Annual Financial Report

HgCapital Trust plc The Directors present the Annual Financial Report of the Company for the year ended 31 December 2008. The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2008 or 2007. The full Annual Report and Accounts can be accessed via the Company's website at www.hgcapitaltrust.com/results.htm or by contacting the Company's Registrar (Computershare Investor Services plc) on telephone number 0870 707 1037. Investment objective The objective of the Company is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The Company provides investors with exposure to a diversified portfolio of private equity investments primarily in the UK and Continental Europe. Financial highlights of 2008 +0.5% Positive net asset growth (assuming historic dividends are reinvested) -12% Fall in share price compared with a 30% decrease in the FTSE All-Share Index and a 44% fall in the FTSE Small Cap Index 55% A high level of net assets available in liquid funds to deploy in attractive opportunities, equating to Â£5.16 per share Â£92m Continued realisations in the year despite challenging market conditions +14% Average annual operating profit growth for our top 10 investments over the last 12 months +15% Ten year total return per annum versus 1% per annum from the FTSE All-Share Index >4x Growth in value of shares over 10 years Chairman's statement This introductory statement forms part of the Directors' Report which continues below. The Board believes that the Company, with a substantial holding of cash, is well positioned for a recession that will generate opportunities to acquire good businesses at reasonable prices The year in review Dramatic changes in financial markets made 2008 a turning point in the balance of advantage between being fully invested or holding liquid assets, ready for investment at significantly lower prices than have been seen for several years. Your Company entered 2008 with liquid funds of Â£80 million, representing one-third of net assets, and finished the year with Â£130 million, equating to Â£5.16 per share, 55% of net assets, available for deployment as the recession progresses, revealing opportunities to acquire good businesses at attractive prices. Our Manager, HgCapital, has rigorously pursued a policy of realising investments before markets turned. Since June 2005 the Company has exited 30 investments, receiving proceeds totalling Â£295 million and representing 2.7x original cost. The Manager has continued to achieve good realisations, even in a falling market: since June 2007, when the credit crisis began to unfold, the Company has completed 14 realisations, with proceeds of Â£186 million, and still delivering 2.6x original cost. Realisations in the first half of 2008 added substantially to net asset value, which reached Â£10.32 per share at the 30th June valuation. The sale of Addison Software and Orbiscom added further to net asset value in the second half, but the fall in ratings of listed equities, magnified by the effect of gearing in the underlying investments, has extinguished these gains from realisations, leaving net asset value at Â£9.29 per share, slightly down on the start of the year. Performance record Year Net assets Revenue available ended attributable Net asset Ordinary for ordinary Earnings Dividends 31 December to ordinary value per share price shareholders per per shareholders ordinary p Gross Â£'000 ordinary ordinary Â£'000 share p revenue share p share p Â£'000 1999 89,863 346.5 289.0 3,901 2,481 9.6 8.00 2000 103,521 411.0 356.5 7,332 4,623 17.9 14.50 2001 95,795 380.3 294.0 3,893 2,420 9.6 8.00 2002 83,837 332.9 219.5 3,528 2,148 8.5 8.00 2003 99,987 397.0 289.5 7,106 3,969 15.8 -** 2004 122,040 484.5 451.5 4,905 2,649 10.5 12.00 2005 156,487 621.3 583.5 4,963 2,965 11.8 8.00 2006 187,135 743.0 731.0 7,769 4,519 17.9 10.00 2007 238,817 948.2 782.5 12,129 7,446 29.6 14.00 2008 234,094 929.4 668.5 12,068 7,445 29.6 25.00* * Final dividend for the year ended 31 December 2007, declared on 13 March 2008, paid on 12 May 2008. ** Change in accounting standards relating to recognition of dividends. Valuation The net asset value published in these results is based on the fair value of unquoted investments at the reporting date. These have been valued based on the International Private Equity and Venture Capital Valuation Guidelines (`IPEV'); how the Company applies these guidelines is described in note 1 to the financial statements and the guidelines can be found in full at www.privateequityvaluation.com. In November 2008, in light of the financial market turmoil and stock market volatility, the Board of IPEV publicly reaffirmed its commitment to fair value as the best measure of valuing private equity portfolio companies and investments in private equity funds. Against a background of economic recession, volatility in equity market ratings and the credit crisis, valuing private businesses is challenging and valuations must be subject to uncertainty. The Manager has undertaken a rigorous valuation of each investment at 31 December 2008 and the Board has thoroughly probed the valuation methodology and examined these proposed valuations in detail against the IPEV guidelines. Valuations have been based on estimates of maintainable earnings made in the light of up-to-date management accounts reporting trading to November 2008 or later, and these estimates have been reviewed in the light of more recent figures as they became available. The Company's policy is not to revalue upwards any new investment until audited accounts for a full year since acquisition become available: however, in view of the deterioration in market conditions, all new holdings have been reviewed and all but one have been written down. Across the portfolio, sixteen investments have been written down in value or written off completely, while four have been revalued upwards to reflect improved trading, in two cases reversing earlier write-downs where management action has successfully turned the business around. One investment remains at cost. The balance of the portfolio comprises small legacy assets awaiting final realisation. The principal factors that affect the valuation of each investment are: current estimates of maintainable earnings; the stock market rating of comparable businesses; the marketability discount applied; changes in the amount of debt in the business; the gearing effect of that debt, which tends to magnify the increase or decrease in the value of equity; and, in the case of investments whose functional currency is not sterling, the change in the exchange rate. The Annual Report and Accounts will contain, for the first time, graphical analyses of these movements in NAV and of the sources of change in the valuations of unrealised investments. In aggregate, in the first half of the year values appreciated reflecting improving trading results; in the second half the overwhelming driver of falling values was the decline in stock market ratings of comparable businesses, despite most of our investments trading ahead of or in line with the previous year. A number of the Company's investments reported profits ahead of last year; a majority of these were businesses based in Germany and the Nordic region, reflecting the value of the diversification across several economies that the Manager's pan-European focus provides. This also gave rise to a substantial foreign exchange gain as sterling fell against the Euro. A portion of this gain has been protected through a foreign exchange hedge, which is explained in the notes to the financial statements. Performance As a consequence, the total return on assets (NAV plus dividend) over the whole year was +0.5%, which while disappointing compares well against a decrease of 30% in the FTSE All-Share Index and a decrease of 44% in the FTSE Small-Cap Index. The Company's net asset value at year-end was Â£9.29 per share. Total return to shareholders (share price growth plus dividend) was -12.0%, which was substantially better than the relevant FTSE indices. The Company's share price fell from Â£7.83 at the end of 2007 to Â£6.69 at the end of 2008, a discount of 28.1% to the net asset value. The Company's long-term returns to shareholders continue to be strong, with a total return (share price plus dividend) over the last ten years of 15.4% p.a., some 14.2% p.a. above the total return on the FTSE All-Share Index. The strong long-term performance delivered by HgCapital as Manager was recognised when the Company was chosen, for the fourth consecutive year, as Private Equity Investment Trust of the Year in the Investment Week awards. We congratulate the Manager and its staff for their hard and dedicated work in achieving this consistently high level of performance. During the year, the Company received Â£91.6 million from the realisation of investments (2007: Â£106.4 million) and invested Â£26.0 million (2007: Â£50.8 million) in new and follow-on investments. Revenue return was 29.6 pence per share (2007: 29.6 pence). Each year the Board recommends a dividend based on the revenue return that year, so as to maintain its status as an investment trust; this year the Board recommends an unchanged final dividend of 25.0 pence per share (2007: 25.0 pence). The market in the Company's shares In 2007 there began a trend of widening discounts against NAV across the whole sector of private equity investment trusts and investment trusts in general, and this continued in 2008. Your Company's shares have traded at a narrower discount than most of its peers, reflecting its very substantial holding of liquid assets in the form of gilts. However, across the sector, discounts have been reported at levels never previously seen, largely reflecting the time lag between the dramatic fall in market ratings and the publication of valuations; in some cases this has been exacerbated by the risks arising from over-commitment to new funds. As updated valuations are published, discounts to net asset value may be expected to tighten; however, the Board believes that among the other factors that have led to such discounts is the uncertainty felt in the market about how recessionary conditions are affecting trading in underlying investments, the risk that they will breach banking covenants, the response of banks to any breach, refinancing risk and the likelihood that holding periods will lengthen resulting in lower annual returns. Your Board, and HgCapital, have always considered it important to provide comprehensive and transparent reports and we welcomed Sir David Walker's report Guidelines for Disclosure and Transparency in Private Equity as a contribution to greater standards of transparency across the private equity sector. To assist shareholders' understanding of the prospects and risks of our portfolio, we are publishing, in the Review of Principal Investments section below, more information than ever before about our principal investments. This section describes each business, the Manager's investment rationale, the source of the investment and how the Manager accomplished the acquisition, the strategy of the Manager in adding value, trading performance and exit strategy. A general update will also be provided when the half-year valuation is published in August and in our interim management statements in May and October. The Board has regularly set out its policy with regard to the repurchase of shares: at a time when there appears to be surplus capital and conditions for new investment appear to be unfavourable, the Board will consider returning capital to shareholders, usually through the market purchase of shares; consequently, the Board is once again asking shareholders to renew the power to purchase shares at the forthcoming Annual General Meeting. However, the Board's current view is that it is strongly in shareholders' interests to retain capital for investment, and that the purchase of shares would make little difference to the discount, which is driven by wider economic uncertainties, not an excess of supply over demand for the Company's shares. Realisations Realisations during the year totalled Â£91.6 million, of which Â£68.2 million came from five major sales: The Sanctuary Spa, Clarion Events and Classic Copyright in the first half and Addison Software and Orbiscom in the second half. All of these realisations have achieved proceeds above the values at which they were held in the Company's balance sheet. These major realisations returned a realised gain over their December 2007 book value of Â£35.8 million. Brief descriptions of these investments can be found in the Manager's review. Investments As I have noted in statements over the last two years, as market conditions have become more challenging, value creation will rely all the more on organic growth and margin enhancement. The Board is reassured that HgCapital's investment style, which has always been to work actively with management to define and deliver strategies that add value to the underlying business and, when necessary, to take radical action to turn a business around, is well suited to these more uncertain times. This increasingly differentiates HgCapital Trust from other private equity investment vehicles, many of which are becoming funds of funds in which the Board and Manager are remote from the underlying investments. The Manager acquired only three businesses this year, investing in total Â£18.9 million on behalf of the Company: Casa Reha, a German care home operator; Achilles, a UK provider of purchasing services in the energy and transport industries; and KVT, an industrial distribution business in Germany. Further information on all new investments can be found in the Manager's report and on the Company's web-site at www.hgcapitaltrust.com. The Board and the Manager are united in believing that the dramatic fall in equity markets in recent months has created excellent conditions for new investment. However, the recession will be deep and recovery is likely to be slow, with the implication that private equity managers should be patient and selective in deploying funds. It remains the case that some owners of businesses are only adjusting their expectations slowly to changed market conditions. The banking crisis that puts pressure on owners to sell also continues to impede the use of leverage to fund acquisitions. The market correction of 2008 marks the end of a long and benign period for investment; the recession of 2009 is the starting point for a new phase of investment at less demanding prices. The Company enters this new phase with substantial liquid funds and late in 2008 the Board and the Manager agreed on terms for the company to commit to invest Â£250 million, and up to a further Â£50 million, alongside HgCapital's new fund, Hg6. The investment phase for these funds will begin in 2009 and take place over 4 to 5 years, matching the forecast recovery from recession, which should in turn lead to an improved market for realisations. The Company's commitment, and revised fee arrangements with the Manager, were described in full in a circular to shareholders issued in December 2008 and accessible via the Company's website. I draw readers' attention to the unique characteristic of this commitment, namely that, should the Company have insufficient cash to invest in any new investment, it can opt out. This flexibility gives a high level of protection from the potential effects of over-commitment that have seriously impacted other investment trusts. At a general meeting in January 2009, shareholders approved these new arrangements and a change in the Company's Articles to prolong the life of the Company to accommodate this new phase in the investment cycle. Prospects The immediate prospects for all businesses remain uncertain, and the Manager has taken further steps to monitor and manage its portfolio companies closely, taking action to protect and enhance value and anticipating any potential breaches of bank covenants. The Manager has also reorganised internally in order to focus on the sectors where it has the strongest franchise and potential deal-flow. This also results in larger deal teams to facilitate deeper due diligence on potential investments and negotiation of bank funding on a club basis in the absence of underwritten syndicated loans. With substantial funds under management, HgCapital has the flexibility to underwrite acquisitions with more equity than before and refinance with debt at a later date. Future deals may include more mezzanine-level funding which, until recently, had been largely squeezed out by easy bank lending. The best private equity managers find opportunity in change and thrive on adapting to it. We can expect deal structures to evolve to meet new conditions, but the fundamental skills involved in identifying businesses with potential, redefining their strategy, and driving improvement remain the same. The Board retains confidence in the Manager's ability to take advantage, with due caution and patience, of the new market conditions. Following realisations, the Company holds a reduced portfolio of unquoted investments that are diversified across sectors and economies, and largely oriented towards non-cyclical growth. This provides a base for value creation in coming years. The Company also has the benefit of strong liquidity to grow the portfolio at advantageous prices. The Board therefore believes the Company is well placed to resume its growth in value when market conditions settle down, while taking advantage of the market correction to acquire good businesses at reasonable prices. The Board is confident that, for many investors, an allocation to a well-managed private equity portfolio remains appropriate, especially with the liquidity, transparency and governance offered by an investment trust. HgCapital Trust has created value for shareholders for more than a decade and the Board believes it will continue to provide patient investors with an efficient vehicle for gaining exposure to a diversified portfolio in an asset class that offers attractive long-term prospects for growth. Roger Mountford Chairman 19 March 2009 Historical total return* performance One year Three years Five years Seven years Ten years % p.a. % p.a. % p.a. % p.a. % p.a. Net asset value 0.5 16.6 21.1 15.7 16.0 Share price (12.0) 6.8 21.0 15.3 15.4 FTSE All-Share Index (29.9) (4.8) 3.5 1.5 1.2 FTSE Small Cap Index (43.9) (15.4) (3.3) (2.2) 1.4 Based on the Company's share price at 31 December 2008 and allowing for dividends to be reinvested, an investment of Â£1,000 ten years ago would now be worth Â£4,183. An equivalent investment in the FTSE All-Share Index would be worth Â£1,124. * Total return assumes all dividends have been reinvested. Investment activity 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Invested 40 25 20 20 15 22 35 45 50 26 (Â£million) Realised 30 18 26 27 31 47 52 62 106 92 (including income) (Â£million) Manager's Report HgCapital Trust plc gives the investor access to a diversified private equity portfolio run by an experienced and well-resourced Manager who makes investments in well-established companies over a number of geographies and sectors. We believe our approach will continue to reward investors with superior performance, both relative to the public markets and its peers over the long term. Investing in private equity Private equity Private equity provides medium to long-term financing to unlisted companies to support their growth and success. In return for their investment, investors receive a share of the equity in the businesses they finance. Private equity investments aim to deliver higher returns than public equity over a rolling period of five to ten years. Investments are typically held for three to seven years before they are realised, with potential interim proceeds during this period also achievable. Advantages of private equity Compared with investment in the public markets, a private equity investor has significant advantages: - More investment opportunities: there are significantly more private than listed companies; - Better access to information: the ability to conduct detailed market, financial, legal and management due diligence; - More control for the private equity manager over the management of the business and the timing of its sale; - Alignment of interest of investors and private equity management, leading to better decision making: the opportunity to act like an owner rather than a fund manager, with the benefit of representation on the Board; and - Management talent: the ability to attract high calibre management into the underlying investments and the alignment of that management's interests to the success of the investment through equity participation. Investment profile Private equity investments are less liquid than public equities. To compensate for this, they offer greater control and more attractive returns. Over the ten years from 1997 to 2007 UK private equity funds outperformed the FTSE All-Share Index by 13.9% per annum and outperformed relevant asset classes over this period*. Individual private equity investments have a risk profile which is dependent on the nature of the underlying business. Investing in a diversified portfolio helps to mitigate some of these risks; the quality of company selections by the private equity manager and its ability to successfully manage its portfolio further mitigates risk. Private Equity Investment Trusts A Private Equity Investment Trust (`PEIT') offers the opportunity to participate in a diversified portfolio of private equity investments. By buying shares in a PEIT, which are freely traded, the investor benefits from liquidity while participating in the potentially superior returns of a private equity portfolio. In addition, PEITs allow investors access to private equity without having to commit to the ten year lock-in and minimum investment required when investing in private equity via limited partnerships. Listed Private Equity (LPEQ) refers to public companies who invest in private equity whose shares are listed and traded on a primary stock exchange. In Europe, primary exchanges include the London Stock Exchange and Euronext. Some private equity companies quoted on the London Stock Exchange are structured as investment trusts. All listed private equity companies offer the opportunity to participate in private equity investments in mainly unlisted companies or portfolios of funds, without the need to be a very wealthy individual or institution. The Company The Company's objective is to provide shareholders with long-term capital appreciation, by usually taking a minority position in all investments made by HgCapital. This approach provides investors with exposure to a diverse portfolio of private equity investments across Western Europe run by a well resourced and experienced manager. *Source: BVCA Performance Measurement Survey 2007. Manager's strategy HgCapital provides access to attractive investment opportunities by acting as lead investor in middle market buyouts in Western Europe Middle-market buyout focus - HgCapital focuses on middle market buyouts with enterprise values of between Â£50 million and Â£500 million. - The middle market offers a high volume of companies with proven, consistent financial performance and defensible market positions. - Companies are small enough to provide opportunities to drive operational improvements, yet large enough to attract quality management and to offer multiple exit options across market cycles. - Companies offer multiple value creation levers giving the potential to effect material operational improvements. Pan-regional - HgCapital focuses on investments in Western Europe, with the majority of activity taking place in the UK, Benelux, German speaking countries and the Nordic region. - Local offices and local expertise, combined with a common culture and consistent processes, underpin HgCapital's ability to produce strong performance. Broad coverage - HgCapital`s dedicated sector teams provide investors with access to the substantial majority of private equity activity within their target size range and across their relevant geographies. Clear investment criteria - HgCapital applies a rigorous and commercial investment approach when evaluating all investment opportunities ensuring that only the most attractive investments are completed, irrespective of an opportunity's sector or geography. - HgCapital seeks companies with protected business models and predictable revenues, which offer a platform for growing market share or have the potential for significant performance improvement. - HgCapital targets situations where significant change is taking place and where the Manager's specialist knowledge and skills can make a real difference. Manager's tactics HgCapital aims to deliver attractive investment returns through the combination of deep sector knowledge, strong operational skills and the application of deep resources across the investment life cycle Sector specialisation - HgCapital's well-resourced sector teams combine the domain knowledge and expertise of a trade buyer with the flexibility of a financial investor. - Deep sector knowledge optimises relevant deal flow and efficient investment selection. - Dedicated teams cover the Healthcare, Industrials, Services and TMT sectors. In addition, over the last four years HgCapital has built a specialist team to identify businesses that will operate, construct and develop renewable energy projects in Western Europe. Active portfolio management - A dedicated team of experienced portfolio management professionals develop, execute and monitor value-enhancement strategies for each of HgCapital's investments. - HgCapital typically invests as the lead, majority shareholder of portfolio companies and appoints HgCapital executives to the companies' boards to participate in business planning and to work with management. - HgCapital regularly reviews the performance of all its investments to quickly identify any issues and ensure potential value is maximised. Deep resources - Continual investment in all areas of the HgCapital business ensures that high quality resources can be applied to each stage of the investment life cycle. - HgCapital's team of approximately 80 people is well-positioned to produce strong returns from a well-diversified portfolio of investments which, HgCapital believes, will continue to be superior to the returns generated by comparable public equity markets. Manager's review - the market Current market conditions are challenging but present significant opportunities 2008 was a challenging year for the European buyout market. The crisis in the global financial system reduced credit availability and the ability of investors to finance new transactions. Simultaneously, the sharp downturn in the European economy, seen in the second half of the year, put pressure on corporate profits. Against this uncertain backdrop, European buyout deal volumes fell markedly to â‚¬69 billion, 54% down on the prior year. Although not immune from tightening credit conditions, the European middle market has been less affected than the larger capital markets and leverage, albeit limited, remains available for high quality assets. HgCapital believes it is well placed to continue to structure profitable transactions in the current environment. We have historically adopted a conservative approach to leverage and are not reliant on plentiful debt finance in order to deliver strong returns to clients. Over the past 10 years over 80% of value creation in HgCapital's buyout deals has come through operational improvements in the underlying portfolio businesses, with less reliance on debt and financial structuring. Going forward, this emphasis on developing and growing portfolio investments will remain a key focus for HgCapital. We see significant opportunities for private equity arising from the current economic environment. Falling public market valuations will present the opportunity to acquire high quality assets at attractive prices. An increasing number of businesses needing to restructure, refinance or drive operational change will further increase opportunities for equity providers. Historically, private equity investments made through an economic downturn have been particularly successful and we believe the coming period will represent an exciting opportunity. Manager's review - the portfolio Despite challenging economic conditions, trading in the unrealised portfolio has been generally positive All investments referred to in this report, excluding the investment in Hg Renewable Power Partners LP, are held by HGT LP. The Company is the sole limited partner in HGT LP. HgCapital Trust (the `Company') invests alongside other clients of HgCapital. Typically, the Company's holding forms part of a much larger majority interest held by HgCapital clients in buyout investments in companies with an enterprise value (`EV') of between Â£50 million and Â£500 million. The Manager's review generally refers to each transaction in its entirety, apart from the tables detailing the Company's participation or where it specifically says otherwise. The Company's net asset value decreased slightly over the year, moving from Â£238.8 million to Â£234.1 million as declines in the unrealised portfolio were largely offset by investments realised significantly in excess of their book value. During the period, the decrease in unrealised valuations was Â£35.1 million and the realised proceeds in excess of the book value as at 31 December 2007 were Â£35.8 million. The increase in NAV from realisations has occurred due to a number of exits throughout the year being achieved at a significant uplift to prior book value. The decrease in unrealised valuations comes despite satisfactory trading performance in the portfolio. The unrealised value of most of the Company's investments is calculated with reference to the valuation ratings of a basket of publicly traded comparable companies. As a result, the large declines seen in public market ratings have led to a fall in the book value of a majority of the unrealised investments. Given the volatile economic conditions during the year, the Company adopted a cautious approach to new investment, investing a total of Â£26.0 million (2007: Â£50.8 million), mainly in three businesses. These new investments were made in Achilles (UK, Â£75 million EV), Casa Reha (Germany, â‚¬327 million EV), and KVT (Switzerland, CHF 530 million EV). During the year, the Company invested a further â‚¬0.8 million out of its â‚¬21 million commitment to the â‚¬303 million Hg Renewable Power Partners fund. The fund's focus is on long-term investments in renewable power projects using proven technologies, including wind, solar, small hydro, landfill gas and waste-to-energy in Western Europe (see the Renewable Energy section below for further details). Despite challenging market conditions the Company realised significant proceeds during the year (including gross income received) amounting to Â£91.6 million (2007: Â£106.3 million). These proceeds arose principally from the sale of Addison, Clarion, Classic Copyright, Hofmann, Orbiscom and The Sanctuary Spa. Attribution analysis of current year movements in net asset value Â£'000 Opening net asset value as at 1 January 2008 238,817 Gross revenue 12,068 Expenditure (3,505) Taxation (2,498) Dividends paid (6,297) Realised proceeds in excess of 31 December 2007 book value 35,755 (excludes gross revenue) Net unrealised depreciation of investments (35,114) Carried interest (5,132) Closing net asset value as at 31 December 2008 234,094 Realised and unrealised movements in net asset value during 2008 Net unrealised depreciation Realised proceeds in excess of investments Â£'m of 31 December 2007 book value Â£'m (excludes gross revenue) Addison - 11.0 The Sanctuary - 9.0 Pulse 6.9 - Orbiscom - 4.9 Classic Copyright - 4.5 Clarion Events - 3.2 Schleich 2.4 - Clinphone - 1.5 PBR - 0.7 Rolfe & Nolan - 0.6 Other (1.0) 0.4 FTSA (2.0) - Cornish Bakehouse (2.3) - SLV (2.6) - Elite (2.6) - Sporting Index (2.8) - Euro Hedge (2.8) - KVT (4.1) - Atlas (4.3) - Voyage (4.6) - SHL (4.9) - Fabory (5.0) - WET (5.4) - Total (35.1) 35.8 At the end of 2008, the Company held a portfolio of 37 investments (2007: 45), of which the 10 principal investments represent over 76% of the portfolio's value. Over the course of 2008 the top 10 companies grew operating profit at an average of 14% year on year. Whilst it cannot be immune from the global downturn, this remaining portfolio is diversified by sector and geography served, and holds companies which should be long-term winners given the markets they serve, the nature of their business, and their competitive position. There will, of course, be challenges along the way. The Company continues to follow International Private Equity and Venture Capital Valuation Guidelines for the valuation of unrealised investments. These guidelines require these investments to be shown at fair value. Valuations of all direct investments have been based on, or checked against, ratings in public markets. As a result, recent falls in public equity markets have forced the Company to write down a number of investments despite many showing generally robust trading through the year. This has led to written down investments representing 33% by value of the portfolio (2007: 7%). Despite this, HgCapital still believes these investments have potential: historically it has realised investments at an average of nearly 2x prior book value since becoming independent in December 2000. The Company's ten largest investments are generally performing well, generating year-on-year growth in earnings. Profiles of these companies can be found in the Review of Principal Investments section of this report. At the same time, a number of investments performed below expectations in the year. Most notably: - SHL, a provider of objective psychometric testing, has been impacted by falling recruitment activity. - FTSA, a manufacturer of crash test dummies, WET, a manufacturer of automotive components, and KVT, a distributor of industrial expanders, have all been affected by the pronounced downturn in the automotive industry. - Fabory, a distributer of industrial fasteners, has also been affected by some weakening in its end markets, although operational improvement programmes are proceeding well. Over the last four years, the focus of the portfolio has shifted towards Continental Europe, with over half the Company's investments by value headquartered outside the UK. We believe that the recent fall in public and private market valuations will offer significant opportunities to acquire high quality assets at attractive prices. HgCapital is well positioned to exploit these opportunities when they arise, given its focused investment strategy, compact existing portfolio and well resourced team. In the current market, the Company also benefits from strong liquidity, holding Â£129.9 million in liquid funds at year-end, available for reinvestment. The Manager expects to use a portion of the funds committed by the Company for investment alongside HgCapital 5 for the purpose of making further investments in existing portfolio companies. This will enable the Manager to continue to take advantage of opportunities to make value-accretive add-on acquisitions, of which it has made 60 to date in the MUST 4 and HgCapital 5 portfolios. New investments by the Company are expected to be made from funds committed for investment alongside HgCapital 6. Asset class+ Cash & other assets 53% Unquoted 47%* Deal type by value++ Buyout 92% Renewable energy 4% Expansion 2% Funds 2% Valuation++ Earnings-based 55% Written down 33% Net assets 6% Cost 5% Other 1% Geographic spread by value++ UK 44% Nordic Region 22% Germany 20% Benelux 7% Rest of Europe 4% North America 2% Switzerland 1% Sector by value++ Healthcare 25% TMT 24% Consumer & Leisure 22% Industrials 15% Services 8% Renewable energy 4% Funds 2% Vintage by value++ 2008 13% 2007 26% 2006 33% 2005 11% Pre 2005 17%* + Percentages are based on net assets ++ Percentages are based on fixed assets and accrued interest and are shown by value *12% relates to Pulse Staffing Limited Investments Selective investments in businesses which should perform across market cycles Company Sector Activity Deal Type Cost Â£'000 Casa Reha Healthcare Care home operator Buyout 8,140 King Luxembourg (KVT) Industrials Distributor of industrial Buyout 5,535 fasteners Achilles TMT Supplier qualification Buyout 5,226 systems Other 631 New investments 19,532 BMFCO (t/a Fabory) Services Distributor of industrial (3,480) fasteners Investment syndication (3,480) Pulse Staffing Healthcare Flexible staffing services Buyout 5,682 in healthcare sector Portfolio purchase Secondary 2,711 Hg RPP LP Renewable Renewable energy fund Fund 606 energy Other investments 936 Further investments 9,935 Total investment by 25,987 the Company Figures below refer to the total size of each acquisition, including debt raised from third parties, made by HgCapital on behalf of its clients, including the Company. New investments Casa Reha In January 2008, HgCapital completed the â‚¬327 million buyout of Casa Reha, one of the leading German providers of elderly care services, specialising in high quality, affordable assisted living. Casa Reha has a nationwide portfolio of 52 homes providing over 7,000 beds and a further portfolio of homes currently under development. The business is highly profitable and has a track record of delivering strong revenue growth both organically and through acquisition. Casa Reha is well placed to exploit future opportunities in the German care home market which is largely insurance and state funded. Achilles In July 2008, HgCapital acquired Achilles for a consideration of Â£75 million. Achilles is a global leader in buyer-sponsored supplier data management and validation services. Achilles operates schemes where buyers in a certain industry require their multiple suppliers to provide information (e.g. environmental compliance information) to the Achilles online database in order to be considered for a contract. Achilles currently operates 30+ schemes in 22 countries and demonstrates rapid growth in both revenues and profitability. KVT In August 2008, HgCapital agreed with a Swiss private equity house to fund jointly the acquisition of KVT for a consideration of CHF530 million. KVT is a leading distributor of specialist fasteners and expanders headquartered in Switzerland, generating its main sales domestically and in Germany and Austria. The business has a market leading position, well invested infrastructure and a high degree of revenue visibility from a diverse customer base and offers the opportunity for continued growth in existing markets and further international expansion. It will not be immune from the global downturn but we still believe in its long-term growth prospects. Pulse In May 2008 HgCapital agreed to buy Bridgepoint Private Equity's holding in Pulse Staffing Limited for Â£6.0 million. Pulse is one of the UK's leading providers of labour management, recruitment and deployment services in the healthcare sector. HgCapital originally invested in the business alongside Bridgepoint (then NatWest Private Equity) in 1999. The investment performed well over the period 2000 to 2003 showing strong growth and paying down acquisition debt. From 2003 to 2005 changing NHS strategy and regulation impacted Pulse's performance such that the investment was written down. In recent years Pulse has repositioned itself under new management to reduce reliance on NHS business and is demonstrating significantly improving performance, with EBITDA up 500% in 2008 over 2007. Realisations Continued realisations in the year, despite challenging market conditions During 2008, HgCapital realised total proceeds of Â£428 million on behalf of its clients, including Â£91.6 million for the Company. HgCapital has successfully completed 9 significant exits during the year despite challenging market conditions. As a result, HgCapital now has a small, focused portfolio and is well positioned to take advantage of future investment opportunities. Company Sector Exit Route Cost Proceeds * Cumulative Current year Â£'000 Â£'000 gain/(loss)** gain/(loss)*** Â£'000 Â£'000 The Sanctuary Spa Consumer & Trade sale 2,409 22,435 20,026 9,029 Leisure Addison TMT Trade sale 2,296 18,800 16,504 11,218 Clarion Events TMT Financial 4,965 12,614 7,649 3,280 sale Hofmann Industrials Financial 4,747 11,469 6,722 348 sale Classic Copyright TMT Financial 6,033 8,850 2,817 7,364 sale (t/a Boosey & Hawkes) Orbiscom TMT Trade sale 2,981 5,512 2,531 4,928 Xtx (Xyratex) TMT Quoted 1,277 3,740 2,463 19 share sale Clinphone Healthcare Quoted 316 2,270 1,954 1,461 share sale Rolfe and Nolan TMT Trade sale 14 1,446 1,432 610 Other (7) 12,817 2,535 (10,282) 333 Full realisations 37,855 89,671 51,816 38,590 Schenck Industrials Release of - 373 373 115 escrow BMFCO (t/a Fabory) Services Profit on - 358 358 358 syndication Other 343 1,192 849 559 Partial realisations 343 1,923 1,580 1,032 & deferred proceeds Total realisations 38,198 91,594 53,396 39,622 * Includes gross revenue received during the year ** Realised proceeds including gross revenue received, in excess of residual cost *** Realised proceeds including gross revenue received, in excess of 31 December 2007 book value and accrued interest Realisation figures below refer to the total value of each transaction, including, where appropriate, repayment of third party debt. Proceeds to clients including the Company are stated net of any such repayment. FULL REALISATIONS Addison HgCapital completed the â‚¬72 million management buyout of Addison in June 2005. Addison is a leading German application software company that provides business-critical solutions to two related markets - tax accountancy and small to medium enterprises. The business was recapitalised in October 2007 returning 0.8x cost to clients, and was sold to Wolters Kluwer NV in October 2008 returning a further Â£96.2 million to clients and achieving returns over the life of the investment of 3.7x original cost. Clarion Events HgCapital completed the Â£45 million management buyout of Clarion Events in October 2004. Clarion is the largest independent exhibition and diversified conference business in the UK, developing, organising and owning a portfolio of 60 business and consumer events. HgCapital successfully sold the business in February 2008 and returned Â£74 million of capital to clients, achieving a 2.5x multiple of original cost. Classic Copyright (t/a Boosey & Hawkes) HgCapital completed the Â£75 million buyout of Classic Copyright (Holdings) Limited in December 2003. Classic Copyright, trading as Boosey & Hawkes, is one of the world's largest publishers of classical music, with a 14% market share. It has a catalogue of classical music copyrights including works by composers such as Rachmaninoff, Strauss and Stravinsky. The business was sold in April 2008 returning Â£29.6 million to clients, equivalent to 1.5x original cost. This relatively disappointing performance is a result of the price paid in the expectation of higher growth, which did not materialise. Clinphone HgCapital completed its investment in Clinphone Holdings in December 1996. Clinphone is a UK based company engaged in providing web-based solutions enabling the capture and transfer of data in clinical trials of new pharmaceutical products. HgCapital exited the business via an IPO during June 2006, selling down the last of its shares in August 2008. Over the life of the investment, it returned 3.3x original cost. Hofmann HgCapital completed the â‚¬138 million buyout of Hofmann in November 2005. Headquartered in Boxberg-Schweigern, Germany, Hofmann is a market-leading provider of frozen food products as well as related on-site catering for small business canteens and social organisations such as care homes, hospitals, and schools in Germany and Austria. In January 2008, HgCapital sold the business to a private equity buyer returning 2.4x original cost. Orbiscom In August 2001, HgCapital completed an early stage investment in Orbiscom. Orbiscom sells a payment platform to credit and debit card issuers, whereby a unique transaction number is substituted for the permanent card number. By using this "proxy number", the card-holder avoids disclosing his/her details to the merchant or indeed, the web. In December 2008, the business was sold to Mastercard returning Â£24.7 million to clients and delivering 1.8x original cost with a residual interest subject to performance. Orbiscom is the last of the early-stage technology investments made by HgCapital. Rolfe & Nolan In March 2003, HgCapital completed the Â£17.3 million public-to-private management buyout of Rolfe & Nolan. The business is the number two global supplier of back-office processing software to the exchange-traded derivatives industry. The company supports over 250 bank, brokerage and exchange clients in 20 countries providing business critical processing software and services, with a majority of revenues on recurring or subscription contracts. The business was recapitalised in 2004 and 2007 returning Â£35.8 million to clients, and was sold to a strategic buyer in July 2008 returning a further Â£8.4 million to clients and achieving overall returns of 2.6x original cost. The Sanctuary Spa In November 1995, HgCapital made its initial investment in the Sanctuary Spa. The Sanctuary Spa operates the women's day health spa, The Sanctuary, in Covent Garden and also owns a range of beauty products distributed through The Sanctuary and Boots the Chemist. In January 2008, the company was sold to PZ Cussons returning proceeds of Â£50.2 million to clients giving a total return over the life of the investment of 7.0x original cost. Xtx (Xyratex) In September 2003, HgCapital completed the Â£107 million acquisition of Xyratex, a world leader in the hard disk and network storage technology market for over 20 years. An IPO of the business on NASDAQ was achieved in June 2004. HgCapital's final remaining shares in Xyratex were sold in early 2008 for Â£23.6 million, resulting in a total return over the life of the investment of 2.2x original cost. Other realisations Other disposals totalling proceeds of Â£2.5 million include the sale of quoted shares in PRA International Limited. Azinger Ltd, Profiad Ltd, and Burns e-Commerce Solutions were also realised. These had previously been written off. Axiom, which had been underperforming in recent years, was sold to a trade buyer in Finland. PARTIAL REALISATIONS Fabory Fabory is a full-line wholesale distributor of industrial fasteners with a market-leading position in the Benelux markets. The initial investment was completed in October 2007; a portion of this investment was syndicated to co-investors during February 2008. Other Other partial realisations included the release of escrow proceeds in respect of Schenck and PBR and the sale of the Company's interest in Biffa plc, which was tendered at the acquiring consortium's offer price. Review of principal investments 1 VISMA www.visma.com Date Invested: May 2006 Original Enterprise Value:NOK 4.3 billion Total HgCapital Clients' Equity: 53% Business Description - VISMA is the number one provider of business software and related services to small and medium-sized enterprises in the Nordic region. - The company provides accounting, resource planning and payroll software, outsourced book-keeping, payroll services and transaction process outsourcing to a customer base of over 200,000 companies. Investment Rationale - Strong organic growth in revenue, with good visibility from a highly recurring and predictable customer base. - Significant potential to improve margins to industry standard levels. - Country specific markets with high barriers to entry driven by local regulatory requirements: highly fragmented market with significant potential for acquisition led growth. Sourcing and Conversion - HgCapital had completed a significant number of other SME software investments in Western Europe and sourced the deal by contacting the CEO directly. - HgCapital worked closely with management to complete a complex public-to-private transaction on an accelerated timetable. Portfolio Management - Plan: Grow through acquisition and organically in high potential niche areas. Improve EBITDA margins to industry standard levels through increased operational focus in the business units. - Initiatives: Supported management in making and integrating 16 bolt-on acquisitions to date. Implemented operational improvements driving margin expansion from 14% to 18% within 18 months. Performance - Current trading: Performance in the year remained strong, with significant growth in both sales and EBITDA. - Exit strategy: Approaches have already been received from a number of private buyers. An IPO or trade sale to software/publishing companies provide alternative exit options. Company's Investment - VISMA Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 TMT Nordic 2006 13,326 12,638 1,753 14,391 Earnings-based Region 2 Pulse www.pulsejobs.com Date Invested: June 1999 Original Enterprise Value: Â£67 million Total HgCapital Clients' Equity: 74% Business Description - Pulse is one of the UK's leading providers of comprehensive labour management, recruitment and deployment services in the healthcare sector. - The company works in partnership with healthcare organisations in the public and private sectors to provide staffing, management services and consultancy. Investment Rationale - Leading player in the healthcare staffing sector with opportunities for growth in related sectors. - Further growth possible through launch of new services around the core business. - Opportunity to reduce costs and improve margins. Sourcing and Conversion - HgCapital completed the public-to-private acquisition of Pulse in 1999, with Bridgepoint Private Equity acting as joint bidder. - In 2008 HgCapital acquired Bridgepoint's stake in Pulse to become the lead investor in the business. Portfolio Management - Plan: Grow organically and through acquisition, continued rationalisation of cost base to boost margins - Initiatives: Increased focus on non-healthcare job sectors, continued cost reduction programme, launched new services around core business offering. Performance - Current trading: Both revenues and EBITDA are significantly up year on year. The business has no external borrowings. - Exit strategy: Pulse is anticipated to be a target for both private equity and trade buyers. Company's Investment - Pulse Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Healthcare UK 1999 6,131 12,858 - 12,858 Earnings-based 3 Mondo www.mondominerals.com Date Invested: October 2007 Original Enterprise Value: â‚¬230 million Total HgCapital Clients' Equity: 91% Business Description - Mondo is the world number two in talc mining and processing. The company's core markets are the European paper and paint industries. - Mondo supplies the majority of talc for paper producers in the highly regional market of Finland, the rest of the Nordic region and Northern Europe. Investment Rationale - Mondo's core customer base is the paper industry which provides sustainable long-term demand. The product is a critical, but low cost, component of the manufacturing process. - The opportunity also exists to push into other high margin applications. - Opportunity for significant improvements in operating efficiencies, especially as the company was carved out of a larger conglomerate. Sourcing and Conversion - HgCapital's German office was directly introduced to management by the CEO of an existing portfolio company. - As a result, HgCapital was able to move quickly and developed a strong relationship with management. Portfolio Management - Plan: Grow sales modestly in strategic markets, deliver operational improvements and significantly increase EBITDA margins through 2011. - Initiatives: Driving of sales in higher margin, non-paper market. Implementation of operational improvements, switching of milling operations from oil to electricity and the hedging of nickel prices. Performance - Current trading: Performance remains robust, with sales broadly flat as planned, but a significant increase in EBITDA. The effect of nickel price decline has largely been mitigated through the company's hedging policy. - Exit strategy: Mondo is anticipated to be an attractive target for both private equity and trade buyers. Company's Investment - Mondo Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Industrials Nordic 2007 7,004 8,475 1,293 9,768 Earnings-based Region 4 Schleich www.schleich-s.com Date Invested: December 2006 Original Enterprise Value: â‚¬165 million Total HgCapital Clients' Equity: 76% Business Description - Schleich is the leading producer of classic plastic toy figurines, such as farm and wildlife animals, historical characters and The Smurfs. - Its products, trading under the well recognised brand Schleich-S, are sold in over 30 countries, including its home market of Germany, the US, the UK and France. Investment Rationale - Schleich's figurines are attractive to retailers, given their low seasonality and high sales per square metre. - Relatively high barriers to entry, given the wide product range, retailer network and a high quality manufacturing process. - Revenue growth is supported by continual innovation in the product range. Sourcing and Conversion - Local corporate finance advisors invited HgCapital into a limited auction process. - HgCapital secured the support of the CEO in the transaction, based upon the plan for the business and the team's track record in the German market. Portfolio Management - Plan: Drive sales growth organically in existing markets and through international expansion. Capture margin improvement through increased scale and the streamlining of the management structure. - Initiatives: Established new retail relationships in the US; revised local product selection and in-store displays to drive growth; reviewed manufacturing footprint. Performance - Current trading: Continued growth in both revenues and EBITDA during the year. - Exit strategy: Several multi-national toy makers represent natural trade buyers; stable profits and risk profile could also support an IPO. Company's Investment - Schleich Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Consumer & Germany 2006 4,634 7,420 1,321 8,741 Earnings-based Leisure 5 Casa Reha www.casa-reha.de Date Invested: January 2008 Original Enterprise Value: â‚¬327 million Total HgCapital Clients' Equity: 51% Business Description - Casa Reha is a leading private German provider of elderly care services, specialising in high quality, affordable assisted living. - Founded in 1995, Casa Reha has a nationwide portfolio of 52 homes providing around 7,000 beds. Investment Rationale - The market offers multiple opportunities for expansion, both organically and through acquisition. - Business model benefits from strong earnings visibility and low capex and working capital requirements for growth. Sourcing and Conversion - The Healthcare team identified Casa Reha during a strategic review of German care homes and approached the then owner (Advent) in mid-2007. - HgCapital was able to complete due diligence and hold discussions with management and the vendor prior to the launch of a formal auction process. Portfolio Management - Plan: Prioritise organic growth, targeting a significant increase in bed numbers, in order to capture anticipated private sector market growth of 6%-7% p.a., as charitable/local authority sector stagnates through under-investment. - Initiatives: Increased the rate of openings of new homes and continued building the pipeline of future homes. New organisational structure, customer relationship management tools and other initiatives were implemented to maintain profitability of existing homes. Performance - Current trading: Like-for-like sales grew and EBITDA was broadly flat in 2008. - Exit strategy: The business should be a strong IPO candidate or attractive to large-cap private equity buyers. Company's Investment - Casa Reha Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Healthcare Germany 2008 8,140 7,878 - 7,878 Written down 6 Sporting Index www.sportingindex.com Date Invested: November 2005 Original Enterprise Value: Â£73 million Total HgCapital Clients' Equity: 70% Business Description - Sporting Index is a sports spread betting firm, with a leading market share in the UK. - It aims to offer more markets, more `fun bets', and more choice than any other sports spread betting company. Investment Rationale - The core sports spread betting business is robust, cash generative and growing steadily, providing a base from which to expand the group. - Industry is fragmented offering opportunities to expand by acquisitions. - New products and new geographies offer further opportunities for growth. Sourcing and Conversion - HgCapital identified the company in 2002 and maintained close contact with management over the following three years, before completing an acquisition of the business in November 2005. Portfolio Management - Plan: Develop direct marketing abilities and customer database to increase retention and usage; develop new distribution channels for spread betting; expand international client base. - Initiatives: Refocused development expenditure away from mass market games, instead focusing on sale of pricing expertise to third parties; delivered cost cutting programme and realignment of resources to front line profit making activities. Performance - Current trading: Sales and profit grew year on year. - Exit strategy: The company will be positioned for a trade exit, most likely to an industry consolidator. Company's Investment - Sporting Index Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Consumer & UK 2005 7,186 4,405 2,229 6,634 Written Leisure down 7 Voyage www.voyagecare.com Date Invested: April 2006 Original Enterprise Value: Â£322 million Total HgCapital Clients' Equity: 52% Business Description - Voyage is an operator of small community-based homes for adults with learning disabilities and associated physical disabilities, autistic spectrum disorders, complex needs and acquired brain injury. - At completion, the company had 1,600 beds in 242 homes across England and Scotland. Investment Rationale - Significant shortage of supply for residential care at this level leaves opportunity for growth. - Voyage enjoys a strong market position and a high quality estate of stable, cash generative properties. Sourcing and Conversion - HgCapital took advantage of a "broken auction" that had collapsed due to a breakdown in communications between bidder and seller. Portfolio Management - Plan: Continued growth through the roll-out of new homes, margin improvement through the consolidation of sites to improve occupancy, close control of cost inflation and move to a higher margin, professional led model. - Initiatives: Implemented move towards a professional led model, focused on control of costs, continued successful roll out of new homes, supported management in reviewing acquisition targets. Performance - Current trading: Performance in 2008 was strong, with significant growth in both sales and EBITDA.. - Exit strategy: Projected exit to either a secondary or a trade buyer, although an IPO is also possible. Company's Investment - Voyage Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Healthcare UK 2006 8,755 4,179 2,277 6,456 Written down 8 Americana www.bench.co.uk Date Invested: March 2007 Original Enterprise Value: Â£180 million Total HgCapital Clients' Equity: 45% Business Description - Americana is a branded apparel business, manufacturing and marketing the Bench brand targeted at the youth market. - The company predominantly operates through UK wholesale channels, with increasing wholesale revenues in continental Europe, and is building a UK retail presence. Investment Rationale - Bench is a strong brand that can be developed internationally. - The company had a proven track record of growing revenue and profits and an excellent supply chain based in China. Sourcing and Conversion - HgCapital was previously in contact with the Chairman and had been monitoring the company for over two years. - HgCapital secured the deal as it was able to convince the founders that it could address the challenges that faced the business, namely management succession and international expansion. Portfolio Management - Plan: Grow wholesale revenues internationally using new and existing distribution agreements and increased investment in sales and marketing; pilot retail expansion and expand if successful. - Initiatives: Accelerated roll-out of retail concept; strengthened management team; implemented rigorous management reporting and business planning. Performance - Current trading: Sales were up but profit was down in 2008. Profits are projected to recover in 2009. - Exit strategy: Options include a trade sale or secondary buyout. Company's Investment - Americana Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 Consumer & UK 2007 4,625 4,483 1,251 5,734 Earnings-based Leisure 9 Achilles www.achilles.com Date Invested: July 2008 Original Enterprise Value: Â£75 million Total HgCapital Clients' Equity: 79% Business Description - Achilles is a global leader in buyer-sponsored supplier data management and validation services. - The company has 22 offices worldwide and has more than 32,000 customers, with focus on industries with "high cost of supplier failure" (e.g. oil & gas, construction). Investment Rationale - Achilles is a global market leader in a market with high barriers to entry. - The company enjoys high visibility of future earnings and shows strong organic growth rates. - The market offers multiple expansion opportunities both into new industries and new geographies. Sourcing and Conversion - HgCapital joined a competitive auction process designed to find a private equity buyer as an alternative to a utility which had previously bid for the business. - Management was attracted to HgCapital given our prior experience of subscription-based businesses in the TMT sector. Portfolio Management - Plan: Extract more value from existing schemes through product additions, roll out existing schemes in new geographies and industries and drive margin expansion. - Initiatives: Implemented review of best practices across business and rolled out across geographies. Performance - Current trading: Still relatively early, but so far trading has been on plan, with continued strong growth in sales and EBITDA. - Exit strategy: Exit options for Achilles are potentially via an IPO, secondary or a trade sale to a software company, outsourcer or B2B exchange. Company's Investment - Achilles Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 TMT UK 2008 5,226 5,226 - 5,226 Cost 10 Elite (t/a SiTel) www.sitelsemi.com Date Invested: June 2005 Original Enterprise Value: $74 million Total HgCapital Clients' Equity: 80% Business Description - SiTel designs chip sets for the home wireless voice and data applications market. - Customers include global manufacturers of home cordless telephone systems, such as Siemens and Panasonic. Investment Rationale - SiTel has a strong market position and had delivered strong revenue growth. - Fully outsourced operations (a fabless business model) allowing a high return on capital. - Significant customer lock-in provides visibility of earnings. - Strong market growth and opportunity to drive revenues further through growth into adjacent niche markets. Sourcing and Conversion - SiTel was carved out as an integrated unit from a US parent. - Initially a limited auction, HgCapital gained exclusivity early in the process. Portfolio Management - Plan: Transition to a fully outsourced model, drive organic growth and expand into new markets. - Initiatives: Managed move to a fabless business model, driving growth through focused R&D spend; reduced inventory levels to improve cash flow. Performance - Current trading: Trading remains very challenging and EBITDA declined significantly in 2008. However, the business is now free of external debt. - Exit strategy: SiTel will most likely be sold to a competitor looking to consolidate its market position. Company's Investment - Elite / SiTel Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost Â£'000 value interest value methodology Â£'000 Â£'000 Â£'000 TMT Benelux 2003 5,749 3,490 1,721 5,211 Written down Renewable energy Hg Renewable Power Partners LP In June 2006, the Company made a commitment of â‚¬21 million to Hg Renewable Power Partners LP, a dedicated renewable energy fund managed by HgCapital. The â‚¬303 million fund is one of the largest raised to date for renewable energy investments in Europe and is focused on long-term investments in renewable power projects using proven technologies, including wind, small hydro, landfill gas and waste-to-energy in Western Europe. Renewable energy benefits from a highly favourable regulatory and policy environment with climate change solidly on the political agenda. The investment in the fund will give the Company exposure to a diversified portfolio of assets offering both income and capital appreciation in a rapidly growing sector. The fund has investments in eight wind projects in construction or operation totalling 200 MW and four biogas projects that are in operation totalling 2 MW. It has made investments in companies that develop wind projects, giving it the right to acquire a further 286 MW of wind projects. The fund's investments are in France, Germany, Ireland, Italy, Sweden and the United Kingdom. The fund's portfolio now includes the following investments: Tir Mostyn A 21.25 MW operating wind farm in North Wales. The original investment was made in November 2004, with construction completed in October 2005. The wind farm has now been operating for over three years. Sorne Wind A 32 MW operating wind farm in Donegal, Ireland. This investment was made in July 2005, with the farm entering operation in November 2006. Picardy Wind A portfolio of four wind farms in Northern France in operation or under construction with a total capacity of 47.5 MW. The initial investment was made in July 2006. Two operating projects total 23.5 MW and the other two are under construction. Wind Direct A business that installs, owns and operates wind turbines on UK industrial sites, providing its customers with low cost, direct energy supplies. The investment was made in 2006 and includes one 4 MW site in operation and one entering construction, with 15 sites in development. HavsnÃ¤s A 95.4 MW project is under construction, located in central Sweden. The investment, which is the first project-financing of renewable generation in the Nordic market, was completed in March 2008. The project will be the largest on-shore wind farm in Sweden. Construction began in April 2008 and commercial operation will begin in April 2010. RidgeWind A United Kingdom wind farm developer with 300 MW of wind farms in development, including two projects totalling 52 MW that have secured planning permission, and the 16 MW Bagmoor project that is in construction. The Bagmoor project is located in Lincolnshire. Commercial operations are expected to begin in 2009. Rewind An investment of â‚¬2.1 million was made in August 2006, in return for the option to acquire a 120 MW portfolio of wind farms in Sicily. Bayern Energie Four operating anaerobic digestion (biogas) plants with a combined capacity of 1.4 MW in Germany. Our involvement in this project was terminated during the year with no further costs. Cost and valuation of the Company's holding Company Deal type Residual cost Valuation Valuation Â£'000 Â£'000 Methodology* Hg Renewable Power Partners Renewable 4,409 4,319 Net assets LP energy The difference between cost and valuation is due to establishment and running costs, fees, foreign exchange movements in the fund and the revaluation of investments. *The primary valuation methodology applied to the fund's investments is a discounted cash flow basis. Investment portfolioâ€ Company Sector Principal Residual Total Year of Portfolio Cum. location valuation* cost investment value Value % Â£'000 Â£'000 % 1 VISMA Holdings + TMT Nordic 13,326 14,391 2006 13.2% 13.2% Region 2 Pulse Staffing Ltd + Healthcare UK 6,131 12,858 1999 11.8% 25.0% 3 Mondo Minerals Co-op + Industrials Nordic 7,004 9,768 2007 9.0% 34.0% Region 4 Schleich Luxembourg SA Consumer & Germany 4,634 8,741 2006 8.0% 42.0% + Leisure 5 Casa Reha SARL + Healthcare Germany 8,140 7,878 2008 7.2% 49.2% 6 Sporting Index Group Consumer & UK 7,186 6,634 2005 6.1% 55.3% Ltd + Leisure 7 Voyage Group Ltd + Healthcare UK 8,755 6,456 2006 5.9% 61.2% 8 Americana Consumer & UK 4,625 5,734 2007 5.3% 66.5% International Holdings Leisure Ltd 9 Achilles Group TMT UK 5,226 5,226 2008 4.8% 71.3% Holdings Limited + 10 Elite Holding SA (t/a TMT Benelux 5,749 5,211 2005 4.8% 76.1% SiTel) + 11 Hg Renewable Power Renewable Europe 4,409 4,319 2006 4.0% 80.1% Partners LP + Energy 12 Atlas Energy Group Ltd Services UK 8,153 4,261 2007 3.9% 84.0% + 13 SLV Electronik SARL + Industrials Germany 5,962 3,850 2007 3.5% 87.5% 14 BMFCO UA (t/a Fabory) Services Benelux 7,391 2,964 2007 2.7% 90.2% + 15 Cornish Bakehouse Consumer & UK 4,200 2,207 2007 2.0% 92.2% Investments Ltd + Leisure 16 Weston Presidio Fund North 2,271 2,137 1998 2.0% 94.2% Capital III, LP America 17 Hoseasons Group Ltd + Consumer & UK 2,197 2,133 2003 2.0% 96.2% Leisure 18 SHL Group Holdings 1 Services UK 6,489 1,975 2006 1.8% 98.0% Ltd + 19 King Luxembourg Sarl Industrials Switzerland 5,535 1,428 2008 1.3% 99.3% (t/a KVT) 20 Software (Cayman), LP TMT UK 530 1,261 2006 1.2% 100.5% - re Blue Minerva 21 Hirschmann Electronics Industrials Germany - 1,129 2004 1.0% 101.5% Holdings SA + 22 Software (Cayman), LP TMT UK 253 585 2007 0.5% 102.0% - re Guildford 23 PBR Holding SA + Healthcare Europe - 209 2002 0.2% 102.2% 24 Tiger Capital Ltd + TMT UK 632 135 2008 0.1% 102.3% 25 Doc M SARL Healthcare Germany - 128 2004 0.1% 102.4% 26 ACT Venture Capital Fund Ireland 38 70 1994 0.1% 102.5% Ltd 27 Crest Avenue Ltd + Fund Ireland 41 41 1992 0.1% 102.6% 28 Addison Luxembourg SA TMT Germany - - 2005 - 102.6% + 29 W.E.T Holding Industrials Germany 7,619 - 2003 - 102.6% Luxembourg SA + 30 FTSA Holdings Ltd + Industrials North 6,813 - 2006 - 102.6% America 31 Wastebidco Ltd Industrials UK - - 2007 - 102.6% 32 Wand / Yankelovich LP Fund North 7 - 1992 - 102.6% America 33 SGI (Holdings) Ltd + Services UK 1,720 - 1999 - 102.6% 34 Schenck Process SA + Industrials Germany - - 2005 - 102.6% 35 Newchurch Ltd Healthcare UK 1,295 - 2000 - 102.6% 36 Lantor plc (formerly Industrials Ireland - - 1992 - 102.6% South Wharf plc) 37 Hofmann M.M. SA + Industrials Germany - - 2005 - 102.6% Hg5 Euro Hedge n/a n/a - (2,801) 2008 (2.6%) 100.0% Total 136,331 108,928 100.0% 100.0% + Through its management of the Company and other funds, HgCapital holds more than 50% of the voting equity shares * Including investment valuation of Â£94,732,000 and accrued interest Â£14,196,000. See Note 11 to the Financial Statements â€ The above investments, other than Hg Renewable Power Partners LP, are held through the Company's investment in HGT LP. See Note 1 of the Financial Statements. Income statement for the year ended 31 December 2008 Note Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Gains on investments and 10 - - 641 55,714 641 55,714 government securities Carried interest 3(b) - - (5,132) (6,189) (5,132) (6,189) Income 2 12,068 12,129 - - 12,068 12,129 Investment management fee 3(a) (643) (840) (1,930) (2,519) (2,573) (3,359) Other expenses 4(a) (932) (669) - - (932) (669) Return/(deficit) on ordinary 10,493 10,620 (6,421) 47,006 4,072 57,626 activities before taxation Taxation on ordinary activities 6(a) (3,048) (3,174) 550 756 (2,498) (2,418) Transfer to/(from) reserves 7,445 7,446 (5,871) 47,762 1,574 55,208 Return/(deficit) per ordinary 7 29.56p 29.56p (23.31p) 189.63p 6.25p 219.19p share The total return column of this statement represents the Company's profit and loss. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies. All recognised gains and losses are disclosed in the Revenue and the Capital columns of the Income Statement and as a consequence no Statement of Total Recognised Gains and Losses has been presented. The movements in reserves are set out in note 17 to the financial statements. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The following notes form part of these financial statements. Balance sheet as at 31 December 2007 Note 2008 2007 Â£'000 Â£'000 Fixed assets Investments held at fair value Quoted at market valuation - 6,482 Unquoted at Directors' valuation 94,732 147,885 9 94,732 154,367 Current assets Debtors 11 16,258 13,906 Government securities 12 124,014 79,723 Cash 13(a) 5,841 117 146,113 Creditors - amounts falling due within one 14 (6,751) (9,296) year Net current assets 139,362 84,450 Net assets 234,094 238,817 Capital and reserves Called up share capital 16 6,296 6,296 Share premium account 17 14,123 14,123 Capital redemption reserve 17 1,248 1,248 Capital reserve - realised 17 238,606 197,852 Capital reserve - unrealised 17 (40,943) 5,682 Revenue reserve 17 14,764 13,616 Total equity shareholders' funds 234,094 238,817 Net asset value per ordinary share 7 929.4p 948.2p These financial statements were approved and authorised for issue by the Board of Directors on 19 March 2009 and signed on its behalf by: Roger Mountford, Chairman Richard Brooman, Director The following notes form part of these financial statements. Cash flow statement for the year ended 31 December 2008 Note 2008 2007 Â£'000 Â£'000 Net cash inflow/(outflow) from operating 4(b) 1,550 (2,259) activities Taxation paid (5,514) (2,137) Capital expenditure and financial investment Purchase of fixed asset investments (25,987) (50,757) Proceeds from the sale of fixed asset 86,027 103,283 investments Net cash inflow from capital expenditure 60,040 52,526 and financial investment Equity dividends paid 8 (6,297) (3,526) Net cash inflow before management of 49,779 44,604 liquid resources Management of liquid resources Purchase of government securities 12 (185,679) (181,486) Sale/redemption of government securities 12 141,624 134,731 Net cash outflow from management of liquid (44,055) (46,755) resources Increase/(decrease) in cash in the period 13(a) 5,724 (2,151) Reconciliation of movements in shareholders' funds for the year ended 31 December 2008 Called up Share Capital redemption Note share premium Capital Revenue reserve capital account reserves reserve Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 31 December 2007 6,296 14,123 1,248 203,534 13,616 238,817 Net (deficit)/return from - - - (5,871) 7,445 1,574 ordinary activities after tax Dividends paid 8 - - - - (6,297) (6,297) At 31 December 2007 16,17 6,296 14,123 1,248 197,663 14,764 234,094 At 31 December 2005 6,296 14,123 1,248 155,772 9,696 187,135 Net return from ordinary - - - 47,762 7,446 55,208 activities after tax Dividends paid 8 - - - - (3,526) (3,526) At 31 December 2006 16,17 6,296 14,123 1,248 203,534 13,616 238,817 The following notes form part of these financial statements. Notes to the financial statements 1. Principal activity and accounting policies The principal activity of the Company is that of an investment trust company. The Company is an investment company as defined by section 833 of the Companies Act 2006 and an investment trust within the meaning of section 842 of the Income and Corporations Taxes Act 1988. Basis of preparation The accounts have been prepared in accordance with applicable UK law and Accounting Standards (GAAP) and with the Statement of Recommended Practice `Financial Statements of Investment Trust Companies' (SORP), dated January 2003 and revised in December 2005. All of the Company's operations are of a continuing nature. Further details on going concern are provided in the Directors' Report. Organisational structure In May 2003, the Company entered into a partnership agreement with HGT General Partner Limited and MUST 4 Carry LP. A limited partnership, HGT LP, was constituted to carry on the business of an investor with the Company being the sole limited partner in this entity. Under the partnership agreement, the Company made a capital commitment of its non-cash investment portfolio to HGT LP, with the result that the Company now holds an investment in HGT LP and all fixed asset investments, excluding the investment in Hg Renewable Power Partners LP, are now held by HGT LP. Note 9 and the Investment Portfolio above present the underlying investments held by HGT LP. The income and capital accruals relating to the investments held in HGT LP are shown in notes 2 and 11. Carried interest paid to the Founder Partner is shown on the Income Statement as it is the first charge on investment gains. The agreement stipulates that the associated income and capital profits, after payment of the carried interest and the General Partner share, are distributed to the Company and consequently these amounts (including the associated cash flows) are shown in the appropriate lines within the Income Statement, Cash Flow Statement and the related notes. Investment income and interest receivable As stated above, all income of HGT LP is distributed to the Company and this income is recognised and shown as income in the Financial Statements of the Company. The accounting policies below apply to the income of HGT LP. Income from equity investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Where the Company elects to receive dividends in the form of additional shares rather than cash dividends, the equivalent of the cash dividend is recognised as income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in Capital reserve - realised. Interest income is accounted for on an accruals basis. Dividends receivable on equity shares where there is no ex-dividend date and on non-equity shares are brought into account when the Company's right to receive payment is established. Management fee and finance costs The annual investment management fee and finance costs are charged 75% to Capital reserve - realised and 25% to the revenue account. This is in line with the Board's expected split of long-term returns, in the form of capital gains and income respectively, from the investment portfolio of the Company. Expenses All expenses are accounted for on an accruals basis. All administrative expenses, excluding the management fee, are charged wholly to the revenue account. Expenses that are incidental to the purchase or sale of an investment are included within the cost or deducted from the proceeds of the investment. Foreign currency All transactions in foreign currencies are translated into sterling at the rates of exchange ruling at the dates of such transactions. Foreign currency assets and liabilities at the balance sheet date are translated into sterling at the exchange rates ruling at that date. Exchange differences arising on the translation of foreign currency assets and liabilities are taken to Capital reserve - realised. Taxation Income taxes represent the sum of the tax currently payable, withholding taxes suffered and deferred tax. Tax is charged or credited in the income statement. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future, or the right to pay less, have occurred at the balance sheet date. This is subject to deferred assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences between the Company's taxable profits and its results, as stated in the financial statements, which are capable of reversal in one or more suitable periods. Investments The general principle applied is that investments should be reported at "fair value" in accordance with FRS26 and the International Private Equity and Venture Capital (`IPEV') Valuation Guidelines, October 2006 edition. Where relevant, the Company applies the policies stated below to the investments held by HGT LP, in order to determine fair value of its investment in HGT LP. Quoted: Quoted investments are designated as held at fair value, which is deemed to be bid market prices. Unquoted: Unquoted investments are also designated as held at fair value and are valued using the following guidelines: (i) initially, investments are valued at cost including fees and transaction costs, unless (iv) is required; (ii) after the receipt of the first audited financial statements following initial investment, companies are valued based on the level of maintainable earnings, an appropriate earnings multiple and the application of a marketability discount, unless (iv) is required; (iii) where more appropriate, investments are valued with reference to their net assets rather than to their earnings; and (iv) appropriate provisions are made against all individual valuations where necessary to reflect unsatisfactory financial performance or a fall in comparable ratings, leading to an impairment in value. Derivative financial instruments: Derivative financial instruments are held at fair value and are valued using quoted market prices or dealer price quotations for financial instruments traded in active markets. Both realised and unrealised gains and losses arising on investments are taken to capital reserves. Capital reserves Capital reserve - realised The following are accounted for in this reserve: (i) gains and losses on the realisation of investments; (ii) losses on investments within the portfolio where there is little prospect of realisation or recovering any value; (iii) realised exchange differences of a capital nature; and (iv) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies. Capital reserve - unrealised The following are accounted for in this reserve: (i) increases and decreases in the valuation of investments held at the year end; and (ii) unrealised exchange differences of a capital nature. 2. Income 2008 2007 Â£'000 Â£'000 Income from investments UK unquoted investment income 4,387 4,748 Foreign unquoted investment income 2,728 3,557 UK dividends 11 41 Gilt interest 4,704 3,650 11,830 11,996 Other income Deposit interest 119 133 Other interest income 119 - 238 133 Total income 12,068 12,129 Total income comprises: Dividends 11 41 Interest 12,057 12,088 12,068 12,129 3 (a) Investment management fee Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investment management fee 935 745 2,805 2,235 3,740 2,980 VAT (recovered)/charged (292) 95 (875) 284 (1,167) 379 643 840 1,930 2,519 2,573 3,359 Details of the investment management, custodian and administration contracts are disclosed in the Directors' Report below. The investment management fee is levied quarterly in arrears. Investment management fees are charged 75% to capital and 25% to revenue. For details regarding the VAT recovery, see Note 19. 3 (b) Carried interest 2008 2007 Â£'000 Â£'000 Carried interest 5,132 6,189 The carried interest payable ranks as a first distribution of capital gains on the investments held in HGT LP, a limited partnership established solely to hold the Company's investments, and is deducted prior to such gains being paid to the Company in its capacity as Limited Partner. The gross amount of capital gains of HGT LP during the period is shown on the Income Statement. Details of the carried interest contract are disclosed in the Directors' Report below. 4. Other expenses (a) Operating expenses 2008 2007 Â£'000 Â£'000 Custodian and administration fees 260 249 Directors' remuneration (note 5) 170 138 Current Auditors' remuneration - audit services 32 - - taxation and interim review 6 - Previous Auditors' remuneration - audit services - 32 - taxation and interim review 5 7 Legal and other administration costs 459 243 932 669 The Company's total expense ratio (`TER') calculated 1.06% 1.32% as a percentage of average net assets and including expenses, after relief for taxation, was: (b) Reconciliation of net return before taxation to net cash flow from operating activities 2008 2007 Â£'000 Â£'000 Total return before taxation 4,072 57,626 Gains on investments held at fair value (641) (55,714) Movement on carried interest (1,057) 1,452 Increase in accrued income (1,904) (5,237) Decrease in debtors 5 15 Increase/(decrease) in creditors 1,076 (397) Tax on investment income included within gross income (1) (4) Net cash inflow/(outflow) from operating activities 1,550 (2,259) 5. Directors' remuneration The aggregate remuneration of the Directors, excluding VAT where applicable, for the year to 31 December 2008 was Â£170,000 (2007: Â£133,000). Further information on the Directors' remuneration is disclosed in the Annual Report and Accounts. 6. Taxation on ordinary activities (a) Analysis of charge in the year Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 Â£'000 Â£`000 Â£'000 Â£`000 Â£'000 Â£`000 Current tax: UK corporation tax 2,988 3,174 (550) (756) 2,438 2,418 Prior year adjustment 60 - - - 60 - Total current tax (note 6(b)) 3,048 3,174 (550) (756) 2,498 2,418 (b) Factors affecting current tax charge for the year The tax assessed for the year is higher than the standard rate of corporation tax in the UK for a large company (28%; 30% to 31 March 2008). The differences are explained below: 2008 2007 Â£'000 Â£'000 Revenue return on ordinary activities before taxation 10,493 10,620 UK corporation tax at 28% thereon (30% to 31 March 2,991 3,186 2008) Effects of: Non taxable UK dividends (3) (12) Tax deductible expenses in capital (550) (756) Tax relief to the capital account 550 756 Tax in relation to the prior year 60 - 57 (12) Current revenue tax charge for the period (note 6(a)) 3,048 3,174 In the opinion of the Directors, the Company has complied with the requirements of Section 842 ICTA 1988 and will therefore be exempt from corporation tax on any capital gains made in the year. 7. Return and net asset value per ordinary share 2008 2007 Revenue and capital returns per share are shown below and have been calculated using the following: Â£7,445,000 Â£7,446,000 Net revenue attributable to equity shareholders after taxation Net capital (deficit)/gains for the year (Â£5,871,000) Â£47,762,000 Total return Â£1,574,000 Â£55,208,000 Number of shares in issue 25,186,755 25,186,755 Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 Return per ordinary share 29.56p 29.56p (23.31p) 189.63p 6.25p 219.19p The net asset value per share of 929.4p (2007: 948.2p) was calculated by dividing equity shareholders' funds of Â£234,094,000 (2007: Â£238,817,000) by the number of shares in issue at the year-end of 25,186,755 (2007: 25,186,755). 8. Dividends on ordinary shares Company Register Payment date 2008 2007 date Â£'000 Â£'000 Final dividend (14.0p) for the year 23 March 1 May 2007 - 3,526 ended 31 December 2006 2007 Final dividend (25.0p) for the year 27 March 11 May 2008 6,297 - ended 31 December 2007 2008 6,297 3,526 The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The total dividends payable in respect of the financial year, which form the basis of the retention test as set out in section 842 of the Income and Corporation Taxes Act 1988, are set out below: 2008 Â£'000 Revenue available for distribution by way of dividend for the year 7,445 Proposed final dividend of 25.0p for the year ended 31 December 2008 (6,297) (based on 25,186,755 ordinary shares in issue at 31 December 2008) Undistributed revenue for section 842 purposes * 1,148 * Undistributed revenue comprises 9.7% of income from qualifying investments of Â£11,830,000 (see note 2). 9. Fixed assets investments 2008 2007 Â£'000 Â£'000 Investments held at fair value through profit and loss Investments held by HGT LP Investments quoted on the London or Dublin Stock - 2,761 Exchanges Investments traded on NASDAQ - 3,721 Unquoted investments 90,413 144,330 Other investments held by the Company Unquoted investments 4,319 3,555 94,732 154,367 Equity shares 19,501 48,982 Non-equity shares 7,569 8,673 Convertible securities - 200 Fixed income securities 70,463 96,512 Derivative instruments (2,801) - 94,732 154,367 Quoted Unquoted Total Â£'000 Â£'000 Â£'000 Opening valuation as at 1 January 2008 6,482 147,885 154,367 Opening unrealised appreciation (33) (5,792) (5,825) Opening book cost 6,449 142,093 148,542 Movements in the year: Additions at cost 312 25,675 25,987 Disposals - proceeds (8,162) (77,865) (86,027) - realised gains on sales 1,401 46,428 47,829 Closing book cost of investments - 136,331 136,331 Closing unrealised depreciation - - (38,798) ( 38,798) investments - financial derivative instruments - (2,801) ( 2,801) Closing valuation of investments as at 31 - 94,732 94,732 December 2008 Investments included in the above are indirectly held by the Company through its investment in HGT LP, as set out in Note 1. The Company has indirect equity holdings of 10% or more of the equity shares in the companies listed below: Company Country of Number of equity shares Effective incorporation equity % Atlas Energy Group Ltd UK 4,706,450 47.1% Cornish Bakehouse Investments UK 382,170 38.2% Ltd Elite Holding SA (t/a SiTel) The Netherlands 4,884 15.6% FTSA Holdings Ltd UK 1,129,815 19.5% Hoseasons Group Ltd UK 267,358 12.2% Mondo Minerals Co-op Finland 1,252,217 11.4% Pulse Staffing Ltd UK 31,229,096 41.8% SGI (Holdings) Ltd UK 3,432,784 16.2% Sporting Index Group Ltd UK 136,751 13.4% Further information on those investments which, in the opinion of the Directors, have a significant effect on the Company's financial statements, is contained in the Review of principal investments. 10. Gains on investments and government securities 2008 2007 Â£'000 Â£'000 Realised gains on sales 47,266 53,017 Change in unrealised (depreciation)/appreciation (43,824) 2,697 - investments and government securities - financial derivative instruments (2,801) - 641 55,714 11. Debtors 2008 2007 Â£'000 Â£'000 Taxation recoverable 453 - Prepayments and other accrued income 1,609 1,264 Accrued income on fixed assets 14,196 12,637 Other debtors - 5 16,258 13,906 12. Government securities 2008 2007 Â£'000 Â£'000 Investments held at fair value through profit and loss Opening valuation 79,723 34,284 Purchases at cost 185,679 181,486 Sales and redemptions (141,624) (134,731) Movement in unrealised capital gains 799 239 Realised capital losses (563) (1,555) Closing valuation 124,014 79,723 13. Movement in net funds (a) Reconciliation of net cash flow to movement in net funds 2008 2007 Â£'000 Â£'000 Change in net funds 5,724 (2,151) Net funds at 1 January 117 2,268 Net funds at 31 December 5,841 117 (b) Analysis of changes in net funds At 1 Jan Cash At 31 Dec 2008 flows 2008 Â£'000 Â£'000 Â£'000 Cash 117 5,724 5,841 14. Creditors - amounts falling due within one year 2008 2007 Â£'000 Â£'000 Carried interest 5,132 6,189 Corporation taxation payable - 2,564 Sundry creditors 1,619 543 6,751 9,296 15. Risk The following disclosures relating to the risks faced by the Company are provided in accordance with Financial Reporting Standard 29, "Financial instruments: disclosures". The reference to investments in this note is in relation to the Company's direct investments and the underlying investments in HGT LP as detailed in Note 1. Financial instruments and risk profile As a private equity investment trust, the Company's primary investment objective is to achieve long-term capital appreciation by investing in unquoted companies, mostly in the UK and Europe. Additionally, the Company holds Government gilts and cash and items such as debtors and creditors arising directly from its operations. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction of the Company's net assets or a reduction in the profits available for distribution by way of dividends. These risks, valuation risk, market risk (comprising currency risk and interest rate risk) and liquidity risk and the Directors' approach to the management of them, are set out below. The Board and the Manager coordinate the Company's risk management. The objectives, policies and processes for managing the risks, and the methods used to manage the risks, that are set out below, have not changed from the previous accounting period. Valuation risk The Company's exposure to valuation risk comprises mainly movements in the value of its underlying investments, the majority of which are unquoted. A breakdown of the Company's portfolio is given above. In accordance with the Company's accounting policies, all underlying unquoted investments are valued by the Directors following the IPEVC. The Company does not hedge against movements in the value of these investments, apart from foreign exchange movements as explained below. The Company has exposure to interest rate movements, through cash and gilt holdings. In the opinion of the Directors, the diversified nature of the Company's portfolio significantly reduces the risks of investing in unquoted companies. Market risk The fair value of future cash flows of a financial instrument held by the Company may fluctuate due to changes in market prices. This market risk comprises: currency risk ,interest rate risk and equity price risk (see below). The Board of Directors reviews and agrees policies for managing these risks. The Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. Currency risk and sensitivity The Company is exposed to currency risk as a result of investing in funds and companies in foreign currencies. The sterling value, being the Company's functional currency, of these assets can be significantly influenced by movements in foreign exchange rates. The Company is partially hedged against Euro currency movements affecting the value of its investments, as explained below. The Manager monitors the Company's exposure to foreign currencies and reports to the board on a regular basis. The following table illustrates the sensitivity of the Revenue and Capital return for the year in relation to the Company's year-end financial exposure to movements in foreign exchange rates against the Company's functional currency. The rates represent the high and low positions during the year for the currencies listed. Revenue return Capital return NAV per NAV per ordinary ordinary share share Â£'000 (pence) Â£'000 (pence) Low Swiss Franc (1.5120) - - 17 - Euro (1.0195) 38 0.1 528 2.1 Euro forward contract (1.0195) - - (530) (2.1) Euro option contract (1.0195) - - (41) (0.2) Norwegian Kroner (9.8175) 45 0.2 322 1.3 US Dollar (1.4377) - - - - 83 0.3 296 1.1 High Swiss Franc (2.2624) - - (462) (1.8) Euro (1.3659) (634) (2.5) (8,830) (35.1) Euro forward contract (1.3659) - - 5,105 20.3 Euro option contract (1.3659) - - 709 2.8 Norwegian Kroner (11.6204) (234) (0.9) (1,689) (6.7) US Dollar (2.0397) (508) (2.0) (1,030) (4.1) (1,376) (5.4) (6,197) (24.6) In the opinion of the Directors, the above sensitivity analysis is not representative of the year as a whole, since the level of exposure changes as the portfolio changes through the purchase and realisation of investments to meet the Company's objectives. Portfolio hedging The Company uses derivative financial instruments such as forward foreign currency contracts and option contracts to manage the currency risks associated with its underlying investment activities. The contracts entered into by the Company are denominated in the foreign currency of the geographic areas in which the Company has significant exposure against its reporting currency. The contracts are designated as a hedge and the fair value thereof is recorded in the balance sheet as investments held at fair value. Unrealised gains and losses are taken to capital reserves. At the balance sheet date, the notional amount and value of outstanding forward foreign exchange contracts and option contracts are as follows: 2008 2007 Currency No. `000 Â£'000 No. `000 Â£'000 Forward foreign currency Euro 25,040 (3,186) - - contracts Currency option Euro 12,520 385 - - The Company does not trade in derivatives, as they are held for hedge specific exposures and have maturities designed to match the exposures they are hedging. It is the intention to hold both the financial investments giving rise to the exposure and the derivatives hedging them until maturity and therefore no net gain or loss is expected to be realised. The derivatives are held at fair value which represents the replacement cost of the instruments at the balance sheet date. Movements in the fair value of derivatives are included in the income statement. Interest rate risk and sensitivity The Company has exposure to interest rate movements as this may affect the fair value of funds awaiting investment, interest receivable on liquid assets and short-dated government securities and interest payable on borrowings. The Company has little immediate direct exposure to interest rates on its fixed assets as the majority of these are fixed rate assets and equity shares that do not pay interest. Therefore, and given that the Company has no borrowings and maintains low cash levels, the Company's revenue return is not materially affected by changes in interest rates. However, funds awaiting investment are invested in Government securities and as stated above, the valuation is affected by movements in interest rates. The sensitivity of the capital return of the Company to movements on interest rates has been based on the UK base rate. With all other variables constant, a 0.5% decrease in the above should increase the capital return in a full year by Â£617,000, with a corresponding decrease if the UK base rate were to increase by 0.5%. In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes as investments are made and repaid throughout the year. Liquidity risk Investments in unquoted companies, which form the majority of the Company's investments, may not be as readily realisable as investments in quoted companies, which might result in the Company having difficulty in meeting obligations associated with financial liabilities. Liquidity risk is currently not significant as more than 55% of the Company's net assets at the year-end are invested in liquid funds. The Board gives guidance to the Manager as to the maximum amount of the Company's resources that should be invested in any one company. For details refer to the Investment Policy section below. Equity price risk Equity price risk is the risk that the fair values of equities (including loans) decrease as a result of changes in the values of underlying businesses. The Board manages the risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Manager. The Board meets regularly and at each meeting reviews investment performance. The Board monitors the Manager's compliance with the Company's objectives, and is responsible for investment strategy. The Manager's best estimate of the effect on the net assets and total return due to a reasonably possible change in the value of unquoted securities, with all other variables held constant, is as follows: % NAV per ordinary change Â£'000 share (pence) Unquoted 10% 9,473 37.6 Financial assets of the Company 2008 2007 Fixed Floating Non Fixed Floating Non interest- interest- rate rate bearing Total rate rate bearing Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Sterling 164,415 5,841 10,672 180,928 134,673 117 21,223 156,013 Euro 31,348 - 7,708 39,056 40,136 - 20,734 60,870 Euro hedge - - (2,801) (2,801) - - - - Norwegian 7,838 - 6,553 14,391 8,887 - 7,553 16,440 kroner Swiss franc 1,428 - - 1,428 - - - - US dollar 5,211 - 2,137 7,348 6,635 - 8,145 14,780 Total 210,240 5,841 24,269 240,350 190,331 117 57,655 248,103 The fixed rate assets comprise gilts and fixed rate lendings to investee companies. Fixed rate lendings relating to fixed assets investments have a weighted average interest rate of 11.4% per annum (2007: 10.9%) and a weighted average life to maturity of 6.0 years (2007: 7.9 years). Fixed rate lendings relating to gilts have an interest rate of 4.0% per annum and matures on 7 March 2009. At the time of maturity, it is the intention to re-invest the proceeds in a gilt with a similar short dated liquidity profile. The floating rate assets consist of cash. The non interest-bearing assets represent the equity content of the investment portfolio and the financial derivative instruments. The Company did not have any outstanding borrowings at the year end (2007: Â£nil). The numerical disclosures above, exclude short-term debtors and creditors. Currency exposure The currency denomination of the Company's financial assets is shown above. Short-term debtors and creditors, which are excluded, are predominantly denominated in sterling, the functional currency of the Company. Capital management policies and procedures The Company's capital management objectives are to ensure that it will be able to finance its business as a going concern and to maximise the revenue and capital return to its equity shareholders, through an appropriate balance of equity capital and debt. The Company's capital at 31 December comprises: 2008 2007 Â£'000 Â£'000 Equity Equity share capital 6,296 6,296 Share premium 14,123 14,123 Capital redemption reserve 1,248 1,248 Retained earnings and other reserves 212,427 217,150 Total capital 234,094 238,817 As stated above, the Company did not have any outstanding borrowings at the year-end. The Board with the assistance of the Manager monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review covers: - the planned level of gearing, which takes into account the Manager's projections of cash flow; - the desirability of buying back equity shares, either for cancellation or to hold in treasury, balancing the effect (if any) this may have on the discount at which shares in the Company are trading against the advantages of retaining cash for investment; - the need to raise funds by an issue of equity shares, including issues from treasury; and - the extent to which revenue in excess of that which is required to be distributed should be retained, whilst maintaining its Section 842 status. The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. 16. Share capital 2008 2007 Nominal Nominal No.'000 Â£'000 No.'000 Â£'000 Authorised: 40,000,000 ordinary shares of 25p each 40,000 10,000 40,000 10,000 Allotted, called up and fully paid: Ordinary shares At 1 January & 31 December 25,187 6,296 25,187 6,296 17. Share premium account and reserves Share Capital Capital Capital redemption premium reserve reserve reserve Revenue account Â£'000 realised unrealised reserve Â£'000 Â£'000 Â£'000 Â£'000 As at 1 January 2008 14,123 1,248 197,852 5,682 13,616 Transfer on disposal of - - 11,511 (11,511) - investments Losses on sale of - - (563) - - government securities Net gain on sale of - - 36,318 - - investments Net movement in unrealised - - - (35,114) - depreciation of investments Dividends paid - - - - (6,297) Net revenue for the year - - - - 7,445 after tax Carried interest - - (5,132) - - Management fee charged to - - (1,380) - - capital, after taxation As at 31 December 2008 14,123 1,248 238,606 (40,943) 14,764 18. Contingent liabilities As at 31 December 2008, investment purchases of Â£14,760,000 (31 December 2007: Â£11,900,000) had been authorised and contractually committed, including the uncalled commitment to Hg Renewable Power Partners LP. In addition, the Company's derivative financial instruments held through HGT LP expire on 29 August 2012. In order to meet any potential liability arising on this date, an amount of Â£6,260,000 million, has been reserved for this purpose. This amount is therefore callable from the Company at this or any earlier date. 19. VAT recoverable On 28 June 2007, the European Court of Justice announced that it had found in favour of the Association of Investment Companies and JPMorgan Claverhouse Trust plc in declaring that management expenses of investment trusts should be exempt from VAT. Her Majesty's Revenue and Customs ("HMRC") has since announced that it has accepted that fund management services are exempt from VAT and it has withdrawn from the appeal in the JPMorgan Claverhouse Trust case. The Company will therefore no longer be charged VAT on management expenses and it is able to recover some or all of the VAT previously charged on management fees. In September 2008, the Company, through its Manager, recovered Â£1,167,000 of VAT (see Note 3(a)) on management expenses charged by the current Manager during the period May 2003 to September 2007. Between February 2001 and April 2003, the Company paid approximately Â£590,000 of VAT on its management expenses to a previous Manager. No recovery of VAT has been recognised in these financial statements in respect of this Â£590,000, as negotiations with the previous Manager are not sufficiently advanced. Recovery of VATÃ¢â‚¬Ë†suffered prior to February 2001 remains uncertain and has similarly not been recognised in these Financial Statements. 20. HgCapital Trust commitment to invest alongside the HgCapital 6 Fund The Company has committed to invest Â£250 million alongside the Manager's latest buyout fund, HgCapital 6, increasing to a maximum of Â£300 million if the size of the funds raised for HgCapital 6, including the Company's commitment, reaches Â£2 billion. The Company has agreed to pay fees on its commitment. The Company will be entitled, without penalty, to opt out of any investment which could cause the Company to lose its status as an investment trust, result in the Company not having the cash resources to meet any of its projected liabilities or expenses, or result in it not being able to pay dividends or undertake any intended share buy-back. Top ten investments % of total income share accrued capital held by Accounting Turnover PBIT* 2007 the % of % of date Currency (millions) (millions) company total total Â£'m 2008 2007 Achilles Group Apr-08 Â£ 24.1 3.0 - 7.9 4.8 - Holdings Limited Americana Jun-08 Â£ 84.0 18.7 1.3 5.7 5.3 3.0 International Holdings Limited Casa Reha SARL Dec-07 â‚¬ 152.7 25* - 6.4 7.2 - Elite Holding Dec-07 $ 147.1 21.5 1.7 15.6 4.8 4.0 SA Dec-07 Mondo Minerals Dec-07 â‚¬ 136.5 26.4* 1.3 11.4 9.0 4.8 Co-op Pulse Staffing Dec-07 Â£ 96.7 1.0 - 41.8 11.8 0.1 Limited Schleich GmbH Dec-07 â‚¬ 81.6 21.7 1.3 9.5 8.0 3.3 Sporting Index May-08 Â£ 25.8 9.5* 2.2 13.4 6.1 4.7 Visma Holdings Dec-07 NOK 2,723.2 457.7 1.8 8.5 13.2 8.9 Voyage Group Mar-08 Â£ 116.3 19.2 2.3 7.9 5.9 5.7 Ltd * Profit Before Interest and Taxation and, where applicable, before amortisation of goodwill and depreciation This table does not form part of the financial statements. Analysis of registered shareholders as at 31 December 2008 By type of holder Number of % of total Number of % of total shares holders 31 Dec 31 Dec 31 Dec 31 Dec 2008 2007 2008 2007 Nominee companies 22,997,660 91.3 90.8 351 55.1 55.0 Direct private 1,154,740 4.6 4.4 235 36.9 37.0 investors Others 1,034,355 4.1 4.8 51 8.0 8.0 Total 25,186,755 100.0 100.0 637 100.0 100.0 By size of holding Number of % of total Number of % of total shares holders 31 Dec 31 Dec 31 Dec 31 Dec 2008 2007 2008 2007 1 - 5,000 583,774 2.3 2.7 434 68.1 68.5 5,001 - 50,000 2,224,052 8.8 9.7 132 20.7 20.2 50,001 - 100,000 2,004,072 8.0 8.3 27 4.3 4.3 Over 100,000 20,374,857 80.9 79.3 44 6.9 7.0 Total 25,186,755 100.0 100.0 637 100.0 100.0 This table does not form part of the financial statements. Board of Directors Roger Mountford (Chairman) Aged 60, Roger Mountford was appointed to the Board in 2004 and became Chairman in April 2005. He spent 30 years as a merchant banker in the City of London and in the Far East, latterly as Managing Director in the Corporate Finance Department of SG Hambros, leading the Bank's practice in the private equity market. He now serves on several boards, including the Civil Aviation Authority, where he is chairman of the CAA Pension Scheme, and the Port of Dover. He is Chairman of The Housing Finance Corporation and of Enterprise LSE Limited, the commercial subsidiary of the London School of Economics. Timothy Amies Aged 70, Timothy Amies was appointed to the Board in 1991. He is a chartered accountant with over 30 years' experience of working in the City. He was a partner at Laurie Milbank & Co, stockbrokers for 16 years prior to its acquisition by Chase Manhattan Bank. He then became a director of Chase Investment Bank involved in mergers and acquisitions. Piers Brooke Aged 68, Piers Brooke was appointed to the Board in 2001. He worked for 38 years in both commercial and merchant banking, holding a variety of general management positions in the UK, Continental Europe, the Far East and North America. Most recently he was Director of Financial Strategy at National Westminster Bank. He has been a director of a number of companies. He is currently a non-executive director of Lothbury Property Trust plc. Richard Brooman Aged 53, Richard Brooman was appointed to the Board in 2007. He is a chartered accountant and is Deputy Chairman and Chairman of the Audit Committee of Invesco Perpetual UK Smaller Companies Investment Trust plc, and a non-executive Director of the Camden & Islington NHS Foundation Trust. He was formerly Chief Financial Officer of Sherwood International plc and Group Finance Director of VCI plc. Prior to this, he served as CFO of the global Consumer Healthcare business of SmithKline Beecham and held senior financial and operational positions at Mars after qualifying with Price Waterhouse. He is Chairman of the Audit and Valuation Committee of the Company. Peter Gale Aged 53, Peter Gale was appointed to the Board in 1991 and is Deputy Chairman of the Company. He has worked in many divisions of National Westminster Bank, specialising in investment management. In 1990 he became responsible for the investment management of National Westminster Bank Group Pension Funds, which subsequently became RBS Pension Trustee Ltd. Upon the purchase of Gartmore Investment Management plc in 1996, he became a principal of the enlarged fund management company and in 2003 became Managing Director of Gartmore Private Equity. He is a non-executive director of Lothbury Property Trust plc. Andrew Murison Aged 60, Andrew Murison was appointed to the Board in 2004. He was Senior Bursar of Peterhouse, Cambridge for nine years and spent the previous twelve years as a principal in private equity partnerships in the USA. Prior to that he was a fund manager, financial journalist and investment banker in the City of London. He now serves on the boards of Aberdeen Growth Opportunities Venture Capital Trust plc, Brandeaux Student Accommodation Fund Limited and Brandeaux US Dollar Fund Limited and is Chairman of JPMorgan European Investment Trust plc. All Directors are members of the Audit and Valuation, Nomination, Directors' Remuneration and Management Engagement Committees. All Directors are non-executive. Directors' report The Chairman's Statement on pages 4-6 forms part of this Directors' Report The Directors present the annual report and financial statements of the Company for the year ended 31 December 2008. BUSINESS REVIEW Background The purpose of the Business Review is to provide an overview of the business of the Company by: - Analysing development and performance using appropriate key performance indicators (`KPIs') - Outlining the principal risks and uncertainties affecting the Company - Describing how the Company manages these risks - Explaining the future business plans of the Company - Setting out the Company's environmental, social and ethical policy - Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company - Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. Principal activity and business review The principal activity of the Company is to operate as an investment trust providing access to a diversified portfolio of private equity investments. A review of the business for the year is given in the Chairman's Statement above, which forms part of this Directors' report, and in the Manager's report (also above). Status of the Company HMRC has accepted the Company as an investment trust for the purposes of section 842 of the Income and Corporation Taxes Act 1988 (ICTA) for the year ended 31 December 2007. In the opinion of the Directors, the Company has conducted its affairs so as to enable it to continue to maintain acceptance as an investment trust since that date. It is the Company's intention to continue to seek authorisation under section 842 of ICTA. The Company is not a close company within the meaning of the provisions of ICTA. The Company is an investment company within the meaning of section 833 of the Companies Act 2006. The Company's shares are eligible investments within the stocks and shares component of an Individual Savings Account (ISA). Going concern The Company's business activities, together with the factors likely to affect its future development, performance and position are described in the Chairman's Statement (above) and in the Manager's report. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Directors' report below. In addition note 15 to the financial statements includes the group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Company has considerable financial resources and as a consequence, the Directors believe that the group is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the Directors have a reasonable expectation that the Company will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Business and strategy The objective of the Company is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The strategy of the Manager is to maximise returns from mid-market private equity investments through sector specialisation and proactive work with portfolio companies. It concentrates on buyouts in Europe with enterprise values between Â£50 million and Â£500 million. No material change will be made to the investment policy without shareholder approval. Investment Policy Investments - The principal policy of the Company is to invest in a portfolio of unlisted companies that are expected to grow organically or by acquisition. - The Company's maximum exposure to unlisted investments is therefore 100% of gross assets. At the time of acquisition no single investment will exceed a maximum of 15% of gross assets. - The Company may invest in assets other than companies where the Manager believes that its expertise in private equity investment can be profitably applied. - The Company may invest in unlisted funds, whether managed by the Company's Manager or not, up to a maximum at the time of acquisition of 15% of gross assets. - The Company may invest in other listed investment companies, including investment trusts, up to a maximum at the time of acquisition of 15% of gross assets. - The Company invests its liquid funds in government or corporate securities, or in bank deposits, in each case with an investment grade rating, or in managed funds with a similar investment policy. Range and diversification - The Company invests primarily in companies whose operations are headquartered or substantially based in or which serve markets in Europe. - The Company invests in companies operating in a range of countries, but there is no policy of making allocations to specific countries or markets. - The Company invests across a range of sectors, but there is no policy of making allocations to sectors. Gearing - Underlying investments or funds are typically leveraged to enhance value creation, but it is impractical to set a maximum for such gearing. - The Company may over-commit to invest in underlying assets in order to maintain the proportion of gross assets that are invested at any time. - The Company may borrow against its portfolio. Hedging - The Company may use derivatives to hedge its exposure to interest rates, currencies, equity markets or specific investments. Borrowing facility The Company had no borrowing facility at the end of the year. The Board regularly reviews cash flow and the use of gearing. Performance In the year to 31 December 2008, the Company's net asset value per share (including dividends re-invested) increased by 0.5%. This compares with a decrease in the FTSE All-Share Index (total return) of 29.9%. The Company's ordinary share price decreased by 12.0% on a total return basis. Results and dividend The total return for the Company is set out in the Income Statement above. The total return for the year, after taxation, was Â£1,574,000 (2007: Â£55,208,000) of which Â£7,445,000 is revenue return (2007: Â£7,446,000). The Directors recommend the payment of a final dividend of 25.0p per ordinary share for the year ended 31 December 2008 (2007: 25.0p). Subject to approval of this dividend at the forthcoming Annual General Meeting (AGM), it will be paid on 11 May 2009 to shareholders on the register of members at the close of business on 3 April 2009. Key performance indicators Each Board meeting conducts a detailed review of the portfolio and reviews a number of indices and ratios to understand the impact on the Company's performance of the individual portfolio holdings. The KPIs used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts include net asset value per share, share price, earnings per share, average monthly trading volumes and cash flow. The Directors recognise that it is in the long-term interest of shareholders that shares do not trade at a significant discount to the prevailing NAV and they also monitor the Company's discount or premium regularly. Principal risks The key risks faced by the Company are set out below. The Board regularly reviews and agrees policies for managing each risk, as summarised below. Performance risk The Board is responsible for deciding the investment strategy to fulfil the Company's objectives and for monitoring the performance of the Manager. An inappropriate strategy may lead to poor performance. To manage this risk the Manager provides an explanation of all investment decisions and the rationale for the composition of the investment portfolio. The Manager monitors and maintains an adequate spread of investments, based on the diversification requirements inherent in the Company's investment policy, in order to minimise the risks associated with particular countries or factors specific to particular sectors. Income/dividend risk The amount of dividends and future dividend levels will depend on the income received and receivable from the Company's underlying portfolio. Regulatory risk The Company operates as an investment trust in accordance with section 842 of ICTA. As such, the Company is exempt from corporation tax on any capital gains realised from the sale of its investments. The Manager monitors investment movements, the level and type of forecast income and expenditure, and the amount of retained income (if any) to ensure that the provisions of section 842 are not breached. The results are reported to the Board at each meeting. Operational risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent upon the control systems of the Manager and the Company's other service providers. The security, for example, of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These are regularly tested and monitored and an internal control report, which includes an assessment of risks together with procedures to mitigate such risks, is prepared by the Manager and reviewed by the Audit and Valuation Committee twice a year. Financial risks The Company's investment activities expose it to a variety of financial risks that include valuation risk, liquidity risk, market price risk, foreign exchange risk and interest rate risk. Further details are disclosed in Note 15 to the Financial Statements, together with a summary of the policies for managing these risks. Liquidity risk The Company, by the very nature of its investment objective, invests in unquoted companies, and liquidity in their securities can be constrained, potentially making the investments difficult to realise at, or near, the Directors' published valuation at any one point in time. The Manager has regard to the liquidity of the portfolio when making investment decisions, and the Company manages its liquid resources to ensure sufficient cash is available to meet its contractual commitments. Social, environmental and ethical policy HgCapital Trust seeks to invest in companies that are well managed, with high standards of corporate governance. The Directors believe this creates the proper conditions to enhance long-term shareholder value. In aiming to achieve a high level of corporate performance, the Company adopts a positive approach to corporate governance and engagement with companies. Socially responsible investment The Company has committed to invest in the Hg Renewable Power Partners fund, which the Board believes offers a profitable route for the Company to participate in efforts to combat climate change. The Manager addresses other investment opportunities on a sector basis. The sectors chosen do not generally raise ethical issues. FUTURE PROSPECTS The Board's main focus is on the achievement of capital growth and the future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in the Chairman's statement and the Manager's report at the beginning of this document. DERIVATIVE TRANSACTIONS On 27 August 2008, the Manager, on behalf of the Company entered into a â‚¬25 million forward foreign exchange contract and a â‚¬12.5 million option contract with a duration of 4 years, in order to partially offset the effect of sterling exchange rate movements on euro currency exposure. The contract secures a sterling/euro exchange rate of â‚¬1.24 on the forward contact and a strike price of â‚¬1.40 on the option contract compared with an average exchange rate of â‚¬1.42 at which euro-denominated assets in HgCapital 5 were acquired. The current write-down of Â£2.8 million is more than offset by unrealised foreign exchange gains on the euro-denominated assets. The contract requires no cash funding until expiry, by which time the Manager expects to be in a position to cover any funding requirement from euro proceeds from the sale of investments. Further details are provided in Note 15 of the financial statements. DIRECTORS The Directors in office during the year and at the date of this report are listed in the Board of Directors section above. The Board undertook a review of committee membership and the resultant position is detailed in the Corporate Governance and Directors' responsibilities report below. The Board has noted the recommendation in the AIC Code of Corporate Governance that non-executive directors serving longer than nine years since election should be subject to annual re-election. Accordingly, Mr Amies and Mr Gale will offer themselves for re-election at this year's Annual General Meeting. The Board has considered the retiring Directors' performance as part of its evaluation process and recommends that both be proposed for re-election, based on the following assessment of their contribution to the operation of the Board. Mr Tim Amies A chartered accountant, he has over thirty years' experience in financial markets. The Board believes that Mr Amies will continue to be an effective member of the Board and Audit & Valuation Committee, and his re-election is recommended to shareholders. Mr Peter Gale Peter Gale is professionally responsible for the selection and monitoring of a wide range of private equity managers on behalf of a major institutional investor. His extensive knowledge of the private equity industry and of trends in this market is of great value to the Board, especially when considering the strategy of the Company and of the Manager. The Board recommends that Mr P Gale be re-elected. None of the Directors has a service contract with the Company. Directors' interests The interests of those persons who were Directors at the end of the year in the ordinary shares of the Company were as follows (all holdings are beneficial unless stated otherwise): 31 December 1 January 2008 2008 T J Amies 15,000 30,000 P L Brooke 2,000 2,000 R J Brooman 1,200 1,200 P Gale 9,996 9,996 R P Mountford 10,289 10,000 A H Murison 8,000 1,281 Substantial interests The Company is aware that the following shareholders had an interest in 3% or more of the voting rights of the Company on 18 March 2009, being the latest practical date prior to publication of this report: Ordinary % of voting shares rights Oxfordshire County Council 1,782,500 7.1 Hg Investment Managers Ltd* 1,725,803 6.9 East Riding Pension Fund 1,300,000 5.2 The Scottish Investment Trust plc 1,200,000 4.8 Hg Pooled Management Ltd** 1,019,619 4.0 Legal & General Investment Managers Ltd 1,003,177 4.0 * Held by HgCapital staff ** Managed on behalf of RW SPLP LP, where the beneficial owner is the BBC Pension Trust Limited Fund RW The Company is not aware that any other shareholder had an interest of 3% or more in the Company's ordinary share capital as at 18 March 2009. Investment management and administration Throughout 2008, the Company's assets were managed by Hg Pooled Management Ltd (HgCapital), under management arrangements implemented in May 2003. A management fee of 1.5% per annum of NAV, excluding investments in other collective investment funds, was payable to HgCapital. The Company's shareholders agreed, at an Extraordinary General Meeting held on 14 January 2009, to amend these arrangements. Consequently, with effect from 1 January 2009, the Company will pay no management fees to HgCapital in respect of its holdings of cash or liquid assets. The Company will continue to pay a fee of 1.5% per annum on the current value of its existing private equity portfolio, excluding investments in other collective investment funds. The Company will also pay charges in respect of its commitment to invest alongside HgCapital's new buyout fund, HgCapital 6. These charges will be the same as those payable by all institutional investors in the new fund. A charge of 1.75% per annum will be payable on the commitment during the investment period of the fund, which is expected to last for between four and five years. The charge will then reduce to 1.5% per annum calculated on the basis of the original cost of the assets, less the original cost of any assets which have been realised or written off. The incentive scheme introduced in May 2003 will remain in place for the Company's existing investments. Under this scheme, the Manager is entitled to a carried interest, in which the executives of HgCapital participate, in order to provide an incentive to deliver good performance. This arrangement allows for a carried interest of 20% of the excess annual growth in average NAV over an 8% preferred return, based on a three-year rolling average NAV, calculated half-yearly and aggregated with any dividends declared by the Company in respect of that financial year. In respect of the Company's investment alongside HgCapital 6, this incentive scheme will be replaced by a carried interest arrangement identical to that which applies to all other investors in HgCapital 6. Under this arrangement, HgCapital will receive 20% of aggregate profits after the repayment to the Company of its invested capital and the payment of a preferred return thereon of 8% per annum. HgCapital has been appointed as Secretary and administrator of the Company for a fee equal to 0.1% of NAV. Hg Investment Managers Limited is the custodian of the Company's assets and its fees and expenses are met by HgCapital. VAT recovery In common with other investment trusts, the Company has, through its Manager pursued the recovery of VAT previously charged on investment management fees. During the year the Company received Â£1,167,000; further recoveries are being sought as described in Note 19 to the Financial Statements above. Continued appointment of the Manager The Board has concluded that it is in shareholders' interests that HgCapital should continue as Manager of the Company on the existing terms. The Board considers the arrangements for the provision of investment management and other services to the Company on an ongoing basis and a formal review is conducted annually. As part of this review, the Board considered the quality and continuity of the Manager's personnel, succession planning, sector and geographic coverage, investment process and the results achieved to date. The Board also considered the Manager's ongoing commitment to the promotion of the Company's shares. The principal contents of the agreement with the Manager have been set out in the previous section. Having considered the terms of this agreement and those of other private equity investment trust companies, the Board considers that the terms of the agreement represent an appropriate balance between cost and incentivisation of the Manager. Voting policy The exercise of voting rights attached to the Company's portfolio has been delegated to HgCapital, whose policy is to participate actively as a shareholder, reviewing each case separately. Donations The Company made no political or charitable donations during the period. Payment of suppliers It is the policy of the Company to pay for the supply of goods and services within the terms agreed with the supplier. The Company has no trade creditors. Annual General Meeting The AGM of the Company, which will include a presentation by the Manager, will be held at the offices of HgCapital, 2 More London Riverside, London SE1 2AP on Thursday 7 May 2009 at 12 noon. Light refreshments will be available at the conclusion of the AGM. Notice of the Annual General Meeting is given in the Annual Report and Accounts. Authority to buy back shares The Directors' authority to buy back shares was renewed at last year's AGM and will expire on 24 October 2009. Although no shares were bought back during the year, the Directors are proposing to renew the authority at the forthcoming AGM, and are seeking authority to purchase up to 3,775,494 ordinary shares (being 14.99% of the issued share capital) as set out in Resolution 8. This authority, unless renewed, will expire on 6 November 2010. The Authority will be used where the Directors consider it to be in the best interest of shareholders. Purchases of ordinary shares will only be made through the market for cash at prices below the prevailing NAV per ordinary share. Under the Listing Rules of the Financial Services Authority, the maximum price that can be paid is 5% above the average of the market values of the ordinary shares for the five business days before the purchase is made. The minimum price that may be paid will be 25.0p per share (being the nominal value of a share). Any shares purchased under this authority will be cancelled. In making purchases, the Company will deal only with member firms of the London Stock Exchange. Authority of Directors to allot shares Resolutions 9 and 10 to be proposed at the AGM are similar to the authorities given to the Directors at last year's AGM. By law, directors are not permitted to allot new shares (or to grant rights over shares) unless authorised to do so by shareholders. Resolution 9 gives the Directors, for the period until the conclusion of the AGM in 2010, the necessary authority to allot securities up to an aggregate nominal amount of Â£314,825, which is equivalent to 1,259,300 ordinary shares of 25.0p each, or approximately 5% of the issued ordinary share capital. There are no shares held in treasury. The Authority will be used where the Directors consider it to be in the best interest of shareholders. Resolution 10 empowers the Directors until the conclusion of the AGM in 2010 or, if earlier, the expiry of fifteen months from the date on which the resolution is passed, to allot securities for cash, otherwise than to existing shareholders on a pro rata basis, up to an aggregate nominal amount of Â£314,825, which is equivalent to 1,259,300 ordinary shares or approximately 5% of the issued share capital. In no circumstances would the Directors use this authority to dilute the interests of existing shareholders by issuing shares at a price that is less than the NAV attributable to the shares at the time of issue. Auditor Each of the persons who is a director at the date of approval of this report confirms that: - so far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and - the director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985. During the year Ernst & Young LLP resigned as auditor to the Company. On 2 December 2008, Deloitte LLP was appointed as independent auditor and has indicated its willingness to continue in office. Resolutions proposing its re-appointment and authorising the Directors to determine its remuneration will be submitted at the AGM. By order of the Board Hg Pooled Management Ltd Secretary 19 March 2009 Corporate governance and Directors' responsibilities The Board of HgCapital Trust plc has considered the principles and recommendations of the AIC Code of Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to HgCapital Trust plc. The Board considers that reporting against the principles and recommendations of the AICÃ¢â‚¬Ë†Code, and by any reference to the AIC Guide (which incorporates the Combined Code), will provide better information to shareholders. The Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Combined Code, except as set out below. The Combined Code includes provisions relating to: - the role of the chief executive - executive directors' remuneration - the need for an internal audit function. For the reasons set out in the AIC Guide, and in the preamble to the Combined Code, the Board considers these provisions are not relevant to the position of HgCapital Trust plc, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions. The Board The Board consists of six non-executive Directors, all of whom the Company deems to be independent of the Company's Manager. In the Board's opinion Mr Amies continues to qualify as an independent Director despite his length of service, as he is independent of the Manager and free from any business or other relationships that could materially interfere with the exercise of his judgment. For the same reasons and having considered Mr Gale's position as a senior employee of Gartmore, a shareholder of the Company, the Board considers him to be independent. Both Mr Gale and Mr Brooke are non-executive directors of Lothbury Property Trust plc. Their fellow Directors consider that each demonstrates that they are independent in character and judgment and that this common directorship of another company does not impede their independence. The Directors' biographies above highlight their wide range of business experience. The Board does not feel that it would be appropriate to adopt a policy on tenure whereby Directors serve for a limited period, as, with a private equity portfolio, historical knowledge is useful. The structure of the Board is such that it is considered unnecessary to identify a senior non-executive Director other than the Deputy Chairman. The Board is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. Strategic issues and all operational matters of a material nature are determined by the Board. The Directors retire by rotation at every third Annual General Meeting (AGM), except for Directors who have served for longer than nine years, who stand for re-election annually. Any Directors appointed to the Board since the previous AGM also retire and stand for election. Messers Gale and Amies were both appointed on 1 May 1991. The AIC Code of Corporate Governance recommends that any non-executive director serving for longer than nine years be subject to annual re-election. Therefore Mr Gale and Mr Amies will stand for annual re-election at this year's AGM. The Board's recommendations that both should be re-elected are set out in the Directors section of the Directors' Report above. The Board meets at least five times a year and there is regular contact with HgCapital between these meetings. The Directors also have access to the advice and services of the Secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Where necessary, in the furtherance of their duties, the Directors may seek independent professional advice at the expense of the Company. The Board has responsibility for ensuring that the Company keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable it to ensure that the financial statements comply with UK Company Law. The Board is also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. Finally, it is the Board's responsibility to present a balanced and understandable assessment of the Company's position in all public communications. The Company has maintained appropriate directors' liability insurance cover throughout the year. Board and Audit and Valuation Committee Directors' evaluation The Board formally reviews its performance on a regular basis, together with that of the Audit and Valuation Committee. An appraisal system has been agreed by the Board for evaluation on a regular basis of the Board, the Audit and Valuation Committee, the Chairman and the individual Directors. The evaluation for the year ended 31 December 2008 has been carried out. This took the form of a detailed questionnaire followed by discussions to identify how the effectiveness of the Board's activities, including its committees, policies or processes might be improved. The results of the evaluation process were presented to and discussed by the Board and it was agreed that the current composition of the Board and its committees reflects a suitable mix of skills and experience and that the Board was functioning effectively. The Board is satisfied that collectively the members of the Audit and Valuation Committee have a sufficient level of recent and relevant financial experience. Delegation of responsibilities The Board has delegated a number of areas of responsibility, outlined below. Management and administration The management of the investment portfolio has been delegated to HgCapital. HgCapital has also been appointed as Secretary and administrator to the Company: certain of its corporate secretarial duties have been delegated to Capita Company Secretarial Services Limited (CCSS) and certain of its fund administration duties have been delegated to Capita Financial Group Limited (CFG) who have teams specialising in providing secretarial and accounting services to investment trusts. Custody and settlement services are undertaken by Hg Investment Managers Limited (authorised and regulated by the Financial Services Authority), which in turn has appointed The Bank of New York Europe Limited (BNYE), a subsidiary of The Bank of New York Mellon, as sub-custodian. The Board has delegated the exercise of voting rights attaching to the securities held in the portfolio to HgCapital. HgCapital does not operate a fixed policy when voting but reviews each case separately. All other matters are reserved for the approval of the Board. Board committees All the Directors of the Company are non-executive and serve on the Nomination Committee, which meets when necessary to select and propose suitable candidates for appointment. When looking for a new Director, the Board assesses the skills of the Board as a whole, to identify any areas that need strengthening. External search consultants are also used. Separate Audit & Valuation and Management Engagement Committees have been established. These committees consist of all six Directors, each of whom has no previous or current connection with the investment management of the Company other than in their capacity as a Director of the Company. The Audit and Valuation Committee, which has written terms of reference detailing its scope and duties and which meets at least four times per year, examines the effectiveness of the control systems. All the Directors of the Company, including the Chairman, are members of this committee to enable them to be kept fully informed of any issues that may arise and to participate fully in discussions on portfolio valuation. The committee reviews the half-yearly and annual reports and also receives information from the relevant corporate audit and compliance departments. The committee reviews the scope, results, cost effectiveness, independence and objectivity of the external auditor. Semi-annually, at each balance sheet date, the committee reviews in detail the valuation of the unquoted investments within the portfolio. Non-audit fees of Â£5,000 were paid to Ernst & Young LLP for reviewing the half-yearly financial statements. During their appointment, Ernst & Young LLP provided details of any other relationship with the Manager and confirmed to the Board that in its opinion it was independent of the Manager. Non-audit fees of Â£4,000 were paid to Deloitte LLP for a review of the new HgCapital 6 commitment terms. Deloitte LLP has provided details of any other relationship with the Manager and confirmed to the Board that in its opinion it is independent of the Manager. Based on the review of non-audit services provided by Ernst & Young LLP and Deloitte LLP, the Board has concluded that both firms are independent of the Company. The Board has considered the independence and objectivity of the Auditors and has conducted a review of non-audit services which the Auditors have provided. It is satisfied in these respects that Deloitte LLP has fulfilled its obligations to the Company and its Shareholders. The external auditor is invited to attend the Audit and Valuation Committee meeting at which the annual accounts are considered and has the opportunity to meet with the committee without representatives of the Manager being present. The Management Engagement Committee, which also has written terms of reference detailing its scope and duties, regularly reviews the terms of the investment management and administration contracts. The Directors' Remuneration Committee, which is made up of all the Directors, meets when necessary to consider any change to the Directors' remuneration. The remuneration of the Chairman and Directors is reviewed against the fees paid to directors of other specialist investment trusts and investment trusts of a comparable size, as well as taking account of published data. The terms of reference of all the committees are available on request and will also be available at each Annual General Meeting. Membership of the Board Committees Mr Mountford is Chairman of the Directors' Remuneration Committee, the Management Engagement Committee and the Nomination Committee. Mr Brooman is the Chairman of the Audit & Valuation Committee. The composition of the Board's standing committees was considered at the year-end and it was felt appropriate that every non-executive Director should be a member of all committees. With a relatively small Board, it was deemed both proportionate and practical to involve all the independent Directors in each committee. Attendance record The following table summarises the Directors' attendance at meetings of the Board and Audit and Valuation Committee, held in the year to 31 December 2008, compared with the number they were eligible to attend. Director Number of meetings attended/eligible to attend Board A&VC Tim Amies 6/6 5/5 Piers Brooke 6/6 4/5 Richard Brooman 6/6 5/5 Peter Gale 5/6 4/5 Roger Mountford 6/6 5/5 Andrew Murison 6/6 5/5 The Management Engagement Committee and Remuneration Committee met on at least one occasion during the year. Internal controls The Board is responsible for the internal controls of the Company and for reviewing their effectiveness, for ensuring that financial information published or used within the business is reliable, and for regularly monitoring compliance with regulations governing the operation of investment trusts. The Board continually reviews the effectiveness of the internal control system. The processes indicated below have been put in place to ensure that the Company fully complied with the AIC Code of Corporate Governance for the year ended 31 December 2008 and up to the date of this report, and will continue to do so for the year ending 31 December 2009. As part of the Board's responsibility for the internal control system, an ongoing process has been established in conjunction with HgCapital, CCSS and CFG for identifying, evaluating and managing the Company's significant risks. Controls relating to the risks identified, covering financial, operational, compliance and risk management, are embedded in the operations of HgCapital, CCSS, CFG, BNYE and other outsourced service providers. There is a monitoring and reporting process to review controls put in place to track risks identified, carried out by the compliance function within HgCapital and the auditors of the other organisations.This accords with the guidance in the Turnbull Report. HgCapital, CCSS and CFG report to the Company on their review of internal controls (which for HgCapital includes checks on the sub-custodian) formally on a semi-annual basis and orally at each Board and Audit and Valuation Committee meeting. The Board has taken actions to remedy any significant failings or weaknesses identified. The Board reviews the `whistle blowing' procedures of HgCapital, CCSS and CFG to ensure that the concerns of their staff may be raised in a confidential manner. The Company does not have its own internal audit function, as all the administration is delegated to the Manager. This matter is kept under annual review. HgCapital prepares cash flow forecasts and management accounts, which allow the Board to assess the Company's activities and to review its performance. The Board and HgCapital have agreed clearly-defined investment criteria, specified levels of authority and exposure limits. Reports on these issues, including performance statistics and investment valuations, are submitted to the Board at each meeting. HgCapital's evaluation procedure and financial analysis of the companies within the portfolio include detailed research and appraisal, and also take into account environmental policies and other business issues. The Board recognises that these control systems can only be designed to manage, rather than eliminate the risk of failure to achieve business objectives and to provide reasonable, but not absolute, assurance against material misstatement or loss. It relies on the operating controls established by HgCapital, CCSS, CFG and BNYE. Financial statements The Board is required to ensure that the financial statements give a true and fair view of the affairs of the Company as at the end of each financial year and of the profit of the Company for that period. The Board considers that in preparing the financial statements the Company has used appropriate accounting policies, consistently applied (except where disclosed) and supported by reasonable and prudent judgments and estimates and that all accounting standards that it considers to be applicable have been followed. Relations with shareholders All shareholders have the opportunity to attend and vote at the AGM. The notice of the AGM which is sent out at least twenty working days in advance sets out the business of the meeting and any item not of an entirely routine nature is explained in the Directors' report above. Separate resolutions are proposed for substantive issues. Both the Chairman of the Board and the Chairman of the Audit and Valuation Committee, together with representatives of HgCapital, are available to answer shareholders' questions at the AGM. Proxy voting figures are announced to shareholders at the AGM. HgCapital holds regular discussions with major shareholders, the feedback from which is greatly valued by the Board. In addition, the Chairman and Directors are available to enter into dialogue and correspondence with shareholders regarding the progress and performance of the Company. A section of the Annual Report and Accounts entitled "Shareholder Information" provides information useful to shareholders. Report of the independent auditor to the members of HgCapital Trust plc We have audited the financial statements of HgCapital Trust plc for the year ended 31 December 2008 which comprise the Income statement, the Balance sheet, the Cash flow statement, the Reconciliation of movements in shareholders' funds and the related notes 1 to 20. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' remuneration report that is described as having been audited. This report is made solely to the Company's members, as a body, in accordance with Section 235 of the Companies Act 1985. 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 auditors' 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. Respective responsibilities of Directors and auditors The Directors' responsibilities for preparing the annual report, the Directors' remuneration report and the financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors' responsibilities. Our responsibility is to audit the financial statements and the part of the Directors' remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors' remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors' report is consistent with the financial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed. We review whether the Corporate governance statement reflects the Company's compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Company's corporate governance procedures or its risk and control procedures. We read other information contained in the annual report and consider whether it is consistent with the audited financial statements. The other information comprises only the Investment objective, Financial highlights, Chairman's statement, Ten year track record, Investing in private equity, Manager's strategy, Manager's tactics, Manager's review, Investments, Realisations, Review of principal investments, Renewable energy, Investment portfolio, Top ten investment listing, Analysis of registered shareholders, Board of Directors, Directors' report and business review, Statement of Directors' responsibilities, the unaudited part of the Directors' remuneration report, Corporate governance and Directors' responsibilities, Shareholder information, Glossary, Notice of Annual General Meeting and Management and administration. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors' remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors' remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' remuneration report to be audited. Opinion In our opinion: - the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 December 2008 and of its profit for the year then ended; - the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and - the information given in the Directors' report is consistent with the financial statements. Deloitte LLP Chartered Accountant and Registered Auditors London 19 March 2009 Management and administration HgCapital Trust plc 2 More London Riverside London SE1 2AP www.hgcapitaltrust.com Registered office (Registered in England No. 1525583) 2 More London Riverside London SE1 2AP Manager HgCapital*â€ 2 More London Riverside London SE1 2AP Telephone: 020 7089 7888 www.hgcapital.com Secretary and administrator HgCapital*â€ 2 More London Riverside London SE1 2AP Telephone: 020 7089 7888 www.hgcapital.com Stockbroker Winterflood Securities* The Atrium Building Cannon Bridge 25 Dowgate Hill London EC4R 2EA Telephone: 020 7621 0004 www.winsresearch.co.uk Custodian Hg Investment Managers Limited* 2 More London Riverside London SE1 2AP Registrar Computershare Investor Services plc* The Pavilions Bridgwater Road Bristol BS99 6ZY Telephone: 0870 702 0131 www-uk.computershare.com/investor Independent auditor Deloitte LLP 2 New Street Square London EC4A 3BZ AIC Association of Investment Companies www.theaic.co.uk LPEQ Listed Private Equity www.lpeq.com HgCapital Trust is a founder member of LPEQ (formerly iPEIT). LPEQ is a group of private equity investment trusts and similar vehicles listed on the London Stock Exchange and other major European stock markets, formed to raise awareness and increase understanding of what listed private equity is and how it enables all investors - not just institutions - to invest in private equity. LPEQ provides information on private equity in general, and the listed sector in particular, undertaking and publishing research and working to improve levels of knowledge about the asset class among investors and their advisers. *Authorised and regulated by the Financial Services Authority. â€ HgCapital is the trading name of Hg Pooled Management Limited In accordance with LR 9.6.3, copies of the above document have today been sent to the Document Viewing Facility, The Financial Services Authority, 25 The North Colonnade, London E14 5HS.

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