major shareholdings
had been made to the Company
under Disclosure and Transparency
Rule 5 (Vote Holder and Issuer
Notification Rules) as at the date of
this report.
Independent auditor
Mazars LLP have indicated their
willingness to continue as auditor
of the Company and resolutions to
re-appoint them and to authorise
the Audit Committee to fix their
remuneration will be proposed at the
Annual General Meeting.
By order of the Board
Mercia Company Secretarial
Services Limited
Secretary
15 June 2023
Northern 3 VCT PLC
Annual Report and Financial Statements
41
Directors’
Remuneration Report
This report has been prepared by
the Directors in accordance with the
requirements of Section 410 of the
Companies Act 2006. A resolution to
approve the Directors’ Remuneration
Report will be proposed at the Annual
General Meeting on 27 July 2023.
The Company’s independent auditor,
Mazars LLP, is required to give its
opinion on certain information
included in this report, as indicated
below. The auditor’s report on these
and other matters is set out on
pages 50 to 54.
Directors’ remuneration policy
The Board currently comprises five
directors, all of whom are non-
executive. The Board does not have a
separate Remuneration Committee,
as the Company has no employees
or executive directors. The Board has
established a Nomination Committee,
chaired by Mr J G D Ferguson and
comprising all of the Directors, which
meets annually (or more frequently
if required) to consider the selection
and appointment of directors and
to make recommendations to the
Board as to the level of directors’ fees.
The Board has not retained external
advisers in relation to remuneration
matters but has access to information
about directors’ fees paid by other
companies of a similar size and type.
The Board considers that directors’
fees should reflect the time
commitment required and the high
level of responsibility borne by
directors, and should be broadly
comparable to those paid by similar
companies. It is not considered
appropriate that either new or
existing directors’ remuneration
should be performance-related, and
none of the Directors is eligible for
bonuses, pension benefits, share
options, long-term incentive schemes
or other benefits in respect of their
services as non-executive directors of
the Company.
The articles of association place an
overall limit (currently £150,000 per
annum) on directors’ remuneration.
The articles of association provide
that directors shall retire and be
subject to re-election at the first
Annual General Meeting aſter their
appointment and that any director
who was not appointed or re-
appointed at one of the preceding
two Annual General Meetings shall
retire and be subject to re-election
at each Annual General Meeting. As
a matter of good practice, the Board
has adopted the 2019 AIC code
recommendation that all directors
should seek annual re-election.
None of the Directors has a service
contract with the Company. On being
appointed or re-elected, directors
receive a letter from the Company
setting out the terms of their
appointment and their specific duties
Table 1: Directors’ fees
Year ended
31 Mar 2023
£
Year ended
31 Mar 2022
£
Year ended
31 Mar 2021
£
2023
change
2022
change
2021
change
J G D Ferguson (Chairman)
30,000
27,500
27,500
9%
–
–
A B Brown (appointed
14 September 2000)
24,000
22,000
12,025
9%
83%
–
C J Fleetwood (Chair of
Audit Committee)
26,000
24,000
24,000
8%
–
–
T R Levett*
24,000
–
–
–
–
–
J M O Waddell
24,000
22,000
22,000
9%
–
–
Total
128,000
95,500
85,525
*Mr T R Levett waived his entitlement to directors’ fees the year ended 31 March 2022 and year ended
31 March 2021.
and responsibilities. A director’s
appointment may be terminated on
three months’ notice being given by
the Company and in certain other
circumstances. A director who ceases
to hold office is not entitled to receive
any payment other than accrued fees
(if any) for past services.
Directors’ remuneration for
the year ended 31 March 2023
(audited information)
The fees paid to individual directors in
respect of the years ended 31 March
2023, 31 March 2022 and 31 March
2021, which represent the entire
remuneration payable to directors,
are shown in Table 1.
Northern 3 VCT PLC
Annual Report and Financial Statements
42
Return to shareholders in Northern 3 VCT PLC
Northern 3 VCT NAV total return
Northern 3 VCT share price total return
UK equity market index total return
150
140
130
120
110
100
90
80
2018
2019
2020
2021
2022
2023
Table 2: Directors’ interests in ordinary shares
15 June 2023
Number of
shares
31 March 2023
Number of
shares
31 March 2022
Number of
shares
J G D Ferguson (Chairman)
929,290
929,290
929,290
A B Brown
15,233
6,395
–
C J Fleetwood
102,563
95,994
90,001
T R Levett
361,695
361,695
341,917
J M O Waddell
44,058
35,220
25,331
Five years to 31 March 2023 (March 2018 = 100)
Directors’ share interests
(audited information)
The interests of the Directors of the
Company (including the interests of
their connected persons) in the issued
ordinary shares of the Company, at
the beginning of the year, at the end of
the year and at the date of this report
are shown in Table 2.
All of the Directors’ share interests
were held beneficially.
The Company has not set out any
formal requirements or guidelines to
directors concerning their ownership
of shares in the Company.
Relative importance of spend
on pay
As the Company has no employees,
the Directors do not consider it
appropriate to present tables
comparing employee pay to that
of the Directors, or comparing
remuneration paid to employees with
distributions to shareholders.
Company performance
The graph opposite compares the
total return (assuming re-investment
of all dividends) to shareholders in the
Company over the five years ended
31 March 2023 with the total return
from a broad UK equity market index
over the same period.
Statement of voting at Annual
General Meeting
At the Annual General Meeting on
9 August 2022 the resolution to
approve the Directors’ Remuneration
Report for the year ended 31 March
2022 was approved by a show of
hands. 92.5% of the proxy votes
received in relation to the resolution
were either for or discretionary.
Statement by the Chairman of
the Nomination Committee
In accordance with the Directors’
remuneration policy, directors’ fees
were reviewed by the Nomination
Committee during its meeting on
10 February 2023, when it was
decided that fees should increase to
£31,500 for the Chairman, £27,300 for
the chair of the Audit Committee and
£25,200 for the remaining directors
for the year to 31 March 2024.
The
Directors’ fees were last amended
in February 2022. There have been
considerable changes to the VCT
legislation in recent years leading
to an increase in the volume of
investment activity of the Company.
This has required a greater time
commitment from the Directors
in order to discharge their duties
effectively and accordingly, it was
recommended that the Directors’
remuneration should be increased
as detailed above. By setting the fees
at a level which reflects the current
requirements of the roles, we aim to
ensure that we are able to attract high
quality people as we refresh the Board
over time.
By order of the Board
J G D Ferguson
Chairman of the Nomination
Committee
15 June 2023
Northern 3 VCT PLC
Annual Report and Financial Statements
43
Corporate
Governance
The Board of Northern 3 VCT PLC
has considered the principles and
recommendations of the Association
of Investment Companies Code of
Corporate Governance (AIC Code).
The AIC Code addresses all the
Principles and Provisions set out in
the UK Corporate Governance Code
(the UK Code), as well as setting
out additional Provisions on issues
that are of specific relevance to the
Company.
The Board considers that reporting
against the Principles and Provisions
of the AIC Code which has been
endorsed by the Financial Reporting
Council, provides more relevant
information to shareholders than
reporting against the UK Code.
The Company is committed to
maintaining high standards in
corporate governance and during
the year ended 31 March 2023 and
has complied with the Principles
and Provisions of the AIC Code,
except as set out below. The AIC
Code is available on the AIC website
(www.theaic.co.uk). It includes an
explanation of how the AIC Code
adapts the Principles and Provisions
set out in the UK Code to make them
relevant for investment companies.
The UK Corporate Governance Code
includes provisions relating to the
role of the chief executive, executive
directors’ remuneration and the
need for an internal audit function.
For the reasons set out in the AIC
Code, and in the preamble to the
UK Corporate Governance Code, the
Board considers these provisions
are not relevant to the position of
the Company, which is an externally
managed venture capital trust. The
Company has therefore not reported
further in respect of these provisions.
Board of directors
The Company has a board of five
non-executive directors, all of whom
are considered to be independent of
the Company’s investment manager,
Mercia Fund Management Limited
(Mercia). The Board meets regularly in
person or by conference call five times
each year, and on other occasions as
required. The Board is responsible
to shareholders for the effective
stewardship of the Company’s affairs
and has a formal schedule of matters
specifically reserved for its decision
which include:
•
consideration of long-term
strategic issues;
•
valuation of the unquoted
investment portfolio; and
•
ensuring the Company’s
compliance with good practice in
corporate governance matters.
A brief biographical summary of each
director is given on pages 10 and 11.
The Chairman, Mr J G D Ferguson,
leads the Board in the determination
of its strategy and in the achievement
of its objectives. The Chairman
is responsible for organising the
business of the Board, ensuring its
effectiveness and setting its agenda,
and has no involvement in the day
to day business of the Company. He
facilitates the effective contribution
of the Directors and ensures that
they receive accurate, timely and
clear information and that they
communicate effectively with
shareholders.
The Board has established a formal
process, led by the Chairman,
for the annual evaluation of the
performance of the Board, its
principal committees and individual
directors. The Directors are made
aware on appointment that their
performance will be subject to
regular evaluation. The performance
of the Chairman is evaluated by a
meeting of the other board members
under the leadership of Mr C J
Fleetwood.
The Company Secretary, Mercia
Company Secretarial Services
Limited, is responsible for advising
the Board through the Chairman
on all governance matters. All of
the Directors have access to the
advice and services of the Company
Secretary, which has administrative
responsibility for the meetings
of the Board and its committees.
Directors may also take independent
professional advice at the Company’s
expense where necessary in the
performance of their duties.
The Company’s articles of association
and the schedule of matters reserved
to the Board for decision provide that
the appointment and removal of the
Company Secretary is a matter for
the Board.
The articles of association provide
that directors shall retire and be
subject to re-election at the first
Annual General Meeting aſter their
appointment and that any director
who was not appointed or re-
appointed at one of the preceding
two Annual General Meetings shall
retire and be subject to re-election
at each Annual General Meeting.
However the Board has as a matter of
good practice adopted the AIC Code
recommendation that all directors
should seek annual re-election
.
Independence of directors
The Board regularly reviews the
independence of its members and
is satisfied that the Company’s
directors are independent in
character and judgement and there
are no relationships or circumstances
which could affect their objectivity
(with the exception of Mr T R Levett
who was a consultant to Mercia until
31 March 2022).
The AIC Code recommends that
where a director has served for more
than nine years, the Board should
state its reasons for believing that
the individual remains independent.
The Board is of the view that a
term of service in excess of nine
years is not in itself prejudicial to
a director’s ability to carry out his/
her duties effectively and from an
independent perspective; the nature
of the Company’s business is such
that individual directors’ experience
and continuity of Board membership
can significantly enhance the
effectiveness of the Board as a whole.
The Company does not have a set
Northern 3 VCT PLC
Annual Report and Financial Statements
44
limit on the tenure of the members
of the Board and the Chairman,
however the Board has as a matter of
good practice adopted the AIC Code
recommendation that all directors
should seek annual re-election,
and acknowledges that regular
refreshment of its membership is
desirable.
Board Committees
The Board has appointed three
standing Committees to make
recommendations to the Board
in specific areas. The Board does
not have a separate Remuneration
Committee, as the Company has no
employees or executive directors.
Detailed information relating to the
remuneration of directors is given in
the Directors’ Remuneration Report
on pages 42 and 43.
Audit Committee
During the year the Audit Committee
comprised:
Mr C J Fleetwood (Chair)
Mrs A B Brown
Mr J G D Ferguson
Mr T R Levett
Mr J M O Waddell
The Audit Committee’s terms of
reference include the following roles
and responsibilities:
•
monitoring and making
recommendations to the Board
in relation to the Company’s
published financial statements
and other formal announcements
relating to the Company’s financial
performance;
•
monitoring and making
recommendations to the Board
in relation to the valuation of the
Company’s unquoted investments;
•
monitoring and making
recommendations to the Board in
relation to the Company’s internal
control (including internal financial
control) and risk management
systems;
•
periodically considering the need
for an internal audit function;
•
making recommendations to
the Board in relation to the
appointment, re-appointment and
removal of the external auditor
and approving the remuneration
and terms of engagement of the
external auditor;
•
reviewing and monitoring the
external auditor’s independence
and objectivity and the
effectiveness of the audit process,
taking into consideration relevant
UK professional and regulatory
requirements;
•
monitoring the extent to which
the external auditor is engaged to
supply non-audit services; and
•
ensuring that the investment
manager has arrangements in
place for the investigation and
follow-up of any concerns raised
confidentially by staff in relation to
the propriety of financial reporting
or other matters.
The committee reviews its terms
of reference and its effectiveness
annually and recommends to the
Board any changes required as a
result of the review. The terms of
reference are available on request
from the Company Secretary and on
the Company’s website. The Audit
Committee ordinarily meets three
times per year and has direct access
to Mazars LLP, the Company’s external
auditor. The Board considers that
the members of the Committee are
independent and have collectively
the skills and experience required
to discharge their duties effectively,
and that the Chairman of the
Committee meets the requirements
of the UK Corporate Governance
Code as to recent and relevant
financial experience. We note that
the Chairman, Mr J G D Ferguson, is
a member of the Audit Committee.
Whilst this is not compliant with
the provisions of the
UK Corporate
Governance Code, it is compliant with
the provisions of the AIC Code. As all
members of the Audit Committee are
independent non-executive directors,
we believe that this is appropriate.
During the year ended 31 March
2023 the Company did not have an
independent internal audit function
as it is not deemed necessary given
the size of the Company and the
nature of the Company’s business.
However, the Committee considers
annually whether there is a need
for such a function and if so would
recommend this to the Board.
During the year ended 31 March 2023
the Audit Committee discharged its
responsibilities by:
•
reviewing and approving the
external auditor’s terms of
engagement, remuneration and
independence;
•
reviewing the external auditor’s
plan for the audit of the
Company’s financial statements,
including identification of key
risks and confirmation of auditor
independence;
•
reviewing the Manager’s statement
of internal controls operated in
relation to the Company’s business
and assessing the effectiveness of
those controls in minimising the
impact of key risks;
•
reviewing periodic reports on the
effectiveness of the Manager’s
compliance procedures;
•
reviewing the appropriateness
of the Company’s accounting
policies;
•
reviewing the Company’s draſt
annual financial statements and
half-yearly results statement prior
to Board approval, including the
proposed fair value of investments;
•
reviewing the external auditor’s
detailed reports to the Committee
on the annual financial
statements;
•
reviewing the taxation advisers’
VCT status monitoring and
compliance reports; and
•
considering the effectiveness of
the external audit process.
The key area of risk that has been
identified and considered by the
Audit Committee in relation to the
business activities and financial
statements of the Company is the
valuation and existence of unquoted
investments, particularly in light
of economic uncertainty caused
by inflationary pressures, rising
interest rates and global economic
slowdown.
Another important area
of risk that is considered by the Audit
Committee is compliance with HM
Revenue & Customs conditions for
maintenance of approved venture
capital trust status.
These issues were discussed with the
investment manager and the auditor
at the pre-year end audit planning
meeting and at the conclusion of the
audit of the financial statements.
Valuation of unquoted investments:
the investment manager confirmed
to the Audit Committee that the
investment valuations had been
carried out consistently with prior
periods and in accordance with
published industry guidelines,
taking account of the latest available
information about investee
companies and current market data.
The Audit Committee reviewed the
estimates and judgements used in
the investment valuations and was
satisfied that the final valuations are
appropriate.
Venture capital trust status:
the
investment manager confirmed
to the Audit Committee that the
conditions for maintaining the
Company’s status as an approved
venture capital trust had been
complied with throughout the year.
The position was also confirmed
and reported on by Philip Hare &
Associates LLP in its capacity as
adviser to the Company on taxation
matters and the relevant report was
reviewed by the Audit Committee.
Northern 3 VCT PLC
Annual Report and Financial Statements
45
The investment manager and auditor
confirmed to the Audit Committee
that they were not aware of any
material misstatements.
Having
reviewed the reports received from
the Manager and auditor, the Audit
Committee is satisfied that the key
areas of risk and judgement have
been appropriately addressed in
the financial statements and that
the significant assumptions used
in determining the value of assets
and liabilities have been properly
appraised and are sufficiently
robust.
The Committee considers
that Mazars LLP has carried out its
duties as auditor in a diligent and
professional manner.
Following a detailed review of
the draſt annual report, the Audit
Committee concluded that, taken
as a whole, it was considered to be
fair, balanced and understandable.
The Audit Committee recommended
to the Board that the Directors’
responsibilities statement in respect
of the annual report and the financial
statements, should be signed
accordingly.
The committee regularly reviews and
monitors the auditor’s effectiveness
and independence. Mazars LLP has
confirmed that it is independent of
the Company and has complied with
the applicable auditing standards.
In accordance with professional
guidelines the engagement leader
is rotated aſter at most five years,
this is the third year that the current
partner has served. As part of its
review, the Committee considers
the nature and extent of non-audit
services supplied by the auditor, all
of which must be approved by the
Committee. There were no non-audit
services contracted for during the
year.
Nomination Committee
During the year the Nomination
Committee comprised:
Mr J G D Ferguson (Chairman)
Mrs A B Brown
Mr C J Fleetwood
Mr T R Levett
Mr J M O Waddell
The Nomination Committee considers
the selection and appointment
of directors and makes annual
recommendations to the Board as
to the level of directors’ fees.
The
Committee monitors the balance
of skills, knowledge, diversity
and experience offered by Board
members, and satisfies itself that they
are able to devote sufficient time to
carry out their role efficiently and
effectively.
When recommending
new appointments to the Board the
Committee draws on its members’
extensive business experience and
range of contacts to identify suitable
candidates, and would consider
the use of formal advertisements
and external consultants where
appropriate. The Committee
recognises the benefits of diversity
in the constitution of the Board and
it is the Committee’s intention that
the diversity of representation on the
Board will continue to increase over
time. New directors are provided
with briefing material relating
to the Company, its investment
manager and the venture capital
industry as well as to their own
legal responsibilities as directors.
The Committee has written terms
of reference which are reviewed
annually and are available on request
from the Company Secretary and on
the Company’s website.
Management Engagement
Committee
During the year the Management
Engagement Committee comprised:
Mr J G D Ferguson (Chairman)
Mrs A B Brown
Mr C J Fleetwood
Mr T R Levett
(appointed 9 February 2023)
Mr J M O Waddell
The Management Engagement
Committee undertakes a periodic
review of the performance of the
investment manager, Mercia, and
of the terms of the management
agreement including the level of fees
payable and the length of the notice
period.
The principal terms of the
agreement are set out in Note 3 to
the financial statements on page 62.
Following the latest review by the
Committee, the Board concluded
that the continuing appointment
of Mercia was in the interests of the
Company and its shareholders as
a whole.
Mercia has demonstrated
its commitment to, and expertise
in, venture capital investment since
their appointment. Mercia has also
performed its company secretarial
and accounting duties efficiently and
effectively.
Corporate responsibility
The Board aims to ensure that the
Company takes a positive approach
to corporate responsibility, in relation
both to itself and to the companies it
invests in.
This entails maintaining
a responsible attitude to ethical,
environmental, governance and social
issues, and the encouragement of
good practice in investee companies.
The Board seeks to avoid investing
in companies which do not operate
within relevant ethical, environmental
and social legislation or otherwise fail
to comply with appropriate industry
standards.
Investor relations
In fulfilment of the Chairman’s
obligations under the UK Corporate
Governance Code, the Chairman
gives feedback to the Board on
any issues raised with him by
shareholders with a view to ensuring
that members of the Board develop
an understanding of the views of
shareholders about their company.
The Board recognises the value of
Corporate governance
continued
Attendance at board and committee meetings
Table 1 sets out the number of substantive Board and committee meetings
held during the year ended 31 March 2022 and the number attended by each
director compared with the maximum possible attendance.
Table 1: Directors’ attendance at meetings
Board
Audit
Committee
Nomination
Committee
Management
Engagement
Committee
Number of meetings held
5*
3
1
1
Attendance (actual/possible):
J G D Ferguson (Chairman)
5/5
3/3
1/1
1/1
C J Fleetwood
5/5
3/3
1/1
1/1
T R Levett
4/5
3/3
1/1
1/1
J M O Waddell
5/5
3/3
1/1
1/1
A B Brown
5/5
3/3
1/1
1/1
*In addition to the
five substantive meetings of the Board held during the year, there were a further five
meetings held by conference call.
Northern 3 VCT PLC
Annual Report and Financial Statements
46
maintaining regular communications
with shareholders.
Formal reports
are sent to shareholders at the year-
end, and an opportunity is given to
shareholders at the Annual General
Meeting to question the Board and
the investment manager on matters
relating to the Company’s operation
and performance. The Manager holds
an annual VCT investor seminar to
which shareholders are invited. Proxy
voting figures for each resolution are
announced at general meetings and
are made available publicly following
the relevant meeting.
Further information can also be
obtained via the Company’s website.
Internal control
The Directors have overall
responsibility for ensuring that
there are in place robust systems
of internal control, both financial
and non-financial, and for reviewing
their effectiveness.
The purpose of
the internal financial controls is to
ensure that proper accounting records
are maintained, the Company’s
assets are safeguarded and the
financial information used within
the business and for publication is
accurate and reliable;
such a system
can provide only reasonable and
not absolute assurance against
material misstatement or loss.
The
Board regularly reviews financial
performance and results with the
investment manager.
Responsibility
for accounting and secretarial services
has been contractually delegated
to Mercia under the management
agreement. Mercia has established
its own system of internal controls
in relation to these matters, details
of which have been reviewed by the
Audit Committee.
Non-financial internal controls include
the systems of operational and
compliance controls maintained by
the investment manager in relation
to the Company’s business as well
as the management of key risks as
referred to in the section headed ‘Risk
management’ below.
The Directors confirm that by means
of the procedures set out above,
and in accordance with ‘Guidance
on Risk Management, Internal
Control and Related Financial and
Business Reporting’, published by the
Financial Reporting Council, they have
established a continuing process for
identifying, evaluating and managing
the significant potential risks faced by
the Company and have reviewed the
effectiveness of the internal control
systems.
This process has been in
place throughout, and subsequent to,
the accounting period under review.
Risk management
Risk management is discussed in the
Strategic Report on page 19.
Share capital, rights attaching
to the shares and restrictions
on voting and transfer
As at 31 March 2023 there were
123,319,779 ordinary shares in issue
(as at that date none of the issued
shares were held by the Company
as treasury shares).
Subject to any
suspension or abrogation of rights
pursuant to relevant law or the
Company’s articles of association,
the shares confer on their holders
(other than the Company in respect
of any treasury shares) the following
principal rights:
(a) the right to receive out of profits
available for distribution such
dividends as may be agreed to be
paid (in the case of a final dividend
in an amount not exceeding the
amount recommended by the
Board as approved by shareholders
in general meeting or in the case of
an interim dividend in an amount
determined by the Board).
All
dividends unclaimed for a period
of 12 years aſter having become
due for payment are forfeited
automatically and cease to remain
owing by the Company;
(b) the right, on a return of assets on a
liquidation, reduction of capital or
otherwise, to share in the surplus
assets of the Company remaining
aſter payment of its liabilities pari
passu with the other holders of
ordinary shares;
and
(c) the right to receive notice of and
to attend and speak and vote in
person or by proxy at any general
meeting of the Company.
On a
show of hands every member
present or represented and voting
has one vote and on a poll every
member present or represented
and voting has one vote for every
share of which that member is the
holder;
the appointment of a proxy
must be received not less than
48 hours before the time of the
holding of the relevant meeting or
adjourned meeting or, in the case
of a poll taken otherwise than at
or on the same day as the relevant
meeting or adjourned meeting, be
received aſter the poll has been
demanded and not less than 24
hours before the time appointed
for the taking of the poll.
These rights can be suspended.
If a member, or any other person
appearing to be interested in shares
held by that member, has failed
to comply within the time limits
specified in the Company’s articles
of association with a notice pursuant
to Section 793 of the Companies Act
2006 (notice by company requiring
information about interests in its
shares), the Company can until the
default ceases suspend the right to
attend and speak and vote at a general
meeting and if the shares represent at
least 0.25% of their class the Company
can also withhold any dividend or
other money payable in respect of the
shares (without any obligation to pay
interest) and refuse to accept certain
transfers of the relevant shares.
Shareholders, either alone or with
other shareholders, have other rights
as set out in the Company’s articles of
association and in the Companies Act
2006.
A member may choose whether
his shares are evidenced by share
certificates (certificated shares) or
held in electronic (uncertificated)
form in CREST (the UK electronic
settlement system).
Any member
may transfer all or any of his shares,
subject in the case of certificated
shares to the rules set out in the
Company’s articles of association or in
the case of uncertificated shares to the
regulations governing the operation
of CREST (which allow the Directors to
refuse to register a transfer as therein
set out);
the transferor remains the
holder of the shares until the name of
the transferee is entered in the register
of members.
The Directors may refuse
to register a transfer of certificated
shares in favour of more than four
persons jointly or where there is no
adequate evidence of ownership or
the transfer is not duly stamped (if
so required).
The Directors may also
refuse to register a share transfer if
it is in respect of a certificated share
which is not fully paid up or on which
the Company has a lien provided
that, where the share transfer is in
respect of any share admitted to the
Northern 3 VCT PLC
Annual Report and Financial Statements
47
Official List maintained by the UK
Listing Authority, any such discretion
may not be exercised so as to prevent
dealings taking place on an open and
proper basis, or if in the opinion of the
Directors (and with the concurrence of
the UK Listing Authority) exceptional
circumstances so warrant, provided
that the exercise of such power
will not disturb the market in those
shares.
Whilst there are no squeeze-
out and sell out rules relating to the
shares in the Company’s articles
of association, shareholders are
subject to the compulsory acquisition
provisions in Sections 974 to 991 of
the Companies Act 2006.
Amendment of articles of
association
The Company’s articles of association
may be amended by the members of
the Company by special resolution
(requiring a majority of at least 75%
of the persons voting on the relevant
resolution).
Appointment and replacement
of directors
A person may be appointed as a
director of the Company by the
shareholders in a general meeting
by ordinary resolution (requiring
a simple majority of the persons
voting on the relevant resolution) or
by the Directors;
no person, other
than a director retiring by rotation
or otherwise, shall be appointed
or reappointed as director at any
general meeting unless he/she is
recommended by the Directors or,
not less than seven or more than 42
clear days before the date appointed
for the meeting, notice is given to the
Company of the intention to propose
that person for appointment or re-
appointment in the form and manner
set out in the Company’s articles of
association.
Each director who is appointed by
the Directors (and who has not been
elected as a director of the Company
by the members at a general
meeting held in the interval since
his appointment as a director of the
Company) is to be subject to election
as a director of the Company by the
members at the first Annual General
Meeting of the Company following
his appointment.
At each Annual
General Meeting of the Company, any
director who was not appointed or re-
appointed at one of the preceding two
Annual General Meetings shall retire
and be subject to re-election.
The Companies Act 2006 allows
shareholders in general meeting
by ordinary resolution (requiring a
simple majority of the persons voting
on the relevant resolution) to remove
any director before the expiration
of his or her period of office, but
without prejudice to any claim for
damages which the director may have
for breach of any contract of service
between him or her and the Company.
A person also ceases to be a director
if he/she or she resigns in writing,
ceases to be a director by virtue of
any provision of the Companies Act,
becomes prohibited by law from
being a director, becomes bankrupt
or is the subject of a relevant
insolvency procedure, or becomes
of unsound mind, or if the Board so
decides following at least six months’
absence without leave or if he/she
or she becomes subject to relevant
procedures under the mental health
laws, as set out in the Company’s
articles of association.
Powers of the Directors
The Company’s articles of association
specify that, subject to the provisions
of the Companies Act 2006 and
articles of association of the
Company and any directions given by
shareholders by special resolution,
the business of the Company is to
be managed by the Directors, who
may exercise all the powers of the
Company, whether relating to the
management of the business or not,
except where the Companies Act
2006 or the articles of association of
the Company otherwise require.
In
particular the Directors may exercise
on behalf of the Company its powers
to purchase its own shares to the
extent permitted by shareholders.
Authority was given at the Company’s
2022 Annual General Meeting to make
market purchases of up to 12,534,389
ordinary shares at any time up to the
2023 Annual General Meeting and
otherwise on the terms set out in the
relevant resolution, and authority is
being sought at the Annual General
Meeting to be held on 27 July 2023 as
set out in a separate circular.
By order of the Board
Mercia Company Secretarial
Services Limited
Secretary
15 June 2023
Corporate governance
continued
Northern 3 VCT PLC
Annual Report and Financial Statements
48
Directors’
Responsibilities Statement
The Directors are responsible for
preparing the annual report and
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 they
are required to prepare the financial
statements in accordance with UK
accounting standards, including FRS
102 ‘The Financial Reporting Standard
applicable in the UK and Republic of
Ireland’.
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 Company
and of its profit or loss for the year.
In preparing these financial
statements, the Directors are required
to:
•
select suitable accounting policies
and then apply them consistently;
•
make judgements and estimates
that are reasonable and prudent;
•
state whether applicable UK
accounting standards have been
followed, subject to any material
departures disclosed and explained
in the financial statements;
•
assess the Company’s ability
to continue as a going concern,
disclosing, as applicable, matters
related to going concern; and
•
use the going concern basis of
accounting unless they either
intend to liquidate the Company
or to cease operations, or have no
realistic alternative but to do so.
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
Company and enable them to ensure
that its financial statements comply
with the Companies Act 2006. They are
responsible for such internal control
as they determine is necessary to
enable the preparation of financial
statements that are free from material
misstatement, whether due to fraud or
error, and have general responsibility
for taking such steps as are reasonably
open to them to safeguard the assets
of the Company and to prevent and
detect fraud and other irregularities.
Under applicable law and regulations,
the Directors are also responsible for
preparing a Strategic Report, Directors’
Report, Directors’ Remuneration
Report and corporate governance
statement that complies with that law
and those regulations.
The Directors are responsible for the
maintenance and integrity of the
corporate and financial information
included on the Company’s website.
Legislation in the UK governing the
preparation and dissemination of
financial statements may differ from
legislation in other jurisdictions.
Responsibility statement of
the Directors in respect of the
annual report and financial
statements for the year ended
31 March 2023
We confirm that to the best of our
knowledge:
•
the financial statements, prepared
in accordance with the applicable
set of accounting standards, give
a true and fair view of the assets,
liabilities, financial position and
profit or loss of the Company; and
•
the Strategic Report and Directors’
Report includes a fair review of the
development and performance
of the business and the position
of the issuer, together with a
description of the principal risks
and uncertainties that they face.
We consider the annual report and
accounts, taken as a whole, is fair,
balanced and understandable and
provides the information necessary
for shareholders to assess the
Company’s position and performance,
business model and strategy.
By order of the Board
Mercia Company Secretarial
Services Limited
Secretary
15 June 2023
Northern 3 VCT PLC
Annual Report and Financial Statements
49
Independent
Auditor’s Report
Opinion
We have audited the financial
statements of Northern 3 VCT PLC
(‘the company’) for the year ended
31 March 2023 which comprise the
income statement, the balance sheet,
the statement of changes in equity,
the statement of cash flows and notes
to the financial statements, including
a summary of significant accounting
policies.
The financial reporting framework
that has been applied in their
preparation is applicable law
and United Kingdom Accounting
Standards, including FRS 102,
‘The Financial Reporting Standard
applicable in the UK and Republic of
Ireland’ (United Kingdom Generally
Accepted Accounting Practice).
In our opinion, the financial
statements:
•
give a true and fair view of the
state of the company’s affairs
as at 31 March 2023 and of the
company’s return for the year then
ended;
•
have been properly prepared in
accordance with United Kingdom
Generally Accepted Accounting
Practice; and
•
have been prepared in accordance
with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance
with International Standards
on Auditing (UK) (ISAs (UK)) and
applicable law. Our responsibilities
under those standards are
further described in the ‘Auditor’s
responsibilities for the audit of the
financial statements’ section of
our report. We are independent of
the company in accordance with
the ethical requirements that are
relevant to our audit of the financial
statements in the UK, including the
FRC’s Ethical Standard as applied
to listed entities and public interest
entities, and we have fulfilled our
other ethical responsibilities in
accordance with these requirements.
We believe that the audit evidence
we have obtained is sufficient and
appropriate to provide a basis for our
opinion.
Conclusions relating to going
concern
In auditing the financial statements,
we have concluded that the Directors’
use of the going concern basis of
accounting in the preparation of the
financial statements is appropriate.
Our audit procedures to evaluate
the Directors’ assessment of the
company’s ability to continue to
adopt the going concern basis of
accounting included but were not
limited to:
•
undertaking an initial assessment
at the planning stage of the audit
to identify events or conditions
that may cast significant doubt on
the company’s ability to continue
as a going concern;
•
reviewing the Directors’ going
concern assessment that includes
the analysis of the company’s,
medium term viability over the
three years to 31 March 2026, as
well as a ‘most likely’ (base case)
scenario and a ‘downside case’
scenario, as approved by the Board
of Directors on 1 June 2023;
•
making enquiries of the Directors
to understand the year of
assessment they considered,
the assumptions made, the
completeness of adjustments
made, and the implication of those
when assessing the ‘base case’
scenario and the ‘downside case’
scenario. This included examining
the minimum cash inflow and
committed outgoings;
•
assessing the cash flow forecasts
for the ‘base case’ and ‘downside
case’ scenarios and evaluating
whether the Directors’ conclusion
on the liquidity position of the
company under both scenarios is
reasonable;
•
considering the consistency of
the Directors’ forecasts with other
areas of the financial statements
and our audit; and
•
evaluating the appropriateness
of the Directors’ disclosures in
the financial statements on going
concern.
Based on the work we have
performed, we have not identified
any material uncertainties relating to
events or conditions that, individually
or collectively, may cast significant
doubt on the company’s ability to
continue as a going concern for a
period of at least twelve months from
when the financial statements are
authorised for issue.
Our responsibilities and the
responsibilities of the Directors
with respect to going concern are
described in the relevant sections of
this report.
In relation to the company’s
reporting on how it has applied the
UK Corporate Governance Code,
we have nothing material to add or
draw attention to in relation to the
Directors’ statement in the financial
statements about whether the
Director’s considered it appropriate
to adopt the going concern basis of
accounting.
Key audit matters
Key audit matters are those matters
that, in our professional judgement,
were of most significance in our audit
of the financial statements of the
current year and include the most
significant assessed risks of material
misstatement (whether or not due
to fraud) we identified, including
those which had the greatest effect
on: the overall audit strategy; the
allocation of resources in the audit;
and directing the efforts of the
engagement team. These matters
were addressed in the context of our
audit of the financial statements as
a whole, and in forming our opinion
thereon, and we do not provide a
separate opinion on these matters.
We summarise below the key audit
matters in forming our audit opinion
above, together with an overview
of the principal audit procedures
performed to address each matter
and key observations arising from
those procedures.
Northern 3 VCT PLC
Annual Report and Financial Statements
50
Key Audit Matter
How our scope addressed this matter
Valuation and existence of the
unquoted investments portfolio
(as described on page 45 in the Audit
Committee Report and as per the
accounting policy set out on page 60)
The company has a significant portfolio of
unquoted investments. These are measured
at fair value, which is in accordance with
the International Private Equity and
Venture Capital Valuation Guidelines by
using measurements of value such as
price of recent transactions subsequently
calibrated, earnings multiples, and
net assets. Therefore, the valuations
methodologies incorporate a significant
level of judgements to ascertain fair value
under each method.
There is therefore a risk that the judgements
made under each methodology may lead to
a material misstatement of the investment
values. Additionally, there is a risk that
investments recorded might not exist.
We therefore identified the valuation and
existence of unquoted investments as a key
audit matter, as it had a significant effect on
our overall audit strategy and our allocation
of resources, including the involvement of
more senior members of the audit team.
Our audit work included but was not limited to:
•
understanding and evaluating management’s process
around investment recording and valuation;
•
we engaged our internal valuation specialists as part of the
audit team to perform the below procedures:
•
considering whether the techniques and methodologies
applied for valuing the sample of unquoted investments
were in accordance with published guidance, principally the
International Private Equity and Venture Capital Valuation
Guidelines. This included reviewing and challenging
the principles and assumptions used in the valuation of
investments under each methodology;
•
for investments valued using the recent transaction
method, we obtained an understanding of the
circumstances surrounding the transaction and whether it
was considered to be carried out on an arms-length basis
and therefore suitable as an input to the valuation;
•
for investments valued using the earning multiple, we
reviewed the reasonableness of the multiple used when
compared to similar companies in the market. We also
agreed the inputs, such as holdings and earning figures
used, to supporting evidence;
•
for investments valued aſter latest funding round, we
recalculated the enterprise value used by obtaining
supporting evidence (i.e. share and loan certificates and
bank statements).
•
examining past date comparison points to understand
variations in data and valuation model drivers;
•
ascertaining the existence of investment holdings
by agreeing the holdings to share certificates and
loan certificates, and reviewing Companies House
documentation to verify total share capital of the investees;
and
•
reviewing the adequacy and appropriateness of disclosures
of unquoted investments in accordance with relevant
accounting standards, including considerations of
the potential effect of changing one or more inputs to
reasonably possible alternative valuation assumptions.
Our observations
Based on the work performed and evidence obtained, we found
that the valuation of unquoted investments as at 31 March 2023
to be reasonable and are performed in accordance with the
guidelines stated above.
Key Audit Matter
How our scope addressed this matter
Risk of fraud in revenue
recognition
(as per the accounting policy set out on
page 60)
The company has recognised significant
income earned on its investments in
its income statement. According to the
Statement of Recommended Practice
issued by the Association of Investment
Companies (‘AIC SORP’), recognition of
revenue relies upon evidence such as
dividend announcements and distribution
notices, with an emphasis on timely
recognition on an accruals basis and
accurate separation between capital and
income items.
We therefore identified accuracy,
completeness and cut-off of revenue as
a key audit matter, as it had a significant
effect on our overall audit strategy and
our allocation of resources, including the
involvement of more senior members of the
audit team.
Our audit work included but was not limited to:
•
understanding and assessing management’s process for
revenue recognition, including considering whether the
processes for revenue recognition are in accordance with
the requirements of United Kingdom Generally Accepted
Accounting Practice and the AIC SORP;
•
for income from quoted investments, forming an
expectation for a selected sample of income using dividend
announcements on recognised stock exchanges, where
applicable, and checking the point of recognition, including
further detailed testing on dividend announcements one
month either side of the year-end to verify that dividends
were recorded in the correct year and tracing to bank
statements;
•
for income from unquoted investments, agreeing a sample
of dividends to distribution notices from the investees and
cash receipts during the year directly from investees’ funds;
•
for a sample of interest income on interest-bearing
unquoted investments, verifying the key input data and
re-performing the calculation of income received, as well as
agreeing to cash receipts;
•
for a sample of interest income on money market fund
agreeing to the bank letters and the evidence of the cash
receipts;
•
testing the realised movements on investments by agreeing
the proceeds to bank statements and investment sale
agreements, as well as recalculating the movement based
on book cost and proceeds; and
•
performing cut-off testing to verify that dividend income
and any investment sales during the year have been
recorded in the appropriate period.
Our observations
Based on the work performed and evidence obtained, we
consider the methodology used in recognising revenue to be
appropriate.
These matters, together with our findings, were communicated to those charged with governance through our Audit Completion Report.
Northern 3 VCT PLC
Annual Report and Financial Statements
51
The scope of our audit was influenced by our application of materiality. We set
certain quantitative thresholds for materiality. These, together with qualitative
considerations, helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual financial statement
line items and disclosures and in evaluating the effect of misstatements,
both individually and on the financial statements as a whole. Based on our
professional judgement, we determined materiality for the financial statements
as a whole as follows:
Overall materiality
£1,103,000 (2022: £1,069,000)
How we determined it
The overall materiality level has been calculated with
reference to the company’s net assets, of which it
represents approximately 1% (2022: 1% of net assets).
Rationale for
benchmark applied
Net assets have been identified as the principal
benchmark within the financial statements as they are
considered to be the main focus of the shareholders.
The significant degree of judgements underpinning
the valuation of unquoted investments is the main
rationale behind the risk of error we identified in
the valuations that could give rise to a material
misstatement. 1% has been chosen as it is a generally
accepted auditing practice for investment trust audits
and the Company is a public interest entity.
Performance
materiality
Performance materiality is set to reduce to an
appropriately low level the probability that
the aggregate of uncorrected and undetected
misstatements in the financial statements exceeds
materiality for the financial statements as a whole.
Based on our risk assessments, together with our
assessment of the overall control environment and the
consideration of our previous audit experience with
the company, our performance materiality was set at
£827,000 (2022: £801,000), which is approximately 75%
of overall materiality (2022: 75% of overall materiality).,
Reporting threshold
We agreed with the Audit Committee that we would
report to them misstatements identified during
our audit above £33,000 (2022: £32,000) as well as
misstatements below that amount that, in our view,
warranted reporting for qualitative reasons.
As part of designing our audit,
we assessed the risk of material
misstatement in the financial
statements, whether due to fraud
or error, and then designed and
performed audit procedures
responsive to those risks. In particular,
we looked at where the Directors
made subjective judgements such as
making assumptions on significant
accounting estimates.
We tailored the scope of our audit to
ensure that we performed sufficient
work to be able to give an opinion
on the financial statements as a
whole. We used the outputs of a risk
assessment, our understanding of the
company, its environment, controls
and critical business processes,
to consider qualitative factors in
order to ensure that we obtained
sufficient coverage across all financial
statement line items.
Other information
The other information comprises the
information included in the annual
report other than the financial
statements and our auditor’s report
thereon. The Directors are responsible
for the other information. Our opinion
on the financial statements does not
cover the other information and, except
to the extent otherwise explicitly stated
in our report, we do not express any
form of assurance conclusion thereon.
Our responsibility is to read the other
information and, in doing so, consider
whether the other information is
materially inconsistent with the
financial statements, or our knowledge
obtained in the course of audit or
otherwise appears to be materially
misstated. If we identify such material
inconsistencies or apparent material
misstatements, we are required to
determine whether this gives rise to a
material misstatement in the financial
statements themselves. If, based on the
work we have performed, we conclude
that there is a material misstatement of
this other information, we are required
to report that fact.
We have nothing to report in this regard.
Opinions on other matters
prescribed by the Companies
Act 2006
In our opinion, the part of the
Directors’ Remuneration Report to be
audited has been properly prepared
in accordance with the Companies Act
2006.
In our opinion, based on the work
undertaken in the course of the audit:
•
the information given in the
Strategic Report and the Directors’
Report for the year for which the
financial statements are prepared
is consistent with the financial
statements and those reports have
been prepared in accordance with
applicable legal requirements;
•
the information about internal
control and risk management
systems in relation to financial
reporting processes and about
share capital structures, given
in compliance with rules 7.2.5
and 7.2.6 in the Disclosure
Guidance and Transparency Rules
sourcebook made by the Financial
Conduct Authority (the FCA Rules),
is consistent with the financial
statements and has been prepared
in accordance with applicable legal
requirements; and
•
information about the company’s
corporate governance code
and practices and about its
administrative, management
and supervisory bodies and their
committees complies with rules
7.2.2, 7.2.3 and 7.2.7 of the FCA
Rules.
Matters on which we are
required to report by exception
In light of the knowledge and
understanding of the company and its
environment obtained in the course
of the audit, we have not identified
material misstatements in;
•
the Strategic Report or the
Directors’ Report; or
•
the information about internal
control and risk management
systems in relation to financial
reporting processes and about
share capital structures, given in
compliance with rules 7.2.5 and
7.2.6 of the FCA Rules.
Independent Auditor’s Report
continued
Northern 3 VCT PLC
Annual Report and Financial Statements
52
We have nothing to report in respect
of the following matters in relation
to which the Companies Act 2006
requires us to report to you if, in our
opinion:
•
adequate accounting records have
not been kept by the company,
or returns adequate for our audit
have not been received from
branches not visited by us; or
•
the company financial statements
and the part of the Directors’
Remuneration Report to be
audited are not in agreement
with the accounting records and
returns; or
•
certain disclosures of directors’
remuneration specified by law are
not made; or
•
we have not received all the
information and explanations we
require for our audit; or
•
a corporate governance statement
has not been prepared by the
company.
Corporate governance
statement
The Listing Rules require us to review
the directors’ statement in relation to
going concern, longer-term viability
and that part of the Corporate
Governance Statement relating to
the company’s compliance with
the provisions of the UK Corporate
Governance Statement specified for
our review.
Based on the work undertaken as
part of our audit, we have concluded
that each of the following elements
of the Corporate Governance
Statement is materially consistent
with the financial statements or our
knowledge obtained during the audit:
•
directors’ statement with regards
the appropriateness of adopting the
going concern basis of accounting
and any material uncertainties
identified set out on page 38;
•
directors’ explanation as to
its assessment of the entity’s
prospects, the year this assessment
covers and why the year is
appropriate set out on page 38.
•
directors’ statement on fair,
balanced and understandable set
out on page 46;
•
board’s confirmation that it has
carried out a robust assessment of
the emerging and principal risks set
out on page 47;
•
the section of the annual report
that describes the review of
effectiveness of risk management
and internal control systems set out
on page 19; and;
•
the section describing the work
of the audit committee set out on
page 45.
Responsibilities of directors
As explained more fully in the
Directors’ responsibilities statement
set out on page 49, the Directors are
responsible for the preparation of the
financial statements and for being
satisfied that they give a true and fair
view, and for such internal control as
the Directors determine is necessary
to enable the preparation of financial
statements that are free from material
misstatement, whether due to fraud
or error.
In preparing the financial statements,
the Directors are responsible for
assessing the company’s ability
to continue as a going concern,
disclosing, as applicable, matters
related to going concern and using
the going concern basis of accounting
unless the Directors either intend to
liquidate the company or to cease
operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities
for the audit of the financial
statements
Our objectives are to obtain
reasonable assurance about whether
the financial statements as a whole
are free from material misstatement,
whether due to fraud or error, and to
issue an auditor’s report that includes
our opinion. Reasonable assurance is
a high level of assurance but is not a
guarantee that an audit conducted in
accordance with ISAs (UK) will always
detect a material misstatement when
it exists. Misstatements can arise from
fraud or error and are considered
material if, individually or in the
aggregate, they could reasonably be
expected to influence the economic
decisions of users taken on the basis
of these financial statements.
The extent to which our procedures
are capable of detecting irregularities,
including fraud is detailed below.
Irregularities, including fraud,
are instances of non-compliance
with laws and regulations. We
design procedures in line with our
responsibilities, outlined above, to
detect material misstatements in
respect of irregularities, including
fraud.
Based on our understanding of
the company and its industry, we
considered that non-compliance with
the following laws and regulations
might have a material effect on
the financial statements: the Data
Protection Act 2018, the UK GDPR,
the Bribery Act 2010, and anti-money
laundering regulations.
To help us identify instances of
non-compliance with these laws
and regulations, and in identifying
and assessing the risks of material
misstatement in respect to non-
compliance, our procedures included,
but were not limited to:
•
gaining an understanding of the
legal and regulatory framework
applicable to the company and
the industry in which it operates,
and considering the risk of acts
by the company which were
contrary to the applicable laws and
regulations, including fraud;
•
inquiring of the Directors,
management and, where
appropriate, those charged
with governance, as to whether
the company is in compliance
with laws and regulations, and
discussing their policies and
procedures regarding compliance
with laws and regulations;
•
inspecting correspondence with
relevant licensing or regulatory
authorities, including HMRC and
FCA;
•
reviewing minutes of Directors’
meetings in the year; and
•
discussing amongst the
engagement team the laws and
regulations listed above, and
remaining alert to any indications
of non-compliance.
We also considered those laws and
regulations that have a direct effect
on the preparation of the financial
statements, such as the Listing Rules,
HMRC Investment Trust rules, the
UK Corporate Governance Code, the
AIC code of Corporate Governance,
the Companies Act 2006 and UK tax
legislation. We identified the risk of
non-compliance with the provisions
of Section 274 of the Income Tax
Act 2007, as well as the conditions
under the Finance Act 2018 for the
maintenance of the VCT approved
status, as the principal area of laws
and regulations that could have a
material impact on the continuance
of the company. We engaged internal
tax experts to review the company’s
compliance with the applicable
regulations.
Northern 3 VCT PLC
Annual Report and Financial Statements
53
In addition, we evaluated the
Directors’ and management’s
incentives and opportunities for
fraudulent manipulation of the
financial statements, including the
risk of management override of
controls, and determined that the
principal risks related to posting
manual journal entries to manipulate
financial performance, management
bias through judgements and
assumptions in significant accounting
estimates, in particular in relation
to the valuation of unquoted
investments, revenue recognition
(which we pinpointed to accuracy,
cut-off and completeness assertions),
and significant one-off or unusual
transactions.
Our procedures in relation to fraud
included but were not limited to:
•
making enquiries of the Directors
and management on whether
they had knowledge of any actual,
suspected or alleged fraud;
•
gaining an understanding of the
internal controls established to
mitigate risks related to fraud;
•
discussing amongst the
engagement team the risks of fraud;
and
•
addressing the risks of fraud
through management override
of controls by performing journal
entry testing.
The primary responsibility for
the prevention and detection of
irregularities, including fraud,
rests with both those charged with
governance and management. As
with any audit, there remained a risk
of non-detection of irregularities,
as these may involve collusion,
forgery, intentional omissions,
misrepresentations or the override of
internal controls.
The risks of material misstatement
that had the greatest effect on our
audit are discussed in the ‘Key audit
matters’ section of this report.
A further description of our
responsibilities is available on
the Financial Reporting Council’s
website at www.frc.org.uk/
auditorsresponsibilities. This
description forms part of our auditor’s
report.
Other matters which we are
required to address
Following the recommendation
of the Audit Committee, we were
appointed by the Audit Committee
on 22 December 2020 to audit the
financial statements for the year
ended 31 March 2021 and subsequent
financial years. The period of total
uninterrupted engagement is three
years, covering the years ended
31 March 2021, 31 March 2022, and
31 March 2023.
The non-audit services prohibited
by the FRC’s Ethical Standard were
not provided to the company and we
remain independent of the company
in conducting our audit.
Our audit opinion is consistent with
the additional report to the Audit
Committee.
Use of the audit report
This report is made solely to the
company’s members as a body in
accordance with Chapter 3 of Part
16 of the Companies Act 2006. Our
audit work has been undertaken
so that we might state to the
company’s members those matters
we are required to state to them
in an auditor’s report and for no
other purpose. To the fullest extent
permitted by law, we do not accept
or assume responsibility to anyone
other than the company and the
company’s members as a body for our
audit work, for this report, or for the
opinions we have formed.
Stephen Eames
(Senior Statutory Auditor)
for and on behalf of Mazars LLP
Chartered Accountants and Statutory
Auditor
The Pinnacle
160 Midsummer Boulevard
Milton Keynes
MK9 1FF
Date: 15 June 2023
Independent Auditor’s Report
continued
Northern 3 VCT PLC
Annual Report and Financial Statements
54
Income Statement
for the year ended 31 March 2023
Notes
Year ended 31 March 2023
Year ended 31 March 2022
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000
Total
£000
Gain/(loss) on disposal of investments
8
Movements in fair value of investments
8
(1,540 )
(1,540 )
(2,860 )
(2,860 )
(126 )
(126 )
Dividend and interest income
2
Investment management fee
3
(519 )
(1,558 )
(2,077 )
(563 )
(1,690 )
(2,253 )
Other expenses
4
(496 )
(496 )
(407 )
(407 )
Return before tax
(283 )
(1,684 )
(1,967 )
(587 )
(119 )
Tax on return
5
(122 )
(1 )
Return aſter tax
(161 )
(1,806 )
(1,967 )
(586 )
(119 )
Return per share
7
(0.1
(1.5
(1.6
(0.5
(0.1
•
The dividends paid or proposed in respect of the year are 4.5p (2022: 5.0p).
•
The total column of the income statement is the statement of total comprehensive income of the Company prepared in accordance with
FRS 102 ‘The Financial Reporting Standard applicable in the
UK and Republic of Ireland’. The supplemental revenue return and capital return columns
have been prepared in accordance with the Statement of Recommended Practice ‘Financial Statements of
Investment Trust Companies and
Venture Capital Trusts’ issued in July 2022 by the Association of Investment Companies (‘AIC SORP’).
•
There are no recognised gains or losses other than those disclosed in the income statement.
•
All items in the above statement derive from continuing operations.
•
No items were recognised in other comprehensive income during the current or prior year.
•
The accompanying notes are an integral part of this statement.
Northern 3 VCT PLC
Annual Report and Financial Statements
55
as at 31 March 2023
Notes
31 March
2023
£000
31 March
2022
£000
Fixed assets
Investments
8
Current assets
Debtors
12
Cash and cash equivalents
Creditors (amounts falling due within one year)
13
(169 )
(152 )
Net current assets
Net assets
Capital and reserves
Called-up equity share capital
14
Share premium
15
Capital redemption reserve
15
Capital reserve
15
Revaluation reserve
15
Revenue reserve
15
Total equity shareholders’ funds
Net asset value per share
16
The accompanying notes are an integral part of this statement.
The financial statements on pages 55 to 77 were approved by the Directors on 15 June 2023 and are signed
on their behalf by
J G D Ferguson
Director
Balance Sheet
Northern 3 VCT PLC
Annual Report and Financial Statements
56
Statement of changes in equity
for the year ended 31 March 2023
Notes
Non distributable reserves
Distributable reserves
Called up
share capital
£000
Share
premium
£000
Capital
redemption
reserve
£000
Revaluation
reserve*
£000
Capital
reserve
£000
Revenue
reserve
£000
Total
£000
At 1 April 2022
Return aſter tax
(9,105 )
(161 )
(1,967 )
Dividends paid
6
(5,614 )
(627 )
(6,241 )
Net proceeds of share issues
15
Shares purchased for cancellation
15
(169 )
(2,973 )
(2,973 )
At 31 March 2023
Year ended 31 March 2022
Notes
Non distributable reserves
Distributable reserves
Called up
share capital
£000
Share
premium
£000
Capital
redemption
reserve
£000
Revaluation
reserve*
£000
Capital
reserve
£000
Revenue
reserve
£000
Total
£000
At 1 April 2021
Return aſter tax
(12,446 )
(119 )
Dividends paid
6
(9,302 )
(547 )
(9,849 )
Net proceeds of share issues
15
Shares purchased for cancellation
15
(100 )
(1,972 )
(1,972 )
At 31 March 2022
*
The revaluation reserve is generally non-distributable other than that part of the reserve relating to gains/losses on readily realisable quoted investments, which is distributable.
The accompanying notes are an integral part of this statement.
Northern 3 VCT PLC
Annual Report and Financial Statements
57
Statement of cash flows
for the year ended 31 March 2023
Notes
Year ended
31 March
2023
£000
Year ended
31 March
2022
£000
Cash flows from operating activities
Return before tax
(1,967 )
(119 )
Adjustments for:
(Gain)/loss on disposal of investments
(1,414 )
(3,963 )
Movements in fair value of investments
(Increase)/decrease in debtors
12
(47 )
Increase/(decrease) in creditors
13
(1,633 )
Net cash outflow from operating activities
(1,871 )
(1,285 )
Cash flows from investing activities
Purchase of investments
8
(17,699 )
(15,360 )
Sale/repayment of investments
8
Net cash inflow/(outflow) from investing activities
(632 )
Cash flows from financing activities
Issue of ordinary shares
Share issue expenses
15
(501 )
(41 )
Purchase of ordinary shares for cancellation
15
(2,973 )
(1,972 )
Equity dividends paid
6
(6,241 )
(9,849 )
Net cash inflow/(outflow) from financing activities
(10,564 )
Increase/(decrease) in cash and cash equivalents
(1,714 )
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Northern 3 VCT PLC
Annual Report and Financial Statements
58
Notes to the financial statements
1. Accounting policies
A summary of the principal accounting policies, all of which have been consistently applied throughout the year and the preceding year, is set out below.
(a) Basis of accounting
The financial statements have been prepared under FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and in accordance with the Statement of Recommended Practice
‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ issued in July 2022 by the Association of Investment Companies (‘AIC SORP’).
The financial statements have been prepared on a going concern basis under the historical cost convention except investments which are stated at their fair value.
The Directors performed an assessment of the Company’s ability to meet its liabilities as they fall due.
In performing this assessment, the Directors took into consideration the uncertain economic outlook
including:
•
the investments and liquid resources held by the Company;
•
the fact that the Company has no debt or capital commitments;
•
the ability of the Company to meet all of its liabilities and ongoing expenses from its assets, including its year-end cash balance;
•
revenue and operating cost forecasts for the forthcoming year;
•
the ability of third-party service providers to continue to provide services; and
•
potential downside scenarios including a fall in the valuation of the investment portfolio or levels of investment income.
Based on this assessment, the Directors are confident that the Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the
financial statements, and therefore determine the going concern basis to be appropriate.
(b) Significant estimates and judgements
Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. While estimates are based on best
judgement using information and financial data available, the actual outcome may differ from these estimates.
A price sensitivity analysis is provided in the other price risk sensitivity section of Note 17 on
pages 73 to 76.
The key estimate in the financial statements is the determination of the fair value of the unlisted investments by the Directors as it significantly impacts the valuation of the unlisted investments at the
balance sheet date.
The fair valuation process involves estimates using inputs that are unobservable.
The key judgement in the valuation of the unquoted investments process is the Directors’
determination of the appropriate application of the International Private Equity and Venture Capital (IPEV)
guidelines to each unlisted investment.
The judgement applied in the selection of the methodology used for determining the fair value of each unlisted investment can have a significant impact upon the
valuation.
Northern 3 VCT PLC
Annual Report and Financial Statements
59
(c) Valuation of investments
Purchases and sales of investments are recognised in the financial statements at the date of transaction (trade date).
As permitted by FRS 102 chapters 11 and 12, the Company’s investments are recorded at fair value at the point of acquisition and are measured at subsequent reporting dates at fair value,
with any changes
being recognised in profit or loss. The fair value of investments held at 31 March 2023 is £85,775,000 (31 March 2022: £85,269,000).
In the case of investments quoted on a recognised stock exchange,
fair value is established by reference to the closing bid price on the relevant date or the last traded price, depending on the convention of the exchange on which the investment is quoted. In the case of
unquoted investments, fair value is established in accordance with IPEV guidelines by using measurements of value such as calibrating to the price of recent investment and earnings or revenue multiples;
where no reliable fair value can be estimated using such techniques, unquoted investments are carried at cost subject to provision for impairment where necessary. The key assumption when using the price
of a recent investment as an input to the valuation is that the price obtained remains a reasonable proxy for fair value for a period of time such that an enterprise value can be inferred and subsequently
recalibrated where necessary to take account of changes to either the prevailing market conditions or performance of the investee.
The price of a recent investment is not a default position for establishing
fair value as at the measurement date and when this technique is employed, the resultant valuations are cross-checked for reasonableness by employing an alternative valuation technique. The key
assumptions for the multiples approach are the selection of the most appropriate earnings or revenue measure (historic or forecast) and the selection of the multiple itself which may be influenced by the
multiples achieved by a range of comparable companies in either private or public transactions.
Gains and losses arising from changes in fair value of investments are recognised as part of the capital return within the income statement and allocated to the revaluation reserve. Transaction costs
attributable to the acquisition or disposal of investments are charged to capital return within the income statement.
(d) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and short-term deposits, including short-term highly liquid investments and money market funds readily convertible to known amounts of cash.
(e) Income
Dividends receivable on quoted equity shares are recognised on the ex-dividend date. Dividends receivable on the portfolio of quoted equity investments held for liquidity purposes are recognised on the
date of receipt due to the nature of how this portfolio is managed. Dividends receivable on unquoted equity shares are recognised when the Company’s right to receive payment is established and there is no
reasonable doubt that payment will be received. Fixed income returns on non-equity shares and debt securities are recognised on an effective interest rate basis, provided there is no reasonable doubt that
payment will be received in due course.
(f) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged to revenue return within the income statement except that:
•
expenses which are incidental to the acquisition or disposal of an investment are allocated to capital return as incurred; and
•
expenses are split and allocated partly to capital return where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated, and accordingly the
basic element of the investment management fee has been allocated 25% to revenue return and 75% to capital return, in order to reflect the Directors’ expected long-term view of the nature of the
investment returns of the Company. The performance-related element of the investment management fee is charged 100% to capital return.
Notes to the financial statements
continued
Northern 3 VCT PLC
Annual Report and Financial Statements
60
(g) Revenue and capital
The revenue column of the income statement includes all income and revenue expenses of the Company. The capital column includes realised and unrealised gains and losses on investments and that part
of the investment management fee which is allocated to capital return.
(h) Taxation
UK corporation tax payable is provided on taxable profits at the current rate. The tax charge for the year is allocated between revenue return and capital return on the ‘marginal basis’ as recommended in the
SORP. Provision is made for deferred taxation on all timing differences calculated at the current rate of tax relevant to the benefit or liability.
(i) Dividends payable
Dividends payable are recognised as distributions in the financial statements when the Company’s liability to make payment has been established.
( j) Provisions
A provision is recognised in the balance sheet when the Company has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to
settle the obligation. No provision is established where a reliable estimate of the obligation cannot be made. Provisions are allocated to revenue or capital depending on the nature of the circumstances.
(k) Share capital account
The share capital account represents the nominal value of all shares issued by the Company.
(l) Share premium account
The share premium account represents the value paid by shareholders for shares above the nominal value.
(m) Capital redemption reserve
The capital redemption reserve is a non-distributable reserve into which amounts are transferred following the redemption or purchase of a company’s own shares.
(n) Revaluation reserve
Changes in the fair value of investments are dealt with in this reserve.
(o) Capital reserve
The following are accounted for in the capital reserve: gains or losses on the realisation of investments; the cost of repurchasing ordinary shares, including stamp duty and transaction costs; and other
capital charges and credits charged to this account in accordance with the above policies.
(p) Revenue reserve
The revenue reserve comprises the retained earnings of a business from profits made in the current and prior periods.
(q) Segmental reporting
The Company has a single operating segment carrying out the investment activity of the Company. All venture investments are based in the UK.
Northern 3 VCT PLC
Annual Report and Financial Statements
61
Notes to the financial statements
continued
2. Income
Year ended
31 March
2023
£000
Year ended
31 March
2022
£000
Investment income:
Dividends from unquoted companies
21
92
Dividends from quoted companies
336
374
Interest receivable:
Bank deposits*
226
1
Loans to unquoted companies
149
971
732
1,438
* Denotes income arising from investments not treated as fair value through profit or loss at the time of acquisition.
3. Investment management fee
Year ended
31 March 2023
Year ended
31 March 2022
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000
Total
£000
Investment management fee
Basic
519
1,558
2,077
563
1,690
2,253
Performance-related
–
–
–
–
–
–
519
1,558
2,077
563
1,690
2,253
Mercia provides investment management, secretarial and administrative services to the Company under an agreement dated 24 September 2001, which may be terminated at any time by not less than 12
months’ notice being given by either party.
The Manager receives a basic management fee, payable quarterly in advance, at the rate of 2.06% per annum of net assets calculated half-yearly as at 31 March and 30 September.
The fee due on the value
of liquid assets above the threshold of £20 million attracts a reduced rate of 1% per annum. The Manager bears the cost of the fees of Brewin Dolphin for managing the listed interest-bearing and equity
portfolios.
The Manager also provides administrative and secretarial services to the Company for a fee of £65,600 per annum (linked to the movement in the RPI).
This fee is included in other expenses
(see Note 4).
The Manager is entitled to receive a performance-related management fee equivalent to 14.2% of the amount, if any, by which the total return in each financial year (expressed as a percentage of opening
net asset value) exceeds a performance hurdle.
The hurdle is a composite rate based on 7% on average long-term investments and the higher of the Bank of England base rate and 3% on average cash and
near-cash investments during the year.
The hurdle rate for the year ended 31 March 2023 was 5.6% (year ended 31 March 2022: 5.7%).
Northern 3 VCT PLC
Annual Report and Financial Statements
62
Following a period in which net assets decline, a ‘high water mark’ will apply to the calculation of the performance-related fee but will be then adjusted downwards to the extent that a positive return is
achieved in the following financial year.
The performance-related management fee is subject to an overall cap of 2.25% of net assets. Any performance related element of the investment management fee is
charged 100% to capital return. There was no performance fee
due in respect of the years to 31 March 2023 and 31 March 2022.
The total running costs of the Company, excluding performance-related management fees and any irrecoverable VAT thereon, are capped at 2.9% of its net assets and Mercia has agreed that any excess will
be refunded by way of a reduction in its fees.
4. Other expenses
Year ended
31 March
2023
£000
Year ended
31 March
2022
£000
Administrative and secretarial services
66
60
Directors’ remuneration
128
95
National Insurance contributions
13
10
Auditor’s remuneration – audit services
58
45
– non-audit services
–
–
Legal and professional expenses
19
27
Share issue promoter’s commission
43
26
Other expenses
169
144
496
407
Information on the Directors’ remuneration is given in the Directors’ remuneration report on pages 42 and 43.
Northern 3 VCT PLC
Annual Report and Financial Statements
63
Notes to the financial statements
continued
5. Tax on return for the year
Year ended
31 March 2023
Year ended
31 March 2022
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000
Total
£000
(a) Analysis of charge/(credit) for the year
UK corporation tax payable/(recoverable) on the return for the year
(122)
122
–
3
(1)
–
(b) Tax reconciliation
Return before tax
(283)
(1,684)
(1,967)
468
(587)
(119)
Return multiplied by the standard rate of UK corporation tax of 19.0% (2020: 19.0%)
(54)
(320)
(374)
89
(112)
(23)
Effect of:
Dividends not subject to tax
(68)
–
(68)
(88)
–
(88)
Capital returns not subject to tax
–
(269)
(269)
–
(753)
(753)
Movements in fair value of investments not subject to tax
–
293
293
–
543
543
Increase in surplus management expenses
–
418
418
–
321
321
Tax charge/(credit) for the year
(122)
122
–
1
(1)
–
(c) Factors which may affect future tax charges
The Company has not recognised a deferred tax asset in respect of surplus management expenses carried forward of £10,599,000 (31 March 2022: £8,401,000), as the Company may not generate sufficient
taxable income in the foreseeable future to utilise these expenses. There is no other unprovided deferred taxation.
Approved venture capital trusts are exempt from tax on capital gains within the Company. Since the Directors intend that the Company will continue to conduct its affairs so as to maintain its approval as a
venture capital trust, no current or deferred tax has been provided in respect of any capital gains or losses arising on the revaluation or disposal of investments.
Northern 3 VCT PLC
Annual Report and Financial Statements
64
6.
Dividends
Year ended
31 March 2023
Year ended
31 March 2022
Revenue
£000
Capital
£000
Total
£000
Revenue
£000
Capital
£000
Total
£000
(a) Recognised as distributions in the financial statements for the year
Previous year’s final dividend
627
3,133
3,760
547
7,108
7,655
Current year’s first interim dividend
–
2,481
2,481
–
2,194
2,194
627
5,614
6,241
547
9,302
9,849
(b) Paid and proposed in respect of the year
First interim paid – 2.0p (2022: 2.0p) per share
–
2,481
2,481
–
2,194
2,194
Final proposed – 2.5p (2022: 3.0p) per share
–
3,083
3,083
546
2,728
3,274
–
5,564
5,564
546
4,922
5,468
The revenue dividends paid and proposed in respect of the year form the basis for determining whether the Company has complied with the requirements of Section 274 of the Income Tax Act 2007 as to the
distribution of investment income.
7. Return per share
The calculation of the return per share is based on the loss aſter tax for the year of £1,967,000 (2022: £119,0000) and on 124,886,897 (2022: 109,817,073) shares, being the weighted average number of shares
in issue during the year.
8. Investments
All investments are accounted for as fair value through profit or loss on initial recognition, therefore all gains and losses arising on these investments are reflected through the profit or loss.
FRS 102, including subsequent amendments, requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The fair value hierarchy shall have the following classifications:
•
Level 1 – unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date.
•
Level 2 – inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.
•
Level 3 – inputs are unobservable (ie for which market data is unavailable) for the asset or liability.
Northern 3 VCT PLC
Annual Report and Financial Statements
65
Notes to the financial statements
continued
31 March
2023
£000
31 March
2022
£000
Level 1
Quoted venture capital investments
5,568
9,142
Listed equity investment funds
11,762
12,421
Level 3
Unquoted venture capital investments
68,445
63,706
85,775
85,269
Movements in investments during the year are summarised as follows:
Venture capital – unquoted
Level 3
£000
Venture capital – quoted
Level 1
£000
Listed equity
Level 1
£000
Total
£000
Book cost at 31 March 2022
57,564
3,851
10,195
71,610
Fair value adjustment at 31 March 2022
6,142
5,291
2,226
13,659
Fair value at 1 April 2022
63,706
9,142
12,421
85,269
Movements in the year:
Purchases at cost
16,208
–
1,491
17,699
Disposals – proceeds
(11,534)
(3,913)
(1,620)
(17,067)
– net realised gains on disposal
(163)
1,558
19
1,414
Movements in fair value
228
(1,219)
(549)
(1,540)
Fair value at 31 March 2023
68,445
5,568
11,762
85,775
Comprising:
Book cost at 31 March 2023
67,747
3,196
10,278
81,221
Fair value adjustment at 31 March 2023
698
2,372
1,484
4,554
68,445
5,568
11,762
85,775
Equity shares
50,779
5,568
11,762
68,109
Preference shares
7,268
–
–
7,268
Interest-bearing securities
10,398
–
–
10,398
68,445
5,568
11,762
85,775
Northern 3 VCT PLC
Annual Report and Financial Statements
66
The gains and losses included in the above table have all been recognised in the income statement on page 55. The listed equity category in the table above comprises quoted investment funds which hold
listed equity securities.
FRS 102 requires disclosure, by class of financial instrument, if the effect of changing one or more inputs to reasonably possible alternative assumptions would result in a significant change to the fair value
measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of each investee company.
See
note 17 for details of the impact of sensitivity analysis on the financial statements.
Details of movements in the venture investment portfolio during the period is provided in the
investment portfolio section on page 21.
At 31 March 2023 there were no commitments (31 March 2022: £nil) in respect of investments approved by the Manager but not yet completed.
9. Investment disposals
Disposals of venture investments during the year were as follows:
Original cost
£000
Carrying value
at 31 March
2022
£000
Disposal
proceeds
£000
Realised
gain against
carrying value
£000
Lineup Systems – disposal of entire holding
974
7,218
7,288
70
Ideagen plc – disposal of entire holding
352
2,079
3,404
1,325
Knowledgemotion (t/a Boclips) – disposal of entire holding
1,740
2,975
3,004
29
Intechnica Holdings – disposal of entire holding
255
275
580
305
Netcall plc – partial disposal
273
270
493
223
Fresh Approach (UK) Holdings – partial disposal
445
466
445
(21)
AVID Technology Group – disposal of entire holding
–
–
86
86
Soda Soſtware Labs (t/a HelloSoda) – disposal of entire holding
–
–
72
72
Axial Systems Holdings – disposal of entire holding
1,293
435
51
(384)
Velocity Composites plc – partial disposal
31
6
15
9
S&P Coil – disposal of entire holding
–
–
6
6
Customs Connect Group – partial disposal
3
–
3
3
Channel Mum – disposal of entire holding
1,314
328
–
(328)
6,680
14,052
15,447
1,395
The cost of the venture investments disposed of in the preceding financial year was £11,006,000, for disposal proceeds totalling £24,791,000.
Northern 3 VCT PLC
Annual Report and Financial Statements
67
Notes to the financial statements
continued
10. Unquoted investments
The cost and carrying value of material investments in unquoted companies held at 31 March 2023 are shown below.
For this purpose any investment included in the table of the fiſteen largest venture
capital investments on page 21, or in the corresponding table in the previous year’s annual report, is regarded as material.
31 March 2023
31 March 2022
Total cost
£000
Carrying value
£000
Total cost
£000
Carrying value
£000
Evotix (formerly SHE)
Ordinary shares
2,487
11,383
1,850
4,692
Loan Stock
–
–
637
636
2,487
11,383
2,487
5,328
Volumatic Holdings
Ordinary shares
216
3,275
216
3,338
216
3,275
216
3,338
Grip-UK (t/a Climbing Hangar)
Ordinary shares
507
507
507
507
Preference shares
2,667
2,667
2,667
2,667
3,174
3,174
3,174
3,174
Tutora (t/a Tutorful)
Ordinary shares
1,654
1,654
1,018
905
Loan Stock
795
898
795
832
2,449
2,552
1,813
1,737
Rockar
Ordinary shares
1,329
1,667
1,329
1,092
Loan Stock
331
804
262
675
1,660
2,471
1,591
1,767
Newcells Biotech
Ordinary shares
1,592
1,592
1,592
1,904
Loan Stock
637
673
–
–
2,229
2,265
1,592
1,904
Adludio
Ordinary shares
1,950
1,950
1,300
1,300
1,950
1,950
1,300
1,300
Northern 3 VCT PLC
Annual Report and Financial Statements
68
31 March 2023
31 March 2022
Total cost
£000
Carrying value
£000
Total cost
£000
Carrying value
£000
Biological Preparations Group
Ordinary shares
194
–
194
–
Preference shares
309
–
309
300
Loan Stock
1,412
1,820
1,412
1,412
1,915
1,820
1,915
1,712
Gentronix
Ordinary shares
734
1,734
734
792
Loan Stock
71
71
71
71
805
1,805
805
863
Clarilis
Ordinary shares
1,772
1,772
1,772
1,853
1,772
1,772
1,772
1,853
Netacea
Ordinary shares
1,411
1,411
–
–
Loan Stock
333
333
–
–
1,744
1,744
–
–
Social Value Portal
Ordinary shares
1,722
1,722
–
–
1,722
1,722
–
–
Administrate
Ordinary shares
2,143
1,716
1,915
1,376
2,143
1,716
1,915
1,376
Pure Pet Food
Ordinary shares
1,281
1,338
1,281
1,341
Loan Stock
320
327
–
–
1,601
1,665
1,281
1,341
Northern 3 VCT PLC
Annual Report and Financial Statements
69
31 March 2023
31 March 2022
Total cost
£000
Carrying value
£000
Total cost
£000
Carrying value
£000
Buoyant Upholstery
Ordinary shares
132
689
132
1,538
Loan Stock
775
775
775
775
907
1,464
907
2,313
Oddbox
Ordinary shares
350
23
350
3,052
Loan Stock
636
654
–
–
986
677
350
3,052
Medovate
Ordinary shares
1,591
480
1,432
1,316
1,591
480
1,432
1,316
Sorted Holdings
Ordinary shares
2,388
–
2,388
–
Loan Stock
154
178
154
166
2,542
178
2,542
166
Lineup Systems
Ordinary shares
–
–
174
6,418
Loan Stock
–
–
800
800
–
–
974
7,218
Knowledgemotion
Ordinary shares
–
–
1,740
2,975
–
–
1,740
2,975
Intechnica
Ordinary shares
–
–
1,665
1,833
–
–
1,665
1,833
Additional information relating to material investments in unquoted companies is given on pages 24 to 31.
Notes to the financial statements
continued
Northern 3 VCT PLC
Annual Report and Financial Statements
70
11. Significant interests
At 31 March 2023 the Company held significant investments, amounting to 20% or more of the equity capital of an undertaking, in the following companies:
Company
Registered office address
Investment type
Equity
£000
Debt
£000
Total investment cost
£000
Gentronix
Block 23 Mereside, Alderley Park, Alderley Edge, Cheshire SK10 4TG
Unquoted
734
71
805
Biological Preparations Group
Unit 12 A-C Pantglas Industrial Estate, Bedwas, Caerphilly CF83 8DR
Unquoted
503
1,412
1,915
Volumatic Holdings
Taurus House, Endemere Road, Coventry CV6 5PY
Unquoted
216
–
216
Pure Pet Food
Unit 4 Chain Bar Road, Cleckheaton BD19 3QF
Unquoted
1,281
320
1,601
During the period the Company received loan note interest totalling £10,000 from Gentronix. No amounts were received from the other significant investments.
12. Debtors
31 March
2023
£000
31 March
2022
£000
Prepayments and accrued income
107
60
107
60
13. Creditors (amounts falling due within one year)
31 March
2023
£000
31 March
2022
£000
Accruals and deferred income
169
152
169
152
Northern 3 VCT PLC
Annual Report and Financial Statements
71
Notes to the financial statements
continued
14. Called-up equity share capital
31 March
2023
£000
31 March
2022
£000
Allotted and fully paid:
123,319,779 (2022: 109,115,361) ordinary shares of 5.0p
6,166
5,456
The capital of the Company is managed in accordance with its investment policy with a view to the achievement of its investment objective, as set out on page 14.
The Company is not subject to externally
imposed capital requirements.
During the year the Company issued 17,587,625 ordinary shares of 5.0p for cash at an average premium of 93.7p per share. 3,383,207 shares were purchased for cancellation during the year at a cost of
£2,958,000.
15. Reserves
Share
premium
£000
Capital
redemption
reserve
£000
Capital
reserve
£000
Revaluation
reserve
£000
Revenue
reserve
£000
At 1 April 2022
20,909
602
64,849
13,659
1,385
Premium on issue of ordinary shares
16,936
–
–
–
–
Share issue expenses
(501)
–
–
–
–
Shares purchased for cancellation
–
169
(2,973)
–
–
Realised on disposal of investments
–
–
1,414
–
–
Transfer on disposal of investments
–
–
7,565
(7,565)
–
Movements in fair value of investments
–
–
–
(1,540)
–
Management fee charged to capital net of associated tax
–
–
(1,680)
–
–
Revenue return aſter tax
–
–
–
–
(161)
Dividends recognised in the year
–
–
(5,614)
–
(627)
At 31 March 2023
37,344
771
63,561
4,554
597
At 31 March 2023 distributable reserves amounted to £65,642,000 (31 March 2022: £68,460,000), comprising the capital reserve, the revenue reserve and that part of the revaluation reserve relating to holding
gains/losses on readily realisable equity investments.
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16. Net asset value per share
The calculation of net asset value per share as at 31 March 2023 is based on net assets of £112,993,000 (2022: £106,860,000) divided by the 123,319,779 (2022: 109,115,361) ordinary shares in issue at
that date.
17. Financial instruments
The Company’s financial instruments comprise equity and interest-bearing investments, cash balances and liquid resources including debtors and creditors. The Company holds financial assets in
accordance with its investment policy of investing mainly in a portfolio of VCT-qualifying unquoted and AIM-quoted securities whilst holding a proportion of its assets in cash or near-cash investments in
order to provide a reserve of liquidity.
Fixed asset investments (see note 8) are valued at fair value. For quoted investments this is either bid price or the latest traded price, depending on the convention of the exchange on which the investment is
quoted. Unquoted investments are carried at fair value as determined by the Directors in accordance with current venture capital industry guidelines. The fair value of all other financial assets and liabilities
is represented by their carrying value in the balance sheet.
In carrying on its investment activities, the Company is exposed to various types of risk associated with the financial instruments and markets in which it invests. The most significant types of financial risk
facing the Company are market risk, credit risk and liquidity risk.
The Company’s approach to managing these risks is set out below together with a description of the nature and amount of the financial
instruments held at the balance sheet date.
Market risk
The Company’s strategy for managing investment risk is determined with regard to the Company’s investment objective, as outlined in the Strategic Report on page 14.
The management of market risk
is part of the investment management process and is a central feature of venture capital investment.
The Company’s portfolio is managed in accordance with the policies and procedures described in
the Corporate Governance statement on pages 44 to 48, having regard to the possible effects of adverse price movements, with the objective of maximising overall returns to shareholders. Investments in
unquoted companies, by their nature, usually involve a higher degree of risk than investments in companies quoted on a recognised stock exchange, though the risk can be mitigated to a certain extent by
diversifying the portfolio across business sectors and asset classes.
The overall disposition of the Company’s assets is monitored by the Board on a quarterly basis.
Details of the Company’s investment portfolio at the balance sheet date are set out on page 21.
An analysis of investments between debt and equity instruments is given in Note 8.
15.5% (31 March 2022: 20.2%) by value of the Company’s net assets comprises equity securities listed on regulated stock exchanges. A 5% increase in the bid price of these securities as at 31 March 2023
would have increased net assets and the total return for the year by £867,000 (31 March 2022: £1,078,000); a corresponding fall would have reduced net assets and the total return for the year by the same
amount.
Other price risk sensitivity
60.6% (31 March 2022: 58.9%) by value of the Company’s net assets comprises investments in unquoted companies held at fair value. A sensitivity analysis is provided below which recognises that the
valuation methodologies employed involve subjectivity in the selection of the key inputs, as described in the valuation policy on page 59. Although the Directors believe that the estimates of fair value
are appropriate, the use of different methodologies or assumptions regarding the inputs could lead to different measurements of fair value. Each portfolio company has been categorised as being subject
to potentially higher or lower estimation uncertainty by considering a range of factors and the availability and extent of cash resources.
A greater sensitivity factor has been applied to those investments
assessed as being susceptible to higher estimation uncertainty.
Whilst the sensitivities applied illustrate the impact of varying the key inputs by the levels specified, it is possible that applying reasonable
alternative assumptions to individual investments could lead to measurements of fair value which vary to a greater extent than that illustrated.
Northern 3 VCT PLC
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73
As at 31 March 2023
Valuation basis
Fair value of
unquoted
investments
£000
Variable input
sensitivity
Impact: increase*
Impact: decrease*
£000*
% of net
assets
£000*
% of net
assets
Earnings/revenue multiple
Higher sensitivity
1,577
+/– 20%
251
0.2%
153
0.1%
Lower sensitivity
18,948
+/– 10%
1,384
1.2%
1,633
1.4%
Price of a recent investment subsequently calibrated as appropriate
Higher sensitivity
14,877
+/– 20%
611
0.5%
447
0.4%
Lower sensitivity
33,043
+/– 10%
2,569
2.3%
2,348
2.1%
Total unquoted investments
68,445
4,815
4.3%
4,581
4.0%
As at 31 March 2022
Valuation basis
Earnings/revenue multiple
Higher sensitivity
7,220
+/– 20%
594
0.6%
591
0.6%
Lower sensitivity
14,256
+/– 10%
1,677
1.6%
1,088
1.0%
Price of a recent investment subsequently calibrated as appropriate
Higher sensitivity
15,654
+/– 20%
2,813
2.6%
3,041
2.8%
Lower sensitivity
26,576
+/– 10%
2,697
2.5%
1,469
1.4%
Total unquoted investments
63,706
7,781
7.3%
6,189
5.8%
•
Impact on net assets and net return aſter taxation.
Notes to the financial statements
continued
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74
Interest rate risk
Some of the Company’s financial assets are interest-bearing, of which some are at fixed rates and some variable.
As a result, the Company is exposed to fair value interest rate risk due to fluctuations in the
prevailing levels of market interest rates.
(a) Fixed rate investments
The table below summarises weighted average effective interest rates for the Company’s fixed rate interest-bearing financial instruments:
31 March 2023
31 March 2022
Total fixed
rate portfolio
£000
Weighted
average
interest rate
%
Weighted
average
period for
which rate
is fixed Years
Total fixed rate
portfolio
£000
Weighted
average
interest rate
%
Weighted
average period
for which rate
is fixed Years
Fixed-rate investments in unquoted companies
7,663
8.7%
2.4
4,490
8.5%
1.8
Although the Company holds investments in loan stocks that pay interest, the Board does not consider it appropriate to assess the impact of interest rate changes in isolation upon the value of the unquoted
investment portfolio, as interest rate changes are only one factor affecting the market price movements that are discussed above under market price risk.
(b) Floating rate investments
The Company’s floating rate investments comprise floating-rate loans to unquoted companies and cash held in interest-bearing deposit accounts. The benchmark rate which determines the rate of interest
receivable is the UK bank base rate for interest bearing deposit accounts, which was 4.25% at 31 March 2023 (31 March 2022: 0.75%) and the LIBOR three month GBP rate for floating rate loans to unquoted
companies, which was 4.42% at 31 March 2023 (31 March 2021: 1.04%).
It is considered that an increase or decrease of 100 basis points in interest rates as at the reporting date would not have a significant
effect on the Company’s net assets or total return for the year. The amounts held in floating rate investments at the balance sheet date were as follows:
31 March
2023
£000
31 March
2022
£000
Floating rate loans to unquoted companies
2,734
3,748
Cash deposits
27,280
21,683
30,014
25,431
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Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.
The investment manager and the Board carry
out a regular review of counterparty risk.
The carrying values of financial assets represent the maximum credit risk exposure at the balance sheet date.
At 31 March 2023 the Company’s financial assets exposed to credit risk comprised the following:
31 March
2023
£000
31 March
2022
£000
Fixed-rate investments in unquoted companies (above)
7,663
4,490
Floating rate loans to unquoted companies (above)
2,734
3,748
Cash deposits (per balance sheet)
27,279
21,683
Accrued dividends and interest receivable
78
29
37,754
29,950
Credit risk relating to loans and preference shares in unquoted companies is considered to be part of market risk. The balances included within unquoted loan investments related to loans which were past
due as at 31 March 2023 is nil (31 March 2022: nil). The exposure to credit risk on accrued income is mitigated by performing loan affordability evaluations on investee companies as part of the investment
due diligence process.
Those assets of the Company which are traded on recognised stock exchanges are held on the Company’s behalf by a third party custodian (a nominee company of Brewin Dolphin Limited).
Bankruptcy or
insolvency of a custodian could cause the Company’s rights with respect to securities held by the custodian to be delayed or limited.
Credit risk arising on transactions with brokers relates to transactions in quoted securities awaiting settlement.
Risk relating to unsettled transactions is considered to be low due to the short settlement
period involved and the high credit quality of the brokers used. The Board further mitigates the risk by monitoring the quality of service provided by the brokers.
The Company’s interest-bearing deposit accounts are maintained with major banks of high creditworthiness. There were no significant concentrations of credit risk to counterparties at 31 March 2023 or
31 March 2022.
Liquidity risk
The Company’s financial assets include investments in unquoted equity securities which are not traded on a recognised stock exchange and which generally may be illiquid.
As a result, the Company
may not be able to realise some of its investments in these instruments quickly at an amount close to their fair value in order to meet its liquidity requirements, or to respond to specific events such as a
deterioration in the creditworthiness of any particular issuer.
The Company’s liquidity risk is managed on a continuing basis by the investment manager in accordance with policies and procedures laid down by the Board.
The Company’s overall liquidity risks are
monitored on a quarterly basis by the Board.
The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses.
At 31 March 2023 these investments were valued at £39,041,000
(31 March 2022: £34,104,000).
Notes to the financial statements
continued
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76
18. Contingencies
At 31 March 2023 contingent assets not recognised in the financial statements in respect of potential deferred proceeds from the sale of investee companies amounted to approximately £950,000
(31 March 2022: £791,000).
The extent to which these amounts will become receivable in due course is dependent on future events.
The Company had no contingent liabilities at 31 March 2023 or 31 March 2022.
19. Related party transactions
Fees payable during the year to the Directors and their interest in shares of the Company are disclosed within the Directors’ Remuneration Report on pages 42 and 43.
There were no amounts outstanding and due to the Directors as at 31 March 2023 (31 March 2022: nil).
20. Post balance sheet events
Aſter the year end, on 4 April 2023, the Company issued 6,597,040 ordinary shares for a consideration of £5,852,000, as a result of a prospectus share offer launched during the year ended 31 March 2023.
On 12 April 2023, the Company invested £398,000 in existing portfolio company, Voxpopme, by way of a follow on funding round.
On 25 April 2023, the investment in Adept Technology plc was sold for £338,000, realising a surplus of £6,000 on its 31 March 2023 valuation of £332,000.
On 28 April 2023, the Company invested £1,744,000 in new portfolio company Camena, a provider of synthetic DNA.
On 16 May 2023, the investment in Evotix (formerly She Soſtware) was sold. The transaction was advanced at the balance sheet date, and as a result the valuation of the investment has been included at the
sales price achieved.
On 18 May 2023, the Company invested £250,000 in existing portfolio company, Netacea, by way of a follow on funding round.
Northern 3 VCT PLC
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77
Glossary of terms
Alternative performance measure or APM
APMs are not prescribed by accounting standards but are industry specific performance measures which help users of the annual accounts and financial statements to better interpret and
understand
performance.
Some of the terms in this glossary have been identified as APMs.
Cumulative return per share (APM)
The sum of the published NAV per share plus cumulative dividends paid per share since the Company was launched. We use this measure as it enables comparisons to be made between different VCTs over
the whole life of each fund.
The cumulative return per share for the Company as at 31 March 2023 comprises the NAV per share of 91.6 pence (2022: 97.9 pence) plus the cumulative dividends paid of 113.4
pence (2022: 108.4 pence) giving a result of 205.0 pence per share (2022: 206.3 pence per share).
Cumulative dividends paid
The total amount of shareholder dividend distributions paid since the Company was launched.
Distributable reserves
The sum of the capital reserve, revenue reserve and that part of the revaluation reserve which is related to readily realisable investments.
Dividend yield (APM)
The sum of dividends proposed or paid in respect of the last 12 months as at a given date expressed as a percentage of the net asset value per share at the start of the period.
We use this measure as it shows
the dividend income receivable by shareholders over a 12 month period expressed as a theoretical yield based on acquiring a single share at the NAV per share at the start of the period.
The dividend yield
as at 31 March 2023 is calculated by dividing the dividend per share paid or proposed over the preceding 12 months of 5.0 pence (2022: 5.0 pence) by the NAV per share at the start of the period of 97.9 pence
(2022: 107.0 pence) giving a result of 5.1% (2022: 4.7%).
Ex-dividend date
The date immediately preceding the record date for a given dividend.
Shareholders who acquire their shares on or aſter the ex-dividend date will not be eligible to receive the relevant dividend.
Gain/loss on disposal of investments
The profit or loss on the sale of an investment during the year calculated by reference to the proceeds received on sale of the investment less the valuation of the investment at the last annual report date.
NAV total return (APM)
The theoretical return to a shareholder over a given period based on acquiring shares at the start of the period at the latest published NAV per share then utilising the proceeds of each dividend paid during
the period to acquire further shares at the latest published NAV per share as at each ex-dividend date.
We use this measure as it enables comparisons to be drawn against an investment index in order to
benchmark performance.
The result is plotted on page 43 and the calculation follows the method prescribed by the Association of Investment Companies.
31 March
2023
31 March
2022
Closing NAV per share (p)
91.6p
97.9p
a
Dividends paid out (p)
5.0p
9.0p
b
Effect of re-investing dividends (p)
–
(0.3p)
c
Adjusted NAV per share (p)
96.6p
106.6p
d = a + b + c
Opening NAV per share (p)
97.9p
107.0p
e
NAV total return (%)
(1.3%)
(0.4%)
= (d / e) -1
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Net asset value or NAV
The amount by which total assets of the Company exceed its total liabilities. It is equal to the total equity shareholders’ funds.
Net asset value per share or NAV per share
Net asset value divided by the number of ordinary shares.
Ongoing charges excluding performance fees (APM)
The total of investment management fees and other expenses as shown in the income statement, as a percentage of the average net asset value. This measure is disclosed to provide information to
shareholders, in line with industry best practice.
Ongoing charges (APM)
31 March
2023
31 March
2022
Investment management fee
2,077
2,253
Other expenses
496
407
Total expenses (a)
2,573
2,660
Annualised average net assets (b)
119,353
117,217
Ongoing charges (a)/(b) (expressed as a percentage)
2.16%
2.27%
Record date
The cut-off date on which a shareholder needs to be beneficially entitled to a share on the share register of the Company in order to qualify for a forthcoming dividend.
Share price total return (APM)
The theoretical return to a shareholder over a given period based on acquiring shares at the start of the period at the prevailing mid-market share price then utilising the proceeds of each dividend paid during
the period to acquire further shares at the share price as at each ex-dividend date.
We use this measure as it enables comparisons to be drawn against an investment index in order to benchmark performance.
The result is plotted on page 43 and the calculation follows the method prescribed by the Association of Investment Companies.
31 March
2023
31 March
2022
Closing price per share (p)
84.5p
94.5p
a
Dividends paid out (p)
5.0p
9.0p
b
Effect of re-investing dividends (p)
(0.1p)
(0.1p)
c
Adjusted price per share (p)
89.4p
103.4p
d = a + b + c
Opening price per share (p)
94.5p
91.0p
e
Share price total return %
(5.4%)
13.6%
= (d/e) -1
Total return for the year
The total income, gain or loss on disposal of investments and movements in the fair value of investments less ongoing charges for the period, as shown in the income statement.
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