Ventus VCT Shareholders
 
 

Commentary on 2019 Accounts and Response to the Ventus Directors’ Letter of 24 June 2019


Shareholder resolutions and requisition notices (the ‘Requisition’) which outlined the shortcomings of the existing directors (the ‘Directors’) were sent to Ventus on the 30th May 2019.

It is believed that the Directors delayed issuing the accounts by three weeks as they negotiated a revised management contract with Temporis. On 24th June 2019 the Directors issued the accounts together with a fifteen page response to shareholders, which addressed some of the concerns.

There are two main areas of improvement described in the letter which appear to have resulted from their recent activities: (i) a reduction in the base investment management fee from 2.0% to 1.5% and (ii) a commitment to undertake a share class merger. It seems likely that these changes would not have been forthcoming in the absence of the Requisition.

The Directors again appear to be reactive rather than proactive in representing shareholder interests. Many shareholders believe that there is a track record of this behaviour, since the previous renegotiation of manager’s fees and the strategic review undertaken in 2017 were also forthcoming at the time of shareholder activism.

On this basis the opportunity should be taken to replace the Directors at the AGM on the 8th August.

A detailed rebuttal is provided below to the points that are raised by the Directors, in the order that they appear in their letter to shareholders of the 24th June 2019.

The proposed directors have been working with ShareSoc throughout the Requisition. ShareSoc has delayed publishing its recommendation until the Directors issued the most recent accounts which were included with their letter of the 24 June 2019. ShareSoc has now issued the following supportive statement following a detailed review:-

“ShareSoc, the UK Individual Shareholders Society, has a campaign called the ShareSoc VCT Investors Group who campaign against high fees and long tenure NEDs and is supportive of the Ventus shareholder resolutions submitted by the Requisitioners”.

Further information can be found at www.sharesoc.org/sharesoc-news/ventus-and-ventus-2-voting-recommendations-from-sharesoc-28-june-2019.

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1) The Directors refer to a ‘small group of shareholders’, implying that the issues are not widespread and shareholder concerns should be dismissed.

The Directors received requisition notices from 23 of the major shareholders representing c. 10% of the shareholding in each fund, which is twice the number of shares required to request additional resolutions at an AGM. Currently, over forty shareholders, representing c.20% of the shares, have now said that they will vote for the removal of the Directors. The level of support for management change and a comprehensive review of the operation of the funds has been widespread from those larger shareholders contacted to date. We welcome the chance to share the campaign more widely.

2) The funds have performed well – so why the change?

The performance of the funds since inception has been poor compared to other investments in the renewables sector as evidenced by the low share price.

It is acknowledged that Temporis has rationalized the portfolio, however, much of the recent performance gains in NAV are due to falling discount rates (as agreed by the Directors) and the assets becoming operational therefore moving from being accounted for at cost to a DCF valuation.

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3) Board refers to the proposed directors as having limited ‘Listed Company’ experience.  

Whilst conducting our search for potential directors there was no shortage of candidates with listed company experience who wished to be non-executive directors. However, what is needed is individuals with relevant industry experience that can adequately challenge and assist the investment manager, understand the challenges the industry faces and complement the investment manager.

The Directors note that it appears only one of the proposed directors has listed company experience. It appears that only one of the existing team had such experience prior to sitting on the Ventus boards, so it is clearly not something that has been considered important in the past. None of the Directors has any VCT board experience (other than Ventus) which is also of value.

The proposed new directors have relevant industry experience together with substantial experience on VCT boards and specifically improvement in VCT governance.

4) The existing directors hold a higher percentage of shares in the VCTs compared to the proposed directors.

This point whilst accurate, is only true as of the 14thJune 2019 when Lloyd Chamberlain who has a substantial number of shares was appointed to the board of Ventus 1.

The 2019 accounts show the following shareholdings for the Directors:

Ventus 1 Number of Shares Joined Board Ventus 2 Number of Shares Joined Board
Williams (Chairman) 25,000 2010 Moore (Chairman) 46,504 2006
Dixon NIL 2017 Wood 31,394 2006
Zeal 50,000 2018 Thomas 20,290 2006

Given the length of service, the shareholdings of the Directors is small and in our opinion it is misleading to imply that they have made a substantial financial commitment into the funds. The proposed directors have been selected on the basis of their expertise and not shareholdings.

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5) The appointment of Lloyd Chamberlain to the board is positive.

The appointment of Lloyd Chamberlain to the board of Ventus 1 appears to be a response to the Requisition, possibly designed to show that the Directors are listening to shareholders. It is noted that he has been appointed as a Ventus 1 director whilst his largest shareholding is in Ventus 2 which is also the company most in need of new directors. It is further noted that at the 2016 AGM, shareholders did not approve an increase in shareholder remuneration at Ventus 2 but did at Ventus 1.

Chamberlain brings no additional relevant experience and there is no need to have four directors at Ventus 1. His appointment will cost shareholders an additional £25,000 per year. It seems that Ventus 1 shareholders are subsidizing a succession plan for Ventus 2. He does, however have a lot of shares. His appointment is not logical and is a questionable use of shareholder funds.

Until receipt of the Requisition, shareholder representation does not appear to have been on the Directors' agenda.

6) The Directors consider that it is likely that the new directors would seek to self-manage the funds thereby presenting additional risks.

The proposed directors are not suggesting the self-management of the funds. A number of alternative management options are possible but the obvious strategy is to work with the existing investment manager. However, there are alternatives that should be seriously investigated. Temporis is not the only fund manager which manages renewable assets, and one option is to tender the investment management role. Self-management might be a possibility in the future, if other courses of action do not look attractive. Regulatory issues will clearly need to be covered off with any alternative scenario, but the new directors are confident that a solution could be implemented, if required.

The shareholders have never expressed any dissatisfaction with Temporis, although given the lack of information it is hard to make an assessment of their performance. We have significant reservations about the ability of the Directors to be responsive, proactive and manage the investment manager correctly, which is why the Requisition is to replace the Directors and not the manager.

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7) The Investment Management Fees will now reduce from 2.0% to 1.5% following the 2020 AGM.   

The 2017 investment management fee renegotiation set out a glide path for fee reduction to reach 2.0% in November 2021. The new lower fee of 1.5%, starting in August 2020, (before the end of the original reductions) therefore appears to have been precipitated by the Requisition. It is noted that the previous re-negotiation coincided shareholder unrest.

This fee reduction has again been negotiated without a competitive process, and without looking at other options. It locks the funds in for a further three-year period, which is unnecessary. It is noted that the Directors have provided no industry wide benchmarking analysis to justify the fees. Shareholders should for example, be advised that the recent takeover by Gresham House of the Hazel Renewable VCTs led to a fee reduction to 1.4% (from 2%) and then to 1.15% p.a. a year later. Even post the 2020 AGM, the Ventus funds will pay their manager 33% more than Gresham House.

The Directors state that there is nothing that can be done with the Temporis management agreement as it has a two year notice period. At the same time the Directors are suggesting that Ventus enter into a new management agreement with an initial three year lock in period whereas a rolling one year contract is more appropriate.

8) The performance fee has not been re-negotiated.

The performance fee has the potential to increase rapidly and is not closely related to actual performance. For the year to Feb 2019 the combined performance fee increased to £600,000. Further increaseswill likely more than offset the benefit of the reduction in base management fee.

The performance fee should be renegotiated by the new directors to ensure that it will not run out of control and is truly incentivising performance.

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9) The merger of the share classes.

In the 2017 annual report the Directors stated that they had decided not to merge the share classes as they had agreed previously. The annual report stated:

“The Directors have found it impossible to be certain that, after a merger, divergent paths for the underlying asset values would emerge that would result in unintended transfers of value. A further problem for which no satisfactory answer has yet been found is the contractual obligation to pay a performance fee to the Manager.”

The requisition has facilitated a way through these obstacles.

10) Thalia and other costs

The Directors have acknowledged the existence of Thalia and have given some information about the costs incurred, but they have again failed to disclose the cumulative annual fees that the manager is receiving, which is standard practice.

A detailed breakdown of other costs was requested but not been provided (other than listing the cost categories). We maintain that it should be possible to reduce the other costs, should there be focus in this area. The Directors’ statement that there is nothing further to be done does not reflect the experience of the proposed directors.

There is little further information on the investment management contract.

The Directors have a culture of providing the minimum useful information. Additional information has been obtained by the Requisition, but more transparency would be healthy.

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11) The proposed directors have not come up with a new strategy

It is too early for a new strategy which could only be provided responsibly with a review of substantial additional information. The new directors will visit the assets, talk to joint venture partners and Temporis and determine the best way forward for the funds in conjunction with the manager.

12) The change in directors will result in risk and instability to the companies.

The current agreement with Temporis has locked the funds in for a further two years. Whilst the new directors can prevent the proposed further three-year lock-in period, there may only be limited other options to bring costs down in the short term.

Whilst Temporis is clearly unlikely to be supportive of the proposed changes to the directors, there is no reason that they will not take a pragmatic view. The scope for instability is therefore limited.

There is significant benefit in having a fresh set of eyes to review the commercial and technical arrangements. It would be wise to assess working practices, with the benefit of VCT and renewables experience and knowledge of best practice, in order to determine the best way forward for Ventus.

Following the review of operations by the new directors any material changes to the management of the funds will be consulted on and put to shareholders at the time of the 2020 continuation vote.

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