1. Temporis Fees
Since Ventus has stopped developing new schemes, the management requirements have reduced materially, but the fees have not. There is a common misconception as to what services Temporis provides Ventus. Temporis does not maintain turbines or provide operation and maintenance services to investee companies. Temporis collects proceeds from investee companies, represents Ventus on the boards and provides general management oversight of the funds and investee companies. Operating the assets is mostly undertaken by the investee companies. The fees to Temporis have been extracted from the annual accounts and are set out below.
|Management Fees y/e Feb £'000||2013||2014||2015||2016||2017||2018|
|Other V1 Costs (excluding Directors Fees and Audit)||226||197||214||166||210||199|
|Other V2 Costs (excluding Directors Fees and Audit)||167||176||168||162||195||183|
|Total Temporis Fees||1,048||1,537||1,703||1,756||2,049||2,163|
|Total Other Costs (excluding Directors Fees and Audit)||393||373||382||328||405||382|
|Total Management Fees||1,441||1,910||2,085||2,084||2,454||2,545|
The investment management fees were negotiated downwards from 2.5% to 2.0% of Net Assets in 2017. This process was not competitive. Fees on similar funds have been renegotiated to lower levels. For example, when the Hazel funds were transferred to Gresham House, they were reduced from 2.0% to 1.15% of Net Assets.
In Ventus 1 the level of future Performance Fees is unclear and could be a substantial liability. Once the return to investors has reached 60p per share, a performance incentive fee, (which is payable in cash) is calculated as 20% of the amount by which the return in any accounting period exceeds 7p per share.
Currently the Ventus 1 Ordinary and C shares and the Ventus 2 C shares qualify for performance fees. Details of the Temporis management contract have been requested, however, the directors have declined to provide further information. Therefore there is no guidance as to what the performance fees will be in the future or if they will incentivise Temporis.
The fees to Temporis as a percentage of dividends to shareholders of the Ventus funds are set out below.
|Dividends to Shareholders y/e Feb £'000||2013||2014||2015||2016||2017||2018|
|V1 Dividends to Investors||942||1,303||1,519||1,972||3,581||2,207|
|V2 Dividends to Investors||1,238||1,342||1,535||1,952||2,254||2,123|
|Total Dividends from Ventus Funds||2,180||2,645||3,054||3,924||5,835||4,330|
|Temporis Fees as a % of Dividends to Investors||48%||58%||56%||45%||35%||50%|
|Total Management Fees as % of Dividends to Investors||56%||72%||68%||53%||42%||59%|
|Note: At Ventus 1 in 2017 there was a special dividend relating to the sale of the Craig Wind Farm|
The fees appear to be material in the context of the lower levels of post development work and returns to shareholders.
2. Corporate Governance and Existing Directors
All three of the directors of Ventus 2 have been in office since the formation of the funds, around 13 years ago. Paul Thomas is not independent as he is linked to Temporis. The Association of Investment Companies code recommends nine years for director tenure to give independence and states that ‘boards should not become ossified with a large number of directors all serving for very long periods together’.
There is concern that the two recently appointed directors at Ventus 1 appear to have no renewables experience which is important when holding the Investment Manager to account.
3. Thalia Power Limited
Services are provided to investee companies by Thalia Power Limited for accounting and other management services. Thalia Power is wholly owned by Temporis. These fees are not disclosed. The directors have been asked to disclose the aggregate level of these fees but have declined to do so. It is estimated that an investee company pays Thalia approximately £40,000 to £50,000 per company. There are 16 investee companies, and whilst it is not disclosed which investee companies have commercial relationships with Thalia, it is possible that these fees could be significant. Thalia fees are not included in the above table.
4. Other Cost Reductions
In the year to February 2018 there were £382,000 of ‘Other Costs’ incurred across the two funds, excluding audit and directors fees. The fees for audit and taxation totalled an additional £75,000.
A review of similar VCT operating costs leads us to believe that there is considerable potential to reduce costs. Information on costs has been requested from the directors but only provided as general cost categories.
6. Longer Term Strategy
The Ventus assets have a limited economic and technical life. In particular, there may be a reduction in revenues as the power price achieved is cannibalised as more renewables come online and availability falls due to component failure. Costs may also increase as potential regulatory changes around distribution and transmission charging come into force and ageing assets result in the need for additional replacement parts and spares.
There are likely to be options around repowering and extending the life of the existing assets which may offset the fall in profitability.
There is a concern that together these factors may conflict with the contractual structure and any incentivisation in place with Temporis. Achieving the objectives of the shareholders will require long term planning which will require careful management so that the interests of all parties are aligned.