24 April 2024
VPC SPECIALTY LENDING
INVESTMENTS PLC
(the
"Company" or "Parent Company" with its
subsidiaries (together) the "Group")
Annual Report and Audited
Financial Statements
For the Year Ended 31
December 2023
The Board of Directors (the "Board")
of VPC Specialty Lending Investments PLC (ticker: VSL) present the
Company's Annual Report and Audited Financial Statements for the
period ended 31 December 2023.
A copy of the Company's Annual
Report is available to view and download from the Company's
website, https://vpcspecialtylending.com/documents/.
Neither the contents of the Company's website nor the contents of
any website accessible from hyperlinks on the Company's website (or
any other website) is incorporated into or forms part of this
announcement.
A copy of the Annual Financial
Report will be submitted shortly to the National Storage
Mechanism ("NSM") and will be available for inspection at the NSM,
which is situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism, in
accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's
Disclosure Guidance and Transparency Rules.
All page numbers below refer to the
Annual Report on the Company's website.
Further information on VPC Specialty
Lending Investments PLC is available at https://vpcspecialtylending.com.
Enquiries
For further information, please
contact:
VPC
Specialty Lending Investments PLC
Graeme Proudfoot
|
via Jefferies or Winterflood
(below)
|
Victory Park Capital
Gordon Watson
Sora Monachino
|
via Jefferies or Winterflood (below)
info@vpcspecialtylending.com
|
|
|
Jefferies International Limited
|
Tel: +44 20 7029 8000
|
Stuart Klein
|
|
Gaudi le Roux
|
|
|
|
Winterflood Securities Limited
|
Tel: +44 20 3100 0000
|
Joe Winkley
|
|
Neil Morgan
Montfort Communications
Matthew Jervois
|
Tel: +44 (0)7717 857736
vpc@montfort.london
|
|
|
Link Company Matters Limited (Company
Secretary)
|
Tel: +44 20 7954 9567
Email:
VPC@linkgroup.co.uk
|
|
|
LEI: 549300UPEXC5DQB81P34
INTRODUCTION TO THE COMPANY AND THE GROUP
VPC Specialty Lending Investments
PLC (the "Company" or "VSL") provides asset-backed lending
solutions to emerging and established businesses ("Portfolio
Companies") with the goal of building long-term, sustainable income
generation. VSL focuses on providing capital to vital segments of
the economy, which for regulatory and structural reasons are
underserved by the traditional banking industry. Among others,
these segments include small business lending, working capital
products, consumer finance and real estate. VSL offers owners of
shares of the Company ("Shareholders") access to a diversified
portfolio of opportunistic credit investments originated by
non-bank lenders with a focus on the rapidly developing
technology-enabled lending sector.
The Company's investing activities
are undertaken by Victory Park Capital Advisors, LLC (the
"Investment Manager" or "VPC"). VPC is an established private
capital manager headquartered in the United
States ("U.S.") with a global presence. VPC identifies and
finances emerging and established businesses globally and seeks to
provide the Company with attractive yields on its portfolio of
credit investments. VPC offers a differentiated private lending
approach by financing Portfolio Companies through asset-backed
delayed draw term loans, which is referred to as "Asset Backed
Lending," designed to limit downside risk while providing
Shareholders with strong income returns. Through rigorous due
diligence and credit monitoring by the Investment Manager, the
Company generates stable income with significant downside
protection.
A summary of the principal terms of
the Investment Manager's appointment and a statement relating to
their continuing appointment can be found on page 113. The
investment policy can be found beginning on page 125 of this Annual
Report. Founded in 2007 and headquartered in Chicago, VPC is an
SEC-registered investment adviser that has been actively involved
in the financial services marketplace since 2010.
This annual report for the year 2023
includes the results of the Company (also referred to as the
"Parent Company") and its consolidated subsidiaries (together the
"Group"). The Company (No. 9385218) was admitted to the premium
listing segment of the Official List of the Financial Conduct
Authority ("FCA") (the "Official List") and to trading on the
London Stock Exchange's main market for listed securities (the
"Main Market") on 17 March 2015, raising £200 million by
completing a placing and offer for subscription (the "Issue"). The
Company raised a further £183 million via a C Share issue
on 2 October 2015. The C Shares were converted into Ordinary Shares
and were admitted to the Official List and to trading on the Main
Market on 4 March 2016.
INVESTMENT OBJECTIVE
The Company's investment objective
is to conduct an orderly realisation of the assets of the Company,
to be effected in a manner that seeks to achieve a balance between
returning cash to Shareholders promptly and maximising
value.
INVESTMENT POLICY
The Company's investments will be
realised in an orderly manner, that is, with a view to achieving a
balance between returning cash to Shareholders promptly and
maximising value.
Until 30 June 2023, the Company
could make new investments directly (in aggregate) up to 5%. of its
Gross Assets (at the time of the investment) in consumer loans, SME
loans, advances against corporate trade receivables and/or
purchases of corporate trade receivables originated by portfolio
companies ("Debt Instruments").
Following this period, the Company
may not make any new investments save that: (a) investments may be
made to honour existing documented contractual commitments to
existing portfolio companies as a majority of the Company's
investments are delayed draw term loans; (b) further investment may
be made into the Company's existing investments without redemption
rights in order to preserve the value of such investments; and (c)
realised cash may be invested in cash or cash equivalents,
government or public securities (as defined in the rules of the UK
Financial Conduct Authority), money market instruments, bonds,
commercial paper or other debt obligations with banks or other
counterparties having a "single A" (or equivalent) or higher credit
rating as determined by any internationally recognized rating
agency selected by the directors of the Company (which may or may
not be registered in the European Union) ("Cash Instruments")
pending its return to Shareholders in accordance with the Company's
investment objective.
Any return of proceeds to the
Shareholders will be subject to compliance with existing gearing
facilities and hedging arrangements, payment of expenses and
reserves for potential liabilities.
The Company will continue to comply
with the restrictions imposed by the Listing Rules.
FINANCIAL HIGHLIGHTS
SUMMARY HIGHLIGHTS FOR 2023
v February
2023: The Company declared its 20th consecutive dividend of 2.00p
for the three-month period to 31 December 2022.
v May
2023: The General Meeting Circular was announced and published to
the Company's website, inclusive of two proposals for the managed
realisation of the Company's assets.
v June
2023: At the General Meeting,
the resolutions put to the meeting, inclusive of two proposals for
the Company's managed realisation that were approved by
Shareholders. The Company announced that at its Annual General
Meeting ("AGM"), all resolutions set out in the Notice of AGM were
passed by the requisite majority.
v June
2023: The Company declared its
21st consecutive dividend of 2.00 pence per share for the
three-month period to 31 March 2023.
v July
2023: The Company sold 932,968 shares of Bakkt (NYSE: BKKT)
for US$1.6 million, including a gain of US$0.1
million.
v August
2023: The Company sold a portion of its remaining equity in Kueski,
Inc., for US$0.8 million, including a gain of US$0.7 million.
Additionally, the Company received a paydown of US$5.3 million on
CFG Partners Holdings, L.P., which was used to reduce the
outstanding gearing facility.August 2023:
The Company declared its 22nd consecutive dividend
of 2.00p per share for the three months to 30 June 2023.
v September
2023: The Company received cash inflows totalling US$14.0
million from the Company's asset backed lending and equity
investments. The proceeds were used to partially reduce the
outstanding gearing facility.
v November 2023:
The Company declared its 23rd consecutive dividend
of 2.00p per share for the three months to 30 September
2023.
v December 2023:
The Company exited its debt investment in Applied
Data Finance, LLC. Additionally, the Company exited majority of the
remaining equity investment in VPC Impact Acquisition Holdings
(NYSE: BKKT).
SUBSEQUENT EVENTS
v January 2024:
The Company exited its debt investments in Elevate
Credit, Inc., and Koalafi (formerly known as West Creek Financial,
LLC).
v February
2024: The
Company declared its 24th consecutive dividend of 2.00p per share
for the three months to 31 December 2023.
v March 2024:
On 4 March 2024, two of the Company's eCommerce
investments, Razor Group ("Razor") and PerchHQ, LLC ("Perch"),
closed a transaction in which Razor will acquire Perch in an
all-stock deal. This acquisition paves the way for Razor to reach
over $1.0 billion in topline revenue in the medium term and adds
significant scale to its operations.
v April 2024:
On 5 April 2024, the Company held a General
Meeting at which shareholders approved the Capital Return
Mechanism. On 9 April 2024, the Board decided to make an initial
distribution to shareholders of $15 million, equivalent to
approximately £11.9 million as at the date of release, through the
issue and redemption of B Shares.
RETURN SUMMARY AS AT 31 DECEMBER 2023
|
31 December
2023
|
31 December
2022
|
Inception to Date NAV (Cum Income)
Return
|
47.44%
|
56.91%
|
Inception to Date Total Shareholder
Return
|
29.79%
|
38.69%
|
Net Asset Value ("NAV" per Ordinary
Share
|
80.91p
|
98.19p
|
Ordinary Share Price
|
66.20p
|
83.10p
|
Discount to NAV
|
18.18%
|
15.37%
|
NAV (Cum Income) Return
|
-9.45%
|
-6.97%
|
Total Shareholder Return (based on
share price)1
|
-10.71%
|
-1.19%
|
Dividends per Ordinary
Share2
|
8.00p
|
8.00p
|
Total Net Return
|
-£25.83
million
|
-£22.11
million
|
Revenue Return
|
+£25.62
million
|
+£28.02
million
|
1 Net of issue costs.
2 Dividends declared which relate to
the period.
TOP
TEN POSITIONS
The table below provides a summary
of the top ten exposures of the Group, net of gearing, as at 31
December 2023 by both asset backed lending and equity investment.
The summary includes a look-through of the Group's investments in
VPC Synthesis, L.P. and VPC Offshore Unleveraged Private Debt Fund
Feeder, L.P. to illustrate the exposure to underlying Portfolio
Companies as it is a requirement of the investment policy (set out
on page 3 to consider the application of the restrictions in this
policy on a look-through basis.
ASSET BACKED LENDING INVESTMENT
|
COUNTRY
|
EXPOSURE
(£)
|
|
Deinde Group, LLC
|
United
States
|
38,087,857
|
|
Razor Group GMBH
|
Germany
|
21,602,947
|
|
Perch HQ, LLC
|
United
States
|
19,069,470
|
|
FinAccel Pte Ltd
|
Singapore
|
17,642,647
|
|
Heyday Technologies, Inc.
|
United
States
|
13,017,276
|
|
Elevate Credit, Inc.
|
United
States
|
9,376,011
|
|
Counsel Financial Holdings,
LLC
|
United
States
|
8,486,624
|
|
Juvo Solutions, LLC
|
United
States
|
8,747,121
|
|
Dave, Inc.
|
United
States
|
3,769,775
|
|
Moonshot Brands Inc.
|
Latin
America
|
3,593,763
|
|
EQUITY INVESTMENT
|
COUNTRY
|
EXPOSURE
(£)
|
WeFox Holding AG
|
Switzerland
|
19,917,885
|
Caribbean Financial Group Holdings,
L.P.
|
Latin
America
|
11,339,755
|
L&F Acquisition Holding Fund,
L.P.
|
United
States
|
5,737,743
|
Sunbit, Inc.
|
United
States
|
3,456,842
|
FinAccel Pte Ltd
|
Singapore
|
3,194,149
|
Keller Lenker, LLC
|
United
States
|
2,602,177
|
West Creek Financial,
Inc.
|
United
States
|
2,545,402
|
VPC Impact Acquisition
Holdings
|
United
States
|
2,380,476
|
Pattern Brands
|
United
States
|
2,012,320
|
Calumet Capital
|
United
States
|
1,982,177
|
|
|
|
|
| |
CHAIRMAN'S STATEMENT
The Company faced multiple
challenges during 2023. With inflation remaining high in many
advanced economies, a major theme throughout the year was the
continued tightening of monetary policy through the raising of
interest rates, which constrained spending by business and
consumers. This made for a difficult environment for the Company's
equity portfolio, which continued to experience setbacks.
Additionally, the eCommerce industry experienced various challenges
in 2023, including competition growth, supply-chain interruptions,
and increased regulations. The Company's eCommerce portfolio was
negatively affected by these industry changes, which also detracted
from the Company's performance.
A further challenge was the
stubbornly wide discount to net asset value ("NAV") at which the
Company's shares traded. In its review of 2023, the Association of
Investment Companies ("AIC") reported that, on average, UK
investment trusts traded at a double-digit discount to NAV for the
entire year - the first time that this has happened since
2008.[1] Discounts have been especially
steep for investment trusts that invest in illiquid assets.
Although discounts have narrowed from their widest point of October
2023, they remain in the double digits. The high discount is one of
the reasons the Directors recommended the
managed wind-down, which
shareholders approved in June.
Despite the unfavourable and
uncertain environment, the Company's core asset-backed lending
business continued to perform well in 2023. This component of the
portfolio benefitted from rising short-term interest rates for most
of the year because most of its loans have variable rates.
Meanwhile, the negative unrealised capital returns from the equity
portfolio were driven by three main factors: (i) depressed revenues
and margin; (ii) marking the equity investments to current exit
values; and (iii) reflecting the impact of terms of mergers within
the portfolio as of year-end and reflecting the general downward
trend in comparable multiples. Here, we should note that Victory
Park Capital Advisors, LLC (the "Investment Manager" or "VPC") have
a stated policy of taking a rigorous and conservative approach to
valuations. For more information on this, see the Investment
Manager's Report.
2023 HIGHLIGHTS
v Gross
revenue return of +13.93% offset by a gross capital unrealised loss
of -18.34%;
v NAV total
return of -9.45% for the year and +47.44% from inception to
date;
v Total
Shareholder return of -10.71% for the year and a cumulative return
of +29.79% from inception to date;
v Robust
performance of the asset-backed loan investments;
v In
December 2023 and January 2024, the Company received full repayment
of the debt investments in Applied Data Finance, LLC, Elevate
Credit, Inc., and Koalafi (formerly known as West Creek Financial,
LLC). These three investments returned $38.0 million of gross
proceeds to the Company, before required repayments of the
Company's gearing facility; and
v A 24th
consecutive quarterly dividend of 2.00p per share for the
three-month period to December 2023 in February 2024.
THE
COMPANY'S BUSINESS
As in the previous year, the Company
experienced divergent performances from the asset-backed lending
and equity portfolios. For the twelve months to the end of December
2023, the NAV per share of the Company decreased by -7.45% on a
total return basis. This return consists of a NAV per share
reduction from 98.19p to 80.91p, including 8.00p of dividends paid
in 2023 (in line with the target dividend of 8.00p per year set out
in the IPO Prospectus), which were fully covered by the revenue
returns during
the year. During the year, the
Company's share price fell from 83.10p to 66.20p.
At the year-end, the Company's core
asset-backed lending business represented 73.0% (67.0% at 31
December 2022) of the total portfolio. This component of the
portfolio has continued to benefit from a secure lending position,
targeting minimal capital losses and a high level of income
generation that supports regular dividend payments. Most of the
Company's asset-backed investments are delayed-draw, floating-rate
senior secured loans that may have equity subordination. These
investments are secured by underlying collateral, which consists of
consumer loans, small business loans, and alternative assets. The
weighted average coupon on the Company's asset-backed investments
increased from 14.65% as at 31 December 2022 to 16.41% as at 31
December 2023, boosted by the sustained rise in short-term interest
rates for most of the year. At the year-end, the expected credit
loss ("ECL") reserve was £6.4 million (£16.4 million at 31 December
2022) on all of the Company's debt investments.
Although there were significant
unrealised losses in the investment portfolio during the year,
these occurred as a result of taking account of market information
as it arose, in accordance with the Investment Manager's strict
valuation methodology. The Investment Manager continues to work
with underlying Portfolio Companies (primarily in the FinTech and
eCommerce sectors) as they restructure their balance sheets and
evaluate strategic combinations to maximise shareholder
value.
CAPITAL RETURN TO SHAREHOLDERS
At the General Meeting on 12 June
2023, Shareholders approved the following proposed
amendments:
v To the
Company's investment policy with a view to realising the Company's
assets in an orderly manner that achieves a balance between
maximising the value received from investments and making timely
returns of cash to the Company's Shareholders; and
v To the
investment management agreement between the Company and VPC as a
consequence of the modification of the Company's investment policy
(the "Investment Policy") so as to better align the interests of
the Shareholders and the Investment Manager.
Since then, the Investment Manager
has been working, and will continue to work, to exit the Company's
investments in a manner that maximises Shareholder value in a
timely and cost-effective manner.
We are also conscious that our
Shareholder register features both institutional and retail
investors. The Board therefore explored mechanisms for structuring
the return of capital so that neither investor group is
disadvantaged. The option that the Company decided to pursue is the
distribution of capital on a strict pro rata basis. On 15 March
2024, the Company published a Notice of General Meeting for the
proposed adoption of a B Share Scheme to facilitate the return of
capital to Shareholders. The General Meeting was held on 5 April
2024, and the B Share Scheme was approved by
Shareholders.
THE
COMPANY'S ESG IMPACT
Following the June 2023 General
Meeting, the Investment Manager has focused on the realisation of
the Company's assets in an orderly manner. The Investment Manager
continues to operate under its environmental, social and governance
("ESG") policy and monitors any ESG risks that it identifies and
presents them to their Investment Committee for review. The
Investment Manager is then responsible for developing an action
plan to address these risks as required. In addition, the
Investment Manager continues to be a signatory of the United
Nations Principles for Responsible Investment, the leading global
network for investors committed to integrating ESG considerations
into long-term investment decision-making.
Throughout the realisation process,
the Investment Manager continues to ensure ESG considerations
remain embedded in its approach. The Investment Manager continues
to emphasise the fair, responsible and ethical treatment of
Portfolio Companies. In some cases, this may require a degree of
flexibility. Although most borrowers intend to repay their
asset-backed investments at the stated maturity dates, some have
sought renegotiation. In some cases, this best serves the interests
of the Company and its Shareholders by increasing the likelihood of
recovering the full value of the investments. Accordingly, the
Investment Manager extended certain debt maturities over the course
of 2023. In addition, throughout the realisation process, the
Company continues to have policies and procedures in place to
maintain a culture of good governance. These include policies and
procedures relating to all aspects of diversity, equity and
inclusion.
OPERATIONAL RESILIENCE
Over the year, eCommerce companies
had to contend with a slower growth environment and the effects of
the cost-of-living crisis in many countries. As high interest rates
and elevated inflation constrained consumers, companies also had to
cope with strained supply chains. These came under further pressure
towards the end of the year, with attacks on shipping in the Red
Sea and drought affecting transit through the Panama Canal. In this
environment, many Portfolio Companies continued to engage in
cost-cutting activity and reassess their strategic
combinations.
Risk management remains a critical
function throughout the realisation process. The Investment Manager
maintains comprehensive operational processes and procedures that
support a culture of compliance and institutional best practices. A
team of more than 25 risk and operations professionals proactively
assess and monitor Portfolio Companies and related activities on a
daily, weekly or monthly basis using proprietary analytic tools.
Technology systems and best-in-class service providers are used to
supplement internal capabilities. The Investment Manager's
expertise and experience in credit and structuring, ability to
navigate uncertain market conditions and emphasis on stringent risk
management should facilitate a disciplined and orderly realisation
of the Company's assets.
BOARD COMPOSITION
During 2023, two directors,
Elizabeth Passey and Clive Peggram, retired from the Board. Both
had served since the Company was established in early 2015. As I
commented at the time of the 2023 AGM, my fellow directors and I
found Elizabeth and Clive's wise counsel and experience of the
Company hugely valuable, and we thank them again for their
contributions on our own behalf and on the Company's. The Board has
taken the decision to recruit an additional director and the
process has started.
OUTLOOK
As interest rates remain elevated
and geopolitical uncertainty is likely to persist in the months
ahead, we draw some encouragement from the resilience that the
Company has demonstrated over the past two years. In particular in
the core investments in asset-backed securities, the Investment
Manager's credit expertise and the implementation of judicious
risk-management measures have all helped the Company to weather a
challenging period while maintaining a high and stable level of
income. The volatility of the unrealised equity portfolio is a
challenge, and we are disappointed by its performance. Realising
good value will take some time, but we are also concerned that, as
the debt portfolio matures, the equity holdings will likely
constitute a larger portion of total NAV and consequently impact
the overall volatility of the portfolio, a risk the Board will seek
to mitigate.
With the realisation process now
underway, the Board meets regularly to review the liquidity of
unrealised holdings and progress towards the Company's revised
investment objective. In this, we recognise that flexibility and
patience are vital to get value from individual investments and
that arrangements may need to be altered to reflect changing
circumstances and market conditions, including the greater
volatility that might arise from a higher proportion of equities.
The Board and the Investment Manager will proceed on a case-by-case
and cost-conscious basis. In doing so, we must balance the need to
maximise Shareholder value with the time-sensitive requirements of
many of our Shareholders. Throughout this process, we will strive
to keep Shareholders informed of progress and developments as they
arise. We are also mindful that where markets are less conducive to
liquidity, the management of risk is crucial.
In recent weeks, Shareholders
approved the B share scheme for the efficient return of capital to
Shareholders and we were pleased to announce the first such
distribution. Meantime, your Board and I would like to thank you
for your continued support as we work towards the successful
realisation of the Company's assets.
Graeme Proudfoot
Chair
23 April 2024
INVESTMENT MANAGER'S REPORT
REVIEW OF 2023 PERFORMANCE
Last year was another year of
economic uncertainty and geopolitical turmoil with the war in
Ukraine, tensions between China and the US, and conflict that
erupted once more in the Middle East. Supply chains remained under
pressure, and consumers in many countries had to contend with a
continued cost-of-living crisis, in large part precipitated by
persistently high inflation. In response to inflationary pressures,
key central banks continued to raise interest rates. The US Federal
Reserve increased the federal funds rate four times over the year,
from 4.25%-4.5% to 5.25%-5.5%, although it refrained from further
rate hikes after July. This pause in further rate hikes gave rise
to hopes that rates might be cut in 2024, although statements from
Federal Reserve officials have somewhat dampened
optimism.
With financing options harder to
come by in an environment of higher interest rates, venture capital
("VC") markets have been subdued, and VC investors have been
cautious. The excitement over generative artificial intelligence
meant that other technology-focused companies struggled to secure
funding. Moreover, the collapse of Silicon Valley Bank and the poor
post-flotation performance of several high-profile technology
companies added to VC investors' wariness. Crunchbase reports that
VC funding fell to its lowest level for five years in 2023, with a
38% decline from the previous year. Meanwhile, mergers
and
acquisitions ("M&A") fell to
their lowest level for a decade.
Similar to 2022, VPC's strong
performance of its asset-backed lending investments was outweighed
by weakness in the equity portion of the portfolio in 2023. By
year-end, the Company's asset-backed lending investments
represented approximately 73.0% of the total investment portfolio.
Here, the Company benefitted from continued increases in short-term
interest rates during the year, which underscore the power of
variable-rate loans. The remainder of the investment portfolio
comprises the Company's equity interests.
The Company completed the year with
a NAV total return of -9.45%, a gross revenue return of +13.93% and
a gross capital return of -18.34%. The Company's revenue return
remained in line with expectations, providing a full cash coverage
of the 8.00p per share dividend for Shareholders during the year as
set out in the IPO Prospectus (the "Target Dividend"). In February
2024, the Company declared its 24th consecutive quarterly dividend
payment of 2.00p per share for the three months to 31
December
2023, and the dividend was paid to
Shareholders in March 2024.
Although capital returns were
negative, the FinTech portfolio continued to produce consistently
positive revenue returns. Since the agreement to realise the
Company's assets at the General Meeting held in June 2023, the
Investment Manager has achieved the repayment of several
asset-backed FinTech investments. These include the positions in
Applied Data Finance, LLC, and, after the year-end, Elevate Credit,
Inc., and Koalafi (formerly known as West Creek Financial, LLC). In
the FinTech equity portfolio, the reduction in unrealised capital
returns generally stemmed from marking these investments to
year-end exit values, in light of near-to-medium-term exit
opportunities and the depressed VC and M&A
environment.
For the Company's eCommerce assets,
the ongoing depression of revenue growth and margins in the overall
industry played a significant role in the adjustment of the fair
market value of equity holdings. This arose as consumers came under
pressure from the cost-of-living crisis, and companies had to cope
with further disruptions to their supply chains. In certain cases,
individual portfolio holdings underperformed expectations, leading
to additional adjustments. The Investment Manager is actively
working to mitigate the risks associated with this sector of the
portfolio, including exploring strategic combinations, among other
options. Please see the Subsequent Events section below for
additional details on specific strategic combinations. VPC
continues to work with its eCommerce Portfolio Companies as they
strengthen their balance sheets and evaluate additional strategic
combinations in an effort to maximise Shareholder value.
The Company's positions in legal
finance have continued to perform well, and the Investment Manager
continues to evaluate exit opportunities for these
investments.
At the year-end, the Company accrued
ECL reserves of £6.4 million (£16.4 million at 31 December 2022).
During the year, certain asset-backed lending investment maturities
were extended to reflect changes in the circumstances of the
particular investment or the prevailing market conditions. In each
case, these extensions were made to preserve value for the
Shareholders, as disclosed in the General Meeting
Circular.
During the realisation process, VPC
will continue to draw on its longstanding reputation and
relationships with management teams, industry professionals and
experts to determine the most cost-effective distribution
mechanisms for maximizing Shareholder value.
INVESTMENTS
During the year, the investment
objective of the Company was amended following Shareholder approval
at the General Meeting in June 2023. Until 30 June 2023, the
Company could make new asset-backed lending investments directly
(in aggregate) up to 5.0% of its Gross Assets (at the time of the
investment) in consumer loans, small-and-medium-sized business
loans, advances against corporate trade receivables and/or
purchases of corporate trade receivables originated by Portfolio
Companies. During
this period, the Company made new
investments of a nominal £3.1 million.
Under the terms agreed for the
wind-down, the Investment Manager is not permitted to make any new
investments save that: (i) investments may be made to honour
existing documented contractual commitments to existing Portfolio
Companies (as a majority of the Company's investments are
delayed-draw term loans); (ii) further investment may be made into
the Company's existing investments without redemption rights in
order to preserve the value of such investments; and (iii) realised
cash may be invested in cash or cash equivalents, government or
public securities (as defined in the rules of the UK Financial
Conduct Authority), money market instruments, bonds, commercial
paper or other debt obligations with banks or other counterparties
having a "single A" (or equivalent) or higher credit rating as
determined by any internationally recognised rating agency selected
by the Directors of the Company (which may or may not be registered
in the European Union) pending its return to Shareholders in
accordance with the Company's investment objective. During the
second half of the year, the Company made follow-on investments
totalling £0.7 million in aggregate and will continue to honour
existing documented contractual commitments to Portfolio Companies
as they arise.
GEARING FACILITY
During the year, the "look-through"
gearing ratio decreased as investments were repaid and payments
required by the facility provider were made on the Company-level
gearing facility. Having started the year at 0.35x, the
look-through gearing ratio ended the year at 0.17x, which reflects
VPC's conservative approach to liquidity and risk management with
the gearing facilities. After the year-end, the non-recourse
gearing facility was repaid following the successful exit of
Elevate Credit, Inc.
As the realisation of the Company's
assets progresses, the Company's level of gearing may increase as a
result of further drawdowns to honour commitments to funds under
existing contractual arrangements or revaluations of the portfolio,
as well as the realisation of assets at less than their carrying
value. An increased level of gearing would increase Shareholders'
exposure to realisation values.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG") INVESTMENT
CONSIDERATIONS
The Investment Manager has a long
history of commitment to ESG considerations as part of its
investment process and firm-wide operations. VPC believes that
integrating ESG principles and prudently identifying and managing
ESG-related risks is integral to its investment process.
As part of its standard risk
management process, VPC actively monitors its Portfolio Companies
across all dimensions of risk and performance, including ESG. There
is frequent communication with Portfolio Companies, and VPC
receives extensive reporting to identify potential issues. Further,
the Investment and Risk teams meet with the Investment Committee at
least weekly to discuss potential ESG concerns and how to address
or remediate them.
Concerning any follow-on investments
in existing Portfolio Companies or material restructurings of
existing investments, VPC will re-evaluate the ESG risks and
communicate any potential incremental ESG risks to the formally
designated "ESG Officer" and "ESG Coordinator", as well as the
Investment Committee, before any such follow-on investment or
restructuring.
As it relates to the realisation
process, the Investment Manager believes that there are minimal ESG
implications of exiting an asset-backed lending investment. While
ESG considerations may not specifically apply to an exit, the ESG
Policy prescribes a process for managing ESG risk throughout the
life of an investment.
OUTLOOK
Although interest rates remain at
elevated levels, rate cuts may occur in the medium term. The
Company's Portfolio Companies are typically high-growth businesses
that have historically raised their funding through venture capital
or private equity, so a loosening of monetary policy would be
positive for improving fundraising opportunities. Much economic and
geopolitical uncertainty remains, however, and market expectations
may well meet with disappointment as to the timing and extent of
any rate cuts.
The Investment Manager will take
full account of market circumstances in working towards the
continued realisation of the Company's assets, along with any
situations specific to individual Portfolio Companies. In some
cases, providing Portfolio Companies additional time to repay
asset-backed lending investments in full will be in the best
interests of Portfolio Companies and Shareholders alike. Though
maturity dates may be extended on certain investments, VPC and the
Company will look for ways to potentially exit the investments
before the stated maturity date, where possible. VPC will remain
focused on mitigating exogenous credit risks and managing downside
protection in the investment portfolio to ensure a timely return of
capital to Shareholders and manage an orderly realisation
process.
Victory Park Capital Advisors, LLC
Investment Manager
23 April 2024