Untitled document

British Smaller Companies VCT2 plc

Annual Report

for the year ended 31 December 2022

bscfunds.com

Transforming small businesses

2 Financial Highlights in the year

4 Five Year Summary

4 Financial Calendar

5 The Portfolio

Strategic Report

6 Chairman’s Statement

10 Objectives and Key Policies

11 Processes and Operations

12 Key Performance Indicators

16 Portfolio Structure and Analysis

18 Investment Review

24 Case Studies

25 Portfolio Summary

at 31 December 2022

26 Summary of Portfolio Movement

since 31 December 2021

27 Investee Company Information

32 Risk Factors

35 Other Matters

35 Section 172 Statement

Corporate Governance

37 Directors

38 Directors’ Report

42 Corporate Governance

49 Directors’ Remuneration Report

52 Directors’ Responsibilities

Statement

Independent Auditor’s Report

53 Independent Auditor’s Report

Financial Statements

60 Statement of Comprehensive

Income

61 Balance Sheet

62 Statement of Changes in Equity

64 Statement of Cash Flows

65 Notes to the Financial Statements

Company Information

90 Notice of the Annual General

Meeting

Advisers to the Company

CONTENTS

About us

Registered Number:

04084003

Financial Overview

British Smaller Companies VCT2 plc

was formed in 2000. It aims to provide

investors exposure to a diversified

portfolio of UK businesses that offer

opportunities in the application and

development of innovation in their

products and services, across established

and emerging industries. The portfolio

has a valuation of £81.4 million as at

31 December 2022.

Discover more about

British Smaller Companies VCT2 plc

www.bscfunds.com

British Smaller Companies VCT2 plc Annual Report & Accounts

1

Dividend Re-Investment Scheme (“DRIS”)

The Company operates a DRIS which gives

shareholders the opportunity to re-invest any cash

dividends. Currently, dividends are re-invested at

the latest reported net asset value as adjusted for the

relevant dividend in question if this has not already

been recognised. Any dividends that are re-invested

by shareholders are eligible for income tax relief at

30 per cent of the amount invested, subject to an

annual investment limit of £200,000, or, if lower, the

amount of a shareholder’s income tax liability. The

Finance Act 2014 confirmed that shares acquired at

any time under dividend re-investment schemes will

not impact tax relief on sales of, or subscriptions for,

VCT shares, unless in the latter case it results in a

breach of the £200,000 investment limit.

BRITISH SMALLER

COMPANIES VCT2 PLC

Transforming small businesses

Share Buy-Backs

Share buy-backs enable shareholders to obtain some

liquidity in an otherwise illiquid market when there is

a need to dispose of shares. This policy is kept under

active review to ensure that any decisions taken are in

the interests of shareholders as a whole. The current

rate of discount at which ordinary shares will be bought

back is targeted to be no more than five per cent of the

latest reported net asset value.

Manager

YFM Private Equity Limited (“the Manager”) is a wholly

owned subsidiary of YFM Equity Partners LLP and is

authorised and regulated by the Financial Conduct

Authority.

Investment Policy

The investment strategy of British Smaller Companies

VCT2 plc (“the Company”) is to invest in UK businesses

across a broad range of sectors that blends a mix of

businesses operating in established and emerging

industries that offer opportunities in the application

and development of innovation in their products

and services.

These investments will all meet the definition of a

Qualifying Investment* and be primarily in unquoted

UK companies. It is anticipated that the majority of

these businesses will be re-investing their profits for

growth and the investments will comprise mainly

equity investments. Further details of the Company’s

investment policy can be found in the Strategic

Report on page 10.

Dividend Policy

The Board remains committed to achieving the

objective, over time, of paying tax free dividends from

realised investment returns. This depends upon the

level of investment income and realisations that the

Company is able to make or achieve in any one

period and cannot be guaranteed.

The tax reliefs that are available for an investment

in a Venture Capital Trust are of particular benefit

for shareholders as there is no income tax payable

on the dividend received, or need to declare them

in a tax return.

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

*Under Chapter 3 Part 6 of the Income Tax Act 2007

2

British Smaller Companies VCT2 plc Annual Report & Accounts

Financial Highlights

in the year

FINANCIAL OVERVIEW

DIVIDENDS PAID IN THE YEAR

3.0p

Total Dividends

Total dividends paid were 3.0 pence per

ordinary share, which equates to 4.9 per

cent of the opening net asset value per

ordinary share.

TOTAL RETURN IN THE YEAR

1

The Company’s Total Return increased

by 3.1 pence, from 139.5 pence per

ordinary share to 142.6 pence per

ordinary share, which includes

cumulative dividends paid of 81.0 pence

per ordinary share. The increase is

equivalent to an annualised return

of 5.0 per cent of the opening net

asset value.

142.6p

h

3.1p

INVESTED IN PORTFOLIO

£16.3m

for 2022

The Company completed a total of

15 investments, of which six were

new additions to the portfolio.

REALISATION PROCEEDS

Realisations of investments generated

total proceeds of £12.9 million in the

year, a gain of £3.6 million over the

opening carrying value and £4.1 million

over cost.

£12.9m

h

£4.1m over cost

British Smaller Companies VCT2 plc Annual Report & Accounts

3

1. Total Return (“TR”) is defined as an Alternative Performance

Measure. The Board considers TR to be the primary measure

of shareholder value; it is calculated as the total of current net

asset value per ordinary share plus cumulative dividends paid

since inception of the Company.

The Annual Report contains a number of Alternative Performance

Measures (“APMs”). APMs are financial measures that are in

addition to those defined or specified in the Company’s financial

reporting framework.

All stated figures above and throughout the annual report exclude

the impact of any tax benefits that may arise to shareholders due

to the Company’s status as a Venture Capital Trust.

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

FUNDS RAISED

£24.2m

for 2022

£24.2 million raised at the beginning of

the period and allotted in January 2022.

4

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL OVERVIEW

Five Year

Summary

Year ended

31 December

2021

Year ended

31 December

2020

Year ended

31 December

2019

Year ended

31 December

2018

Income £000

661

2,752

1,076

1,684

Profit before and after taxation £000

20,389

4,251

4,536

4,454

Net assets attributable to

ordinary shares £000

87,375

70,929

72,333

64,054

Profit per ordinary share

14.71p

3.27p

3.60p

4.17p

Dividends per ordinary

share paid in the year

8.0p

3.5p

8.0p

3.0p

Net asset value per

ordinary share

61.5p

55.0p

55.2p

59.9p

Total Return per ordinary share

1

139.5p

125.0p

121.7p

118.4p

Increase in Total Return

per ordinary share

1

14.5p

3.3p

4.1p

Year ended

31 December

2022

1,075

6,253

111,869

3.45p

3.0p

61.6p

142.6p

3.1p

Annualised return

1

5.2%

Cumulative 3 year increase in

Total Return per ordinary share

1

20.9p

Annualised 3 year return

1

12.6%

Cumulative 5 year increase in

Total Return per ordinary share

1

28.3p

Annualised 5 year return

1

9.9%

1. These are Alternative Performance Measures. The Board considers Total Return to be the primary measure of shareholder value. The

annualised return comprises the cumulative dividends paid plus the NAV at 31 December 2022, compared to the NAV at the beginning of

the relevant period.

Results announced

20 March 2023

Annual General Meeting

15 June 2023

Shareholder workshop

20 June 2023

Ex-dividend date

11 May 2023

Record date

12 May 2023

DRIS Election date

26 May 2023

Dividend paid

26 June 2023

Financial Calendar

British Smaller Companies VCT2 plc Annual Report & Accounts

5

The

Portfolio

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Strategic Report

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Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

6

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

I am pleased to present the 2022 annual report and

financial statements of British Smaller Companies VCT2

plc (“BSC2” or “the Company”), highlighting another

year of resilience from the Company in a challenging

economic environment.

The past twelve months has seen the continued trend

of high inflation driving up interest rates, with consumers

struggling with rising costs of energy, food and other

goods and services. The higher interest rate

environment has in turn fed through into a cooling

of sentiment towards growth-focused investments,

reducing valuations of many publicly listed companies.

In light of these conditions, the robust performance

of BSC2 is all the more pleasing, with the Company

generating a 5.0 per cent return on its opening Net Asset

Value in the year. In contrast, the FTSE Small Cap has

fallen by 16.3 per cent over the same period, while the

Share Price Total Return for an index of generalist VCTs

which are members of the AIC has reduced by 4.2 per

cent. The Company is now ranked second across all

generalist VCTs when considering a blended average

performance ranking over 1, 3, 5 and 10 years.

Two factors have driven this solid outcome. First, the

Company achieved three strong exits from portfolio

companies in the year, all at significant uplifts from

where the companies were valued at the start of the

year. Second, despite softer public markets resulting

in reduced valuations multiples, the Company’s

underlying portfolio companies are continuing to grow;

the ten largest investments in the portfolio are currently

growing revenues at an average of c.51 per cent a year.

This has helped to offset decreases in valuations,

contributing to the Company’s positive return.

Financial Performance

In 2022, the Company delivered a 3.1 pence per

ordinary share increase in Total Return, which as noted

above is equivalent to 5.0 per cent of the opening net

asset value at 31 December 2021. Total Return is now

142.6 pence per ordinary share.

This was driven by the investment portfolio, which

generated a return of £7.9 million, 11.2 per cent over its

opening value, of which £3.6 million was realised and

£4.3 million unrealised. New and follow-on investments

totalling £16.3 million were completed.

Realisations in the Year

Realisations of investments generated total proceeds

of £12.9 million, a gain of £3.6 million over the opening

carrying value and £4.1 million over the original cost.

There were three significant realisations in the year:

Springboard and Intelligent Office in September 2022

and Vuealta in December 2022.

The realisation of Springboard generated proceeds of

£5.8 million, representing a capital profit over cost of

£3.9 million, an uplift of 46.0 per cent or £1.8 million on

the carrying value at the beginning of the year. Including

income, the total return from this investment was £6.6

million over a near eight year holding period, producing

an internal rate of return of 23 per cent and a multiple of

4.1x cost. There is the prospect of further consideration

in 2023 based on performance targets; however no

value has been recognised relating to these potential

payments at this time.

The sale of Intelligent Office generated proceeds of

£4.1 million, representing a capital profit over cost of

£2.1 million and an uplift of 29.0 per cent, or £0.9

million, on the carrying value at the beginning of the

year. Including income, the total return from this

investment was £5.0 million over an eight and a half

year holding period, producing an internal rate of return

of 14 per cent and a multiple of 2.6x cost.

In December 2022, the Company completed the partial

exit of its investment in leading planning and forecasting

software and services business, Vuealta, through the

sale of its fast-growing software division to long-standing

partner, Anaplan. The sale generated proceeds of

£3.1 million, 1.5x cost, and an uplift of 49 per cent or

£1.0 million on the carrying value at the beginning of the

year (including further investments made in the financial

year prior to sale). The Company remains invested in

the core Vuealta consulting business to support its next

phase of growth. Further details on Vuealta are given in

the case study on page 24.

In addition, two investments, Arraco and Seven, which

had previously been fully provided for, were unable to

recover any value and were subsequently realised

during the year.

Shortly after year-end, the Company realised its

investment in Wakefield Acoustics, generating a return

of 1.5x cost. This was a pleasing result, given the

investment was valued at £nil just nine months before,

emphasising the need to support companies at all

stages through their growth journey.

Chairman’s

Statement

British Smaller Companies VCT2 plc Annual Report & Accounts

7

The movement in net asset value (“NAV”) per ordinary share and the dividends paid are set out in the table below:

Pence per

ordinary share

£000

NAV at 31 December 2021

61.5

87,375

Increase in value

2.3

4,287

Gain on disposal of investments

2.0

3,586

Net underlying change in investment portfolio

4.3

7,873

Net operating costs

(0.5)

(985)

Incentive fee

(0.4)

(635)

Total Return in period

3.4

6,253

Issue/buy-back of new shares*

(0.3)

23,685

NAV before the payment of dividends

64.6

117,313

Dividends paid

(3.0)

(5,444)

NAV at 31 December 2022

61.6

111,869

Cumulative dividends paid

81.0

Total Return:at 31 December 2022142.6

at 31 December 2021139.5

* The allotment of shares from the 2021/22 fundraising reduces total return per ordinary share as the fundraising was priced at the 30 September 2021 NAV

per ordinary share but allotted shortly after 31 December 2021 for operational reasons.

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

New Investments

The Company invested £16.3 million in the year. Six new

investments were made in the year, totalling £8.1 million.

In our continued support of the portfolio, nine companies

received follow-on funding in the year, totalling £8.2

million in aggregate. The new investments are:

Investment

Sector

AutomatePro

SaaS platform providing test-

automation tools for ServiceNow

Biorelate

Medical data curation

Plandek

DevOps analytics platform

Quality Clouds

Quality control technology for

low code software solutions

Relative Insight

AI-based text data analytics

platform

Summize

Contract lifecycle management

software provider

Financial Results

During the year, the Board paid ordinary dividends of

3.0 pence per ordinary share in respect of the year

ended 31 December 2022, bringing the cumulative

dividends paid as at 31 December 2022 to 81.0 pence

per ordinary share.

8

British Smaller Companies VCT2 plc Annual Report & Accounts

Chairman’s

Statement

(continued)

STRATEGIC REPORT

The charts on page 12 show in greater detail the

movement in Total Return and Net Asset Value

over time.

The investments held at the beginning of the financial

year, amounting to £70.0 million, delivered a return

over the year of £7.9 million.

The current portfolio’s net valuation increased by

£4.3 million. Within this there were valuation gains

of £10.8 million, offset by £6.5 million of downward

movements.

As anticipated by the impact of the changes to VCT

regulations in 2015, the composition of the portfolio

continues to evolve towards younger, higher growth

companies which are reinvesting earnings for further

growth. This, along with the ongoing realisation of

earlier, more income-focused investments, results in the

reduction of the Company’s ongoing income. However,

helped by the receipt of an ordinary dividend of £0.4

million from Displayplan and the benefit of higher

interest rates on cash balances held, income in the

year was £1.1 million, compared to £0.7 million in the

previous financial year. The trend of lower ongoing

income from the portfolio is expected to continue as the

proportion of new investments continues to grow,

though this may be offset by higher interest on cash

deposits, at least in the short term.

Dividends

Dividends paid in the year totalled 3.0 pence per

ordinary share. These comprised interim dividends of

3.0 pence per ordinary share for the year ended 31

December 2022. Cumulative dividends paid as at 31

December 2022 were 81.0 pence per ordinary share.

Following the realisations of Springboard and Intelligent

Office, a special dividend for the year ending 31

December 2023 of 2.25 pence per ordinary share

was paid on 11 January 2023, to shareholders on the

register at 18 November 2022, increasing cumulative

dividends to date to 83.25 pence per ordinary share.

An interim dividend for the year ending 31 December

2023 of 1.5 pence per ordinary share will be paid on

26 June 2023, to shareholders on the register at

12 May 2023.

Dividend Re-investment Scheme (“DRIS”)

The Company operates a DRIS, which gives

shareholders the opportunity to re-invest any cash

dividends; it is open to all shareholders, including

those who invested under the recent offers. The main

advantages of the DRIS are:

1the dividends remain tax free; and

2any DRIS investment attracts income tax relief

at the rate of 30 per cent.

For the financial year ended 31 December 2022,

£1.1 million was re-invested by way of the DRIS, from

overall dividend proceeds of £5.4 million.

Liquidity and Fundraising

At 31 December 2022, the Company’s cash reserves

of £28.5 million represented 25.5 per cent of net assets;

this includes £24.2 million from the Company’s 2021/22

fundraise, for which the associated shares were allotted

in January 2022.

Having previously assessed its expected cash

requirements, the Company announced a new share

offer on 30 November 2022, alongside British Smaller

Companies VCT plc, with the intention of raising up to

£75 million, in aggregate which included an over-

allotment facility of £25 million, in aggregate. Gross

Applications exceeding £62.5 million have been

received as at the date of this report, of which £23.5

million relate to the Company. The related allotment

will take place in early April 2023.

SHAREHOLDER RELATIONS

Annual General Meeting

15 June 2023

The Annual General Meeting of the Company

will be held at 2:30 pm on 15 June 2023 at

8-10 Hill Street, London W1J 5NG. Full details

of the agenda for this meeting are included in

the Notice of the Annual General Meeting on

page 90.

British Smaller Companies VCT2 plc Annual Report & Accounts

9

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Share Premium Cancellation

Following shareholder approval at a General Meeting,

in March 2022, the Company cancelled the balance

of its Share Premium, £44.3 million, which was

transferred to the Capital Reserve, giving the Company

greater flexibility to continue to pay regular dividends to

shareholders and to provide its periodic offer to buy

back shares from shareholders. As set out on page 63,

this will become available for distribution at various

times over the period to 1 January 2026.

Shareholder Relations

The shareholder workshop held on 29 June 2022 was

well attended. Attendees heard from economist and

author Paul Collier; Ben Hookway, CEO of Relative

Insight, one of the Company’s recent investments; and

Matthew Scullion of Matillion. The Matillion interview

and the slides from the event can be viewed on the

website www.bscfunds.com.

We also hosted an event by video platform on

1 December 2022, which included presentations from

Karen Barrett, CEO of Unbiased and Sarim Khan,

CEO of SharpCloud.

We are pleased to announce that the next in-person

shareholder workshop will be held jointly with British

Smaller Companies VCT Plc on 20 June 2023 at 1

Great George Street, Westminster, London SW1 3AA.

The electronic communications policy continues to be

a success, with 82 per cent of shareholders now

receiving communications in this way. Documents such

as the annual report are published on the website

www.bscfunds.com rather than by post, saving on

printing costs, as well as being more environmentally

friendly.

The Company’s website, www.bscfunds.com,

is refreshed on a regular basis and provides a

comprehensive level of information in what I hope

is a user-friendly format.

Post Balance Sheet Events

Since year-end, the Company has invested £2.4 million

into DrDoctor, a patient engagement and

communications software platform. The Company also

realised its investment in Wakefield Acoustics at the

value recognised at 31 December 2022 (£0.6 million).

Outlook

As we look forward, inflation, and in turn interest rates,

are showing signs of nearing peaks. The resilience of

the Company’s portfolio through a challenging period

has been pleasing for me and my fellow board

members, and we are hopeful that the experiences

gained by the portfolio companies stand them in good

stead to take advantage of opportunities as they arise

in the coming year.

The Company’s current fundraising is being well

supported by new and existing shareholders, and we

remain grateful as always for your ongoing trust and

support. The funds raised will keep the Company well

positioned to continue to support the existing portfolio

and to continue to seek out the most promising new

opportunities to augment the portfolio. I look forward to

updating investors on this progress later in the year.

Peter Waller

Chairman

20 March 2023

10

British Smaller Companies VCT2 plc Annual Report & Accounts

The Company’s objective is to

maximise Total Return and provide

investors with a long-term tax free

dividend yield whilst maintaining

the Company’s status as a venture

capital trust.

Investment Policy

The investment strategy of the Company is to invest

in UK businesses across a broad range of sectors that

blends a mix of businesses operating in established

and emerging industries that offer opportunities in the

application and development of innovation in their

products and services.

These investments will all meet the definition of a

Qualifying Investment and be primarily in unquoted

UK companies. It is anticipated that the majority of

these businesses will be re-investing their profits for

growth and the investments will comprise mainly

equity investments.

The Company seeks to build a broad portfolio of

investments in early stage companies focussed on

growth with the aim of spreading the maturity profiles

and maximising return as well as ensuring compliance

with the VCT guidelines.

Borrowing

The Company does not borrow and has no borrowing

facilities, choosing to fund investments from its own

resources.

Objectives and

Key Policies

STRATEGIC REPORT

Co-investment

British Smaller Companies VCT2 plc and British Smaller

Companies VCT plc (together “the VCTs”) typically

co-invest in investments, allocating such investments

40 per cent to the Company and 60 per cent to British

Smaller Companies VCT plc. However, the Board of the

Company has discretion as to whether or not to take up

its allocation; where British Smaller Companies VCT plc

does not take its allocation, the Board may opt to

increase the Company’s allocation in such opportunities.

The VCTs may invest alongside co-investment funds

managed by YFM, the Manager of the VCTs. The VCTs

have first choice on the initial £4.5 million of all equity

investment opportunities meeting the VCT qualifying

criteria. Amounts above £4.5 million are allocated two

thirds to the VCTs and one third to YFM’s co-investment

funds.

Asset Mix

Cash which is pending investment in VCT-qualifying

securities is primarily held in interest bearing instant

access, short-notice bank accounts, money market

funds and investment funds listed on a recognised

stock exchange (including FCA authorised and

regulated UCITS funds).

Remuneration Policy

The Company’s policy on the remuneration of its

directors, all of whom are non-executive, can be found

on page 49.

Other Key Policies

Details of the Company’s policies on the payment of

dividends, the DRIS and the buy-back of shares are

given on page 1. In addition to these the Company’s

anti-bribery and environmental and social

responsibilities policies can be found on page 36.

British Smaller Companies VCT2 plc Annual Report & Accounts

11

The Manager is responsible for the

sourcing and screening of investment

opportunities, carrying out suitable

due diligence investigations and

making submissions to the Board

regarding potential investments.

Post investment, the Manager works

intensively with the businesses and

management teams in which the

Company is invested, monitoring

progress, effecting change and,

where applicable, redefining

strategies with a view to maximising

values through structured exit

processes.

The Board regularly monitors the performance of the

portfolio and the investment requirements set by the

relevant VCT legislation. Reports are received from the

Manager regarding the trading and financial position of

each investee company and senior members of the

Manager regularly attend the Company’s Board

meetings. Monitoring reports on compliance with VCT

regulations are also received at each Board meeting so

that the Board can monitor that the Venture Capital Trust

status of the Company is maintained and take corrective

action if appropriate. Monitoring reports carrying out an

independent review of this compliance are received

twice a year.

Processes and

Operations

The Board reviews the terms of YFM Private Equity

Limited’s appointment as Manager on a regular basis.

YFM Private Equity Limited has performed investment

advisory, management, administrative and secretarial

services for the Company since its inception on 28

November 2000. The principal terms of the agreement

under which these services are performed are set out in

note 3 to the financial statements.

In the opinion of the directors, the continuing

appointment of YFM Private Equity Limited as Manager

is in the interests of the shareholders as a whole, in view

of its experience in managing venture capital trusts and

in making, managing and exiting investments of the

nature falling within the Company’s investment policies.

Administration of the Listed Investment Funds

Quoted Portfolio

The Company holds a small portfolio of listed investment

funds, the purpose of which is to optimise returns from

liquid assets while preserving capital value. Reporting

to the Manager, this portfolio is managed by Brewin

Dolphin Limited on a discretionary basis. The Board

receives regular reports on the make-up and market

valuation of this portfolio.

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

12

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

Key Performance

Indicators

Total Return, calculated by reference to the

cumulative dividends paid plus net asset value

(excluding tax reliefs received by shareholders),

is the primary measure of performance in the

VCT industry.

Total Return (pps)

The chart illustrates the Total Return

(excluding tax reliefs received by

shareholders) for investors who

subscribed to the first fundraising in

2000/01 who have re-invested their

dividends.

2013201420152016201720182019202020212022

108.2

111.0

118.0

120.4

132.0

124.3

140.1

147.9

Total Return with Dividend Re-Investment Scheme

(as at 31 December)

190.2

182.0

201320142015

20162017

20182019

202020212022

39.043.548.0

52.555.5

58.566.5

62.9

65.6

62.9

59.7

58.8

59.9

55.2

70.078.081.0

61.5

61.6

55.0

104.6

106.4

110.9

112.2

114.3

118.4

121.7

125.0

Total Return

(as at 31 December)

139.5

142.6

Total Return (pps)

NAV (pps)

Cumulative dividends (pps)

The chart shows how the Total Return

of your Company has developed over

the last ten years.

The evaluation of comparative success

of the Company’s Total Return is by way

of reference to the Share Price Total

Return for an index of generalist VCTs

that are members of the AIC (based on

figures provided by Morningstar). This is

the Company’s stated benchmark index.

A comparison and explanation of the

calculation of this return is shown in

the Directors’ Remuneration Report

on page 51.

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

British Smaller Companies VCT2 plc Annual Report & Accounts

13

Shareholder Returns

The Board considers Total Return to be the primary measure of shareholder value. The IRR returns from the offers over the

last ten years are set out below. IRR is the annual rate of return that equates the cost at the date of the original

investment, with the value of subsequent dividends plus the audited 31 December 2022 Net Asset Value per Share. This

excludes the benefit of any initial tax relief.

Set out below is the annualised return over 10, 5, 3, 2 and 1 years to 31 December 2022. The annualised return is

calculated with reference to the cumulative dividends paid in the period plus the unaudited NAV at 31 December 2022,

compared to the NAV at the beginning of the relevant period.

10 yrs5 yrs3 yrs2 yrs1 yr

6.8%

9.9%

Excluding all tax reliefs

12.6%

Annualised return p.a. over

10, 5, 3, 2 and 1 year periods

16.4%

(to 31 December 2022)

5.2%

The IRRs shown are based on

fundraisings and offer prices during the

relevant calendar year whilst the graph

below shows specific financial periods to

31 December 2022.

201220132014201520162017201820192021

7.1%

7.4%

7.9%

6.0%

6.5%

6.4%

10.8%

9.9%

18.5%

Excluding all tax reliefs

14

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

Expenses

Ongoing Charges

The Ongoing Charges figure, as calculated in line with

the AIC recommended methodology, is used by the

Board to monitor expenses. This figure shows

shareholders the costs of the Company’s recurring

operational expenses, expressed as a percentage of

the average net asset value. Whilst based on historical

information, this provides an indication of the likely level

of costs that will be incurred in managing the Company

in the future.

Year toYear to

31 December 31 December

20222021

(%) (%)

Ongoing Charges figure*2.082.16

* Alternative Performance Measure

The level of ongoing charges has fallen in the year due

to the increased level of net assets. Shareholders also

benefit from the Company’s agreement with the

Manager to pay a lower level of management fee of

1 per cent on surplus cash. The Company’s ongoing

charges ratio is one of the lowest in the VCT industry.

Expenses Cap

The total costs incurred by the Company in the year

(excluding any performance related fees, trail commission

payable to financial intermediaries and VAT) is capped at

2.9 per cent of the total net asset value as at the relevant

year end. The treatment of costs in excess of the cap is

described in note 3 on page 71. There was no breach of

the expenses cap in the current or prior year.

Compliance with VCT Legislative Tests

A principal risk facing the Company is the retention

of its VCT qualifying status. The Board receives regular

reports on compliance with the VCT legislative tests

from the Manager. In addition, the Board receives

formal reports from its VCT Tax Adviser (Philip Hare &

Associates LLP) twice a year. The Board can confirm

that during the period, all of the VCT legislative tests

have been met.

Under Chapter 3 Part 6 of the Income Tax Act 2007, in

addition to the requirement for a VCT’s ordinary share

capital to be listed in the Official List on a European

regulated market throughout the period, there are further

specific tests that VCTs must meet following the initial

three year provisional period.

Income Test

The Company’s income in the period must be derived

wholly or mainly (70 per cent) from shares or securities.

Retained Income Test

The Company must not retain more than 15 per cent

of its income from shares and securities.

Qualifying InvestmentsTest

At least 80 per cent by value of the Company’s

investments must be represented throughout the

period by shares or securities comprised in Qualifying

Investments of investee companies.

For shares issued in accounting periods beginning

on or after 6 April 2018, at least 30 per cent of those

share issues must be invested in Qualifying Investments

of investee companies by the anniversary of the

accounting period in which those shares are issued.

Eligible Shares Test

At least 70 per cent of the Company’s Qualifying

Investments must be represented throughout the

period by holdings of non-preferential shares.

Investments made before 6 April 2018 from funds raised

before 6 April 2011 are excluded from this requirement.

At least 10 per cent of the Company’s total investment

in each Qualifying Investment must be in eligible shares.

In addition, monies are not permitted to be used to

finance buy-outs or otherwise to acquire existing

businesses or shares.

Investment Limits

There is an annual limit for each investee company

which provides that they may not raise more than £5

million of state aided investment (including from VCTs)

in the 12 months ending on the date of each investment

(£10 million for Knowledge Intensive Companies).

There is also a lifetime limit that a business may not

raise more than £12 million of state aided investment

(including from VCTs); the limit for Knowledge Intensive

Companies is £20 million.

Key Performance

Indicators

(continued)

Maximum Single Investment Test

The value of any one investment must not, at any time

in the period, represent more than 15 per cent of the

Company’s total investment value. This is calculated

at the time of investment and updated should there

be further additions; as such, it cannot be breached

passively.

The Board can confirm that during the period, all of the

VCT legislative tests set out above have been met,

where required.

Further restrictions placed on VCTs are:

Dividends from Cancelled Share Premium

The Finance Act 2014 introduced a restriction with

respect to the use of monies in respect of VCTs. In

particular, no dividends can be paid out of cancelled

share premium arising from shares allotted on or after

6 April 2014 until at least three full financial years have

elapsed from the date of allotment.

Following shareholder approval at a General Meeting,

in March 2022 the Company cancelled the balance of

its Share Premium, £44.3 million, of which £16.4 million

is now distributable. The remaining £27.9 million will

become distributable over the period to 1 January 2026,

as set out on page 63.

Other

No more than seven years can have elapsed since

the first commercial sale achieved by the business

(ten years in the case of a Knowledge Intensive

Company), unless:

a. The business has previously received an

investment from a source that has received state

aid; or

b. The investment comprises more than 50 per cent of

the average of the previous five years’ turnover and

the funds are to be used in the business to fund

growth into new product markets and/or new

geographies.

Wherever possible, the Company self-assures that an

investment is a Qualifying Investment, subject to the

receipt of professional advice.

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

British Smaller Companies VCT2 plc Annual Report & Accounts

15

Portfolio Structure

and Analysis

Less than 1 year

Between 1 and 3 years

Between 3 and 5 years

Greater than 5 years

27

10

7

47

20222021

16

26

5

62

Value below cost

20222021

Value above cost

At cost

8485

7

15

9

AGE OF

INVESTMENTS (%)

VALUE COMPARED

TO COST (%)

Portfolio Structure

The broad range of the portfolio is illustrated

below, with 47 per cent of the portfolio

valuation being held for more than five

years, whilst 93 per cent is held at cost or

above. 18 per cent of the portfolio value is

held in loans and preference shares,

although loans now account for only

4 per cent of the value.

16

British Smaller Companies VCT2 plc Annual Report & Accounts

Equity

L

Loan

P

Preference shares

20222021

2022 - 18%

2021 - 21%

82

79

INVESTMENT

L

INSTRUMENT (%)

P

STRATEGIC REPORT

British Smaller Companies VCT2 plc Annual Report & Accounts

17

Strategic Report

Portfolio Analysis

Also included below is a profile of the portfolio by

investments made before and after the VCT rule

changes in 2015, and the break down by industry

sector.

New Media

Application Software

Cloud & DevOps

Retail & Brands

Business Services

Advanced Manufacturing

Other

Investments made following rule change in 2015

8478

20222021

Investments made prior to rule change in 2015

VCT RULES (%)

16

22

16

VCT

rules

post

2015

17

VCT

rules

pre

2015

14

64

INDUSTRY SECTOR (%)

4

1

6

1 8

6

Data

Tech-enabled Services

37

9

Investment

Review

STRATEGIC REPORT

The movements in the investment portfolio are set out

in Table Abelow:

Table A

Investment Portfolio

Portfolio

£million

Listed

investment

funds

£million

Investment

Portfolio

£million

Opening fair value

at 1 January 2022

70.0

-

70.0

Additions

16.3

1.7

18.0

Disposal proceeds

(12.9)

-

(12.9)

Valuation movement

8.0

(0.1)

7.9

Closing fair value at

31 December 2022

81.4

1.6

83.0

At 31 December 2022 the investment portfolio was

valued at £83.0 million, representing 74.2 per cent

of net assets (80.1 per cent at 31 December 2021).

Cash and fixed term deposits at 31 December 2022

of £28.5 million represented 25.5 per cent of net assets

(24.3 per cent at 31 December 2021).

The Portfolio

£81.4 million

Fair value of the portfolio

(2021: £70.0 million)

26

Number of portfolio

companies with a value

of more than £0.5 million

(2021: 22)

£0.8 million

Income from the portfolio

(2021: £0.7 million)

£16.3 million

Level of investment

(2021: £6.1 million)

£8.0 million

Return from portfolio

(2021: £26.0 million)

The portfolio showed robust performance in the

period, adding £8.0 million of value on the opening

fair value of £70.0 million. The composition of

investments continues to show its dynamism, with

£16.3 million invested in the period and cash proceeds

of £12.9 million received.

Fair value changes

Table B

Investment Portfolio

£million%

Gain in fair value from the portfolio

4.455

Gain on disposal over

opening value from the portfolio

3.645

Gain arising from the portfolio

8.0100

Fall in value of other investments

(0.1)

Gain arising from the

investment portfolio

7.9

18

British Smaller Companies VCT2 plc Annual Report & Accounts

19

S

t

r

a

t

e

g

i

c

Re

por

t

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Of the £8.0 million gain in the year, £3.6 million arose

from investments which were realised, including

Springboard (£1.8 million), Intelligent Office (£0.9

million) and the partial realisation of Vuealta (£1.0

million). Further details can be found in the Chairman’s

Statement and note 7 to the financial statements.

The ongoing portfolio delivered a net value gain of

£4.4 million in the year. It is pleasing to see the fair

value increases arising across a range of companies,

including tech-focused businesses such as Outpost,

Unbiased and Vuealta, as well as legacy companies

such as Displayplan and ACC.

Some decreases in value have been seen. The

Company’s largest investment, Matillion, saw its

valuation decrease, driven by lower valuation multiples

of comparable public companies; although the effect of

this has been partly offset by the company’s continued

strong revenue growth and movements in exchange

rates over the year. Arcus Global and Sipsynergy have

both struggled somewhat over the past 12 months,

but the Manager continues to work closely with the

companies’ management teams to navigate their

current challenges.

Other Significant Investment Movements

Investments

During the year ended 31 December 2022, the

Company invested £16.3 million across 15 companies.

Six new companies were added to the portfolio,

receiving aggregate investment of £8.1 million; while

a further £8.2 million was invested across nine existing

portfolio companies. The analysis of these investments

is shown in Table C. The case study on page 24 gives

more information on the investment in AutomatePro.

Table C

Investments

Company

New

£million

Investments made

Follow-on

£million

Total

£million

Outpost

-

2.0

Relative Insight

2.0

-

2.0

Unbiased

-

1.8

AutomatePro

1.5

-

1.5

Plandek

1.4

-

1.4

Summize

1.2

-

1.2

Vypr

-

1.2

Biorelate

1.0

-

1.0

Quality Clouds

1.0

-

1.0

Elucidat

-

0.8

Wooshii

-

0.7

Vuealta

-

0.6

Force24

-

0.5

Sipsynergy

-

0.4

Other (including capitalised income)

-

0.2

Portfolio

8.1

8.2

16.3

Listed investment funds

1.7

Total additions in the year

18.0

20

British Smaller Companies VCT2 plc Annual Report & Accounts

Investment

Review

(continued)

STRATEGIC REPORT

Disposal of Investments

During the year to 31 December 2022, the Company

received proceeds from disposals of £12.9 million, a net

gain of £3.6 million over the opening carrying value at

the beginning of the year, and an overall net gain of

£4.1 million over cost. This included the successful

realisations of Springboard, Intelligent Office and

Vuealta. Further details are given in the Chairman’s

statement on page 6.

Table D

Disposal of Investments

Net

proceeds

from sale

of investments

£million

Opening

value

31 December

2021*

£million

Gain on

opening value

£million

Total investment disposals

12.9

9.3

3.6

* Including further investments during the year prior to realisation.

Further analysis of all investments sold in the year can be

found in note 7 to the financial statements on page 78.

Investment Portfolio Composition

As at 31 December 2022, the portfolio was valued

at £81.4 million, comprising wholly of unquoted

investments. An analysis of the movements in the

year is shown on page 75.

The portfolio has 26 investments valued above £0.5

million, four more than a year earlier, with the single

largest investment, Matillion, representing 19.6 per cent

of the net asset value.

The charts on pages 16 and 17 show the diversity of

the portfolio, split by industry sector, age of investment,

investment instrument and the valuation compared

to cost.

Under VCT legislation, it is not possible to deposit funds

for longer than seven days, which means that cash

deposits must be available on very short notice. The

Board and the Manager continually review opportunities

to generate a higher level of income, without significantly

changing the risk profile of the funds held. As part of this,

the Company holds a small diversified quoted portfolio

of listed investment funds, managed by Brewin Dolphin

Limited. At 31 December 2022, this quoted portfolio

was valued at £1.6 million, or 1.4 per cent of net assets.

The quoted portfolio value decreased by £0.1 million in

the year.

Valuation Policy

Unquoted investments are valued in accordance

with both IFRS 13 ‘Fair Value Measurement’ and

International Private Equity and Venture Capital

Guidelines, December 2022 edition (IPEV Guidelines).

Initially, at the first quarter-end following investment,

investments are valued at the price of the funding round;

following this, the valuation switches to a new primary

basis for all subsequent periods.

The valuation methodology applied depends upon the

facts and circumstances of each individual investment.

This may be with reference to revenue multiples,

earnings multiples, net assets, discounted cash flows or

calibrated from the price of the most recent investment.

The full valuation policy is set out in note 1 on pages 66

and 67.

Table E shows the value of investments within each

valuation category as at 31 December 2022; no

investments are currently valued using discounted

cash flow methodologies.

With continued investment in earlier stage businesses

that are investing for growth, the majority of valuations

continue to be based on revenue multiples.

British Smaller Companies VCT2 plc Annual Report & Accounts

21

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Table E

Valuation Policy

Valuation

£million

2022

% of

portfolio

by value

2021

% of

portfolio

by value

Revenue multiple

61.6

75

78

Earnings multiple

9.9

12

19

Cost or price of recent investment, reviewed for change in fair value

5.3

7

-

Sale proceeds

2.6

3

-

Net assets, reviewed for change in fair value

2.0

3

Total

81.4

100

Grow our economyImprove our society

Value their peopleProtect the environment

Sustainable Investment and Environmental, Social

and Governance (“ESG”) Management

The Company backs small UK businesses to help

them to grow and produce strong financial returns for

shareholders with the additional aim of building better

businesses that are ultimately more sustainable.

In order to deliver more sustainable businesses,

and to meet its commitments under the Principles

for Responsible Investment (PRI), the Manager has

continued to develop its processes in this area.

The Manager’s approach is based on the belief that

good businesses:

These aims are consistent with the Company’s financial

aims because businesses which improve in these areas

also strengthen their resilience and value creation

potential through their increased attractiveness to

customers, employees, suppliers and eventual future

owners and investors.

Sustainable Investment Principles

This set of principles guides the Manager’s investment

process:

>

To seek to understand the ESG related impacts

and potential impacts of investments, aiming to

grow and enhance positive impacts and to avoid,

reduce or minimise any negative impacts over an

investment’s lifetime, leaving them overall better

businesses;

>

To play a positive role in the investor, business and

wider communities by promoting good practice in

ESG management, and by being transparent in the

way that investments are made and how the

Manager behaves;

>

To increase focus on the challenge of climate

change both as it may be affected by our

investments, and as it may impact on them

and their resilience to possible climate change

scenarios;

>

To show leadership by managing the Manager’s

own business’ ESG impacts to the best of their

ability; and

>

To be a proactive signatory to the PRI and to

integrate its principles into the Manager’s business

practices.

In line with the PRI the Manager has developed

processes to help the portfolio businesses to be better

in each of these spheres, by assessing them in terms

of creating positive impacts and outcomes and

preventing or minimising negative ones.

The Manager has more recently developed and

integrated its ESG management processes, which are:

>Pre-investment Phase:

Structured processes at the pre-investment stage

to identify areas of potential ESG improvement as

part of the due diligence and pre-investment

deliberations. Appropriate data is collected and

assessed on each business against ESG criteria

at the point of investment as a benchmark against

which to evaluate future progress.

>Portfolio Phase:

For those investments made since 2020, based on

the data collected at the point of investment at the

start of the portfolio phase, bespoke areas for

improvement are agreed with each management

team together with consequent objectives and

targets. A similar process has been applied to the

significant majority of investments made prior to

2020. Improvements are then measured and

recorded against a set of ESG criteria using the

Manager’s bespoke ESG framework, refreshing

targets annually and placing focus on any new

issues as they become more material in the

management of the company and in meeting

the expectations of its stakeholders.

>Reporting:

Annual reports will be produced, using the

Manager’s ESG framework for consistency,

recording the relevant initiatives, impacts and ESG

KPI performance of each company and providing

an overview of progress across the Manager’s

portfolios.

Note that Investment Companies are not within scope

for reporting under the Task Force on Climate-Related

Financial Disclosures (TCFD); and the Company does

not use more than 40,000kWh of energy and therefore

is not required to report on its energy usage within

Streamlined Energy and Carbon Reporting regulations.

ESG Performance Data and Reporting

ESG KPI data analysis

The Manager has developed its ESG KPI data collation

process. It has established a data set reflecting the

above ESG themes and a means of collecting this to

make year on year comparisons for each company and

across the portfolio. Where possible baseline data has

been collected from the date of investment with a view

to showing where the Manager’s support has made a

difference during the hold period to the reporting date.

Annual company specific ESG performance progress

report

The reviews that the Manager has been conducting

enabled the identification of relative strengths and

weaknesses and agreement of programmes of action

with each business.

Since 2021 the Manager has moved to recording annual

updates and agreed actions in a more visual and

detailed report on both qualitative and quantitative

aspects of each company’s progress. As well as using

this for portfolio reporting to investors it will be used as

an engagement tool with the senior management teams

of each company.

2022 ESG KPI Report for Investments held in YFM’s

VCT funds

>£44.7 million of R&D investment during 2022

>£51.6 million of export sales achieved in 2022

>95 per cent of companies were independently

chaired in 2022

>40 per cent of companies had female directors on

boards, with 20 per cent having a female CEO

>40 per cent of businesses had a designated board

member with responsibility for improving ESG

issues

22

British Smaller Companies VCT2 plc Annual Report & Accounts

Investment

Review

(continued)

STRATEGIC REPORT

Growing

our economy

Improving

our society

British Smaller Companies VCT2 plc Annual Report & Accounts

23

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Valuing

our people

Protecting

our environment

>35 per cent of the portfolio workforce was female in

2022

>995 new jobs were created from date of investment

to 2022

>75 per cent had mental wellbeing programmes in

place and 70 per cent held regular employee

engagement surveys

>Approaching 29,000 hours of training was given to

employees

>60 per cent of companies had active carbon

reduction strategies (up from 10 per cent at

investment)

>25 per cent offset all or a defined portion of their

carbon impact

>But only 20 per cent formally measure their carbon

footprint

Summary and Outlook

The portfolio continues to show its resilience, with strong

underlying levels of revenue growth across the largest

investments, helping to counter downward pressure on

revenue multiples. Portfolio company management

teams continue to be resilient and adaptable to

economic conditions, which will hold them in good

stead for future progress.

We continue to see a strong pipeline of potential

investments in a range of growth companies, as well

as opportunities to further support the continued

growth of the current portfolio. We thank investors for

their continuing support in the Company’s ongoing

fundraising, and are looking forward to putting the

funds raised to work.

David Hall

YFM Private Equity Limited

20 March 2023

24

British Smaller Companies VCT2 plc Annual Report & Accounts

Case Studies

STRATEGIC REPORT

AMOUNT INVESTED

£1.5 million

BUSINESS AT INVESTMENT

A cloud based intelligent test automation and DevOps

software provider

THE INVESTMENT

Growth capital to fund US expansion, tech innovation

and customer success capabilities

RATIONALE FOR THE DEAL

To scale up AutomatePro’s sales, marketing and

customer success functions and to develop innovative

new product modules. The investment will also help

the business continue expansion into the US, filling

the demand from the existing and growing

ServiceNow ecosystem

AMOUNT INVESTED

£2.0 million

BUSINESS AT INVESTMENT

Scenario planning and forecasting solutions for supply

chain, finance, HR and operations through the

Anaplan platform

THE INVESTMENT

Growth capital to enable further growth and overseas

expansion

RATIONALE FOR THE DEAL

The investment backs the experienced founders and

management team to continue their global expansion

strategy alongside US-based Anaplan. Vuealta is an

Anaplan Gold Partner and has a seat on the Anaplan

Global Strategic Council

SINCE INVESTMENT

Vuealta’s software division rapidly developed and

demonstrated its business potential, which led to the

decision by Anaplan to acquire the business. The

Company remains invested in the core Vuealta

consulting business to support its next phase of

growth

British Smaller Companies VCT2 plc Annual Report & Accounts

25

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

PageName of

Nocompany

Date of

initial

investmentLocation

Industry

Sector

Recognised

Valuation atincome/Realised &

Amount 31 December proceeds unrealised

invested 2022 to date value to date*

£000 £000 £000 £000

28Matillion Limited

Nov-16Manchester

Data

1,77821,8745,94627,820

28Outpost VFX Limited

Feb-21Bournemouth

New Media

3,0006,202106,212

29Unbiased EC1 LimitedDec-19LondonTech-enabled Services 3,7316,072-6,072

29Wooshii Limited

May-19London

New Media3,096

4,1973054,502

29Displayplan Holdings Limited

Jan-12Stevenage

Business Services700

4,1091,7065,815

30Elucidat Ltd

May-19Brighton

Application Software2,640

4,03944,043

30ACC Aviation Group Limited

Nov-14Reigate

Business Services1,379

3,5753,5257,100

30Force24 Ltd

Nov-20Leeds

Application Software2,100

3,091-3,091

31Vypr ValidationJan-21ManchesterTech-enabled Services 2,2002,598-2,598

Technologies Limited

31SharpCloud Software LimitedOct-19LondonData2,2712,508-2,508

Relative Insight LimitedMar-22LancasterTech-enabled Services 2,0002,010-2,010

Investment companiesApr-15--2,5001,961-1,961

KeTech Enterprises LimitedNov-15NottinghamTech-enabled Services 2,0001,7882,5994,387

Tonkotsu LimitedJun-19

London

Retail & Brands1,5921,485

-1,485

AutomatePro LimitedDec-22

London

Cloud & DevOps1,4831,483

-1,483

Plandek LimitedOct-22

London

Cloud & DevOps1,3801,380

-1,380

Hampshire

Cloud & DevOps2,0451,378

-1,378

Sipsynergy (via HostedJun-16

Network Services Limited)

Traveltek Group Holdings Limited Oct-16

East Kilbride

Application Software1,1631,359

5271,886

Frescobol Carioca LtdMar-19

London

Retail & Brands1,2001,284

-1,284

Summize LimitedOct-22

Manchester

Application Software1,2001,200

-1,200

Vuealta Holdings LimitedSep-21LondonTech-enabled Services 2,0301,1923,0674,259

Ncam Technologies LimitedMar-18

London

New Media1,7621,175

871,262

Biorelate LimitedNov-22

Manchester

Application Software1,0401,040

-1,040

Quality Clouds LimitedMay-22

London

Cloud & DevOps1,0001,000

-1,000

Leeds

Data1,0001,000

-1,000

PanintelligenceNov-19

(via Paninsight Limited)

E2E Engineering LimitedSep-17

Business Services600800

142942

Welwyn

Garden City

Wakefield

4421,090

Wakefield Acoustics**Dec-14

(via Malvar Engineering Limited)

Advanced761648

Manufacturing

Other investments below £0.5 million

10,136

9375,210

6,147

Total unquoted investments

57,787

81,38523,570

104,955

Full disposals to date

45,622

-74,347

74,347

Total portfolio

103,409

81,38597,917

179,302

* represents recognised income and proceeds received to date plus the unrealised valuation at 31 December 2022.

** realised in January 2023 at the valuation shown.

Portfolio Summary

at 31 December 2022

Name of Company

Investment

valuation at

31 December

2021

£000

Disposal

proceeds

£000

Additions

including

capitalised

income

£000

Valuation

gains including

profits/(losses)

on disposal

£000

Investment

valuation at

31 December

2022

£000

Outpost VFX Limited

1,614

-

2,000

2,588

6,202

Vuealta Holdings Limited/Vuealta Group Limited

1,491

(3,067)

631

2,137

1,192

Unbiased EC1 Limited

3,082

-

1,767

1,223

6,072

Wooshii Limited

3,162

-

656

379

4,197

Traveltek Group Holdings Limited

983

-

376

1,359

Elucidat Limited

2,926

-

840

273

4,039

Panintelligence (via Paninsight Limited)

750

-

250

1,000

Frescobol Carioca Ltd

1,148

-

136

1,284

E2E Engineering Limited

688

-

112

800

Vypr Validation Technologies Limited

1,386

-

1,200

12

2,598

Relative Insight Limited

-

2,000

10

2,010

AutomatePro Limited

-

1,483

-

1,483

Plandek Limited

-

1,380

-

1,380

Summize Limited

-

1,200

-

1,200

Biorelate Limited

-

1,040

-

1,040

Quality Clouds Limited

-

1,000

-

1,000

Tonkotsu Limited

1,520

-

(35)

1,485

Force24 Ltd

2,773

-

500

(182)

3,091

Other investments £0.5 million and below

310

-

160

(316)

154

SharpCloud Software Limited

2,927

-

(419)

2,508

Ncam Technologies Limited

1,636

-

(461)

1,175

Sipsynergy (via Hosted Network Services Limited)

1,561

-

409

(592)

1,378

Arcus Global Limited

1,324

-

(1,119)

205

Matillion Limited

25,050

-

(3,176)

21,874

Investments made after November 2015

54,331

(3,067)

16,266

1,196

68,726

Displayplan Holdings Limited

1,891

-

2,218

4,109

Springboard Research Holdings Limited

3,959

(5,782)

-

1,823

-

ACC Aviation Group Limited

2,450

-

1,125

3,575

Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office)

3,163

(4,080)

-

917

-

Other investments £0.5 million and below

2,063

-

476

2,539

Wakefield Acoustics (via Malvar Engineering)

186

-

462

648

KeTech Enterprises Limited

1,976

-

(188)

1,788

Investments made prior to November 2015

15,688

(9,862)

-

6,833

12,659

Total investments

70,019

(12,929)

16,266

8,029

81,385

26

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

Summary of Portfolio Movement

since 31 December 2021

British Smaller Companies VCT2 plc Annual Report & Accounts

27

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Investee Company

Information

Data

Fair Value

£25.4m

Number of companies

3

Tech-enabled Services

Fair Value

£13.7m

Number of companies

5

Application Software

Fair Value

£11.8m

Number of companies

7

New Media

Fair Value

£11.7m

Number of companies

4

Business Services

Fair Value

£8.9m

Number of companies

5

Cloud & DevOps

Fair Value

£5.2m

Number of companies

4

Retail and Brands

Fair Value

£2.8m

Number of companies

2

Advanced Manufacturing

Fair Value

£0.8m

Number of companies

2

Other

Fair Value

£1.1m

Number of companies

6

Matillion is a leading provider of cloud-based data

extraction and transformation tools. The company helps

businesses interpret their data in the cloud for insight and

decision making and is headquartered in Manchester

with offices in Denver, Seattle and New York.

www.matillion.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

£1,456,000

£21,874,000

November 2016

3.1%

Revenue multiple

Year ended 31 December

2020

$million

2022*

$million

Revenue

LBITA

Loss before tax

Retained losses

Net assets

57.26

(31.34)

(31.60)

(68.30)

226.96

29.98

(11.57)

(11.89)

(36.88)

22.89

* 13 months to 31 January 2022

Matillion Limited

Manchester

The top 10 investments had a

combined value of £58.3 million,

71.6 per cent of the total portfolio.

28

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

Outpost is a visual effects firm best known for their

striking environments, seamless digital makeup and

photoreal creatures. The company is headquartered

in Bournemouth, with studios in Montreal and London.

An impressive client list includes global streaming

platforms such as Netflix, Amazon and Apple, and

major Hollywood studios.

www.outpost-vfx.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

Interest:

£3,000,000

£6,202,000

February 2021

11.5%

Revenue multiple

£10,137 (2021 £nil)

Year ended 31 March

2021*

£million

2022*

£million

Revenue

LBITA

Loss before tax

Retained losses

Net assets

19.08

(0.02)

(0.41)

(4.03)

0.89

7.47

(1.16)

(1.75)

(3.72)

1.20

* Unaudited

Outpost VFX Limited

Bournemouth

Portfolio

British Smaller Companies VCT2 plc Annual Report & Accounts

29

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Unbiased is a technology-enabled marketplace

that connects consumers to Independent Financial

Advisers, Mortgage Brokers and Accountants. The

company has a strong, well-established position and

brand awareness in the IFA market with a high level

of recurring subscription income from the thousands

of professionals in their network. The proven UK model

is now being launched into the much larger US

financial advisor market.

www.unbiased.co.uk

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

£3,731,000

£6,072,000

December 2019

12.3%

Revenue multiple

Year ended 30 September

2021

£million

2022

£million

Revenue

EBITA (LBITA)

Loss before tax

Retained losses

Net assets

8.00

0.29

(0.32)

(2.19)

2.40

5.73

(0.58)

(1.09)

(1.90)

2.69

Unbiased EC1 Limited

London

Displayplan specialises in creating and delivering

permanent in-store “point of purchase” display

and fixtures. It provides a complete retail display

consultancy service from concept through to design,

sourcing and final installation. Clients include M&S,

Sainsburys and Nike.

www.displayplan.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

Dividends:

£70,000

£4,109,000

January 2012

12.0%

Earnings multiple

£377,000 (2021 £73,500)

Year ended 31 December

2020

£million

2021

£million

Revenue

EBITA

Profit before tax

Retained profits

Net assets

23.62

2.48

2.28

7.97

8.38

18.01

1.40

1.22

6.54

6.95

Displayplan Holdings Limited

Stevenage

Wooshii is a global video production agency using

technology to manage a geographically distributed

network of creative professionals. The company offers

clients the convenience and quality of a traditional

video marketing agency combined with cutting edge

video management tools. It has an impressive client list

including Coca Cola, Google, Microsoft and Amazon.

Wooshii has also developed software tools to enable

its customers to extract greater value from their

historic libraries.

www.wooshiivideoagency.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

Dividends:

£3,096,000

£4,197,000

May 2019

13.3%

Revenue multiple

£109,800 (2021 £90,074)

Year ended 31 March

2021*

£million

2022*

£million

Revenue

LBITA

Loss before tax

Retained losses

Net liabilities

4.30

(1.18)

(1.45)

(5.97)

(4.06)

2.63

(1.07)

(1.24)

(4.51)

(2.95)

* Unaudited

Wooshii Limited

London

30

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

Elucidat provides a cloud-based e-learning authoring

platform which allows its customers to drive down

the cost of producing business-critical training. The

company has impressive customer retention and

a client list including Tesco, Target and Walmart.

www.elucidat.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

Interest:

Dividends:

£2,640,000

£4,039,000

May 2019

10.0%

Revenue multiple

£19,397 (2021 £20,000)

£4,384 (2021 £nil)

Year ended 31 December

2020

£million

2021

£million

Revenue

LBITA

Loss before tax

Retained losses

Net assets

5.11

(0.06)

(0.77)

(1.72)

1.80

3.00

(0.49)

(0.92)

(1.12)

2.41

Elucidat Ltd

Brighton

Force24 provides cloud-based personalised marketing

automation technology trusted by over 350 businesses

including household brands such as Michelin, Tarmac

and Children In Need.

www.force24.co.uk

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

£2,100,000

£3,091,000

November 2020

13.3%

Revenue multiple

Year ended 31 December

2020

£million

Revenue

LBITA

Loss before tax

Retained losses

Net assets

3.48

(0.09)

(0.66)

(0.19)

3.61

2021

£million

4.55

(1.96)

(2.26)

(1.83)

1.97

Force24 Ltd

Leeds

ACC Aviation is the market leader in airline-to-airline

“wet lease” brokerage and associated services. The

company also provides a range of consultancy and

specialist charter services to clients via its global

office network.

www.accaviation.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

£145,000

£3,575,000

November 2014

18.5%

Earnings multiple

Year ended 31 December*

2020

£million

2021

£million

34.91

(0.67)

(3.75)

12.26

Revenue

EBITA (LBITA)

Loss before tax

Retained profits

Net assets

41.84

0.84

(2.23)

9.71

9.73

12.27

*information for NEWACC (2018) Limited shown

ACC Aviation Group Limited

Reigate

British Smaller Companies VCT2 plc Annual Report & Accounts

31

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

SharpCloud provides a leading decision making

platform for managers. It provides the ability to

aggregate fragmented data into easily interpretable

top-down output that shortens decision making cycles

and eliminates decision waste.

www.sharpcloud.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

£2,271,000

£2,508,000

October 2019

13.0%

Revenue multiple

Year ended 31 December

2020

£million

2021

£million

Revenue

LBITA

Loss before tax

Retained losses

Net assets

1.80

(0.76)

(1.05)

(3.38)

3.11

1.42

(1.64)

(1.83)

(2.45)

1.54

SharpCloud Software Limited

London

Vypr is a cloud-based data validation platform

providing industry-leading consumer intelligence for

use in all aspects of product development including

packaging, pricing and naming.

www.vyprclients.com

Cost:

Valuation:

Date of initial investment:

Equity held:

Valuation basis:

£2,200,000

£2,598,000

January 2021

12.9%

Revenue multiple

Year ended 31 March

2021

£million

2022

£million

Revenue

LBITA

Loss before tax

Retained losses

Net assets

2.07

(1.20)

(1.49)

(1.48)

1.05

1.46

(0.03)

(0.27)

(0.16)

2.37

Vypr Validation Technologies Limited

Manchester

STRATEGIC REPORT

The Board carries out a regular

review of the risk environment in

which the Company operates. The

emerging and principal risks and

uncertainties identified by the Board

and techniques used to mitigate these

risks are set out in this section.

The Board seeks to mitigate its emerging and principal

risks by setting policy, regularly reviewing performance

and monitoring progress and compliance. In the mitigation

and management of these risks, the Board rigorously

applies the principles detailed in section 4: “Audit, Risk and

Internal Control” of The UK Corporate Governance Code

issued by the Financial Reporting Council in July 2018.

Details of the Company’s internal controls are contained in

the Corporate Governance Internal Control section on

pages 47 and 48 and further information on exposure to

risks, including those associated with financial instruments,

can be found in note 17a of the financial statements.

The Board has considered emerging risks. The Board

seeks to mitigate emerging risks and identified risks by

regular reviews of performance and monitoring

compliance with policy. The Board has identified the

following as potential emerging risks:

>Deterioration of macro-economic environment

>Geo-political instability

Risk

Factors

Risk

Mitigation

Change

VCT Qualifying Status:

The Company must at all times

ensure compliance with the

conditions for maintenance of

approved VCT status. The loss

of approval as a VCT could lead

to its investors losing the various

tax benefits associated with

VCT investments.

One of the Key Performance Indicators monitored

by the Company is the compliance with VCT

rules. Compliance with these rules is closely

monitored by the Manager on an ongoing basis

and regularly reported to and reviewed by the

Board. The Company also makes use of external

experts, who review the Company’s compliance

with VCT rules on a regular basis. Details of how

the Company manages these requirements can

be found under the heading “Compliance with

VCT Legislative Tests” on pages 14 and 15.

No change

Economic:

Events such as recession and

interest rate fluctuations, which

may include factors arising from

geopolitical shocks, could

adversely affect investee

companies’ performance and

valuations. This could result in

a reduction in the performance

of the Company.

As well as the response to the ‘Investment and

Strategic’ risk on page 33, the Company has a

clear investment policy (summarised on page 10)

and a diversified portfolio operating in a range of

sectors which helps to mitigate against sector

specific impacts. The Manager actively monitors

investee company performance, which provides

quality information for monthly reviews of the

portfolio.

Increased – following a

reduction of risk owing

to COVID19 restrictions

ending, the war in

Ukraine and rising

global inflation has

created a small

increase to this risk.

32

British Smaller Companies VCT2 plc Annual Report & Accounts

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Risk

Mitigation

Change

Investment and Strategic:

Inappropriate strategy, poor asset

allocation or consistently weak

stock allocation may lead to

underperformance and poor

returns to shareholders. The quality

of enquiries, investments, investee

company management teams and

monitoring, and the risk of not

identifying investee company

difficulties may lead to

underperformance by the

Company and poor returns

to shareholders.

The Board reviews strategy annually. At each

of the Board meetings, the directors review the

appropriateness of the Company’s objectives

and stated strategy in response to changes in the

operating environment and peer group activity.

It also reviews compliance of the Manager

with the stated investment strategy.

The Manager carries out appropriate due

diligence on potential investee companies and

their management teams and utilises external

reports where appropriate to assess the viability

of investee businesses before investing.

Wherever possible, a nonexecutive director will

be appointed to the board of the investee

company on behalf of the Company.

No change

Regulatory:

The Company is required to

comply with the Companies Act

2006, the rules of the UK Listing

Authority, the Financial Conduct

Authority’s Prospectus Rules

and UK-adopted International

Financial Reporting Standards; it is

also subject to the AIFMD EU Exit

Regulations. Breach of any of

these might lead to suspension of

the Company’s Stock Exchange

listing, financial penalties or a

qualified audit report.

The Manager and the Company Secretary have

procedures in place to ensure recurring Listing

Rules requirements are met and actively consult

with brokers, solicitors and external compliance

advisers as appropriate.

The Manager ensures that it hires suitably

qualified members of staff who are experienced

with regulatory requirements and relevant

accounting standards.

The key controls around regulatory compliance

are explained on pages 47 and 48.

No change

Legislative:

A change to the VCT regulations

could result in a significant change

to investment strategy which could

adversely impact the Company.

Such changes may also result

in changes to VCT tax reliefs

for investors, which could make

future fundraising difficult.

The Manager is a member of the Venture Capital

Trust Association which engages with the

Government to help shape future legislation.

No change

Reputational:

Inadequate or failed controls might

result in breaches of regulations or

loss of shareholder trust.

The Board is comprised of directors with suitable

experience and qualifications who report annually

to the shareholders on their independence. The

Manager is well-respected, with a proven track

record. It has a formal recruitment process to

employ experienced investment staff.

Advice is sought from external advisors where

required.

No change

British Smaller Companies VCT2 plc Annual Report & Accounts

33

34

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

Risk

Factors

(continued)

Risk

Mitigation

Change

Operational:

The Company is reliant on a

number of third parties, in particular

the Manager, for investment

management and administration

services.

Failure of the operational systems

and Controls of these third parties

could result in an inability to

provide accurate reporting and

monitoring.

The Manager has a documented business

continuity plan, which provides for back-up

services in the event of a system breakdown.

The Manager’s systems are protected against

viruses and other cyber-attacks. The Manager

regularly tests its business continuity plan. Both

the Company and the Manager maintain

appropriate insurances.

No change

Cyber Security and Information

Technology:

A failure in IT systems and controls

might lead to business interruption,

loss of data, the inability of the

Manager to provide accurate

reporting and monitoring or the loss

of Company records.

The Manager has in place significant cybersecurity

controls, including two factor authentication, email

protection software, monitored firewalls and

regularly updated electronic devices. The Manager

is Cyber Essentials Plus certified. Staff at the

Manager regularly receive training in relation to

their cybersecurity obligations.

No change

ESG:

The Company, the Manager and

the portfolio companies may fail to

positively contribute towards, and

adapt to, the global transition

towards decarbonisation and other

ESG priorites, which could result in

regulatory breaches, reduced

investor and/or employee attraction

and the reduced ability of portfolio

companies to attract lending to

fund their growth.

The Manager is a signatory of the UN’s Principles

for Responsible Investment; it has published its

Sustainable Investment Principles; and has

rewritten its Ethical Policy. Its investment process

now includes a set of over 50 thematic ESG KPIs,

with which it is now tracking its portfolio over time

across four key areas:

Improve our Society; Protect our Environment;

Grow our Economy; and Value our People.

Further details can be found on pages 21 to 23.

No change

Liquidity:

a. The Company may not have

sufficient liquidity available to

meet its financial obligations.

b. The VCT invests into smaller

unquoted companies, which

by their nature are illiquid,

therefore they may be difficult

to realise, at fair market value,

at short notice.

The Company’s overall liquidity risks and cashflow

forecasts are monitored on an ongoing basis by the

Manager and on a quarterly basis by the Board.

The Company’s valuation methodology takes

account of potential liquidity restrictions in the

markets in which it invests.

For any publicly listed investments, accounting

standards require an ongoing assessment of the

liquidity of the stock.

The Manager regularly reviews its exit plans for

investee companies to allow it to identify the

optimal point at which to seek a sale. As part of a

planned exit, the assistance of a third party adviser

will normally be sought, with a view to identifying

the largest number of possible purchasers.

No change

British Smaller Companies VCT2 plc Annual Report & Accounts

35

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Section 172 Statement

This Section 172 Statement should be read in

conjunction with the other contents of the Strategic

Report, on pages 6 to 36.

Section 172 of the Companies Act 2006 requires that a

director must act in the way that they consider, in good

faith, would be most likely to promote the success of the

company for the benefit of its members as a whole, and

in doing so have regard (amongst other matters) to:

>the likely consequences of any decision in the long

term;

>the interests of the company’s employees;

>the need to foster the company’s business

relationships with suppliers, customers and others;

>the impact of the company’s operations on the

community and the environment;

>the desirability of the company maintaining a

reputation for high standards of business conduct;

and

>the need to act fairly as between members of the

company.

The Company takes a number of steps to understand

the views of investors and other key stakeholders and

considers these, along with the matters set out above,

in Board discussions and decision making.

Key Stakeholders

As an investment company with no employees, the

Company’s key stakeholders are its investors, its service

providers and its portfolio companies.

Investors

The Board engages and communicates with

shareholders in a variety of ways.

The Company encourages shareholders to attend its

Annual General Meeting.

Along with British Smaller Companies VCT plc, the

Company held two Investor Workshops during the year.

A physical workshop was held on 29 June 2022 and an

online webinar was hosted on 1 December 2022. Both

were well attended.

Maintaining the Company’s status as a VCT is critical

to meeting the Company’s objective to maximise Total

Return and provide investors with an attractive long-term

tax-free dividend yield. The Company receives regular

reports on this issue from the Manager and has taken

various steps in the year to ensure that the relevant

tests are met.

The Board also aims for investors to continue to have

tax efficient opportunities to invest in the Company,

and to generate tax-free returns from both capital

appreciation and ongoing dividends.

After carefully considering its funding needs, on 30

November 2022, the Company issued a prospectus,

alongside British Smaller Companies VCT plc, to raise

up to £75 million in aggregate for the 2022/23 tax year.

Following shareholder approval at a General Meeting,

in March 2022, the Company cancelled the balance

of its Share Premium, £44.3 million, which was

transferred to the Capital Reserve, giving the Company

greater flexibility to continue to pay regular dividends to

shareholders and to provide its periodic offer to buy back

shares from shareholders. As set out on page 63, this

will become available for distribution at various times

over the period to 1 January 2026.

During the year the Board kept its arrangements for

dividends, share buy-backs and the dividend re-

investment scheme under constant review. Along with

normal dividends totalling 3.0 pence per ordinary share

in the year ended 31 December 2022, a special dividend

of 2.25 pence per ordinary share was paid in January

2023, following the realisation of the Company’s

investments in Springboard and Intelligent Office.

Manager

The Company’s most important service provider is its

Manager. There is regular contact with the Manager,

and members of the Manager’s board attend all of the

Company’s Board meetings. There is also an annual

strategy meeting with the Manager, alongside the board

of British Smaller Companies VCT plc.

The Manager maintains strong relationships with

relevant media publications and a wide range of

distributors for the Company’s shares, including

wealth managers, independent financial advisers and

execution-only brokers. RAM Capital acts as a promoter

of the Company’s shares to smaller distributors.

Other Matters

36

British Smaller Companies VCT2 plc Annual Report & Accounts

STRATEGIC REPORT

The Company is a member of the Association of

Investment Companies which promotes the interests

of investment companies, including VCTs. The Manager

is a founder member of the Venture Capital Trust

Association, which promotes the interests of VCTs

in a variety of ways.

Portfolio Companies

The Company holds minority investments in its portfolio

companies and has delegated the management of the

portfolio to the Manager. The Manager provides the

Board with regular updates on the performance of each

portfolio company at least quarterly and the Board is

made aware of all major issues.

The Manager has a dedicated Portfolio team to assist

the portfolio companies with the challenges that they

face as fast-growing companies. The Manager promotes

ongoing, sustainable growth within the businesses; this

often involves improving systems and processes, as well

as significant job creation.

Employees

The Company has no employees. The Board is

composed of one female non-executive director and

two male non-executive directors. For a review of the

policies used when appointing directors to the Board

of the Company, please refer to the Directors’

Remuneration Report.

Environment and Community

The Company seeks to ensure that its business is

conducted in a manner that is responsible to the

environment. The management and administration of the

Company is undertaken by the Manager, YFM Private

Equity Limited, who recognises the importance of its

environmental responsibilities and has signed up to the

United Nations’ Principles for Responsible Investment.

More details of the work that the Manager has done in

this area are set out on pages 21 to 23. Its Sustainable

Investment Policy can be found at www.yfmep.com/who-

we-are/our_impact/.

Business Conduct

The Company has a zero tolerance approach to bribery.

The following is a summary of its policy:

>It is the Company’s policy to conduct all of its

business in an honest and ethical manner. The

Company is committed to acting professionally,

fairly and with integrity in all its business dealings

and relationships;

>The directors of the Company, the Manager and

any other service providers must not promise, offer,

give, request, agree to receive or accept financial or

other advantage in return for favourable treatment,

to influence a business outcome or gain any

business advantage on behalf of the Company

or encourage others to do so;

>The Company has communicated its anti-bribery

policy to the Manager and its other service

providers and, in turn, the Manager ensures that

portfolio companies implement appropriate policies

of their own; and

>The Manager has its own Anti-Bribery and

Anti-Slavery policies and ensures that portfolio

companies adopt a similar policy.

The Strategic Report on pages 6 to 36 is approved

by order of the Board.

Peter Waller

Chairman

20 March 2023

Other Matters

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

37

Peter Waller Chairman

(appointed to the Board 1 November 2010, took over

the role of Chair on 7 May 2019) is an experienced

chairman and director with extensive UK and

international executive experience in the IT technology,

software and services sector. He initially worked with

IBM and Hitachi then with Spring plc, at that time one

of the UK’s largest recruitment and training businesses.

Peter is also Chair of KeyPoint Technologies (UK)

Limited and the Director and Founder of Turnberry

Management Company Limited. Over the past two

decades Peter has worked as a board member with

multiple private and public companies. His particular

skills are in sales and marketing and working with

companies to develop successful sales growth

strategies.

Barbara Anderson

(appointed 1 October 2020) is an experienced

Non-Executive Director and Chair who has worked

extensively with SMEs, third sector and PLCs in

regulated sectors, international private companies and

venture capital specialists. Amongst other roles, Barbara

is currently Non-Executive Director and Chair of Audit

& Risk at Sovereign Housing Association, Independent

Board Member and Chair of Audit & Risk at SmartDCC

Ltd and Non-Executive Director and Chair of the

Remuneration Committee at British Business Bank plc.

Her expertise includes innovation for growth and

sustainability including ESG, strategic planning,

start-up acceleration and business transformation.

Roger McDowell

Chair of the Audit & Risk Committee (appointed 6 March

2019) has considerable experience as a chairman and

non-executive director of a wide range of technology,

business services and manufacturing businesses.

Following the flotation of his family’s business and

subsequent trade sale, he began his plural career in

2000, when he took board roles in three private equity

backed technology businesses. He is chairman of

Hargreaves Services Plc, Avingtrans Plc, Flowtech

Fluidpower Plc and Brand Architekts Group Plc and

non-executive director of Tribal Group Plc and Proteome

Sciences Plc. Roger is Chairman of the Audit & Risks

Committee at Proteome Sciences.

Directors

CORPORATE GOVERNANCE

Secretary

The City Partnership (UK) Limited

The Mending Rooms

Park Valley Mills

Meltham Road

Huddersfield

HD4 7BH

Registered No: SC269164

Registered Office

of the Company

5th Floor

Valiant Building

14 South Parade

Leeds

LS1 5QS

Registered No:

04084003

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

38

British Smaller Companies VCT2 plc Annual Report & Accounts

The directors present their report

and audited financial statements of

British Smaller Companies VCT2 plc

("the Company") for the year ended

31 December 2022.

Principal Activity

The Company is a public limited company incorporated

and domiciled in the United Kingdom. The address of

the registered office and principal place of business

is 5th Floor, Valiant Building, 14 South Parade, Leeds,

LS1 5QS.

The Company has its primary, and sole, listing on the

London Stock Exchange.

The principal activity of the Company is the making

of long term equity and loan investments, mainly in

unquoted businesses.

The Company operates as a venture capital trust

(“VCT”) and has been approved by HM Revenue &

Customs as an authorised venture capital trust under

Chapter 3 Part 6 of the Income Tax Act 2007. It is

the directors’ intention to continue to manage the

Company’s affairs in such a manner as to comply

with Chapter 3 Part 6 of the Income Tax Act 2007.

Business Performance and Future Prospects

A detailed and fair review of the Company’s business,

its development, its financial performance during and

at the end of the financial year, and its future prospects

is set out in the Strategic Report on pages 6 to 36. The

principal risks and uncertainties the Company faces

are detailed on pages 32 to 34.

The Board believes that the Annual Report and Financial

Statements taken as a whole is fair, balanced and

understandable and provides the information necessary

for shareholders to assess the Company’s performance,

business model and strategy.

Results and Dividends

The Statement of Comprehensive Income is set out on

page 60. The profit before and after taxation for the year

amounted to £6,253,000 (2021: £20,389,000).

During the year the Company paid a total of £5,444,000

(2021: £11,015,000) in dividends totalling 3.0 pence per

ordinary share (2021: 8.0 pence). A detailed review can

be found in note 5 on page 73.

A special dividend of 2.25 pence per ordinary share in

respect of the year ending 31 December 2023 was paid

on 11 January 2023 to shareholders on the register on

18 November 2022. The directors have announced an

interim dividend of 1.5 pence per ordinary share for the

year ending 31 December 2023. The dividend will be

paid on 26 June 2023 to shareholders on the register

on 12 May 2023.

The net asset value per ordinary share at 31 December

2022 was 61.6 pence (2021: 61.5 pence). The transfer

to and from reserves is given in the Statement of

Changes in Equity on page 62.

Going Concern

The directors have carefully considered the issue of

going concern in view of the Company’s activities and

associated risks. The Company has a well-diversified

portfolio with businesses in a variety of sectors, many of

which are well funded. Some portfolio companies may

require additional funding in the near- to medium-term;

the Company is well placed to provide this, where

appropriate.

The Company has a significant level of liquidity, which

will be further enhanced by the current fundraising. In

addition, the Board has control over, and can flex as

appropriate, the Company’s major outgoings, which

predominantly comprise investments, dividends and

share buy-backs.

The directors have also assessed whether material

uncertainties exist and their potential impact on the

Company’s ability to continue as a going concern; they

have concluded that no such material uncertainties exist.

The directors have carefully considered the issue of

going concern and are satisfied that the Company has

sufficient resources to meet its obligations as they fall

due for a period of at least 12 months from the date of

this report. As at 31 December 2022, the Company held

cash balances, listed investment funds and fixed term

deposits with a combined value of £30,070,000; this

excludes gross Applications of £23.5 million to date from

the current fundraising, which will be allotted in April

2023. Cash flow projections show the Company has

sufficient funds to meet both its contracted expenditure

and its discretionary cash outflows in the form of share

buy-backs and dividends. In the year ended 31

December 2022, the Company’s costs and discretionary

expenditures were:

Directors’

Report

For the year ended 31 December 2022

CORPORATE GOVERNANCE

British Smaller Companies VCT2 plc Annual Report & Accounts

39

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Administrative expenses

(before fair value movements related

to credit risk and incentive fee)

Share buy-backs1,572

Dividends (before DRIS)5,444

Total9,375

Taking all of the above into consideration, the directors

are satisfied that the Company has sufficient resources

to meet its obligations for at least 12 months from the

date of this report and therefore believe that it is

appropriate to continue to apply the going concern basis

of accounting in preparing the financial statements.

Statement on Long-term Viability

The AIC’s Code of Corporate Governance requires

the Board to assess the Company’s viability over an

appropriate period. The directors believe that a period

of three years is appropriate to assess the Company’s

viability because the Company is required to invest

funds raised within this timeframe in order to retain its

status as a VCT.

In making their assessment, the directors have reviewed

the types of investment that the Company will be able to

make under current VCT legislation and they believe that

the existing portfolio and future investments will be able

to deliver the Company’s objective “to maximise total

return and provide investors with a long-term tax free

dividend yield whilst maintaining the Company’s status

as a venture capital trust”.

The directors have also taken into account the emerging

and principal risks and their mitigation identified in the

Strategic Report on pages 32 to 34, the nature of the

Company’s business, including its reserves of cash (plus

anticipated proceeds following allotment of the current

fundraising in April 2023), the potential of its venture

capital portfolio to generate returns in the future and, as

noted above, the ability of the directors to minimise the

level of cash outflows, should this be necessary.

Taking into account the Company’s current position and

principal risks, the directors have concluded that there is

a reasonable expectation that the Company will be able

to continue in operation and meet its liabilities as they

fall due over that period.

£’000

Corporate Governance

The statement on corporate governance set out on

pages 42 to 48 is included in the Directors’ Report

2,359

by reference.

Directors’ and Officers’ Liability Insurance

The Company has, as permitted by the Companies Act

2006, maintained insurance cover on behalf of the

directors, indemnifying them against certain liabilities

which may be incurred by any of them in relation to

the Company.

Provision of Information to the External Auditor

The directors confirm that so far as each director is

aware, there is no relevant audit information of which

the Company’s auditor is unaware; and that each of the

directors has taken all the steps that they ought to have

taken as a director in order to make themselves aware

of any relevant audit information and to establish that

the Company’s auditor is aware of that information.

Share Capital

As shown in note 11 of the financial statements, the

Company has only one class of share, being ordinary

shares of 10 pence each.

Buy-back and Issue of Ordinary Shares

Under the existing authority, which expires on the

conclusion of the Company’s Annual General Meeting

in 2025 or on 13 June 2025, whichever is the later, the

Company has the power to purchase shares up to

14.99 per cent of the Company’s ordinary share capital

as at 21 March 2022, being 27,338,720 ordinary shares.

During the year, the Company purchased 2,737,038

ordinary shares of 10 pence each in the market (as

disclosed in the table on page 40), for aggregate

consideration, including costs, of £1,572,000. These

shares are held in treasury. The buy-back was in

accordance with the Company’s buy-back policy,

and under the authorities granted by the shareholders

at general meetings held on 7 May 2019 and 13

June 2022. At 31 December 2022 18,666,812 shares

were held in treasury, representing 9.3 per cent of the

total issued share capital (including treasury shares)

at that date.

40

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

Directors’

Report

(continued)

Buy-back of Shares

Date

Number of

Ordinary shares

of 10p

bought back

Percentage

of issued

share capital

at that date

Consideration

paid per

ordinary

share (pence)

29 March 2022

1,182,557

0.65%

58.93

28 June 2022

380,153

0.21%

57.50

27 September 2022

556,386

0.31%

56.36

16 December 2022

617,942

0.34%

54.22

The directors have unconditional authority to allot shares

in the Company or to grant rights to subscribe for or to

convert any security into ordinary shares in the

Company up to an aggregate nominal amount of

£10,000,000 (equivalent to 100,000,000 shares),

expiring on 13 September 2023.

This authority will be replaced by a new authority to

issue shares up to an aggregate nominal amount of

£10,000,000 at this year’sAnnual General Meeting.

40,224,521 shares were issued arising from the

Company’s January 2022 fundraising. These shares

were issued under the previous authority granted by the

shareholders at the annual general meeting on 10 June

2021, which expired on 10 September 2022. Further

details are given in note 11 on page 83.

In addition, the directors have authority to allot shares

and waive pre-emption rights in the Company in

connection with the Company’s Dividend Re-investment

Scheme (DRIS), up to an aggregate nominal amount of

£2,000,000 (equivalent to 20,000,000 shares) until 7

May 2024.

During the year to 31 December 2022, a total of

1,826,028 ordinary shares were issued under the

Company’s DRIS.

Capital Disclosures

The following information has been disclosed in

accordance with Schedule 7 of the Large and Medium

Sized Companies and Groups (Accounts and Reports)

Regulations 2008 (as amended):

> The Company’s capital structure is summarised in

note 11 to the financial statements. Each ordinary

share carries one vote. There are no restrictions on

voting rights or any agreement between holders of

securities that result in restrictions on the transfer

of securities or on voting rights;

> There are no securities carrying special rights with

regard to the control of the Company;

> The Company does not have an employee share

scheme;

> The rules concerning the appointment and

replacement of directors, amendments to the Articles

of Association and powers to issue or buy-back the

Company’s shares are contained in the Articles of

Association of the Company and the Companies

Act 2006;

> With the exception of the Manager’s Incentive

Agreement, there are no agreements to which the

Company is party that take effect, alter or terminate

upon a change in control following a takeover bid;

and

> There are no agreements between the Company and

its directors providing for compensation for loss of

office that may occur because of a takeover bid.

Environment

The Company is a low energy user and is therefore

exempt from the reporting obligations under the

Companies (Director’s Report) and Limited Liability

Partnerships (Energy and Carbon Report) Regulations

2018. The Company has no greenhouse gas emissions

to report from the operations of the Company, nor does it

have responsibility for any emissions producing sources

including those within its underlying investment portfolio

under part 7 of schedule 7 to the Large and Medium-

sized Companies and Groups (Accounts and Reports)

Regulations 2008, as amended.

British Smaller Companies VCT2 plc Annual Report & Accounts

41

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Directors and their Interests

The directors of the Company at 31 December 2022,

their interests and contracts of significance are set out in

the Directors’ Remuneration Report on pages 49 to 51.

Substantial Shareholdings

The directors are not aware of any substantial

shareholdings representing 3 per cent or more of the

Company’s issued share capital as at 31 December

2022 and the date of this report.

Independent Auditor

BDO LLP has indicated its willingness to continue in

office and a resolution concerning its reappointment

will be proposed at the Annual General Meeting.

There were no non-audit service provided by BDO LLP

during the year.

Financial Instruments

Details of the financial instruments held by the Company

and the risks associated with them are set out on pages

80 to 84 and this information is accordingly incorporated

into the Directors’ Report by reference.

Employment Policies

The employment policies of the Company are set out on

page 49.

Events after the Balance Sheet Date

Having previously assessed its expected cash

requirements, the Company announced a new share

offer on 30 November 2022, alongside British Smaller

Companies VCT plc, with the intention of raising up to

£75 million, in aggregate which included an over-

allotment facility of £25 million, in aggregate. Gross

Applications exceeding £62.5 million have been received

as at the date of this report, of which £23.5 million relate

to the Company. The related allotment will take place in

early April 2023.

Since year-end, the Company has invested £2.4 million

into DrDoctor, a patient engagement and

communications software platform. The Company also

realised its investment in Wakefield Acoustics at the

value recognised at 31 December 2022 (£0.6 million).

Annual General Meeting

Shareholders will find the Notice of the Annual General

Meeting on pages 90 to 92 of these financial statements.

The business of the meeting includes an ordinary

resolution (Resolution 8) proposed to ensure the

directors retain the authority to allot shares in the

Company until the later of 15 September 2024 or the

date of the 2024 Annual General Meeting up to an

aggregate nominal amount of £10,000,000 (representing

approximately 55 per cent of the issued ordinary share

capital of the Company as at 20 March 2023, excluding

treasury shares).

Also included is the following special resolution:

Resolution 9 is proposed to empower the directors to

allot shares under the authority granted by the ordinary

resolution above and to sell treasury shares without

regard to any rights of pre-emption on the part of the

existing shareholders.

This report was approved by the Board on 20 March

2023 and signed on its behalf by

British Smaller Companies VCT2 plc

Registered number 04084003

Peter Waller

Chairman

42

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

The Board is committed to the

principle and application of sound

corporate governance and confirms

that the Company has taken steps,

appropriate to a venture capital

trust and relevant to its size and

operational complexity, to

comply with the principles and

recommendations of the Association

of Investment Companies’ Code of

Corporate Governance issued in

February 2019 (“AIC Code”) available

on the AIC website www.theaic.co.uk.

The AIC Code addresses all the principles set out in the

UK Corporate Governance Code issued by the Financial

Reporting Council (“FRC”), as well as setting out

additional principles and recommendations on issues

which are of specific relevance to the Company.

The UK Corporate Governance Code can be found

on the website of the FRC at www.frc.org.uk.

The Board considers that reporting against the principles

and recommendations of the AIC will provide better

information to shareholders.

The Company is committed to maintaining the highest

standards of corporate governance and during the

year to 31 December 2022 complied with the

recommendations of the AIC Code and relevant

provisions of the UK Corporate Governance Code,

except as set out below.

The UK Corporate Governance Code includes

provisions relating to the appointment of a chief

executive and a recognised senior independent non-

executive director, the presumption concerning the

Chairman’s independence and the need for an internal

audit function. For reasons set out in the AIC Code, and

in the introduction to the UK Corporate Governance

Code, the Board considers these provisions are not

relevant to the position of British Smaller Companies

VCT2 plc, which is an externally advised venture capital

trust. The Company has therefore not reported further in

respect of these provisions.

Role of the Board

An agreement between the Company and YFM Private

Equity Limited sets out the matters over which the

Manager has authority. This includes monitoring of the

Company’s assets and the provision of accounting,

company secretarial, administration and some marketing

services. All other matters are reserved for the approval

of the Board. A formal schedule of matters reserved to

the Board for decision has been approved. This includes

determination and monitoring of the Company’s

investment objectives and policy and its future strategic

direction, gearing policy, management of the capital

structure, appointment and removal of third party service

providers, review of key investment and financial data

and the Company’s corporate governance, risk control

and custody arrangements.

The Board meets at least quarterly; additional meetings

are arranged as necessary. Full and timely information is

provided to the Board to enable it to function effectively

and to allow directors to discharge their responsibilities.

There is an agreed procedure for directors to take

independent professional advice if necessary, at the

Company’s expense. This is in addition to the access

that every director has to the advice and services of the

Company Secretary, who is responsible to the Board

for ensuring that applicable rules and regulations are

complied with and that Board procedures are followed.

The Company indemnifies its directors and officers and

has purchased insurance to cover its directors. Neither

the insurance nor the indemnity provide cover if the

director has acted fraudulently or dishonestly.

Board Composition

The Board consists of three non-executive directors,

all of whom are regarded by the Board as independent

of each other and also of the Company’s Manager,

including the Chairman. The independence of the

Chairman was assessed upon his appointment.

Although The UK Corporate Governance Code

presumes that the chairman of a company is deemed

not to be an independent director, the remaining

directors, having considered the nature of the role

Corporate

Governance

British Smaller Companies VCT2 plc Annual Report & Accounts

43

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

in the Company, are satisfied that Mr P C Waller fulfils

the criteria for independence as a non-executive director.

The directors have a breadth of investment, business

and financial skills and experience relevant to the

Company’s business and provide a balance of power

and authority including recent and relevant financial

experience. Brief biographical details of each director

are set out on page 37.

A review of Board composition and balance is included

as part of the annual performance evaluation of the

Board, details of which are given below.

There are no executive officers of the Company.

Given the structure of the Board and the fact that the

Company’s administration is conducted by YFM Private

Equity Limited, the Company has not appointed a chief

executive officer or a senior independent non-executive

director. In addition, the directors consider that the role

of a senior independent non-executive director is taken

on by all of the directors. Shareholders are therefore

able to approach any director with any queries they

may have.

Boardroom Diversity

The Board is committed to ensuring that the Company

is run in the most effective manner. Consequently the

Board monitors the diversity of all directors to ensure

an appropriate level of experience and qualification.

The Board believes in the value and importance of

diversity in the boardroom but does not consider that it

is appropriate or in the best interests of the Company

and its shareholders to set prescriptive targets for

gender or nationality on the Board.

Diversity of thought, experience and approach are all

important and the directors will always seek to appoint

on merit against objective criteria.

Tenure

Directors are initially appointed until the following Annual

General Meeting when, under the Company’s Articles

of Association, it is required that they be elected by

shareholders. Thereafter, it is the Board’s policy that

a director’s appointment will run for a term of one year

until the next Annual General Meeting. Subject to the

performance evaluation carried out each year, the Board

will agree whether it is appropriate for the director

to seek a further term. The Board, when making a

recommendation, will take into account the ongoing

requirements of The UK Corporate Governance Code,

including the need to refresh the Board and its

Committees.

The Board seeks to maintain a balance of skills and

the directors are satisfied that as currently composed

the balance of experience and skills of the individual

directors is appropriate for the Company, in particular

with regards to investment appraisal and investment

risk management.

The terms and conditions of directors’ appointments are

set out in formal letters of appointment, copies of which

are available for inspection on request at the Company’s

registered office and at the Annual General Meeting. Mr

P C Waller’s, Ms B LAnderson’s and Mr R S McDowell’s

appointment are terminable by either the director or the

Company on three months’ notice.

The directors recommend the re-election of Mr P C

Waller, Ms B LAnderson and Mr R S McDowell at

this year’sAnnual General Meeting, because of their

commitment, experience and contribution to the

Company.

Meetings and Committees

The Board delegates certain responsibilities and

functions to Committees. Directors who are not

members of Committees may attend at the invitation

of the Chairman.

The table on page 44 details the number and function

of the meetings attended by each director.

During the year there were nine formal Board

meetings, three Audit & Risk Committee meetings,

two Nominations & Remuneration Committee meetings,

one Allotment Committee meeting and two General

meetings. The directors met via video, telephone and

electronic conferences on 38 other occasions.

44

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

Meetings Attended

Mr P CMs B L Mr R S

DirectorWaller Anderson McDowellTotal

Board meetings9979

Audit & Risk Committee3333

Nominations & Remuneration

Committee2222

Allotment Committee-1-1

Video, telephone &

electronic conferences38383738

General meeting2112

Total54545055

In addition, there were two DRIS allotment meetings

which the directors were not required to attend, but

which were attended by the Company Secretary.

Training and Appraisal

On appointment, the Manager and Company Secretary

provide all directors with induction training. Thereafter,

regular briefings are provided on changes in regulatory

requirements that affect the Company and its directors.

Directors are encouraged to attend industry and other

seminars covering issues and developments relevant

to VCTs.

The performance of the Board has been evaluated in

respect of the financial year ended 31 December 2022.

The Board, led by the Chairman, has conducted a

performance evaluation to determine whether it and

individual directors are functioning effectively.

The factors taken into account were based on the

relevant provisions of The UK Corporate Governance

Code and included attendance and participation at

Board and Committee meetings, commitment to Board

activities and the effectiveness of their contribution.

The results of the overall evaluation process are

communicated to the Board. Performance evaluation

continues to be conducted on an annual basis.

The Chairman has confirmed that the performance

of the other directors being proposed for re-election

continues to be effective and that they continue to show

commitment to the role. The independent directors have

similarly appraised the performance of the Chairman.

They considered that the performance of Mr P C Waller

continues to be effective.

Audit & Risk Committee

The Audit & Risk Committee consists of the directors of

the Company. It meets at least three times each year.

The directors consider that it is currently appropriate

that the Chairman of the Committee should be Mr R S

McDowell due to his experience in the role. The

members of the Committee consider that they have the

requisite skills and experience to fulfil the responsibilities

of the Committee, and that the Chair of the Committee

meets the requirements of The UK Corporate

Governance Code as to recent and relevant financial

experience.

The Audit & Risk Committee’s terms of reference

include the following roles and responsibilities:

>Monitoring and making recommendations to the

Board in relation to the Company’s published

financial statements (including in relation to the

valuation of the Company’s unquoted investments)

and other formal announcements relating to the

Company’s financial performance;

>Monitoring and making recommendations to the

Board in relation to the Company’s internal control

(including internal financial control) and risk

management systems;

>Annually considering the need for an internal audit

function;

>Making recommendations to the Board in relation to

the appointment, re-appointment and removal of the

external auditor and approving the remuneration

and terms of engagement of the external auditor;

>Reviewing and monitoring the external auditor’s

independence and objectivity and effectiveness of

the audit process, taking into consideration relevant

UK professional and regulatory requirements;

>Reviewing and monitoring the Company’s tax status

and compliance;

>Monitoring the extent to which the external auditor

is engaged to supply non-audit services; and

>Ensuring that the Manager has arrangements in

place for the investigation and follow-up of any

concerns raised confidentially by staff in relation to

the propriety of financial reporting or other matters.

It reviews the terms of the investment management

agreement and examines the effectiveness of the

Company’s internal control and risk management

systems, receives information from the Manager’s

compliance department and reviews the scope and

results of the external audit, its cost effectiveness and

the independence and objectivity of the external auditor.

Corporate

Governance

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

45

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

The directors’ statement on the Company’s system of

internal control is set out on pages 47 and 48.

The Audit & Risk Committee has written terms of

reference, which clearly define its responsibilities, copies

of which are available for inspection on request at the

Company’s registered office and at the Annual General

Meeting, and also on the Company’s website at

www.bscfunds.com.

The Company does not have an internal audit function

as it is not deemed appropriate given the size of the

Company and the nature of the Company’s business.

However, the Committee considers annually whether

there is a need for such a function and, if so, would

recommend this to the Board.

During the year ended 31 December 2022 the Audit

& Risk Committee discharged its responsibilities by:

>Reviewing and approving the external auditor’s

terms of engagement, remuneration and

independence;

>Reviewing the external auditor’s plan for the audit

of the Company’s financial statements, including

identification of key risks;

>Reviewing YFM Private Equity Limited’s statement

of internal controls operated in relation to the

Company’s business and assessing the

effectiveness of those controls in minimising

the impact of key risks;

>Reviewing reports on the effectiveness of the

Manager’s compliance procedures;

>Reviewing the appropriateness of the Company’s

accounting policies;

>Reviewing the Company’s draft annual financial

statements, half yearly results statement and

interim management statements prior to Board

approval, including the proposed fair value of

investments as determined by the directors;

>Reviewing the external auditor’s detailed reports to

the Audit & Risk Committee on the annual financial

statements; and

>Recommending to the Board and shareholders the

re-appointment of BDO LLP as the Company’s

external auditor.

The key areas of risk that have been identified and

considered by the Audit & Risk Committee in relation

to the business activities and financial statements of

the Company are as follows:

>Valuation of unquoted investments; and

>Compliance with HM Revenue & Customs’

conditions for maintenance of approved venture

capital trust status.

These issues were discussed with the Manager and the

auditor at the pre-year-end audit planning meeting and

at the conclusion of the audit of the financial statements.

Valuation of Unquoted Investments

The Audit & Risk Committee reviewed the estimates

and judgements made in the investment valuations and

was satisfied that they were appropriate. The Manager

confirmed to the Audit & Risk Committee that the

investment valuations had been carried out consistently

with prior periods and in accordance with published

industry guidelines, taking account of the latest available

information about investee companies; current market

data; and a report from the auditor, including key audit

findings in respect of the valuations.

Venture Capital Trust Status

The Manager confirmed to the Audit & Risk Committee

that the conditions for maintaining the Company’s status

as an approved venture capital trust had been complied

with throughout the year. The position was also reviewed

by the Company’s advisers.

Financial Statements

The Manager confirmed to the Audit & Risk Committee

that it was not aware of any material unadjusted

misstatements. Having reviewed the reports received

from the Manager and the auditor, the Audit & Risk

Committee is satisfied that the key areas of risk and

judgement have been appropriately addressed in the

financial statements and that the significant assumptions

used in determining the value of assets and liabilities

and revenue recognition have been properly appraised

and are sufficiently robust.

46

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

Corporate

Governance

(continued)

Relationship with the Auditor

As part of the review of audit effectiveness and

independence, BDO LLP has confirmed that it is

independent of the Company and has complied with

applicable auditing standards. BDO LLP was appointed

as the result of a competitive tendering process in 2016.

As a consequence, this is their seventh year of office as

auditor; in accordance with professional guidelines the

initial engagement partner was rotated off the audit after

five years; as such, this is the second year of the current

partner’s tenure.

Having completed its review, the Audit & Risk Committee

is satisfied that BDO LLP remained effective and

independent in carrying out its responsibilities up to the

date of signing this report and its recommendation for

reappointment is endorsed by the Board. No non-audit

services were provided by BDO LLP during the year.

Nominations & Remuneration Committee

The Company has a Nominations & Remuneration

Committee, which consists of the directors, all of whom

are considered by the Board to be independent of the

Manager. The Chairman of the Board acts as Chairman

of the Nominations & Remuneration Committee.

In considering appointments to the Board, the

Nominations & Remuneration Committee takes into

account the ongoing requirements of the Company and

the need to have a balance of skills and experience

within the Board.

Meetings are held as and when required. There were

two Nominations & Remuneration Committee meetings

during the year.

The Board considers succession planning at least

annually, especially in relation to the positions of the

Chairman and the Chairman of the Audit & Risk

Committee.

Investment Committee

The Board has determined that, due to the investment

procedures currently in place, in its opinion there is no

role for an independent Investment Committee.

Allotment Committee

The Company has an Allotment Committee, which

consists of the directors, all of whom are considered

by the Board to be independent of the Manager. The

quorum for Committee meetings is one director, unless

otherwise determined by the Board. In addition, the

Company Secretary has an authority to allot shares

under the DRIS.

The Committee considers and, if appropriate, authorises

the allotment of shares. The Committee ensures that the

total number of shares to be issued does not exceed the

authority given by the shareholders. There are no written

terms of reference.

Relations with Shareholders

The Board regularly monitors the shareholder profile

of the Company. It aims to provide shareholders with

a full understanding of the Company’s activities and

performance, and reports formally to shareholders at

least twice a year by way of the Annual Report and

the Interim Report. This is supplemented by the daily

publication of the Company’s share price and the

publication of the net asset value of the Company

for the two quarters of the year where an Annual or

Interim Report is not normally issued (31 March and

30 September), through the London Stock Exchange.

All shareholders have the opportunity, and are

encouraged, to attend the Company’s Annual General

Meeting, at which the directors and representatives

of the Manager are available in person to meet with

and answer shareholders’ questions. In addition,

representatives of the Manager periodically hold

shareholder workshops which review the Company’s

performance and industry developments, and which give

shareholders a further opportunity to meet members

of the Board and chief executives or chairpersons of

some of the investee companies. During the year, the

Company’s Manager has held regular discussions with

shareholders. The directors are made fully aware of

shareholders’ views. The Chairman and directors make

themselves available, as and when required, to address

shareholder queries. The directors may be contacted

British Smaller Companies VCT2 plc Annual Report & Accounts

47

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

through the Company Secretary, whose details are

shown on page 37.

The Company’s Annual Report and Notice of the

Annual General Meeting are published in time to give

shareholders at least 21 clear days’ notice of the

Annual General Meeting. Shareholders wishing to raise

questions in advance of the meeting are encouraged to

write to the Company Secretary at the address shown

on page 37. Separate resolutions are proposed for each

separate issue. Proxy votes will be counted and the

results announced at the Annual General Meeting for

and against each resolution.

Internal Control and Risk Management

Under an agreement dated 28 November 2000,

superseded by an agreement dated 31 October 2005

and as varied by agreements dated 8 December 2010,

26 October 2011, 16 November 2012, 17 October 2014,

7 August 2015 and 13 November 2019, certain functions

of the Company have been sub-contracted to YFM

Private Equity Limited. The Board receives operational

and financial reports on the current state of the

Company and on appropriate strategic, financial,

operational and compliance issues. These matters

include, but are not limited to:

>A clearly defined investment strategy for the

Manager to the Company;

>All decisions concerning the acquisition or disposal

of investments are ratified by the Board;

>Regular reviews of the Company’s investments,

liquid assets and liabilities, revenue and

expenditure;

>Regular reviews of compliance with the VCT

regulations to retain its status; and

>The Board receives copies of the Company’s

management accounts on a regular basis showing

comparisons with budget. These include a report by

the Manager with a review of performance.

Additional information is supplied on request.

The Board confirms the procedures to implement the

guidance detailed in Principle O of the AIC Code were in

place throughout the year ended 31 December 2022

and up to the date of this report. A detailed review of the

risks faced by the Company and the techniques used to

mitigate these risks can be found in the Strategic Report

on pages 32 to 34.

The Board acknowledges that it is responsible for

overseeing the Company’s system of internal control

and for reviewing its effectiveness. Such a system is

designed to manage rather than eliminate the risk of

failure to achieve business objectives and can only

provide reasonable and not absolute assurance against

material misstatement or loss.

The Board arranges its meeting agenda so that risk

management and internal control is considered on

a regular basis and a full robust risk and control

assessment takes place no less frequently than twice

a year. There is an ongoing process for identifying,

evaluating and managing the significant risks faced by

the Company. This process has been in place for longer

than the year under review and up to the date of

approval of the Annual Report. The process is formally

reviewed bi-annually by the Board. However, due to

the size and nature of the Company, the Board has

concluded that it is not necessary at this stage to set

up an internal audit function. This decision will be

kept under review. The directors are satisfied that the

systems of risk management that they have introduced

are sufficient to comply with the FRC Guidance on Risk

Management, Internal Control and Related Financial

and Business Reporting.

In particular the Board, together with the Audit & Risk

Committee, is responsible for overseeing and reviewing

internal controls concerning financial reporting. In

addition to those controls sub-contracted as listed

above, the following controls have been in place

throughout the year:

>A robust system of internal control is maintained by

the Manager over the preparation and reconciliation

of investment portfolio valuations;

>Monthly reconciliation of assets held as cash or

on fixed term deposit;

>Independent review of the valuations of portfolio

investments by the Board (quarterly);

>The Audit & Risk Committee’s review of financial

reporting and compliance (as set out on pages 44

to 46);

>The Board reviews financial information including

the Annual Report, Interim Report and interim

management statements prior to their external

communication; and

>The Board reviews the financial information in any

prospectus or offer for subscription issued by the

Company in connection with the issue of new

share capital.

48

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

Corporate

Governance

(continued)

The Company was registered with the FCA as a Small

Registered Alternative Fund Manager until 24 March

2021 and up to that date held its own investments.

From that date, the Manager became the Company’s

Alternative Investment Fund Manager and took over

responsibility for the custody of the Company’s

investments. All certificates and other documents

evidencing title (whether or not in registered form)

will be received by the Company and will be held in the

Company’s name and held in custody by the Manager.

No third party custodian has been appointed. The

Company will take legal ownership of its assets.

The Board has reviewed the effectiveness of the

Company’s systems of internal control and risk

management for the year and up to the date of this

Report. The Board is of the opinion that the Company’s

systems of internal, financial, and other controls are

appropriate to the nature of its business activities and

methods of operation given the size of the Company,

and the Board has a reasonable expectation that the

Company will continue in operational existence for the

foreseeable future.

Conflicts of Interest

The directors have declared any conflicts or potential

conflicts of interest to the Board, which has the authority

to authorise such situations if appropriate. The Company

Secretary maintains the Register of Directors’ Interests,

which is reviewed quarterly by the Board, when changes

are notified, and the directors advise the Company

Secretary and the Board as soon as they become aware

of any conflicts of interest. Directors who have conflicts

of interest which have been approved by the Board do

not take part in discussions or decisions which relate to

any of their conflicts.

Corporate Governance in Relation to Investee

Companies

The Company delegates responsibility for monitoring

its investments to its Manager whose policy, which

has been noted by the Board, is as follows:

YFM Private Equity Limited is committed to introducing

corporate governance standards into the companies in

which its clients invest. With this in mind, the Company’s

investment agreements contain contractual terms

specifying the required frequency of management board

meetings and of annual shareholders’ meetings, and for

representation at such meetings through YFM Private

Equity Limited. In addition, provision is made for the

preparation of regular and timely management

information to facilitate the monitoring of an investee

company performance in accordance with best practice

in the private equity sector.

Co-Investment

Typically, the Company invests alongside other venture

capital funds and other private equity funds managed

by the Manager, such syndication spreading investment

risk. Details of the amounts invested in individual

companies are set out in the Strategic Report. Co-

investments are detailed in note 7 to the financial

statements on pages 79 to 81.

Management

The Board has delegated the monitoring of the

investment portfolio to the Manager.

This report was approved by the Board on 20 March

2023 and signed on its behalf by

Peter Waller

Chairman

British Smaller Companies VCT2 plc

Registered number 04084003

British Smaller Companies VCT2 plc Annual Report & Accounts

49

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

The Board has prepared this report

in accordance with the requirements

of the Large and Medium Sized

Companies and Groups (Accounts

and Reports) (Amendment)

Regulations 2013. Ordinary

resolutions for the approval of

this report and the Directors’

Remuneration Policy will be put

to the members at the forthcoming

Annual General Meeting.

The law requires the Company’s auditor, BDO LLP, to

audit certain information included in this report. Where

disclosures have been audited, they are indicated

as such. The auditor’s opinion is included in the

Independent Auditor’s Report on pages 53 to 59.

Directors’ Remuneration Policy

This statement of the Directors’ Remuneration Policy

took effect following approval by shareholders at the

Annual General Meeting held on 16 June 2020.

A resolution to approve the Directors’ Remuneration

Policy will be put to shareholders every three years.

The Board comprises three directors, all of whom are

non-executive. The Company currently has an

independent Nominations & Remuneration Committee,

which is comprised of the full Board and of which

Mr P C Waller is the independent Chairman.

The Board has not retained external advisors in relation

to remuneration matters but has access to information

about directors’ fees paid by other companies of a

similar size and nature and this is used as a reference

when setting directors’ remuneration. Shareholders’

views in respect of the directors’ remuneration are

communicated at the Company’s AGM and are taken

into consideration in formulating the Directors’

Remuneration Policy.

At the last Annual General Meeting, 97 per cent of

shareholders who exercised their voting rights voted for

the resolution approving the Directors’ Remuneration

Report, showing significant shareholder approval.

The Board’s policy is that the remuneration of non-

executive directors should reflect the experience of the

Board as a whole, to be fair and comparable to that of

other relevant venture capital trusts that are similar in

size and have similar investment objectives and

structures. Furthermore, the level of remuneration

should be sufficient to attract and retain the directors

needed to properly oversee the Company and to

reflect the duties and responsibilities of the directors

and the value and amount of time committed to the

Company’s affairs.

It is not considered appropriate that directors’

remuneration should be performance-related, and as

such the directors are not eligible for bonuses, share

options, pension benefits, long-term incentive schemes

or other benefits in respect of their services as non-

executive directors of the Company.

It is the Board’s policy that directors do not have service

contracts, but new directors are provided with a letter

of appointment. The terms of directors’ appointments

provide that directors should retire and be subject to

election at the first Annual General Meeting after their

appointment. Thereafter, it has been agreed that all

directors will offer themselves for re-election on an

annual basis. All director’s appointments are terminable

by each director or the Company on three months’

notice. Any director who ceases to hold office is not

entitled to receive any payment other than accrued fees

(if any) for past services. There were no payments for

loss of office made during the period.

The policy will continue to be applied in the forthcoming

year.

Brief biographical notes on the directors are given on

page 37.

Statement by the Chairman of the Nominations &

Remuneration Committee

The directors have reviewed the level of directors’ fees

and, in light of the current inflationary environment,

agreed that with effect from 1 April 2023, they will be

increased to £45,000 per annum for the Chairman and

£28,000 for the other directors. In accordance with the

Directors’ Remuneration Policy, the directors have

agreed that they should be reviewed again in March

2024. The cap on aggregate annual fees is £110,000.

Directors’

Remuneration Report

50

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

Directors’ Remuneration for the year ended

31 December 2022 (audited)

The directors who served in the year and the previous

year received the following emoluments in the form of

fees, which represent the entire remuneration payable

to directors (see Table A):

There are no executive directors (2021: none).

Table A

Total Fixed Fees Paid (audited)

2022 2021

£ £

P C Waller

42,08440,000

B LAnderson

26,08324,000

R S McDowell

26,08324,000

94,25088,000

With effect from 1 March 2022, the annual salary of

the Chairman was increased to £42,500 (previously

£40,000) and the annual salary of the other directors

was increased to £26,500 (previously £24,000). Prior to

that date the annual salaries of the Chairman and the

other directors had been unchanged since 1 April 2018.

Table B

Total Fixed Fees Paid: Annual change

202220212020

Director% % %

P C Waller5.2%0.0%*0.0%*

B LAnderson

8.7%0.0%*0.0%*

R S McDowell

8.7%0.0%*0.0%*

Directors and their Interests (audited)

The directors of the Company at 31 December 2022

and their beneficial interests in the share capital of the

Company (including those of immediate family

members) were as shown in Table C:

Table C

Directors and their interests (audited)

Number ofPercentage of

ordinary shares at: voting rights:

31 December 31 December 31 December 31 December

2022 2021 2022 2021

P C Waller

54,056

44,4390.03%0.03%

B LAnderson

333,032

9,1120.18%0.01%

R S McDowell

588,650

266,3910.32%0.19%

None of the directors held any options to acquire

additional shares at the year end.

The Company has not set out any formal requirement

or guidelines concerning their ownership of shares

in the Company.

Relative Importance of Spend on Pay

Directors’ remuneration, dividend distribution and share

buy-backs are shown in Table D:

The remuneration of the directors is fixed and contains

no performance related variable element. As the

Company has no employees, the directors do not

consider it relevant to compare directors’ fees against

employee pay.

Table D

Relative Importance Of Pay

2022 2021

£ £

Dividends

5,444,000

11,015,000

Share buy-backs

1,572,000

1,942,000

McDowell from the date of his appointment on 6 March 2019 was

£24,000. The annual salary of Mr P C Waller from the date of his

appointment as chairman on 7 May 2019 was £40,000.

* The annual salary of Ms B LAnderson from the date of her appointment

Total directors fees94,25088,000

on 1 October 2020 was £24,000 and the annual salary of Mr R S

Consideration of Employment Conditions

of Non-director Employees

The Company does not have any employees.

Accordingly, the disclosures required under paragraph

38 and 39 of Schedule 8 to the Large and Medium-sized

Companies and Groups (Accounts and Reports)

Regulations 2008 are not required.

Directors’

Remuneration Report

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

51

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Company Performance

The Board is responsible for the Company’s investment

strategy and performance, although the management of

the Company’s investment portfolio is delegated to the

Manager through the investment agreement, as referred

to in the Corporate Governance section.

Net asset value Total Return (calculated by reference to

the net asset value and cumulative dividends paid, as

set out in note 12 of these financial statements and

excluding tax reliefs received by shareholders) is the

primary recognised measure of performance in the

VCT industry. This measure is shown on page 12.

The graph above shows a comparison over the last ten

years of the movements in both the Company’s Share

Price Total Return and the Share Price Total Return for

an index of generalist VCTs which are members of the

AIC (based on figures provided by Morningstar). In line

with the index all the relative performance measures

have been rebased to 100 as at December 2012. The

directors consider this to be the most appropriate

published index on which to report on comparative

performance.

This report was approved by the Board and signed

on its behalf on 20 March 2023.

Peter Waller

Chairman

BSC2 - Share Price Total Return*

VCT Generalist Share Price Total Return

(Source: Index compiled by Morningstar)*

* assumes dividends re-invested

100

150

200

250

20122013201420152016201720182019202020212022

Percentage movement per ordinary share

52

British Smaller Companies VCT2 plc Annual Report & Accounts

CORPORATE GOVERNANCE

The directors are responsible for

preparing the annual report and the

financial statements in accordance

with UK-adopted International

Financial Reporting Standards

(UK-adopted IFRS) in conformity

with the requirements of the

Companies Act 2006 and applicable

law and regulations.

Company law requires the directors to prepare

financial statements for each financial year. Under

that law the directors are required to prepare

the financial statements in accordance with UK-adopted

International Financial Reporting Standards (UK-

adopted IFRS) in conformity with the requirements of

the Companies Act 2006. 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 for the Company for that period.

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 they have been prepared in

accordance with UK-adopted International Financial

Reporting Standards (UK-adopted IFRS) in

conformity with the requirements of the Companies

Act 2006, subject to any material departures

disclosed and explained in the financial statements;

>Prepare the financial statements on the going

concern basis unless it is inappropriate to presume

that the Company will continue in business; and

>Prepare a directors’ report, a strategic report and

directors’ remuneration report which comply with

the requirements of the Companies Act 2006.

the Company and 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. The directors are responsible for ensuring

that the annual report and accounts, taken as a whole,

are fair, balanced, and understandable and provide the

information necessary for shareholders to assess the

performance, business model and strategy.

Website Publication

The directors are responsible for ensuring the annual

report and the financial statements are made available

on a website. Financial statements are published on the

Company’s website www.bscfunds.com in accordance

with legislation in the United Kingdom governing the

preparation and dissemination of financial statements,

which may vary from legislation in other jurisdictions.

The maintenance and integrity of the Company’s

website is the responsibility of the directors. The

directors’ responsibility also extends to the ongoing

integrity of the financial statements contained therein.

Directors’ Responsibilities Pursuant to DTR4

The directors confirm to the best of their knowledge:

>The financial statements have been prepared in

accordance with UK-adopted International Financial

Reporting Standards (UK-adopted IFRS) in

conformity with the requirements of the Companies

Act 2006 and give a true and fair view of the assets,

liabilities, financial position and profit and loss of the

Company; and

>The annual report includes a fair review of the

development and performance of the business and

the financial position of the Company, together with

a description of the principal risks and uncertainties

that they face.

The names and functions of all the directors are stated

on page 37.

This statement was approved by the Board and signed

on its behalf on 20 March 2023.

The directors are responsible for keeping adequate

accounting records that are sufficient to show and

explain the Company’s transactions and disclose with

reasonable accuracy at any time the financial position of

Peter Waller

Chairman

Directors’ Responsibilities

Statement

British Smaller Companies VCT2 plc Annual Report & Accounts

53

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Opinion on the financial statements

In our opinion the financial statements:

>give a true and fair view of the state of the

Company’s affairs as at 31 December 2022

and of its profit for the year then ended;

>have been properly prepared in accordance with

UK adopted international accounting standards; and

>have been prepared in accordance with the

requirements of the Companies Act 2006.

We have audited the financial statements of British

Smaller Companies VCT2 plc (the ‘Company’) for the

year ended 31 December 2022 which comprise the

Statement of Comprehensive Income, the Balance

Sheet, the Statement of Changes in Equity, the

Statement of Cash Flows and the notes to the financial

statements, including a summary of significant

accounting policies. The financial reporting framework

that has been applied in their preparation is applicable

law and UK adopted international accounting standards.

Basis for opinion

We conducted our audit in accordance with International

Standards on Auditing (UK) (ISAs (UK)) and applicable

law. Our responsibilities under those standards are

further described in the Auditor’s responsibilities for the

audit of the financial statements section of our report.

We believe that the audit evidence we have obtained is

sufficient and appropriate to provide a basis for our

opinion. Our audit opinion is consistent with the

additional report to the Audit & Risk Committee.

Independence

Following the recommendation of the Audit & Risk

Committee, we were appointed by the Board of Directors

during 2016 and subsequently by the shareholders at

the AGM on 10 May 2017 to audit the financial

statements for the year ended 31 December 2016 and

subsequent financial periods. The period of total

uninterrupted engagement including retenders and

reappointments is 7 years, covering the years ended 31

December 2016 to 31 December 2022. We remain

independent of the Company in accordance with the

ethical requirements that are relevant to our audit of the

financial statements in the UK, including the FRC’s

Ethical Standard as applied to listed public interest

entities, and we have fulfilled our other ethical

responsibilities in accordance with these requirements.

The non-audit services prohibited by that standard were

not provided to the Company.

Conclusions relating to going concern

In auditing the financial statements, we have concluded

that the directors’ use of the going concern basis of

accounting in the preparation of the financial statements

is appropriate. Our evaluation of the directors’

assessment of the Company’s ability to continue to

adopt the going concern basis of accounting included:

>Obtaining the VCT compliance reports prepared

by management’s expert during the year and as at

year end and reviewing the calculations for the year

end report,therein to check that the Company was

meeting its requirements to retain VCT status;

>Consideration of the Company’s expected future

compliance with VCT legislation, the absence of

bank debt, contingencies and commitments and

any market or reputational risks;

>Reviewing the forecasted cash flows that support

the directors’ assessment of going concern,

challenging assumptions and judgements made

in the forecasts, and assessing them for

reasonableness. We have stress tested forecasts

including consideration of current cash levels, future

expenses with reference to historic expenditure and

cash ouflows relating to new investments in order to

determine whether the Company will continue

meeting VCT compliance rules; and

>Evaluating the directors’ method of assessing the

going concern in light of market volatility.

Based on the work we have performed, we have not

identified any material uncertainties relating to events

or conditions that, individually or collectively, may cast

significant doubt on the Company’s ability to continue as a

going concern for a period of at least twelve months from

when the financial statements are authorised for issue.

In relation to the Company’s reporting on how it has

applied the UK Corporate Governance Code, we have

nothing material to add or draw attention to in relation to

the Directors’ statement in the financial statements about

whether the Directors considered it appropriate to adopt

the going concern basis of accounting.

Our responsibilities and the responsibilities of the

Directors with respect to going concern are described

in the relevant sections of this report.

Independent

Auditor’s Report

to the members of British Smaller Companies VCT2 plc

INDEPENDENT AUDITOR’S REPORT

54

British Smaller Companies VCT2 plc Annual Report & Accounts

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the

financial statements of the current period and include the most significant assessed risks of material misstatement

(whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit

strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were

addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and

we do not provide a separate opinion on these matters.

Key audit matter

How the scope of our audit addressed the key audit matter

Valuation of unquoted

investments (Note 1 and

Note 7)

We consider the valuation of

investments to be the most significant

audit area as there is a high level of

estimation uncertainty involved in

determining the unquoted investment

valuations.

There is also an inherent risk of

management override arising from

the unquoted investment valuations

being prepared by the Investment

Manager, who is remunerated based

on factors including the net asset

value of the Company.

For these reasons we considered the

valuation of unquoted investments to

be a key audit matter.

Our sample for the testing of unquoted investments was stratified according to

risk considering, inter alia, the value of individual investments, the nature of the

investment, the extent of the fair value movement and the subjectivity of the

valuation technique.

For investments in our sample we:

Challenged whether the valuation methodology was the most appropriate in the

circumstances under the International Private Equity and Venture Capital

Valuation (“IPEV”) Guidelines and the applicable accounting standards. We have

recalculated the value attributable to the Company, having regard to the

application of enterprise value across the capital structures of the investee

companies.

For investments sampled that were valued using less subjective valuation

techniques (cost and price of recent investment reviewed for changes in fair

value) we:

> Verified the cost or price of recent investment to supporting documentation;

> Considered whether the investment was an arm’s length transaction through

reviewing the parties involved in the transaction and checking whether or not

they were already investors of the investee company;

INDEPENDENT AUDITOR’S REPORT

Independent

Auditor’s Report

(continued)

Overview

20222021

Key audit matters

Valuation of unquoted investments

33

Materiality

£1,600,000 (2021: £1,400,000) based on 2% (2021: 2%)

of total investments.

An overview of the scope of our audit

Our audit was scoped by obtaining an understanding

of the Company and its environment, including the

Company’s system of internal control, and assessing

the risks of material misstatement in the financial

statements. We also addressed the risk of management

override of internal controls, including assessing whether

there was evidence of bias by the Directors that may

have represented a risk of material misstatement.

British Smaller Companies VCT2 plc Annual Report & Accounts

55

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Key audit matterHow the scope of our audit addressed the key audit matter

>Considered whether there were any indications that the cost or price of

recent investment was no longer representative of fair value considering,

inter alia, the current performance of the investee company and the

milestones and assumptions set out in the investment proposal; and

>Considered whether the price of recent investment is supported by

alternative valuation techniques.

For investments sampled that were valued using more subjective techniques

(earnings multiples and revenue multiples) we:

>Challenged and corroborated the inputs to the valuation with reference

to management information of investee companies, market data and

our own understanding and assessed the impact of the estimation

uncertainty concerning these assumptions and the disclosure of these

uncertainties in the financial statements;

>Reviewed the historical financial statements and any recent

management information available to support assumptions about

maintainable revenues, earnings or cash flows used in the valuations;

>Considered the revenue or earnings multiples applied and the discounts

applied by reference to observable listed company market data; and

>Challenged the consistency and appropriateness of adjustments made

to such market data in establishing the revenue, cash flow or earnings

multiple applied in arriving at the valuations adopted by considering the

individual performance of investee companies against plan and relative

to the peer group, the market and sector in which the investee company

operates and other factors as appropriate.

Where appropriate, we performed a sensitivity analysis by developing our

own point estimate where we considered that alternative input assumptions

could reasonably have been applied and we considered the overall impact of

such sensitivities on the portfolio of investments in determining whether the

valuations as a whole are reasonable and free from bias.

Key observations

Based on the procedures performed we consider the investment valuations

to be appropriate considering the level of estimation uncertainty.

56

British Smaller Companies VCT2 plc Annual Report & Accounts

INDEPENDENT AUDITOR’S REPORT

Independent

Auditor’s Report

(continued)

Our application of materiality

We apply the concept of materiality both in planning

and performing our audit, and in evaluating the effect

of misstatements. We consider materiality to be the

magnitude by which misstatements, including omissions,

could influence the economic decisions of reasonable

users that are taken on the basis of the financial

statements.

In order to reduce to an appropriately low level the

probability that any misstatements exceed materiality,

we use a lower materiality level, performance materiality,

to determine the extent of testing needed. Importantly,

misstatements below these levels will not necessarily be

evaluated as immaterial as we also take account of the

nature of identified misstatements, and the particular

circumstances of their occurrence, when evaluating their

effect on the financial statements as a whole.

Based on our professional judgement, we determined

materiality for the financial statements as a whole and

performance materiality as follows:

Company financial statements

2022

£’000

2021

£’000

Materiality

1,600

1,400

Basis for determining materiality

2% of total investments

(2021: 2% of total investments)

Rationale for the benchmark appliedIn setting materiality, we have had regard to the nature

and disposition of the investment portfolio. Given that

the VCT’s portfolio is comprised of unquoted

investments which would typically have a wider spread

of reasonable alternative possible valuations, we have

applied a percentage of 2% of the investment value.

Performance materiality

1,2001,000

75% of materiality (2021: 75% of materiality)

Basis for determining

performance materiality

Rationale for the percentage applied

for performance materiality

The level of performance materiality applied was set

after having considered a number of factors including

the expected total value of known and likely

misstatements based on our knowledge and experience

of the audited entity.

Lower testing threshold

We determined that for Revenue return before tax, a

misstatement of less than materiality for the financial

statements as a whole, could influence users of the

financial statements as it is a measure of the Company’s

performance of income generated from its investments

after expenses. As a result, we determined a lower

testing threshold for those items impacting revenue

return of £206,000 (2021: £190,000) based on 10% of

total expenditure excluding the incentive fee (2021: 10%

of total expenditure excluding the incentive fee).

Reporting threshold

We agreed with the Audit & Risk Committee that we

would report to them all individual audit differences in

excess of £80,000 (2021:£70,000). We also agreed to

report differences below this threshold that, in our view,

warranted reporting on qualitative grounds.

Other information

The directors are responsible for the other information.

The other information comprises the information

included in the Annual report other than the financial

statements and our auditor’s report thereon. Our opinion

on the financial statements does not cover the other

information and, except to the extent otherwise explicitly

British Smaller Companies VCT2 plc Annual Report & Accounts

57

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Going concern and

longer-term viability

>The directors’ statement with regards to the appropriateness of

adopting the going concern basis of accounting and any material

uncertainties identified; and

>The directors’ explanation as to their assessment of the Company’s

prospects, the period this assessment covers and why the period is

appropriate.

Other Code provisions

>Directors’ statement on fair, balanced and understandable;

>Board’s confirmation that it has carried out a robust assessment of the

emerging and principal risks;

>The section of the annual report that describes the review of

effectiveness of risk management and internal control systems; and

>The section describing the work of the Audit & Risk Committee.

Other Companies Act 2006 reporting

Based on the responsibilities described below and our work performed during the course of the audit, we are required

by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.

In our opinion, based on the work undertaken in the course of the audit:

Strategic report and

Directors’ report

>the information given in the Strategic Report and the Directors’ Report

for the financial year for which the financial statements are prepared is

consistent with the financial statements; and

>the Strategic Report and the Directors’ Report have been prepared in

accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Company and its

environment obtained in the course of the audit, we have not identified

material misstatements in the Strategic Report or the Directors’ Report.

stated in our report, we do not express any form of

assurance conclusion thereon. Our responsibility is to

read the other information and, in doing so, consider

whether the other information is materially inconsistent

with the financial statements or our knowledge obtained

in the course of the audit, or otherwise appears to be

materially misstated. If we identify such material

inconsistencies or apparent material misstatements,

we are required to determine whether this gives rise

to a material misstatement in the financial statements

themselves. If, based on the work we have performed,

we conclude that there is a material misstatement of this

other information, we are required to report that fact.

We have nothing to report in this regard.

Corporate governance statement

The Listing Rules require us to review the Directors’

statement in relation to going concern, longer-term

viability and that part of the Corporate Governance

Statement relating to the Company’s compliance with

the provisions of the UK Corporate Governance Code

specified for our review.

Based on the work undertaken as part of our audit, we

have concluded that each of the following elements of

the Corporate Governance Statement is materially

consistent with the financial statements or our

knowledge obtained during the audit.

58

British Smaller Companies VCT2 plc Annual Report & Accounts

Responsibilities of Directors

As explained more fully in the Directors’ responsibilities

statement, the Directors are responsible for the

preparation of the financial statements and for being

satisfied that they give a true and fair view, and for such

internal control as the Directors determine is necessary

to enable the preparation of financial statements that

are free from material misstatement, whether due to

fraud or error.

In preparing the financial statements, the Directors are

responsible for assessing the Company’s ability to

continue as a going concern, disclosing, as applicable,

matters related to going concern and using the going

concern basis of accounting unless the Directors either

intend to liquidate the Company or to cease operations,

or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the

financial statements

Our objectives are to obtain reasonable assurance about

whether the financial statements as a whole are free

from material misstatement, whether due to fraud or

error, and to issue an auditor’s report that includes

our opinion. Reasonable assurance is a high level

of assurance, but is not a guarantee that an audit

conducted in accordance with ISAs (UK) will always

detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are

considered material if, individually or in the aggregate,

they could reasonably be expected to influence the

economic decisions of users taken on the basis of

these financial statements.

Extent to which the audit was capable of detecting

irregularities, including fraud

Irregularities, including fraud, are instances of non-

compliance with laws and regulations. We design

procedures in line with our responsibilities, outlined

above, to detect material misstatements in respect of

irregularities, including fraud. The extent to which our

procedures are capable of detecting irregularities,

including fraud is detailed below:

Non-compliance with laws and regulations

Based on:

>Our understanding of the Company and the

industry in which it operates;

>Discussion with management and those charged

with governance; and

>Obtaining an understanding of the Company’s

policies and procedures regarding compliance

with laws and regulations.

We considered the significant laws and regulations to be

the Companies Act 2006, the FCA listing and DTR rules,

the principles of the UK Corporate Governance Code,

industry practice represented by the Statement of

Recommended Practice: Financial Statements of

Investment Trust Companies and Venture Capital Trusts

(“the SORP”) and updated in 2022 with consequential

amendments and the applicable financial reporting

framework. We also considered the Company’s

qualification as a VCT under UK tax legislation.

Our procedures in respect of the above included:

>Agreement of the financial statement disclosures

to underlying supporting documentation;

INDEPENDENT AUDITOR’S REPORT

Independent

Auditor’s Report

(continued)

Directors’ remuneration

In our opinion, the part of the Directors’ Remuneration Report to be audited

has been properly prepared in accordance with the Companies Act 2006.

Matters on which we are required

to report by exception

We have nothing to report in respect of the following matters in relation to

which the Companies Act 2006 requires us to report to you if, in our opinion:

>adequate accounting records have not been kept, or returns adequate

for our audit have not been received from branches not visited by us; or

>the financial statements and the part of the Directors’ Remuneration

Report to be audited are not in agreement with the accounting records

and returns; or

>certain disclosures of directors’ remuneration specified by law are not

made; or

> we have not received all the information and explanations we require

for our audit.

British Smaller Companies VCT2 plc Annual Report & Accounts

59

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

>Enquiries of management and those charged with

governance relating to the existence of any non-

compliance with laws and regulations;

>Obtaining the VCT compliance reports prepared

by management’s expert during the year and as

at year end and reviewing their calculations for the

year end report to check that the Company was

meeting its requirements to retain VCT status; and

>Reviewing minutes of meeting of those charged

with governance throughout the period for instances

of non-compliance with laws and regulations.

Fraud

We assessed the susceptibility of the financial statement

to material misstatement including fraud.

Our risk assessment procedures included:

>Enquiry with management and those charged with

governance regarding any known or suspected

instances of fraud;

>Obtaining an understanding of the Company’s

policies and procedures relating to:

-Detecting and responding to the risks of

fraud; and

-Internal controls established to mitigate risks

related to fraud.

>Review of minutes of the Board and other

committee meetings throughout the period for

any known or suspected instances of fraud;

>Discussion amongst the engagement team as to

how and where fraud might occur in the financial

statements; and

>Obtaining an understanding of the control

environment in monitoring compliance with laws

and regulations.

Based on our risk assessment, we considered the areas

most susceptible to fraud to be the valuation of unquoted

investments and management override of controls.

Our procedures in respect of the above included:

>The procedures set out in the Key Audit Matters

section above;

>Obtaining independent evidence to support the

ownership of a sample of investments;

>Recalculating investment management fees and

incentive fees in total;

>Obtaining independent confirmation of bank

balances; and

>Reviewing journals that relate to the current year end

that were posted into the accounting system post year

end against supporting documentation, to assess the

reasonability of these journals and assess whether

those journals are not an indication of management

override of controls or an indication of fraud.

We also communicated relevant identified laws and

regulations and potential fraud risks to all engagement

team members who were all deemed to have

appropriate competence and capabilities and remained

alert to any indications of fraud or non-compliance

with laws and regulations throughout the audit.

Our audit procedures were designed to respond to risks

of material misstatement in the financial statements,

recognising that the risk of not detecting a material

misstatement due to fraud is higher than the risk of

not detecting one resulting from error, as fraud may

involve deliberate concealment by, for example, forgery,

misrepresentations or through collusion. There are

inherent limitations in the audit procedures performed

and the further removed non-compliance with laws and

regulations is from the events and transactions reflected

in the financial statements, the less likely we are to

become aware of it.

A further description of our responsibilities is available

on the Financial Reporting Council’s website at:

www.frc.org.uk/auditorsresponsibilities. This description

forms part of our auditor’s report.

Use of our report

This report is made solely to the Company’s members,

as a body, in accordance with Chapter 3 of Part 16

of the Companies Act 2006. Our audit work has been

undertaken so that we might state to the Company’s

members those matters we are required to state to them

in an auditor’s report and for no other purpose. To the

fullest extent permitted by law, we do not accept or

assume responsibility to anyone other than the

Company and the Company’s members as a body,

for our audit work, for this report, or for the opinions

we have formed.

Vanessa-Jayne Bradley

(Senior Statutory Auditor)

For and on behalf of BDO LLP,

Statutory Auditor

London, UK

20 March 2023

BDO LLP is a limited liability partnership registered in England and Wales

(with registered number OC305127).

60

British Smaller Companies VCT2 plc Annual Report & Accounts

Revenue

Notes£000

2022

Capital

£000

Total Revenue

£000 £000

2021

Capital Total

£000 £000

Gains on investments

held at fair value

7

-

4,287

4,287-

20,70220,702

Gain on disposal

of investments

7

-

3,586

3,586-

5,3425,342

Gain arising from the

investment portfolio

-

7,873

7,873-

26,04426,044

Income

2

1,075

-

1,075661

-661

Total income

1,075

7,873

8,948661

26,04426,705

Administrative expenses:

Manager’s fee

(447)(1,339)

(1,786)

(374)

(1,118)

(1,492)

Incentive fee

-(635)

(635)

-

(4,407)

Other expenses

(274)-

(274)

(417)

-

(417)

3

(721)(1,974)

(2,695)

(791)

(5,525)

(6,316)

Profit (loss) before taxation

3545,899

6,253

(130)

20,519

20,389

Taxation

4

--

-

Profit (loss) for the year

3545,899

6,253

(130)

20,519

20,389

Total comprehensive

income (expense) for the year

3545,899

6,253

(130)

20,519

20,389

Basic and diluted earnings (loss)

per ordinary share

6

0.20p3.25p

3.45p

(0.09p)

14.80p

14.71p

The accompanying notes on pages 65 to 89 are an integral part of these financial statements.

The Total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in

accordance with UK-adopted International Financial Reporting Standards (UK-adopted IFRS). The supplementary

Revenue and Capital columns are prepared under the Statement of Recommended Practice ‘Financial Statements of

Investment Trust Companies and Venture Capital Trusts’ (issued in July 2022 – “SORP”) published by the AIC.

Statement of

Comprehensive Income

For the year ended 31 December 2022

FINANCIAL STATEMENTS

British Smaller Companies VCT2 plc Annual Report & Accounts

61

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

2022

Notes£000

2021

£000

ASSETS

Non-current assets at fair value through profit or loss

Financial assets at fair value through profit or loss

7

82,981

70,019

Accrued income and other assets

8

948

493

83,929

70,512

Current assets

Accrued income and other assets

Current asset investments

Cash and cash equivalents

8

287

9

1,988

9

26,486

28,761

217

1,988

19,201

21,406

Net asset value per ordinary share

10

(821)

27,940

111,869

(4,543)

16,863

87,375

LIABILITIES

Current liabilities

Trade and other payables

Net current assets

Net assets

Shareholders’ equity

Share capital

Share premium account

Capital redemption reserve

Other reserves

Merger reserve

Capital reserve

Investment holding gains and losses reserve

Revenue reserve

Total shareholders’ equity

11

20,014

858

88

2

5,525

52,263

7

31,762

1,357

111,869

12

61.6p

15,808

24,122

88

2

5,525

12,818

28,009

1,003

87,375

61.5p

The accompanying notes on pages 65 to 89 are an integral part of these financial statements.

The financial statements were approved and authorised for issue by the Board of Directors and were signed on its

behalf on 20 March 2023.

Peter Waller

Chairman

At 31 December 2022

Balance Sheet

62

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

Statement of

Changes in Equity

For the year ended 31 December 2022

Share

capital

£000

Share

premium

account

£000

Other

reserves*

£000

Capital

reserve

£000

Investment

holding gains

and losses

reserve

£000

Revenue

reserve

£000

Total

equity

£000

Balance at 31 December 2020

14,133

16,735

5,615

22,461

9,254

2,731

70,929

-

(5,525)

-

(130)

-

(130)

(5,525)

Revenue loss for the year

Expenses charged to capital

Investment holding gain on

investments held at fair value

-

20,702

-

20,702

Realisation of investments in the year--

-5,342-

-

5,342

Total comprehensive

(expense) income for the year--

-(183)20,702

(130)

20,389

Issue of share capital 1,276 5,774

Issue of shares – DRIS 399 1,851

Issue costs ** - (238)

Purchase of own shares - -

Dividends--

---

- (48)-

- (1,942)-

-(9,456)-

-

(1,559)

7,050

2,250

(286)

(1,942)

(11,015)

Total transactions with owners1,6757,387

-(11,446)

-

(1,559)

(3,943)

Realisation of prior year

investment holding gains--

-1,986

(1,947)

(39)

-

Balance at 31 December 2021 15,80824,122

5,61512,818

28,009

1,003

87,375

---

(1,974)

-

354

-

354

(1,974)

Revenue return for the year - -

Expenses charged to capital - -

Investment holding gain on

investments held at fair value--

--

4,287

-

4,287

Realisation of investments in the year-

-

-3,586-

-3,586

Total comprehensive

income for the year-

-

-1,6124,287

3546,253

21,274

902

(1,125)

(44,315)

-

Issue of share capital4,023

Issue of shares – DRIS 183 Issue

costs ** -Share

premium cancellation -Purchase

of own shares -

Dividends-

-

---

- 44,315-

- (1,572)-

-(5,444)-

- 25,297

- 1,085

- (1,125)

- --

(1,572)

-(5,444)

Total transactions with owners4,206

(23,264)

-37,299-

-18,241

Realisation of prior year

investment holding gains-

-

-534(534)

--

Balance at 31 December 2022 20,014

858

5,61552,26331,762

1,357111,869

The accompanying notes on pages 65 to 89 are an integral part of these financial statements.

British Smaller Companies VCT2 plc Annual Report & Accounts

63

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Capital

reserve

£000

Revenue

reserve

£000

Total

£000

Distributable reserves as shown on previous page

52,263

1,357

53,620

Income not yet distributable

-

(988)

Cancelled share premium not yet distributable

(27,879)

-

(27,879)

Revaluation losses

(490)

-

(490)

Dividend paid 11 January 2023

(4,097)

-

(4,097)

Reserves available for distribution***

19,797

369

20,166

*Other reserves include the capital redemption reserve, the merger reserve and the other reserve, which are non-distributable. The other

reserve was created upon the exercise of warrants, the capital redemption reserve was created for the purchase and cancellation of own

shares, and the merger reserve was created on the merger with British Smaller Technologies Company VCT plc.

** Issue costs include both fundraising costs and costs incurred from the Company’s DRIS.

*** Following the circulation of the Annual Report to shareholders.

The merger reserve was created to account for the difference between the nominal and fair value of shares issued as

consideration for the acquisition of the assets and liabilities of British Smaller Technology Companies VCT plc. The

reserve was created after meeting the criteria under section 131 of the Companies Act 1985 and the provisions of the

Companies Act 2006 for merger relief. The merger reserve is a non-distributable reserve.

The capital reserve and revenue reserve are both distributable reserves. The reserves total £53,620,000, representing an

increase of £39,799,000 during the year. The directors also take into account the level of the investment holding gains

and losses reserve and the future requirements of the Company when determining the level of dividend payments.

Of the potentially distributable reserves of £53,620,000 shown above, £988,000 relates to income not yet distributable

and £27,879,000 relates to cancelled share premium which will become distributable from the dates shown in the table

below. In addition revaluation losses of £490,000 included within the investment holding gains and losses reserve are not

considered to be recoverable.

The Company held a General Meeting on 25 February 2022, at which shareholders approved the cancellation of the

Company’s share premium account, subject to the sanction of the High Court which was subsequently received on 11

March 2022. Total share premium cancelled will be available for distribution from the following dates:

£000

1 January 2024299

1 January 20257,387

1 January 202620,193

Cancelled share premium not yet distributable27,879

For the year ended 31 December 2022

Reserves available for distribution

Under the Companies Act 2006 the capital reserve and the revenue reserve are distributable reserves. The table

below shows amounts that are available for distribution.

64

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

2022

Notes£000

2021

£000

Net cash outflow from operating activities

(5,911)

(1,419)

Cash flows generated from (used in) investing activities

Purchase of financial assets at fair value through profit or loss

7

(17,978)

(6,092)

Proceeds from sale of financial assets at fair value through profit or loss

7

12,929

11,182

Deferred consideration

7

4

471

Net cash (outflow) inflow from investing activities

(5,045)

5,561

Cash flows from financing activities

Issue of ordinary shares

25,297

7,050

Costs of ordinary share issues*

(1,125)

(286)

Purchase of own ordinary shares

(1,572)

(1,942)

Dividends paid

5

(4,359)

(8,765)

Net cash inflow (outflow) from financing activities

18,241

(3,943)

Net increase in cash and cash equivalents

7,285

199

Cash and cash equivalents at the beginning of the year

19,201

19,002

Cash and cash equivalents at the end of the year

9

26,486

19,201

* Issue costs include both fundraising costs and expenses incurred from the Company’s DRIS

Reconciliation of Profit before Taxation to Net Cash Outflow from

Operating Activities

2022

£000

2021

£000

Profit before taxation

6,253

20,389

(Decrease) increase in trade and other payables

(3,722)

4,412

Increase in accrued income and other assets

(529)

(117)

Gain on disposal of investments

(3,586)

(5,342)

Gains on investments held at fair value

(4,287)

(20,702)

Capitalised income

(40)

(59)

Net cash outflow from operating activities

(5,911)

(1,419)

The accompanying notes on pages 65 to 89 are an integral part of these financial statements.

Statement of

Cash Flows

For the year ended 31 December 2022

British Smaller Companies VCT2 plc Annual Report & Accounts

65

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

1.Principal Accounting Policies

Basis of Preparation

The accounts have been prepared on a going concern basis as set out in the Directors Report on page 38 and in

accordance with UK-adopted International Financial Reporting Standards (UK-adopted IFRS).

The directors have carefully considered the issue of going concern in view of the Company’s activities and

associated risks. The Company has a well-diversified portfolio with businesses in a variety of sectors, many of

which are well funded. Some portfolio companies may require additional funding in the near- to medium-term; the

Company is well placed to provide this, where appropriate.

The Company has a significant level of liquidity, which will be further enhanced by the current fundraising. In

addition, the Board has control over, and can flex as appropriate, the Company’s major outgoings, which

predominantly comprise investments, dividends and share buy-backs.

The directors have also assessed whether material uncertainties exist and their potential impact on the Company’s

ability to continue as a going concern; they have concluded that no such material uncertainties exist.

Taking all of the above into consideration, the directors are satisfied that the Company has sufficient resources to

meet its obligations for at least 12 months from the date of this report and therefore believe that it is appropriate to

continue to apply the going concern basis of accounting in preparing the financial statements.

The financial statements have been prepared under the historical cost basis as modified by the measurement of

investments at fair value through profit or loss.

The accounts have been prepared in compliance with the recommendations set out in the Statement of

Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ issued

by the Association of Investment Companies (issued in July 2022 – “SORP”) to the extent that they do not conflict

with UK-adopted International Financial Reporting Standards (UK-adopted IFRS).

The financial statements are prepared in accordance with UK-adopted International Financial Reporting Standards

(UK-adopted IFRS) and interpretations in force at the reporting date. New standards coming into force during the

year and future standards that come into effect after the year-end have not had a material impact on these financial

statements.

The Company has carried out an assessment of accounting standards, amendments and interpretations that have

been issued by the IASB and that are effective for the current reporting period. The Company has determined that

the transitional effects of the standards do not have a material impact.

The financial statements are presented in sterling and all values are rounded to the nearest thousand (£000),

except where stated.

Financial Assets held at Fair Value through Profit or Loss - Investments

Financial assets designated as at fair value through profit or loss (“FVPL”) at inception are those that are managed

and whose performance is evaluated on a fair value basis, in accordance with the documented investment strategy of

the Company. Information about these financial assets is provided internally on a fair value basis to the

Company’s key management. The Company’s investment strategy is to invest cash resources in venture capital

investments as part of the Company’s long-term capital growth strategy. Consequently, all investments are

classified as held at fair value through profit or loss.

All investments are measured at fair value on the whole unit of account basis with gains and losses arising from

changes in fair value being included in the Statement of Comprehensive Income as gains or losses on investments

held at fair value.

Transaction costs on purchases are expensed immediately through profit or loss.

Notes to the

Financial Statements

66

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

1.Principal Accounting Policies (continued)

Although the Company holds more than 20 per cent of the equity of certain companies, it is considered that the

investments are held as part of the investment portfolio, and their value to the Company lies in their marketable

value as part of that portfolio. These investments are therefore not accounted for using equity accounting, as

permitted by IAS 28 ‘Investments in associates’ and IFRS 11 ‘Joint arrangements’ which give exemptions from

equity accounting for venture capital organisations.

Under IFRS 10 “Consolidated Financial Statements”, control is presumed to exist when the Company has power

over an investee (whether or not used in practice); exposure or rights; to variable returns from that investee, and

ability to use that power to affect the reporting entities returns from the investees. The Company does not hold

more than 50 per cent of the equity of any of the companies within the portfolio. The Company does not control any

of the companies held as part of the investment portfolio. It is not considered that any of the holdings represent

investments in subsidiary undertakings.

Valuation of Investments

Unquoted investments are valued in accordance with IFRS 13 “Fair Value Measurement” and, using the

International Private Equity and Venture Capital Valuation Guidelines (“the IPEV Guidelines”) updated in December

2022. Quoted investments are valued at market bid prices. A detailed explanation of the valuation policies of the

Company is included below.

Initial Measurement

The best estimate of the initial fair value of an unquoted investment is the cost of the investment. Unless there are

indications that this is inappropriate, an unquoted investment will be held at this value within the first three months of

investment.

Subsequent Measurement

Based on the IPEV Guidelines we have identified six of the most widely used valuation methodologies for unquoted

investments. The Guidelines advocate that the best valuation methodologies are those that draw on external,

objective market-based data in order to derive a fair value.

Unquoted Investments

> Revenue multiples. An appropriate multiple, given the risk profile and revenue growth prospects of the

underlying company, is applied to the revenue of the company. The multiple is adjusted to reflect any risk

associated with lack of marketability and to take account of the differences between the investee company and

the benchmark company or companies used to derive the multiple.

> Earnings multiple. An appropriate multiple, given the risk profile and earnings growth prospects of the

underlying company, is applied to the maintainable earnings of the company. The multiple is adjusted to reflect

any risk associated with lack of marketability and to take account of the differences between the investee

company and the benchmark company or companies used to derive the multiple.

> Net assets. The value of the business is derived by using appropriate measures to value the assets and

liabilities of the investee company.

> Discounted cash flows of the underlying business. The present value of the underlying business is derived by

using reasonable assumptions and estimations of expected future cash flows and the terminal value, and

discounted by applying the appropriate risk-adjusted rate that quantifies the risk inherent in the company.

> Discounted cash flows from the investment. Under this method, the discounted cash flow concept is applied

to the expected cash flows from the investment itself rather than the underlying business as a whole.

> Price of recent investment. This may represent the most appropriate basis where a significant amount of

new investment has been made by an independent third party. This is adjusted, if necessary, for factors relevant to

the background of the specific investment such as preference rights and will be benchmarked against other

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

67

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

valuation techniques. In line with the IPEV Guidelines the price of recent investment will usually only be used

for the initial period following the round and after this an alternative basis will be found.

Due to the significant subjectivity involved, discounted cash flows are only likely to be reliable as the main basis of

estimating fair value in limited situations. Their main use is to support valuations derived using other

methodologies and for assessing reductions in fair value.

One of the valuation methods described above is used to derive the gross attributable enterprise value of the

company after which adjustments are then made to reflect specific circumstances, such as the impact of the

coronavirus pandemic. This value is then apportioned appropriately to reflect the respective debt and equity

instruments in the event of a sale at that level at the reporting date.

Listed Investment Funds

Listed investment funds are valued at active market bid price. An active market is defined as one where

transactions take place regularly with sufficient volume and frequency to determine price on an ongoing basis. No

methodology other than active market bid price has been applied as at 31 December 2022.

Income

Dividends and interest are received from financial assets measured at fair value through profit and loss and are

recognised on the same basis in the Statement of Comprehensive Income. This includes interest and preference

dividends rolled up and/or payable at redemption. Interest income is also received on cash, cash equivalents and

current asset investments. Dividend income from unquoted equity shares is recognised at the time when the right to

the income is established.

Expenses

Expenses are accounted for on an accruals basis. Expenses are charged through the Revenue column of the

Statement of Comprehensive Income, except for the Manager’s fee and incentive fees. Of the Manager’s fees 75

per cent are allocated to the Capital column of the Statement of Comprehensive Income, to the extent that these

relate to an enhancement in the value of the investments and in line with the Board’s expectation that over the

long term 75 per cent of the Company’s investment returns will be in the form of capital gains. The incentive fee

payable to the Manager (as set out in note 3) is charged wholly through the Capital column.

Tax relief is allocated to the Capital Reserve using a marginal basis.

Incentive Fee

The incentive fee is accounted for on an accruals basis. As further detailed in note 3, the incentive fee is calculated as

20 per cent of the amount by which the cumulative dividends per ordinary share paid as at the last business day

in December in any year, plus the average of the Company’s middle market price per ordinary share on the five

dealing days prior to that day, exceeds the Hurdle (as defined in note 3), multiplied by the number of ordinary shares

issued and the ordinary shares under option. At the end of each reporting period, an accrual is recognised based

upon the cumulative dividends per ordinary share paid to the reporting date, plus the average of the Company’s

middle market price per ordinary share on the five dealing days prior to the reporting date. The incentive fee is charged

wholly through the Capital column.

Cash, Cash Equivalents and Current Asset Investments

Cash at bank comprises cash at hand and bank deposits with an original maturity of less than three months,

readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.

Current asset investments comprise money market funds and balances held in fixed term deposits which mature

after three months.

68

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

1.Principal Accounting Policies (continued)

Cash and cash equivalents include cash at hand, money market funds and bank deposits repayable on up to

three months’ notice as these meet the definition in IAS 7 ‘Statement of cash flows’ of a short-term highly liquid

investment that is readily convertible into known amounts of cash and subject to insignificant risk of change in

value.

Balances held in fixed term deposits which mature after three months are not classified as cash and cash

equivalents, as they do not meet the definition in IAS 7 ‘Statement of cash flows’ of short-term highly liquid

investments.

Cash and cash equivalents are valued at amortised cost, which equates to fair value.

Cash flows classified as “operating activities” for the purposes of the Statement of Cash Flows are those arising

from the Revenue column of the Statement of Comprehensive Income, together with the items in the Capital

column that do not fall to be easily classified under the headings for “investing activities” given by IAS 7 ‘Statement of

cash flows’, being management and incentive fees payable to the Manager. The capital cash flows relating to the

acquisition and disposal of investments are presented under “investing activities” in the Statement of Cash Flows

in line with both the requirements of IAS 7 and the positioning given to these headings by general practice in the

industry.

Share Capital and Reserves

Share Capital

This reserve contains the nominal value of all shares allotted under offers for subscription.

Share Premium Account

This reserve contains the excess of gross proceeds less issue costs over the nominal value of shares allotted

under offers for subscription, to the extent that it has not been cancelled.

Capital Reserve

The following are included within this reserve:

>Gains and losses on realisation of investments;

>Realised losses upon permanent diminution in value of investments;

>Capital income from investments;

>75 per cent of the Manager’s fee expense, together with the related taxation effect to this reserve in

accordance with the policy on expenses in note 1 of the financial statements;

>Incentive fee payable to the Manager;

>Capital dividends paid to shareholders;

>Applicable share issue costs;

>Purchase and holding of the Company’s own shares; and

>Credits arising from the cancellation of any share premium account.

Investment Holding Gains and Losses Reserve

Increases and decreases in the valuation of investments held at the year end are accounted for in this reserve,

except to the extent that the diminution is deemed permanent.

Revenue Reserve

This reserve includes all revenue income from investments along with any costs associated with the running of

the Company – less 75 per cent of the Manager’s fee expense as detailed in the Capital Reserve above.

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

69

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Taxation

Due to the Company’s status as a venture capital trust and the continued intention to meet the conditions required to

comply with Chapter 3 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 arises. Deferred tax is recognised on all

temporary differences that have originated, but not reversed, by the balance sheet date.

Deferred tax assets are only recognised to the extent that they are regarded as recoverable. Deferred tax is

calculated at the tax rates that are expected to apply when the asset is realised. Deferred tax assets and liabilities are

not discounted.

Dividends Payable

Dividends payable are recognised only when an obligation exists. Interim and special dividends are recognised

when paid and final dividends are recognised when approved by shareholders in general meetings.

Segmental Reporting

In accordance with IFRS 8 ‘Operating segments’ and the criteria for aggregating reportable segments, segmental

reporting has been determined by the directors based upon the reports reviewed by the Board. The directors are of

the opinion that the Company has engaged in a single operating segment - investing in equity and debt securities

within the United Kingdom - and therefore no reportable segmental analysis is provided.

Critical Accounting Estimates and Judgements

The preparation of financial statements in conformity with generally accepted accounting practice requires the

use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the

financial statements and the reported amounts of revenues and expenses during the reporting period. Although

these estimates are based on management’s best knowledge of the amount, event or actions, actual results may

ultimately differ from those estimates. The estimates and assumptions that have a significant risk of causing a

material adjustment to the carrying amounts of assets and liabilities within the next financial year are those used to

determine the fair value of investments at fair value through profit or loss, as disclosed in note 7 to the financial

statements.

The fair value of investments at fair value through profit or loss is determined by using valuation techniques. As

explained above, the Board uses its judgement to select from a variety of methods and makes assumptions that are

mainly based on market conditions at each balance sheet date.

The Board uses its judgement to select the appropriate method for determining the fair value of investments

through profit or loss.

2.Income

2022 2021

£000 £000

Dividends from unquoted companies

642328

Interest on loans to unquoted companies

206273

Income from unquoted portfolio

848601

Income from listed investment funds

22-

Income from investments held at fair value through profit or loss

870601

Interest on bank deposits

20560

1,075661

70

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

3.Administrative Expenses

2022 2021

£000 £000

Manager’s fee

1,7861,492

Administration fee

7570

Total payable to YFM Private Equity Limited

1,8611,562

Incentive fee

6354,407

Other expenses:

General expenses

12063

Directors’ remuneration

10696

Listing and registrar fees

6855

Auditor’s remuneration - audit fees (excluding irrecoverable VAT)

6241

Trail commission

5933

Printing

4034

Irrecoverable VAT

4325

2,9946,316

Fair value movement related to credit risk

(299)-

2,6956,316

Ongoing charges figure

2.08%2.16%

Directors’ remuneration comprises only short term benefits including social security contributions of £10,000 (2021:

£8,000).

The directors are the Company’s only key management personnel.

No fees are payable to the auditor in respect of other services (2021: £nil, apart from costs of £12,000 for audit-

related services which were charged to the share premium account).

YFM Private Equity Limited has acted as Manager and performed administrative and secretarial duties for the

Company under an agreement dated 28 November 2000, superseded by an agreement dated 31 October 2005

and as varied by agreements dated 8 December 2010, 26 October 2011, 16 November 2012, 17 October 2014, 7

August 2015 and 13 November 2019 (the “IA”). The agreement may be terminated by not less than twelve

months’ notice given by either party at any time. Under an Investment Agreement dated 13 November 2019, YFM

Private Equity Limited was appointed as the Company’s Alternative Investment Fund Manager. As a result, the

Company was de-registered by the Financial Conduct Authority as a Small Registered Alternative Fund Manager on

24 March 2021 and responsibility for the custody of the Company’s investments passed to YFM Private Equity

Limited on that date.

The key features of the agreement are:

>YFM Private Equity Limited receives a Manager’s fee, payable quarterly in advance, calculated at half-yearly

intervals as at 30 June and 31 December. The fee is allocated between capital and revenue as described in

note 1;

>The annual Manager’s fee payable to the Manager is 1.0 per cent on all surplus cash, defined as all cash

above £5 million. The annual fee on all other assets will be 2.0 per cent of net assets per annum. Based on

the Company’s net assets at 31 December 2022 of £111,869,000, and cash of £28,274,000 at that date this

equates to approximately £2,002,000 per annum;

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

71

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

>YFM Private Equity Limited shall bear the annual operating costs of the Company (including the Manager’s

fee set out above but excluding any payment of the performance incentive fee, details of which are set out

below and excluding VAT and trail commissions) to the extent that those costs exceed 2.9 per cent of the net

asset value of the Company; and

>under the IA, YFM Private Equity Limited also provides administrative and secretarial services to the

Company for a fee of £46,000 per annum plus annual adjustments to reflect movements in the Retail Prices

Index. This fee is charged fully to revenue, and totalled £75,000 for the year ended 31 December 2022

(2021: £70,000).

When the Company makes investments into its unquoted portfolio, the Manager charges that investee an advisory

fee. With effect from 1 October 2013, if the average of relevant fees exceeds 3.0 per cent of the total invested into

new portfolio companies and 2.0 per cent into follow-on investments over the Company’s financial year, this excess

will be rebated to the Company. As at 31 December 2022, the Company was due a rebate from the Manager of £nil

(2021: £nil).

Monitoring and directors’ fees the Manager receives from the investee companies are limited to a maximum of

£40,000 (excluding VAT) per annum per company.

The total remuneration payable to YFM Private Equity Limited under the IA in the year was £1,861,000 (2021:

£1,562,000).

Under the IA, YFM Private Equity Limited is entitled to receive fees from investee companies in respect of the

provision of non-executive directors and other advisory services. YFM Private Equity Limited is responsible for

paying the due diligence and other costs incurred in connection with proposed investments which for whatever

reason do not proceed to completion. In the year ended 31 December 2022, the fees receivable by YFM Private

Equity Limited from investee companies which were attributable to advisory and directors’ and monitoring fees

amounted to £2,026,000 (2021: £1,235,000).

Under the Subscription Rights Agreement dated 23 November 2001 between the Company, YFM Private Equity

Limited and Chord Capital Limited (“Chord” formerly Generics Asset Management Limited), as amended by an

agreement between those parties dated 31 October 2005, YFM Private Equity Limited and Chord have a

performance-related incentive, structured so as to entitle them to an amount equivalent to 20 per cent of the

amount by which the cumulative dividends per ordinary share paid as at the last business day in December in any

year, plus the average of the middle market price per ordinary share on the five dealing days prior to that day,

exceeds 120 pence per ordinary share, multiplied by the number of ordinary shares issued and the ordinary shares

under option (if any) (the “Hurdle”). Under the terms of the Subscription Rights Agreement, once the Hurdle has

been exceeded it is reset at that value going forward, which becomes the new Hurdle. Any subsequent exercise of

these rights will only occur once the new Hurdle has been exceeded. The subscription rights are exercisable in the

ratio 95:5 between the Manager and Chord Capital Limited.

By a Deed of Assignment dated 19 December 2003 (together with a supplemental agreement dated 5 October

2005), the benefit of the YFM Private Equity Limited subscription right was assigned to YFM Private Equity Limited

Carried Interest Trust (the “Trust”), an employee benefit trust formed for the benefit of certain employees of YFM

Private Equity Limited and associated companies. Pursuant to a deed of variation dated 16 November 2012

between the Company, the trustees of the Trust and Chord, the Subscription Rights Agreement was varied so that

the subscription rights will be exercisable in the ratio of 95:5 between the trustees of the Trust and Chord.

Pursuant to a deed of variation dated 5 August 2014 the Subscription Rights Agreement was varied so that the

recipient was changed from the Trust to YFM Private Equity Limited. Pursuant to a deed of variation dated 13

November 2019 the Subscription Rights Agreement was varied so that the recipients can elect to receive the

incentive in the form of shares or cash.

As at 31 December 2021 the total of cumulative cash dividends paid and mid-market price was 135.5 pence per

ordinary share. Consequently the Hurdle was exceeded and a performance related incentive of £4,407,000 for the

year ended 31 December 2021 was paid. The Hurdle for the year ending 31 December 2022 was reset at 135.5

pence per ordinary share.

72

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

3.Administrative Expenses (continued)

As at 31 December 2022, the total of cumulative cash dividends paid and mid-market price was 137.25 pence per

ordinary share. Consequently the Hurdle was exceeded and a performance related incentive of £635,000 for the

year ended 31 December 2022 is payable. The Hurdle for the year ending 31 December 2023 is reset at 137.25

pence per ordinary share.

If the IA is terminated, the beneficiaries of the Incentive Agreement will continue to be entitled to the Incentive

Payment. The Incentive Payment will be modified so as to entitle the recipients to an Incentive Payment that is fair,

having regard to all the circumstances.

Under the terms of the offer launched with British Smaller Companies VCT plc on 22 September 2021, YFM

Private Equity Limited was entitled to 3.0 per cent of gross subscriptions, (3.5 per cent for Applications received

from Applicants who did not invest their money through a financial intermediary advisor and invested directly into

the Company) less commissions payable to an execution-only broker or platform. The net amount paid to YFM

Private Equity Limited under this offer amounted to £744,000.

Under the terms of the offer launched with British Smaller Companies VCT plc on 30 November 2022, YFM Private

Equity Limited will be entitled to 3.0 per cent of gross subscriptions, (3.5 per cent for Applications received from

Applicants who did not invest their money through a financial intermediary advisor and invested directly into the

Company) less commissions payable to an execution-only broker or platform.

The details of directors’ remuneration are set out in the Directors’ Remuneration Report on page 50 under the

heading “Directors’ Remuneration for the year ended 31 December 2022 (audited)”.

4.Taxation

Revenue

£000

2022

Capital

£000

Total

£000

Revenue

£000

2021

Capital

£000

Total

£000

Profit (loss) before taxation

354

5,899

6,253

(130)

20,519

20,389

Profit (loss) before taxation

multiplied by standard rate

of corporation tax in UK

of 19% (2021: 19%)

67

1,121

1,188

(25)

3,899

3,874

Effect of:

UK dividends received

(172)

-

(172)

(62)

-

(62)

Non-taxable profits on investments

-

(1,496)

-

(4,948)

Deferred tax not recognised

105

375

480

87

1,049

1,136

Tax charge

-

The Company has no provided or unprovided deferred tax liability in either year.

Deferred tax assets of £3,703,000 (2021: £3,072,000) calculated at 25% (2021: 25%) in respect of unrelieved

management expenses (£14.81 million as at 31 December 2022 and £12.29 million as at 31 December 2021)

have not been recognised as the directors do not currently believe that it is probable that sufficient taxable profits will

be available against which assets can be recovered.

Due to the Company’s status as a venture capital trust and the continued intention to meet with the conditions

required to comply with Section 274 of the Income Tax Act 2007, the Company has not provided for deferred tax on

any capital gains or losses arising on the revaluation or realisation of investments.

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

73

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

5.Dividends

Amounts recognised as distributions to equity holders in the period to 31 December:

Revenue

£000

2022

Capital

£000

Total

£000

Revenue

£000

2021

Capital

£000

Total

£000

Interim dividend for the year ended

31 December 2022 of 1.5p

(2021: 1.5p) per ordinary share

-

2,718

-

1,934

Second interim dividend for the year

ended 31 December 2022 of 1.5p

(2021: 1.5p) per ordinary share

-

2,726

1,559

544

2,103

Third interim dividend for the

year ended 31 December 2021

of 5.0p per ordinary share

-

6,978

-

5,444

1,559

9,456

11,015

Shares allotted under DRIS

(1,085)

(2,250)

Dividends paid in Statement

of Cash Flows

4,359

8,765

The first interim dividend of 1.5 pence per ordinary share was paid on 6 May 2022 to shareholders on the register

as at 1 April 2022.

The second interim dividend of 1.5 pence per ordinary share was paid on 3 October 2022 to shareholders on the

register as at 2 September 2022.

A special dividend of 2.25 pence per ordinary share in respect of the year ending 31 December 2023, amounting to

£4,097,000, was paid on 11 January 2023 to shareholders on the register on 18 November 2022. An interim

dividend of 1.5 pence per ordinary share, in respect of the year ending 31 December 2023, will be paid on 26

June 2023 to shareholders on the register on 12 May 2023. These dividends were not recognised in the year

ended 31 December 2022 as the obligations did not exist at the balance sheet date.

6.Basic and Diluted Earnings per Ordinary Share

The basic and diluted earnings per ordinary share is based on the profit after tax attributable to shareholders of

£6,253,000 (2021: £20,389,000) and 181,163,554 (2021: 138,592,343) ordinary shares being the weighted

average number of ordinary shares in issue during the year.

The basic and diluted revenue earnings (loss) per ordinary share is based on the revenue profit for the year

attributable to shareholders of £354,000 (2021: loss of £130,000) and 181,163,554 (2021: 138,592,343) ordinary

shares being the weighted average number of ordinary shares in issue during the year.

The basic and diluted capital earnings per ordinary share is based on the capital profit for the year attributable to

shareholders of £5,899,000 (2021: £20,519,000) and 181,163,554 (2021: 138,592,343) ordinary shares being the

weighted average number of ordinary shares in issue during the year.

During the year the Company allotted 1,826,028 new ordinary shares in respect of its DRIS and 40,224,521 new

ordinary shares from the fundraising.

74

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

6.Basic and Diluted Earnings per Ordinary Share (continued)

The Company has also repurchased 2,737,038 of its own shares in the year, and these shares are held in the

capital reserve. The total of 18,666,812 treasury shares has been excluded in calculating the weighted average

number of ordinary shares for the period. The Company has no securities that would have a dilutive effect and

hence basic and diluted earnings per ordinary share are the same.

The Company has no potentially dilutive shares and consequently, basic and diluted earnings per ordinary share

are equivalent in both the year ended 31 December 2022 and 31 December 2021.

7.Financial Assets at Fair Value through Profit or Loss - Investments

IFRS 13, in respect of financial instruments that are measured in the balance sheet at fair value, requires disclosure

of fair value measurements by level of the following fair value measurement hierarchy:

Level 1: quoted prices in active markets for identical assets or liabilities. The fair value of financial instruments

traded in active markets is based on quoted market prices at the balance sheet date. An active market is defined as

a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide

pricing information on an ongoing basis. The quoted market price used for financial assets held by the Company is

the current bid price. These instruments are included in level 1 and comprise fixed income securities classified as

held at fair value through profit or loss.

Level 2: the fair value of financial instruments that are not traded in an active market is determined by using

valuation techniques. These valuation techniques maximise the use of observable market data where it is available

and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are

observable, the instrument is included in level 2. The Company held no such instruments in the current or prior

year.

Level 3: the fair value of financial instruments that are not traded in an active market (for example, investments in

unquoted companies) is determined by using valuation techniques such as revenue and earnings multiples. If one

or more of the significant inputs is not based on observable market data, the instrument is included in level 3. The

majority of the Company’s investments fall into this category at 31 December 2022.

Each investment is reviewed at least quarterly to ensure that it has not ceased to meet the criteria of the level in

which it is included at the beginning of each accounting period. The change in fair value for the current and previous

year is recognised through profit or loss.

There have been no transfers between these classifications in either period.

All items held at fair value through profit or loss were designated as such upon initial recognition.

Valuation of Investments

Full details of the methods used by the Company are set out in note 1 of these financial statements. Where

investments are held in listed investment funds, fair value is set at the market bid price.

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

75

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Movements in investments at fair value through profit or loss during the year to 31 December 2022 are summarised

as follows:

IFRS 13 measurement classification

Level 3

Level 1

Unquoted

Investments

£000

Listed

Investment

Funds

£000

Total

Investments

£000

Opening cost

42,037

-

42,037

Opening investment holding gain*

27,982

-

27,982

Opening fair value at 1 January 2022

70,019

-

70,019

Additions at cost

16,226

1,752

17,978

Capitalised income

40

-

40

Disposal proceeds

(12,929)

-

(12,929)

Net profit on disposal

3,586

-

3,586

Change in fair value

1,451

(156)

1,295

Foreign exchange gain

2,992

-

2,992

Closing fair value at 31 December 2022

81,385

1,596

82,981

Closing cost

49,494

1,752

51,246

Closing investment holding gain*

31,891

(156)

31,735

Closing fair value at 31 December 2022

81,385

1,596

82,981

* Following the merger between the Company and British Smaller Technologies Company VCT plc a total of

£975,000 of negative goodwill was recognised in the investment holding gains and losses reserve in respect of

the investments acquired. The relevant amount per investment is realised at the point of disposal to the capital

reserve. At 31 December 2022 a total of £27,000 (2021: £27,000) was held on investments yet to be realised in

the investment holdings gains and losses reserve.

There were no individual reductions in fair value during the year that exceeded 5 per cent of the total assets of the

Company (2021: £nil).

Level 3 valuations include assumptions based on non-observable market data, such as discounts applied either to

reflect changes in fair value of financial assets held at the price of recent investment, or to adjust revenue and

earnings multiples. IFRS 13 requires an entity to disclose quantitative information about the significant

unobservable inputs used. Of the Company’s level 3 investments, 75 per cent are held on a revenue multiple

basis and 12 per cent on an earnings multiple basis, which have significant judgement applied to the valuation

inputs. The table on page 76 sets out the range of Revenue Multiple (RM), Earnings Multiple (EM), and discounts

applied in arriving at investments valued on these bases. The remaining 13 per cent are valued based on cost or

price of recent investment, reviewed for change in fair value (7 per cent), net asset value reviewed for change in fair

value (3 per cent) and expected sale proceeds (3 per cent).

76

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

7.Financial Assets at Fair Value through Profit or Loss - Investments (continued)

Application

Revenue Multiple inputsSoftware

Cloud &

DevOpsData

NewRetail &

MediaBrands

Tech-enabled

Services

2022 Revenue Multiple Range5.37-5.792.81-5.79 5.37-11.76 1.05-5.171.16-1.402.10-5.71

Revenue Multiple

Weighted Average

5.744.06

10.88

2.711.29

5.22

2021 Revenue Multiple Range

8.40-10.30 4.10

4.10-26.90

1.89-8.701.27

8.70-10.30

Revenue Multiple

Weighted Average

8.664.10

22.27

6.991.27

9.20

2022 Combined RM and/or

Marketability Discount

Range44%-76%36%-40% 0%-56%20%-40%24%-60% 40%-68%

Combined RM and/or

Marketability Discount

Weighted Average

50%38%

8%

28%43%

47%

2021 Combined RM and/or

Marketability Discount

Range

52%-76%52%

19%-72%

60%-68%44%

60%-72%

Combined RM and/or

Marketability Discount

Weighted Average

61%52%

26%

64%44%

68%

Advanced

Earnings Multiple inputsManufacturing

Business

Services

Retail &

Brands

Tech-enabled

Services

2022 Earnings Multiple Range

n/a8.76-8.89n/a

12.12

Earnings Multiple

Weighted Average

n/a8.83n/a

12.12

2021 Earnings Multiple Range

11.736.90-15.15 15.00

10.76-13.66

Earnings Multiple

Weighted Average

11.7312.6815.00

12.41

2022 Combined EM and

Marketability Discount

Range

n/a36%-48%n/a

56%

Combined EM and

Marketability Discount

Weighted Average

n/a39%n/a

56%

2021 Combined EM and

Marketability Discount

Range

60%20%-64%24%

40%-60%

Combined EM and

Marketability Discount

Weighted Average

60%49%24%

51%

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

77

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

The standard also requires disclosure, by class of financial instruments, if the effect of changing one or more

inputs to reasonably possible alternative assumptions would result in a significant change to the fair value

measurement. Each unquoted portfolio company has been reviewed in order to identify the sensitivity of the

valuation methodology to using alternative assumptions. Where discounts have been applied (for example to

revenue/earnings levels or multiple ratios) alternatives have been considered which still fall within the IPEV

Guidelines (see page 66). For each unquoted investment, two scenarios have been modelled: more prudent

assumptions (downside case) and more optimistic assumptions (upside case). Applying the downside alternative

the value of the unquoted investments would be £3.4 million or 4.2 per cent lower. Using the upside alternative the

value would be increased by £3.6 million or 4.4 per cent.

Movements in investments at fair value through profit or loss during the previous year to 31 December 2021 are

summarised as follows:

IFRS 13 measurement classification

Level 3

Unquoted

Investments

£000

Opening cost

39,891

Opening investment holding gain

9,224

Opening fair value at 1 January 2021

49,115

Additions at cost

6,092

Capitalised income

59

Disposal proceeds

(11,186)

Net profit on disposal*

5,237

Change in fair value

20,539

Foreign exchange gain

163

Closing fair value at 31 December 2021

70,019

Closing cost

42,037

Closing investment holding gain

27,982

Closing fair value at 31 December 2021

70,019

* The net profit on disposals in the table above is £5,237,000 whereas that shown in the Statement of Comprehensive Income is £5,342,000. The

difference comprises deferred proceeds in respect of assets which have been disposed of in prior periods and were not included in the portfolio at 1

January 2021.

78

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

7.Financial Assets at Fair Value through Profit or Loss - Investments (continued)

The following disposals took place in the year:

Net proceeds

from sale

£000

Opening

carrying

value as at

Cost 1 January 2022

£000 £000

Profit (loss)

on disposal

£000

Unquoted investments:

Springboard Research Holdings Limited

5,782

1,8813,959

1,823

Intelligent Office UK (IO Outsourcing Limited t/a Intelligent Office) 4,0801,956

3,163917

Vuealta Group Limited*3,0671,970

2,0611,006

Arraco Global Markets Limited*-1,780

160(160)

Seven Technologies Holdings Limited-1,222

--

Total proceeds received**12,9298,8099,3433,586

* opening carrying value includes further investments made during the year.

** The total from disposals in the year in the table above is £12,929,000 whereas that shown in the Statement of Cash Flows is £12,933,000. The difference

comprises proceeds of £4,000 which were received relating to a prior year disposal.

The following disposals took place in the year to 31 December 2021:

Net proceeds

from sale

£000

Opening

carrying

value as at

Cost 1 January 2021

£000 £000

Profit (loss)

on disposal

£000

Unquoted investments:

Matillion Limited

5,946

3212,539

3,407

Deep-Secure Ltd

3,279

5001,966

1,313

KeTech Enterprises Limited

1,275

1,4901,292

(17)

Tissuemed Limited

599

4865

534

Ncam Technologies Limited

87

8787

-

Macro Art Holdings Limited

-

159-

-

Friska Limited

-

1,400-

-

Total from unquoted investments

11,186

4,0055,949

5,237

Deferred proceeds:

Business Collaborator Limited

300

-300

-

Bagel Nash Group Limited

100

-66

34

Ness (Holdings) Limited

71

--

71

Deferred proceeds received

471

-366

105

Total proceeds received

11,657

4,0056,315

5,342

* The total from disposals in the year in the table above is £11,657,000 whereas that shown in the Statement of Cash Flows is £11,653,000. The difference

comprises proceeds of £4,000 which were received after the previous year end.

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

79

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Significant Interests

YFM Private Equity Limited, the Company’s Manager, also acts as manager to certain other funds that have

invested in some of the companies within the current portfolio of the Company. Details of these investments are

summarised in the tables below.

At 31 December 2022 the Company held a significant holding of at least 20 per cent of the issued ordinary share

capital, either individually or alongside commonly managed funds, in the following companies:

Company

Principal activity

No of shares

held by the

Company

Percentage

of class held

by the

Company*

Percentage

of class held

by commonly

managed

funds*

ACC Aviation Group Limited

Business Services

146,850

19%

69%

Arcus Global Limited

Application Software

304,457

16%

37%

AutomatePro Limited

Cloud & DevOps

42,565

8%

25%

Biz2Mobile Limited

Application Software

3,861,591

10%

26%

Displayplan Holdings Limited

Business Services

1,260

12%

34%

EL Support Services Limited**

Investment Company

3,500

50%

100%

Elucidat Ltd

Application Software

3,025

10%

25%

Force24 Ltd

Application Software

23,786

13%

40%

Immunobiology Limited**

Lifesciences

62,485,280

27%

KeTech Enterprises Limited

Tech-enabled Services

128,333

16%

47%

Macro Art Holdings Limited

Business Services

100,000

12%

30%

NB Technology Services Limited**

Investment Company

3,500

50%

100%

Ncam Technologies Limited

New Media

1,186,915

15%

51%

OC Engineering Services Limited**

Investment Company

3,500

50%

100%

Outpost VFX Limited

New Media

3,962,520

12%

35%

Panintelligence (via Paninsight Limited)

Data

22,712

10%

35%

SH Healthcare Services Limited**

Investment Company

3,500

50%

100%

SharpCloud Software Limited

Data

26,340

13%

40%

Cloud & DevOps

6,093,201

20%

62%

Sipsynergy (via Hosted

Network Services Limited)**

SP Manufacturing Services Limited**

Investment Company

3,500

50%

100%

Tonkotsu Limited

Retail & Brands

33,662

12%

38%

Traveltek Group Holdings Limited

Application Software

36,190

15%

47%

Unbiased EC1 Limited

Tech-enabled Services

1,031,782

12%

35%

Vuealta Holdings Limited

Tech-enabled Services

60,583

18%

51%

80

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

7.Financial Assets at Fair Value through Profit or Loss - Investments (continued)

Company

Principal activity

No of shares

held by the

Company

Percentage

of class held

by the

Company*

Percentage

of class held

by commonly

managed

funds*

Vypr Validation Technologies Limited

Tech-enabled Services

13,236

13%

32%

Advanced Manufacturing

49,600

15%

37%

Wakefield Acoustics

(via Malvar Engineering Limited)

Wooshii Limited

New Media

972,207

13%

38%

* Fully diluted holding.

** The registered office of these significant holdings is given on the inside back cover.

The amounts shown below are the net cost of investments as at 31 December 2022 and exclude those companies

which are in receivership or liquidation.

British Smaller

Companies

VCT2 plc

£000

British Smaller

Companies

VCT plc

£000

Other commonly

managed

funds Total

£000 £000

ACC Aviation Group Limited

145

220

185550

Arcus Global Limited

2,050

3,075

-5,125

AutomatePro Limited

1,483

2,225

1,2925,000

Biorelate Limited

1,040

1,560

-2,600

Biz2Mobile Limited

1,265

1,898

-3,163

Displayplan Holdings Limited

70

130

-200

e2E Engineering Limited

600

900

-1,500

Eikon Holdco Limited

500

750

2501,500

EL Support Services Limited

500

-1,000

Elucidat Ltd

2,640

3,961

-6,601

Force24 Ltd

2,100

3,150

1,0506,300

Frescobol Carioca Ltd

1,200

1,800

-3,000

Intamac Systems Limited

905

302

-1,207

KeTech Enterprises Limited

10

1030

Macro Art Holdings Limited

321

481

-802

Matillion Limited

1,456

1,778

5493,783

NB Technology Services Limited

500

-1,000

Ncam Technologies Limited

1,675

2,512

1,9976,184

OC Engineering Services Limited

500

-1,000

Outpost VFX Limited

3,000

4,500

1,5009,000

Panintelligence (via Paninsight Limited)

1,000

1,500

1,0003,500

Plandek Limited

1,380

2,070

-3,450

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

81

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

British Smaller

Companies

VCT2 plc

£000

British Smaller

Companies

VCT plc

£000

Other commonly

managed

funds Total

£000 £000

Quality Clouds Limited

1,000

1,500

1,0003,500

Relative Insight Limited

2,000

3,000

-5,000

SH Healthcare Services Limited

500

-1,000

SharpCloud Software Limited

2,271

3,407

1,3227,000

SP Manufacturing Services Limited

500

-1,000

Sipsynergy (via Hosted Network Services Ltd)

2,045

2,654

1,5516,250

Summize Limited

1,200

1,800

-3,000

TeraView Limited

377

-754

Tonkotsu Limited

1,592

2,388

9954,975

Traveltek Group Holdings Limited

1,163

1,715

3,5776,455

Unbiased EC1 Limited

3,731

5,596

1,22310,550

Vuealta Holdings Limited

61

91

18170

Vypr Validation Technologies Limited

2,200

3,300

-5,500

Wakefield Acoustics (via Malvar Engineering Limited)

720

1,080

-1,800

Wooshii Limited

3,096

4,644

8018,541

Significant Holdings

Profit (loss)

before taxation

£million

Net assets

(liabilities)

£million

EL Support Services Limited

0.10

0.22

NB Technology Services Limited

0.01

(0.13)

Ncam Technologies Limited

(1.94)

0.02

OC Engineering Services Limited

0.03

SH Healthcare Services Limited

(0.30)

(0.31)

Sipsynergy (via Hosted Network Services Ltd)

(0.62)

0.58

SP Manufacturing Services Limited

0.67

(0.98)

Vuealta Holdings Limited

n/a

Information on ACC Aviation Group Limited is given on page 30.

82

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

8.Accrued income and other assets

2022 2021

£000 £000

Non-current assets:

Accrued income on financial assets

948493

Current assets:

Accrued income on financial assets

143107

Accrued income on cash, cash equivalents and cash deposits

423

Prepayments and other debtors

102107

287217

Non-current assets relates to income receivable on exit from the relevant investee company where this is expected

to be more than one year from the balance sheet date.

The carrying amounts of the Company’s accrued income are denominated in sterling.

9.Cash and Cash Equivalents

2022 2021

£000 £000

Cash at bank

26,48619,201

Cash and Cash Equivalents

26,48619,201

At 31 December 2022 a further £1.99 million (2021: £1.99 million) was also held in fixed term deposit accounts which

were due to mature in April 2023 (2021: April 2022). In accordance with the definition of cash and cash equivalents the

amounts in both the current and prior year are shown separately as current asset investments on the face of the

balance sheet.

10. Trade and Other Payables

2022 2021

£000 £000

Amounts payable within one year:

Incentive fee

6354,407

Accrued expenses

186136

8214,543

An amount of £635,000 has been accrued within trade and other payables in relation to the performance incentive

fee for the year ended 31 December 2022 (2021:£4,407,000 for the year ended 31 December 2021), as further

explained in note 3.

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

83

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

11. Called-up Share Capital

2022

Allotted,

called-up and

fully paid

£000

2021

Allotted,

called-up and

fully paid

£000

Ordinary shares of 10 pence

Issued 200,135,522 (2021: 158,084,973) including 18,666,812 shares

held in treasury (2021: 15,929,774)

20,014

15,808

The movement in the year was as follows:

Price

penceDate

Number

of shares

Share

Capital

£000

Total as at 1 January 2022

158,084,973

15,808

Issue of shares

Fundraising

61.74-66.16

7 Jan 2022

40,224,5214,023

Issue of shares

DRIS

60.0

6 May 2022

903,71491

Issue of shares

DRIS

58.8

3 Oct 2022

922,31492

As at 31 December 2022 (including treasury shares)

200,135,52220,014

As at 31 December 2022 (excluding treasury shares)

181,468,710

The movement in the previous year to 31 December 2021 was as follows:

Price

penceDate

Number

of shares

Share

Capital

£000

Total as at 1 January 2021

141,332,528

14,133

Issue of shares

DRIS

53.5

5 Mar 2021

742,80574

Issue of shares

Fundraising

54.872-54.943

11 Mar 2021

12,756,9511,276

Issue of shares

DRIS

57.0

25 Oct 2021

760,73376

Issue of shares

DRIS

57.0

16 Nov 2021

2,491,956249

As at 31 December 2021 (including treasury shares)

158,084,97315,808

As at 31 December 2021 (excluding treasury shares)

142,155,199

During the year the Company purchased 2,737,038 (2021: 3,553,337) of its own shares and these shares are

held on the balance sheet in the Capital Reserve. Full details of the share purchases are set out in the Directors’

Report under the heading ‘Buy-Back and Issue of Shares’. The treasury shares have been included in calculating

the number of ordinary shares in issue, and excluded in calculating the number of ordinary shares with voting

rights in issue, at 31 December 2022 and 31 December 2021.

84

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

12. Basic and Diluted Net Asset Value per Ordinary Share

The basic and diluted net asset value per ordinary share is calculated on attributable assets of £111,869,000

(2021: £87,375,000) and 181,468,710 (2021: 142,155,199) ordinary shares in issue at the year end.

The treasury shares have been excluded in calculating the number of ordinary shares in issue at 31 December

2022.

The Company has no potentially dilutive shares and consequently, basic and diluted net asset values per ordinary

share are equivalent in both the years ended 31 December 2022 and 31 December 2021.

13. Total Return per Ordinary Share

The Total Return per ordinary share is calculated on cumulative dividends paid of 81.0 pence per ordinary share

(2021: 78.0 pence per ordinary share) plus the net asset value as calculated per note 12.

14. Financial Commitments

There are no financial commitments at 31 December 2022 or 31 December 2021.

15. Events after the Balance Sheet Date

Having previously assessed its expected cash requirements, the Company announced a new share offer on 30

November 2022, alongside British Smaller Companies VCT plc, with the intention of raising up to £75 million, in

aggregate which included an over-allotment facility of £25 million, in aggregate. Gross Applications exceeding

£62.5 million have been received as at the date of this report, of which £23.5 million relate to the Company. The

related allotment will take place in early April 2023.

Since year-end, the Company has invested £2.4 million into DrDoctor, a patient engagement and communications

software platform. The Company also realised its investment in Wakefield Acoustics at the value recognised at 31

December 2022 (£0.6 million).

16. Contingent liability

As set out in note 3 on pages 71 and 72, the Manager and Chord Capital are entitled to a performance-related

incentive fee if the cumulative dividends per ordinary share paid as at the last business day of December in any

year, plus the average of the middle market price per ordinary share of the five dealing days prior to that day,

exceeds a Hurdle, which is set at 137.25 pence per ordinary share for the year ending 31 December 2023. The

value of the incentive fee is 20 per cent of the excess to the Hurdle, multiplied by the number of ordinary shares

issued. Excluding the payment of dividends, the reported net assets per ordinary share have increased by 2.8

pence per ordinary share since 31 December 2022. If this increase were to flow through to an increase in the

middle market price per ordinary share in the last five dealing days of December 2023, at a discount of 5 per cent to

the net asset value per ordinary share, then an incentive fee of approximately £872,000 would be payable at 31

December 2023 based on the number of shares in issue at 20 March 2023.

17. Financial Instruments

The Company has no derivative financial instruments and has no financial asset or liability for which hedge

accounting has been used in either year. The Company classifies its financial assets as either fair value through

profit or loss or at amortised cost, and its financial liabilities, primarily accrued expenses, at amortised cost.

It is the directors’ opinion that the carrying value of financial assets and liabilities approximates their fair value.

Therefore, the directors consider all assets and liabilities to be carried at a valuation which equates to fair value.

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

85

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Investments are made in a combination of equity, fixed rate and variable rate financial instruments so as to comply

with VCT legislation and provide potential future capital growth. Surplus funds are held in bank deposits until

suitable qualifying investment opportunities arise.

The Company has reviewed all contracts for embedded derivatives that are required to be separately accounted for

if they do not meet certain criteria set out in the standard. No embedded derivatives have been identified by the

Company.

The accounting policies for financial instruments have been applied to the items below:

Assets as per balance sheet

2022

Assets at

fair value

Other through profit

assets or loss

£000 £000

2021

Assets at

fair value

Other through profit

assets or loss

£000 £000

Non-current assets at fair value through profit or loss

Financial assets

-82,981

-70,019

Accrued income on financial assets

-948

-493

Current assets

Cash and cash equivalents

26,486-

19,201-

Cash on fixed term deposit

1,988-

Accrued income on financial assets

-143

-107

Accrued income on cash, cash equivalents and cash deposits

42-

3-

28,51684,072

21,19270,619

Other assets – not financial instruments

102-

107-

28,61884,072

21,29970,619

Liabilities as per balance sheet

2022

Other

financial

liabilities

£000

2021

Other

financial

liabilities

£000

Trade and other payables

(186)

(136)

Performance incentive fee

(635)

(4,407)

(821)

(4,543)

Assets classified as fair value through profit or loss were designated as such upon initial recognition.

The Company’s investing activities expose it to various types of risk that are associated with the financial

instruments and markets in which it invests. The most important types of financial risk to which the Company is

exposed are market risk, credit risk and liquidity risk. The nature and extent of the financial instruments outstanding at

the balance sheet date and the risk management policies employed by the Company are discussed below. There

have been no changes since last year in the objectives, policies, and processes for managing and measuring risks

facing the Company.

86

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

17. Financial Instruments (continued)

17a Market Risk

Market Price Risk

The Company invests in new and expanding businesses, the shares of which may not be traded on the stock

market. Consequently, exposure to market factors, in relation to many investments, stems from market based

measures that may be used to value unlisted investments.

The market also defines the value at which investments may be sold. Returns are therefore maximised when

investments are bought or sold at appropriate times in the economic cycle.

Market price risk arises from uncertainty about the future prices of financial instruments held in accordance with the

Company’s investment objectives. It represents the potential loss that the Company might suffer through holding

market positions in the face of market movements. In addition, the ability of the Company to purchase or sell

investments is also constrained by requirements set down for VCTs.

Of the Company’s financial assets through profit or loss, 2 per cent (2021: nil) are investment funds listed on the

main market of the London Stock Exchange (including FCA authorised and regulated UCITS funds). A 5 per cent

increase in stock prices as at 31 December 2022 would have increased the net assets attributable to the

Company’s shareholders and the total profit for the year by £80,000 (2021: £nil). An equal change in the opposite

direction would have decreased the net assets attributable to the Company’s shareholders and the total profit for the

year by an equal amount.

Of the Company’s financial assets through profit or loss, 98 per cent are in unquoted companies held at fair value

(2021: 100 per cent). The valuation methodology for these investments includes the application of externally

produced revenue and earnings multiples. Therefore the value of the unquoted element of the portfolio is also

indirectly affected by price movements on the listed market. Investments have been valued in line with the

Guidelines described within note 1. Those using revenue and earnings multiple methodologies include judgements

regarding the level of discount applied to that multiple. The effect of changing the level of discounts applied to the

multiples is considered in note 7 on page 77.

The largest single concentration of risk relates to the Company’s investment in Matillion Limited which constitutes

19.6 per cent (2021: 28.7 per cent) of the net assets attributable to the Company’s shareholders. The Board seeks to

mitigate this risk by diversifying the portfolio and monitors the status of all investments on an ongoing basis. The

average investment (excluding both those whose value has been reduced to nil and those managed on a

discretionary basis by Brewin Dolphin Securities Limited) is 2.1 per cent (2021: 2.7 per cent) of the value of net

assets.

Comparison of Realised Proceeds to Unrealised Valuations

The table below shows a comparison of the realised proceeds to the unrealised valuations one year prior to sale,

for all disposals of unquoted investments over the last ten years.

Date of

Disposal

Sale

proceeds

to date

£000

Valuation

one year

earlier

£000

Increase

(decrease)

£000

Digital Healthcare Limited

Aug-13

1,285

1,156

129

Waterfall Services Limited

Jan-14

964

489

475

Insider Technologies (Holdings) Limited

Oct-15

773

587

186

Callstream Group Limited

Mar-16

785

773

12

Cambrian Park & Leisure Homes Limited

Mar-17

-

1,251

(1,251)

Ness (Holdings) Limited

Mar-17

152

509

(357)

Selima Holding Company Ltd

May-17

1,406

462

944

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

87

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

Date of

Disposal

Sale

proceeds

to date

£000

Valuation

one year

earlier

£000

Increase

(decrease)

£000

Harvey Jones Holdings Limited

Aug-17

559

617

(58)

PowerOasis Limited

Sep-18

-

365

(365)

GTK (Holdco) Limited

Dec-18

2,465

1,801

664

Mangar Health Limited

Dec-18

3,675

2,641

1,034

Gill Marine Holdings Limited

Dec-18

2,844

1,922

922

Leengate Holdings Limited

Apr-19

1,291

1,179

112

Jun-19

-

280

(280)

The Heritage Window Company

Holdco Limited

Eikon Holdco Limited (partial realisation)

Oct-19

4,209

1,500

2,709

Business Collaborator Limited

Mar-20

5,390

2,441

2,949

RMS Group Holdings Limited

Jun-20

562

353

209

Bagel Nash Group Limited

Oct-20

100

405

(305)

Deep-Secure Ltd

Jul-21

3,279

1,479

1,800

Tissuemed Limited

Dec-21

599

65

534

Arraco Global Markets Limited

Sep-22

-

924

(924)

Sep-22

4,080

3,069

1,011

Intelligent Office UK

(via IO Outsourcing Limited)

Springboard Research Holdings Limited

Sep-22

5,782

4,124

1,658

Seven Technologies Holdings Limited

Dec-22

-

Vuealta Group Limited (partial realisation)

Dec-22

3,067

1,969

1,098

43,267

30,361

12,906

Interest Rate Risk

The Company’s venture capital investments include £2,992,000 (2021: £3,755,000) of loan stock in unquoted

companies. The majority of this loan stock at 31 December 2022 is at fixed rates to guard against fluctuations in

interest rates. As a result the Company is only exposed to cash flow interest rate risk on £611,000 (2021: £611,000) of

its loan stock portfolio.

The Company has some exposure to interest rates as a result of interest earned on bank deposits. Other financial

assets (being accrued income) and other financial liabilities (being accrued expenses) attract no interest. A

sensitivity analysis has not been performed as the amounts involved are not considered to be significant.

88

British Smaller Companies VCT2 plc Annual Report & Accounts

FINANCIAL STATEMENTS

17. Financial Instruments (continued)

2022

2021

Weighted

average

interest rate

£000%

Weighted

average

time for

which rate

is fixed

Months

Weighted

average

interest rate

£000%

Weighted

average

time for

which rate

is fixed

Months

Fixed rate loan stock and

preference shares

6,2638.0

50

8,0027.6

15

Cash on fixed term deposit

1,9882.6

3

1,9881.0

3

Combined

8,2516.7

39

9,9906.3

12

Exchange Rate Risk

Of the Company’s financial assets measured at fair value through profit or loss, 26 per cent (2021: 35 per cent) are

denominated in US dollars. A 5 per cent increase in the £:$ exchange rate at 31 December 2022 would have

decreased the net assets attributable to the Company’s shareholders and the total profit for the year by £1,042,000

(2021: £1,193,000). An equal change in the opposite direction would have increased the net assets attributable to

the Company’s shareholders and the total profit for the year by £1,151,000 (2021: £1,318,000).

17b Credit Risk

Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or

commitment that it has entered into with the Company. The Manager has in place a monitoring procedure in

respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets

excluding equity investments total £44,985,000 (2021: £36,218,000) which best represents the maximum credit

risk exposure at the balance sheet date.

The Company does not invest in floating rate instruments other than, on occasion, unquoted loan stock. Credit

risk on unquoted loan stock held within unlisted investments is considered to be part of market risk as disclosed

above.

The fair value of other assets is not regarded as having changed due to the changes in credit risk in either year.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to

unsettled transactions is considered to be small due to the short settlement period involved and the high credit

quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further

mitigate this risk. Bankruptcy or insolvency of the broker may cause the Company’s rights with respect to

securities held by the broker to be delayed or limited. The Manager monitors the Company’s risk by reviewing the

broker’s internal control reports on a regular basis.

The only significant assets not held at fair value are cash and cash equivalents and cash on fixed term deposit.

The cash held by the Company is held across a number of banks to spread the risk. Bankruptcy or insolvency of

these banks may cause the Company’s rights with respect to the cash held by the bank to be delayed or

limited. The banks used by the Company are large and reputable. Should the credit quality or the financial

position of the banks deteriorate significantly the Manager will move the cash holdings to another bank.

The maturities of the loan stock portfolio are as follows:

2022

£000

2021

£000

<1 year

1-2 years

2-5 years

<1 year1-2 years

2-5 years

Unquoted loan investments1,615

-

1,377

2,053591

1,111

Notes to the

Financial Statements

(continued)

British Smaller Companies VCT2 plc Annual Report & Accounts

89

Strategic Report

Financial Overview

Corporate Governance

Independent Auditor’s Report

Financial Statements

Company Information

An aged analysis of the unquoted loan investments included above, which are past due but not individually

impaired, is set out below. For this purpose these loans are considered to be past due when any payment due

date under the loan’s contractual terms (such as payment of interest) is received late or missed. The full value of the

loan is given even though, in some cases, the only default is in respect of interest.

2022 2021

£000 £000

< 1 year< 1 year

Loans to investee companies past due1,383400

17c Liquidity Risk

The risk to the Company relates to liabilities which fall due within one year. These liabilities are deemed immaterial

and as such the risk associated with them is minimal.

The Company needs to retain enough liquid resources to support the financing needs of its investment businesses. To

meet this aim the Company places its surplus funds in bank interest deposit accounts. Investments in liquid funds

are held for the purpose of liquidity whilst waiting for suitable qualifying investment opportunities to arise.

The Company’s liquidity risk is managed on an ongoing basis by the Manager in accordance with policies and

procedures in place. The cash requirements of the Company in respect of each investment are assessed at

monthly portfolio meetings.

The Company’s overall liquidity risks are monitored on a quarterly basis by the Board. The Company maintains

sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses. Of

the Company’s assets 23.7 per cent (2021: 22.0 per cent) are in the form of liquid cash. There are no undrawn

committed borrowing facilities at either year end. The Company does not have a material amount of liabilities at the

year end.

18. Capital Management

The Company’s objectives when managing capital are:

>to safeguard its ability to continue as a going concern, so that it can continue to provide returns for

shareholders and benefits for other stakeholders; and

>to ensure sufficient liquid resources are available to meet the funding requirements of its investments and

to fund new investments where identified.

The Company has no external debt; consequently all capital is represented by the value of share capital,

distributable and other reserves. Total shareholder equity at 31 December 2022 was £111,869,000 (2021:

£87,375,000).

In order to maintain or adjust its capital structure the Company may adjust the amount of dividends paid to

shareholders, return capital to shareholders, issue new shares or sell assets.

There have been no changes in capital management objectives or the capital structure of the business from the

previous year. The Company is not subject to any externally imposed capital requirements.

19. Related Party Transactions

Fees payable during the year to the directors and their interests in the shares of the Company are disclosed within the

Directors’ Remuneration Report on page 50. There were no amounts outstanding and due to the directors at 31

December 2022 (2021: £nil).

90

British Smaller Companies VCT2 plc Annual Report & Accounts

BRITISH SMALLER COMPANIES VCT2 PLC

No: 04084003

Notice of the

Annual General Meeting

(1)That the annual report and accounts for the year

ended 31 December 2022 be received.

(2)That the Directors’ Remuneration Report for the year

ended 31 December 2022 be approved other than

the part of such report containing the Directors’

Remuneration Policy.

(3) That the Director’s Remuneration Policy contained

in the Director’s Remuneration report for the year

ended 31 December 2022 be approved.

(4)That Mr P C Waller be re-elected as a director.

(5)That Ms B LAnderson be re-elected as a director.

(6)That Mr R S McDowell be re-elected as a director.

(7)That BDO LLP be re-appointed as auditor to the

Company to hold office until the conclusion of the

next general meeting at which accounts are laid

before the Company and that the directors be

authorised to fix the auditor’s remuneration.

(8)That the directors be and are hereby generally and

unconditionally authorised in accordance with

Section 551 of the Companies Act 2006 (the “Act”)

to exercise all the powers of the Company to allot

shares in the Company or to grant rights to subscribe

for or to convert any security into shares in the

Company up to an aggregate nominal amount of

£10,000,000, during the period commencing on the

passing of this Resolution and expiring on the later

of 15 months from the passing of this Resolution or

the next Annual General Meeting of the Company

(unless previously revoked, varied or extended by

the Company in general meeting), but so that this

authority shall allow the Company to make before

the expiry of this authority offers or agreements

which would or might require shares in the Company

to be allotted, or rights to subscribe for or to convert

any security into shares to be granted, after such

expiry and that all previous authorities given to the

directors be and they are hereby revoked, provided

that such revocation shall not have retrospective

effect.

Ordinary ResolutionsSpecial Resolution

(9)That the directors be and are hereby empowered in

accordance with Section 570(1) of the Act during the

period commencing on the passing of this

Resolution and expiring at the conclusion of the

Company’s next Annual General Meeting, or on the

expiry of 15 months following the passing of this

Resolution, whichever is the later, (unless previously

revoked, varied or extended by the Company in

general meeting), to allot equity securities (as

defined in Section 560 of the Act) for cash pursuant

to the general authority conferred upon the directors

in Resolution 8 above as if Section 561 of the Act did

not apply to any such allotment provided that this

power is limited to the allotment of equity securities

in connection with the allotment for cash of equity

securities up to an aggregate nominal amount of

£10,000,000, but so that this authority shall allow the

Company to make offers or agreements before the

expiry and the directors may allot securities in

pursuance of such offers or agreements as if the

powers conferred hereby had not so expired. This

power applies in relation to a sale of shares which is

an allotment of equity securities by virtue of Section

560(3) of the Act as if in the first sentence of this

Resolution the words “pursuant to the general

authority conferred upon the directors in Resolution

8 above” were omitted.

By order of the Board

The City Partnership (UK) Limited

Company Secretary

20 March 2023

Registered office:

5th Floor, Valiant Building, 14 South Parade, Leeds LS1 5QS

Information regarding the Annual General Meeting, including the

information required by section 311A of the Companies Act 2006, is

available from www.bscfunds.com.

NOTICE IS HEREBY GIVEN that the ANNUAL GENERAL MEETING of the Company will be held at 8-10 Hill Street,

London W1J 5NG on 15 June 2023 at 2:30 pm for the following purposes:

To consider and, if thought fit, pass the following resolutions:

Company Information

Notes:

(a)Any member of the Company entitled to attend and vote at the

Annual General Meeting is also entitled to appoint one or more

proxies to attend, speak and vote instead of that member. Any

such appointment can only be made using the procedures set

out in these notes and the notes of the Form of Proxy. A

member may appoint more than one proxy in relation to the

Annual General Meeting provided that each proxy is appointed

to exercise the rights attached to a different share or shares

held by that member. A proxy may demand, or join in

demanding, a poll. A proxy need not be a member of the

Company but must attend the Annual General Meeting in order

to represent their appointer. A member entitled to attend and

vote at the Annual General Meeting may appoint the Chairman

or another person as their proxy although the Chairman will not

speak for the member. A member who wishes their proxy to

speak for them should appoint their own choice of proxy (not

the Chairman) and give instructions directly to that person. If

you are not a member of the Company but you have been

nominated by a member of the Company to enjoy information

rights, you do not have a right to appoint any proxies under the

procedures set out in these notes. Please read note (k) below.

Under section 319A of the Companies Act 2006, the Company

must answer any question a member asks relating to the

business being dealt with at the Annual General Meeting

unless:

•answering the question would interfere unduly with the

preparation for the Annual General Meeting or involve the

disclosure of confidential information;

•the answer has already been given on a website in the

form of an answer to a question; or

•it is undesirable in the interests of the Company or the

good order of the Annual General Meeting that the

question be answered.

(b) To be valid, a Form of Proxy must be completed and signed

and with the power of attorney or other written authority, if any,

under which it is signed or an office or notarially certified copy

or a copy certified in accordance with the Powers of Attorney

Act 1971 of such power and written authority, must be delivered

to The City Partnership (UK) Limited, The Mending Rooms,

Park Valley Mills, Meltham Road, Huddersfield, HD4 7BH not

less than 48 hours (excluding weekends and public holidays)

before the time appointed for holding the Annual General

Meeting or adjourned meeting at which the person named in

the Form of Proxy proposes to vote. In the case of a poll taken

more than 48 hours (excluding weekends and public holidays)

after it is demanded, the document(s) must be delivered as

aforesaid not less than 24 hours (excluding weekends and

public holidays) before the time appointed for taking the poll, or

where the poll is taken not more than 48 hours (excluding

weekends and public holidays) after it was demanded, be

delivered at (and prior to the commencement of) the meeting

at which the demand is made. If no voting indication is given in

the Form of Proxy, your proxy will vote (or abstain from voting)

as they think fit in relation to any matter put to the Annual

General Meeting.

(c) To be valid, any Form of Proxy or other instrument appointing a

proxy, must be returned by no later than 2.30 pm on 13 June

2023 through any one of the following methods:

i) by post, courier or (during normal business hours only)

hand to the Company’s UK registrar at:

The City Partnership (UK) Limited

The Mending Rooms

Park Valley Mills

Meltham Road

Huddersfield

HD4 7BH;

ii)electronically through the website of the Company’s UK

registrar at www.proxy-bsc2-agm.cpip.io; or

iii) in the case of shares held through CREST, via the

CREST system (see note (p) below);

(d)If you return more than one proxy appointment, either by paper

or electronic communication, the appointment received last by

the Registrar before the latest time for the receipt of proxies will

take precedence. You are advised to read the terms and

conditions of use carefully. Electronic communication facilities

are open to all shareholders and those who use them will not

be disadvantaged.

(e)The return of a completed Form of Proxy, electronic filing or any

CREST Proxy Instruction (as described in note (p) below) will

not prevent a shareholder from attending the Meeting and

voting in person if they wish to do so.

(f) In order to revoke a proxy instruction a member will need to

inform the Company by sending a signed hard copy notice

clearly stating the intention to revoke the proxy appointment to

The City Partnership (UK) Limited, The Mending Rooms, Park

Valley Mills, Meltham Road, Huddersfield, HD4 7BH. In the

case of a member which is a company, the revocation notice

must be executed under its common seal or signed on its behalf

by an officer of the company or an attorney for the company.

Any power of attorney or any other authority under which the

revocation notice is signed (or a duly certified copy of such

power or authority) must be included with the revocation notice.

The revocation notice must be received by The City Partnership

before the Annual General Meeting or the holding of a poll

subsequently thereto. If a member attempts to revoke their

proxy appointment but the revocation is received after the time

specified then, subject to note (g) directly below, the proxy

appointment will remain valid.

(g)Completion and return of a Form of Proxy will not preclude a

member of the Company from attending and voting in person.

If a member appoints a proxy and that member attends the

Annual General Meeting in person, the proxy appointment will

automatically be terminated.

(h)Copies of the directors’ Letters of Appointment, the Register of

Directors’ Interests in the ordinary shares of the Company, and

a copy of the current articles of association of the Company will

be available for inspection at the registered office of the

Company during usual business hours on any weekday

(weekends and public holidays excluded) from the date of this

Notice, until the end of the Annual General Meeting and at the

Annual General Meeting venue itself for at least 15 minutes

prior to and during the meeting.

(i)Pursuant to Regulation 41 of the Uncertificated Securities

Regulations 2001, the Company has specified that only those

holders of the Company’s shares registered on the Register of

Members of the Company as at close of business on 13 June

2023 or, in the event that the Annual General Meeting is

adjourned, on the Register of Members at close of business on

the day two days before the time of any adjourned meeting,

shall be entitled to attend and vote at the said Annual General

Meeting in respect of such shares registered in their name at

the relevant time. Changes to entries on the Register of

Members after close of business on 13 June 2023 or, in the

event that the Annual General Meeting is adjourned, on the

Register of Members less than 48 hours before the time of any

adjourned meeting, shall be disregarded in determining the

right of any person to attend and vote at the Annual General

Meeting.

(j)As at 20 March 2023 the Company’s issued share capital

comprised 182,896,128 ordinary shares of 10 pence each with

a further 18,666,812 shares held in treasury. Those treasury

shares represented 9.3 per cent of the total issued share capital

(including treasury shares) at the aforementioned date. Each

ordinary share carries one voting right at the Annual General

Meeting of the Company and so the total number of voting

rights in the Company as at 20 March 2023 was 182,896,128.

The website referred to above will include information on the

number of ordinary shares and voting rights.

(k)If you are a person who has been nominated under section 146

of the Companies Act 2006 to enjoy information rights

(“Nominated Person”):

•You may have a right under an agreement between you

and the member of the Company who has nominated you

to have information rights (“Relevant Member”) to be

appointed or to have someone else appointed as a proxy

for the Annual General Meeting;

•If you either do not have such a right or if you have such a

right but do not wish to exercise it, you may have a right

under an agreement between you and the Relevant

Member to give instructions to the Relevant Member as

to the exercise of voting rights;

•Your main point of contact in terms of your investment in

the Company remains the Relevant Member (or, perhaps

your custodian or broker) and you should continue to

contact them (and not the Company) regarding any

changes or queries relating to your personal details and

your interest in the Company (including any administrative

matters). The only exception to this is where the Company

expressly requests a response from you.

(l)A company which is a member can appoint one or more

corporate representatives who may exercise, on its behalf, all

its powers as a member provided that no more than one

corporate representative exercises powers over the same

share.

(m) In the case of joint members, any one of them may sign the

Form of Proxy. The vote of the person whose name stands first

in the register of members of the Company will be accepted to

the exclusion of the votes of the other joint holders.

(n)A vote withheld is not a vote in law, which means that the vote

will not be counted in the calculation of votes for or against the

resolution. If no voting indication is given on the Form of Proxy,

the proxy will vote or abstain from voting at their discretion. The

proxy will vote (or abstain from voting) as they think fit in relation

to any other matter which is put before the Annual General

Meeting.

(o)Members may not use any electronic address provided either

in this Notice of Annual General Meeting, or any related

documents (including the Chairman’s letter and Form of Proxy),

to communicate with the Company for any purposes other than

those expressly stated.

(p)CREST members who wish to appoint a proxy or proxies

through the CREST electronic proxy appointment service may

do so by using the procedures described in the CREST Manual.

CREST Personal Members or other CREST sponsored

members, and those CREST members who have appointed a

service provider(s), should refer to their CREST sponsor or

voting service provider(s), who will be able to take the

appropriate action on their behalf. In order for a proxy

appointment or instruction made using the CREST service to

be valid, the appropriate CREST message (a “CREST Proxy

Instruction”) must be properly authenticated in accordance with

Euroclear UK & Ireland’s specifications, and must contain the

information required for such instruction, as described in the

CREST Manual (available via www.euroclear.com/CREST).

The message, regardless of whether it constitutes the

appointment of a proxy or is an amendment to the instruction

given to a previously appointed proxy must, in order to be valid,

be transmitted so as to be received by the issuer’s agent

(8RA57) not less than 48 hours (excluding weekends and

public holidays) before the time of the Annual General Meeting.

For this purpose, the time of receipt will be taken to be the time

(as determined by the time stamp applied to the message by

the CRESTApplication Host) from which the issuer’s agent is

able to retrieve the message by enquiry to CREST in the

manner prescribed by CREST. After this time any change of

instructions to proxies appointed through CREST should be

communicated to the appointee through other means.

92

British Smaller Companies VCT2 plc Annual Report & Accounts

Notice of the

Annual General Meeting

(continued)