Q1: Do you still think valuations are being impacted by Covid-19 for new deals and are you still seeing the same volume of opportunities?
A1: If anything, we are seeing more opportunities than we were pre-Covid. The issue is that you have two categories – the good and the bad side of these opportunities. There are more stressed opportunities coming in at lower valuations and there will be opportunities in there, but you have to be careful. Whereas, with businesses that are doing better because of Covid are coming in at higher valuations. The key is to then try and normalise what those businesses are doing – to take out the impact of Covid wherever possible to then get down to the true value of those opportunities within those businesses.
Q2: How has Covid-19 impacted on the funding opportunities available to the types of businesses in which the VCT invests?
A2: The pandemic has presented a mixture of challenges but also opportunities for growing companies who have been able to be nimble and reactive. Seneca have in turn been highly reactive and adapted to the current situation and therefore been able to support companies as evidenced by the number of deals and opportunities in the pipeline. Seneca’s strong relationships and network have enabled businesses seeking funding to connect with Seneca, and likewise for Seneca to be able to pick up on those opportunities.
Q3: AIM has seen increased volatility given Brexit and Covid-19; do you still see this as a good place to get returns?
A3: Absolutely, but as always and especially in light of the current climate, our view is to proceed with caution. We’ve had a good period on AIM over the last 12-15 months in particular, but Seneca’s investment in AIM quoted companies goes back much further. Seneca was founded in 2010 and has been investing in AIM with EIS funds for many years now and through various market cycles and economic conditions and the returns are there but you do need to proceed with caution. Volatility can, on the other hand, provide opportunities for returns – that is what enables good businesses to access funds. Investors are looking to back and find those exciting growth capital businesses and that is what drives demand and the corresponding increase in share prices. So, if you can get in at the right time within that volatility, as educated by your due diligence, review of the opportunity and the strength of the management team – those core themes we focus on – then the answer is yes, there is opportunity to make some good returns as long as you are proceeding with caution.
Seneca exercises this caution as evidenced by the sheer scale of those opportunities we turn down versus those that we believe have that potential to generate returns. We mentioned how we have £30m in investment opportunities and obviously we wouldn’t be executing against that number of companies but within that, as part of the commercial due diligence, we take out those that we do not believe have the return potential and only transact on those where we have a strong belief in the business and management team.
Ultimately, you need an investment manager with the right skill set. It takes a different skill set to be investing on AIM and trying to generate returns and Seneca has proven over the last 10 years that it has that skill set with their AIM exit track record – a track record which is now also emerging for the VCT with profitable AIM exits building.
Q4: What’s the Board’s view on their intentions to realise the Scancell shares given the recent improvements in the Scancell share price?
A4: We are currently monitoring the price of Scancell very closely, but the price appears to be stable (as at 8 March 2021), which is in part as a result of the Redmile investment, so the Board is not currently focusing on raising more money for the moment. Therefore, we do not intend to sell any further shares at this time at the current price but we will continue to monitor it.
We understand a number of our shareholders from the Ordinary share pool are keen for us to liquidate our Scancell shares but the majority of our shareholders want us to retain the Scancell shares because they believe that it is a significant investment that still has plenty of mileage to go. We have liquidated about 16% of our holding over the last year, which gave us liquidity to pay further dividends, but we have retained the majority of our holding. We believe that there are plenty of opportunities within Scancell, all of which could represent a significant uplift in value for the business. The recent uplift in value was a result of the development of the SN14 vaccine and should this clinical trial succeed, this too could create further value in the business and as such there are no further plans at the current value to realise any more shares in Scancell.
Q5: From reading the Annual Report, it’s clear that the VCT has supported SkinBio from an early stage and that the company is doing very well, so why has 40% of the VCT’s holding been sold?
A5: Seneca’s role as Investment Manager is to try to de-risk our investments as we go along and the right thing to do is to take profits on the way up and that is exactly what we have been doing. SkinBio’s share price was down to 6p at one-point last year and it is now up at the time of the presentation to around 35p-40p. Similarly to Scancell, SkinBio has several potential ongoing opportunities, all of which could represent significant uplift in the Company’s value, but likewise, those opportunities if not realised could have a detrimental impact on value. Whilst we are optimistic that the latter is unlikely to be the case, we still need to bear in mind that these businesses are early stage and represent a certain level of risk as a result and as such we have always taken the approach to try and de-risk those businesses where possible during the course of our investment.
We have already realised over a 2x return from our shareholding in Skinbio and we still have a significant holding in the company to benefit from any further uplift in the share price.
Q6: Regarding the Company’s decision to steer clear of start-ups as part of its investment strategy – which I do not dispute the wisdom of, however, as government regs are trending to ensure VCTs have an early-stage portfolio, does this risk losing the VCT status? How close to the bar is the current portfolio and does this need to account for both the Ordinary and B share pool’s holdings as one overall Risk ratio?
A6: Maintaining our VCT status is of the upmost importance to us and we work diligently to ensure that the various qualifying tests are met, including the permitted age limit restrictions, as detailed on page 4 of our Annual Report. The VCT retains specialist tax advisers who assist with the monitoring of these tests on an ongoing basis. The HMRC VCT conditions continue to be fully met by the VCT, with sufficient forward looking headroom. The Ordinary share pool and the B share pool are not subject to all of the same VCT qualifying tests and as such do not form part of one overall ‘risk ratio’ with regard to the VCT qualifying tests as the Ordinary share pool pre-dates a number of the newer HMRC VCT conditions.
Whilst we do avoid start-ups as a means to mitigate our risk, our B share portfolio is still very much an early stage portfolio and all of the investments are qualifying as detailed on pages 12 and 39 of the Annual Report and we ensure alongside our tax advisers that any new investments also meet the HMRC VCT conditions in order to safeguard our VCT status.