Half-yearly Report

Strategic Equity Capital plc Half Yearly Report & Financial Statements for the six months to 31 December 2013 Key highlights: John Hodson, Chairman of Strategic Equity Capital plc, commented that the Company has seen: - 29.4% increase in net asset value ("NAV") per share over the six months ended 31 December 2013 - 4.6% outperformance of comparable FTSE Smaller Companies ex Investment Companies Index over the same period - 16.6% outperformance of comparable FTSE Smaller Companies ex Investment Companies Index over 3 years - Portfolio companies continue to display attractive valuations and strong operational momentum For further information, please contact: Capita Sinclair Henderson Limited 01392 477500 Jonathan Carslake Daniel Roach GVO Investment Management Limited 0203 691 6100 Investment: Stuart Widdowson, Adam Steiner Investor relations: Theresa Russell Copies of the announcement and other corporate information can be found on the Company website at: www.strategicequitycapital.com 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 below. Investment Manager's strategy The strategy of GVO Investment Management Limited ("GVOIM" or the "Investment Manager") is to invest in publicly quoted companies which will increase their value through strategic, operational or management change. GVOIM 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. Shareholder information Financial calendar Company's year-end 30 June Annual results announced September Annual General Meeting November Company's half-year 31 December Half yearly results announced February Share price The Company's Ordinary shares are listed on the main market of the London Stock Exchange. The mid market price is quoted daily in the Financial Times under `Investment Companies'. Share dealing Shares can be traded through your usual stockbroker. Share register enquires The register for the Ordinary shares is maintained by Computershare Investor Services plc ("Registrar"). In the event of queries regarding your holding, please contact the Registrar on 0870 707 1285. Changes of name and/or address must be notified in writing to the Registrar whose address is shown below. NAV The Company's net asset value is announced weekly to the London Stock Exchange. Website Further information on the Company can be accessed via the Company's website www.strategicequitycapital.com Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's on the Company's website (or any other website) is incorporated into, or forms part of, this announcement. FINANCIAL SUMMARY six months At At At % change to 31 December 30 June 31 December 31 December 2013 2013 2012 2013 Performance Total shareholder return for the period (1) 29.39% 25.40% 11.29% Capital return Net asset value per Ordinary share 162.00p 126.36p 111.97p 28.21% Ordinary share price (mid-market) 146.50p 104.25p 91.75p 40.53% Discount of Ordinary share price to net asset value 9.57% 17.50% 18.06% Average discount of Ordinary share price to net asset value for the period ended 13.12% 17.71% 18.51% Total assets (£'000)(2) 96,772 79,791 72,599 21.28% Equity shareholders' funds (£'000) 96,487 78,396 72,360 23.08% Ongoing charges(3) 1.30% 1.16% 1.16% Revenue return per Ordinary share 0.61p 1.45p 0.68p Dividend yield 1.12% 1.44% 1.62% Proposed final dividend for year n/a 1.50p n/a n/a Ordinary shares in issue with voting rights(2) 59,558,111 62,039,682 64,624,655 (4.00%) Interim period's Highs/Lows High Low Net asset value per Ordinary share 163.07p 127.60p Ordinary share price 146.50p 104.25p (1) Total return is the increase per share in net asset value plus dividends paid. (2) The fourth semi-annual tender offer took place in November 2013. 2,481,571 shares were bought back for cancellation at a cost of £3,439,000. (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. 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 and 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 commitment 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. CHAIRMAN'S REPORT Introduction The Company made excellent progress in the six months to the end of December 2013, delivering good growth in both share price and net assets. The Manager's consistent focus on high quality smaller companies with strong competitive positions in growing niche markets has delivered market outperformance over the medium and long term. In the six month period to 31 December 2013, the portfolio has also benefitted from its bias towards investing in companies outside the FTSE 350 and the ability of investee companies to generate growth alongside high levels of free cash flow. Performance As at 31 December 2013 the Company had net assets of £96.5 million (162.0 pence per share). This represented an increase of 23.1% over the six month period. Including dividends, the Company delivered a total return to shareholders of 29.4% over the six months. The Company outperformed the FTSE Smaller Companies ex Investment Trust index by 4.6%. This strong absolute and relative performance was delivered despite maintaining an average cash balance of 11%. The Company has delivered a NAV total return per share of 82.9% over the past three years, significantly exceeding the 66.4% return from the FTSE Small Companies ex Investment Trust index. The Company's five year NAV growth of 309.0% has exceeded the return from the index by more than 100%. Notably, growth in the Company's NAV has been delivered without the use of gearing. Discount Management The discount to NAV at which the Company's shares trade narrowed significantly from an average in the financial year ending June 2013 of 17.7% to an average of 13.1% and ended the period at 9.6%. The Board believes that the narrowing in the discount has been driven by a mix of the strong ongoing performance of the Company and its broadening shareholder base. The Manager has increased its marketing activity as the market capitalisation of the Company approaches £100m, the level at which many discretionary fund management groups will start considering an investment trust for inclusion in their portfolios. The Board As stated in the Annual Report, now that the acquisition of the Manager has been completed and the new arrangements are working satisfactory, the Board is actively taking steps to recruit a successor to myself as the present Chairman, as I have now completed over nine years of service. Investment Manager The various improvements made to the investment process since the financial crisis have led to a clear improvement in the Company's performance and consistency of returns. Since the end of June 2009 the Company's NAV has substantially outperformed the FTSE Smaller Companies ex Investment Trust index. I am confident that the Manager's approach to investment can create value for shareholders over the long term. Having reviewed the Investment Manager's report, I can confirm that it has complied with our investment restrictions and the FCA rules. In September 2013, Hansa Aktiengesellschaft ("Hansa"), a Swiss-based international investment and holding company, acquired SVG Investment Managers Limited ("SVGIM"), the then Manager, from SVG Capital plc. Hansa also acquired SVG Capital's shareholding in the Company on the announcement of the deal in August 2013. SVGIM has since been re-named GVOIM. GVOIM has retained its successful investment culture and process within the new structure. The current investment managers of the Company are unchanged and have retained complete investment autonomy, leading to the continuity of the investment approach. Alternative Investment Fund Managers Directive The Board has been monitoring the progression of the Alternative Investment Fund Managers Directive ("AIFMD") and has been actively discussing options with providers. This will ensure that the Company will be able to comply with its requirements when AIFMD is fully implemented in July 2014. The current intention is that the Manager will be the Alternative Investment Fund Manager. Banking Arrangements The Company has maintained its policy of operating without a banking facility. The Manager and the Board periodically review the Company's gearing policy. Tender In May 2012, the Company introduced periodic tender offers in May and November each year. Subject to unforeseen circumstances, the Directors intend to offer such tender offers in the event that the discount to NAV at which the Company's shares trade exceeds on average 10 per cent. over the relevant 6 month period to June or December as the case may be. Each tender offer is for up to 4 per cent. of the Company's issued share capita at a price equivalent to a 10 per cent. discount to NAV (including current period revenue and deducting the estimated tender costs) per share. As a result, in November 2013, the Company undertook its fourth semi-annual tender offer, buying back 2,481,571 shares for cancellation at a price of 137.90p per share. As mentioned above, the average discount to NAV at which the Company's shares traded during the 6 month period to 31 December 2013 was 13.1 per cent., and the discount to NAV at which the Company's shares trade has narrowed considerably over the period from 1 July 2013 to date. The Company's shares now trade at around 10 per cent. discount to NAV. It remains the Board's current intention to offer a tender to shareholders in May 2014, a circular in respect of which will be posted in April 2014. However, in the event that the discount continues to narrow prior to publication, the Board will re-consider whether it is in shareholders' best interests to proceed with the tender offer. Dividend The Directors continue to expect that returns for shareholders will derive primarily from the capital appreciation of the shares rather than from dividends. In line with previous years the Board does not intend to propose an interim dividend. Marketing Activities The Manager and the Company's broker continue to work together to broaden the shareholder base and refresh the shareholder register and have increased marketing activities to the regional private client broker community. The increasing profile of the Company and its strong medium term performance has captured the attention of retail investors as average daily trading volumes increased substantially in the last quarter of 2013. Outlook The Board shares the Manager's belief that the prospects for the Company remain good. The increased interest in equities from institutional and private investors has led to markets re-rating. However, the growth prospects and balance sheets of the portfolio companies appear strong and continue to improve. The global economy appears to be supportive of a period of good earnings growth and corporate managers are more positive. Investor interest in smaller companies continues to grow, which should benefit the Company and its underlying holdings. If these trends are sustained they could prove to be a tailwind for the Company's continued NAV growth. John Hodson 27 February 2014 INVESTMENT MANAGER'S REPORT Investment Strategy Our strategy is to invest in publicly quoted companies which will increase their value 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 valuations, 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 less than £300 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 Stock markets were strong over the financial period as investors' appetite for risk returned. Investors shrugged off the ongoing imbalances and instability of many peripheral European countries. The weeks leading up to and after the enactment of the sixteen day US federal government shutdown at the end of September did not produce excessive panic; with a few exceptions, companies were not forced into warning on profits. Equally, investors correctly anticipated that the US Congress would reach a deal on the budget for 2014 in advance of the mid December deadline. UK economic growth data continued to surprise positively, however much of this was driven by a mix of government spending returning to nominal growth (from a reduction in 2012) and higher consumer spending. The latter appeared to have been stimulated by a mix of ongoing low interest rates, high levels of employment and a decline in the savings ratio. The period began with a continuation of trends from earlier periods, with a small number of larger constituents of the FTSE Small Cap index leading the market. However from late July/ early August, we began to witness smaller members of the FTSE Small Cap index and companies listed on AIM outperforming as they began to re-rate. The ratings of a number of these companies were much lower than equivalent mid sized companies, despite offering similar growth. With the improving economic environment, investors appear to have returned to investing in slightly less liquid stocks. The ability for private investors to hold AIM stocks in ISAs from early August may also have stimulated more private investor interest. The Company's NAV performed well after this inflection point in late July. Over the six months, the FTSE Smaller Companies Index ex Investment Trusts outperformed the FTSE100 index by 13.5%, rising by 24.8%. Interestingly, AIM companies also performed well with the FTSE AIM index rising by 23.6%. Smaller Companies also outperformed the FTSE 250 Index, which rose by 18.3%. After a slow start in 2013, M&A among small and mid-cap companies increased after August. Notable transactions included the bids for Delcam by Autodesk and Andor Technologies by Oxford Instruments. In both cases, the valuation multiples paid for the target companies appeared to price in significant short term cost and/or sales synergies. Performance Review Performance over the period was strong and continued to be driven by stock specific factors. The Company's portfolio continued to trade well, with the majority of companies meeting or exceeding consensus earnings forecasts. Indeed there were no negative attributors during the period - i.e. all holdings delivered a positive return. Top 5 contributors to performance Valuation at Period period end attribution Company £'000 (basis points) E2V Technologies 11,311 376 Wilmington 7,568 313 4imprint 9,498 303 Andor Technology 4,400 248 CVS Group 3,105 239 A number of holdings performed exceptionally well during the period. The most significant contributors to performance were E2V Technologies ("E2V"), Wilmington, 4imprint, Andor Technology and CVS Group which delivered market beating returns of 30.4%, 48.2%, 33.7%, 86.0% and 41.9% respectively over the period, materially outperforming the 24.8% rise in the FTSE Small Cap index. At its AGM in July 2013, E2V announced that its longstanding CEO was leaving the business and that a process to find a successor had started. The new CEO was announced in October 2013 and will join the business in Q1 2014. Despite tough end market conditions, the shares re-rated significantly over the period. The incoming CEO joins from Spectris PLC, a well regarded FTSE 250 electronics company, and it is likely that he will be mandated to improve both organic growth and returns. Despite the re-rating, we believe that the shares are priced for moderate future growth and imply no material improvement in margins. Wilmington enjoyed a strong re-rating, helped by the well-received acquisition of Compliance Week, an online subscription portal. We believe that the market had previously overlooked the compelling mix of organic earnings growth and cash generation offered by the company, supplemented by upside from bolt-on acquisitions. Despite the strong run we still believe that there is upside to both earnings and rating. The business model involves selling data and services, often on a subscription basis, typically to repeat clients. As a result, sales and earnings visibility tend to be strong, and cashflow typically exceeds profits due to clients paying upfront. 4imprint's US division, which accounts for more than 90% of reported profits, continued to generate organic revenue growth in the low teens. With its low market share and disruptive business model, we continue to believe that it has many years of growth ahead of it. The shares continued to re-rate over the period, and the valuation is beginning to reflect the growth potential of the business. Andor Technology ("Andor") delivered a strong return of 86% over the period, recovering from a disappointing trading update in mid June. The position was increased significantly in early August, at a price of 307p following additional due diligence, including a site visit to the head office and manufacturing base in Belfast. We believed that the company's rating belied its quality and medium term growth prospects, with a small number of investors being unwilling to own the shares due to the lack of short term earnings momentum. In the autumn, Andor announced the bolt on acquisitions of Spectral Applied Research and Apogee Imaging Systems, both funded by cash from the company's balance sheet. The company's low rating attracted a bid from Oxford Instruments, initially pitched at 500p, and subsequently increased to 525p. The bid has helped deliver a strong short term return for the Company's NAV. However, we believe that the commercial prospects for the business were improving and that higher returns could have been achieved over the medium term were the business to remain independent. CVS Group continued to deliver in line performance, driven by continued and accelerating like-for-like growth, supplemented by further accretive acquisitions of veterinary practices over the period. Outside of the top five contributors, other holdings enjoyed strong rises in their share prices. RPC rose by 49% following the announcements of further cost savings initiatives as well as the acquisition of M&H Plastics. Since the Company first invested in 2007, the company's executives and board have delivered significant shareholder value-the market capitalisation has grown from c.£300m to £1bn, with only £90m equity raised from shareholders - i.e. £610m value created excluding dividends paid. Over the same period, the FTSE Small Cap ex Investment Trusts Index generated a single digit positive absolute return. Gooch & Housego's share price rose by 38%, driven by strong final results and investors welcoming the two bolt on acquisitions funded from cash on the balance sheet. Allocate's share price rose 35% following in line profit performance with the final results, with better cashflow than anticipated. We believe that the shares remain significantly under valued compared with the growth prospects, the quality of the business and precedent M&A multiples in the healthcare software sector. XP Power, Goals Soccer and Northbridge all enjoyed share price increases of above 30% over the period, and reported in line results. Northbridge made two bolt-on acquisitions, the largest of which was funded by a modest equity placing. Bottom 5 contributors to performance Valuation at Period period end Attribution Company £'000 (basis points) Advanced Medical Solutions 168 2 Cash 9,487 3 Hill & Smith Holdings 393 8 Vintage Mizuho 1 1,985 16 Lavendon 2,364 39 With the exception of Lavendon, the bottom contributors to performance were the smallest holdings in the portfolio or cash. Nevertheless all delivered positive returns. Lavendon's financial performance was in line with expectations over the second half of the year. However this masked slightly disappointing returns in the UK business with better than anticipated results in the profitable Middle East business unit. We believe that investors are looking for tangible evidence of a cyclical recovery in the UK business before re-rating the shares further. Advanced Medical Solutions and Hill & Smith Holdings are two small holdings which we initiated during 2013. In both cases, following initial market purchases, the share prices moved quickly above our buying level. The positions are unlikely to be increased other than in the case of a secondary fundraising, a market setback, or favourable stock specific movements. Vintage Mizuho 1 ("Vintage 1") delivered a steady return of 6.8% over the period. However we believe that further distributions at a premium to book value are likely over the short term given the vintage of the private equity portfolios and the favourable exit climate for private equity investors. The average cash balance in the Company's portfolio was 11% over the period, reflecting both the Board and the Investment Manager's conservative approach to gearing and desire to retain the ability to participate in block transactions at short notice without being a forced seller of other holdings. Dealing activity The level of portfolio activity picked up compared with previous periods, with disposals of £17.5m (excluding distributions from unlisted investments) in the period representing around 20% of the weighted average NAV. In addition £1.2m of net distributions were received from unlisted investments. £11.1m of purchases were made. KCOM was exited in full over the period raising £6.5m. This has been a successful investment for the Company, with the investment of £4.2m delivering 2.6x cost and 32% IRR over our holding period. The shareholder register has transitioned from recovery investors to income investors following the successful turnaround executed since late 2008. We do not believe that the future returns will meet the requirements of the portfolio. Profits were taken from other mature holdings, which typically have delivered in line with our original expectations. Selective selling down of Lavendon netted £4.5m. As commented on previously, CVS Group has continued to deliver improved like-for-like sales growth and re-started its M&A programme. The shares have re-rated to reflect the improving organic and inorganic growth prospects and this has been used to reduce the position. Sales netted £3.0m. In addition, mature holdings including RPC, Journey Group, Tyman and Gooch & Housego were reduced at various points in the period following strong share price performances. Of the £11.1m invested, more than 60% was deployed into a major new investment, Servelec plc ("Servelec"), in a block, on its £122m IPO in late November 2013. Servelec is a UK-based technology group with three distinct operations: 1. Market leader in electronic patient records for Mental and Community NHS healthcare trusts; 2. Specialist technical services involved in specifying, designing, assembling, installing and managing automation and safety systems for the oil & gas and petrochemical industries; 3. Telemetry hardware and SCADA software for utilities, process industries and transport sectors. Prior to the IPO, Servelec constituted the UK activities of CSE Global, a quoted Singaporean technology group. The investment in Servelec represents the first IPO investment decision made by funds managed by GVOIM since its formation in 2002. We are typically sceptical about investing in IPOs, partially due to their patchy short term track record, particularly those which float on AIM. However, the long term performance of some IPOs has been exceptional - for example Capita, Dignity and Ultra Electronics. There were five key reasons why we invested in Servelec at IPO. Firstly, we had significant notice and time to fulfil our due diligence requirements. This enabled us to meet with the broader management team on multiple occasions and undertake our own customer and competitor due diligence. Secondly, Servelec operates in sectors and markets we understand and have experience of. For example, the main competitor in the healthcare division is Civica, which was a portfolio holding of the Company prior to its acquisition by 3i in 2008. Thirdly, the management's interests were aligned with ours as shareholders - the board invested £3.2m on IPO. Fourthly, the IPO was attractively priced given the medium term organic and inorganic growth prospects as well as our sum-of-parts valuation. Finally, as a 100% free float, there was no overhang from the vendor. Although the investment is in its early stages, it is pleasing to note that it has already made a significant positive contribution to performance. We deployed the remaining proceeds into enlarging existing holdings and establishing small weightings in two new investments. Further investments of £1.4m and £1.2m were made in Wilmington and Gooch & Housego respectively during the early summer months as we believed they offered an attractively rated blend of growth and cashflow. £0.8m was invested in Andor Technology following the due diligence site visit to Belfast in early August and other primary research. An additional £0.7m was invested in Northbridge through two placings in the late summer, the latter of which was to support the acquisition of their Singaporean agent Crestchic Asia. We understand that the purchase consideration for the business was at a considerable discount to the replacement value of Crestchic Asia's rental fleet of loadbanks. The position in XP Power was topped up on an opportunistic basis as the shares came under pressure when it was demoted out of the MSCI European Small Cap Index and tracker funds exited. Portfolio Review The portfolio remained highly focused, with a total of 18 direct holdings and the top 10 holdings accounting for 75% of the NAV at the end of the financial period. The portfolio remains predominantly invested in quoted equities, however, the percentage of the portfolio invested in unlisted securities changed from 3.7% to 2.1% at the end of the period due to the final distributions from SRFII. 9.6% of the NAV was invested in cash at the period end. Portfolio as at 31 December 2013 - Top 10 Largest Investments % of % of invested invested Date of portfolio at portfolio at % of Sector first Cost Valuation 31 December 30 June net Company Classification investment £'000 £'000 2013 2013 asset E2V Technologies Technology Oct 2009 3,267 11,311 13.0 12.7 11.7 Tyman Manufacturing Apr 2007 3,832 9,644 11.1 13.1 10.0 4imprint Support services Feb 2006 3,584 9,498 10.9 10.0 9.8 Servelec Group Technology Dec 2013 6,500 8,388 9.6 - 8.7 Wilmington Group Media Oct 2010 5,085 7,568 8.7 5.4 7.8 Gooch & Housego Technology Dec 2011 4,092 6,796 7.8 5.6 7.0 Allocate Software Technology Dec 2009 3,534 5,608 6.4 5.9 5.8 Goals Soccer Leisure Mar 2012 3,269 4,818 5.5 5.2 5.0 Andor Technology Technology Aug 2012 2,986 4,400 5.0 2.3 4.6 RPC Group Manufacturing Feb 2007 1,483 4,047 4.6 5.2 4.2 37,632 72,078 82.6 65.4 74.6 Portfolio as at 31 December 2013 - Sector split Sector Percentage Technology 40.5% Support services 17.1% Manufacturing 14.6% Net cash 9.6% Media 7.9% Leisure 5.0% Retail 3.2% Unquoted Investments 2.1% Portfolio as at 31 December 2013 - Size split (by market capitalisation) Size Percentage £100m - £300m 43.8% £300m - £500m 24.8% Less than £100m 15.5% Net cash 9.6% Greater than £500m 4.2% Unquoted investments 2.1% The underlying operational performance of the portfolio remains strong. In most cases, companies are operating in growth markets, generating good returns but rarely peak margins. We remain wary of continuing to hold investments where we believe peak returns are being delivered by companies operating in markets which are close to the top of their cycle. There are a number of holdings which have the potential to improve returns, even in flat markets, through specific management action and attention. We continue to like these investments, provided a flawless recovery is not priced in, as they can generate earnings growth and improved cashflow even in flat markets. E2V has the potential to be one such investment, where we believe suboptimal spending decisions may have led to the benefits of a significant cost restructuring in 2010 and 2011 being temporarily lost. With a revitalised board in place, we believe there are good prospects for positive medium term earnings and cashflow upgrades. Meanwhile, the rating remains below that of many sector peers, implying neither the scope for improved returns nor growth. Portfolio characteristics FTSE Small Cap ex Investments Trusts Consensus Median Strategic Equity FTSE Small Cap ex ex financials and portfolio characteristics Capital Investment Trusts resources Price/Earnings ratio (FY1) 15.7x 17.7x 15.4x Dividend yield 2.2% 2.2% 2.2% Price/ Book ratio 2.4x 1.5x n/a Price/ Sales ratio 1.8x 0.7x 0.7x Price/Cash flow ratio 16.5x n/a n/aSVG Cash flow yield 10.1% n/a n/a Forecast earnings growth (FY1) 13.0% 52.2% 13.7% Forecast net debt to EBITDA 0.0x 2.0x 1.6x Source: Factset Portfolio Analysis System, Investec, Peel Hunt. The poor, but recovering profitability of the resources and financials sectors in the FTSE Small Cap Index has a material impact on overall index valuation and growth characteristics. Given this, we believe that comparison against the FTSE Small Cap Index excluding these sectors is worthy of inclusion. Once again, as in previous reports, the financial and valuation characteristics of the Company's portfolio compared with the average FTSE Small Cap Company (ex resources and financials), shows similar earnings growth, at a marginally higher p/e ratio, with a similar dividend yield and a much stronger balance sheet. The two key implications of this data set remain the same: Firstly, on a balance sheet adjusted basis (i.e. with similar levels of net debt, achieved through a return of capital and share consolidation), the Company's portfolio would trade at a significantly lower p/e multiple with improved earnings growth. Secondly, in our opinion, properly utilised, the strong balance sheets of the portfolio companies allow their boards many more options to enhance shareholder value than the average small cap company. These options include increasing the dividend pay out ratio, making earnings enhancing acquisitions and returning capital to shareholders. In comparison, the "risky" highly geared small cap recovery stocks tend to be reliant on benign or improving end markets for earnings growth, rather than the actions of their boards. With five portfolio companies making acquisitions from their own cash resources in the last quarter of 2013 alone, it is clear that portfolio company boards are positive about their prospects. Even after this M&A activity, balance sheets in aggregate across the portfolio remain ungeared. Unlisted investments Over the period, the Company received a total of £0.9m from SRFII and £0.2m from Vintage 1. The SRFII investment period ended in June 2011 and the fund made its final distribution in July 2013. The outstanding commitment relating to Vintage 1 is £1.3m and its manager has communicated that it does not expect to make any further net draw downs. Outlook We continue to believe that the outlook for equities remains positive for the medium to long term in absolute terms. Although equities are less obviously "cheap" than at any time since 2008, their relative value compares well with other asset classes, in particular bonds. Indeed, asset allocators and retail investors are shifting into equities and in the case of UK Smaller Companies at the highest rate since the millennium. Increasing confidence over the macro economic recovery in the US and UK appears to be driving this, with equities seen as being "investable" again. Negative real interest rates in both areas are supportive for equities. Company balance sheets are much stronger than in 2007/8 and the prospect of permanent capital value destruction from equities appears lower than for some time. Yet, as always, risks remain. The Eurozone is at risk of suffering from deflation, with several sovereign wealth crises possible at any time. The end of tapering in the US is likely to lead to higher interest rates and a stronger dollar. The consequences on other currencies and sovereign debt pricing, particularly in the developing world, could lead to a wholesale "re-pricing" of risk and increased market volatility. Much of the stock market return since mid 2012 has been driven by re-rating, only some of which is warranted. We believe that some quoted companies have re-rated too far and trade at significant premiums to their intrinsic value. Precedent M&A multiples in their sectors show that they make unattractive trade or leveraged buyout candidates on account of their low cashflow yields and/or contingent liabilities. In comparison, focused research can still unearth higher quality stocks which remain very attractively rated given their cashflows and growth prospects. We believe that there are three key implications from the overall re-rating of the market: - Lower quality recovery stocks, priced for recovery, risk significant share price declines if they do not deliver to expectations; - Higher quality stocks, delivering on their expectations, are probably undervalued. If they do not re-rate, we anticipate that they will be acquired by trade or financial buyers; - 2014 will be a stock-pickers market. - We are prudently assuming that the pace of re-rating will moderate or even cease, and that delivered earnings growth, M&A and cash generation/degearing will provide sustainable returns to equity holders. Given that we focus on investing in companies where we anticipate multiple drivers of return, not just re-rating, we are confident that the Company's NAV can continue to progress even in a market where re-rating is absent. The prospects for these other three key drivers of shareholder value look good. Estimated forward earnings growth from both the portfolio and the smaller companies index continues to gradually creep upwards, and now stands at more than 13% p.a. supported by a more positive macro outlook. The portfolio continues to generate strong cashflow, as demonstrated by the average net debt continuing to fall, even despite the multiple bolt-on acquisitions completed by portfolio companies. Adding together the earnings growth of the portfolio, the dividend yield of 2.2%, degearing of 2-3% of the portfolio companies' market capitalisations, suggests mid to high teens returns are achievable even in the event of no further re-rating or corporate activity. Yet we anticipate that M&A will continue to accelerate from the end of 2013. In our experience, our highly selective stock picking approach has led to many M&A approaches for portfolio companies over time. We would be disappointed if there were no approaches for any of our holdings during 2014. We would also anticipate portfolio companies continuing to utilise their strong balance sheets to make accretive bolt-on acquisitions themselves. Given the potential risks in the markets, we will continue to invest in companies with strong balance sheets, which are likely to prove more resilient investments in times of uncertainty. We will almost certainly run with a strong net cash balance at a portfolio level to allow us to act nimbly as and when we come across compelling investment opportunities. Whilst the Company has participated in an IPO during 2013, we anticipate that new investments will be derived from secondary fundraisings and market purchases during 2014. We have a pipeline of a number of situations we are watching closely. Subject to finalising our due diligence, a small number of these have the potential to become significant new investments during the course of 2014. In conclusion, 2014 is likely to see a further year of gains for equities, although the level of progress is unlikely to match that of 2012 and 2013. The market may become more discriminating between strong and weak companies. M&A activity should continue to build. Given the extended run in equities and the continued macro economic imbalances across the globe, we would not be surprised to see a temporary correction in equities over the year, upon which we aim to capitalise. The portfolio is in good health with more than 80% of underlying company sales to North America and the UK which we perceive to be the strongest areas for growth in 2014. We anticipate further growth in the Company's NAV. 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 benefitted recently from material upgrades to forecast earnings. Following the disposal of Brand Addition, virtually all of the profits of the group are generated by the fast growing US business. The company has a significant net cash balance. Funds managed by GVOIM currently hold approximately 8% of the company's equity. Allocate Software is the leading workforce optimisation software applications provider for global organisations with large, multiskilled 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 leading 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. The Company became the 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 four further acquisitions of complementary businesses-Dynamic Change, Real Time Health and Zircadian in the UK and RosterOn in Australia. The quality and visibility of earnings is improving significantly as early contracts renew - to date the company has a 100% renewal rate. Funds managed by GVOIM currently hold approximately 9% of the company's equity. Andor Technology is a global market leader in the design and manufacture of specialist scientific cameras, mainly for the research and life sciences markets. Originally "spun out" of Queens University in the 1990s, it is based in Belfast. Approximately 95% of sales are exported out of the United Kingdom. Its superior product performance has led the company to gain significant market share from international peers. Organic growth suffered through late 2012 and 2013, due to temporary spending cuts in some major markets. The company continued to be managed for the long term with its sales and R&D budgets growing despite the soft end markets, leading to what we believed to be a temporary, but significant fall in margins and earnings expectations. This led to a savage de-rating prior to our investment. In December 2013, the company recommended a cash bid from Oxford Instruments. Funds managed by GVOIM currently hold approximately 3% 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 GVOIM, 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 in 2012, which has virtually eliminated debt. During 2013, a new chairman and CEO were appointed. Funds managed by GVOIM currently hold approximately 5% of the company's equity. Goals Soccer is a developer and operator of 5-a-side soccer centres in the UK, trading from 42 centres. In early 2012, the company announced that it would significantly reduce the speed of rolling out new sites for 12-18 months. Given that the roll out of sites requires significant capital, the impact of this change was to increase the free cash generation of the business and drive a large degearing of its balance sheet. The entry valuation was a significant discount to precedent M&A - specifically the acquisition of its only major competitor, Powerleague, by Patron Capital in 2009. A recently appointed chairman is working with the executive team to optimise operational performance and return the business to growth. Funds managed by GVOIM currently hold approximately 5% of the company's equity. Gooch & Housego is a global market leader in the design and manufacture of specialist optical components and subsystems. Funds managed by GVOIM previously invested in the company during 2010 and the Manager knows the business and management team well. The company's shares de-rated significantly at the end of 2011 and early 2012, driven by concerns over slowing activity in their industrial division. GVOIM took advantage of this weakness in the share price to rebuild a stake at a significantly lower level than its exit price in late 2010. The new product development pipeline and ramping up of volumes on existing contracts has the potential to deliver significant growth over the medium term. Its fiberoptic products have strong long term growth prospects as they substitute conventional electronics in aerospace and defence applications. A strong balance sheet continues to enable the company to augment this organic growth with acquisitions. Funds managed by GVOIM currently hold approximately 3% of the company's equity. RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from GVOIM and another shareholder acting in concert the group initiated a strategic and operational review and made substantial changes to its board in 2008. 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. This deal created significant shareholder value. RPC has announced further cost savings initiatives over the last year, which will continue to improve group returns. It also announced the acquisition of UK-based M&H Plastics in December 2013, which we believe will make an excellent addition to the group. Funds managed by GVOIM currently hold approximately 1% of the company's equity. Servelec is a UK technology company with three key divisions. The healthcare software business is a market leader in the design and operation of electronic patient records for NHS mental and community trusts. The controls division specifies, designs, assembles, installs and maintains safety and remote control systems for the oil & gas and process industries. The technologies division provides software, hardware and systems for industrial telemetry and SCADA applications. It was listed in November 2013, having previously been owned by a Singaporean listed group. The company has a strong balance sheet. Future cashflow is expected to include a significant unwind of debtors from work carried out on the NHS NPFIT programme as it ends. Profits appear to be at a cyclical low. Funds managed by GVOIM currently hold approximately 5% of the company's equity, acquired at IPO. Tyman is a 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 was 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. We believe that there is substantial upside from a medium term recovery in the end markets of the building products division in North America. The recent acquisition of North American peer Truth has the potential to bring significant cost and sales synergies to augment this end market recovery. Funds managed by GVOIM currently hold approximately 4% of the company's equity. Wilmington 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 fully reflected in the current rating. With a stronger balance sheet, there is potential upside from targeted M&A. In July, the company announced the acquisition of Compliance Week, a highly complementary asset to their existing business, at a very reasonable multiple of profits. The management team has a good track record of creating value from M&A. Funds managed by GVOIM currently hold approximately 4% of the company's equity. GVO Investment Management Limited 27 February 2014 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 GVOIM'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. INTERIM MANAGEMENT REPORT The important events that have occurred during the period under review are set out in the Chairman's report and Investment Manager's report, which also include the key factors influencing the financial statements. The Directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 30 June 2013. The principal risks are set out in the annual report which is available at www.strategicequitycapital.com. In summary these risks are: - General risk; - Market risk; - Regulatory risks; - Financial risks; and - Financial instruments. Going concern The Company has adequate financial resources to meet its investment commitments and as a consequence, the Directors believe that the Company is well placed to manage its business risks. After making appropriate enquiries and due consideration of the Company's cash balances, the liquidity of the Company's investment portfolio and the cost base of the Company, the Directors have a reasonable expectation that the Company has adequate available financial resources to continue in operational existence for the foreseeable future and accordingly have concluded that it is appropriate to continue to adopt the going concern basis in preparing the Half-Yearly Report, consistent with previous years. RESPONSIBILTY STATEMENT The Directors confirm that to the best of their knowledge: - the condensed set of financial statements contained within the Half-Yearly Report has been prepared in accordance with International Accounting Standard 34, `Interim Financial Reporting' issued by the International Accounting Standards Board as adopted by the EU, and gives a true and fair view of the assets, liabilities, financial position and profit of the Company as required by the Disclosure and Transparency Rules ("DTR") 4.2.4R; - the interim management report includes a fair review of the information required by: (a) DTR 4.2.7 of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and (b) DTR 4.2.8 of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last annual report that could do so. This Half Yearly Report was approved by the Board of Directors on 27 February 2014 and the above responsibility statement was signed on its behalf by John Hodson, Chairman. Statement of comprehensive income for the 6 month period ended 31 December 2013 6 month period ended Year ended 6 month period ended 31 December 2013 30 June 2013 31 December 2012 unaudited audited unaudited Revenue Capital Revenue Capital Revenue Capital return return Total return return Total return return Total Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Investments Gains on investments at fair value through profit or loss - 22,150 22,150 - 16,722 16,722 - 7,087 7,087 - 22,150 22,150 - 16,722 16,722 - 7,087 7,087 Income Dividends 22 950 - 950 1,798 - 1,798 858 - 858 Interest 22 19 - 19 28 - 28 15 - 15 Underwriting commission 22 - - - 2 - 2 - - - 969 - 969 1,828 - 1,828 873 - 873 Expenses Investment Manager's fee 88 (398) - (398) (539) - (539) (249) - (249) Investment Manager's performance fee - - - - (1,132) (1,132) - - - Other expenses 33 (199) (61) (260) (345) (122) (467) (171) (61) (232) Total expenses (597) (61) (658) (884) (1,254) (2,138) (420) (61) (481) Net return before finance costs and taxation 372 22,089 22,461 944 15,468 16,412 453 7,026 7,479 Finance costs - - - - - - - - - Net return before taxation 372 22,089 22,461 944 15,468 16,412 453 7,026 7,479 Taxation - - - - - - - - - Net return after taxation for the period 372 22,089 22,461 944 15,468 16,412 453 7,026 7,479 pence pence pence pence pence pence pence pence pence Returns per Ordinary share - Basic 55 0.61 35.98 36.59 1.45 23.72 25.17 0.68 10.56 11.24 The total column of this statement is the Statement of comprehensive income of the Company. All items in the above statement derive from continuing operations. These accounts are unaudited and have not been reviewed by the Company's auditors. These are not the Company's statutory accounts. These accounts have been prepared under International Financial Reporting Standards, and in accordance with the accounting policies applied in the annual report which is available at www.strategicequitycapital.com. The notes to the accounts form an integral part of the Half-Yearly Financial Statements. Statement of changes in equity for the 6 month period ended 31 December 2013 Share Capital Share premium Special Capital redemption Revenue capital account reserve reserve reserve reserve Total Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 For the 6 month period ended 31 December 2013 1 July 2013 6,203 5,246 46,089 17,638 1,778 1,442 78,396 Net return and total comprehensive income for the period - - - 22,089 - 372 22,461 Dividend paid 4 - - - - - (931) (931) Shares bought back for cancellation (248) - (3,439) - 248 - (3,439) 31 December 2013 5,955 5,246 42,650 39,727 2,026 883 96,487 For the year to 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 Dividend paid 4 - - - - - (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 6 month period ended 31 December 2012 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 period - - - 7,026 - 453 7,479 Dividend paid 4 - - - - - (1,010) (1,010) Shares bought back for cancellation (269) - (2,748) - 269 - (2,748) 31 December 2012 6,462 5,246 48,986 9,196 1,519 951 72,360 These accounts have been prepared under International Financial Reporting Standards, and in accordance with the accounting policies. BALANCE SHEET as at 31 December 2013 As at As at As at 31 December 30 June 31 December 2013 2013 2012 unaudited audited Unaudited Note £'000 £'000 £'000 Non-current assets Investments held at fair value through profit or loss 6 87,205 71,414 68,804 Current assets Trade and other receivables 80 265 70 Cash and cash equivalents 9,487 8,112 3,725 9,567 8,377 3,795 Total assets 96,772 79,791 72,599 Current liabilities Trade and other payables 285 1,395 239 Net assets 96,487 78,396 72,360 Capital and reserves: Share capital 7 5,955 6,203 6,462 Share premium account 5,246 5,246 5,246 Special reserve 42,650 46,089 48,986 Capital reserve 39,727 17,638 9,196 Capital redemption reserve 2,026 1,778 1,519 Revenue reserve 883 1,442 951 Total shareholders' equity 96,487 78,396 72,360 Net asset value per share pence pence pence Basic 162.00 126.36 111.97 Shares in issue number number number Ordinary shares 7 59,558,111 62,039,682 64,624,655 These accounts have been prepared under International Financial Reporting Standards and in accordance with the accounting policies. Statement of cash flows for the 6 month period ended 31 December 2013 6 month 6 month period ended Year ended period ended 31 December 30 June 31 December 2013 2013 2012 unaudited audited unaudited Note £'000 £'000 £'000 Operating activities Net return before finance costs and taxation 22,461 16,412 7,479 Adjustment for gains on investments (22,150) (16,722) (7,087) Share buy back expenses 61 122 61 Operating cash flows before movements in working capital 372 (188) 453 Decrease/(increase) in receivables 185 (43) 152 (Decrease)/increase in payables (1,110) 1,200 8 Purchases of portfolio investments (11,638) (22,778) (8,299) Sales of portfolio investments 17,997 34,494 13,026 Net cash flow from operating activities 5,806 12,685 5,340 Financing activities Equity dividend paid 4 (931) (1,010) (1,010) Shares bought back in the period (3,439) (5,645) (2,748) Share buyback expenses (61) (122) (61) Net cash flow from financing activities (4,431) (6,777) (3,819) Increase in cash and cash equivalents for period 1,375 5,908 1,521 Cash and cash equivalents at start of period 8,112 2,204 2,204 Cash and cash equivalents at 31 December 2013 9,487 8,112 3,725 These accounts have been prepared under International Financial Reporting Standards and in accordance with the accounting policies. Notes to the Half Yearly Report for the 6 month period ended 31 December 2013 1.1 Corporate information Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom, registered in England and Wales under the Companies Act 2006 whose shares have a premium listing on the London Stock Exchange. The Company is registered as a public limited company and 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. 1.2 Basis of preparation/statement of compliance The condensed interim financial statements of the Company have been prepared on a going concern basis and in accordance with International Accounting Standard ("IAS") 34, `Interim financial reporting' issued by the International Accounting Standards Board ("IASB") (as adopted by the EU). They do not include all the information required for a full report and financial statements and should be read in conjunction with the report and financial statements of the Company for the year ended 30 June 2013, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("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 condensed interim financial statements do not comprise Statutory Accounts within the meaning of Section 434 of the Companies Act 2006. Statutory Accounts for the year ended 30 June 2013 have been delivered to the Registrar of Companies. The report of the Auditors on those Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006. Convention The financial statements are presented in Sterling, being the currency of the primary 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 The accounting policies, presentation and method of computation used in these condensed financial statements are consistent with those used in the preparation of the financial statements for the year ended 30 June 2013. 1.4 New standards and interpretations not applied Implementation of changes and accounting standards in the financial period, as outlined in the 30 June 2013 Statutory Accounts, had no significant effect on the accounting or reporting of the Company. 2. Income 6 month Year 6 month Period ended Ended period ended 31 December 2013 30 June 2013 31 December 2012 £'000 £'000 £'000 Income from investments: UK dividend income 911 1,741 841 Overseas dividend income 39 57 17 Liquidity fund income 19 28 15 969 1,826 873 Other income: - Underwriting commission - 2 - 969 1,828 873 Total income comprises: Dividends 950 1,798 858 Interest 19 28 15 Underwriting commission - 2 - 969 1,828 873 Income from investments: Listed UK 911 1,741 841 Listed overseas 58 85 32 969 1,826 873 3. Other expenses 6 month period ended Year ended 6 month period ended 31 December 2013 30 June 2013 31 December 2012 (unaudited) (audited) (unaudited) Revenue Capital Revenue Capital Revenue Capital return return Total return return Total return return Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Secretarial services 40 - 40 77 - 77 38 - 38 Auditors' remuneration for: audit services 14 - 14 26 - 26 14 - 14 Directors' remuneration 54 - 54 103 - 103 52 - 52 Other expenses 91 61† 152 139 122† 261 67 61† 128 199 61 260 345 122 467 171 61 232 † Expenses incurred in relation to the tender offer process. 4. Dividend The Company paid a final dividend of 1.50p (30 June 2012: 1.50p) per Ordinary share on 62,039,682 (30 June 2012: 67,317,324) shares, amounting to £930,595 (30 June 2012: £1,009,760). The dividend was paid on 15 November 2013 to shareholders on the register at 18 October 2013. 5. Return per Ordinary share 6 month period ended Year ended 6 month period ended 31 December 2013 30 June 2013 31 December 2012 Revenue Capital Revenue Capital Revenue Capital return return Total return return Total return return Total pence pence pence pence pence pence pence pence pence Return per Ordinary share 0.61 35.98 36.59 1.45 23.72 25.17 0.68 10.56 11.24 Returns per Ordinary share are calculated based on 61,392,316 (30 June 2013: 65,215,418 and 31 December 2012: 66,527,084) being the weighted average number of Ordinary shares, excluding shares held in treasury, in issue throughout the period. 6. Investments 31 December 2013 £'000 Investment portfolio summary: Listed investments at fair value through profit or loss 85,220 Unlisted investments at fair value through profit or loss 1,985 87,205 31 December 2013 Listed Unlisted Total £'000 £'000 £'000 Analysis of investment portfolio movement Opening book cost 47,011 277 47,288 Opening investment holding gains 21,516 2,610 24,126 Opening valuation 68,527 2,887 71,414 Movements in the period: Purchases at cost 11,638 - 11,638 Sales - proceeds (16,947) (1,050) (17,997) - realised gains on sales 9,015 1,036 10,051 Decrease in unrealised appreciation 12,987 (888) 12,099 Closing valuation 85,220 1,985 87,205 Closing book cost 50,717 263 50,980 Closing investment holding gains 34,503 1,722 36,225 85,220 1,985 87,205 Investments in unquoted investment funds are generally held at the valuations provided by the managers of those funds. The valuations for Vintage 1 is as at 30 November 2013. A list of the top ten portfolio holdings by their aggregate market values is given in the Investment manager's report above. 31 December 2013 Total £'000 Analysis of capital gains: Gains on sale of investments 10,047 Foreign exchange gains 4 Movement in investment holding gains 12,099 22,150 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: - Quoted prices (unadjusted) in active markets for identical assets or liabilities ("level 1"). - 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"). - 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 31 December 2013. Financial instruments at fair value through profit and loss Level 1 Level 2 Level 3 Total £'000 £'000 £'000 £'000 Equity investments and limited partnership interests 85,220 - 1,985 87,205 Liquidity funds - 7,450 - 7,450 Total 85,220 7,450 1,985 94,655 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 are 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 International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. There were no transfers between levels for the period ended 31 December 2013. The following table presents the movement in level 3 instruments for the period ended 31 December 2013 by class of financial instrument. Equity investments £'000 Opening balance 1,956 Disposals during the period (15) Total gains for the period included in the Statement of comprehensive income 44 Closing balance 1,985 7. Share capital 31 December 2013 Number £'000 Allotted, called up and fully paid Ordinary shares of 10p each: 59,558,111 5,956 During the period ended 31 December 2013, 2,481,571 shares were repurchased by the Company for cancellation. At 31 December 2013 the Company held Nil (30 June 2013: Nil; 31 December 2012: Nil) shares in treasury. 8. Investment Manager's fee A basic management fee is payable to the Investment Manager at the lower of (i) the annual rate of 1% of the adjusted NAV of the Company or (ii) 1% per annum of the market capitalisation of the Company. 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 set out below. No performance fee has been payable in the period. 9. Investment Manager's performance fee The Investment Manager is entitled to a performance fee on the following terms: - the Company's performance is measured over rolling three year periods ending on 30 June in each year, with the first performance period having commenced on 1 July 2008 and ended on 30 June 2011 and the current Performance Period having commenced on 1 July 2011 and ending on 30 June 2014; - the Company's performance is measured 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, being the index against which the Board has historically compared the Company's investment performance; - 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 previously paid). Currently the Investment Manager is entitled to 15% of any 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). 10. Taxation The tax charge for the half year is £Nil (30 June 2013: £Nil; 31 December 2012: £Nil) based on an estimated effective tax rate of 0% for the year ended 30 June 2013. The estimated effective tax rate is 0% as investment gains are exempt from tax owing to the Company's status as an Investment Company and there is expected to be an excess of management expenses over taxable income. 11. Capital commitments and contingent liabilities The Company has a commitment to invest €1,560,000 in Vintage 1 (30 June 2013: €1,560,000; 31 December 2012: €1,560,000). 12. Related party transactions GVOIM is regarded as a related party of the Company. 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 GVOIM in relation to the strategy, operations and management of potential investee companies. The amounts payable to GVOIM, in respect of management fees, during the period to 31 December 2013 was £398,000 (30 June 2013: £539,000; 31 December 2012: £249,000), of which £214,000 (30 June 2013: £157,000; 31 December 2012: £135,000) was outstanding at 31 December 2013. The amount due to the Investment Manager for performance fees at 31 December 2013 was £Nil (30 June 2013: £1,132,000; 31 December 2012: £Nil). GVOIM has entered into Commission Sharing Arrangements with a number of executing brokers. Under this arrangement the amount of commission received by GVOIM in relation to trading activities carried out on behalf of the Company for the period to 31 December 2013 was £4,300 (30 June 2013: £6,600; 31 December 2012: £4,500) of which £4,300 (30 June 2013: £5,600; 31 December 2012: £3,000) was outstanding at 31 December 2013. Directors & advisors J Hodson* J E Cornish* I Dighé* M C Phillips* Sir Clive M Thompson * Independent of the Investment Manager Investment Manager GVO Investment Management Limited 25 North Row London W1K 6DJ Tel: 020 3691 6100 Secretary and registered office Capita Sinclair Henderson Limited Beaufort House 51 New North Road Exeter EX4 4EP Enquiries: 01392 477500 Registrar and transfer office Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS99 6ZY Tel: 0870 707 1285 Website: www.computershare.com Brokers Canaccord Genuity Limited 88 Wood Street London EC2V 7QR Custodian The Northern Trust Company 50 Bank Street Canary Wharf London E14 5NT Auditors Ernst & Young LLP 1 More London Place London SE1 2AF Solicitors Stephenson Harwood LLP 1 Finsbury Circus London EC2M 7SH An investment company as defined under Sections 833 of the Companies Act 2006 REGISTERED IN ENGLAND No 5448627 A member of the Association of Investment Companies The Half Yearly Financial Report will be posted to shareholders shortly. The Report will also be available for download from the following website: www.strategicequitycapital.com or on request from the Company Secretary. NATIONAL STORAGE MECHANISM A copy of the Half Yearly Financial Report will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: http://www.morningstar.co.uk/uk/nsm Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of this announcement.

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