EDGE Performance VCT Update 9 May 2020

At the 2019 AGM of Edge Performance VCT, all 3 directors who stood for re-election were not re-elected; nor were the auditors Grant Thornton.  Subsequent to the 2019 AGM, the Company’s sole remaining director, Terry Back, re-appointed 2 of the 3 former directors.

ShareSoc launched a campaign in Jan 2020 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.

Although we have not communicated formally with the campaign members since then, we have been working hard behind the scenes. But up to now there was no information which we thought was appropriate, or timely, to communicate, or that we could make public. We now note there is a webinar on 13 May, where hopefully the directors and manager will provide a useful update.

The Directors of Edge Performance VCT plc have now announced Video Calls to Discuss Share Valuations and Portfolio Updates at 11.00am (I Class) and Noon (H Class) on Wednesday 13 May 2020.

During each video call, members of the Investment Manager’s senior investment management team will discuss and report on the respective portfolios. The Investment Manager intends to address a selection of questions from the Shareholders which have been submitted in advance of the calls. If you have any questions you would like to raise with the Investment Manager, please add these to your response when confirming your attendance on the video call. To confirm your attendance on either video call, please email David Glick, whose email address is in the RNS, specifying which video call(s) you would like to attend.  The Investment Manager will send out invitation links.

The RNS is here: https://www.investegate.co.uk/edge-performance-vct–edgh-/rns/share-valuations-and-portfolio-updates/202005071426153162M/. Readers may also wish to read the April RNS, in which the directors announced their reduced estimate of (unaudited) NAVs: https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/EDGH/14510765.html.

This Video link call is a chance to hear from the manager and Board, hopefully what the Coolabi plans are and what the cost structure is going forward and to ask questions direct.

We think the meeting is open to shareholders and also to prospective investors.

Background

At the 2019 AGM, all 3 directors who stood for re-election were not re-elected; nor were the auditors Grant Thornton.  Subsequent to the 2019 AGM, the Company’s sole remaining director, Terry Back, re-appointed 2 of the 3 former directors.

A shareholder action group was formed in December 2019 and made contact with most of the larger shareholders. ShareSoc launched a formal campaign in Jan 2020 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 were 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. (Note: this was the original plan. However, the Board reneged on their promise to hold a GM in February.)

In addition, we have been seeking 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 to date have been 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. Note this statement was true when we made it January 2020. The data was before an H class exit which has subsequently improved the H class performance.

 

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:

Detailed below are numerous historic failures in corporate governance. Despite the Board being aware of this, they have continued to treat shareholders with disdain, having committed formally twice to hold a General Meeting in February 2020, but have failed to do so, nor even make any reference to this major failing.

  • Subsequent to the 2019 AGM, the Company’s sole remaining director, Terry Back, re-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.

In January 2020, we commented: 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.

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. The third director should be either Terry Back or Sir Aubrey Brocklebank, who was appointed on 11 October 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 very good allrounder, has extensive VCT director experience elsewhere and has specific skills in the cost reduction side. 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.

In January 2020, we said that 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 should also remind you that I Class shareholders paid £595k of management fees and £624k of other expenses (of which £255k were administration services fees paid to the manager) in 2019 to manage the Edge VCT I class  which effectively consisted of one investee company Coolabi, on whose board two Edge managers sat and were paid fees by Coolabi. This exorbitant cost and the long delay in selling Coolabi whose value has halved over the last 2 years formed the main platform for the ShareSoc Action Group’s concerns and case for action.

Clearly the meeting on 13 May will be crucial to the action group in deciding what we do next. We urge all shareholders to listen in. In addition, please also join the Edge VCT campaign, join our VCT Investor Group, and support our work by becoming a full member of ShareSoc.

We hope the announcement will present the work of the current Edge VCT Board’s promised review, but which has been strongly influenced and supported by continued pressure from ShareSoc, not least by proposing  resolutions at the originally planned GM in Feb to replace several directors and to nominate 2 new more shareholder friendly directors which so many large shareholders supported.

With best regards,

Cliff Weight/Andrew Kenny

ShareSoc Edge Shareholder Action Group

 

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

 

 

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