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Albion Development - New Performance Incentive.

Sophisticated and complex high-risk tax-sensitive investments in small companies: handle with care
Karellan
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Albion Development - New Performance Incentive.

#212550

Postby Karellan » April 4th, 2019, 7:39 am

I read that Albion Development wants to alter their management agreement including the performance incentive. Sometimes it amazes me that there is anything left for the people who have invested in VCTs. It seems that they want to link the incentive to RPI rather than the current hurdle. More complicated stuff to read I fear.

barchid
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Re: Albion Development - New Performance Incentive.

#212904

Postby barchid » April 5th, 2019, 10:39 am

Karellan
This is very interesting and somewhat disconcerting, where did you see this please as I would like to read it but do not see it as an RNS ?
My memory seems to remind me that their performance fees rose higher if the share prices were over about £1, which currently only AAEV is, thus a favourite trick was to buy the deeply discounted counters CRWN & KAY which will likely never reach £1 in my lifetime!

Gostevie
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Re: Albion Development - New Performance Incentive.

#212909

Postby Gostevie » April 5th, 2019, 10:52 am

Details here:

https://www.albion.capital/sites/defaul ... 0FINAL.pdf

(I offer no opinion on its contents as I haven't yet read them in any detail.)

Gostevie

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Re: Albion Development - New Performance Incentive.

#212943

Postby BusyBumbleBee » April 5th, 2019, 1:28 pm

Karellan wrote:I read that Albion Development wants to alter their management agreement including the performance incentive. Sometimes it amazes me that there is anything left for the people who have invested in VCTs. It seems that they want to link the incentive to RPI rather than the current hurdle. More complicated stuff to read I fear.

Actually, Karellan, it isn't that complicated as I discovered yesterday when the documents arrived and I read them.

I have always thought highly of Albion (formerly Close) and they seem to treat investors at least as well as other VCT houses and have provided steady returns over many years.

Getting to the detail. Simply put with an RPI increase of 2% (official target?) the target return becomes 4%.

So the investor gets that full 4% but anything over that is split 20% to the manager and 80% to the investor and you get a table that looks like this

4% return = 4.0 to investor and 0.00 to the manager
5% return = 4.8 to investor and 0.20 to the manager
6% return = 5.6 to investor and 0.40 to the manager
7% return = 6.4 to investor and 0.60 to the manager
8% return = 7.2 to investor and 0.80 to the manager
9% return = 8.0 to investor and 1.00 to the manager

Whereas under the old scheme it would have looked like this

4% return = 4.0 to investor and 0.00 to the manager
5% return = 5.0 to investor and 0.00 to the manager
6% return = 6.0 to investor and 0.00 to the manager
7% return = 6.9 to investor and 0.10 to the manager
8% return = 7.7 to investor and 0.30 to the manager
9% return = 8.5 to investor and 0.50 to the manager

If inflation was to take off again the investor would gain at the expense of the manager.

Bearing in mind that a lot has changed since the VCT was first formed, I do not think it unreasonable to modify the performance fee along these lines. In particular interest rates have dropped substantially all round making it much harder to get a good return on cash or from loans and pref shares and much harder to meet the 6.5% hurdle on the original 98.7 pence price. Remember Albion tends to have less cash than other VCTs about 15% usually.

However, I have some concerns about definitions namely

1. on page 8 of the document it states that the performance fee does not kick in until "the total return exceeds 6.5 pence per Albion Development Share...."
(A)At the time this was written Treasury Shares did not exist in the UK. This issue needs clarification as, if they are counted in the manager loses - if they are counted out the investor loses. There are over 9 million of them so they are significant.
(B) the number of shares in issue changes during the year - are they going to work on a weighted average or take some other number in order to work out the return per share?

2. on page 10 it defines RPI as "the general index of retail prices published by the office of national statistics each month". The question must be asked "which month?" There is an annual figure published which would give less scope to choose the most favourable one. It can be found here https://www.ons.gov.uk/economy/inflatio ... /czbh/mm23 by jiggling the selection criteria. For 2018 as a whole it was 3.3% whereas for December 2018 (AADV's year end) it was only 2.7%

3. The starting point for the new incentive is 84.7 pence - (page 5) - this concerns me as it is not shown in the deed of variation on
page 10. But I can live with it as it is probably the right thing to do.

I am pleased that they are also reducing the CAP to 2.5%

I guess they will ripple these changes thru all the Albion VCTs so we should all pay attention to them - I am happy if they satisfactorily clarify the points above.

On the whole Albion is a trendsetter rather than a follower so we can expect other VCTs to follow this example in due course.

In one respect though it is not a trendsetter: at the top of page 9 it says "in line with common practice in the VCT industry, the Manager is entitled to an arrangement fee, payable by each investee company of approximately 2%. They can also keep the directors fees if one of the manager's staff is appointed to the board of an investee company. I really don't like these arrangement fees but at least Albion tell us up front about them.

Finally - I hope Albion gets lots of dosh from this new performance fee cos if they do then so will I. And that the chairman gets a good return on his latest £120K investment in the shares and the other directors too on their investments of £50K and £20K - they are certainly showing their confidence in the company..

Karellan
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Re: Albion Development - New Performance Incentive.

#212998

Postby Karellan » April 5th, 2019, 6:39 pm

barchid wrote:Karellan
This is very interesting and somewhat disconcerting, where did you see this please as I would like to read it but do not see it as an RNS ?
My memory seems to remind me that their performance fees rose higher if the share prices were over about £1, which currently only AAEV is, thus a favourite trick was to buy the deeply discounted counters CRWN & KAY which will likely never reach £1 in my lifetime!


It dropped through my letter box with the annual report.

barchid
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Re: Albion Development - New Performance Incentive.

#213123

Postby barchid » April 6th, 2019, 1:38 pm

Karellan
Yes, that is the beauty of either holding them certificated or in a personal crest account, mine are in crest on a platform and since CS direct stopped offering a personal crest I'm unaware of anyone other than expensive Ex/O brokers who do. I keep my BSC in certificates since discovering on this forum of their discounted dris, I should probably do the same with all my vct's.

BusyBumbleBee
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Re: Albion Development - New Performance Incentive.

#213169

Postby BusyBumbleBee » April 6th, 2019, 5:02 pm

barchid wrote:I keep my BSC in certificates since discovering on this forum of their discounted dris, I should probably do the same with all my vct's.

How right you are - cheapest way to invest in VCTs.


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