This is a letter which I have just sent to Temporis to pass on to the Ventus 2 VCT Board - doubtless it will also be passed on to the Ventus BOD as well
Alan Moore OBE – Chairman
Ventus 2 VCT plc
c/o The City Partnership (UK) Limited
Thistle House
21 Thistle Street
Edinburgh EH2 1DF
Dear Mr Moore
It is most remiss of me not to write earlier on the publication of the Interim Results and the Strategy Note.
On the whole I thought they were good documents, as did other investors I have spoken to. A great deal of thought went into them and I and others thank you for this.
There are a couple of outstanding issues we raised at the meeting with the board late last year and these are set out below
MANAGER’S FEESThe manager receives fees as follows (according to the last annual report)
“
The Investment Manager is entitled to an annual fee equal to 2.5% of the Company’s net asset value (“NAV”). This fee is exclusive of VAT and is paid quarterly in advance. The fee covers the provision by the Investment Manager of investment management services as well as all accounting and administrative services together with the additional annual trail commission payable to authorised financial intermediaries. Total annual running costs are in aggregate capped at 3.6% of NAV (excluding the Investment Manager’s performance-related incentive fee, investment costs and irrecoverable VAT), with any excess being borne by the Investment Manager.
The Investment Manager will receive a performance-related incentive fee subject to the Company achieving certain defined targets. No incentive fee will be payable until the Company has provided a cumulative return to investors in the form of growth in NAV plus payment of dividends (“the Return”) of 60p per share. Thereafter, the incentive fee, which is payable in cash, is calculated as 20% of the amount by which the Return in any accounting period exceeds 7p per share. The incentive fee is exclusive of VAT.”
First a couple of questions :
a) surely VCT management charges have been exempt form VAT since 2008 which I assume includes the performance fee. Could you change the wording in the next annual report to reflect reality here?
b) How long does the trail commission continue? And what is its cost per annum?
The government has changed the rules under which Ventus 2 operates and investments in new companies are no longer allowed, so Temporis no longer has to do this. It is not part of the strategy to sell any assets so that cost has also been removed. Put another way; the 2½% of NAV basic fee was set back in 2008 and no longer reflects the amount of work required of the manager. A more realistic fee would be 1 to 1½ % of NAV which is still substantially above the fees of comparable listed Green Infrastructure Funds but takes into account the scale of operations within the VCT.
Other costs are not so easily cut but we did point out that a common board would reduce costs by about 0.125 pence per share in reality.
The
Incentive Fee is part of the manager’s reward and also needs to be addressed but the feeling is that it should reflect extra work or skill
evidenced year by year and not a reward for doing the work that is rewarded within the standard management fee. There is more on this under ‘Share Class Merger’ below.
These two issues need urgent attention and preferably a renegotiation before the AGM. It is the single biggest investor concern. It would be good if a vote on the new reward system was taken at the AGM.
SHARE BUY BACKS There don’t seem to be many shares available in the market so implementing such a policy would not cost the company much, if anything. But some existing investors would like to see a buy back policy introduced which would give some certainty of value to their shareholdings.
SHARE CLASS MERGERThe putative merger of the ORD and “C” classes is also welcomed by shareholders who would also like to see the “D” shares merged at the same time.
However, there are some problems here of which I am sure you are well aware. The problems relate mainly to the ORD share class and the performance-related incentive fee. At the moment the “g
rowth in NAV plus payment of dividends (“the Return”) of 60p per share” coupled with the “7p per share increase in return in a year” is highly unlikely to be reached even in the medium term, whereas with the “C” and “D” share classes it should be reached in the near future.
I don’t think there is any easy solution and so it may be necessary to rethink and rebase the whole performance-related incentive fee at the same time as the share class merger. Such a rebasing would also reflect the change in Manager work-load caused by the changes in legislation.
Currently both share classes are paying dividends of very nearly 6½ pence per 100 p of NAV – which should/must continue with the addition of the extra penny coming from the reduction of the Manager’s fee by one percentage point making
7.5 pence from the time the new ORDs come into existence. The incentive scheme set out below might work but
a) it does slightly disadvantage the ORD shares as they would probably not pay any incentive fee until 2023 under the existing scheme whereas the “C” shares would probably pay it from 2020 onwards. However, the disadvantage is small – nowhere near the labourers in the vineyard advantage!
b) It does not take into account the fact that large parts of the revenue of investee companies is index linked probably adding one or two percentage points of income per year.
c) It does not take into account the extra money that investee companies will ‘rake in’ when their external loans are paid off but this could be addressed by adding something this to the scheme
“When an investee company has paid off its loans, the interest saved by that company shall be held within the company to provide a reserve to ‘refresh and renew’ its assets. At that time the Incentive plan will need to be reworked to ensure the manager is sufficiently incentivised to see this chapter in the life of the VCT to a successful conclusion”
Such a scheme probably needs to be in place for five years and then reviewed annually thereafter
A possible Incentive Scheme:Step One : exchange all ORDs and “C” shares into NEW ORDs with each share having a NAV of exactly 100 pence. Set the incentive fee at 20% of any total return of in excess of 7½% of NAV. The target end of year Total Return then becomes 100 + 7.5 pence per share which is effectively the same as now with the addition of the 1 penny extra from reducing the base manager fee.
Step Two : state that for each succeeding year the hurdle for the payment of the incentive fee will be the higher of:
i) what the End of Year Total Return should have been (manager has to catch up)
and
ii) the actual End of Year Total Return (the manager has already been paid an incentive fee on some of this)
increased by 7.5%
Repeat Step 2
in each succeeding year.
Step Three : publish an illustrative table like one of these:
No increase in DividendCode: Select all
A B C D E F G I
2018 100.00 107.50 109.00 0.30 7.50 0.25 1.50
2019 109.00 117.18 118.20 0.21 7.50 0.25 1.52
2020 118.20 127.07 128.00 0.19 7.50 0.25 1.66
2021 128.00 137.60 138.00 0.08 7.50 0.25 1.81
2022 138.00 148.35 149.00 0.13 7.50 0.25 1.96
2023 149.00 160.18 158.00 - 7.50 0.25 2.12
2024 160.18 172.19 173.00 0.16 7.50 0.25 2.29
2025 173.00 185.98 187.00 0.21 7.50 0.25 2.48
2026 187.00 201.03 202.00 0.19 7.50 0.25 2.69
2027 202.00 217.15 219.00 0.37 7.50 0.25 2.91
A B C D E F G I
Increasing Dividend by RPI of 2% per annum.Code: Select all
Year ending Feb Start Total Return Target Total Return Actual Total Return Incentive p/share Dividend p per share Director fee p per share Base Fee p per share
2018 100.00 107.50 109.00 0.30 7.50 0.25 1.50
2019 109.00 117.18 118.20 0.21 7.65 0.25 1.52
2020 118.20 127.07 128.00 0.19 7.80 0.25 1.65
2021 128.00 137.60 138.00 0.08 7.96 0.25 1.80
2022 138.00 148.35 149.00 0.13 8.12 0.25 1.95
2023 149.00 160.18 158.00 - 8.28 0.25 2.11
2024 160.18 172.19 173.00 0.16 8.45 0.25 2.27
2025 173.00 185.98 187.00 0.21 8.62 0.25 2.46
2026 187.00 201.03 202.00 0.19 8.79 0.25 2.67
2027 202.00 217.15 219.00 0.37 8.96 0.25 2.89
TOTALS 1.83 82.12 2.50 20.82
10 years' dividends 82.12
I have also attached the spreadsheet used to calculate this and will publish this letter on the Lemon Fool to see the reactions of other investors
I hope this is useful and shall look forward to hearing from you.
With all best wishes for the New Year
Yours sincerely - etc
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Sorry I couldn't get the table headings s to line up properly!
The columns are
A: Year ending Feb
B. Start Total Return
C. Target Total Return
D. Actual Total Return
E. Incentive p/share
F. Dividend p per share
G. Director fee p per share
I. Base Fee p per share
It may not be a perfect solution but apart from the small disadvantage to the ORDs it seems to be one hell of a lot better than we have now
Hope you like it - and as always comments very welcome - and, of course, you could also write to the board in support of the idea!!