Downing TWO VCT plc : Final Results Downing

Downing TWO VCT plc FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2016

FINANCIAL HIGHLIGHTS

CHAIRMAN'S STATEMENT

Introduction I am pleased to present the Annual Report for the year ended 31 December 2016. As the Company now has a number of planned exit share pools in different stages of their life, the Manager has had to focus on progressing investment realisations in some pools while also working on building new investment portfolios for the more recent pools. Overall, progress has been satisfactory.

A brief summary of each share pool is provided below.

'C' Share pool The final distribution to 'C' Shareholders was made in March 2016. Total Return to those investors was 120.83p per Share compared to the original cost net of income tax relief of 70.0p. The Board congratulates the Manager on delivering a very successful outcome for investors. Since the year end, the 'C' and 'A' Shares, which had negligible residual value, were cancelled.

'D' Share pool The 'D' Shares were originally issued in 2010 and at the year end held a portfolio of seven live investments with a total value of £2.4 million.

At 31 December 2016, the NAV of a combined holding of one 'D' Share and one 'E' Share stood at 36.7p, which represents an increase of 3.5% over the year after adjusting for the dividends of 17.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 103.2p, compared to the initial cost to original subscribers net of income tax relief of 70p.

'F' Share pool The 'F' Share pool was launched in 2012 and now holds a portfolio of 23 investments with a total value of £7.2 million.

At 31 December 2016, the 'F' Share NAV stood at 69.7p, which represents an increase of 3.9% over the year after adjusting for the dividends of 5.0p per share paid in the year. Dividends paid to date total 25.0p per share such that Total Return (NAV plus cumulative dividends to date) is now 94.7p, compared to the initial cost to original subscribers net of income tax relief of 70p.

In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per 'F' Share on 30 June 2017 to Shareholders on the register at the close of business on 26 May 2017.

'G' Share pool The 'G' Share pool was launched in 2013 and completed its initial investment phase this year. At 31 December 2016, the pool held 19 investments with a total value of £20.1 million.

At 31 December 2016, the 'G' Share NAV stood at 83.5p, which represents an increase over the year of 2.5% after adjusting for the dividends of 5.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 103.5p, compared to the initial NAV of 100.0p.

In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per 'G' Share on 30 June 2017 to Shareholders on the register at the close of business on 26 May 2017.

'K' Share pool The 'K' Share Offer for Subscription was launched on 15 December 2015 and closed on 30 September 2016. Having raised gross proceeds £16.2 million. The process of build the 'K' Share portfolio is now well underway.

At 31 December 2016, the pool held 11 investments with a total value of £9.9 million. The NAV at 31 December 2017 stood at 99.0p per share.

Share buybacks For share classes where all investors are still within the initial five year period (currently the 'G' Share and 'K' Share classes), the Company operates a general policy of buying in its own shares for cancellation when any become available in the market. During this period, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount). Any buybacks are subject to regulatory restrictions and other factors such as the availability of liquid funds.

The Company is now unlikely to make any further purchases of 'D' Shares, 'E' Shares and 'F' Shares as the process of returning funds to those Shareholders is now underway in the case of the 'D' and 'E' Shares and is due to start early next year in the case of the 'F' Shares.

During the year to 31 December 2016, the Company repurchased and subsequently cancelled 11,295 'F' Shares and 33,975 'G' Shares for an aggregate consideration of £7,511 and £28,370 respectively, being an average price of 66.5p per 'F' Share and 83.5p per 'G' Share.

A resolution to renew the buyback authority for the Company to purchase its own shares will be proposed at the forthcoming Annual General Meeting.

Annual General Meeting ("AGM") The Company's tenth AGM will be held at Ergon House, Horseferry Road, London, SW1P 2AL at 10:45 a.m. on 20 June 2017.

Two items of special business will be proposed at the AGM. As mentioned above, the Company will seek to renew the authority for the Company to buy back shares.

Also, the Company is seeking Shareholder approval to amend the Company's Articles of Association to simplify the process of cancelling share classes once they have come to the end of their planned exit life. The proposed changes will eliminate the requirement for a Shareholder Circular to be issued in order to cancel a share class once it has reduced to a negligible residual value. This will result in some costs savings for the Company.

Outlook Although the long term implications of Brexit may not yet be clear, the impact on the Company is not expected to be significant. The majority of the share pools are already fully invested and progressing satisfactorily. The 'K' Share is still making new investments as it builds its portfolio and faces greater challenges from new VCT rules than it is likely to from factors connected with Britain leaving the EU. VCT rules brought in over the last year or so have reduced the scope of investments that can be made, however the Manager is confident that a reasonable portfolio can be built which can deliver shareholders the targeted results.

We expect to see significant headway made in realising most of the remaining investments in the 'D' Share pool over the next few months. The Manager will also be developing plans during the course of this year for realisation of investments from the 'F' Share pool, ahead of the commencement of the return of funds to those investors early next year.

I look forward to updating Shareholders on progress in my statement with the Half Yearly Report to 30 June 2017.

Hugh Gillespie Chairman 26 April 2017

INVESTMENT MANAGER'S REPORT- 'D' SHARE POOL

Introduction The 'D' Share pool holds investments in seven companies and is fully invested. The focus this year has been on realisations and ten full or partial exits have completed in the period. We have realisation plans in place for the remainder of the portfolio.

Net asset value and results At 31 December 2016, the 'D' Share NAV stood at 36.6p and the 'E' Share NAV at 0.1p, giving a combined NAV of 36.7p. Total Return (NAV plus cumulative dividends to date) was 103.2p for a combined holding of one 'D' and one 'E' Share. This represents a net increase of 1.8p over the year (after adjusting for dividends paid during the year of 17.0p per 'D' Share), equivalent to an increase of 3.5%.

The return on ordinary activities for the 'D' Shares for the period was a gain of £176,000 (2015: £723,000) being a revenue loss of £58,000 (2015: profit £339,000) and a capital gain of £234,000 (2015: £384,000).

'D' Share pool - divestment activity Ten full or partial exits have completed in the period generating total proceeds of £2.2 million.

The most significant of these were Quadrate Catering Limited and Quadrate Spa Limited which generated proceeds of £581,000 and £520,000 and uplifts over cost of £140,000 and £168,000 respectively.

Other significant realisations included, Kidspace Adventures (Holdings) Limited which generated proceeds of £470,000, an uplift over cost of £95,000 and Future Biogas (SF) Limited which returned £203,000 over a cost of £169,000.

'D' Share pool - portfolio valuation The majority of the 'D' Share portfolio performed in line with expectations during the year. There were a few small valuation movements in the period that resulted in an unrealised gain of £27,000.

Fenkle Street LLP, is a property development company based in Newcastle. The hotel is trading well and the valuation has increased by £50,000 to reflect the expected future cash flows of the company.

Avon Solar Limited, the owner of residential rooftop solar assets in the UK, was uplifted by £22,000 due to continued good performance.

Unfortunately these gains were partially offset by a reduction in value on Mosaic Spa and Health Clubs Limited which has continued to have minor performance issues and has resulted in an unrealised loss of £45,000.

Outlook Realisation plans are in place for the remaining investments in the portfolio with some expected to complete in the next few months in order to make a final distribution to investors.

Downing LLP 26 April 2017

REVIEW OF INVESTMENTS - 'D' SHARE POOL

Portfolio of investments The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'D' Share pool

*              Part-qualifying investment

Summary of investment movements

Disposals

*              Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'F' SHARE POOL

Introduction The 'F' Share pool holds 23 investments and is fully invested in a portfolio focussed on asset backed businesses and those with predictable revenue streams.

Net asset value and results At 31 December 2016, the 'F' Share NAV stood at 69.7p. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 94.7p. This represents a net increase of 2.8p per share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 3.9%.

The return on ordinary activities for the 'F' Share pool for the year was a gain of £302,000 (2015: £118,000) being a revenue loss of £113,000 (2015: profit £175,000) and a capital gain of £415,000 (2015: loss £57,000).

'F' Share pool - investment activity Four new investments were made in the period totalling £700,000. £300,000 was invested into Vectis Alpha Limited which is seeking to build and develop renewable energy plants; £150,000 was invested into Brownfields Trading Limited which is seeking to develop small-scale waste disposal projects; £125,000 was invested into both Rhodes Solutions Limited and Morava Limited which are both exploring opportunities in the wood refinery sector.

Three full exits were completed in the period generating total proceeds of £1.3 million.

Grasshoppper 2007 Limited, the company that owns The Grasshopper Inn, a public house near Westerham, Kent was sold and generated proceeds equivalent to the original cost of £378,000.

The divestment of Kidspace Adventures Holdings Limited, the owner of three well established children's play areas in Croydon, Romford and Epsom, realised £313,000 which was £63,000 more than the investment cost.  

The final repayment on Redmed Limited, the owner and operator of a bar in Lincoln, was made which completed the exit of the investment and generated proceeds of £16,000.

One notable partial divestment took place in the period being the part repayment of a non-qualifying loan to Gara Rock Resort Limited, formerly Aminghurst Limited, which generated proceeds of £581,000.

F' Share pool - portfolio valuation The majority of investments remain valued at or above cost and there were several valuation movements in the period that resulted in an unrealised gain of £410,000.

Pearce and Saunders Limited, the owner of three freehold pubs in south east London, has previously been written down in value due to poor performance of the underlying pub companies, however rising property prices have benefitted the investment and the valuation has been increased by £248,000 and is now held at original cost.

The valuation of anaerobic digestion plant, Merlin Renewables Limited has increased by £75,000 as the plant continues to perform ahead of expectations.

Four smaller movements have also been recognised in the period. Atlantic Dogstar Limited, which owns a group of London pubs, are performing to plan and the valuation has been increased by £27,000.

Lambridge Solar Limited, Augusta Pub Company Limited and Pabulum Pubs Limited are all performing well and have been increased in value by £26,000, £25,000 and £9,000 respectively.

Outlook The focus now for the 'F' Share portfolio is on close monitoring and support of the portfolio companies to ensure that prospects for growth are optimised in the period until the realisation process commences in early 2018.

Downing LLP 26 April 2017

REVIEW OF INVESTMENTS - 'F' SHARE POOL

Portfolio of investments The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

Summary of investment movements

Additions

Disposals

*              Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'G' SHARE POOL

Introduction Over the course of the year, the 'G' Share pool has continued to build its initial VCT qualifying portfolio and focus now turns to investee monitoring.

Net asset value and results At 31 December 2016, the 'G' Share NAV stood at 83.5p. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 103.5p. This represents a net increase of 2.2p per Share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 2.5%.

The return on ordinary activities for the 'G' Share pool for the year was a gain of £550,000 (2015: £286,000) being a revenue profit of £74,000 (2015: £257,000) and a capital gain of £476,000 (2015: £29,000).

'G' Share pool - investment activity Five new qualifying investments were made in the period totalling £5.0 million. £1.45 million was invested into Quadrate Catering Limited which operates a restaurant in the Cube Complex in Birmingham.

£1.3 million was invested in Walworth House Pub Limited to purchase a freehold property in south London and convert it into a public house.

£1.0 million was invested into Hermes Renewables Limited which is preparing to build and operate a wood pelleting plant. £750,000 was invested in Zora Energy Renewables Limited, a new wood pellet sales and distribution business.

One non-qualifying investment was made in Quadrate Spa Limited for £1.45 million which owns and operates a health club business in The Cube complex in Birmingham. 

In the period, total proceeds of £5.6 million were received. Kidspace Adventures Holdings Limited was sold and generated proceeds equivalent to cost of £2.0 million.

Grasshoppper 2007 Limited, the company that owns The Grasshopper Inn, a public house near Westerham, Kent was sold and generated proceeds of £1.1 million.

Three non-qualifying loans were repaid in full in the period. £1.3 million was repaid on Hobblers Heath Limited, the children's adventure playground development in Hounslow, West London.

Pub People Limited, the public house operator in the East Midlands, repaid £873,000 and Ludlow Taverns Limited repaid £388,000. 

'G' Share pool - portfolio valuation The majority of investments remain valued at or above cost and there were several valuation movements in the period totalling an unrealised gain of £471,000.

Atlantic Dogstar Limited owns a group of London pubs which are performing well and the valuation has been increased by £480,000.

Augusta Pub Company Limited, the owner of three freehold pubs in London, has been increased in value by £49,000 following independent valuations of the sites.

Two small increases on Pabulum Pubs Limited and Ormsborough Limited of £17,000 and £9,000 respectively were also made.

Unfortunately these gains were partially offset by an £84,000 reduction in the value of Oak Grove Renewables Limited due to performance issues at this anaerobic digestion plant.

Outlook The 'G' Share pool is fully qualifying and therefore our focus has now shifted to close monitoring and support of the portfolio companies in order to nurture growth before the ultimate exit date.

Downing LLP 26 April 2017

REVIEW OF INVESTMENTS - 'G' SHARE POOL

Portfolio of investments The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

Summary of investment movements

Additions

Disposals

* Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'K' SHARE POOL

Introduction The 'K' Share pool closed its fundraising period on 30 September 2016 having raised £16.2 million. The process of investing the funds is well under way with £9.9 million invested in qualifying or part qualifying investments.

'K' Share pool - Net asset value and results At 31 December 2016, the 'K' Share NAV stood was 99.0p, a decrease of 1.0p on the initial price resulting from the initial "cash drag" from holding uninvested funds.

The return on ordinary activities for the 'K' Share pool for the year was a loss of £154,000 being wholly related to revenue.

'K' Share pool - Investment activity 11 initial qualifying investments have been made during the period totalling £9.9 million as we start to build the qualifying portfolio of the 'K' Share pool.

The qualifying investments include a £1.3 million investment in Yamuna Renewables Limited which is planning to build a wood pellet plant in Austria.

£1 million was invested in both Vectis Alpha Limited, which is seeking to build and develop renewable energy plants, and Brownfields Trading Limited, which is seeking to develop small-scale waste disposal projects.

£736,000 was invested into both Ironhide Generation Limited and Indigo Generation Limited. £591,000 was invested in  Rockhopper Renewables Limited and £337,000 in SF Renewables (Solar) Limited which are all in the process of acquiring land in India to build and operate ground mounted solar arrays.

Jito Trading Limited, Rhodes Solutions Limited and Morava Limited are all exploring opportunities in the wood refinery sector following investments of £1.5 million, £1.25 million and £1.1 million respectively.

£350,000 was invested in Zora Energy Renewables Limited, a new wood pellet sales and distribution business.

No valuation adjustments have been made in the period with all investments remaining at cost.

Outlook The task of building the 'K' Share portfolio has very recently begun. We will continue to seek investment opportunities and develop the current investment portfolio over the remainder of the planned life of the share pool.

Downing LLP 26 April 2017

REVIEW OF INVESTMENTS - 'K' SHARE POOL

Portfolio of investments The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

*              Part-qualifying investment

REVIEW OF INVESTMENTS - 'K' SHARE POOL (continued)

Summary of investment movements

Additions

Directors' responsibilities statement The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report, the Strategic Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that year.

In preparing these financial statements the Directors are required to:

*select suitable accounting policies and then apply them consistently; *make judgements and accounting estimates that are reasonable and prudent; *state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and *prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions, to disclose with reasonable accuracy at any time the financial position of the company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

Statement as to disclosure of information to Auditor The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

INCOME STATEMENT for the year ended 31 December 2016

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS 102"). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 by the Association of Investment Companies ("AIC SORP").

Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the return/loss as stated above and at historical cost.

INCOME STATEMENT (ANALYSED BY SHARE POOL) for the year ended 31 December 2016

'C' Share pool

'D' Share pool

'F' Share pool

 'G' Share pool

'K' Share pool

BALANCE SHEET as at 31 December 2016

BALANCE SHEET (ANALYSED BY SHARE POOL) as at 31 December 2016

'C' Shares

'D' Shares

'F' Shares

'G' Shares

'K' Shares

STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2016

CASH FLOW STATEMENT for the year ended 31 December 2016

NOTES TO THE ACCOUNTS for the year ended 31 December 2016

1. General information Downing TWO VCT plc ("The Company") is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales and its registered office is Ergon House, Horseferry Road, London SW1P 2AL.

2. Accounting policies Basis of accounting The Company has prepared its financial statements under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and in accordance with the Statement of Recommended Practice ("SORP") for investment trust companies and venture capital trusts issued by the Association of Investment Companies ("AIC") revised November 2014 as well as the Companies Act 2006.

The Company implements new Financial Reporting Standards ("FRS") issued by the Financial Reporting Council when required.

The financial statements are presented in Sterling (£).

Presentation of Income Statement In order to better reflect the activities of a venture capital trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The return on ordinary activities is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments Venture capital investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 102 sections 11 and 12.

For unquoted investments, fair value is established using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

*Price of recent investment; *Multiples; *Net assets; *Discounted cash flows or earnings (of underlying business); *Discounted cash flows (from the investment); and *Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership, liquidation or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.

It is not the Company's policy to exercise significant influence over investee companies. Therefore the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.

Income Dividend income from investments is recognised when the Shareholders' rights to receive payment has been established, normally the ex-dividend date.

Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective rate applicable and only where there is reasonable certainty of collection in the foreseeable future.

Distributions from partnership companies are recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.

Expenses All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

*Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment. *Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating Investment Manager's fees 100% as revenue. *Expenses and liabilities not specific to a share class are generally allocated pro rata to the net assets. *Performance incentive fees arising from the disposal of investments are deducted as a capital item.

Taxation The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting year.                 Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments which arise.

Deferred taxation which is not discounted is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in years different from those in which they are included in the accounts. Deferred taxation is not discounted.

Other debtors and other creditors Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costs Issue costs in relation to the shares issued for each share class have been deducted from the revenue reserve account for the relevant share class.

Significant estimates and judgements Disclosure is required of judgements and estimates made my management in applying the accounting policies that have a significant effect on the financial statements. The area involving a higher degree of judgement and estimates is the valuation of unquoted investments as explained in the investment accounting policy above.

3. Basic and diluted return per share

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share for any of the share classes. The return per share disclosed therefore represents both the basic and diluted return per share for all share classes.

4. Basic and diluted net asset value per share          

The 'C' Share pool, 'D' Share pool, 'F' Share pool, 'G' Share pool and 'K' Share pool are treated as separate investment pools. Within the 'C' Share pool the Directors allocate the assets and liabilities of the Company between the 'C' Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights. Within the 'D' Share pool the Directors allocate the assets and liabilities of the Company between the 'D' Shares and 'E' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights.

5. Principal risks The Company's financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits and financial liabilities, being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.

The fair value of investments is determined using the detailed accounting policy.

The fair value of cash deposits and short term debtors and creditors equates to their carrying value in the Balance Sheet.

Loans and receivables and other financial liabilities are stated at amortised cost which the Directors consider is equivalent to fair value.

The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

*Market risks *Credit risk *Liquidity risk

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:

Market risks

As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

*Investment price risk *Interest rate risk

Investment price risk

Investment price risk arises from uncertainty about the valuation of financial instruments held in accordance with the Company's investment objectives in addition to the appropriateness of the valuation method used. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.

Interest rate risk

The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:

*"Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments. *"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments. *"No interest rate" assets do not attract interest and comprise equity investments and debtors.

The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors.

The Manager manages credit risk in respect of loan stock with a similar approach as described under "Market risks" above. In addition the credit risk is mitigated for all investments in loan stocks by taking security, covering the full par value of the loan stock, in the form of fixed and floating charges over the assets of the investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. Similarly the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions and both also ultimately part-owned by the UK Government. Consequently, the Directors consider that the credit risk associated with cash deposits is low.

There have been no changes in fair value during the year that are directly attributable to changes in credit risk.

Of the investments in loan stock above, as at 31 December 2016 £2,876,000 relates to the principal of loan notes where, although the principal remains within term, the investee company is not fully servicing the interest obligations under the loan note and is thus in arrears.

Liquidity risk

Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors, (£486,000, 2015: £532,000) and has no borrowings, the Board believes that the Company's exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.

The Company's liquidity risk is managed by the Investment Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2016, but has been extracted from the statutory financial statements for the year ended 31 December 2016 which were approved by the Board of Directors on 26 April 2017 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the period ended 31 December 2015 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 December 2016 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Ergon House, London, SW1P 2AL and will be available for download from www.downing.co.uk.