Ventus VCT Shareholders

 Shareholder Concerns


 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
Base Fee 722 796 875 891 893 870
Performance Fee 264 197
TOTAL 722 796 875 891 1,157 1,067
Other V1 Costs (excluding Directors Fees and Audit) 226 197 214 166 210 199
Base Fee 326 741 828 865 892 895
Performance Fee   201
TOTAL 326 741 828 865 892 1,096
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.


5. Amalgamation of Share Classes

Given the similar nature of the assets held by the Ordinary, C and D shareholders in each fund, amalgamation should be undertaken relatively easily. It was the original intention to merge the share classes, however, the directors have now said that they do not wish to proceed. The benefits would include administrative cost savings, reduction in the unnecessary volume of information provided to shareholders, reduced complexity and increased liquidity (particularly for the C and D shareholders).

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.