Annual Financial Report
STRATEGIC EQUITY CAPITAL PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2013
The full Annual Report and Accounts can be accessed via the Company's website
at: www.strategicequitycapital.com or by contacting the Company Secretary by
telephone on 01392 412122.
INVESTMENT OBJECTIVE
The investment objective of the Company is to achieve absolute returns (i.e.
growth in the value of investments) rather than relative returns (i.e.
attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
The Company's investment policy can be found within the Extracts from the
Report of the Directors, below.
INVESTMENT MANAGER'S STRATEGY
The Investment Manager, SVG Investment Managers Limited ("SVGIM"), employs a
strategy to invest in publicly quoted companies which create value through
strategic, operational and management change. SVGIM follows a practice of
constructive corporate engagement and aims to work with management teams in
order to enhance shareholder value.
A more detailed explanation can be found in the Investment Manager's Report
below.
FINANCIAL SUMMARY
At 30 June
2013 2012 % change
Performance
Total return (1) 25.40% (0.92%)
Capital return
Net as set value (statutory) per Ordinary 126.36p 101.96p 23.93%
share
Ordinary share price (mid-market) 104.25p 82.00p 27.13%
Discount of Ordinary share price to net 17.50% 19.58%
asset value
Average discount of Ordinary share price
to net asset value for year 17.71% 17.65%
Total assets (£'000)(2) 79,791 69,074 15.52%
Equity shareholders' funds (£'000) (2) 78,396 68,639 14.21%
Ongoing charges (3) 1.16% 1.15%
Revenue return per Ordinary share 1.45p 1.61p
Dividend yield (4) 1.44% 1.83%
Proposed final dividend for year 1.50p 1.50p n/a
Ordinary shares in issue with voting
rights (2) 62,039,682 67,317,324 (7.84%)
Year's Highs/Lows High Low
Net asset value per Ordinary share 127.25p 100.57p
Ordinary share price 106.50p 81.25p
(1) Total return is the increase/decrease per share in net asset value plus
dividends paid.
(2) Semi-annual tender offers took place in November 2012 and May 2013 resulting
in 5,277,642 shares being bought back for cancellation during the year, at a
cost of £5,645,000 (including stamp duty). Further information on the tender
offer process can be found below.
(3) The ongoing charges figure has been calculated using the Association of
Investment Companies' ("AIC's") recommended methodology and relates to the
ongoing costs of running the Company. Non-recurring fees are therefore excluded
from the calculation.
(4) Dividend yield is calculated using the proposed dividend for the year and the
closing share price.
CHAIRMAN'S REPORT
Introduction
I am pleased to report that over the financial year the Company continued to
see healthy gains in the value of its portfolio companies. In addition
realisations significantly reduced its exposure to unlisted investments.
The Manager's focus on high quality smaller companies with strong competitive
positions in growing niche markets led to the majority of the increase in
portfolio value being driven by sustainable earnings growth rather than
re-rating and market sentiment.
Performance
As at 30 June 2013 the Company had net assets of £78.4 million (126.4p per
share). This represented an increase of 23.9% over the previous year on a net
assets per share basis and 14.2% growth in net assets. Including dividends the
Company delivered a total return to shareholders of 25.4% over the 12 months.
In addition, the Company has returned 8% of its capital to shareholders through
tender offers at a premium to market value.
The Company's NAV per share has delivered a total return of 92.7% over the past
three years, significantly exceeding the 61.6% return from the FTSE Smaller
Companies ex Investment Trust index, delivering attractive absolute returns and
outperforming on a rolling three year basis. The five year NAV per share return
is also comfortably ahead of the index. This long term performance partially
reflects the refinements made to the investment process following the financial
crisis, and continues to confirm my confidence in the Company's investment
strategy.
Although the growth of the Company's NAV lagged the FTSE Smaller Company index
over the past year, this has been a direct result of the clearly stated policy
of the Manager to only invest for the long term in higher quality companies
with strong balance sheets and limited exposure to discretionary consumer
spending. In comparison, much of the return of the index was driven by a short
term re-rating of higher risk, highly indebted, typically lower quality
companies. Some of these companies, such as Thomas Cook, were larger
constituents of the index which saw astonishing rises in their share prices,
leading to a disproportionate impact on the total index return. Notably, the
Company's NAV growth over the year was delivered with lower volatility than the
market and very low beta, leading to a steady increase in value driven by
company performance rather than market sentiment. This is reflected in the
Company having been awarded a maximum 5 Crown rating by Trustnet for its risk
adjusted performance.
Tender Mechanism
The average discount to NAV at which the Company's shares traded remained
unchanged at 17.7% over the year. It is worth noting that the level of the
discount has been narrowing since the end of 2009. The discount narrowed
significantly in the run up to the tender offers.
The Board
At the last AGM I gave notice of my intention to step down as Chairman of your
Company at the forthcoming AGM. During the year it became apparent that there
was a possibility of a change in the ownership of our Manager following the new
relationship of SVG Capital (the owner of our Manager) and Aberdeen. This
change of ownership has now been announced. Your Board agreed that it would be
in the best interests of your Company for the Board to remain unchanged until
the acquisition is completed and the new arrangements are working
satisfactorily. The Board will then take the necessary steps to recruit a
replacement Chair and refresh Board membership as we think appropriate.
Investment Manager
The various improvements made to the investment process since the financial
crisis has led to a clear improvement in the Company's performance and
consistency of returns. I remain confident that the Manager's approach to
investment should create value for shareholders over the long term. Having
reviewed the Investment Manager's reports I can confirm that it has complied
with our investment restrictions and the Financial Conduct Authority ("FCA")
rules.
Hansa Aktiengesellschaft ("Hansa"), a Swiss-based international investment and
holding company with total assets of approximately US$1.8 billion, has entered
into an agreement to acquire the Manager, SVG Investment Managers Limited
("SVGIM"), from SVG Capital plc. This has been approved by the FCA. Hansa will
be the majority owner of SVGIM; the senior management of SVGIM will purchase a
significant minority stake in SVGIM on the same terms as Hansa. SVGIM will
retain its successful investment culture and process within the new structure
but with significantly greater assets to manage or advise. The current
investment managers of Strategic Equity Capital will be unchanged, and retain
complete investment autonomy, ensuring continuity of approach.
Banking Arrangements
The Company does not currently maintain a bank facility and does not operate
with any leverage. The Board and the Manager reviews the appropriateness of the
Company's banking and leverage arrangements on a periodic basis.
Dividend
The Directors continue to expect that returns for shareholders will derive
primarily from the capital appreciation of the shares rather than from
dividends. The Board is proposing a final dividend of 1.50p per Ordinary share
for the year ending 30 June 2013, payable on 15 November 2013 to holders on the
register as at 18 October 2013.
AGM
The Annual General Meeting of the Company will be held at 11.30am on Tuesday 5
November 2013 at the offices of Canaccord Genuity Limited, 1st Floor, 41
Lothbury, London EC2R 7AE. Shareholders are asked to register at 1st Floor
Reception upon arrival.
Continuation Vote
At each AGM of the Company, shareholders are given the opportunity to vote on
an ordinary resolution that the Company continues as an investment trust. The
Company's net asset value performance, on a total return basis, has been
strong, up 25.4% over the year to 30 June 2013 (albeit lagging the FTSE Small
Cap ex Investment Companies Index for the year), and outperforming the FTSE
Small Cap ex Investment Companies Index on this basis over three and five
years.
In addition, your Board is of the opinion that there remain attractive
investment opportunities in selected companies. Accordingly, the Board is
recommending that shareholders should vote in favour of the continuation
resolution.
AIFMD
The Alternative Investment Fund Managers' Directive came into force in July of
this year. Alternative Investment Fund Managers ("AIFMs") have until 22 July
2014 to obtain the relevant authorisation or registration under the Directive.
We expect that the Company will not fall within the full scope of the Directive
due to its size and lack of gearing but the question of who should be the
Company's AIFM remains, and the Board is considering the various options.
Marketing Activities
The Manager and the Company's broker continue to work together to broaden the
shareholder base. I am optimistic that the Company's narrowing discount, long
term track record and SVGIM's increased marketing resource should all combine
to make further progress over the next year.
Outlook
The Board shares the Manager's belief that the prospects for the Company remain
good. The valuation of the portfolio remains attractive. The underlying companies
are performing well and have strong balance sheets. The efficacy of the Manager's
improved investment process has become increasingly visible in the Company's
track record, which has continued to lead to interest from potential new
shareholders as well as awards from external market rating agencies.
J Hodson
12 September 2013
Directors
John Hodson (Chairman)
Sir Clive Thompson (Deputy Chairman)
John Cornish
Ian Dighé
Michael Phillips
INVESTMENT MANAGER'S REPORT
Investment Strategy
Our strategy is to invest in above average quality publicly quoted companies
which will create capital growth through strategic, operational or management
change. We follow a practice of constructive corporate engagement and aim to
work with management teams in order to enhance shareholder value. We aim to
build a consensus with other stakeholders, and prefer to work alongside
like-minded co-investors as leaders, followers or supporters. We try to avoid
confrontation with investee companies as we believe that there is strong
evidence that overtly hostile activism generally generates poor returns for
investors.
We are long term investors; we typically aim to hold companies for the duration
of three-year investment plans that include an entry and exit strategy and a
clearly identified route to value creation. The duration of these plans can be
shortened by transactional activity or lengthened by adverse economic
conditions. Before investing we undertake an extensive due diligence process,
assessing market conditions, management and stakeholders. Our investments are
underpinned by buying at a discount to fundamental value, which we derive using
private equity-based techniques. These include a focus on cash flows, the
potential value of the company to trade or financial buyers and potentially
beneficial changes in capital structure over the investment period.
Our typical investee company has a market capitalisation of under £150 million
at the time of initial investment. We believe that smaller companies provide
the greatest opportunity for our investment style as they are relatively
under-researched, often have more limited resources, and frequently can be more
attractively valued.
We believe that this approach, if properly executed, will generate favourable
risk adjusted returns for shareholders over the long term.
Market Background
In contrast to the turbulence of the prior year, stock markets rallied strongly
over the financial period, pausing only for breath in late November and May.
The FTSE Indices have delivered unusually strong returns; 17.9% for the FTSE
All Share, 32.8% for the FTSE 250 and 38.6% for the FTSE Small Cap Index.
Risk appetite is clearly returning, as witnessed by the out performance of FTSE
Small Cap compared with other indices. However, the stellar performance of the
Small Cap Index was not uniform, with the median small cap stock only returning
15% over the period, less than 40% of the return of the index.
A handful of larger constituents, typically highly indebted and exposed to
discretionary UK spending, drove the market. The four sectors of Travel &
Leisure, General Retail, Real Estate Investment & Services and Construction &
Materials sectors, accounting for 28% of the Index constituents in June 2012,
delivered 56% of the total index performance over the year, with Thomas
Cook alone delivering 4.9% points of the index performance across the year
(Source: Factset Portfolio Analysis System).
Re-rating in general has been a major driver of the market over the past year,
with the forward p/e multiple of the Small Cap Index increasing from 9.6x to
11.7x. The average price to book ratio has also increased from 1.0x to 1.4x
over the last year. Many share prices have been driven by momentum and not
fundamentals. In some areas of the market, we perceive this has led to some
pockets of overvaluation and complacency, masked by the overall rating of the
market. In particular, we do not believe that the recovery in consumer
cyclicals, and the associated re-ratings will prove to be sustainable over the
medium term due to (a) continued real wages decline and (b) ultra (and
unsustainably) low interest rates. The "feel-good" factor may have returned,
but the inevitable medium term rise in interest rates will come and dampen
enthusiasm.
We also believe that the premium rating of the FTSE 250 Index relative to the
FTSE Small Cap Index looks increasingly anomalous, given its slowing earnings
growth.
Performance Review
Performance over the period continued to be driven by stock specific factors,
with many of the self-help and recovery situations continuing to play out.
Self-help at Lavendon, CVS and Wilmington to re-align costs and resources
helped deliver strong returns. Holdings with a high proportion of sales to the
recovering North American market performed well, notably Tyman and 4imprint.
Whilst the level of absolute NAV growth was strong, the Company's lack of
exposure to domestic earners in the Travel & Leisure, General Retail, Real
Estate Investment & Services and Construction & Materials sectors tempered the
performance relative to the FTSE Small Cap Index, a reversal of previous years.
It is also notable that many other fund managers shared our views on these
sectors, with the average IMA UK Smaller Companies fund significantly
underperforming over the year.
In the autumn of 2012, we recognised that the headline multiples of many
companies in these sectors looked low. In our opinion these companies have
impaired business models, are over geared, and have other specific investment
risks (e.g. high pension deficits; structurally unattractive markets; poor
return on capital). As an example, we reviewed Thomas Cook in October, when the
share price was heavily depressed and the equity priced on c.35% free cash flow
yield and the company heavily indebted with a poor trading history. Whilst we
felt that there could be good upside in the share price, it was dependent on
(a) successfully convincing the banks to support a period of stability and
(b) a recovery plan driven by a management team with limited experience in the
sector. We concluded that we could not accurately assess the likelihood of
success and that purchasing the shares would have been akin to taking a bet
rather than making an investment decision.
The Company's NAV growth has been delivered with lower volatility than the
market and a low beta of 0.3x (Source: Numis Securities), and we believe that
the risk adjusted return is highly favourable. The risk statistics also
indicate that a high proportion of the portfolio absolute returns over the year
were driven by stock specific events, rather than merely the market re-rating.
Since we set out to improve the investment process in 2009, we have
specifically decided to only invest in companies of above average quality, with
strong business models, where our co-ownership can influence and help positive
change, and where none of our "blacklist" criteria are present. We continue to
believe that the tactic of investing in these highly cash generative, niche
market leaders, with a high proportion of overseas earnings and avoiding
companies with exposure to discretionary UK public or consumer spending, with
added corporate engagement will deliver attractive absolute returns over the
medium to long term. However, the unconstrained and concentrated nature of the
Company's portfolio is likely to lead to uncorrelated performance relative to
comparative indices, and potentially periods of underperformance against
specific indices.
Top 5 contributors to performance
Period
Valuation attribution
at period end (basis points)
Company £'000 %
Tyman 9,335 +763
4imprint 7,175 +639
Lavendon 6,529 +471
CVS Group 4,388 +193
Wilmington 3,839 +186
Of the 23 positions held over the year, eight delivered returns higher than the
Small Cap Index. 18 delivered positive returns.
Large holdings Tyman, 4imprint, Lavendon, CVS and Wilmington delivered market
beating returns of 67%, 84%, 60%, 46% and 103% over the year, materially
outperforming the 38.6% rise in the Small Cap Index. The Tyman management team
has positioned the group well for the recovery in the North American market.
The transformational $200m acquisition of Truth in May 2013 will increase this
exposure- we estimate 75% of group sales and a higher proportion of group
profits are derived from North America following the deal. It remains the
largest holding in the portfolio. The move from AIM to the main market in
July 2013 is likely to increase liquidity and drive a re-rating of the shares.
We believe there is considerable scope for earnings upside due to the high
operational gearing.
4imprint continues to deliver low teens growth from its disruptive business
model in North America. Again, it has a high proportion of sales derived from
North America-c.90%. We continue to believe it can generate mid teens earnings
growth for the foreseeable future. The company has re-rated significantly over
the past year. Lavendon continued to perform well, as end markets improved in
the Middle East and self-help initiatives in Europe more than offset lacklustre
end markets. CVS continued to re-rate over the year, as the underlying sales
performance improved and the company continued to reduce its gearing.
Wilmington recovered significantly from a depressed level last year, helped by
a return to earnings growth and the appointment of a highly regarded new
Finance Director. It still looks attractively priced given the improved double
digit earnings growth outlook and the c.9% combined annualised return and from
the dividend de-gearing.
Unlike past years, the portfolio did not benefit from new takeover approaches
to individual holdings, or significant divisional disposals. We continue to
believe that the valuation and business model characteristics of the portfolio
holdings make them susceptible to M&A activity. In addition, the strong balance
sheets of the portfolio companies enable them to execute value enhancing M&A of
their own.
Bottom 5 contributors to performance
Period
Valuation attribution
at year end (basis points)
Company £'000 %
E2V Technologies 9,061 (170)
Mecom Sold (60)
Optos Sold (45)
Andor 1,633 (5)
Kewill Sold (1)
On the negative side, E2V Technologies released disappointing news flow through
the year, leading to earnings downgrades. Whilst some defence and industrial
markets deteriorated, we believe that some of the underperformance was driven
by suboptimal operational management, especially in the imaging division. The
company has some excellent market positions, world leading technology and
enjoys high margins. Notwithstanding the restructuring since 2009, we felt that
the company was failing to deliver to its full potential - with respect to
organic growth, margins and cash flow. In addition, we had some lingering
governance concerns. Following intervention by SVGIM and other shareholders, a
new chairman was appointed in April 2013. He has acted quickly and decisively
to date and we believe this will herald a sustained period of improved
financial and shareholder returns. Even on depressed earnings, the shares trade
at a considerable discount to what we believe to be fair value today.
Mecom's disappointing streak continued through the year, driven predominately
by advertising revenues deteriorating faster than anticipated in its key Dutch
markets. Operating gearing in the business model led this to have a severely
negative impact on profits. Following a meeting with the management team in
March, we decided to exit the position. The company is clearly heading down a
break up route. However, we believe that there are fewer potential buyers for
the remaining assets. This low competitive tension, combined with continued
poor outlook for the end markets, led us to believe that the company would
struggle to deliver the 7x EBITDA multiples achieved from past disposals in
2009. With the break up process elongating, deteriorating cash flows and
weakening M&A comparatives, we decided to exit the position. This was largely
complete by the time of the latest profits warning in April 2013.
We established a small position in Optos in late Q2 2012. We were attracted to
its market leading technology and the growth prospects from the launch of a new
product family. However, we exited the position before building it to a major
weight for two key reasons. Firstly, our due diligence had highlighted that the
changing business model might lead to a short term deterioration in the
proportion of profits which turn into cash. The first trading statement
following our initial investment showed cash conversion significantly below our
expectations and the explanations for this posed more questions than they
answered. Secondly, we were unable to complete a key part of our remaining due
diligence.
Andor released a brace of disappointing trading updates during the year. This
was not unexpected and we had started to build the position cautiously. The
company is suffering from a hiatus in end markets, leading to some pressure on
the release of customers' R&D budgets which ultimately drive its sales. We
believe this hiatus is temporary, and will clear within the next year or so.
Neither R&D nor sales budgets have been cut and as a result margins and
earnings have fallen by a significant degree over the year. The market is
pricing in no return to growth, or margin expansion back to historic levels
which we believe is very conservative. The lack of short term earnings momentum
has also acted as a drag on the rating.
Kewill was acquired by Francisco Partners in Q3 2012, having announced bid
talks in Q2 2012.
A number of other stocks underperformed, largely due to the lack of earnings
momentum rather than fundamental overvaluation. This did lead to a number of
opportunities to add to positions at compelling valuations.
Strategic Recovery Fund II returned less than the aggregate portfolio, mainly
due to the relatively high weighting in E2V.
Dealing activity
The level of portfolio turnover was 20.9% with disposals of £14.9m (excluding
distributions from unlisted investments) in the period representing around
22.9% of the weighted average NAV. In addition £11.5m of distributions were
received from unlisted investments. £14.1m of purchases were made with the vast
majority of purchases representing additional investment into existing
holdings.
Strong performances from 4imprint, Tyman and Lavendon necessitated some taking
of profits, raising £2.1m, £3.3m and £2.3m respectively. In addition, funds
were raised from investments which had disappointed, and mature investments,
partial or full exits in other holdings where these were complete, or where the
risk adjusted return was unattractive. The final holding in Statpro was sold in
a mini-block, raising £1.4m. The toe hold positions in Avingtrans and Brewin
Dolphin were sold, achieving good returns.
We deployed the proceeds into enlarging existing holdings and establishing
small to medium weights in three new investments. Existing positions in
Allocate, CVS, Goals Soccer and Gooch & Housego were increased. We continue to
believe that the growth outlook will improve substantially for Allocate and Gooch
& Housego. In our opinion, the former is very modestly rated given the strong
medium term growth prospects and cash generation and one of our most undervalued
holdings.
£4.4m was deployed in new investments, mainly Andor Technology (£2.2m),
Northbridge Industrial Services (£0.8m) and XP Power (£1.4m). All were made
through market purchases.
Andor is a global leader in the design and manufacture of high performance
digital cameras. Originally spun out of Queen's University in Belfast, it has
become the market leading product in a number of high end niche applications.
We believe that considerable growth opportunities remain over the medium to
long term, driven by modest end market growth, further share gain through the
launch of a new mid-market model, and leveraging the company's IP by entry into
new market niches. It trades at a considerable EV/Sales discount to the level
which we believe trade acquirers would be prepared to pay to acquire the
business. There is substantial cash on the balance sheet. The tough end market
conditions are well known, albeit some short term risk still exists. A reversal
in market conditions, when it occurs, is likely to deliver substantial step up
in earnings. Judged on short term performance, our initial purchases have
proven to be a little premature. However, they should deliver a good medium
term return. There is considerable scope to increase the weight on completion
of our due diligence.
Northbridge Industrial Services is a specialist equipment hire company,
supplying loadbanks, transformers and specialist oilfield equipment. It is one
of the few global designers and manufacturers of loadbanks and also
manufactures its own transformers. It is a global business, with exposure
across all five continents.
XP Power is a leading designer, engineer and manufacturer of power supplies and
converters. It focuses on the low volume/high value market segment, where the
end products tend to be business machines with multi year product life cycles,
in comparison to supplying high volume/low value consumer electronics
customers, typically operating on 9-12 month product life cycles. Over the past
decade, it has transformed from distributor to integrated designer and
manufacturer. It sells to a very broad global customer base. The company
suffered from a weak start to 2012, which led to earnings downgrades and a
significant de-rating. The company has a very high return on capital employed,
is strongly cash generative and has good growth prospects across the cycle. Given
the high operational gearing in the business, recovering end markets from mid
2013 should drive substantial medium term growth in earnings and cashflows. We
were also attracted to the strong balance sheet and shareholder friendly
dividend policy. At our point of entry, the company was priced for negligible
growth.
When making new investments, we continue to be highly selective. We are
conscious to avoid investing at close to peak multiples for peak earnings, and
where valuation has neither support from precedent M&A transactions, nor
underlying cash flows. However, we are still able to deploy capital which we
believe should generate IRRs notably ahead of the 15% level we target across
the cycle.
The nature of the pipeline has changed since the New Year, with new prospects
typically quality businesses which have lagged the markets, trading on
attractive ratings, as well as the return of more interesting, quality
secondary fundraisings. Unusually, we are also considering two IPOs which are
special situations, and likely to happen in late Q3/early Q4 2013. One is a UK
business operating in a market we know well, where the transaction is being
driven by the foreign corporate owner wishing to exit overseas business
activities. The other is a replacement capital fundraising for a privately
owned asset, co-owned by some of the UK high street lenders. We know the
markets the company operates in extremely well due to an existing successful
investment in the area. Both potential investments are likely to be priced
attractively.
Portfolio as at 30 June 2013 Largest Investments
2012 2011
Date % of % of % of
Sector of first Cost Valuation invested invested net
Company classification investment £'000 £'000 portfolio portfolio assets
Tyman Manufacturing Apr 2007 4,105 9,335 13.1 12.2 11.9
E2V Technologies Technology Oct 2009 3,306 9,061 12.7 10.1 11.6
4imprint Group Support Services Feb 2006 3,584 7,175 10.0 8.4 9.2
Lavendon Group Support Services Nov 2009 2,497 6,529 9.1 8.5 8.3
KCOM Group Telecoms May 2007 2,653 5,956 8.3 7.8 7.6
CVS Group Retail Oct 2010 2,513 4,388 6.1 4.3 5.6
Allocate Software Technology Dec 2009 3,534 4,206 5.9 5.7 5.4
Gooch & Housego* Technology Dec 2011 3,106 4,013 5.6 2.0 5.1
Wilmington Group Media Oct 2010 3,733 3,839 5.4 1.9 4.9
RPC Group Manufacturing Feb 2007 1,981 3,746 5.2 6.3 4.8
*Second investment following previous holding March 2010 to November 2010.
Sector spilt %
Technology 26.4
Support services 21.5
Manufacturing 16.7
Net cash 8.9
Telecoms 7.6
Retail 5.6
Media 4.9
Leisure 4.7
Unquoted investments 3.7
Size split
(by market capitalisation) %
Greater than £500m 4.8
£300m - £500m 19.5
£100m - £300m 46.9
Less than £100m 16.2
Net cash 8.9
Unquoted investments 3.7
Portfolio Review
The portfolio remained highly focused, with a total of 17 holdings, with the
top 10 holdings accounting for 74.4% of net assets. The portfolio remains
predominantly invested in quoted equities. However, the percentage of the
portfolio invested in unlisted securities changed from 19.3% to 3.7% of net
assets at the end of the period largely due to the ongoing exit from SRFII.
8.9% of the portfolio was invested in cash at the period end.
Operationally the portfolio is in good shape. Poor performers have been either
exited, or, in the case of E2V, earnings appear to have bottomed out. The
exception is the immature holding in Andor where end market conditions remain
challenging, albeit the management team has taken the deliberate decision not
to reduce discretionary R&D and sales force costs. We continue to believe that
the majority of portfolio holdings continue to trade at significant discounts
to comparable M&A trade multiples.
The absolute valuation of the portfolio remains attractive given the earnings
growth and dividend. The 12.6% SVG free cash flow yield* is also attractive; we
tend to regard a cash yield less than 10% as a sign of valuations becoming
stretched. The strong average balance sheet of portfolio holdings allows for
the underlying companies to fund growth initiatives, and, if appropriate,
increase cash returns to shareholders. Despite it being much less highly geared
than the index, the portfolio only trades on a modest p/e premium to the
FTSE Smaller Companies Index. This indicates that, on a balance sheet adjusted
basis, the portfolio is trading at a discount. In addition, the portfolio is
forecast to deliver both superior earnings growth and a marginally higher
dividend yield than the index.
*SVG free cash flow yield is equal to (operating cash flow less maintenance
capex) dividend by enterprise value.
Portfolio Characteristics
Strategic Equity Smaller
Consensus Median portfolio characteristics Capital companies
Price/Earnings ratio (FY1) 12.4X 11.7X
Dividend yield 3.0% 2.9%
Price/Book ratio 2.2X 1.4X
Price/Sales ratio 1.2X 0.5X
Price/Cash flow ratio 11.8X n/a
SVG Cash flow yield 12.6% n/a
Forecast earnings growth (FY1) 10.6% 9.9%
Forecast net debt to EBITDA 0.5X 2.5X
Source: Factset Portfolio Analysis System, Investec, Peel Hunt. FY1 = forecast
next 12 months.
Unlisted Investments
The Company's largest unlisted investment, SRFII, ended its life in June 2013.
The majority of the proceeds were cash. However, remaining holdings, where we
believed there was significant value, namely E2V, were transferred in specie.
The SRFII investment has delivered an IRR of 36.8% and cash multiple of 2.8x
cost, net of fees, since purchase in August 2009. This compares with an IRR of
13.5% for the FTSE Small Cap ex Investment Trusts Index, and the Company's net
asset value total return of 25.2% IRR and 2.3x cost over the same period.
Over the financial year the Company received £0.3m from Vintage Mizuho I,
bringing the total distributions from unlisted investments to £11.5m for the
year. The outstanding commitment relating to Vintage is €1.6m and its manager
has communicated that it does not expect to make any further net draw downs.
The Vintage investment has delivered an IRR of 46.1% and cash multiple of 5.7x
cost since first investment in 2007. The FTSE Small Cap ex Investment Trusts
Index has delivered a total return of -16.4% over the same period.
Outlook
We remain of the view that the outlook for UK smaller companies is positive.
Forward earnings growth forecasts for the FTSE Small Cap ex Investment Trusts
Index is 9.9%, and is notably higher than both the FTSE 250 and FTSE All share
(7.5% and 6.3% respectively) for the first time since late 2007.
Valuations are not as low as they were in 2009, however we believe in
aggregate, they remain below fair value. This is in spite of the re-rating of
the market over the past year - significant in the case of Small Cap which has
re-rated from a forward p/e of 9.6x to 11.7x. The mix of the rating, earnings
growth and dividend yield of the market suggests that mid teens total medium
term returns are achievable, potentially more, if markets re-rate further.
From a macro perspective, the growth and stability pictures are mixed. There is
clear recovery momentum in both the UK and North American economies. To date
the UK recovery appears to be the "wrong type of growth"- consumer led
(unsustainable in our view given record low interest rates) rather than export
led. There are some signs that industrial confidence is rising, and the
depreciation of sterling experienced over the last two years could finally
deliver industrial growth in the UK. In addition, there are record numbers of
workers in the private sector. Two major problems remain: (a) to date, negative
real wage growth and (b) government debt which remains too high, fuelled by
spending, which also remains too high. The new Bank of England Governor appears
likely to continue to set policy for base rates to deliver negative real
interest rates. The sustainability of this low interest rate policy will be
dependent on the continued support of international investors, a relatively
narrow trading range for sterling, a well executed exit from QE, tolerance for
gilt investors to be satisfied with negative real returns and continued
political stability. Loss of one or a combination of these factors could lead
to unexpected and rapid rate rises, which would quickly kill off any consumer
related recovery. Interest rates must rise at some stage - we only hope that
the UK consumers have deleveraged more by then.
By comparison, the US recovery appears broader, with most sectors other than
public spending showing growth. The US consumer has repaired its balance sheet.
US manufacturers are enjoying a renaissance driven by falling energy prices (a
result of shale gas) and labour rates becoming more attractive relative to
cheaper offshore locations. Job shortages are reported in the construction
sector, which appears to be in the foothills of a multi-year recovery. 31% of
the Company's portfolio holdings' sales are derived from North America, and we
believe, a higher proportion of earnings. This exposure to the US has increased
substantially over the past two years and we are very comfortable with it.
In comparison to the UK and North America, the outlook in Europe, Asia and the
BRICs is less positive. In Europe, Mario Draghi's July 2012 commitment to "do
what ever it takes" to save the Euro, with the establishment of OMT (Outright
Monetary Transactions) scheme clearly placated the markets in the short term,
and led to reduced borrowing costs for the endangered periphery European
governments. However, we perceive that the continued policy failures of the
European politicians and austerity fatigue will lead ultimately to a binary
outcome. The more palatable short term, structured outcome is QE through a
mechanism which will be "acceptable" to Germany, likely after the German
elections. This would broadly be positive for markets and lead to a long
overdue relative depreciation of the Euro. The alternative is that political
instability in the peripheral countries will force an unstructured partial or
full break up of the Euro, with banks across the Eurozone being forced to take
losses which their balance sheets may not be able to sustain. This latter
scenario could lead to significant market volatility.
Fortunately, corporate balance sheets remain strong - and in some cases,
companies are arguably overcapitalised. There has been some evidence of
companies re-gearing and returning cash to shareholders through special
dividends and buybacks. M&A activity remains low, but is building with several
large deals announced at the tail end of June. Feedback from the corporate
finance community is that there is significant M&A interest, but deals are
taking a long time to consummate. Due diligence processes are prolonged and
there are often multiple price negotiations prior to exchange of contracts.
Although financial buyers are completing larger leveraged buyouts, deal
activity in the small and mid cap space is sporadic, driven by limited leverage
and limited sources of lending. Trade M&A appears to be ticking up and more of
our portfolio companies are soliciting opinions from investors on this subject.
With record low cost of borrowing, well selected and executed acquisitions have
the potential to add significant value.
The significant increase in activity in the small and mid cap IPO market has
also been a welcome sign that equity markets are beginning to function again.
We believe this trend will continue, and are willing to consider primary issues
on a highly selective basis.
Underlying share trading volumes remain flat, with the value statistics being
inflated by the absolute rise in value of the indices. We have often spoken of
the contraction in the sell side broker capacity, driven by poor trading
volumes and a lack of primary and secondary equity issuance and falling
margins. There is some evidence of recovery here, although we would not rule
out further consolidation.
To conclude: we continue to believe equities offer compelling absolute and
relative medium term returns compared with other asset classes. The aggregate
market rating is closer to fair value than for some time, although we believe
still offers rating upside. However, there are both pockets of overvaluation in
markets, as well as lingering systematic risks, which causes us to retain a
level of caution. This will continue to drive our stock selection, always
seeking a margin of safety in valuations as well as investing in companies with
above average business models and cash generation, and geographic diversity of
their sales.
Adam Steiner/Stuart Widdowson
SVG Investment Managers Limited
12 September 2013
All statements of opinion and/or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent SVG Investment Managers Limited's own
assessment and interpretation of information available to it at the date of
this report. As a result of various risks and uncertainties, actual events or
results may differ materially from such statements, views, projections or
forecasts. No representation is made or assurance given that such statements,
views, projections or forecasts are correct or that the objectives of the
Company will be achieved.
TOP 10 INVESTEE COMPANY REVIEW
4imprint Group is the fourth largest distributor of promotional products in the
world with an international network of companies in the UK, USA, Hong Kong and
Europe. We have been involved with the company since a change of management in
2003. The company has benefited recently from material upgrades to forecast
earnings. Following the disposal of Brand Addition, the fast growing US
business accounts for virtually all of the profits of the group and the company
has significant net cash balances. The rating reflects neither the growth
prospects, nor the quality of the business. Funds managed by SVGIM currently
hold approximately 8% of the company's equity.
Allocate Software is the leading workforce optimisation software applications
provider for global organisations with large, multi-skilled workforces. It is
the clear European market leader in the healthcare vertical market, where the
compelling return on investment for clients is driving significant growth. It
is also the clear lead provider of optimisation software for the global
offshore and defence markets. A strong management team is focused on delivering
continued profitable growth, maximising the commercial potential of the product
suite. SVGIM became a major shareholder as part of a placing to fund the
acquisition of its Nordic equivalent, Timecare AB, in December 2009. The
company has subsequently made three further acquisitions of complimentary
businesses - Dynamic Change and Zircadian in the UK and RosterOn in Australia.
The quality and visibility of earnings has improved materially over the
company's period of ownership, but this has yet to be reflected in the rating.
Funds managed by SVGIM currently hold just under 10% of the company's equity.
CVS Group is the UK's leading operator of veterinary practices, with a market
share of c.12%, several times the size of its nearest competitor. CVS has
followed a strategy of consolidating the market through the acquisition of
single and small chains of practices, largely funded by debt. Given the
economics of scale in veterinary drug and products purchasing, the roll up
economics are compelling. SVGIM became a shareholder following a period of
disappointing trading. The shares de-rated significantly as disappointed growth
investors exited and other investors concerned about the level of borrowings
reduced their holdings. With limited ongoing capex requirement, we believed
that the company could degear rapidly and still continue its roll up strategy.
The entry valuation was undemanding on a cash flow basis and demand for its
services is less discretionary than for many other retailers. Funds managed by
SVGIM currently hold approximately 4% of the company's equity.
E2V Technologies is a global market leader in the design and manufacture of
specialist electronic components and low volume, high value, high reliability
semiconductors, predominately for the medical, aerospace, defence and
industrial markets. An ill-timed acquisition in September 2008 funded by debt
left the balance sheet of the business over-stretched as the economic downturn
began. A new Finance Director, well known to SVGIM, was appointed in May 2009.
The management team acted, raising new equity to pay down debt as well as
restructure the UK and French cost base, a process which is now largely
complete. The Company made its initial investment during December 2009 via a
placing and a deeply discounted rights issue to refinance the balance sheet.
The restructuring has been executed flawlessly. The final phase was disposal of
non-core assets earlier this year, which has virtually eliminated debt. We
believe that the group remains materially undervalued compared to precedent M&A
multiples in its sector. Funds managed by SVGIM currently hold approximately
5% of the company's equity.
Gooch & Housego is a global designer and manufacturer of precision optical
components and sub-systems, and light measurement instrumentation products. It
has particular expertise in acousto optics, fiber optics and crystal growth
technologies. Products are typically in high value, low volume applications in
demanding industry verticals such as aerospace and defence, healthcare and high
reliability industrials. We believe that the company has three key long term
growth drivers: 1) fiber optical substitution of conventional electronics and
wiring 2) new applications in medical and life science applications
3) growing sales of higher value add subsystems and modules. Funds managed by
SVGIM currently hold approximately 4% of the company's equity.
KCOM Group is a provider of communications solutions to businesses in the
public sector in the UK. It also has a very strong regional consumer-based
business based around Hull in East Yorkshire. Following discussions instigated
by shareholders the company announced major changes to its management team in
November 2008. Following further consultation with shareholders the company has
implemented an innovative remuneration package that closely aligns shareholders
and management. Since then, the company has undergone a strategic review and
announced an important network sharing deal with BT Group. The positive impact
of these changes and the company's growth potential has taken time to be
translated into headline sales growth and many potential shareholders are
sceptical that the growth will emerge. However, the company remains highly cash
generative, with strong earnings visibility and the Board has committed to a
further three year period of double digit dividend growth. Funds managed by
SVGIM currently hold less than 3% of the company's equity.
Lavendon Group is the market leader in the rental of powered aerial work
platforms in both Western Europe and the Gulf States. The group entered the
current downturn having over-spent on equipment, and with an overstretched
balance sheet. The nature of powered access equipment is such that capital
expenditures can be reduced materially for a significant amount of time without
detriment to the fleet. We believed that the company would generate significant
surplus cash flow over the two years following investment which would be used
to pay down debt and thus create value for equity shareholders. We invested in
the company via a fundraising in late 2009 which brought the company's debt
down to high but manageable levels, and have been actively engaged with the
board to help drive improved returns. Since 2009, the company has met its debt
reduction targets, announced an operational and strategy review and executive
board changes. A new group CEO was appointed in Q4 2011. Trading has been
stronger in 2013 than many anticipated, with a notable recovery in the highly
profitable Middle Eastern business unit. Funds managed by SVGIM currently hold
approximately 4% of the company's equity.
RPC Group is Europe's leading manufacturer of rigid plastic packaging.
Following lobbying from SVGIM and another shareholder acting in concert, the
group has initiated a strategic and operational review and made substantial
changes to its board. The management team has performed well against RPC's new
objectives, leading to a significant reduction in group debt and ongoing focus
on improving return on invested capital. As the restructuring ended, RPC
acquired its smaller Scandinavian competitor, Superfos, funded by a mixture of
debt and new equity. It is clear that this acquisition has created value
through substantial cost synergies, although it is too early to judge whether
sales synergies will be delivered. Although the Company has been an investor
for some five years, we believe that good upside still exists as the market
continues to digest the improved focus on shareholder returns. The new CEO may
also implement further value enhancing restructuring activities, as well as
value additive M&A. Funds managed by SVGIM currently hold less than 3% of the
company's equity. Funds managed by SVGIM currently hold less than 3% of the
company's equity.
Tyman is leading international supplier of building products to the door and
window industry, and was the world's leading manufacturer of marine breakaway
couplings. The company has significant operations in nine separate countries
across Europe, the Americas, Asia and Australasia. The building products
division enjoys clear market leadership in a number of niches, with a highly
diversified customer base, serving both the new build and RMI (repair and
maintenance) markets. The building products division has been adversely
impacted by the significant fall in residential construction activity
experienced since 2007, which, combined with a geared balance sheet, led to a
material fall in the share price through 2008. We began building our stake in
the company in late 2009 following the appointment of a new Chairman, who has
subsequently reconstituted the executive management and non-executive Board.
Since then, strong cash flows and a disposal of the non-core marine couplings
business have reduced the debt burden substantially. In the period, the company
acquired its closest US peer Truth. We believe this will enhance the upside
from the recovery in US residential new build and RMI markets. Funds managed by
SVGIM currently hold approximately 4% of the company's equity.
Wilmington Group provides business information and training services to
professional business customers in the financial services, legal and medical
sectors. More than 76% of revenues in the main publishing and information
division are delivered digitally, typically on a subscription basis, and with
high levels of client retention. The company is highly cash generative. Growth
has been held back over the past few years due to a significant fall, and no
recovery, in its legal training market, and the decline in some legacy print
publications. This has masked strong growth in the rest of the business. The
declining segments have now either been exited or stabilised. The company's
earnings are set to grow organically at double digit rates, as well as
generating significant free cash flow, neither of which we feel are reflected
in the current rating. With a stronger balance sheet, there is potential upside
from targeted M&A. The management team has a good track record of creating
value from M&A. Funds managed by SVGIM currently hold approximately 3% of the
company's equity.
EXTRACTS FROM THE REPORT OF THE DIRECTORS
The Directors present their report and financial statements for the year ended
30 June 2013.
The Company has been incorporated with an indefinite life but is subject to an
annual continuation vote. The Company is registered in England with number
5448627.
Business Review
The Business Review should be read in conjunction with the Chairman's report
and the Investment Manager's report above.
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 policies.
• 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.
Review of the Business of the Company
The principal activity of the Company is to conduct business as an investment
trust. The Company is currently an investment company in accordance with the
provisions of Section 833 of the Companies Act 2006. The Directors do not
envisage any change in the Company's activity in the future.
New regulations for obtaining and retaining investment trust status came into
force for periods on or after 1 January 2012. The year ended 30 June 2013 is
the first accounting period of the Company to be affected by the new
regulations and approval under the new regime was granted by HMRC on 14 March
2013. Accordingly, the Company will be treated as an investment trust under
Sections 1158/1159 of the Corporation Tax Act 2010 for the year ended 30 June
2013 and for each subsequent accounting period, subject to there being no
subsequent serious breaches of the regulations. The Company's status as an
investment trust means that the Company does not pay capital gains tax on any
profits arising from the disposal of its investments.
Investment objective
The investment objective of the Company is to achieve absolute returns (i.e.
growth in the value of investments) rather than relative returns (i.e.
attempting to out-perform selected indices) over a medium term period,
principally through capital growth.
Investment policy
The Company invests primarily in equity and equity-linked securities quoted on
markets operated by the London Stock Exchange where the Investment Manager
believes the securities are undervalued and could benefit from strategic,
operational or management initiatives. The Company also has the flexibility to
invest up to 20% of the Company's gross assets at the time of investment in
securities quoted on other recognised exchanges.
The Company may invest up to 20% of its gross assets at the time of investment
in unquoted securities, provided that, for the purpose of calculating this
limit, any undrawn commitments which may still be called shall be deemed to be
an unquoted security.
The maximum investment in any single investee company will be no more than 15%
of the Company's investments at the time of investment.
The Company will not invest more than 10%, in aggregate, of the value of its
total assets at the time the investment is made in other listed closed-end
investment funds provided that this restriction does not apply to investments
in any such funds which themselves have published investment policies to invest
no more than 15% of their total assets in other listed closed-end investment
funds.
Other than as set out above, there are no specific restrictions on
concentration and diversification. The Board does expect the portfolio to be
relatively concentrated, with the majority of the value of investments
typically concentrated in the securities of 10 to 15 issuers across a range of
industries. There is also no specific restriction on the market capitalisation
of issues into which the Company will invest, although it is expected that the
majority of the investments by value will be invested in companies with a
market capitalisation of less than £300 million.
The Company's Articles of Association permit the Board to take on borrowings of
up to 25% of the net asset value at the time the borrowings are incurred for
investment purposes.
Investment Manager
The Investment Manager appointed by the Company is SVGIM. Established in 2002,
the Public Equity Team of SVGIM was one of the first in the UK to invest in
publicly traded equities using private equity techniques. The team now consists
of five investment professionals who combine a number of complimentary skill
sets, including corporate finance, traditional fund management, research and
private equity disciplines. SVGIM currently has funds under management of
around £200m.
Hansa Aktiengesellschaft ("Hansa"), a Swiss based international investment and
holding company with total assets of approximately US$1.8 billion, has entered
into an agreement to acquire the Manager, SVG Investment Managers Limited
("SVGIM"), from SVG Capital plc. Hansa will be the majority owner of SVGIM; the
senior management of SVGIM will hold a significant minority stake. SVGIM will
retain its successful investment culture and process within the new structure
but with significantly greater assets to manage or advise. The current
investment managers of Strategic Equity Capital will be unchanged, and retain
complete investment autonomy, ensuring continuity of approach.
Performance
Over the year to 30 June 2013, net assets have increased by 14.2% to
£78.4 million (23.9% on a per share basis). Further information on the performance
of the Company's portfolio is contained in the Investment Manager's report.
The Company's investment objective is one of capital growth and it is
anticipated that returns for shareholders will derive primarily from capital
gains. The Board intends to declare final dividends only where necessary to
comply with investment trust rules. The Board recommends a final dividend of
1.50p (2012: 1.50p) per Ordinary share, amounting to £931,000
(2012: £1,010,000).
Future Trends
Both the Chairman's report and the Investment Manager's report contain
'Outlook' sections setting out their view of the future.
Share capital
At the year-end the Company's issued share capital comprised 62,039,682
Ordinary shares each with a nominal value of 10p, representing the Company's
issued share capital. All shares have equal voting rights. No shares were held
in treasury during the year and at the year end (2012: 67,317,324 shares in
issue and no shares held in treasury). At General Meetings of the Company, the
holders of Ordinary shares are entitled to one vote for every share held. At
the AGM held on 1 November 2012 the Company was authorised to make market
purchases of its own shares up to a limit of 10,090,866 Ordinary shares.
Performance Analysis using KPIs
At quarterly Board meetings the Directors consider a number of key performance
indicators to assess the Company's success in achieving its objective,
principally: the NAV per Ordinary share, the movement in the Company's share
price, the discount of the share price in relation to the NAV and the ongoing
charges. Information relating to these KPIs can be found in the financial
summary above.
Tender Offers
In May 2012, shareholders passed a resolution introducing periodic tender
offers in May and November each year, with each tender offer being for up to 4%
of the issued share capital at a price equivalent to a 10% discount to the net
asset value (including current period revenue and deducting the estimated
tender offer costs). The periodic tenders replace the Company's annual relative
investment performance and discount tests which were measured as at 30 June
each year.
During the financial year, two tender offers took place. As a result of the
tender offer made in November 2012, 2,692,669 shares, representing 4% of the
Company's issued share capital, were bought back for cancellation at a price of
101.55p per share. Following the most recent tender offer, in May 2013, the
Company bought back a further 2,584,973 shares for cancellation, representing
4% of the Company's issued share capital, at a price of 111.52p per share.
In total, the Company has bought back 5,277,642 shares during the year,
representing 7.84% of the Company's share capital as at 1 July 2012, at a cost
of £5,645,000 including stamp duty.
Principal Risks and Uncertainties Associated with the Business
General
Changes in economic conditions (including, for example, interest rates, foreign
exchange rates and rates of inflation), industry conditions, competition,
changes in the law, political and diplomatic events and trends, tax laws and
other factors can substantially affect the value, adversely or positively, of
investments made by the Company and, therefore, the Company's performance and
prospects, in addition to the value of the shares
Market risk
The Company's investments are subject to normal market fluctuations and the
risks inherent in the purchase, holding or selling of equity securities and
related instruments, and there can be no guarantee that the quoted value of the
Company's investments will be realisable in the event of a sale.
Market price and discount volatility
The market price of the shares, as well as being affected by the Company's net
asset value, also takes into account prevailing interest rates, supply and
demand for the shares, market conditions and general investor sentiment. As a
result, the total market value of the shares in the Company may vary
considerably from the net asset value per share of the Company. In addition,
other factors such as a concentrated shareholder base may contribute to
infrequent trading or volatile share price movements.
Reliance on the Investment Manager
The Investment Manager has the right to resign as the Investment Manager under
the Investment Management Agreement. The Investment Manager must give 12
months' written notice to the Company. Such a resignation could have an adverse
effect on the Company's performance and prospects.
Nature of investee companies
The investment portfolio is focused towards small and mid-sized companies.
These companies may involve a higher degree of risk than larger sized
companies. In addition, while the investment policy of the Company is to
identify and invest in companies that the Investment Manager believes are
undervalued, there is a risk that the Investment Manager may be unable to
deliver on the strategic, management and operational initiatives identified at
the time of initial investment and, as such, companies may not prove to be
capable of generating additional value for shareholders and so would not assist
in achieving the Company's investment objective.
Concentrated portfolio
The majority of the Company's portfolio is invested in 10 to 15 companies
operating in a number of industries, as was the initial intention. As a result
the portfolio could carry a higher degree of risk than a more diversified
portfolio.
As the Company's objective is to achieve absolute returns rather than returns
relative to a particular index or benchmark over a medium-term period, the
portfolio is managed without comparison to any stock market index. As a result
there will be periods when the Company's performance will not correlate with
such indices.
Borrowing and gearing
The Company's revolving credit facility of £5 million with The Royal Bank of
Scotland expired on 14 July 2012 (at which point there were no drawdowns) and
was not replaced.
The Company's Articles of Association permit borrowings of up to 25% of the net
asset value at the time the borrowings are incurred.
Debt investments
Any debt securities that may be held by the Company will be affected by any
changes to interest rates.
Unlisted investments
The Company may invest a proportion of its gross assets in companies that are
not listed or admitted to trading upon any recognised stock exchange. These
investments may be illiquid and difficult to realise and more volatile than
investments of larger, longer-established businesses. Prior to its dissolution
in July 2013, the SRF II valuation was updated monthly and other unlisted
investments are updated at least once every six months.
Overseas investments
The Company may invest up to 20% of its gross assets in companies listed or
traded on recognised stock exchanges other than the London Stock Exchange. In
any instances where the Company does not hedge its currency exposure, the
movement of exchange rates between sterling and any other currencies in which
the Company's investments are denominated may have a material effect,
unfavourable as well as favourable, on the return otherwise experienced on the
investments made by
the Company. Although the Investment Manager will seek to manage any foreign
exchange exposure in relation to the Company, there is no assurance that this
can be performed effectively. Currency hedging may force the Investment Manager
to realise underlying investments as well as affecting the overall value of the
portfolio and the net asset value per share.
Movements in the foreign exchange rate between sterling and the currency
applicable to a particular shareholder may have an impact upon that
shareholder's returns in its own currency of account.
Charges against capital
The Company's current accounting policy is to charge its operational costs to
revenue, with the exception of any performance fee, which will be charged
wholly to capital. In the event of the Company making a revenue loss or
becoming liable to a performance fee, it may need to liquidate some of its
investments to pay operational costs or the performance fee or both.
Regulatory risks
A breach of Companies Act regulations and FCA/London Stock Exchange rules may
result in the Company being liable to fines or the suspension of the Company
from listing on the London Stock Exchange.
The Board, with its advisers, monitors the Company's regulatory obligations
both on an ongoing basis and at quarterly Board meetings.
If the Company did not comply with the provisions of Sections 1158/1159 of the
Corporation Tax Act ("CTA"), it would lose investment trust status and become
subject to corporation tax on realised capital gains. In order to minimise this
risk, the Directors, the Investment Manager and the Company Secretary monitor
the Company's compliance with the key criteria of Sections 1158/1159 on a
monthly basis. At quarterly Board meetings, compliance with these provisions is
discussed in detail between the Board, the Investment Manager and the Company
Secretary. The Board also regularly reviews the share register to ensure the
Company is not a close company (as defined in the CTA), however, the Board
acknowledges that it has no control over shareholders purchasing shares nor
their concentration on the share register. Being a close company would breach
the CTA rules.
Financial risks
The financial situation of the Company is reviewed in detail at each Board
meeting, monitored and approved by the Board and the Audit Committee. The risks
are expanded further in Note 17.
Financial instruments
As part of its normal operations, the Company holds financial assets and
financial liabilities. Full details of the role of financial instruments in the
Company's operations are set out in Note 17.
Social, Environmental, Community and Employee Issues
The Company has no employees and the Board consists entirely of non-executive
Directors. As an investment trust, the Company has no direct impact on the
community or the environment and as such has no policies in this area. In
carrying out its activities and in relationships with suppliers, the Company
aims to conduct itself responsibly, ethically and fairly.
Investment Management Agreement
The Company's investments are managed by SVGIM under an agreement dated 12 July
2005.
The Investment Manager's appointment is subject to termination on 12 months'
notice given at any time by either party.
There are no specific provisions contained within the Investment Management
Agreement relating to compensation payable in the event of termination of the
agreement other than entitlement to fees, including performance fees, which
would be payable within any notice period.
However, in the event that a continuation resolution proposed at any Annual
General Meeting is not passed, the Investment Management Agreement expressly
permits the Company to give notice terminating the Investment Manager's
appointment without any compensation being payable to the Investment Manager in
lieu of any period of notice otherwise required under the Investment Management
Agreement.
At regular Board meetings the Directors keep under review the performance of
the Investment Manager. In the opinion of the Directors the continuing
appointment of SVGIM as Investment Manager is in the best interests of
shareholders as a whole.
Investment Manager's fees
The Investment Manager is entitled to receive from the Company a basic fee
together, where applicable, with a performance fee.
Basic fee
The basic management fee accrues weekly and is payable quarterly in arrears.
The basic fee, as set out in a deed of amendment approved by shareholders in
November 2010, is the lower of (i) 1.0% of the adjusted NAV of the Company and
(ii) 1.0% per annum of the Company's market capitalisation. In order to avoid
double charging of basic management fees payable to the Investment Manager by
the Company, the NAV of the Company is reduced by the value of the Company's
limited partnership interest in SRF II.
Performance fee arrangements
The Company's performance is measured over rolling three-year periods ending on
30 June each year, by comparing the NAV total return per share over a
performance period against the total return performance of the FTSE SmallCap
(ex Investment Companies) Index. A performance fee is payable if the NAV total
return per share (calculated before any accrual for any performance fee to be
paid in respect of the relevant performance period) at the end of the relevant
performance period exceeds both:
(i) the NAV per share at the beginning of the relevant performance period as
adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap
ex Investment Companies Index (expressed as a percentage) and (b) 2.0% per
annum over the relevant performance period ("Benchmark NAV"); and
(ii) the high watermark (which is the highest NAV per share by reference to
which a performance fee was paid previously).
Currently, the Investment Manager will be entitled to 15% of the excess over
the higher of the Benchmark NAV per share and the high watermark.
Payment of a performance fee that has been earned will be deferred to the
extent that the amount payable exceeds 1.75% per annum of the Company's NAV at
the end of the relevant performance period (amounts deferred will be payable
when, and to the extent that, following any later performance period(s) with
respect to which a performance fee is payable, it is possible to pay the
deferred amounts without causing that cap to be exceeded or the relevant NAV
total return per share to fall below the relevant Benchmark NAV per share and
the relevant high watermark).
A performance fee of £1,132,000 is payable in respect of the three-year period
ending on 30 June 2013.
Administration Agreement
Under an agreement dated 12 July 2005, company secretarial services and the
general administration of the Company are undertaken by Capita Sinclair
Henderson Limited ("CSH"). The fee charged in the year was £77,000 (2012: £
77,000 of which £27,000 was refunded for VAT giving a net figure of £50,000).
The fee is subject to annual review based on the UK Retail Price Index. In the
event that there is an increase in the issued share capital of the Company, the
fee will be adjusted upwards by agreement between the Company and CSH. The
agreement may be terminated by either party giving notice of not less than six
months.
Going Concern
The financial statements have been prepared on a going concern basis. The
Directors consider this to be appropriate as the Company has adequate resources
to continue in operational existence for the foreseeable future. In reaching
this conclusion, the Directors took into account the value of net assets; the
Company's Investment Policy; its risk management policies; the diversified
portfolio of readily realisable securities which can be used to meet funding
commitments; its revenue; and the ability of the Company in the light of these
factors to meet all of its liabilities and ongoing expenses.
In relation to the continuation vote, the Directors have consulted with a
significant proportion of the Company's investors in assessing the potential
outcome of the vote. The Directors have recommended that all shareholders vote
in favour of the continuation vote and, based on consultation with
shareholders, the Directors have no reason to believe that the proposed
resolution will not be passed.
On behalf of the Board
John Hodson
Chairman
12 September 2013
The annual report contains the following statements:
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and the financial
statements in accordance with applicable United Kingdom law and those
International Financial Reporting Standards ("IFRS") adopted by the European
Union ("EU").
Under Company law the Directors must not approve the financial statements
unless they are satisfied that they present fairly the financial position, the
financial performance and cash flows of the Company for that period. In
preparing these financial statements, the Directors are required to:
• select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Change in Accounting Estimates and Errors, and then apply them
consistently;
• present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific requirements
in IFRS is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the Company's financial position
and financial performance;
• state that the Company has complied with IFRS, subject to any material
departures disclosed and explained in the financial statements; and
• make judgements and estimates that are reasonable and prudent.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy, at any time, the financial position of the Company and to
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors, to the best of their knowledge, state that:
• the financial statements, prepared in accordance with IFRS as adopted by the
EU, give a true and fair view of the assets, liabilities, financial position
and profit of the Company; and
• the Chairman's report, Investment Manager's report and Report of the
Directors include a fair review of the development and performance of the
business and the position of the Company together with a description of the
principal risks and uncertainties that it faces.
The Directors confirm that, so far as they are each aware, there is no relevant
audit information of which the Company's Auditor is unaware, and each Director
has taken all the steps that ought to have been taken as a Director to make
himself aware of any relevant audit information and to establish that the
Company's Auditor is aware of that information.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
On behalf of the Board
John Hodson
Chairman
12 September 2013
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 30 June 2013 and 30 June 2012 but is
derived from those accounts. Statutory accounts for 2013 will be delivered to
the Registrar of Companies in due course. The Auditor has reported on those
accounts; their report was (i) unqualified, (ii) did not include a reference to
any matters to which the Auditor drew attention by way of emphasis without
qualifying their report and (ii) did not contain a statement under Section 498
(2) or (3) of the Companies Act 2006. The text of the Auditor's report can be
found in the Company's full Annual Report and Accounts at
www.strategicequitycapital.com.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2013
Year ended 30 June 2013 Year ended 30 June 2012
Revenue Capital Revenue Capital
return return Total return return Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Investments
Gains/(losses) on
investments held at fair
value through profit or
loss - 16,722 16,722 - (1,818) (1,818)
8 - 16,722 16,722 - (1,818) (1,818)
Income
Dividends 2 1,798 - 1,798 1,905 - 1,905
Interest 2 28 - 28 16 - 16
Underwriting commission 2 2 - 2 - - -
1,828 - 1,828 1,921 - 1,921
Expenses
Investment Manager's fee 3 (539) - (539) (442) - (442)
Investment Manager's
performance fee 3 - (1,132) (1,132) - - -
Other expenses 4 (345) (122) (467) (305) (129) (434)
Total expenses (884) (1,254) (2,138) (747) (129) (876)
Net return/(loss) before
finance costs and taxation 944 15,468 16,412 1,174 (1,947) (773)
Finance costs
Interest payable - - - (48) - (48)
Total finance costs - - - (48) - (48)
Net return/(loss) before
taxation 944 15,468 16,412 1,126 (1,947) (821)
Taxation 5 - - - - - -
Net return/(loss) and
total comprehensive
income for the year 944 15,468 16,412 1,126 (1,947) (821)
pence pence pence pence pence pence
Return/(loss) per Ordinary share
Basic 7 1.45 23.72 25.17 1.61 (2.79) (1.18)
The total column of this statement represents the Statement of comprehensive
income. The supplementary revenue and capital return columns are both prepared
under guidance published by the AIC. All items in the above statement derive
from continuing operations. No operations were acquired or discontinued during
the year.
The notes form part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2013
Share Capital
Note Share premium Special Capital redemption Revenue
capital account reserve reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
For the year ended 30 June 2013
1 July 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639
Net return and total
comprehensive income for
the year - - - 15,468 - 944 16,412
Dividends paid 6 - - - - - (1,010) (1,010)
Shares bought back
for cancellation (528) - (5,645) - (528) - (5,645)
30 June 2013 6,203 5,246 46,089 17,638 1,778 1,442 78,396
For the year ended 30 June 2012
1 July 2011 7,011 5,246 54,435 4,117 970 691 72,470
Net (loss)/return and
total comprehensive
income for the year - - - (1,947) - 1,126 (821)
Dividends paid 6 - - - - - (309) (309)
Shares bought back for cancellation (280) - (2,701) - 280 - (2,701)
30 June 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639
The notes form part of these financial statements.
BALANCE SHEET
AS AT 30 JUNE 2013
30 June 30 June
2013 2012
Note £'000 £'000
Non-current assets
Investments held at fair
value through profit or loss 8 71,414 66,648
Current assets
Trade and other receivables 10 265 222
Cash and cash equivalents 14 8,112 2,204
8,377 2,426
Total assets 79,791 69,074
Current liabilities
Trade and other payables 11 1,395 435
Total assets less
current liabilities 78,396 68,639
Net assets 78,396 68,639
Capital and reserves:
Share capital 12 6,203 6,731
Share premium account 13 5,246 5,246
Special reserve 13 46,089 51,734
Capital reserve 13 17,638 2,170
Capital redemption reserve 13 1,778 1,250
Revenue reserve 13 1,442 1,508
Total shareholders' equity 78,396 68,639
pence pence
Net asset value per share
Basic 15 126.36 101.96
The financial statements were approved by the Board of Directors on
12 September 2013. They were signed on its behalf by
J Hodson
Chairman
12 September 2013
The notes form part of these financial statements.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE 2013
Year ended Year ended
30 June 2013 30 June 2012
Note £'000 £'000
Operating activities
Net return/(loss) before finance costs and taxation 16,412 (773)
Adjustment for (gains)/losses on investments and
foreign exchange (16,722) 1,818
Share buy back expenses 122 129
Interest paid - (48)
Operating cash flows before movements in
working capital (188) 1,126
Increase in receivables (43) (5)
Increase/(decrease) in payables 1,200 (9)
Purchases of portfolio investments (22,778) (6,932)
Sales of portfolio investments 34,494 9,612
Net cash flow from operating activities 12,685 3,792
Financing activities
Dividends paid 6 (1,010) (309)
Shares bought back in the year 13 (5,645) (3,474)
Share buy back expenses (122) (129)
Net cash flow from financing activities (6,777) (3,912)
Increase/(decrease) in cash and cash equivalents for the year 5,908 (120)
Cash and cash equivalents at start of the year 2,204 2,324
Cash and cash equivalents at 30 June 14 8,112 2,204
The notes form part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2013
1.1 Corporate information
Strategic Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom and registered in England and Wales under the
Companies Act 2006 whose shares are publicly traded. The Company is an
investment company as defined by Section 833 of the Companies Act 2006.
The Company carries on business as an investment trust within the meaning of
Sections 1158/1159 of the Corporation Tax Act 2010.
The financial statements of Strategic Equity Capital plc for the year ended
30 June 2013 were authorised for issue in accordance with a resolution of the
Directors on 12 September 2013.
1.2 Basis of preparation and statement of compliance
The financial statements of the Company have been prepared in accordance with
IFRS issued by the International Accounting Standards Board (as adopted by the
EU), interpretations issued by the International Financial Reporting
Interpretations Committee, and applicable requirements of United Kingdom
company law, and reflect the following policies which have been adopted and
applied consistently. Where presentational guidance set out in the Statement of
Recommended Practice ("SORP") for investment trusts issued by the AIC (as
revised in 2009) is consistent with the requirements of IFRS the Directors have
sought to prepare financial statements on a basis compliant with the
recommendations of the SORP.
The financial statements of the Company have been prepared on a going concern
basis.
Convention
The financial statements are presented in Sterling, being the currency of the
Primary Economic Environment in which the Company operates, rounded to the
nearest thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being investment business.
1.3 Accounting policies
Investments
All investments in the scope of IAS 39 held by the Company are classified as
"fair value through profit or loss". As the Company's business is investing in
financial assets with a view to profiting from their total return in the form
of interest, dividends or increase in fair value, listed equities, unlisted
equities and fixed income securities are designated as fair value through
profit or loss on initial recognition. The Company manages and evaluates the
performance of these investments on a fair value basis in accordance with its
investment strategy. Investments are initially recognised at cost, being the
fair value of the consideration.
After initial recognition, investments are measured at fair value, with
movements in fair value of investments and impairment of investments recognised
in the Statement of comprehensive income and allocated to capital.
Capital distributions from SRF II are accounted for on a reducing cost basis;
cash received is first applied to reducing the historical cost of an
investment; a realised gain will be recognised only when the cost has been
reduced to nil.
For investments actively traded in organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices at
the close of business on the Balance sheet date, without adjustment for
transaction costs necessary to realise the asset.
In respect of unquoted instruments, or where the market for a financial
instrument is not active, fair value is established by using recognised
valuation methodologies, in accordance with International Private Equity and
Venture Capital ("IPEVC") Valuation Guidelines. New investments are initially
carried at cost, for a limited period, being the price of the most recent
investment in the investee company. This is in accordance with IPEVC Guidelines
as the cost of recent investments will generally provide a good indication of
fair value. Fair value is the amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm's length transaction.
Trade date accounting
All "regular way" purchases and sales of financial assets are recognised on the
"trade date" i.e. the day that the Company commits to purchase or sell the
asset. Regular way purchases, or sales, are purchases or sales of financial
assets that require delivery of the asset within a time frame generally
established by regulation or convention in the market place.
Income
Dividends receivable on quoted equity shares are taken into account on the
ex-dividend date. Where no ex-dividend date is quoted, they are brought into
account when the Company's right to receive payment is established. Other
investment income and interest receivable are included in the financial
statements on an accruals basis. Dividends receivable from UK registered
companies are accounted for net of imputed tax credits. Income on fixed income
securities is recognised on a time apportionment basis from the date of
purchase.
Expenses
All expenses are accounted for on an accruals basis. The Company's investment
management and administration fees, finance costs (including interest on the
bank facility, calculated on the effective interest rate method) and all other
expenses are charged through the Statement of comprehensive income. These
expenses are allocated 100% to the revenue column of the Statement of
comprehensive income. The Investment Manager's performance fee is allocated
100% to the capital column of the Statement of comprehensive income. In the
opinion of the Directors the fee is awarded entirely for the capital
performance of the portfolio. Costs incurred in relation to the tender offer
process have been allocated to the capital column of the Statement of
comprehensive income.
Cash and cash equivalents
Cash in hand and at bank and short-term deposits which are held to maturity are
carried at fair value. Cash and cash equivalents are defined as cash in hand,
demand deposits and short-term, highly liquid investments readily convertible
to known amounts of cash and subject to insignificant risk of changes in value.
Bank overdrafts that are repayable on demand which form an integral part of the
Company's cash management are included as a component of cash and cash
equivalents for the purpose of the Statement of cash flows and Balance sheet.
Bank loans and borrowings
All bank loans and borrowings are initially recognised at cost, being the fair
value of the consideration received, less issue costs where applicable. After
initial recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost, any difference between cost and redemption value
being recognised in the Statement of comprehensive income over the period of
the borrowings on an effective interest rate basis.
Taxation
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the Statement of comprehensive income except
to the extent that it relates to items recognised directly in equity, in which
case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the Balance sheet date, and
any adjustment to tax payable in respect of previous years. The tax effect of
different items of expenditure is allocated between the revenue and capital
columns of the Statement of comprehensive income on the same basis as the
particular item to which it relates, using the Company's effective rate of tax,
as applied to those items allocated to revenue, for the accounting year.
Deferred income tax is provided on all temporary differences at the Balance
sheet date between the tax basis of assets and liabilities and their carrying
amount for financial reporting purposes. Deferred income tax liabilities are
measured on an undiscounted basis at the tax rates that are expected to apply
to the year when the liability is settled, based on tax rates (and tax laws)
that have been enacted or substantively enacted at the Balance sheet date.
Deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised.
Dividends payable to shareholders
Dividends to shareholders are recognised as a deduction from equity in the year
in which they have been declared and approved by the shareholders. The final
dividend is proposed by the Board and is not declared until approved by the
shareholders at the Annual General Meeting following the year end. Dividends
are charged to the Statement of changes in equity.
Share capital transactions
Incremental costs directly attributable to the issuance of shares are
recognised as a deduction from equity. When share capital recognised as equity
is repurchased, the amount of the consideration paid, including directly
attributed costs, is recognised as a deduction from equity. Repurchased shares
are either classified as treasury shares and are presented as a deduction from
shareholders' equity, or are cancelled.
Foreign currency transactions
The currency of the Primary Economic Environment in which the Company operates
is Sterling which is also the presentational currency. Transactions denominated
in foreign currencies are translated into Sterling at the rates of exchange
ruling at the date of the transaction.
Investments and other monetary assets and liabilities are converted to Sterling
at the rates of exchange ruling at the Balance sheet date. Exchange gains and
losses relating to investments and other monetary assets and liabilities are
taken to the capital column of the Statement of comprehensive income.
Use of estimates
The preparation of financial statements requires the Company to make estimates
and assumptions that affect items reported in the Balance sheet and Statement
of comprehensive income at the date of the financial statements. Although the
estimates are based on best knowledge of current facts, circumstances, and, to
some extent, future events and actions, the Company's actual results may
ultimately differ from those estimates, possibly significantly.
Use of significant estimates - in respect of unquoted instruments, or where the
market for a financial instrument is not active, fair value is established by
using recognised valuation methodologies, in accordance with IPEVC Valuation
Guidelines. New investments are initially carried at cost, for a limited
period, being the price of the most recent investment in the investee company.
This is in accordance with IPEVC Guidelines as the cost of recent investments
will generally provide a good indication of fair value. Fair value is the
amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm's length transaction.
1.4 New standards and interpretations not applied
IASB and IFRIC have issued the following standards and interpretations which
are not effective for the year ended 30 June 2013 and have not been applied in
preparing these financial statements.
International Accounting Standards (IAS/IFRS) Effective date*
IFRS 9 Financial Instruments: Classification & Measurement 1 January 2015
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Ventures 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013
IAS 1 Amendments resulting from annual improvements 1 January 2013
IAS 19 Employee Benefits 1 January 2013
IAS 27 Reissued as IAS 27 Consolidated and Separate Financial Statements
(as amended in 2011) 1 January 2013
IAS 28 Investments in associates and joint ventures 1 January 2013
The Directors do not anticipate that the initial adoption of the above
standards, amendments and interpretations will have a material impact on the
Company's financial statements in the period of initial application.
*Years beginning on or after
2 Income
30 June 2013 30 June 2012
£'000 £'000
Income from investments:
UK dividend income 1,741 1,905
Overseas dividend income 57 -
Liquidity fund income 28 11
1,826 1,916
Other income:
Underwriting commission 2 -
Other interest income - 5
2 5
1,828 1,921
Total income comprises:
Dividends 1,798 1,905
Interest 28 16
Underwriting commission 2 -
1,828 1,921
Income from investments:
Listed UK 1,741 1,905
Listed overseas 85 11
1,826 1,916
3 Investment Manager's fee
30 June 2013 30 June 2012
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 539 - 539 442 - 442
Performance fee - 1,132 1,132 - - -
539 1,132 1,671 442 - 442
A basic management fee is payable to the Investment Manager at the lower of
(i) the annual rate of 1.0% of the adjusted NAV of the Company or
(ii) 1.0% per annum of the market capitalisation of the Company. In order to
avoid double charging of basic management fees payable to the Investment
Manager by the Company, the NAV of the Company is reduced by the value of the
Company's Limited Partnership interest in SRF II. The basic management fee
accrues weekly and is payable quarterly in arrears.
The Investment Manager is also entitled to a performance fee, details of which
are given in the Report of the Directors in the full Annual Report and
Accounts.
4 Other expenses
30 June 2013 30 June 2012
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Secretarial services* 77 - 77 50 - 50
Auditors' remuneration for:
Audit services** 26 - 26 26 - 26
Directors' remuneration 103 - 103 95 - 95
Other expenses 139 122†261 134 129†263
345 122 467 305 129 434
* Included within the 2012 balance is a receipt of £27,000 (£Nil in the current
year) representing a refund from H.M. Revenue & Customs of VAT on
administration fees.
** No non-audit fees were incurred during the year.
†Expenses incurred in relation to the tender offer process.
5 Taxation
30 June 2013 30 June 2012
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Corporation tax at 23.75%
(2012: 25.5%) - - - - - -
The Company is subject to corporation tax at 23.75%. As at 30 June 2013 the
total current taxation charge in the Company's revenue account is lower than
the standard rate of corporation tax in the UK (23.75%). The differences are
explained below:
30 June 2013 30 June 2012
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return/(loss) on ordinary activities before taxation 944 15,468 16,412 1,126 (1,947) (821)
Theoretical tax at UK corporation tax rate of 23.75% (2012: 25.5%) 224 3,674 3,898 287 (496) (209)
Effects of:
- UK dividends that are not taxable (413) - (413) (486) - (486)
- Overseas dividends that are not taxable (14) - (14) - - -
- Unrelieved expenses 203 268 471 199 33 232
- Non-taxable investment (gains)/losses - (3,971) (3,971) - 463 463
- Disallowable expenses - 29 29 - - -
- - - - - -
Factors that may affect future tax charges
The Company has £8,697,000 excess management expenses (2012: £6,713,000) that
are available to offset future taxable revenue. It is considered too uncertain
that there will be sufficient future taxable profits against which these
expenses can be offset and therefore, in accordance with IAS 12, a deferred tax
asset of £1,826,000 (2012: £1,712,000) in respect of these amounts has not been
recognised.
Deferred tax is not provided on capital gains and losses arising on the
revaluation or disposal of investments because the Company meets (and intends
to continue for the foreseeable future to meet) the conditions for approval as
an investment trust company.
6 Dividends
Under the requirements of Sections 1158/1159 Corporation Tax Act 2010 no more
than 15% of total income may be retained by the Company. These requirements are
considered on the basis of dividends declared in respect of the financial year
as shown below.
30 June 2013 30 June 2012
£'000 £'000
Net return after taxation per Company accounts 944 1,126
Final dividend proposed of 1.50p (2012: 1.50p) per share (931) (1,010)
Revenue retained for Section 1158 purposes 13 116
The following dividends were declared and paid by the Company:
30 June 2013 30 June 2012
£'000 £'000
Final dividend 1.50p per share (2012: 0.44p) 1,010 309
7 Return/(loss) per Ordinary share
30 June 2013 30 June 2012
Weighted Weighted
average average
Net number of Per Net number of Per
return Ordinary share return Ordinary share
£'000 shares pence £'000 shares pence
Total
Return/(loss) per share 16,412 65,215,418 25.17 (821) 69,723,696 (1.18)
Revenue
Return per share 944 65,215,418 1.45 1,126 69,723,696 1.61
Capital
Return/(loss) per share 15,468 65,215,418 23.72 (1,947) 69,723,696 (2.79)
8 Investments
30 June 2013
£'000
Investment portfolio summary
Listed investments at fair value through profit or loss 68,527
Unlisted investments at fair value through profit or loss 2,887
71,414
30 June 2013
Listed Unlisted Total
£'000 £'000 £'000
Analysis of investment portfolio movements
Opening book cost 50,552 4,569 55,121
Opening investment holding gains 2,882 8,705 11,527
Opening valuation 53,374 13,274 66,648
Movements in the year:
Purchases at cost 22,538 - 22,538
Sales - proceeds (26,379) (8,115) (34,494)
- realised gains on sales 300 3,823 4,123
Increase/(decrease) in unrealised appreciation 18,694 (6,095) 12,599
Closing valuation 68,527 2,887 71,414
Closing book cost 47,011 277 47,288
Closing investment holding gains 21,516 2,610 24,126
68,527 2,887 71,414
A list of the top 10 portfolio holdings by their aggregate market values is
given in the Investment Manager's report above.
Transaction costs incidental to the acquisitions of investments totalled
£88,000 (2012: £47,000) and disposals of investments totalled £30,000
(2012: £17,000) for the year.
30 June 2013 30 June 2012
Total Total
£'000 £'000
Analysis of capital gains/(losses)
Gains on sale of investments 4,115 1,584
Foreign exchange gains 8 7
Movement in investment holding gains 12,599 (3,409)
16,722 (1,818)
The Company is required to classify fair value measurements using a fair value
hierarchy that reflects the subjectivity of the inputs used in measuring the
fair value of each asset. The fair value hierarchy has the following levels:
â— Quoted bid prices (unadjusted) in active markets for identical assets or
liabilities ("level 1").
â— Inputs other than quoted prices included within level 1 that are observable
for the asset or liability, either directly (that is, as prices) or indirectly
(that is, derived from prices) ("level 2").
â— Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) ("level 3").
The level in the fair value hierarchy within which the fair value measurement
is categorised is determined on the basis of the lowest level input that is
significant to the fair value of the investment.
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value at
30 June 2013.
Financial instruments at fair value through profit and loss
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
30 June 2013
Equity investments and limited
partnership interests 68,527 931 1,956 71,414
Liquidity funds - 7,750 - 7,750
Total 68,527 8,681 1,956 79,164
30 June 2012
Equity investments and limited
partnership interests 53,374 11,447 1,827 66,648
Liquidity funds - 1,800 - 1,800
Total 53,374 13,247 1,827 68,448
Investments whose values are based on quoted market prices in active markets
are classified within level 1 include active listed equities. The Company does
not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded in
active markets and/or subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information.
Level 3 instruments include private equity, as observable prices are not
available for these securities, the Company has used valuation techniques to
derive the fair value. In respect of unquoted instruments, or where the market
for a financial instrument is not active, fair value is established by using
recognised valuation methodologies, in accordance with IPEVC Valuation
Guidelines.
There were no transfers between levels for the year ended 30 June 2013.
The following table presents movements in level 3 instruments for the year
ended 30 June 2013 by class of financial instrument.
Total
Equity
Investments
£'000
Opening balance 1,827
Disposals during the year (37)
Total loss for the year included in the Statement of 166
comprehensive income
Closing balance 1,956
9 Significant interests
The Company had holdings of 3% or more in the following companies:
Name of Class of 30 June 2013
Investment Share Percentage held
Journey Group Ordinary 13.0
Allocate Software Ordinary 9.1
4imprint Group Ordinary 5.3
Goals Soccer Centre Ordinary 5.2
CVS Group Ordinary 4.2
E2V Technologies Ordinary 3.5
Gooch & Housego Ordinary 3.5
Unlisted investments:
Strategic Recovery Fund II Partnership interest 33.3
10 Other receivables
30 June 2013 30 June 2012
£'000 £'000
UK Dividends receivable 235 202
Overseas dividends receivable 16 -
Accrues income 3 -
Other receivables and prepayments 11 20
265 222
11 Other payables
30 June 2013 30 June 2012
£'000 £'000
Amounts due to brokers for settlement of trades - 240
Amounts due to broker regarding share buy backs 1,132 -
Other payables and accruals 263 195
1,395 435
12 Share capital
Number £'000
Allotted, called up and fully paid
Ordinary shares of 10p each:
At 1 July 2012 67,317,324 6,731
Share buy backs (5,277,642) (528)
At 30 June 2013 62,039,682 6,203
13 Reserves
Capital Capital
Reserve Reserve
arising on arising on Capital
Share Special investments investments redemption Revenue
premium reserve sold held reserve reserve
For the year ended 30 June 2013 £'000 £'000 £'000 £'000 £'000 £'000
Opening balance 5,246 51,734 (9,357) 11,527 1,250 1,508
Net gains on realisation of investments - - 4,115 - - -
Foreign exchange gains - - 8 - - -
Increase in unrealised appreciation - - - 12,599 - -
Share buy back expenses - - (122) - - -
Shares bought back for cancellation - (5,645) - - 528 -
Investment Manager's performance fee - - (1,132) - - -
Retained net revenue for the year - - - - - 944
Dividends paid - - - - - (1,010)
As at 30 June 2013 5,246 46,089 (6,488) 24,126 1,778 1,442
Capital Capital
reserve reserve
arising on arising on Capital
Share Special investments investments redemption Revenue
premium reserve sold held reserve reserve
For the year ended 30 June 2012 £'000 £'000 £'000 £'000 £'000 £'000
Opening balance 5,246 54,435 (10,819) 14,936 970 691
Net gains on realisation of investments - - 1,584 - - -
Foreign exchange gains - - 7 - - -
Decrease in unrealised appreciation - - - (3,409) - -
Share buy back expenses - - (129) - - -
Share buy backs - (2,701) - - 280 -
Retained net revenue for the period - - - - - 1,126
Dividends paid - - - - - (309)
As at 30 June 2012 5,246 51,734 (9,357) 11,527 1,250 1,508
14 Reconciliation of net cash flow to net funds
30 June 2013 30 June 2012
£'000 £'000
Opening net funds 2,204 2,324
Increase/(decrease) in cash and cash equivalents in year 5,908 (120)
Closing net funds 8,112 2,204
At Net At
30 June 2012 cash flow 30 June 2013
£'000 £'000 £'000
Cash at bank 404 (42) 362
Liquidity funds 1,800 5,950 7,750
2,204 5,908 8,112
15 Net asset value per Ordinary share
The net asset value per Ordinary share is based on net assets of £78,396,000
(2012: £68,639,000) and on 62,039,682 (2012: 67,317,324) Ordinary shares, being
the number of shares in issue at the year end.
16 Capital commitments and contingent liabilities
The Company has a commitment to invest €1,560,000 (2012: €1,560,000) in
Vintage.
17 Analysis of financial assets and liabilities
The Company's financial instruments comprise securities, cash balances
(including amounts held in liquidity funds) and debtors and creditors that
arise from its operations, for example, in respect of sales and purchases
awaiting settlement and debtors for accrued income.
The Company has little exposure to credit and cash flow risk. Credit risk is
due to uncertainty in a counterparty's ability to meet its obligations. The
Company has no exposure to debt purchases and ensures that cash at bank is held
only with reputable banks with high quality external credit ratings. All the
assets of the Company which are traded on listed exchanges are held by The
Northern Trust Company, the Company's Custodian. Bankruptcy or insolvency of
the Custodian may cause the Company's rights with respect to securities held by
the Custodian to be delayed or limited. The Board reviews the Custodian's
annual controls report and the Investment Manager's management of the
relationship with the Custodian.
The Company invests in markets that operate DVP (Delivery versus Payment)
settlement. The process of DVP mitigates the risk of losing the principal of a
trade during the settlement process. The Manager continuously monitors dealing
activity to ensure best execution, a process that involves measuring various
indicators including the quality of trade settlement and incidence of failed
trades. Counterparty lists are maintained and adjusted accordingly.
Due to timings of investment and distributions, at any one time the Company may
hold significant amounts of surplus cash. Any funds in excess of those required
to meet daily operation requirements are invested in Institutional Liquidity
Funds. These are highly liquid assets that are redeemable on less than 24 hours
notice. The Company only invests in funds that have a AAA rating and the fund's
performance is monitored by the Investment Manager. As at 30 June 2013 the
Company had £7.8 million (2012: £1.8 million) invested in such funds. The
maximum exposure to credit risk is £8,377,000 (2012: £2,426,000). There are no
assets past due or impaired.
The Company finances its operations through its issued capital and existing
reserves.
The principal risks the Company faces in its investment portfolio management
activities are:
â— market price risk, i.e. the movements in value of investment holdings caused
by factors other than interest rate movement;
â— interest rate risk;
â— liquidity risk; and
â— foreign currency risk.
The Investment Manager's policies for managing these risks are summarised below
and have been applied throughout the year:
Policy
(i) Market price risk
The Company's investment portfolio is exposed to market price fluctuations
which are monitored by the Investment Manager.
Adherence to the investment objectives and the limits on investment set by the
Company mitigates the risk of excessive exposure to any one particular type of
security or issuer.
If the investment portfolio valuation fell by 20% from the 30 June 2013
valuation (2012: 20%), with all other variables held constant, there would have
been a reduction of £14,283,000 (2012: 13,330,000) in the return before
taxation and equity. An increase of 20% in the investment portfolio valuation
would have had an equal and opposite effect on the return before taxation and
equity.
(ii) Cash flow interest rate risk exposure
No amounts were drawn on the loan facility during the year (2012: £Nil). This
facility expired on 14 July 2012 and has not been replaced.
The Company's bank accounts earn interest at a variable rate which is subject
to fluctuations in interest rates.
The Company holds cash in liquidity funds. Income from these funds is dependent
on the performance of the funds.
If interest rates had reduced by 0.5% from those obtained at 30 June 2013
(2012: 0.5%), it would have the effect, with all other variables held constant,
of reducing the net return before taxation and equity by £24,000
(2012: £8,000). If there had been an increase in interest rates of 0.5% there
would have been an equal and opposite effect in the net return before taxation and
equity. The calculations are based on average cash at bank and liquidity funds
for the year ending 30 June 2013 and these may not be representative of the
year as a whole.
Non-interest rate risk exposure
The remainder of the Company's portfolio and current assets are not subject
directly to interest rate risk.
Details of the risk profile of the Company are shown in the following tables.
The interest rate risk profile of the Company's financial assets at
30 June 2013 was:
Cash flow
No interest interest
rate risk rate risk
financial financial
Total assets assets
£'000 £'000 £'000
Sterling
Ordinary shares 68,527 68,527 -
Unlisted investments 931 931 -
Liquidity funds 7,750 - 7,750
Cash 362 - 362
Receivables* 254 254 -
77,824 69,712 8,112
Euros
Unlisted investments 1,956 1,956 -
1,956 1,956 -
Total 79,780 71,668 8,112
* Receivables exclude prepayments which under IAS 32 are not classed as
financial assets.
The interest rate risk profile of the Company's financial assets at
30 June 2012 was:
Cash flow
No interest interest
rate risk rate risk
financial financial
Total assets assets
£'000 £'000 £'000
Cash flow
Sterling
Ordinary shares 53,374 53,374 -
Unlisted investments 11,447 11,447 -
Liquidity funds 1,800 - 1,800
Cash 404 - 404
Receivables* 202 202 -
67,227 65,023 2,204
Euros
Unlisted investments 1,827 1,827 -
1,827 1,827 -
Total 69,054 66,850 2,204
* Receivables exclude prepayments which under IAS 32 are not classed as
financial assets.
The interest rate risk profile of the Company's financial liabilities at
30 June 2013 was:
No interest
rate risk
financial
Total liabilities
£'000 £'000
Sterling
Creditors 1,395 1,395
All amounts were due in three months or less for a consideration equal to the
carrying value of the creditors shown above.
The interest rate risk profile of the Company's financial liabilities at
30 June 2012 was:
No interest
rate risk
financial
Total liabilities
£'000 £'000
Sterling
Creditors 435 435
All amounts were due in three months or less for a consideration equal to the
carrying value of the creditors shown above.
(iii) Liquidity risk
The Investment Manager may invest on behalf of the Company in securities which
are not readily tradable, which can lead to volatile share price movements. It
may be difficult for the Company to sell such investments. Although the
Company's AIM quoted investments and unquoted investments are less liquid than
securities listed on the London Stock Exchange, the Board seeks to ensure that
an appropriate proportion of the Company's investment portfolio is in invested
in cash and readily realisable investments, which are sufficient to meet any
funding requirements that may arise.
(iv) Foreign currency risk
The Company invests in a private equity fund denominated in Euros, and this is
the only non-sterling asset. The Company is, therefore, subject to foreign
currency risk.
During the year the Sterling/Euro exchange rate fluctuated 12% between a low of
1.1432 on 12 March 2013 and a high of 1.2848 on 24 July 2012, before closing at
1.1668 on Friday 28 June 2013 (2012: 1.2359).
If the Sterling/Euro exchange rate had decreased by 15% from that obtained at
30 June 2013 (2012: 15%), it would have the effect, with all other variables
held constant, of increasing net profit and equity shareholders' funds by
£345,000 (2012: £322,000). An increase of 15% (2012: 15%) would have decreased
net profit and equity shareholders' funds by £255,000 (2012: £238,000). The
calculations are based on the value of the investment in Vintage as at
30 June 2013 and this may not be representative of the year as a whole. The
balance exposed to foreign currency risk is £1,956,000 (2012: £1,827,000).
Fair values of financial assets and financial liabilities
The carrying value of the financial assets and liabilities of the Company is
equivalent to their fair value.
Managing Capital
Capital structure
The Company is funded through shareholders' equity and cash reserves. The
Company's Articles of Association permit the Board to borrow up to 25% of the
Company's net asset value at the time of borrowing. Capital is managed so as to
maximise the return to shareholders while maintaining an appropriate capital
base to allow the Company to operate effectively in the marketplace and to
sustain future development of the business. The Company pays such dividends as
are required to maintain its investment trust status, and may also from time to
time return capital to shareholders through the purchase of its own shares at a
discount to net asset value.
Capital constraints
The Company operates so as to qualify as a UK investment trust for UK tax
purposes. This previously required that no investment exceeded 15% by value of
the Company's portfolio at the point of investment. New regulations for
obtaining and retaining investment trust status have been published by
HM Revenue & Customs and came into force on 1 January 2012, which no longer
require this 15% test to be met. It remains the Company's investment policy
that the maximum investment in any single investee company will be no more than
15% of the Company's investments at the time of investment.
The Company's capital requirement is reviewed regularly by the Board.
18 Related party transactions and transactions with the Investment Manager
The Investment Manager may draw upon advice from the Industry Advisory Panel
("IAP") of which Sir Clive Thompson, a Director of the Company, is a member.
The IAP was established to provide advice to SVGIM in relation to the strategy,
operations and management of potential investee companies.
The amounts payable to the Investment Manager are disclosed in Note 3 above.
The amount due to the Investment Manager for management fees at 30 June 2013
was £157,000 (30 June 2012: £115,000). The amount due to the Investment Manager
for performance fees at 30 June 2013 was £1,132,000 (30 June 2012: £nil).
SVGIM has entered into Commission Sharing Agreements with a number of executing
brokers. Under this arrangement the amount of commission received by SVGIM in
relation to trading activities carried out on behalf of the Company for the
period to 30 June 2013 was £6,600 (2012: £4,000). The amount outstanding to
SVGIM at the year end was £5,600 (2012: £1,000).
Fees paid to Directors are disclosed in the Directors' Remuneration Report and
full details of Directors' interests are set out in the Report of the
Directors, both of which can be found within the full Annual Report and
Accounts.
NOTICE OF ANNUAL GENERAL MEETING
The Annual General Meeting of Strategic Equity Capital plc will be held at the
offices of Canaccord Genuity Limited, 1st Floor, 41 Lothbury, London EC2R 7AE
at 11.30 am on Tuesday, 5 November 2013.
The notice of this meeting can be found in the Annual Report and Accounts at:
www.strategicequitycapital.com
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for inspection
at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.