Downing THREE VCT PLC
FINAL RESULTS FOR THE YEAR ENDED 31 December 2016

FINANCIAL HIGHLIGHTS

	31 Dec  2016		31 Dec 2015
	Pence		Pence
'C' Share pool
Net asset value per 'C' Share	-		53.2
Net asset value per 'A' Share	-		0.1
Cumulative distributions per 'C' Share	120.3		75.0
Adjusted for performance fee estimate	-		(7.4)
Total return per 'C' Share and 'A' Share	120.3		120.9
'D' Share pool
Net asset value per 'D' Share	36.4		51.3
Net asset value per 'E' Share	0.1		0.1
Cumulative distributions per 'D' Share	66.5		49.5
Total return per 'D' Share and 'E' Share	103.0		100.9
'F' Share pool
Net asset value per 'F' Share	69.4		71.5
Cumulative distributions per 'F' Share	25.0		20.0
Total return per 'F' Share	94.4		91.5
'H' Share pool
Net asset value per 'H' Share	86.2		90.5
Cumulative distribution per 'H' Share	15.0		10.0
Total return per 'H' Share	101.2		100.5
'J' Share pool
Net asset value per 'J' Share	95.8		98.5
Cumulative distribution per 'J' Share	-		-
Total return per 'J' Share	95.8		98.5

CHAIRMAN'S STATEMENT

Introduction
I am pleased to present the Annual Report for the year ended 31 December 2016. As the Company now has a number of planned exit share pools in different stages of their life, the Manager has had to focus on progressing investment realisations in some pools while also working on building new investment portfolios for the more recent pools. Overall, progress has been satisfactory.

A brief summary of each share pool is provided below.

'C' Share pool
The final distribution to 'C' Shareholders was made in March 2016. Total Return to those investors was 120.36p per Share compared to the original cost net of income tax relief of 70.0p. The Board congratulates the Manager on delivering a very successful outcome for investors. Since the year end, the 'C' and 'A' Shares, which had negligible residual value, were cancelled.

'D' Share pool
The 'D' Shares were originally issued in 2010 and at the year end held a portfolio of seven live investments with a total value of £2.4 million.

At 31 December 2016, the NAV of a combined holding of one 'D' Share and one 'E' Share stood at 36.5p, which represents an increase of 4.1% over the year after adjusting for the dividends of 17.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 103.0p, compared to the initial cost to original subscribers net of income tax relief of 70p.

'F' Share pool
The 'F' Share pool was launched in 2012 and now holds a portfolio of 23 investments with a total value of £7.2 million.

At 31 December 2016, the 'F' Share NAV stood at 69.4p, which represents an increase of 4.1% over the year after adjusting for the dividends of 5.0p per share paid in the year. Dividends paid to date total 25.0p per share such that Total Return (NAV plus cumulative dividends to date) is now 94.4p, compared to the initial cost to original subscribers net of income tax relief of 70p.

In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per 'F' Share on 30 June 2017 to Shareholders on the register at the close of business on 26 May 2017.

'H' Share pool
The 'H' Share pool was launched in 2014 and is due to complete its initial investment phase next year. At 31 December 2016, the pool held 15 investments with a total value of £11.0 million.

At 31 December 2016, the 'H' Share NAV stood at 86.2p, which represents an increase over the year of 0.8% after adjusting for the dividends of 5.0p per share paid in the year. Total Return (NAV plus cumulative dividends to date) is now 101.2p, compared to the initial NAV of 100.0p.

In line with the dividend policy, the Board is proposing to pay a final dividend of 2.5p per 'H' Share on 30 June 2017 to Shareholders on the register at the close of business on 26 May 2017.

'J' Share pool
The 'J' Share Pool was launched in December 2014 and is still in its initial investment phase. At 31 December 2016, the pool held 14 VCT qualifying investments with a total value of £10.3 million.

At 31 December 2016, the 'J' Share NAV stood at 95.8p, compared to the initial NAV of 100.0p.

Due to VCT regulations the 'J' Share pool is effectively prohibited from paying dividends in its first three years.

Share buybacks
For share classes where all investors are still within the initial five year period (currently the 'H' Share and 'J' Share classes), the Company operates a general policy of buying in its own shares for cancellation when any become available in the market. During this period, any such purchases will be undertaken at a price equal to the latest published NAV (i.e. at nil discount). Any buybacks are subject to regulatory restrictions and other factors such as the availability of liquid funds.

The Company is now unlikely to make any further purchases of 'D' Shares, 'E' Shares and 'F' Shares as the process of returning funds to those Shareholders is now underway in the case of the 'D' and 'E' Shares and is due to start early next year in the case of the 'F' Shares.

A resolution to renew the buyback authority for the Company to purchase its own shares will be proposed at the forthcoming Annual General Meeting.

Annual General Meeting ("AGM")
The Company's tenth AGM will be held at Ergon House, Horseferry Road, London, SW1P 2AL at 10:50 a.m. on 20 June 2017.

Two items of special business will be proposed at the AGM. As mentioned above, the Company will seek to renew the authority for the Company to buy back shares.

Also, the Company is seeking Shareholder approval to amend the Company's Articles of Association to simplify the process of cancelling share classes once they have come to the end of their planned exit life. The proposed changes will eliminate the requirement for a Shareholder Circular to be issued in order to cancel a share class once it has reduced to a negligible residual value. This will result in some costs savings for the Company.

Outlook
Although the long term implications of Brexit may not yet be clear, the impact on the Company is not expected to be significant. The majority of the share pools are already fully invested and progressing satisfactorily. The 'J' Share is still making new investments as it builds its portfolio and faces greater challenges from new VCT rules than it is likely to from factors connected with Britain leaving the EU. VCT rules brought in over the last year or so have reduced the scope of investments that can be made, however the Manager is confident that a reasonable portfolio can be built which can deliver shareholders the targeted results.

We expect to see significant headway made in realising most of the remaining investments in the 'D' Share pool over the next few months. The Manager will also be developing plans during the course of this year for realisation of investments from the 'F' Share pool, ahead of the commencement of the return of funds to those investors early next year.

I look forward to updating Shareholders on progress in my statement with the Half Yearly Report to 30 June 2017.

Michael Robinson
Chairman
26 April 2017

INVESTMENT MANAGER'S REPORT- 'D' SHARE POOL

Introduction
The 'D' Share pool holds investments in seven companies and is fully invested. The focus this year has been on realisations and ten full or partial exits have completed in the period. We have realisation plans in place for the remainder of the portfolio.

Net asset value and results
At 31 December 2016, the 'D' Share NAV stood at 36.4p and the 'E' Share NAV at 0.1p, giving a combined NAV of 36.5p. Total Return (NAV plus cumulative dividends to date) was 103.0p for a combined holding of one 'D' and one 'E' Share. This represents a net increase of 2.1p over the year (after adjusting for dividends paid during the year of 17.0p per 'D' Share), equivalent to an increase of 4.1%.

The return on ordinary activities for the 'D' Shares for the period was a gain of £206,000 (2015: £690,000) being a revenue loss of £30,000 (2015: profit £306,000) and a capital gain of £236,000 (2015: £384,000).

'D' Share pool - divestment activity
Ten full or partial exits have completed in the period generating total proceeds of £2.2 million.

The most significant of these were Quadrate Catering Limited and Quadrate Spa Limited which generated proceeds of £581,000 and £520,000 and uplifts over cost of £140,000 and £168,000 respectively.

Other significant realisations included, Kidspace Adventures (Holdings) Limited which generated proceeds of £470,000, an uplift over cost of £95,000 and Future Biogas (SF) Limited which returned £203,000 over a cost of £169,000.

'D' Share pool - portfolio valuation
The majority of the 'D' Share portfolio performed in line with expectations during the year. There were a few small valuation movements in the period that resulted in an unrealised gain of £27,000.

Fenkle Street LLP, is a property development company based in Newcastle. The hotel is trading well and the valuation has increased by £50,000 to reflect the expected future cash flows of the company.

Avon Solar Limited, the owner of residential rooftop solar assets in the UK, was uplifted by £22,000 due to continued good performance.

Unfortunately these gains were partially offset by a reduction in value on Mosaic Spa and Health Clubs Limited which has continued to have minor performance issues and has resulted in an unrealised loss of £45,000.

Outlook
Realisation plans are in place for the remaining investments in the portfolio with some expected to complete in the next few months in order to make a final distribution to investors.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'D' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'D' Share pool

	Cost	Valuation	Valuation  movement in year	% of portfolio
	£'000	£'000	£'000
VCT qualifying and partially qualifying investments
Mosaic Spa and Health Clubs Limited*	521	300	(45)	8.1%
Westcountry Solar Solutions Limited	250	250	-	6.8%
Avon Solar Limited	210	240	22	6.5%
Quadrate Spa Limited	144	-	-	0.0%
	1,125	790	(23)	21.4%
Non-qualifying investments
Gara Rock Resort Limited	1,322	1,322	-	35.8%
Fenkle Street LLP	122	270	50	7.3%
Future Biogas (Reepham Road) Limited	320	-	-	0.0%
	1,764	1,592	27	43.1%
	2,889	2,382	27	64.5%
Cash at bank and in hand		1,313		35.5%
Total investments		3,695		100.0%

*              Part-qualifying investment

Summary of investment movements

Disposals

	Cost	MV at  01/01/16*					Disposal proceeds				Gain/ (loss) against cost				Total realised gain during  the year
	£'000		£'000			£'000				£'000				£'000
VCT qualifying and partially qualifying investments
Future Biogas (Reepham Road) Limited	261		196			261				-				65
Quadrate Catering Limited	441		539			581				140				42
Liverpool Nurseries (Holdings) Limited	-		-			12				12				12
Kidspace Adventures Holdings Limited	375		465			470				95				5
Quadrate Spa Limited	352		520			520				168				-
Camandale Limited	422		2			2				(420)				-
Non-qualifying investments
Future Biogas (SF) Limited	169		169			203				34				34
Kilmarnock Monkey Bar Limited	-		-			6				6				6
Redmed Limited	27		24			28				1				4
Commercial Street Hotel Limited	100		100			100				-				-
Total 'D' Share pool	2,147		2,015			2,183				36				168

*Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'F' SHARE POOL

Introduction
The 'F' Share pool holds 23 investments and is fully invested in a portfolio focussed on asset backed businesses and those with predictable revenue streams.

Net asset value and results
At 31 December 2016, the 'F' Share NAV stood at 69.4p. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 94.4p. This represents a net increase of 2.9p per share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 4.1%.

The return on ordinary activities for the 'F' Share pool for the year was a gain of £308,000 (2015: £108,000) being a revenue loss of £107,000 (2015: profit £165,000) and a capital gain of £415,000 (2015: loss £57,000).

'F' Share pool - investment activity
Four new investments were made in the period totalling £700,000. £300,000 was invested into Vectis Alpha Limited which is seeking to build and develop renewable energy plants; £150,000 was invested into Brownfields Trading Limited which is seeking to develop small-scale waste disposal projects; £125,000 was invested into both Rhodes Solutions Limited and Morava Limited which are both exploring opportunities in the wood refinery sector.

Three full exits were completed in the period generating total proceeds of £1.3 million.

Grasshoppper 2007 Limited, the company that owns The Grasshopper Inn, a public house near Westerham, Kent was sold and generated proceeds equivalent to the original cost of £378,000.

The divestment of Kidspace Adventures Holdings Limited, the owner of three well established children's play areas in Croydon, Romford and Epsom, realised £313,000 which was £63,000 more than the investment cost.

The final repayment on Redmed Limited, the owner and operator of a bar in Lincoln, was made which completed the exit of the investment and generated proceeds of £16,000.

One notable partial divestment took place in the period being the part repayment of a non-qualifying loan to Gara Rock Resort Limited, formerly Aminghurst Limited, which generated proceeds of £581,000.

F' Share pool - portfolio valuation
The majority of investments remain valued at or above cost and there were several valuation movements in the period that resulted in an unrealised gain of £410,000.

Pearce and Saunders Limited, the owner of three freehold pubs in south east London, has previously been written down in value due to poor performance of the underlying pub companies, however rising property prices have benefitted the investment and the valuation has been increased by £248,000 and is now held at original cost.

The valuation of anaerobic digestion plant, Merlin Renewables Limited has increased by £75,000 as the plant continues to perform ahead of expectations.

Four smaller movements have also been recognised in the period. Atlantic Dogstar Limited, which owns a group of London pubs, are performing to plan and the valuation has been increased by £27,000.

Lambridge Solar Limited, Augusta Pub Company Limited and Pabulum Pubs Limited are all performing well and have been increased in value by £26,000, £25,000 and £9,000 respectively.

Outlook
The focus now for the 'F' Share portfolio is on close monitoring and support of the portfolio companies to ensure that prospects for growth are optimised in the period until the realisation process commences in early 2018.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'F' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'F' Share pool	Cost	Valuation	Valuation  movement in year	% of portfolio
	£'000	£'000	£'000
VCT qualifying and partially qualifying investments
Apex Energy Limited	1,000	1,000	-	13.2%
Vulcan Renewables Limited	653	779	-	10.3%
Goonhilly Earth Station Limited	760	760	-	10.0%
Merlin Renewables Limited	500	575	75	7.6%
Lambridge Solar Limited	500	569	26	7.5%
Pearce and Saunders Limited	497	497	248	6.6%
Augusta Pub Company Limited	290	349	25	4.6%
Vectis Alpha Limited	300	300	-	4.0%
Pabulum Pubs Limited	200	237	9	3.2%
Atlantic Dogstar Limited	200	227	27	3.0%
Fresh Green Power Limited	200	200	-	2.6%
City Falkirk Limited	422	177	-	2.3%
Fubar Stirling Limited	268	169	-	2.2%
Brownfields Trading Limited	150	150	-	2.0%
Morava Limited	125	125	-	1.7%
Rhodes Solutions Limited	125	125	-	1.7%
Green Energy Production UK Limited	100	100	-	1.3%
Cheers Dumbarton Limited	48	17	-	0.2%
Lochrise Limited	13	-	-	0.0%
	6,351	6,356	410	84.0%
Non-qualifying investments
Baron House Developments LLP	481	481	-	6.4%
Gara Rock Resort Limited	258	258	-	3.4%
London City Shopping Centre Limited	66	66	-	0.9%
Pearce and Saunders DevCo Limited	46	46	-	0.6%
	851	851	-	11.3%
	7,202	7,207	410	95.3%
Cash at bank and in hand		357		4.7%
Total investments		7,564		100.0%

Summary of investment movements

Additions

	Cost
	£'000
VCT qualifying and partially qualifying investments
Vectis Alpha Limited	300
Brownfields Trading Limited	150
Morava Limited	125
Rhodes Solutions Limited	125
Total 'F' Share pool	700

Disposals

	Cost		MV at  01/01/16*			Disposal proceeds		Gain against cost		Total realised gain during  the year
	£'000		£'000			£'000		£'000		£'000
VCT qualifying and partially qualifying investments
Kidspace Adventures Holdings Limited	250			310		313		63		3
Redmed Limited	18			14		16		(2)		2
Grasshopper 2007 Limited	378			378		378		-		-
Non-qualifying investments
Gara Rock Resort Limited	581			581		581		-		-
Southampton Hotel Developments Limited		298		-		-		(298)		-
Total 'F' Share pool	1,525			1,283		1,288		(237)		5

*Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'H' SHARE POOL

The 'H' Share pool raised funds in 2014 and has made good progress in building its VCT qualifying portfolio and is fully qualifying as at 31 December 2016.

Net asset value and results
At 31 December 2015, the net asset value per 'H' Share was 86.2p. Total Return (NAV plus cumulative dividends to date) for Shareholders who invested in the original share offer is now 101.2p. This represents a net increase of 0.7p per share over the year (after adjusting for dividends paid during the year of 5.0p per Share), equivalent to an increase of 0.8%.

The return on ordinary activities for the 'H' Share pool for the year was a gain of £97,000 (2015: £112,000) being a revenue profit of £44,000 (2015: £217,000) and a capital gain of £53,000 (2015: loss £105,000).

Investment activity
The pool made seven qualifying investments in the period totalling £5.3 million, as well as one non-qualifying investment for £850,000 as we continue to build the qualifying portfolio of the 'H' share pool.

Brief details of the investments made in the year are as follows:

The qualifying investments include £1.5 million in Hermes Renewables Limited, which is seeking to build and operate a wood pelleting plant.

£1.0 million was invested in Zora Energy Renewables Limited, a new wood pellet sales and distribution business.

£850,000 was invested in Quadrate Catering Limited which operates a restaurant in the Cube Complex in Birmingham.

£613,000 was invested in each of Ironhide Generation Limited and Indigo Generation Limited. £492,000 was invested in Rockhopper Renewables Limited and £281,000 in SF Renewables (Solar) Limited. All of the above investments are in the process of acquiring land in India to build and operate ground mounted solar arrays.

One non-qualifying investment was made in Quadrate Spa Limited for £850,000 which owns and operates a health club business in The Cube complex in Birmingham. 

In the period, total proceeds of £3.2 million were received. Kidspace Adventures (Holdings) Limited, which owns three well established children's play areas in Croydon, Romford and Epsom, was sold and generated proceeds equivalent to cost of £1.1 million.

Three non-qualifying loans were repaid in full in the period being Hobblers Heath Limited which repaid £727,000, Pub People Limited, the public house operator in the East Midlands which repaid £984,000 and Ludlow Taverns Limited which repaid £388,000. 

The majority of investments remain valued at cost and there was a total unrealised gain of £53,000 in the period. There was one positive valuation movement in the period on Atlantic Dogstar Limited. The company owns a group of London pubs which are performing to plan and as such the valuation has been increased by £137,000. Unfortunately this was partially offset by a value write down on Oak Grove Renewables Limited of £84,000, due to performance issues at this anaerobic digestion plant.

Outlook
The 'H' Share pool has become fully qualifying at the year end and as a result our focus will now shift to the close monitoring and support of the portfolio companies in order to nurture growth before the planned exit date.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'H' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'H' Share pool	Cost	Valuation	Valuation  movement in year	% of portfolio
	£'000	£'000	£'000
VCT qualifying investments
Hermes Renewables Limited	1,500	1,500	-	13.0%
Apex Energy Limited	1,300	1,300	-	11.3%
Atlantic Dogstar Limited	1,000	1,137	137	9.8%
Zora Energy Renewables Limited	1,000	1,000	-	8.6%
Quadrate Catering Limited	850	850	-	7.3%
Ironhide Generation Limited	613	613	-	5.3%
Indigo Generation Limited	613	613	-	5.3%
Antelope Pub Limited	500	500	-	4.3%
Rockhopper Renewables Limited	492	492	-	4.3%
SF Renewables (Solar) Limited	281	281	-	2.4%
Oak Grove Renewables Limited	420	231	(84)	2.0%
	8,569	8,517	53	73.6%
Non-qualifying investments
Hedderwick Limited	1,250	1,250	-	10.8%
Quadrate Spa Limited	850	850	-	7.3%
Peace and Saunders Limited	193	193	-	1.7%
Augusta Pub Limited	155	155	-	1.3%
	2,448	2,448	-	21.1%
	11,017	10,965	53	94.7%
Cash at bank and in hand		609		5.3%
Total investments		11,574		100.0%

REVIEW OF INVESTMENTS - 'H' SHARE POOL (continued)

Summary of investment movements

Additions

	Cost
	£'000
VCT qualifying investments
Hermes Renewables Limited	1,500
Zora Energy Renewables Limited	1,000
Quadrate Catering Limited	850
Indigo Generation Limited	613
Ironhide Generation Limited	613
Rockhopper Renewables Limited	492
SF Renewables (Solar) Limited	281
Non-qualifying investments
Quadrate Spa Limited	850
Total 'H' Share pool	6,199

Disposals

	Cost	MV at  01/01/16*			Disposal proceeds		Gain against cost		Total realised gain during  the year
	£'000		£'000		£'000		£'000		£'000
VCT qualifying investments
Kidspace Adventures Holdings Limited	1,084		1,084		1,084
Non-qualifying investments
Pub People Limited	984		984		984		-		-
Hobblers Heath Limited	727		727		727		-		-
Ludlow Taverns Limited	388		388		388		-		-
	3,183		3,183		3,183		-		-

*Adjusted for additions in the year

INVESTMENT MANAGER'S REPORT- 'J' SHARE POOL
Introduction
The fundraising for the 'J' Share pool was launched in December 2014 and raised £11 million prior to closing in 2015. The majority of these funds have now been invested as at the period end and the Share pool is due to become qualifying at the end of 2017.

Net asset value and results
At 31 December 2016, the net asset value and total return per 'J' Share was 95.8p. This represents a net decrease of 2.7p per share over the year, equivalent to an increase of 2.7%.

The loss on ordinary activities for the 'J' Share, after taxation, for the period was £294,000 (2015: loss £158,000), being a revenue loss of £210,000 (2015: loss £53,000) and a capital loss of £84,000 (2015: loss £105,000).

Investment activity
During the period, 11 qualifying investments have been made totalling £8.0 million as we start to build the qualifying portfolio of the 'J' Share pool.

The qualifying investments include £900,000 in Vectis Alpha Limited which is seeking to build and develop renewable energy plants.

£900,000 was also invested in Brownfields Trading Limited which is seeking to develop small-scale waste disposal projects.

£800,000 was invested in Yamuna Renewables Limited, which is planning to build a wood pellet plant in Austria.

£613,000 was invested in each of Ironhide Generation Limited and Indigo Generation Limited. £492,000 was invested in Rockhopper Renewables Limited and £281,000 into SF Renewables (Solar) Limited. All of the above investments are in the process of acquiring land in India to build and operate ground mounted solar arrays.

Jito Renewables Limited, Rhodes Renewables Limited and Morava Renewables Limited are all exploring opportunities in the wood refinery sector following investments of £1 million, £1 million and £1.2 million respectively.

£300,000 was invested in Zora Energy Renewables Limited, a new wood pellet sales and distribution business.

One valuation adjustment was made in the period on Oak Grove Renewables which was written down by £84,000 due to performance issues at the anaerobic digestion plant. The remaining investments are all held at cost.

Outlook
The task of building the 'J' Share portfolio is progressing well. A number of new businesses have been backed which we believe have good potential for growth over the planned life of the Share pool.

Downing LLP
26 April 2017

REVIEW OF INVESTMENTS - 'J' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 December 2016:

'J' Share pool	Cost	Valuation	Valuation  movement in year	% of portfolio
	£'000	£'000	£'000
VCT qualifying investments
Morava Limited	1,150	1,150	-	11.2%
Cederville Limited	1,000	1,000	-	9.7%
Pilgrim Trading Limited	1,000	1,000	-	9.7%
Rhodes Solutions Limited	1,000	1,000	-	9.7%
Jito Trading Limited	1,000	1,000	-	9.7%
Brownfields Trading Limited	900	900	-	8.7%
Vectis Alpha Limited	900	900	-	8.7%
Yamuna Renewables Limited	800	800	-	7.8%
Indigo Generation Limited	613	613	-	5.9%
Ironhide Generation Limited	613	613	-	5.9%
Rockhopper Renewables Limited	492	492	-	4.8%
Zora Energy Renewables Limited	300	300	-	2.9%
SF Renewables (Solar) Limited	281	281	-	2.7%
Oak Grove Renewables Limited	420	231	(84)	2.3%
	10,469	10,280	(84)	99.7%
Cash at bank and in hand		32		0.3%
Total investments		10,312		100.0%

Summary of investment movements

Additions

	Cost
	£'000
VCT qualifying investments
Morava Limited	1,150
Jito Trading Limited	1,000
Rhodes Solutions Limited	1,000
Brownfields Trading Limited	900
Vectis Alpha Limited	900
Yamuna Renewables Limited	800
Indigo Generation Limited	613
Ironhide Generation Limited	613
Rockhopper Renewables Limited	492
Zora Energy Renewables Limited	300
SF Renewables (Solar) Limited	281
Total 'J' Share pool	8,049

Directors' responsibilities statement
The Directors are responsible for preparing the Strategic Report, The Report of the Directors, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law), including Financial Reporting Standard 102, the financial reporting standard applicable in the UK and Republic of Ireland (FRS 102). 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 of 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 applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
*prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions, to disclose with reasonable accuracy at any time the financial position of the company and to 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.

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

Statement as to disclosure of information to Auditor
The Directors in office at the date of the report have confirmed, as far as they are aware, that there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

INCOME STATEMENT
for the year ended 31 December 2016

			Year ended 31 December 2016				Year ended 31 December 2015
			Revenue	Capital	Total		Revenue	Capital	Total
			£'000	£'000	£'000		£'000	£'000	£'000
Income			585	40	625		2,449	-	2,449
(Loss)/gain on investments			-	580	580		-	(200)	(200)
			585	620	1,205		2,449	(200)	2,249
Investment management fees			(643)	-	(643)		(695)	-	(695)
Other expenses			(296)	-	(296)		(275)	-	(275)
Return/(loss) on ordinary activities before tax			(354)	620	266		1,479	(200)	1,279
Tax on total comprehensive income and ordinary activities			21	-	21		(162)	-	(162)
Return/(loss) for the year and total comprehensive income			(333)	620	287		1,317	(200)	1,117
Basic and diluted return/(loss) per:
'C' Share			(0.4p)	-	(0.4p)		9.5p	(4.4p)	5.1p
'A' Share			-	-	-		-	-	-
'D' Share			(0.3p)	2.3p	2.0p		3.1p	3.8p	6.9p
'E' Share			-	-	-		-	-	-
'F' Share			1.0p	3.8p	2.8p		1.5p	(0.5p)	1.0p
'H' Share			0.3p	0.4p	0.7p		1.6p	(0.8p)	0.8p
'J' Share			(2.0p)	(0.8p)	(2.8p)		(0.8p)	(1.6p)	(2.4p)

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the Statement of Total Comprehensive Income of the Company prepared in accordance with Financial Reporting Standards ("FRS 102"). The supplementary revenue and capital return columns are prepared in accordance with the Statement of Recommended Practice issued in November 2014 by the Association of Investment Companies ("AIC SORP").

Other than revaluation movements arising on investments held at fair value through the profit and loss, there were no differences between the return/loss as stated above and at historical cost.

INCOME STATEMENT (ANALYSED BY SHARE POOL)
for the year ended 31 December 2016

'C' Share pool

		Year ended 31 December 2016				Year ended 31 December 2015
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Income		6	-	6		815	-	815
(Loss)/gain on investments		-	-	-		-	(317)	(317)
		6	-	6		815	(317)	498
Investment management fees		(8)	-	(8)		(56)	-	(56)
Other expenses		(35)	-	(35)		(41)	-	(41)
Loss/(return) on ordinary activities before tax		(37)	-	(37)		718	(317)	401
Tax on total comprehensive income and ordinary activities		7	-	7		(36)	-	(36)
Loss/(return) attributable to equity shareholders		(30)	-	(30)		682	(317)	365

'D' Share pool

		Year ended 31 December 2016				Year ended 31 December 2015
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Income		83	40	123		528	-	528
Gain/(loss) on investments		-	196	196		-	384	384
		83	236	319		528	384	912
Investment management fees		(52)	-	(52)		(97)	-	(97)
Other expenses		(31)	-	(31)		(54)	-	(54)
Return on ordinary activities before tax		-	236	236		377	384	761
Tax on total comprehensive income and ordinary activities		(30)	-	(30)		(71)	-	(71)
Return attributable to equity shareholders		(30)	236	206		306	384	690

'F' Share pool

		Year ended 31 December 2016				Year ended 31 December 2015
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Income		99	-	99		407	-	407
Loss on investments		-	415	415		-	(57)	(57)
		99	415	514		407	(57)	350
Investment management fees		(136)	-	(136)		(144)	-	(144)
Other expenses		(73)	-	(73)		(85)	-	(85)
Return/(loss) on ordinary activities before tax		(110)	415	305		178	(57)	121
Tax on total comprehensive income and ordinary activities		3	-	3		(13)	-	(13)
Return/(loss) attributable to equity shareholders		(107)	415	308		165	(57)	108

'H' Share pool

		Year ended 31 December 2016				Year ended 31 December 2015
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Income		355	-	355		594	-	594
Loss on investments		-	53	53		-	(105)	(105)
		355	53	408		594	(105)	489
Investment management fees		(239)	-	(239)		(253)	-	(253)
Other expenses		(61)	-	(61)		(69)	-	(69)
Return/(loss) on ordinary activities before tax		55	53	108		272	(105)	167
Tax on total comprehensive income and ordinary activities		(11)	-	(11)		(55)	-	(55)
Return/(loss) attributable to equity shareholders		44	53	97		217	(105)	112

'J' Share pool

		Year ended 31 December 2016				Year ended 31 December 2015
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
Income		42	-	42		104	-	104
Loss on investments		-	(84)	(84)		-	(105)	(105)
		42	(84)	(42)		104	(105)	(1)
Investment management fees		(208)	-	(208)		(144)	-	(144)
Other expenses		(96)	-	(96)		(26)	-	(26)
Loss on ordinary activities before tax		(262)	(84)	(346)		(66)	(105)	(171)
Tax on total comprehensive income and ordinary activities		52	-	52		13	-	13
Loss attributable to equity shareholders		(210)	(84)	(294)		(53)	(105)	(158)

BALANCE SHEET
as at 31 December 2016

		2016		2015
		£000		£000
Fixed assets
Investments		30,836		22,707
Current assets
Debtors		133		632
Cash at bank and in hand		2,337		16,578
		2,470		17,210
Creditors: amounts falling due within one year		(286)		(494)
Net current assets		2,184		16,716
Net assets		33,020		39,423
Capital and reserves
Called up share capital		78		78
Capital redemption reserve		106		106
Special reserve		9,888		15,749
Share premium reserve		24,639		24,639
Revaluation reserve		(790)		(1,466)
Capital reserve - realised		(1,033)		(1,033)
Revenue reserve		132		1,350
Total equity shareholders' funds		33,020		39,423
Basic and diluted net asset value per Share:
'C' Share		-		53.2p
'A' Share		-		0.1p
'D' Share		36.4p		51.3p
'E' Share		0.1p		0.1p
'F' Share		69.4p		71.5p
'H' Share		86.2p		90.5p
'J' Share		95.8p		98.5p

		2016		2015
		£000		£000
Fixed assets
Investments		-		748
Current assets
Debtors		-		174
Cash at bank and in hand		26		2,962
		26		3,136
Creditors: amounts falling due within one year		(23)		(71)
Net current assets		3		3,065
Net assets		3		3,813
Capital and reserves
Called up share capital		18		18
Capital redemption reserve		106		106
Special reserve		-		2,733
Share premium reserve		-		-
Revaluation reserve		(106)		55
Capital reserve - realised		-		-
Revenue reserve		(15)		901
Total equity shareholders' funds		3		3,813

BALANCE SHEET (ANALYSED BY SHARE POOL)
as at 31 December 2016

'C' Shares

'D' Shares

		2016		2015
		£000		£000
Fixed assets
Investments		2,382		4,369
Current assets
Debtors		4		251
Cash at bank and in hand		1,313		629
		1,317		880
Creditors: amounts falling due within one year		(65)		(124)
Net current assets		1,252		756
Net assets		3,634		5,125
Capital and reserves
Called up share capital		25		25
Capital redemption reserve		-		-
Special reserve		3,584		5,206
Share premium reserve		-		-
Revaluation reserve		(507)		(667)
Capital reserve - realised		-		-
Revenue reserve		532		561
Total equity shareholders' funds		3,634		5,125

BALANCE SHEET (ANALYSED BY SHARE POOL) (continued)
as at 31 December 2016

'F' Shares

		2016		2015
		£000		£000
Fixed assets
Investments		7,207		7,379
Current assets
Debtors		25		129
Cash at bank and in hand		357		349
		382		478
Creditors: amounts falling due within one year		(80)		(115)
Net current assets		302		363
Net assets		7,509		7,742
Capital and reserves
Called up share capital		11		11
Capital redemption reserve		-		-
Special reserve		8,321		9,155
Revaluation reserve		64		(644)
Capital reserve - realised		(1,033)		(1,033)
Revenue reserve		146		253
Total equity shareholders' funds		7,509		7,742

'H' Shares

		2016		2015
		£000		£000
Fixed assets
Investments		10,967		7,896
Current assets
Debtors		104		49
Cash at bank and in hand		609		4,360
		713		4,409
Creditors: amounts falling due within one year		(88)		(138)
Net current assets		625		4,271
Net assets		11,592		12,167
Capital and reserves
Called up share capital		13		13
Capital redemption reserve		-		-
Special reserve		(2,017)		(1,345)
Share premium reserve		13,608		13,608
Revaluation reserve		(52)		(105)
Capital reserve - realised		-		-
Revenue reserve		40		(4)
Total equity shareholders' funds		11,592		12,167

BALANCE SHEET (ANALYSED BY SHARE POOL) (continued)
as at 31 December 2016

'J' Shares

		2016		2015
		£000		£000
Fixed assets
Investments		10,280		2,315
Current assets
Debtors		-		28
Cash at bank and in hand		32		8,279
		32		8,307
Creditors: amounts falling due within one year		(30)		(46)
Net current assets		2		8,261
Net assets		10,282		10,576
Capital and reserves
Called up share capital		11		11
Capital redemption reserve		-		-
Special reserve		-		-
Share premium reserve		11,031		11,031
Revaluation reserve		(189)		(105)
Capital reserve - realised		-		-
Revenue reserve		(571)		(361)
Total equity shareholders' funds		10,282		10,576

STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2016

	Called up share capital	Capital redemption reserve	Special reserve	Share premium reserve	Revaluation reserve	Capital reserve - realised	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2015	67	106	22,268	13,608	(289)	(1,033)	342	35,069
Total comprehensive income	-	-	-	-	(234)	34	1,317	1,117
Transactions with owners
Issue of new shares	11	-	-	11,031	-	-	-	11,042
Share issue costs	-	-	-	-	-	-	(309)	(309)
Transfer between reserves	-	-	(6,519)	-	(943)	7,462	-	-
Dividend paid	-	-	-	-	-	(7,496)	-	(7,496)
At 31 December 2015	78	106	15,749	24,639	(1,466)	(1,033)	1,350	39,423
Total comprehensive income	-	-	-	-	406	214	(333)	287
Transactions with owners
Issue of new shares	-	-	-	-	-	-	-	-
Share issue costs	-	-	-	-	-	-	-	-
Transfer between reserves	-	-	(5,861)	-	270	6,476	(885)	-
Dividend paid	-	-	-	-	-	(6,690)	-	(6,690)
At 31 December 2016	78	106	9,888	24,639	(790)	(1,033)	132	33,020

CASH FLOW STATEMENT
for the year ended 31 December 2016

				Year ended 31 December 2016
	'C' Share pool				'D' Share pool	'F' Share pool	'H' Share pool	'J' Share pool	Total
				£'000	£'000	£'000	£'000	£'000	£'000
Net cash inflow/(outflow) from operating activities		16		95	199	(38)	(62)	(197)	(3)
Cash flow from investing activities
Purchase of investments				-	-	(700)	(6,200)	(8,050)	(14,950)
Sale of investments				749	2,182	1,287	3,183	-	7,401
Net cash (outflow)/inflow from investing activities				749	2,182	587	(3,017)	(8,050)	(7,549)
Net cash outflow/(inflow) before financing activities				844	2,381	549	(3,079)	(8,247)	(7,552)
Cash flows from financing activities
Equity dividends paid			8	(3,780)	(1,697)	(541)	(672)	-	(6,690)
Net cash (outflow)/inflow from financing activities				(3,780)	(1,697)	(541)	(672)	-	(6,690)
(Decrease)/increase in cash				(2,936)	684	8	(3,751)	(8,247)	(14,242)
Cash and cash equivalents at start of year				2,962	629	349	4,360	8,279	16,579
Cash and cash equivalents at end of year				26	1,313	357	609	32	2,337
Cash and cash equivalents comprise
Cash at bank and in hand				26	1,313	357	609	32	2,337
Total cash and cash equivalents				26	1,313	357	609	32	2,337

			Year ended 31 December 2015
			'C' Share pool		'D' Share pool	'F' Share pool	'H' Share pool	'J' Share pool	Total
				£'000	£'000	£'000	£'000	£'000	£'000
Net cash inflow/(outflow) from operating activities				534	160	157	46	(35)	862
Cash flows from investing activities
Purchase of investments				(158)	(417)	(1,725)	(6,636)	(2,830)	(11,766)
Sale of investments				5,671	3,550	1,665	5,767	410	17,063
Net cash inflow/(outflow) from investing activities				5,513	3,133	(60)	(869)	(2,420)	5,297
Net cash inflow/(outflow) before financing activities				6,047	3,293	97	(823)	(2,455)	6,159
Cash flows from financing activities
Equity dividends paid				(3,588)	(2,695)	(540)	(673)	-	(7,496)
Proceeds from share issue				-	-	-	-	11,042	11,042
Share issue costs				-	-	-	-	(309)	(309)
Net cash (outflow)/inflow from financing activities				(3,588)	(2,695)	(540)	(673)	10,733	3,237
Increase/(decrease) in cash				2,459	598	(443)	(1,496)	8,278	9,396
Cash and cash equivalents at start of year				503	31	792	5,856	-	7,182
Cash and cash equivalents at end of year				2,962	629	349	4,360	8,278	16,578
Cash and cash equivalents comprise
Cash at bank and in hand				2,962	629	349	4,360	8,278	16,578
Total cash and cash equivalents				2,962	629	349	4,360	8,278	16,578

NOTES TO THE ACCOUNTS
for the year ended 31 December 2016

1. General information
Downing THREE VCT plc ("The Company") is a venture capital trust established under the legislation introduced in the Finance Act 1995 and is domiciled in the United Kingdom and incorporated in England and Wales and its registered office is Ergon House, Horseferry Road, London, SW1P 2AL.

2. Accounting policies
Basis of accounting
The Company has prepared its financial statements under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and in accordance with the Statement of Recommended Practice ("SORP") for investment trust companies and venture capital trusts issued by the Association of Investment Companies ("AIC") revised November 2014 as well as the Companies Act 2006.

The Company implements new Financial Reporting Standards ("FRS") issued by the Financial Reporting Council when required.

The financial statements are presented in Sterling (£).

Presentation of Income Statement
In order to better reflect the activities of a venture capital trust and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The return on ordinary activities is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Venture capital investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 102 sections 11 and 12.

For unquoted investments, fair value is established using the IPEV guidelines. The valuation methodologies for unquoted entities used by the IPEV to ascertain the fair value of an investment are as follows:

*Price of recent investment;
*Multiples;
*Net assets;
*Discounted cash flows or earnings (of underlying business);
*Discounted cash flows (from the investment); and
*Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Gains and losses arising from changes in fair value are included in the Income Statement for the year as a capital item and transaction costs on acquisition or disposal of the investment are expensed. Where an investee company has gone into receivership, liquidation or administration (where there is little likelihood of recovery), the loss on the investment, although not physically disposed of, is treated as being realised.

It is not the Company's policy to exercise significant influence over investee companies. Therefore the results of these companies are not incorporated into the Income Statement except to the extent of any income accrued. This is in accordance with the SORP and FRS 102 sections 14 and 15 that does not require portfolio investments, where the interest held is greater than 20%, to be accounted for using the equity method of accounting.

Income
Dividend income from investments is recognised when the Shareholders' rights to receive payment has been established, normally the ex-dividend date.

Interest income is accrued on a time apportionment basis, by reference to the principal sum outstanding and at the effective rate applicable and only where there is reasonable certainty of collection in the foreseeable future.

Distributions from partnership companies is recognised as they are paid to the Company. Where such items are considered capital in nature they are recognised as capital profits.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Income Statement, all expenses have been presented as revenue items except as follows:

*Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
*Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. The Company has adopted the policy of allocating Investment *Manager's fees 100% as revenue.
*Expenses and liabilities not specific to a share class are generally allocated pro rata to the net assets.
*Performance incentive fees arising from the disposal of investments are deducted as a capital item.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting year.

Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with 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 arise.

Deferred taxation which is not discounted is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts. Deferred taxation is not discounted.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Issue costs
Issue costs in relation to the shares issued for each share class have been deducted from the revenue reserve account for the relevant share class.

Significant estimates and judgements
Disclosure is required of judgements and estimates made my management in applying the accounting policies that have a significant effect on the financial statements. The area involving a higher degree of judgement and estimates is the valuation of unquoted investments as explained in the investment accounting policy.

3. Basic and diluted return per share

	'C' Shares			'A' Shares	'D' Shares	'E' Shares	'F' Shares	'H' Shares	'J' Shares
Revenue return/ (loss) (£'000)		(30)		-	(30)	-	(107)	44	(210)
Net capital (loss)/gain for the year (£'000)			-	-	236	-	415	53	(84)
Total return/ (loss) after taxation (£'000)	(30)			-	206	-	308	97	(294)
Weighted average number of shares in issue	7,158,326			10,750,064	9,979,109	14,994,862	10,821,660	13,446,972	10,733,377

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share for any of the share classes. The return per share disclosed therefore represents both the basic and diluted return per share for all share classes.

4. Basic and diluted net asset value per share

			2016					2015
	Shares in issue		Net asset value					Net asset value
	31 Dec 2016	31 Dec 2015	per share				£'000	per share			£'000
'C' Shares	7,158,326	7,158,326		-			3		53.2p		3,802
'A' Shares	10,750,064	10,750,064		-			-		0.1p		11
'D' Shares	9,979,109	9,979,109		36.4p			3,619		51.3p		5,110
'E' Shares	14,994,862	14,994,862		0.1p			15		0.1p		15
'F' Shares	10,821,660	10,821,660		69.4p			7,509		71.5p		7,742
'H' shares	13,446,972	13,446,972		86.2p			11,592		90.5p		12,167
'J' Shares	10,733,377	10,733,377		95.8p			10,282		98.5p		10,576
							33,020				39,423

The 'C' Share pool, 'D' Share pool, 'F' Share pool, 'H' Share pool and 'J' Share pool are treated as separate investment pools. Within the 'C' Share pool the Directors allocate the assets and liabilities of the Company between the 'C' Shares and 'A' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights. Within the 'D' Share pool the Directors allocate the assets and liabilities of the Company between the 'D' Shares and 'E' Shares such that each share class has sufficient net assets to represent its dividend and return of capital rights.

5. Principal risks
The Company's financial instruments comprise investments held at fair value through profit and loss, being equity and loan stock investments in unquoted companies, loans and receivables consisting of short term debtors, cash deposits and financial liabilities, being creditors arising from its operations. The main purpose of these financial instruments is to generate cashflow and revenue and capital appreciation for the Company's operations. The Company has no gearing or other financial liabilities apart from short-term creditors and does not use any derivatives.

The fair value of investments is determined using the detailed accounting policy

The fair value of cash deposits and short term debtors and creditors equates to their carrying value in the Balance Sheet.

Loans and receivables and other financial liabilities are stated at amortised cost which the Directors consider is equivalent to fair value.

The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

*Market risks
*Credit risk
*Liquidity risk

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:

Market risks

As a VCT, the Company is exposed to investment risks in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of these investment risks is a fundamental part of investment activities undertaken by the Investment Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The key investment risks to which the Company is exposed are:

*Investment price risk
*Interest rate risk

 

Investment price risk

Investment price risk arises from uncertainty about the valuation of financial instruments held in accordance with the Company's investment objectives in addition to the appropriateness of the valuation method used. It represents the potential loss that the Company might suffer through changes in the fair value of unquoted investments that it holds.

Interest rate risk

The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

There are three categories in respect of interest which are attributable to the financial instruments held by the Company as follows:

*"Fixed rate" assets represent investments with predetermined yield targets and comprise certain loan note investments.
*"Floating rate" assets predominantly bear interest at rates linked to Bank of England base rate or LIBOR and comprise cash at bank and liquidity fund investments and certain loan note investments.
*"No interest rate" assets do not attract interest and comprise equity investments and debtors.

The Company monitors the level of income received from fixed and floating rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular, should this be required to ensure compliance with the VCT regulations.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, cash deposits and debtors.

The Manager manages credit risk in respect of loan stock with a similar approach as described under "Market risks" above. In addition the credit risk is mitigated for all investments in loan stocks by taking security, covering the full par value of the loan stock, in the form of fixed and floating charges over the assets of the investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. Similarly the management of credit risk associated with interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held by Bank of Scotland plc and Royal Bank of Scotland plc, both of which are A-rated financial institutions and both also ultimately part-owned by the UK Government. Consequently, the Directors consider that the credit risk associated with cash deposits is low.

There have been no changes in fair value during the year that are directly attributable to changes in credit risk.

 

Of the investments in loan stock above, as at 31 December 2016 £1,270,000 relates to the principal of loan notes where, although the principal remains within term, the investee company is not fully servicing the interest obligations under the loan note and is thus in arrears.

Liquidity risk

Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. As the Company has a relatively low level of creditors, (£286,000, 2015: £494,000) and has no borrowings, the Board believes that the Company's exposure to liquidity risk is low. The Company always holds sufficient levels of funds as cash in order to meet expenses and other cash outflows as they arise. For these reasons, the Board believes that the Company's exposure to liquidity risk is minimal.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 December 2016, but has been extracted from the statutory financial statements for the year ended 31 December 2016 which were approved by the Board of Directors on 26 April 2017 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the period ended 31 December 2015 have been delivered to the Registrar of Companies and received an Independent Auditors report which was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 December 2016 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at Ergon House, London, SW1P 2AL and will be available for download from www.downing.co.uk.