I recently attended the Crown Place VCT AGM, which was held on Wednesday November 8th 2017 commencing at 11.00 at the City of London Club, 19 Old Broad Street, London EC2N 1DS.
The link to the annual report for year ending June 30th 2017 can be found here:
https://www.albion-ventures.co.uk/funds/CRWNThe IMS for the three months ending September 30th 2017 was released just before the AGM; it reported a NAV of 31.71 pence per share, an increase of 0.73 pence per share (2.4 per cent) since 30th June 2017 (after taking into account the payment of dividends).
https://tinyurl.com/y8awgp66For this year’s AGM there were around 20 ordinary shareholders in attendance. The meeting began with a portfolio review given by Emil Gigov (Albion partner and investment manager) which also included a short Q&A session. We then had a presentation (with Q&As) by Jamie Ward, CEO and co-founder of one of the Albion investee companies, PayasUgym, this was followed by the formal AGM and then lunch, which consisted of a selection of sandwiches with a choice of red or white wine and soft drinks.
Manager’s presentation and portfolio review:Emil began with a brief review of the year’s performance where the total return was 4p/share (2p/share paid as dividends and a 2p/share increase in NAV). Most of the gains (circa 80%) came from the asset-backed portfolio. There were four exits during the year returning £1.6m, but the two of the most notable exits (i.e. the largest) were post year-end: (Hilson Moran and the Crown Hotel) with exit multiples of 1X and 3X respectively.
Given the possible VCT rule changes, which may favour growth investments over asset-based investments, Emil opted to concentrate on the growth portfolio in the review, where there have been seven new investments. The growth portfolio now comprises 30 different investments (22% of NAV), with digital marketing and cyber-security both cited as key sectors. Albion now have four companies in the Times Tech Track 100 (which ranks the top hundred fast growing UK tech companies) and Albion are the only VC with four or more entries:
http://www.fasttrack.co.uk/league-table ... gue-table/There were name checks for Proveca (specialists in developing pediatric versions of generic medicines), Grapeshot (targeted online advertising), Egress (cybersecurity solutions including encrypted retractable email) and Black Swan (data analytics for marketing), all of whom had demonstrated strong growth during the year.
Following the VCT portfolio review, we were given a brief overview of the ongoing Patient Capital Review and how it may affect the Albion VCTs in the forthcoming budget. The Patient Capital Review consultation document contains comparative data that supports the premise that the UK is relatively good at nurturing start-ups, but not so good at growing start-ups in to large billion pound companies. Given this situation, HM Treasury wish to determine whether they can improve the way they allocate taxpayer funds in order to stimulate investment that will help create more billion-pound companies.
There were over 1,000 written responses to the Patient Capital Review consultation and the resulting government proposals are likely to be detailed in the budget on November 22nd. Albion believes that the proposed changes could include a restriction on future investment in asset-backed investments such as Schools, Care Homes and Hotels. Should this be the outcome, then Crown Place and the other Albion VCTs would seek shareholder consent for a change in investment policy, whereby going forward, all new investments would be focused on providing development capital for growth companies in areas where Albion already have expertise (for example, tech and med-tech).
Q&As:Q: If there are changes in the budget to prevent investment in asset backed, income generating investments such as Care Homes and Schools, are we likely to hang on to those sorts of investments for a longer in order to underpin the VCT dividends?
A: Quite possibly, but we need to wait for the budget.
Q: There were many changes to VCT rules two years ago, why are there more changes now?
A: It is probably inevitable that governments will want to tinker, given the generous tax breaks.
Q: How long did we hold Hilson Moran? Did we get rid of it too early?
A: We held for 5 years, timing of a disposal of this type is critical and we think we got that right.
Q: Are we seeing a lot of competition when investing in these growth opportunities and are we paying too much?
A: We are seeing quite a bit of competition, especially for the earlier opportunities.
Q: What is our preferred exit for companies in the growth portfolio?
A: Most entrepreneurs do not want an exit via an IPO, often they would like to expand geographically (especially the USA) which might involve a Private Equity partner and then sell after the expansion plan has been executed.
Q: The last legacy investment (from the Murray Johnstone days) and our fifth largest holding in the portfolio is ELE. A few years ago we managed to extract a decent chunk of money out of them and we were told that we had just missed out selling the business, we haven’t heard much about them since. or received any further payments, is there anything to report?
A: Trading at ELE is satisfactory. We will sell the company when the time is right, the trouble has been that the company contains two main divisions and they have not been synchronized with one another in terms of their business cycles, ideally we would like to sell when both divisions are close to their peaks.Formal AGMThere were no questions of any significance regarding the resolutions and they were all passed with large majorities (>95%), although the number of shares voted for each resolution was disappointingly low (circa 6.2m, which corresponds to just under 4% of the total)
PayasUgymWebsite:
https://www.payasugym.com/Recent Press article:
https://tinyurl.com/y8fgc8cxPayasUgym was set up in 2010 by Jamie Ward and Neil Harmsworth, both of whom had become frustrated by the lack of easy gym access when away from home. They both disliked the general requirement for annual gym memberships, the arduous induction process and the hard selling techniques employed by the gyms to increase membership numbers.
PayasUgym provides a means of accessing various gyms all around the UK without having to endure a hard sell, or having to sign up for an annual membership at each gym. Customers sign up online (using a PC or mobile App.) for a single visit to one specific gym, or for a one month pass which allows free access to similar gyms within the PayasUgym network.
The App will identify all participating gyms within a specified area and each gym listed has user ratings. There is no hard sell, no contract, no additional fees, no induction and no need to cancel membership if the gym does not meet expectations, or is only required for a short period.
Customer satisfaction with the standard process of accessing gyms through membership is low, with a Net Promoter Score (NPS) of <30, whereas PayasUgym has scored 72 in a recent NPS survey.
PayasUgym is also gaining popularity among many gym operators, for example they have recently signed up Nuffield gyms (>100 gyms throughout the UK) and produced a report and recommendations based on customer feedback for Nuffield. Following implementation of the recommendations, Nuffield have increased the rate of new members signing up by 50% (at the expense of competitors).
PayasUgym were the first company offering this online service and they are always at the top of Google searches for gym search. The gym market in the UK has annual sales of £5Bn, of which PayasUgym have £5m, they currently have 40% of the UK gyms signed up, including several chains (for example Soho, Bannatyne and Nuffield). In the last 12 months, there have been 50m gym searches through PayasUgym, 1.7m gym visits and 400K individual customers have used the portal.
PayasUgym will continue expanding their network of gyms and ramp up advertising which will include Ch4 (2017) and Sky (2018). In addition, other growth opportunities will be explored which include:
* Monetizing big data collected from customers, this could result in B2B opportunities, rather than B2C.
* Nutritional supplements (B2B).
* Sports apparel (B2B).
Albion invested in PayasUgym 2014 (£250K seed capital) and the Albion VCTs now hold just 5.5% of the equity.
We were told by the manager that this is a relatively small investment by Albion standards, but it provides a good example of how seed funding can be deployed as growth capital. Should the budget include changes to prevent future asset backed VCT investments, there are likely to be more investments of this type in the future across all of the Albion VCTs.
Q&AsQ: Is it the type of market outside of the UK? Could you expand internationally?
A: Most international markets are very fragmented, although there may be opportunities in Germany and the USQ: Can you describe your cash flow model?
A: Consumers pay us directly and we front load the commission.Q: You mentioned that the gyms receive feedback scores from the visitors who booked through PayasUgym. What incentives are there for customers to leave feedback?
A: The customers receive five credits for every five completed feedback forms submitted. Each credit is worth £1, which may be redeemed through money off future gym bookings made through PayasUgym
Q: What is your profit margin?
A: When we started out our gross margin was around 20%, it is now 55%, but we expect this to be squeezed as we continue with the growth strategy.Q: You said you had most of the major gym chains already signed up. Which large chains are still to sign up?
A: We do not have David Lloyd (that one will be difficult), and we do not have Fitness First.Q: Who are your biggest competitors?
A: Our two biggest competitors are GymPass ( https://www.gympass.com/uk ) and GymClass ( https://gym-class.co.uk/ )
Gympass is more of a B2B business that we are concentrating on corporate membership, GymClass targets females for gym classes, so our target markets are somewhat different.Q: Where does the 55% margin come from?
A: If a customer pays us £50 for one month access, we do not pay the gym for the first two visits, thereafter we pay the gym for each visit, but there is a cap.Q: When do you expect to reach profitability?
A: We currently have sales of £400k/month, but are burning cash at £30K a month, we forecast to make a small profit next year and we will not require any further new investment capital from 2019. Exit is most likely to be through a Private Equity sale from 2019 (onwards).
Lunch:Over lunch, I talked to a number of the Albion managers on a variety of topics, but mainly on the Patient Capital Review.
The consensus was that there is likely to be a cut in up front tax relief for VCT investments, with tax relief possibly being reduced to 20%. Whilst this would be considered highly unwelcome, it would not be anything like as bad as HMG tinkering with the tax-free status of VCTs dividends, which could be disastrous for the sector and for SMEs seeking growth capital investment.