Albion Venture VCT (AAVC): AGM 2019

[timbo003]

This year’s Albion AGM was held at The Charterhouse, Charterhouse Square, London EC1M 6AN on Wednesday 21 August 2019 commencing at noon. This year there was also a General meeting to accompany the Annual General Meeting with the formal business for both meetings scheduled to occur after the Manager’s Presentations and the Q&A sessions

My notes from last year’s Albion VCT AGM can be found here:
viewtopic.php?f=25&t=1315&view=previous

The IMS (April 1st to June 30th 2019) was also released on the same day as the AGM, this reported NAV at 79.37p /share (on June 30th), which was an increase of 2.87p/share from June the previous year.
https://www.investegate.co.uk/albion-ve ... 5102H8347/

For this year’s AGM there were around 50 - 60 ordinary shareholders in attendance, which was 2 or 3 times more than for other recent Albion AGMs. The probable reason for the increased attendance was that this year the BOD had included a General meeting on the agenda, the purpose of which was to ask shareholders to approve a change in the manager’s performance incentive fee, which many shareholders believe will enrich the manager at the expense of ordinary shareholders.

The Annual report for year ending March 2019 along with other relevant documents can be found here
https://www.albion.capital/funds/AAVC

The circular sent to shareholders regarding the performance fee proposal and ShareSoc’s response to the proposal can be found at the links below:
https://www.albion.capital/sites/defaul ... 202019.pdf
https://www.sharesoc.org/campaigns/albion-vct-campaign/

The Chairman Richard Glover kicked off the meeting by welcoming shareholders and then handed over to Patrick Reeve who gave a colorful account of the history of the Charterhouse venue, he then went on to outline the running order for the meeting which was as follows:
• Managers Presentation - Portfolio review and new investments (Will Fraser Allen)
• Proposed new performance incentive scheme – background (Patrick Reeves)
• Q&A (Portfolio)
• Proposed new performance incentive scheme – Directors perspective (Richard Glover)
• Q&A (New incentive scheme)
• Formal Business
• Investment opportunities in Artificial Intelligence (David Grimm Albion Investment manager)
• Lunch

Manager’s Presentation

Will Fraser-Allen spent around 10 minutes reviewing the VCT performance and developments within the portfolio, the main points were as follows:
• The total return for the year was 7.9p/share (+ 10%)
• Top Quartile in the VCT industry over 3 and 5 years
• Long term returns for Albion Venture Trust is broadly in line with the FTSE all share – but VCTs comes with the benefit of tax free dividends
• Historically only invested in asset based investments now switching to growth investments (currently 80% asset based) will change over the next few years.
• Over time portfolio will be a mixture of mature companies
• Returns this year came mainly from maturing asset based investments, Care Homes were up but further growth is likely to be slow, Stanwell hotel was sold for £1.4m over book. Schools are now maturing assets (currently 1000 pupils, capacity 1500, G-networks marked up following investment by a French infrastructure fund.
• Shareholders approved change in investment policy last year.
• Three main exits: Holiday Inn Express at Stanstead, loan stock repaid to the VCT but still retain a small residual holding, Goat Farm, a non-qualifying windfarm, Stanwell hotel sold for £1.4m
• New Investments
Arecor (developing new diabetes treatments). Phrasee (marketing technology, uses AI to send bespoke emails). Forward Health (Whatsapp type app and workflows for Hospitals), Helios (Platform for doctors to have consultation with patients with mental health issues and their families). Raremark (data collection platform from suffers of rare diseases – generating valuable data for pharma industry)
• Going forward avoid B2C focus on B2B, Focus on technology, software, big data in healthcare, and education
• The asset based portfolio is now mainly mature, so this part of the portfolio will be more about income rather than growth

Proposed Management Performance Incentive Scheme: Manager’s view

Patrick Reeve spent around 10 minutes putting the case for the proposed new performance incentive fee, key points were as follows:
• We acknowledge that this a very sensitive area for shareholders
• We need to attract and retain talent to give the returns you need as shareholders
• We have lost people in the past to competitors
• A well-structured scheme will tie in good investment managers
• When old performance fee was introduced in 1996 we had had high growth and high interest rates, now we have low growth and low interest rates
• The old scheme is now significantly underwater, so it is ineffective
• The BOD spent a lot of time looking at benchmarks and where an appropriate level should be
• A significant number of VCTs have no hurdle whatsoever, many others have a hurdle far lower than us (RPI + 2%)
• The norm for a great number of VCTs is 20% (profit share) and for Venture funds in general
• Two of our VCTs have a performance fee of just 15%, but there are reasons for this, Kings Arms Yard came to us after 15 years of shocking performance under another manager and Albion Tech and General had a new incentive fee at 15% a few years ago after a period of underperformance.
• Growth will not come from the legacy investments
• TER cap now set at 2.5% (excluding performance fee) which places this VCT in a very good place compared to most of its peers
• The general management fee is 1.9% compared to the norm of 2% plus.

Before handing over to Will for the first Q&A session, Patrick set the ground rules for questions which were: state name and whether you are a shareholder before the question, only one question per person.

Q&As on investment portfolio

Q: At what point will the portfolio transformation affect the dividend policy?
A: We wish to retain the current 5p target, we might not necessarily cover that in the short term, but in the longer term we want to build up the growth portfolio so we are able to deliver a total return delivered through capital gains on the growth investments. As we sit here today we are hoping it won’t have to change.

Q: We currently have good assets in the portfolio, like the care homes and schools, which are likely to go on and on for many years, so why do we have to monkey with something which is doing well and go through all the costs and arrangement fees (which go to the manger) in order to get something different?
A: We are not a Landlord, we are an investor in businesses, and so while the businesses have an asset base, what they are is businesses run by a management team. A typical structure is the VCT(s) would own half the business the other half is owned by the management team. The decision on when to sell is not in our control, it is a joint decision and typically our partners will want to sell when a business has matured and there is less upside.

Q: In the document you circulated on the performance fee you say you are going to lower expenses but you don’t say how you are going to do it, so, how exactly are you going to do this?
A: This is a question for the next Q&A session

Q: You stated in an earlier answer that your exit timings from the asset based investments depends upon the other partner in the business, but surely that does not apply to the renewable energy assets, where the partner is quite often the farmer, who is quite happy just to watch the wind turbines go round and round forever?
A: As I said before, the exits depend on the partners and those (renewable) assets may be held longer than others.

Q: I’m sure most shareholders would prefer you held the renewable assets indefinitely
(Applause from a number of attendees)
A: Thank you

Q: You said earlier that the growth portfolio stands at 3%, I was wondering if you intend increasing that percentage and if so to what degree?
A: Absolutely, over time the entire portfolio will migrate. It may take 8 years or so, maybe longer for the renewables, the asset based investments will be sold and the proceeds will be reinvested into the growth portfolio. The 3% referred to six very small investments made up to end of March; we have invested more in the Growth portfolio since then.

Q: You said you expect returns to be more volatile from a new growth portfolio, but do you expect that on average returns over time to be higher or lower than in the past?
A: We want shareholders to have expectations of a target of 5p although it would be nice to surprise on the upside.

Q: But surely higher risk should mean higher return?
A: We are looking to build a diversified portfolio and diversification should help mitigate overall risk

Q: With the assets such as Hotels and Care homes, do you have sinking funds for repairs and refurbishment?
A: Yes, we always put something aside for that. We always treat our freehold assets as if we are long term holders, even if we intend to stay invested for only a short time. To give a couple of examples: We recently spent £1.4M on a refurb at the Stanstead hotel and for the pubs we typically reinvest one third to one half of profits back into the estate each year.


Proposed Management Performance Incentive Scheme: Director’s view

Richard Glover spent around 10 minutes explaining why the Board were proposing the new performance incentive fee, before taking questions. Key points and sound-bites were as follows:
• The discussions and debate took place over a number of months
• We were looking for more detail and undertook benchmarking
• We were taking into account a third party review.
• The problem we faced was that the existing incentive scheme was under water and not worth having.
• With the change in rules we are looking at a less predictable and possibly lower returns
• The evidence we were presented with by the manager persuaded us that it was important to recruit and retain the right individuals.
• We did not think it would be in anyone’s interest to limit the manager’s ability and we didn’t want to tie a ball and chain around the mangers foot, when getting the right people in place.
• We looked at the largest eight, the top eight VCTs with about 40% of funds under management and they have no hurdle at all.
• There is an argument to say do we need a hurdle at all? We took the view that we currently have a hurdle, so we should continue to have one, even though we were at odds with a significant minority.
• When we looked at the management fees, the management fees charged by Albion are the lowest in the sector.
• The TER is the lowest in the sector.
• 20% share is what most of the Albion funds use, but it is also very common and widely held in the sector and by the people we regard as competition
• It is a reasonable and by no means unchallenging scheme that we could put in place
• It is in the best interest of shareholders and consistent across the market place
• We have 70% of votes in favour of the proposal. I have the proxies here now.
• We genuinely feel that while there are different views on this, we are not that wide of the mark on this and it is a scheme we are comfortable with.

Q&As on performance fee

Q: I read this document very carefully and I have listened to what you said and I find your arguments totally unpersuasive. This document is extremely thin, on the positive end it makes unsubstantiated assertions and at the bottom end it make economically illiterate barrel scrapping statements. It contains no quantification whatsoever of the possible impact of adopting the new scheme as opposed to the old scheme. The only quantification it includes is historical performance which we agree is not terribly relevant to the case in point. Did the Board model the potential impact of the old scheme vs the new scheme over a period of 5 – 10 years? VCT shareholders tend to be long term shareholders and it is the accumulative effects of additional costs year after year which are extremely damaging to long term returns. So did the Board do modelling and quantify under different scenarios to assess the impact of the new scheme vs old scheme?
A: In so far as we only have history to go on, then projecting forward there will be a number of what ifs? The thinking behind this was recognising that the asset based investments that the VCT holds are quite mature now and future gains will come from the technology based investments. You can do the maths; anyone can do the maths……

Q: But did the Board do the maths?
A: Yes, the board did the maths; it is not a difficult exercise…..

Q: Indeed, when travelling to this meeting on the train, I performed some calculations and over a period of 5 or 10 years using quite modest assumptions for growth there will be a substantial transfer of value amounting to many hundreds of thousands of pounds if not millions of pounds from the shareholders to the manager.
A: If that turns out to be the case that will mean the Manager will have been extremely successful and shareholders will have benefited accordingly. It is the BODs view that the manager should share in the success and I very much hope they get a substantial payment every year.

Q: Would it not be better in the case of this VCT which currently has only a very small amount of growth companies and a lot of asset based investments, to have the incentive scheme staggered, so for the first 5 years there is a more modest fee, then after 5 years have this very demanding (for shareholders) incentive scheme. Why have this heavy incentive scheme for the next few years, when it is not really having a significant impact?
A: Our view was that the growth will come from these new investments and therefore rather than phased in incentive, which may be quite difficult to do given the maturity of the asset based investments. Staggering or phasing in was not debated, as we were quite comfortable looking ahead as far as we could and knowing what we did about the market, that this would perform for us.

Q: I bought shares earlier this year in the offer and I don’t think you are being fair or ethical on shareholders who invested earlier this year. I am now locked in for 5 years into a VCT with a performance fee I didn’t sign up to. This is not in line with FCA guidelines on treating customers fairly
A: At the time of the prospectus there was nothing to say as this did not come along until the summer time, so I suppose any VCT is always looking at the incentivisation processes and people invest based any number of considerations that are attractive about a particular fund. If the management fee is a particular key part of it, it is not the only part of it. There was nothing that could be said at the time of the prospectus, because at the time of the prospectus a decision had not been made.

Q: So if I am not happy I can submit a formal complaint and possibly receive recompense, or are you not regulated by the FCA?
A: From a regulatory point of view Albion’s customer is the VCT, not the shareholders, so there is not an FCA customer complaint procedure for this.
There is a constant move of what a VCT does how a board wishes to conduct its affairs at any point in time, so at any point in time it is always assumed that shareholders want us to continue to provide liquidity but at any point in time there will be things which change. You talk about recompense, but I am not sure what you would be compensated for. You are only locked in for 5 years because you do not want to lose the tax break, anyone can still sell their shares at any time. This is an important point you are not locked in from a fund perspective.

At this point in the meeting the chairman paused the Q&As and stated that he was conscious of time and suggested we should have just one or maybe two more questions.

Q: You are taking millions of pounds out of shareholders pockets and you want to cut the questions short. On this year alone on historical performance it would have cost us quarter of a million pounds. This deserves to be talked about.
A: I am certainly conscious we have an agenda we have to get through, I don’t want to cut short any questions but if there are questions let’s take them.

Q: If in 5 years’ time you make losses, how will you recoup the losses? Will you go back to shareholders for more money?
A: That’s not how a performance works, so the answer is no.

Q: I have a different perspective, I support the resolution, I was the Director at Close who helped set up the VCT. Incentive for management was a very central issue and capital incentives are very important in our line of business and that is what we concentrate on. Incentives are very important and I am a founder shareholder in this company Close Bros were very concerned that we were raising cash from Private investors for the first time and the Chairman of Close told me that a sensitive part of my body would end up on the Board table if I didn’t manage this exposure to private investor properly. I don’t think anyone would disagree that this was a good initiative for private investors and I piled into it and I’ve got over 100K shares in this company I really care about it (heckling:. I‘ve got more than you, but what does that matter?) I have been invested for any years and I have a good shareholding. Over the years I have been recruiting people like Patrick. This is such a horny old chestnut, give them the right incentive and they are right, they must keep up with the market and I will be voting for the proposal. They must keep up with the market, it is unfair to suggest that the manager is pulling a fast one, they are very fair proposals.
A: Thank you for that, no comment

Q: A couple of points on bench marking, I have done my own benchmarking using AIC data and ranked the VCTs by 10 year NAV total return. Albion Venture Trust comes in at number 18 out of 45.
Your comment that VCTs generally pay 20% performance fee ignores the fact that there are a substantial number of VCTs above Albion in the ranking table which charge less than 20%, for example the three Northern VCTs charge between 12 and 15%, the two Baronsmeads charge just 10%, Income and Growth (Mobeus) charge 15%, furthermore there are no VCTs which charge more than 20%. The maximum any VCT charges is 20% so it is certainly not appropriate to say that VCTs generally pay a 20% performance fee. On the hurdle you say that the top eight VCTs do not have a hurdle. If you rank VCTs by 10 year performance, all of the top eight have a hurdle and there are only two in the top eighteen (Octopus Titan ranked 17th and Proven ranked 14th) that have no hurdle, so who are your top eight who have no hurdle?
A: I am not going have a go at the competition here, but if you take the top eight managers, 41% of those by value do not have a hurdle and on another point, without naming names, have a look at some of the VCTs you mentioned earlier on in your question and look at their co-investment schemes where the manager invests in the top slice of the investments which result in large transfers of value from the shareholder to the manager. This is something we will not do at Albion as it distorts the alignment of interest.

Q: We in ShareSoc are worried about VCTs in general where directors have very long tenure, have a too close relationship with the manager and where performance fees are not challenged sufficiently. That is why in this case we have looked at the proposals and we have recommended that shareholders vote against numerous resolutions at this AGM. You have told us that 70% voted for the resolution which means that 30% voted against which is a very, very large vote against a Director’s resolution, so much so, any resolution where there are >20% votes against, it is usual for the directors to say how they are going to consult with shareholders in future to take into account their views. I hope you will be telling us how you are going to do that. In relation to the proposal. I think I have to say it’s a case of bread, butter, jam and cream. I worked for 30 years as a remuneration consultant and I know it when I see it. Not only are you going to rebase the starting point, you are going to have a lower (albeit only marginal) hurdle, but this is the sort of remuneration creep that has happened in far too many companies in the UK, then the 8% profit share will be increased to 20%, you have told us that your bench marking date justifies this, my benchmarking does not.
A: Thank you for your comments, I think we have to disagree on that, as far as we are concerned we took a long hard look and we are wanting to be competitive and consistent with the sector. We could stand we could still and do nothing, but that would not be in the long term interest of the fund and not in the long term interest of shareholders and that was the key consideration for the board.

Q: Markets are cyclical, and when markets are heading downwards it is normal in the fund manager business for the manager not to take a penalty, so if there was a (downward) 20% market correction would the performance fee still be paid on the (upward) correction back to the norm?
A: We have a hurdle which compounds, so if we had a correction and performance goes that way (down) the hurdle goes the other way (up) the gap gets bigger, there is a requirement for a catch up. The performance fee only pays if shareholders are also rewarded for success, so we are simply taking a contribution for our efforts from that, so the answer to your question is no.

Formal Business

The chairman went through the resolutions at a fairly brisk pace. I was sat near the font so it was difficult to assess how the voting went on the show of hands, but on the proxy votes, all resolutions were passed (see links below for details)
https://www.albion.capital/sites/defaul ... ts2019.pdf
https://www.albion.capital/sites/defaul ... ts2019.pdf


Investment opportunities in Artificial Intelligence

Davis Grimm spent around 15 minutes giving a general overview with a few examples, but I suspect most shareholders were more interested in the lunch that followed, as there were no questions asked after the presentation. The main message for me was that London is the best place to invest in AI and that UCL are particularly strong in this area. Phrasee and Limitless Technology were cited as examples of recent AI lead investments within the growth portfolio.

Lunch:

I spoke to a number of the Albion team over lunch, but managed to steer clear of discussing anything to do with performance fees. This was my first AGM held at Charterhouse and it seemed like a particularly good venue for future Albion AGMs and a worthy replacement for the City Club in Broad Street which is no longer available. It is a well preserved old building with a pleasant outside area overlooking the grounds and is it conveniently close to Farringdon tube station.


Postscript

Since the meeting I have revisited the AIC data in an attempt to understand where the Manager and Chairman were coming from in their response to my question on bench marking.

When the Chairman talked about no hurdle in the top eight VCTs, I now assume that they had ranked by size rather than by performance (which seems totally inappropriate to me). Furthermore, the number 1 ranked VCT (by the BODs definition) is Octopus Titan which dwarfs the rest (more than 4 times larger than the second largest VCT). Furthermore, it has a relatively mediocre performance record (17th based on the 10 year total NAV return) and it only holds the number one spot by virtue of multiple mergers. I suspect the Octopus Titan performance would have been considerably better if it did not have one of the most shareholder unfriendly performance fees in the VCT industry.

The manager’s other comment on how co-investment schemes (used by the other VCTs mentioned in my question) transfer large amounts of value from the shareholders to the manager are certainly not supported by the statements in the latest Annual Reports of these VCTs, where they actually quantify this effect (which is small).

I intend to publish my findings on these points along with my own bench marking within the next week or so.

[BusyBumbleBee]

That is an incredible report, Tim - many, many thanks. And I know what you have said is accurate.

It raises a lot of issues for example

Before handing over to Will for the first Q&A session, Patrick set the ground rules for questions which were: state name and whether you are a shareholder before the question, only one question per person.

which shows where the power is - Surely that is a job for the Chairman of the Meeting not the Manager.

A well-structured scheme will tie in good investment managers

It would tie them in better if bonuses were paid in shares locked in for five years.

we are an investor in businesses, and so while the businesses have an asset base, what they are is businesses run by a management team. A typical structure is the VCT(s) would own half the business the other half is owned by the management team.

Isn't that their skin in the game?

Furthermore it appears that the two meetings (AGM and GM) were run in together. It is not possible to limit Qs to one; just about OK to limit it to one per item but NOT one for all the items on TWO whole meetings

We have 70% of votes in favour of the proposal. I have the proxies here now.

Oh no they didn't: they had 64.24% in favour and 6.20% to be cast by the Chairman of the Meeting

Q: If in 5 years’ time you make losses, how will you recoup the losses? Will you go back to shareholders for more money?
A: That’s not how a performance works, so the answer is no.

No wonder it was limited to one question cos the obvious follow up was "I simply don't believe you cos the only reason you are asking for a change today is that the existing one is under water"

I could go on but will leave with one thought. Were the two separate meetings called because if the bonus issue was on the AGM agenda it would have had to be a special resolution? Edge put one on an AGM class meeting agenda as a special and lost it see https://edge.uk.com/wp-content/uploads/ ... 2019-1.pdf

Management Performance Incentive
At a meeting of the I Share class held on 5 July 2018, a vote was held on a special resolution to put in place a new performance incentive fee arrangement for the Investment Manager in relation to the I Shares, replacing the previous scheme which was brought to an end with effect from 31 August 2016. While a majority of those voting on the resolution voted in favour of it, the higher
threshold required to pass a special resolution was not achieved and accordingly no new performance incentive scheme for
the I Share class was put in place.

[scotia]

Postscript
Since the meeting I have revisited the AIC data in an attempt to understand where the Manager and Chairman were coming from in their response to my question on bench marking.
When the Chairman talked about no hurdle in the top eight VCTs, I now assume that they had ranked by size rather than by performance (which seems totally inappropriate to me). Furthermore, the number 1 ranked VCT (by the BODs definition) is Octopus Titan which dwarfs the rest (more than 4 times larger than the second largest VCT).

As I was reading your report, and before I reached your postscript, the thought struck me that the chairman was probably benchmarking on Octopus alone - which you also seem to have concluded! Just checking the figures:-
A: I am not going have a go at the competition here, but if you take the top eight managers, 41% of those by value do not have a hurdle
Ok - from his words it looks like we would need to list the top eight management groups by size - possibly ignoring Albion? From the AIC, I have carried out a quick sum on total assets for Generalist and AIM VCTs. My conclusions are (all in millions)
Octopus 1146
Baronsmead 345
Northern 270
Foresight 263
Mobeus 259
Proven 246
Maven 208
Unicorn 208
So Octopus makes up 38.9% of the total - reasonably close to his 41% claim.
(I'd appreciate a check on my figures)

[londoninvestor]

Q: If in 5 years’ time you make losses, how will you recoup the losses? Will you go back to shareholders for more money?
A: That’s not how a performance works, so the answer is no.

No wonder it was limited to one question cos the obvious follow up was "I simply don't believe you cos the only reason you are asking for a change today is that the existing one is under water"

Exactly - erasing historic underperformance is such a terrible precedent to set!

I'd have been prepared to countenance ringfencing the growth portfolio for fee purposes, and starting a new hurdle for it based on current NAV - but I'd have wanted a hurdle higher than RPI+2. But writing off underperformance against an existing hurdle is exceptionally obnoxious.

[londoninvestor]

Q: I have a different perspective, I support the resolution, I was the Director at Close who helped set up the VCT. Incentive for management was a very central issue and capital incentives are very important in our line of business and that is what we concentrate on. Incentives are very important and I am a founder shareholder in this company Close Bros were very concerned that we were raising cash from Private investors for the first time and the Chairman of Close told me that a sensitive part of my body would end up on the Board table if I didn’t manage this exposure to private investor properly.

This perhaps reveals more of the mentality at play than the speaker intended.

Pesky private investors - they get in the way of the old boys' club of manager and directors cosily dividing the spoils!

[scotia]

So returning to the management statement
A: I am not going have a go at the competition here, but if you take the top eight managers, 41% of those by value do not have a hurdle
I have redone my calculations on VCT Managers' total investment size in millions of pounds, but using market capitalisation (from LSE) rather than total assets (from AIC), and also including Foresight Solar VCT (which I previously missed), I now get
Octopus (OTV2, OAP3, OOA, OSEC) 1084
Baronsmead (BVT, BMD) 313
Foresight (FTF, FTSV, FTV) 269
Northern (NVT, NTV, NTN) 255
Mobeus (IGV, MIX, MIG, MIG4) 237
Proven (PVN, PGOO) 229
Maven (MIG1, MIG3, MAV4, MIG5, MIG6) 189
Unicorn (UAV) 181
Total = 2757, of which Octopus makes up 39.3% - a similar conclusion to my previous computation.
Octopus Titan (OTV2 - size 778) charges performance fees of 20% on yearly gains (of the NAV + cumulative dividends) with no hurdle. - information from Titan brochure and KID of September 2018.
Octopus Apollo (OAP3 - size 115) mirrors the Titan performance fees in its brochure of May 2019, although it includes the word "may" rather than "will". No hurdle is mentioned. However the KID of May 2019 indicates that there will be a hurdle equal to the Bank of England base rate.
Octopus Aim (OOA - size ) and Aim 2 (OSEC) have no performance fees (KIDs of September 2018)
So from this we can see that Octopus is going to have a very substantial impact on the 41% statement - even if only Titan is included.

I object when numbers (like 41%) are plucked out of thin air with only the vaguest of explanations - and I particularly object to them when they appear to be presented in a way as to produce the maximum of obfuscation (e.g. due to the size of Titan). Since a VCT manager may have several VCTs with differing Fee structures (as Octopus) the 41% number makes no sense unless it applies only to individual VCTs which contain performance fees and which are managed by the top 8 managers (by value) - including, or not including Albion. Was this how it was calculated? Is the wording "by manager" inaccurate ? Now a more relevant figure would have been the percentage of VCTs by number which fell into this category. Do you think a polite request by an owner of AAVC shares (I don't own any) would obtain this number? In answer to another question the response was A: Yes, the board did the maths; it is not a difficult exercise….. So clearly the board is good at maths, and the appropriate number should be quickly forthcoming.

[UncleEbenezer]

As I was reading your report, and before I reached your postscript, the thought struck me that the chairman was probably benchmarking on Octopus alone - which you also seem to have concluded!

Indeed. Titan is one of those I disposed of entirely in raising funds for the house purchase. Given their outrageous performance incentive, I no longer feel any desire to hold.

On the other hand, I still hold - and am reasonably happy with Octopus AIM, which doesn't share the no-hurdle fee. Managed by a different team, with charges in a similar ballpark to other AIM VCTs.

I'm struggling to think who else might feature in their hurdleless total. From memory, ProVen and Mobeus have some ugly fees but not entirely hurdle-free. YFM??? Could it be they're disingenuously including limited-life VCTs in that total?

[thebarns]

Excellent report on the AGM.

I have invested in 4 of their VCTs on 3 separate occasions in last three years.

Their respective performances have been good, especially with the VCT relief.

I am fine with some form of management incentive, as long as the decent performance continues and they are not out of line with the accepted norm of incentive schemes - it appears they may have just tried to push the boundaries a bit too far.

[BusyBumbleBee]

Exactly - erasing historic underperformance is such a terrible precedent to set!

I'd have been prepared to countenance ringfencing the growth portfolio for fee purposes, and starting a new hurdle for it based on current NAV - but I'd have wanted a hurdle higher than RPI+2. But writing off underperformance against an existing hurdle is exceptionally obnoxious.

Absolutely right ,LondoInvestor, and it's what used to happen, And it could be easy done by only issuing B shares in future which could have the new incentive and existing investors - all in the ORDs - could continue as they are with the benefits of the asset backed portfolio.

[londoninvestor]

Exactly - erasing historic underperformance is such a terrible precedent to set!

I'd have been prepared to countenance ringfencing the growth portfolio for fee purposes, and starting a new hurdle for it based on current NAV - but I'd have wanted a hurdle higher than RPI+2. But writing off underperformance against an existing hurdle is exceptionally obnoxious.

Absolutely right ,LondoInvestor, and it's what used to happen, And it could be easy done by only issuing B shares in future which could have the new incentive and existing investors - all in the ORDs - could continue as they are with the benefits of the asset backed portfolio.

I had actually been thinking more of a single share class, with the portfolios just being treated as notionally separate for the purposes of fee accounting. You'd need a bit of special treatment for dividends, giving them a notional allocation between the portfolios. But no big deal, the board have told us they're good at maths.

The B share approach would work too, and have the admirable feature of leaving existing holders with a nearly pure asset-backed portfolio. I wonder though if it creates a line of thinking that Albion don't want to go down.

After all, if newly bought AAVC shares will be exposed purely to the growth portfolio, why bother with a new share class in AAVC? Investors could just buy into one of the other 5 Albion VCTs. (Or perhaps we should say 4, as CRWN is in a somewhat similar position to AAVC.)

And if you pursue that line of thought, the natural conclusion for AAVC is an orderly wind-down - at a relaxed pace, trying to sell the asset-backed investments opportunistically when the price is right. I suspect Albion don't see much upside for them in operating the VCT that way, and if that led to them thinking "sod it" and rushing the sales, it wouldn't be good for shareholders either.

[barchid]

There was an RNS put out yesterday evening at 18.30 by Albion with a short statement about the GM pointing out that 70.44% of votes cast were in favour of the management resolution and that "more than 20% against".
Still playing silly games as it was over 20%, agreed, but almost 30% would have been a much more accurate statement.
They also say that the board will reflect carefully on feedback received.
They have not made a very good start, imho.

[BusyBumbleBee]

Well spotted, Barry

only 64.24% voted in favour according to their web site

There was an RNS put out yesterday evening at 18.30 {-- After hours on a FRIDAY - typical of some company burying bad news - not at all what I expected of an Albion board of directors - absolutely shocking--] by Albion with a short statement about the GM pointing out that 70.44% of votes cast were in favour of the management resolution and that "more than 20% against" {-- It that's the way they 'round' figures, what about all the figures in the accounts? --].

Still playing silly games as it was over 20%, agreed, but almost 30% would have been a much more accurate statement.{-- agreed --]
They also say that the board will reflect carefully on feedback received.{-- it seems they have already done this and decided to brazen it out with strange maths and a downright untruth - see above and below **--]
They have not made a very good start , imho.

*** The Untruth
{-- web site shows that they, the board, only had 64.24% in favour and a further 6.20% 'Discretionary' which were to be cast by the Chairman of the Meeting --]

[BusyBumbleBee]

... the board have told us they're good at maths. {-- Yup: they certainly are creative there, where nearly 30% becomes "over 20%" see the RNS late Friday --}

The B share approach would work too, and have the admirable feature of leaving existing holders with a nearly pure asset-backed portfolio. I wonder though if it creates a line of thinking that Albion don't want to go down. {-- originally they issued B shares probably because, perhaps, as the guy that recruited the management team said at the EGM

"Close Bros were very concerned that we were raising cash from Private investors for the first time and the Chairman of Close told me that a sensitive part of my body would end up on the Board table if I didn’t manage this exposure to the private investor properly."

but that has obviously gone by the board {pun intended} now --}

After all, if newly bought AAVC shares will be exposed purely to the growth portfolio, why bother with a new share class in AAVC? Investors could just buy into one of the other 5 Albion VCTs. (Or perhaps we should say 4, as CRWN is in a somewhat similar position to AAVC.)

And if you pursue that line of thought, the natural conclusion for AAVC is an orderly wind-down - at a relaxed pace, trying to sell the asset-backed investments opportunistically when the price is right. I suspect Albion don't see much upside for them in operating the VCT that way, and if that led to them thinking "sod it" and rushing the sales, it wouldn't be good for shareholders either.
{-- your last two paragraphs make sense particularly as the manager seems to have a 'sod it' attitude, however they could morph it to the new style over time and then merge the share classes or they could just manage that portfolio for income as JLEN and others do. That tax free income is worth a lot in a VCT wrapper --}

kind regards - BBB

[timbo003]

Benchmarking the Albion Performance Fee

At the recent Albion Venture AGM, shareholders were told repeatedly that the new performance fee agreed between the manager and the Directors was determined following a benchmarking exercise which compared Albion Venture VCT with other VCTs in the sector.

This would have been a useful and relevant exercise had they used relevant comparators, but unfortunately the comparators they chose to use were of dubious relevance.

Shareholders were told at the AGM that the new performance incentive fee was being introduced as it was in the best long term interests of shareholders, which must mean that it should maximise long term (10 year) NAV total return. A relevant and valid benchmarking exercise must therefore give most weight to the VCTs which have the best record on long term shareholder returns (NAV total return). However the BOD opted not to adopt this approach and instead they opted to benchmark against those VCTs and VCTs managers who have managed to raise the largest sums of cash from shareholders, which bears little or no correlation to long term performance.

The AIC website allows investors to sort VCTs by a number of criteria, including long term performance and assets under management (size)

Table 1 shows the top 20 Generalist VCTs listed on the AIC web site ranked by long term performance (10 year Total NAV return), with Albion venture lying in 18th place.
https://drive.google.com/file/d/1vgbQj0 ... sp=sharing

Table 2 shows details of the fee structure for the top 18 of these VCTs (ranked by performance); the fees information included in the table has been extracted from the most recently published annual reports for each VCT. Albion Venture and Albion Development have both recently changed their fees structure, so they are listed twice in the table (old fee structure in black text, new structure in blue text).
https://drive.google.com/file/d/11B_0y4 ... sp=sharing

Table 3 shows the largest Generalist VCTs ranked by Total Net assets (i.e. size)
https://drive.google.com/file/d/1LAxNQG ... sp=sharing

On inspection of the tables it is evident that several of the statements made at the AGM by the Chairman are misleading or in some cases incorrect, for example:

• The TER is the lowest in the sector:
Response: This is incorrect. Seven out of the top eighteen (ranked by performance) have a lower TER.

• We looked at the largest eight, the top eight VCTs with about 40% of funds under management and they have no hurdle at all.
Response: If you rank by performance, seven of the top eight have a hurdle that is higher (i.e. more demanding on the manager) than Albion’s new hurdle , the only one which has a lower hurdle is Baronsmead and this is more than compensated by the relatively low % fee paid to the manager if target is exceeded (Baronsmead’s 10% vs Albion’s 20%)

• 20% share is what most of the Albion funds use, but it is also very common and widely held in the sector and by the people we regard as competition.
Response: 20% may be common, but it is disingenuous to say very common when five out of the top eight VCTs (ranked by performance) have a lower percentage profit share

• It is in the best interest of shareholders and consistent across the market place.
Response: The 20% profit share is certainly not consistent across the market place as there are many exceptions as outlined above. The new performance fee it is certainly not in the best interest of shareholders as all the top eight performing VCTs, which Albion should be trying to emulate or exceed in terms of performance, have a better long term performance record than Albion and a fee structure which is less generous towards the manager and less punitive towards the shareholders. It is in the best interest of shareholders that they benchmark against the top performers.

Let us now hope that when the Albion Venture Chairman engages with shareholders as he has said he will, that he takes these facts into account (along with modelling that shows how much worse off shareholders are likely to be under the new scheme) and responds accordingly, for example agrees to reopen negotiations with Albion Management on a revised fee structure that is more in line with their (true) peers and less damaging to shareholder returns.

In the next few days I will endeavour to summarise some further thoughts on the following:
• Modelling the new performance fee vs the old performance fee on long term shareholder returns
• The effect of co-investment schemes run by some other VCTs on shareholder returns, which on first perusal of various annual reports seem to be far less than we were led to believe at the AGM.
• Alternatives ways to attract and retain talented investment managers

.

[james188]

An excellent analysis, Tim. Very well done.

AAVC should have hired you to negotiate the manager's fee deal, as you would have done a much better job. I am uncomfortable with the inescapable fact that the Board seem out of touch with reality and (as others have observed) far too reliant on the manager. So, I will probably put more investment this tax year into other houses, which is highly unfortunate from my perspective, as I had intended to build up in the Albion VCTs as a hedge against more aggressive generalist VCTs in which I am invested (which have actually done very well for me - e.g. ProVen, Mobeus, Northern and (although rather less so recently) Baronsmead). The Albion annual shareholder event this year (which I have not previously attended, as I was not an investor) should be interesting.

I have not given up on Albion, but the jury is out so far as I am concerned.

[londoninvestor]

Tim, thanks very much for this detailed work.

On this theme, do you have data on which other VCTs have reset their performance hurdles when they were underwater, and what the returns of those VCTs were relative to the competition?

[timbo003]

.
Co-investment Schemes

At the Albion Venture AGM last month, the manager told shareholders that a number of other VCTs/VCT managers with more shareholder friendly fee structures than Albion (and with better 10 year performance records) operated co-investment schemes and these schemes had a negative impact on shareholder returns, see extract from the AGM report “look at their co-investment schemes where the manager invests in the top slice of the investments which result in large transfers of value from the shareholder to the manager.”

With a typical co-investor scheme the manager co-invests with the VCTs taking a stake in the portion of an investment which has the greatest upside potential (typically ordinary equity) without making an investment in the less risky higher ranking shares and debt. Such schemes received a bad press when they were introduced around 15 years ago, which was probably in part due to the way they were introduced, see link to a Citywire article from the period:
https://citywire.co.uk/investment-trust ... ts/a270431

I have now had the opportunity to go through the latest published reports for each VCT in the top 18 to assess what sort of co-investment scheme (if any) is in operation. There are nine different managers operating the top eighteen VCTs, of which Foresight, Northern, Baronsmead and Maven operate co-investment schemes, whereas Albion, Mobeus, Proven, YFM and Octopus do not (as far as I can ascertain).
I have copied details for each scheme into a single document (see link)
https://drive.google.com/file/d/1A5cuPk ... sp=sharing

For Northern, the maximum the manager can invest is 5%, so the maximum upside a VCT could forego would be 5%, but in most cases it is likely to be significantly less, as the VCT would normally have a significant stake in higher ranking investments in the investee companies (which will yield smaller multiples but still add to the VCTs share of total proceeds). Furthermore, not all investments are successful (as NVM managers are no doubt aware) as Northern VCT was better off by £16K in 2017, as a result of the manager taking some of the loses in the co-investments that did not perform as planned.

The terms of Maven’s scheme seem similar to Northern’s (i.e. 5% with no cherry picking) and they also co-invest 1.5% on the VCTs Aim listed investments (VCT Aim investments tend to be 100% equity, so there is no advantage for the manager).

Baronsmead’s scheme has recently been modified (2017). Both the old and the new schemes appear to be a bit more generous towards the manager compared to Northern, although the performance incentive fee for Baronsmead ranks as one of the least onerous from a shareholder perspective (10% share with 8% hurdle for Baronsmead 2nd). For Baronsmead’s old scheme, the manager invested in 12% of the ordinary equity. In the modified scheme (introduced in response to VCT rule changes) in the instances where the VCT investment is nearly all equity, the manager invests in just 0.75% of the equity and receives options (with a rising hurdle) over a further 12% of the ordinary equity (note: I prefer the old unmodified scheme). The Baronsmead annual report is quite transparent about the lost opportunity cost for the VCT, which they estimate at 3.9p over the last 14 years (approximately 0.28p/share/year)

The recently introduced Foresight scheme is more difficult to assess as it is new and it runs alongside a recently introduced performance incentive scheme which in its self has some of the characteristics of a co-investment scheme, but for the co-investment scheme the manager’s investment will be 1.5% of the VCTs total investment (with a maximum 5% of the ordinary shares available to the VCT).

Leaving aside the outstanding issue that Albion Venture shareholders have been unduly punished by a reset in the target for the performance incentive fee (i.e. reset to NAV), the basic structure of the newly introduced performance fee ( 20% share with a hurdle of RPI plus NAV) still compares unfavourably (from a shareholder perspective) with those of the top performing VCTs run by Northern, Maven, Baronsmead and Foresight, even taking into account their respective co-investment schemes. Furthermore the new scheme compares very unfavourably (from a shareholder perspective) with the performance investment schemes for the top performing Mobeus and YFM VCTs, which do not operate VCT co-investment schemes.

.

[barchid]

Tim
This seems to have been a massive effort on your part to extract these figures & I am sure all posters on this matter will, like me, be hugely grateful to you for collating and comparing the effects of the co-investment schemes which are used by Albion's peers.
This once again shows that our board at AAVC are either being very economical with the truth or incredibly ill informed, as most recently witnessed by their RNS put out after hours on a Friday with dubious but deliberate use of AGM voting numbers, almost every statement they have made on this matter, since it became a live issue, has been questionable and your work(s) illustrates these variances most eloquently, thank you again.

[timbo003]

thanks Barchid

Yes agreed, the Chairman was either being economical with the truth at the AGM, or he really has no idea about carrying out comparative benchmarking. Either way, he should be told that he needs to reopen talks with Albion and renegotiate a fairer performance fee arrangement, if he is not prepared to do this, he better start looking for a new job as all shareholders should be fully briefed on his mishandling handling of the performance incentive fee negotiations well in time for the next AGM, when I assume he will be up for re-election

[BusyBumbleBee]

thanks Barchid .... Yes agreed, the Chairman was either being economical with the truth at the AGM, or he really has no idea about carrying out comparative benchmarking. Either way, he should be told that he needs to reopen talks with Albion and renegotiate a fairer performance fee arrangement, if he is not prepared to do this, he better start looking for a new job as all shareholders should be fully briefed on his mishandling handling of the performance incentive fee negotiations well in time for the next AGM, when I assume he will be up for re-election

Hi Tim & Barry - agreed amazing work by Tim for which he deserves more than the single rec I can give him.

It seems as though there is enough material coming thru on this and another thread on a recent AGM to write a book.

Some many years ago I skim read a book either by Nat Lofthouse or Tom Finney (can't remember which cos it was over 60 years ago!) but in it was a chapter "The Average Director's Knowledge of Football" and the first and only page of that chapter read.

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So - Tim, how about "The Average Director's Knowledge of Shareholder Interests" for one of your chapters? with kind regards - John