Questions from shareholders prior to Oxford Technology VCTs' AGM 2020
The OT VCTs received some questions ahead of the AGM which we present together with answers to those questions.
1) Q Has OT4 received the Castleton takeover bid money?
A Yes, £832,451.75 was received.
2) Q Will the proceeds be swiftly passed on to OT4 shareholders?
A The Board regularly reviews the dividend policy of all four VCTs. The board's policy is to distribute as much of exit proceeds as possible while complying with the VCT rules of being at least 80% invested in qualifying stock and complying with the accounting rules of a viability test (which in the case of the OT VCTs the Board has considered at least three years liquidity) which is harder to pass if all investments are unquoted and illiquid. Balancing these requirements, the Board has declared an interim dividend of 5p/share to be paid on 31 July.
3) Q Will the Board of OT4 consider a buyback as was done in OT2 a few years ago after the OC Robotics sale.
A The Board has shareholder authority to do a buyback (but not a tender offer) and it was considered as part of the dividend discussions. Shareholders should note that the funds available at the time of OT2 were over twice what is available in OT4 and the number of shareholders were half. The Board also had concerns about doing a tender at a time when investee valuations are in a state of flux due to Covid-19 ramifications, and also did not consider the incremental costs of a tender were good use of shareholder funds at this time.
4) Q There was a recent spike in the Scancell share price following an announcement that it was working on a Covid-19 vaccine. Did any OT VCT top slice?
A All the OT VCTs are currently planning to patiently hold Scancell to the completion of trials and to a point where a significant valuation inflection might be reached. OT2 & OT3 had no near term need to raise cash. However, OT1 did a small top slice to compensate for potential deferred dividends from investees as its liquidity position required this.
5) Q In OT4 will any Castleton proceeds be used to support other investees in the portfolio?
A If there is a good business case and the VCT rules permit, existing investees may be supported but such cases will be very selective and quite limited.
6) Q Is Lucius Cary still active in the management of the VCTs?
A Yes. He has been involved with all the VCTs and investees since the start and has a long term relationship with many of the founders. He sits on the Ixaris board and is in regular contact with half the portfolio companies. Andrea Mica handles the other half, primarily the biotech companies and our VCT compliance.
7) Q Evergreen VCTs seem to cut their losers earlier. How do Oxford VCTs differ?
A The Oxford VCTs are one time technology funds and not evergreen. Lucius and his team finished picking the portfolio over 10 years ago. Many of the very early stage companies now might be more appropriate for SEIS/EIS. To spread risk the funds invested in 30-40 different companies. It was expected that the returns would be essentially complete within 10 years of start up but this has not proved to be the case.
On every fund over half the investees have disappeared, a few have been sold generating dividends (and tenders) in the 30p - 55p range. The remaining portfolios essentially consist of 4 substantive investees per VCT (including Select, Arecor, Scancell, Ixaris & ImmBio). The remaining small companies in the portfolios have some upside possibilities, do not consume an inordinate amount of management time and are unlikely to realise meaningful amounts in a fire sale. On the other hand, they do provide additional help in meeting the VCT qualifying rules as these are based on historical investment cost. This is what makes a "limited life" technology fund different to an evergreen VCT.
OTM has expertise in exiting companies as with Telegesis (OT3) and OCR (OT2) with Board and third party support. In practice Arecor, Ixaris and ImmBio have larger VCTs (Albion/Downing/Calculus, Foresight and British Smaller) in the driving seat. Scancell is quoted with Vulpes on board. Only Select remains of the substantive investees where the four Oxford VCTs have a large aggregate stake. The OT1 Board stays very close to the founder & managing director of Select.
8) Q OT1 has Resolutions 1-8 as Ordinary Resolutions, resolutions 9-12 are Special Business and Resolutions 11-12 are special resolutions. Please explain.
A The advice we have had from our Company Secretary is that Special Business requires a longer notice period to shareholders than Ordinary Business (typically 3 vs 2 weeks).
Special Resolutions apply to something outside the normal course of business. Items envisaged in the Articles of Association are treated as Ordinary Resolutions requiring a simple majority. Whereas allotment of shares on a non-rights basis and new articles are changing shareholders rights and require a supermajority.
9)Q The four Directors are all middle class, middle aged privileged white males; as are the investment managers. This has not changed in over five years. This is the least diverse company imaginable. What steps are the Directors taking to address this complete absence of diversity?
A On many metrics, the Directors are diverse, e.g. in age, experience, background and education. An external nomination committee was established to recommend directors for 3 vacant positions in 2015. The Nomination Committee consisted of a representative from the Oxford CC pension fund, the largest shareholder in 2 VCTs, a shareholder with previous senior HR experience with BP and a representative from the ShareSoc Action Group. About 10 candidates from the shareholder base put their names forward, not all of whom were male. All were interviewed by the Nomination Committee. Those on the final list were further interviewed by OTM and some of the Board. The Nomination Committee proposals were accepted and appointment made to the Boards of OT1, 2 &3. A year later the common board structure was introduced to ensure effective governance at an efficient price. In line with best practice Lucius stood down from all boards; leaving only NEDs. Given the major changes, the 3 new Directors specifically requested David Livesley to continue after Richard Vessey and Mike O' Regan stood down at the time of the reorganization to provide continuity. David has periodically offered to stand down but the other Directors have requested his continuation. The fact that detailed questions (see Q 17-19) are being asked about ImmBio, a company that David has known for 15 years, confirms the value of long term tenure as the science changes and evolves along with the business case.
The diversity issue is addressed on page 19 of our Annual Report, and also note the new Association of Investment Companies Code guidelines on the matter (the “2019 AIC Code”).
10) Q The average tenure of the OT4 Board members is about 7 years. This is above average. https://www.statista.com/statistics/684847/ftse-100-executive-directors-tenure-by-gender-uk/ What do the Board plan to do to move back to industry average?
A This is not unusual in the VCT industry where long term tenure is seen as an advantage as the Directors are familiar with both the legislation and the portfolios. There are many non-executive directors within the VCT industry with similar or longer tenures. The statistics quoted regarding executive directors of FTSE 100 companies reflect neither the nature of VCTs, or the non-executive status of its Directors.
11) Q Could you not have found a way to do voting as part of the AGM rather than the technology-free mailing in of votes in advance? The fact that votes can only be cast by post is just staggering.
A Whilst proxy forms can be returned by post to Neville Registrars, they can also be emailed to firstname.lastname@example.org. As you might imagine, under current circumstances the holdings of AGMs and the procedures for doing so has been the subject of considerable debate both within the AIC and government. Legislation regarding this was only passed last month. We are following what is currently suggested as best practice. There are also cost implications for allowing electronic voting, and to date, the Directors have considered this extra facility does not add sufficient value to make it worth enabling.
12) Q You include two KPIs on page 13 of the annual report (OT4). In the case of the first KPI, we have seen value loss which must make that a significant fail. We’ve also seen an increase in costs as a percentage of net assets, so also a big fail. Given that you failed on both the KPIs you set yourself, what are you going to do differently next year to ensure that you don’t fail again then?
A Costs as a % of assets for the year to 29 February 2020 were lower than the previous year. While there was a fall in NAV, 30% of the reduction was due to paying a dividend to shareholders. We do appreciate the Total Return for the year was disappointing with significant mark downs on the value of some of our lower value holdings. However, we believe the companies remain viable and should provide a return in the future.
13) Q Given that Select is now cash positive and paying a dividend, has a formal request been made to them for the company to purchase our shares and allow us an exit?
A There is a very big difference between a company paying a dividend and having surplus funds to buy shares back. Select only has very limited available funds, so any cash used to buy shares back would need to be taken from those earmarked for Select’s dividend. The £10k received paid out to OT4 as a dividend would enable the buy back of less than 1% of the company’s investment, and there would be no change in the overall net assets nor total return of the VCT. The combined VCTs hold over 50% of the shares in Select. We did institute a formal sales process a few years ago, and whilst an offer was received, it was decided that it was not acceptable and was not progressed. Conversations with Select management are ongoing regarding their purchasing some of the VCT shares. Sale back to management is seldom a good exit route for investors, as the price paid is usually much lower than that which would be paid by a third party investor/acquirer. Select is also performing in a reasonably resilient manner despite recent turmoil.
14) Q The Directors maintain that they believe that remaining as a VCT is the right thing to do. Please could you share that analysis? Given that the vast majority of shareholders are now carrying a significant capital loss, the tax benefits of being a VCT with only three real investments seem tenuous (OT4, although a relevant question for each fund).
A Distributions from a VCT are tax free. Given we will shortly be paying a dividend, I suggest most shareholders would be displeased if they were to be required to pay up to nearly 40% tax on the dividend. An option is to distribute the individual investments in specie to shareholders – see next question. Furthermore, for shareholders in OT1,OT2 & OT3, if the funds did not remain as VCTs, those shareholders who deferred capital gains at the time of their initial subscription would face a potential capital gains tax charge.
15) Q What options to remaining a VCT were investigated? For example, did you examine simply distributing the shares in the three main holdings direct to shareholders in the VCT?
A Distribution in specie would lose investors their tax free status. If we were to consider distribution in specie of any of the holdings, tax treatment is complicated. Not only does this create additional effort and expense for the investee company, it is also much more complicated for shareholders who have tiny investments in private companies to manage, and shareholders would have little or no ability to sell these holdings individually. Depending on circumstances, in the future, there may well be income tax, or capital gain tax liability. There would be a taxable capital gain if any investments were sold above the value at the time of any transfer (admittedly, there would also a capital loss for any companies that were eventually realised at a lower price), and any dividends would be taxable at the shareholder’s highest rate of tax. Finally there would be no management of these assets on behalf of individual investors.
16) Q What are the Directors / manager doing to exit the three main holdings (OT4)?
A Directors continue to monitor all holdings on a regular basis, and are always looking for realisation opportunities. Disposing of a venture capital investment requires alignment with other investors, or taking a significant discount to the real price. Achieving an exit from a company like Arecor is unlikely whilst they continue to develop so rapidly. As discussed above, an ultimately unsuccessful sales process was run for Select. For many of the investments, OT4 holds a small minority stake, and trying to sell such investments is unlikely to be at best price.
17) Q How were the valuations of Arecor & ImmBio reached?
A As stated in the Annual Report, Arecor’s value is based on the price of the last funding round, adjusted for continued performance, and ImmBio on a NPV of the value of its Chinese contract adjusted for risk.
18) Q How will ImmBio fund their Covid-19 vaccine? There are over 130 vaccines currently being developed with most in clinical trials. It sounds unlikely that a small under-funded company coming from behind would stand a chance.
A There will be several different winners in the Covid-19 vaccine race. There will be those who may reach the market first with adequate vaccines which may address the initial market need or short term protection without providing a solid long term immunity. However, as the world has finally realised that the last 5 major pandemics or near pandemics have all had zoobiotic origins, vaccine platforms capable of producing long term protection as well as being able to respond rapidly to future threats will be required. The science behind ImmBio’s technology matches exactly to what is required to develop a long term vaccine for Covid-19. ImmBio has been talking about the importance of T Cell activation for an extremely long time. Like other vaccine companies, they will apply for grants but are also talking to other potential funding sources. But there is no certainty that ImmBio will be able to succeed in this market place. Immbio does not expect to use any of its current resources pursuing a Covid vaccine.
19) Q Has the Board looked at moving off main market to lower costs?
A One of the conditions associated with remaining a VCT is that the company is listed on the main market. The Directors have written to both the London Stock Exchange and Financial Conduct Authority regarding the financial burden their fees impose on small companies, and are engaged in a dialog with both organisations. These fees represent a significant proportion of the cost base of the VCT.
20) Q Once again, we see value loss in the company (OT4). What measures have the Directors taken to find a new manager?
A The Directors have had discussions with a wide number of potential fund managers over a number of years, several of whom have progressed into much more detailed exchanges. Finding a fund manager who would be willing to take over managing the VCT(s) could be straightforward, provided the VCT(s) were willing to effectively pay two managers for 12 months during the transition as OTM is entitled to 12 months’ notice. The reason we refer to VCTs here is as a number of the investments are common with the other OT VCTs, and for another manager to be willing to manage the existing portfolio, some economies of scale in managing the investments would definitely be necessary. The Directors’ preferred approach, which is to find a manager willing to raise additional capital to extend the life of the VCT and spread the cost base over a wider range of assets, has been more challenging although detailed discussions continue with at least 3 potential managers. Separately, we appreciate the frustration of paying fees particularly with the performance of the portfolio, but it is highly unlikely that any other manager would charge such a low fee for the services the fee covers, which covers the investment management and much of the administration for a total of 1% of NAV. In addition, OT1 has reduced its ongoing investment management fee to 0.5% of NAV per annum.
21) Q The new articles contain a new class of share. Why are you doing this and spending yet more of our money on admin to make it happen? It seems like a lot of effort to make changes to a dying company.
A One of the barriers to finding a new manager to take over the VCTs has been the costs associated with the legal paperwork required. The VCTs needed to update their Articles to bring them in line with the Companies Act 2006. The marginal cost of including the B share provision was minimal, but removes an additional barrier to engaging a new manager. Given much of the work was based on previous work done by Oxford Technology 2 VCT, and most was done pro-bono by the directors themselves, the costs were less than £1,000 for OT4. We wonder how many other VCTs (or other companies) would do it for even this price?
22) Q ImmBio’s value almost halved during the year, but at the end of the year, you invested £150k. Why do you insist on catching this falling knife? Why not leave it to someone else? If they can’t raise money elsewhere, are they really a credible company?
A The nature of the investment round was such that non-participation would have led to significant dilution, and was therefore unattractive. In addition, our participation encouraged other investors to participate. If we had not invested, it was unlikely that ImmBio would have survived, leading to a significant loss to the VCT. The ImmBio valuation is based on an NPV of the licence which ImmBio has signed with the Chinese, with a discount for risk. We have chosen to increase the discount during the year on the basis of our perception of risk. This doesn’t change the perspective that if ImmBio can deliver on the obligations contained within the contract it remains an attractive and viable business.