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ShareSoc Launches EDGE Performance VCT Campaign

ShareSoc has launched a campaign to improve the performance of Edge Performance VCT Plc (consisting of H and I share classes) and reduce the fees charged by its investment manager, Edge Investments Limited.

We are seeking shareholders to:

  • collectively work together to persuade the incumbent directors to make various changes,
  • vote to appoint new directors,
  • vote against various resolutions at the upcoming General Meeting in February 2020.

In addition, we seek to persuade Edge Performance VCT to agree a better deal with its investment manager or find a suitable replacement. We are very concerned about the board’s response to shareholders’ concerns so far.

Campaign Objectives

Our objectives are as follows:

  1. Change some members of the Board, to create a Board clearly focussed on :
    1. accelerating the process of looking for exit of the (essentially a single) investment for the I share class, given the limited life nature of that VCT
    2. ensuring that the I class shareholders are not incurring excessive costs (currently in excess of £1m a year to manage what is essentially a single investment) until this investment is exited
    3. reducing the operating costs of Edge Performance VCT to enable the H share class to be viable by itself, once the remaining investment of I class is realised and the sale proceeds are paid to the I class shareholders; and
    4. determining the best long term strategy for the VCT.
  2. Highlight the concerns of many shareholders about the current situation.
  3. Persuade the Directors of Edge Performance VCT to engage with its shareholders and discuss what more appropriate manager agreements, other costs and strategy might be.
  4. Deter other VCT boards from approving egregious management fee arrangements.

Information about the Campaign

The general problems of VCTs are summarised here: The VCT Investors Group Campaign

The Edge Performance VCT issues are explained below:

Edge Performance VCT has performed badly:

  • Funds in the limited life share class(es) (the majority of the money raised) were due to have been returned to shareholders between 2 and 7 years ago; shareholders who need to liquidate these holdings are faced with a very unpalatable bid price of about 11.5p. per I share.
  • The costs of what should be a very simple VCT to run are amongst the highest in the industry.
  • I and H shares rank 61 and 62 out of 62, over the past five years in TSR (total shareholder returns) terms, according to AIC stats[see note 1].

Shareholders have registered their dissatisfaction by voting against the Board and their proposals:

  • At the 2019 AGM, all 3 directors who stood for re-election were not re-elected; nor were the auditors Grant Thornton; the remuneration report was not approved, nor was approval given to allot shares.
  • At the I share class meeting on 5 July 2018 (called to seek to reward the manager even further on top of the generous fees it was already earning), the Special Resolution on a new performance fee arrangement was also not approved, despite the Board using shareholder money to engage proxy consultants to solicit votes in favour.

Corporate governance is poor:

  • Subsequent to the 2019 AGM, the Company’s sole remaining director, Terry Back, appointed Sir Robin Miller; and the Board, comprising Terry Back and Sir Robin Miller, subsequently appointed Lord Howard Flight as director of the Company. This was despite them both having been removed by shareholders at the AGM. Their failure to challenge and reduce the fees paid to the investment manager (and even agreeing to an increase in the expenses cap in 2016) and the limited progress on selling the stake in Coolabi were very good reasons neither should have stayed in office.
  • The delay in the Edge Performance VCT Board learning of, and reacting to, the significant dilution that resulted from the recent funding round by Coolabi is of significant concern, and indicates communication between the Board and the manager is poor.
  • Far too much of Board’s focus seems to be based on offering alternative performance fees to the manager for the I Class, rather than on cost reductions:
    • The Board announced in August 2016 that I class performance fees were removed in 2016. The 2017 annual report noted this: “In August 2016, the performance fee in respect of the I Share Fund was removed. The Board announced that it will, in due course, undertake a wider review of the Company’s future performance and consider implementing an alternative incentive, if appropriate, which will be subject to shareholder approval. The Investment Manager has been fully supportive of this process.” “His [Robin Miller’s] entitlement to a performance fee in respect of the I Share Fund fell away in August 2016, with the Board’s decision to remove the Investment Manager’s performance fee in respect of the I Share Fund.” However, since then, there has been no progress on reducing the annual management fee of 1.75% NAV for the I Class nor the administration services fee, the latter last year was £309,000.
    • The Annual Report for 2018 and the May 2018 Circular said that the performance fee for the I Class was still in place, even though it had been removed in 2016. The circular said shareholders had the choice of approving the proposed performance fee or keep the previous. We understand the previous performance fee was removed in 2016, so the circular was incorrect. (Alternatively, the August 2016 RNS was incorrect.)
    • The 27 September 2018 announcement of the Variation to Investment Management Agreement announced further actions of the Board which we believe are not in the shareholders’ best interests – “The removal of the I Share Performance Incentive Fee is conditional upon the Company and the Manager acting in good faith and using all reasonable endeavours to agree alternative performance incentive arrangements in relation to the I Shares”. The change from “consider implementing an alternative incentive, if appropriate” to “using all reasonable endeavours” is significant and not in shareholders’ best interests. In particular, the Board has (again) failed to agree or note the need to reduce the management fee and the administration services fee.
  • The longer the current manager agreements continue, the more the manager gets paid. Introducing a performance fee, on top of the current management fee and administration services fee, is the wrong approach.
  • The Board engaged proxy consultants, at shareholder expense, to solicit votes in favour of the flawed proposal at the July 2018 I Class meeting. This money was wasted, as shareholders nevertheless voted against the proposal.
  • Lord Flight did not stand for re-election in 2018 when his reappointment was due. The Board are unwilling to advise shareholders of this oversight.

A number of shareholders have been communicating with the Board, but so far, have not managed to elicit any significant change. The Board has promised to present their strategy, and proposals to revise the cost structure, before a general meeting in February 2020 where they can be voted on. We are concerned at the time this is taking, and that, on past form, the Board will not be aggressive enough with reducing the cost base.

There will be very limited opportunity to contact shareholders after the Board publish their own plan, and hence we are contacting some key shareholders now.

This campaign is being run by the ShareSoc Edge Shareholder Action Group, whose founder members are, Andrew Kenny, Cliff Weight, Mark Lauber, Richard Roth, Robin Goodfellow and Shivani Parikh.

Our proposals

Progress with exiting the major investment (Coolabi) at a fair price should be the major priority for the Board.

A reduction in the operating expenses would help avoid yet further losses to shareholders in the meantime, and will be essential to ensure the viability of the VCT once any proceeds from Coolabi are distributed to shareholders. Indeed, we think that a reduction from the current £1.5 million to an absolute maximum of £400,000 should be achievable for the whole company, whilst the I shares still have value, and even less thereafter.

We think 3 directors on a VCT of this size is sufficient. Richard Roth and Robin Goodfellow are willing to stand for election. Lord Flight is standing down and we think Sir Robin Miller should be removed as he has taken too long to address the issues which are highlighted above. We would be willing for Terry Back to continue with Richard Roth and Robin Goodfellow as fellow directors. This would mean there is no need and no space for Sir Aubrey Brocklebank, who was appointed as a fourth director on 11 Nov 2019.

We think the Board needs a balance of skills and experience, which collectively reflects what each director and candidate brings to the table.

Richard is a good allrounder, has extensive VCT director experience elsewhere and has specific skills in the cost reduction side which would complement Terry Back’s skills in media. He is currently Chairman at Oxford Technology 2 VCT Plc, and a director of 4 other VCTs. Richard is a Chartered Management Accountant and is audit committee chairman of all 5 companies. He previously held senior positions in the airline industry and is a graduate from Bath University. Richard has participated in the recent successful Ventus VCTs’ campaign.

Robin is also an experienced Chairman and Non-Executive Director of other VCTs and will bring wise counsel and fresh eyes to this Board. Currently, Robin Goodfellow is the Chairman at Oxford Technology 3 VCT Plc and a director of three other VCTs. In his past career Robin was Audit Manager at ExxonMobil . He graduated from Cambridge University and holds an MBA from London Business School. Robin has participated in several VCT shareholders campaigns and was for many years a regular commentator on and activist in the VCT industry.

If the Edge Performance VCT Board can demonstrate sufficient progress in addressing the above issues with its announcement in the next few weeks, then we will be prepared to withdraw our resolutions, but only if we are comfortable that their proposals will achieve the required objectives.

We fear however that, despite months of the Board talking with the Investment Manager and reviewing arrangements with all other suppliers, there is neither an “oven-ready” proposal for the necessary reduction in the costs nor hope of an imminent sale of Coolabi. If this turns out to be the case, we think that a better Board would be Terry Back, Richard Roth and Robin Goodfellow and we intend to requisition resolutions to seek to make this happen.

We strongly appeal to all investors to join this campaign. It would help if you could make a donation (e.g. £500, £100, £50 or whatever you can afford) to help fund our costs, but this is not a requirement to join. If you are not a shareholder in Edge Performance VCT, your support in this campaign is still important as it will help us to push for change. Click the button below to join and, optionally, to donate.

Join the campaign

 

Further information and prior blogs can be found in the links below:

https://www.sharesoc.org/blog/vcts/edge-another-vct-problem-case/

https://www.sharesoc.org/blog/vcts/edge-performance-vct-the-worst-show-on-earth/

https://www.sharesoc.org/blog/vcts/edge-vct-trick-treat-pair-rnss/

https://www.sharesoc.org/agm-reports/edge-performance-vct/

https://www.sharesoc.org/blog/company-news//a-couple-of-problem-vcts-foresight-4-and-edge-performance/

 

 

[1] Below is a link to the AIC database for VCTs.

https://www.theaic.co.uk/financial-advisers/find-compare-investment-companies?type=Filter&sort=5sptr&az=&country=&region=VCT&objective=&sector=&manager=&page_new=1&page=2 

Clicking on Venture Capital Trusts in the Investment sector tag and then sorting shows that in performance terms Edge I and Edge H are the 2 worst VCT performers out of all 62 VCTs over 5 years with I being down 74% and H down 46%. On an ongoing AIC charge basis Edge I and Edge H are bottom decile with annual charges of 3.66% and 4.26% respectively.

Cliff Weight, Director, ShareSoc and co-ordinator, ShareSoc Edge Shareholder Action Group

Disclaimer: I own shares in Edge Performance VCT.

 

4 Comments
  1. Stephen Burke 3rd January 2020 at 12:09 pm

    I’m an H shareholder and I somewhat wonder about conflicts of interest with the I shareholders, in that if they get repaid the H shares on their own are almost certainly not a viable size to continue, and also an accelerated disposal of Coolabi might well not be the best long-term option. How do you think that should be addressed? I don’t especially want to join a campaign which might make my position worse … has anyone solicited views from the I shareholders on whether they want their money back quickly?

  2. Mark Lauber 3rd January 2020 at 2:08 pm

    Stephen, thank you for your query. Your point about the H share class size is a good one, and will have to be addressed once the main problem of governance and cost is addressed. Bear in mind that the H shares have a fee cap which will mitigate the problem, particularly if other costs can be brought under control. The detail of this will rest with the Board (including our proposed Directors), so I’ll leave them to answer in more detail. I’d mention that Richard and Robin do have experience in running smaller VCTs on a cost effective basis (see above).

    With respect to Coolabi, there are a couple of things to consider. Coolabi is still lossmaking and has repeatedly raised further funds. Because EDGE can no longer participate, the EDGE stake is becoming more and more diluted with each round. Note as well the very high cost of running EDGE I for what is largely a single investment. Waiting to achieve a higher price for Coolabi in the future could very well result in a lower outcome for EDGE shareholders due to further ongoing EDGE costs and stake dilution.

  3. marben100 3rd January 2020 at 2:15 pm

    Stephen,

    Don’t forget also that if you join the campaign, you will be kept in touch with developments and it will be easier for you to ensure that your concerns are properly addressed.

    Best,
    Mark Bentley

  4. Stephen Burke 3rd January 2020 at 2:54 pm

    Thanks for the replies – I’ll join for information but don’t promise to support specific actions (my shareholding isn’t very significant anyway). From the last report, even after the deltaDNA sale the H share assets are only 9 million and some of that will come back as a dividend, and presumably there would have to be another dividend if Coolabi is sold – I’m not sure I believe that it’s possible to run such a small VCT, although perhaps it could be merged with something else. I do appreciate that the I shareholders have more reason to be unhappy than I have – for me it was a regular VCT with a small number of high-risk investments so the fact that some of them may do badly isn’t unexpected and I’m prepared to wait to see how the remaining investments turn out.

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