Downing Planned Exit VCT 2 PLC : Half-yearly report

DOWNING PLANNED EXIT VCT 2 PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 JULY 2013

Performance summary

CHAIRMAN'S STATEMENT

Introduction
I am pleased to present the Half-Yearly Report for the period ended 31 July 2013. The Company now has four active share pools, each at different stages in their lives.

The 'F' Share and 'G' Share pools have seen significant levels of investment activity throughout the period, while the 'C' Share and 'D' Share pools, which are essentially fully invested, have been focussed on their existing portfolios as they move towards their target exit dates.

Generally progress has been positive over the six months, although it has been necessary to make a small number of provisions against investments, which is a reminder of the challenging environment in which we continue to operate.

Fundraising
The 'G' Share fundraising launched in January 2013 has issued 21.9 million 'G' Shares, generating net proceeds of £22.8 million after share issue costs of £925,000. The offer for subscription will remain open until 31 October 2013. The Board is pleased with the outcome of the fundraising to date, which creates a substantial new share class for the manager to invest and reduces the burden of fixed running costs for all Shareholders.

Net asset values
'C' Share pool
At 31 July 2013, the net asset value ("NAV") for a combined holding of one 'C' Share and one 'A' Share was 93.3p, an increase of 0.9p (0.9%) over the period. Total Return (NAV plus dividends paid to date) is now 113.3p for a combined holding.

'D' Share pool
At 31 July 2013, the net asset value ("NAV") for a combined holding of one 'D' Share and one 'E' Share was 79.0p, an increase of 1.7p (2.1%) over the period. Total Return (NAV plus dividends paid to date) is now 94.0p for a combined holding.

'F' Share pool
At 31 July 2013, the net asset value ("NAV") for a holding of one 'F' Share was 84.0p, a decrease of 2.0p (2.3%) over the period. Total Return (NAV plus dividends paid to date) is now 91.5p for a combined holding.

'G' Share pool
At 31 July 2013, the net asset value ("NAV") for a holding of one 'G' Share was 100.1p, an increase of 0.1p on the purchase price of the shares.

A full review for each share pool is covered in the specific Investment Manager's Reports.

Dividends
In line with the Company's stated policies, interim dividends will be paid as follows:

'C' Shares        2.5p per share
'D' Shares        2.5p per share
'F' Shares        2.5p per share
'G' Shares   5.0p per share

The 'G' Share dividend of 5.0p per share is the initial dividend for that share class and is in line with the prospectus. As with the other share pools, in future, the 'G' Share class is expected to pay a dividend of 2.5p per share twice each year.

Each of the above dividends will be paid on 27 November 2013 to Shareholders on the register at 8 November 2013.

Share buybacks
The Company has a general policy of buying in its own shares that become available in the market for cancellation. No shares were purchased in the six month period to 31 July 2013.

The current policy is that the Company will buy 'C' Shares, 'A' Shares, 'D' Shares or 'E' Shares at approximately a 10% discount to the latest published NAV. In respect of the 'F' Shares, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount) until October 2016 and, in respect of 'G' Shares, purchases will be undertaken at a nil discount until October 2017. All buybacks are subject to regulatory restrictions and other factors such as availability of liquid funds.

Outlook
We expect to see continued new investment activity in the 'F' Share and 'G' Share pools over the remainder of the year as the process of building the portfolios is ongoing. The Manager reports satisfactory levels of dealflow which will provide suitable investment opportunities.

The Manager also has a growing investment monitoring role across all pools which is vital to ensure that investee companies stay on track and that support is provided where appropriate in order that they can ultimately deliver the expected outcomes.

Over the coming months, the Board will give consideration to future fundraising plans and also to whether there might now be an opportunity to create a larger VCT by way of a merger with one or more other VCTs which could bring benefits to all Shareholders. Naturally, I will bring you news of any developments at the appropriate time.

Hugh Gillespie
Chairman

INVESTMENT MANAGER'S REPORT
'C' SHARE POOL

Investment activity
The 'C' Share pool is now fully qualifying; accordingly, no new qualifying investments were made during the period.

The majority of the 'C' Share pool investments have performed in line with expectations over the period, with no change in valuation. There have, however, been a number of adjustments which resulted in a net valuation decrease of £48,000.

A £30,000 increase in value was recognised for Quadrate Catering Limited which owns the Marco Pierre White Steakhouse located in the iconic Cube building in Birmingham. Performance of the restaurant is ahead of projections.

A further £10,000 uplift in East Dulwich Tavern Limited was recognised at the interim to reflect that the pub continues to perform well.

A £35,000 write down in value was made to Honeycombe Pubs VCT Limited which owns a bar in Burnley, Lancashire. The bar is in the process of being sold and the reduced valuation reflects the anticipated net proceeds due to the 'C' Share pool on disposal.

Chapel Street Services Limited and Chapel Street Food and Beverage Limited were both written down by £24,000 at the half year point. The valuation reflects that the businesses are trading behind the original business plan.

Net asset value
At 31 July 2013, the net asset value ("NAV") for a combined holding of one 'C' Share and one 'A' Share was 93.3p, an increase of 0.9p (0.9%) over the period. Total Return (NAV plus dividends paid to date) is now 113.3p for a combined holding.

Results and dividend
The profit on ordinary activities for the 'C' Shares, after taxation, for the period was £68,000, comprising a revenue profit of £117,000 and a capital loss of £49,000.

The company will pay an interim dividend of 2.5p per 'C' Share, on 27 November 2013, to 'C' Shareholders on the register at 8 November 2013.

Outlook
The decrease in the portfolio value over the past six months, albeit a small one, is disappointing, however investment income received has ensured that NAV continued to move forward.

Overall, the 'C' Share portfolio has performed well to date and we believe that there is potential for further growth before we start to seek realisations in order to return funds to Shareholders in late 2014. Trading conditions do, however, remain challenging for most businesses and therefore close monitoring of all portfolio companies will remain a priority.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO
'C' SHARE POOL
as at 31 July 2013

SUMMARY OF INVESTMENT MOVEMENTS
'C' SHARE POOL
for the six months ended 31 July 2013

* Partially qualifying investment

INVESTMENT MANAGER'S REPORT
'D' SHARE POOL

Investment activity
The 'D' Share pool is fully qualifying therefore investment activity during the period was limited to one follow-on investment and one new investment at a total cost of £137,000, details of which are set out below.

A further investment of £94,000 was made in Future Biogas (Reepham Road) Limited, to provide liquidity for the business following higher feedstock costs.

A new investment of £42,000 was made in Kilmarnock Monkey Bar Limited after one of the two pubs owned by Camandale was transferred into the Company. The Monkey Bar is now let to a third party manager, who pays a regular rent to the company.

The majority of the 'D' Share pool investments have performed in line with expectations over the period, with no change in valuation. There have, however, been seven adjustments.

A £40,000 increase in value was recognised for Quadrate Catering Limited which owns the Marco Pierre White Steakhouse located in the iconic Cube building in Birmingham. Performance of the restaurant is ahead of projections.

Green Electricity Generation Limited and Avon Solar Energy Limited both own a portfolio of solar panels on the rooftops of domestic properties across the UK. The panels have now been generating income for over a year and have started to establish reliable track records, resulting in an uplift of £11,000 for Green Electricity Generation and £8,000 for Avon Solar.

Further increases in value were recognised for Kidspace Adventures Holdings Limited (£17,000) and Alpha Schools Holdings Limited (£8,000) to reflect that the businesses are performing well.

A further reduction in value was recognised in Camandale Limited of £24,000 after one of the two pubs owned by the Company was transferred into a new investment, Kilmarnock Monkey Bar Limited. The new valuation of Camandale reflects the standalone valuation of the remaining pub, The Riverbank.

A £35,000 reduction in value was recognised for Liverpool Nurseries (Holdings) Limited. This cautionary reduction in value reflects that the business is performing behind budget.

In total, the portfolio produced net unrealised capital gains of £25,000 for the six months.

Net asset value
At 31 July 2013, the net asset value ("NAV") for a combined holding of one 'D' Share and one 'E' Share was 79.0p, an increase of 1.7p (2.1%) over the period. Total Return (NAV plus dividends paid to date) is now 94.0p for a combined holding.

Results and dividend
The profit on ordinary activities for the 'D' Shares, after taxation, for the period was £173,000, comprising a revenue profit of £148,000 and a capital profit of £25,000.

The Company will pay an interim dividend of 2.5p per 'D' Share, on 27 November 2013, to 'D' Shareholders on the register at 8 November 2013.

Outlook
After a series of setbacks in the portfolio, the D share portfolio is now starting to show signs of growth with a number of valuation uplifts recognised for investments that are performing to plan. We are satisfied with progress to date and believe there is good potential for growth ahead of 2015, when the pool will seek to start realising its investments.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO
'D' SHARE POOL
as at 31 July 2013

* Partially qualifying investment

SUMMARY OF INVESTMENT MOVEMENTS
'D' SHARE POOL
for the six months ended 31 July 2013

* Partially qualifying investment
** Adjusted for purchases in the year

INVESTMENT MANAGER'S REPORT
'F' SHARE POOL

Investment activity
The 'F' Share pool made three new qualifying investments (including partially qualifying investments or investments that will become qualifying in due course) and two non-qualifying investments during the period at a total cost of £1,295,000, details of which are set out below.

In May 2013, the 'F' Share pool invested £311,000 in Redmed Limited to allow it to complete the purchase and refurbishment of a high street bar in Lincoln city centre. The bar was refurbished and relaunched in September 2013 as Craft Bar & Kitchen.

£200,000 was invested in Pabulum Pubs Limited in April 2013 and £100,000 invested in Augusta Pub Company Limited in May 2013, both companies have purchased freehold pubs in London.

In July 2013, a £500,000 loan was made to Pub People Limited which owns and operates 50 pubs in the East Midlands. This non-qualifying investment is secured against five freehold pubs in the company's estate.

A £107,000 non-qualifying investment was made in Dominions House Limited in March 2013 in a building in Cardiff.

The majority of the 'F' Share pool investments have performed in line with expectations over the period and continued to be valued at original cost, however there have been three adjustments.

A reduction in value was made to Southampton Hotel Developments Limited following delays to the build. As such, a precautionary £150,000 provision was made at this time.

Performance of the nightclub owned by City Falkirk Limited has unfortunately continued to operate below expectation and a further reduction in value of £95,000 has been made. We are working closely with the club's management in order to try to bring the trading back on track, however, it is clear that the depressed economic conditions are a major contributing factor to the weak performance.

An £11,000 uplift in the value of Kidspace Adventures Holdings Limited was recognised at the interim to reflect that the business is performing well.

In total, the portfolio produced net unrealised capital losses of £234,000 for the six months.

Net asset value
At 31 July 2013, the net asset value ("NAV") for a holding of one 'F' Share was 84.0p, a decrease of 2.0p (2.3%) over the period. Total Return (NAV plus dividends paid to date) is now 91.5p for a combined holding.

Results and dividend

The loss on ordinary activities for the 'F' Shares, after taxation, for the period was £215,000, comprising a revenue profit of £19,000 and a capital loss of £234,000.

The company will pay an interim dividend of 2.5p per 'F' Share, on 27 November 2013, to 'F' Shareholders on the register at 8 November 2013.

Outlook

The 'F' Share portfolio is still at a relatively early stage and the initial setbacks in the portfolio are disappointing. The focus for the remainder of the year will be to identify further good quality qualifying investments to utilise remaining funds and to continue building a portfolio with good potential for growth over the next four year when the commencements of the realisations are planned.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO
'F' SHARE POOL
as at 31 July 2013

* Partially qualifying investment

SUMMARY OF INVESTMENT PORTFOLIO
'F' SHARE POOL
as at 31 July 2013

* Partially qualifying investment
** Adjusted for purchases in the year

INVESTMENT MANAGER'S REPORT
'G' SHARE POOL

During the period, 21.9 million 'G' Shares were issued under the offer for subscription, generating net proceeds of £22.8 million after share issue costs. The task of investing these new funds is now underway.

Investment activity
During the 'G' Share pool's initial period, 11 new investments were made at a total cost of £7.4million. Of these investments, three were VCT qualifying.

Brief details of the largest of these qualifying investments (or investments that will become qualifying in due course) are as follows:

In May 2013, the 'G' Share pool invested £500,000 in Redmed Limited to allow it to complete the purchase and refurbishment of a high street bar in Lincoln city centre. The bar was refurbished and relaunched in September 2013 as Craft Bar & Kitchen.

£400,000 was invested in Pabulum Pubs Limited in April 2013 and £200,000 invested in Augusta Pub Company Limited in May 2013, both companies have purchased freehold pubs in London.

In addition to the above, a number of non-qualifying investments were made in the form of secured loans. These helped to generate investment income on funds ahead of them being employed in VCT qualifying investments.

One non-qualifying loan, West Tower Holdings Limited, was realised in the period generating disposal proceeds of £1,020,000 against a holding cost and value of the same. The investment was in a wedding venue.

Net asset value
At 31 July 2013, the net asset value ("NAV") for a holding of one 'G' Share was 100.1p, an increase of 0.1p on the purchase price of the shares.

Results and dividend
The profit on ordinary activities for the 'G' Shares, after taxation, for the period was £18,000, comprising a revenue profit of £18,000 and a capital profit of £nil.

The company will pay an interim dividend of 5.0p per 'G' Share, on 27 November 2013, to 'G' Shareholders on the register at 8 November 2013.

Outlook
The task of building the 'G' Share investment portfolio is at an early stage but we are satisfied with the progress made to date in investing the funds. The general economic climate remains challenging, but we continue to see good quality deal flow which we believe will allow us to build a portfolio which can deliver the targeted returns to shareholders over the life of the pool.

Downing LLP

SUMMARY OF INVESTMENT PORTFOLIO
'G' SHARE POOL
as at 31 July 2013

* Partially qualifying investment

**Adjusted for purchases in the year

All of the above investments were purchased during the year.

UNAUDITED SUMMARISED BALANCE SHEET
as at 31 July 2013

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

INCOME STATEMENT
for the six months ended 31 July 2013

A Statement of Total Recognised Gains and Losses has not been prepared as all gains/losses are recognised in the Income Statement as noted above.

UNAUDITED CASH FLOW STATEMENT
for the six months ended 31 July 2013

NOTES TO THE UNAUDITED CASH FLOW STATEMENT
for the six months ended 31 July 2013

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1.        The unaudited half-yearly results cover the six months to 31 July 2013 and have been prepared in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" revised January 2009 and in accordance with the accounting policies set out in the statutory accounts for the year ended 31 January 2013, which were prepared under UK Generally Accepted Accounting Practice.

2.        All revenue and capital items in the Income Statement derive from continuing operations.

3.        The Company has only one class of business and derives its income from investments made in shares, securities and bank deposits.

4.        The comparative figures are in respect of the six month period ended 31 July 2012 and the year ended 31 January 2013 respectively.

5.        Dividends

No dividends have been paid or declared in respect of the 'A' Shares or 'E' Shares.

6.        Basic and diluted return per share

7.        Net asset value per share

8.        Reserves

The Special reserve, Capital reserve - realised and Revenue reserve are all distributable reserves. The Revaluation reserve includes losses of £1,171,000 which are included in the calculation of distributable reserves. Total distributable reserves are £12,376,000 (£14,058,000 at 31 January 2013).

9.        The unaudited condensed financial statements set out herein do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 and have not been delivered to the Registrar of Companies. The figures for the year ended 31 January 2013 have been extracted from the financial statements for that year, which have been delivered to the Registrar of Companies; the Auditor's report on those financial statements was unqualified.

10.        The Directors confirm that, to the best of their knowledge, the half-yearly financial statements have been prepared in accordance with the "Statement: Half-Yearly Financial Reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by:

a)        DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)        DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

11.        Risks and uncertainties
Under the Disclosure and Transparency Directive, the Board is required, in the Company's half-yearly results, to report on principal risks and uncertainties facing the Company over the remainder of the financial year.

The Board concluded that the key risks facing the Company over the remainder of the financial period are as follows:

(i)        Compliance risk of failure to maintain approval as a VCT; and
(ii)        Investment risk associated with investing in small and immature businesses.

The Company's compliance with the VCT regulations is continually monitored by the Manager, who reports regularly to the Board on the current position. The Company has also appointed PricewaterhouseCoopers to provide regular reviews and advice in this area.

In order to make VCT qualifying investments, the Company has to invest in small businesses which are often immature. It also has a limited period in which it must invest the majority of its funds. The Manager follows a rigorous process in vetting and careful structuring of new investments, including taking a charge over the assets of the business wherever possible and, after an investment is made, closely monitoring the business.

The Board is satisfied that these approaches provide satisfactory management of the key risks.

12.        Going concern
The Directors have reviewed the Company's financial resources at the period end and conclude that the Company is well placed to manage its business risks.

The Board confirms that it is satisfied that the Company has adequate resources to continue in business for the foreseeable future. For this reason, the Board believes that the Company continues to be a going concern and that it is appropriate to apply the going concern basis in preparing the financial statements.

13.        Copies of the unaudited half-yearly report will be sent to Shareholders shortly. Further copies can be obtained from the Company's registered office or will be available for download from www.downing.co.uk.