Foresight VCTAIC VCT Seminar

Rodney Appiah, Director

January 2019

Foresight Overview

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Background

Foresight’s multiple award-winning SME investment team is highly active with more than 350 years of collective investment experience.

30 years’ experience

Established in 1984

Initial focus on early-stage Venture Capital, now on more established SMEs

Successful first fund led to additional fund raising and diversification

Current team has managed 200+ investments

Active in the market

Current portfolio of over 65 companies

29 new investments in last 12 months, 8 follow-ons, £75m deployed

50 exits and recaps since 2010, 9 in last 12 months

Team of 23 experienced practical deal doers

Flexible funds

Funds available to invest across the UK (Limited Partnership Fund and Venture Capital Trusts) – we are sector agnostic

£0.1m to £5m equity cheques in businesses valued at £1m - £25m

Supporting MBOs, MBIs, equity release and growth capital transactions

Majority and minority stakes

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Sector agnostic investments with a number of acquisitive portfolio companiesActively

Considering Acquisitions

Freeze-drying technologyWirral, c.£1m t/o

Healthcare

Fashion website (B2C)London / Nottingham

c.£3m t/o

Consumer

Refrigeration & HVAC servicesKent, c.£11m t/o

Business services

Employee monitoring systems,Dumfries, c.£2m t/o

Tax Advisory,St Albans, c.£5m t/o

Aid consultancy,Hove, c.£12m t/o

Temp recruitment,Notts, c.£8m t/o

Camera rental and crew,London, c. £17m t/o

Children's nurseries,North-West, c.£1m t/o

Peaking power, Nottingham,

c.£2m t/o

Sports clothing retail,Nottingham, c.£5m t/o

Hospital equipment maintenance, Lancashire, c.£4m t/oHorticultural retail,

Lancashire, c.£7m t/o

Airflow monitoring sensors,

Notts, c.£1m t/o

Traffic management services,Salford, c.£7m t/o

Contract cleaning,Manchester, c.£4m t/o

Hospital equipment maintenance,

Belfast, c.£15m t/oPowertool retailing,Folkestone, c.£38m t/o

Online retail,Dudley, c.£1m t/o

Golf equipment retail,Manchester, c.£15m t/o

Eyewear retailer,London, c.£6m t/o

Film processing,Slough, c.£3m t/o

Indian restaurants,North West, c.£3m t/o

POS branded printing,Surrey, c.£6m t/o

Coffee shop chain,Nottingham, c.£4m t/o

Diagnostics & research, Bedford, c.£3m t/o

Translation Services,Manchester, c.£6m t/o

Healthy dining Newcastle c.£2m t/o

Contract Research,Manchester, c.£4m t/o

Mobile payment systems,Milton Keynes, c.£0.2m t/o

Online franking,Northampton, c.£0.2m t/o

Outdoor clothing retail,Nottingham, c.£5m t/o

Health and wellbeing provider, Bolton, c.£6m t/o

Food Health & Safety , Leicester, c.£0.9m t/o

Equestrian products,Bedford, c.£0.5m t/o

Children’s Furniture,Milton Keynes, c.£2m t/o

Current portfolio

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Sector agnostic investments with a number of acquisitive portfolio companiesActively

Considering Acquisitions

Electron beam welding,

Cambridgeshire, c.£10m t/o

Turbine refurbishment,

Dundee, c.£13m t/o

Engineering maintenance,Nottingham,

c.£5m t/o

Office supplies manufacturer,

Northampton, c.£6m t/o

Infrared spectrometers,

Orpington, c.£7m t/o

Consumer payment solutions,

London, c.£11m t/o

Multi screen graphics,Derby, c.£22m t/o

Industrials TMT

App development platform, Nottingham,

c.£1m t/o

Distribution of specialist fasteners

East Sussex, c.£22m t/oGas spring dampeners,

Leicester, c.£4m t/o

Content analysis, London, c.£3m t/o

Brand management software, Notts, c.£1m t/o

Microscopy consumables,

Stansted, c.£4m t/o

Marketing technology,So’ton, c.£2m t/o

IT outsourcing, Nottingham, c.£12m t/o

Field service management software,

Coventry, c.£4m t/o

Containment solutions, Cheshire,

c.£4m t/o

Search retargeting, London, c.£4m t/o

Programmatic advertising,Manchester, c.£2m t/o

Wireless connectivity, London, c.£7m t/o

AI software platform, Edinburgh c.£4m t/o

Satellite data analytics, Birmingham, c.£1m t/o

Gas spectroscopy,Oxfordshire, c.£1m t/o

Novel valve technology,Salford, pre-rev

IOT gas valves,Southampton, pre-rev

Digital printing,Merseyside, c.£4m t/o

Modular software, Wrexham c.£1.5m t/o

Software platform, Loughborough c.£3m t/o

AI software platform, London c.£1m t/o

Ebike technology, Glasgow c.£1m t/o

Current portfolio (Cont’d)

What did we learn in 2018?

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Key themes

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SMEs remained surprisingly resilient in the face of a number of headwinds last year…

Key Portfolio Themes

Continued maturity of ecommerce platforms and challenge to traditional retail sector

The evolution of the digital marketing and advertising sector and implications for data ownership / privacy

Scaling SMEs remains a people and capital resource challenge

Brexit and/or recession contingency planning

Backing earlier stage and faster growing businesses

Key SME Themes

Brexit Data Security / Ownership

Recessionary Risk Open banking

Retail Challenges

Ageing Population

Availability of alternative

finance

Automation and sharing

economy

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Selected recent transactions

Company Details

Location Newcastle

Industry Consumer & Leisure

Ownership 46.4%

Stage Growth Capital

Revenue / EBITDA £1.2m / Breakeven

Date May 2018

Company Details

Location Loughborough

Industry SaaS

Ownership 25%

Stage Growth Capital

Revenue / EBITDA £2.8m / £0.3m

Date August 2018

1) Scale of opportunity (market size): Paleo and Indian are the only growing areas of the fast casual dining market. 18% growth from paleo. Take away and fast food market size is £18bn in UK.

2) Where in business cycle: Early stages of buy and build model. 5 sites. Working on refining model through format testing. Expect to do more follow-on investments.

3) Company’s key differentiators: Clean cakes. Only healthy eating chain in the North East.

4) Who we’ve brought in: John Upton as Chair (ex MD Leon, ex McDonalds Ops Director). Nick Doggett as FD (ex Lazard)

5) Our value-add: Transition from sit down to grab & go model,outsourced production. Increased gross margins 62% to 70%. Increasedrigour to financial reporting, better MI.

1) Scale of opportunity (market size): Huge, as all SMEs and all schools are a potential target, across UK and US.

2) Where in business cycle: Vacancy Filler more developed with over 200 customers. Weduc very early stage (2018) and already has 53 customers.

3) Company’s key differentiators: Diversified across sectors (HR & education) with the possibility of demerging company. Successful management team who have previously grown & exited software start-ups.

4) Who we’ve brought in: Rob Pointen as FD turned around a similar company (Impero, ed-tech) for PE before. Tim Duffy as Chair (ex MeetingZone, Esendex).

5) Our value-add: DD showed issues with revenue recognition, fixed. Refinedstrategy from simultaneous development of five products to a focus on twoand much lower cash burn.

£2.5m growth capital investment into health-conscious restaurant chain

£2.5m growth capital investment into software platform Accrosoft Ltd

VCT Investing in the New Regulatory Environment

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Evolution of VCT rule changes….

What is the end goal?

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Key Changes

Since 2015 VCTs have no longer been able to invest in management buyouts (MBOs),and can now only invest in companies under seven years old after their first commercialsale took place, or under 10 years old if they are knowledge-intensive companies

The 2017 Budget, meanwhile, introduced a risk-to-capital condition, which allinvestments held by VCTs, Enterprise Investment Schemes (EIS) and Seed EnterpriseInvestment Schemes (SEIS) must meet from 6 April 2018. This principles-based test isdesigned to reduce the scope for capital-preservation strategies.

Another change that will come into force from 6 April 2018 is that VCTs must invest atleast 30 per cent of funds raised in qualifying investments within 12 months of the endof the accounting period in which they were raised.

And from 6 April 2019, the percentage of qualifying investments a VCT must hold willincrease from 70 per cent to 80 per cent.

However, the amount knowledge-intensive companies can receive via EIS and VCTschemes annually will double from £5m to £10m in April.

The changes are fundamentally about

returning VCTs to their original purpose –

offering risk capital to support the growth in

entrepreneurial businesses

What will it mean for the VCT investing landscape?

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Some Observations…

Growth investing will command greater focus

As the VCT rules changes continue to restrict capital preservation strategies and / or traditional private equity, specialist minority investing will increasingly come to the fore

A track record of early stage investing will become important to VCT managers

Expect more co-investing and collaboration between VCTs going forward

Expect greater volatility in VCT portfolios

This will take some time, given that VCT managers are still able to hold on to their legacy investments under the old VCT rules.

However, growth investing invariably leads to supporting earlier stage and more entrepreneurially led businesses, creating a wider range of return outcomes for investors

Increased funding for IP rich businesses

Knowledge intensive businesses will be able to attract more funding under the VCT and EIS rules due to recent changes, potentially de-risking the investment opportunity for VCT managers and investors

Has Foresight’s Investment Strategy Changed?

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Sector generalist but specific about the assets into which we invest Large addressable market

Growth and fragmentation

International

Avoiding cyclicality

Operational gearing

Predictable recurring revenues

Downside protection

Competitive advantage

Operationally strong

Experienced and proven team

Focus on profits

Flexible and open to operational improvement

Sectors

Companies

Management

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What is our approach?

A strategic partner as well as an equity funder

Hands on investment management

Developing management teams

and boards

Shaping portfolio company strategy

Operations and tactics

Financing

Geographic expansion

Exit management

Sourcing of board level appointees, Chairmen, CFOs etc.

Building management teams and skill base

Expansion across the UK

Further into European, US and Asian markets

Input into the overall strategy of investee companies

Including business model and market positioning

Active role on company boards e.g. supply chain management, sales strategy etc.

Multiple rounds of investment to support and drive growth

Introduce equity and debt co-investment partners

Supporting acquisitions

Exit route central to investment appraisal

Work closely with management to prepare company

Introduce appropriate advisers

Illustrative companiesDescription

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Key Themes for 2019

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Key themes for 2019

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My Personal View…

Maturation of the fintech and regtech sector

Experience / Leisure concepts will change the

high street

Sharing economy will face increased regulation

GDPR and Data Privacy concerns will adversely impacting the adtech

sector

Automation and cloud technology will continue to change the world of

work

Internet of Things