Annual Financial Report

RNS Number : 0953T

Dunedin Enterprise Inv Trust PLC

18 March 2019

 

18 March 2019

For release 18 March 2019

Dunedin Enterprise Investment Trust PLC ("the Company")

Year ended 31 December 2018

Dunedin Enterprise Investment Trust PLC, the private equity investment trust, announces its results for the year ended 31 December 2018.

Financial Highlights:

·     Share price total return of 9.4% in the year to 31 December 2018

·     Net asset value total return of 6.4% in the year to 31 December 2018

·     Realisations of £12.3m in the year

·     New investment of £14.2m in the year

·     Exit of Pyroguard during the year

·     £10.3m returned via B shares in February 2018

·     Further £10.3m returned via B shares in October 2018

·     Total of £109m returned to shareholders since 2012

·     Final dividend of 2.0p per share proposed for the year ended 31 December 2018

Comparative Total Return Performance

Year to 31 December 2018	Net Asset value	Share price	FTSE Small Cap (ex Inv Cos) Index
One year	6.4%	9.4%	-13.8%
Three years	35.3%	91.4%	12.2%
Five years	34.6%	49.0%	23.3%
Ten years	85.1%	270.5%	278.1%

For further information please contact:

Graeme Murray Dunedin LLP   0131 225 6699 0131 718 2310            07813 138367

Corinna Osborne / Emily Weston Equity Dynamics 07825 326 440 / 07825326442 [e-mail] [e-mail]

 

Chairman's Statement

In the year to 31 December 2018 your Company's net asset value total return was 6.4%, generated principally from both valuation uplifts and realisations.

The relative share price performance was pleasing this year with a total return to shareholders of 9.4%. This was boosted by a return of capital to shareholders of 100p per share and the payment of a 5.5p dividend.

In terms of share price the Company has been one of the best performing investment trusts over the past two years.

The Company's net asset value per share decreased from 489.2p to 412.9p during the year after taking account of the return of capital and dividends.  Since 2012, following a change in investment policy, a total of £109m has been returned to shareholders by way of capital and dividends.

The discount at which the shares trade was 20.6% at the end of the year, based on a net asset value per share of 412.9p and a share price of 328p.

Since the year end the share price has increased by a further 13.4% to 372p.

Realisations

In September 2018 there was a successful realisation of Pyroguard, the specialist fire resistant glass manufacturer. Total proceeds from the sale amounted to £9.3m, representing an uplift of £1.2m (15%) over the valuation of £8.1m at 31 December 2017. The investment delivered a return of 5.9x and an IRR of 35%.

In addition, deferred proceeds of £1.7m were received from Steeper and £0.6m from Trustmarque.

Two realisations were received from the European private equity fund, Realza: a £1.0m repayment of loan stock was received from Dolz, the automotive pump manufacturer; in January 2019 Litalsa, a provider of services for metal can and closure manufacturers, was realised generating proceeds of £3.9m, representing a return of 2.9x original cost and an IRR of 26%.  At 31 December 2018 Litalsa has been valued at the realised proceeds received in January 2019.

Portfolio

Two new investments were made in the year by the Dunedin managed fund to which your Company has an outstanding commitment. In June 2018, £6.4m was invested in GPS, the global payments processor which supports a number of digital banks, challenger banks, fintechs and financial institutions. In November 2018 £3.0m was invested in Incremental, a Glasgow-headquartered, market-leading IT services business.

Overall the trading performance of the portfolio has been strong during the year. Unrealised valuation increases of £9.1m were partially offset by decreases of £4.3m. Valuation uplifts were achieved by FRA, RED, Kingsbridge and EV, all of which are trading well as a result of strong organic growth. The most significant valuation reduction in the year to 31 December 2018 was the decline of £1.9m in the value of the holding in Formaplex.

Commitments & Liquidity

At the year end the Company had outstanding commitments to limited partnership funds of £19.4m, which consisted of £18.8m to Dunedin managed funds and £0.6m to Realza, the remaining European fund. Assuming these funds are held to maturity, it is estimated that only some £11.5m of this total outstanding commitment will be drawn over the remaining life of the funds.

The investment periods of all funds to which the Company has made a commitment have now ended. In future the Company will only be required to meet drawdowns for follow-on investments, management fees and ongoing expenses during the remainder of the funds' life.

At 31 December 2018 the Company held cash balances of £5.7m. In addition we have a revolving credit facility with Lloyds Bank of £10m which was undrawn at 31 December 2018 and is available until 31 May 2019. The Board and the Manager keep the cash and commitment position under regular review. It is the Board's intention to extend the revolving credit facility by a further year but at a lower level of £5m.

B Share Scheme

Shareholders received two returns of capital via the B Share Scheme during the year, representing a total of £20.6m or 100p per share

Following the realisation of Innova/5 in December 2017, £10.3m was returned in February 2018. This was achieved by the issue of 1 B share of 50p for every 1 ordinary share held. The B shares were immediately redeemed, and proceeds of £10.3m were distributed to shareholders on 16 February 2018.

Following the realisation of Pyroguard in September 2018, a further £10.3m was returned to shareholders in October 2018 by way of the issue of 1 B share of 50p for every 1 ordinary share held. The B shares were immediately redeemed, and proceeds of £10.3m were distributed to shareholders on 23 October 2018.

Dividends

It is proposed that a final dividend of 2.0p per share be paid on 16 May 2019. This will distribute to shareholders the net profit generated by the Company during 2018.

 

Outlook

There remains significant uncertainty regarding the final outcome of Brexit. While the Board does not expect there to be any significant impact from Brexit on the operations of the Company itself, each of our portfolio companies has developed plans to cater for a variety of outcomes which will be continually reviewed as the course of the Brexit negotiations become clearer.

More generally, the Board welcomes the improvement in the trading performance of a number of portfolio companies and the returns which have been delivered for shareholders by the underlying investment performance of the portfolio and the returns of capital.

Duncan Budge

Chairman

18 March 2019

 

Manager's Review

The total net asset total return to shareholders in the year to 31 December 2018 was 6.4%. This is stated after taking account of a final dividend for 2017 of 5.5p (paid in May 2018) and two B share redemptions equivalent in total to 100p (paid in February 2018 and October 2018).

The net asset value per share in the year to 31 December 2018 decreased from 489.2p to 412.9p.

The Company's net asset value decreased from £101.0m to £85.2m over the year. As detailed below this movement is stated following a dividend payment of £1.1m and capital of £20.6m returned to shareholders via the issue and redemption of B shares in February 2018 and October 2018.

	£m
Net asset value at 1 January 2018	101.0
Unrealised value increases	9.1
Unrealised value decreases	(4.3)
Realised gain over opening valuation	1.4
Net income and capital movements	(0.3)
Net asset value prior to shareholder distribution	106.9
Dividends paid to shareholders	(1.1)
B share redemption	(20.6)
Net asset value at 31 December 2018	85.2

 

Portfolio Composition

The investment portfolio can be analysed as shown in the table below.

	Valuation at 1 January 2018 £'m	Additions in year £'m	Disposals in year £'m	Realised movement £'m	Unrealised movement £'m	Valuation at 31 December 2018 £'m *1
Dunedin managed	57.2	14.0	(11.3)	1.4	3.5	64.8
Third party managed	10.0	0.2	(1.0)	-	1.3	10.5
Investment portfolio	67.2	14.2	(12.3)	1.4	4.8	75.3
AAA rated money market funds	23.5	-	(21.4)	-	-	2.1
	90.7	14.2	(33.7)	1.4	4.8	77.4

 

^*1 - in addition the Company held net assets of £7.8m

New Investment Activity

In June 2018, the Company made an investment of £6.4m through Dunedin Buyout Fund III LP in GPS, the global payments processor which supports a number of digital banks, challenger banks, fintechs and financial institutions. GPS is a market leader in issuer processing, enabling next generation payment technology. It provides a single, global integrated platform, GPS Apex, that powers and enables functionality of next generation fintech payment companies. GPS employs circa 150 people based in London and Newcastle.

In December 2018, the Company invested £3.0m in Incremental through Dunedin Buyout Fund III LP. Incremental is a Glasgow-headquartered, market leading IT services business. It was formed following the acquisitions of First eBusiness Solutions in December 2016 and GAP Consulting in June 2018. The business helps its clients to design, implement and manage their IT infrastructure needs which include ERP, CRM, cyber security and digital applications. With a headcount of 135, Incremental has three main delivery sites in Glasgow, Inverurie and Northwich and sales offices in London and Manchester.

There were follow-on investments made in Formaplex (£1.5m), Hawksford (£1.1m), EV (£0.6m) and Premier Hytemp (£0.4m).

Realisations

In September 2018, Pyroguard, the specialist fire resistant glass manufacturer, was realised. Total proceeds from the sale amounted to £9.3m consisting of capital of £8.7m and income of £0.6m. The proceeds received represent an uplift of £1.2m when compared to the valuation of £8.1m at 31 December 2017. The original cost of the investment was £3.8m and over the life of the investment a total of £22.5m was received by Dunedin Enterprise representing a 5.9x return and an IRR of 35%.

Deferred proceeds of £1.7m were received from Steeper, the leading supplier of rehabilitation services including prosthetic, orthotic and electronic assistive devices and services. Further deferred proceeds of £0.6m were received from Trustmarque, the provider of software management services.

There was a £1.0m repayment of loan stock from within the Realza portfolio following a recapitalisation of Dolz, the automotive pump manufacturer.

Following the year end in January 2019 there was a further realisation from the Realza portfolio. Litalsa, the provider of printing and varnishing services for metal can and closure manufacturers, was realised generating proceeds of £3.9m which represent a return of 2.9x original cost and an IRR of 26%.  At 31 December 2018 Litalsa has been valued at the realised proceeds received in January 2019.

Unrealised valuation uplifts

In the year to 31 December 2018 there were valuation uplifts generated from the following investments: FRA (£3.6m), RED (£2.2m), Kingsbridge (£1.3m) and EV (£0.6m).

FRA, the international forensic consultancy business, has continued to experience a strong demand for its services over the year, boosted by new client wins and an expansion in the scale of current client work. Over the course of 2018 maintainable EBITDA (maintainable EBITDA being EBITDA for the last twelve months adjusted for exceptional items) has increased by 19%. During 2018 FRA has opened new offices in New York, Dallas, Philadelphia, and Helsinki. Following the year end FRA undertook a refinancing of its bank debt resulting in £1.5m being returned to Dunedin Enterprise.

RED, the supplier of SAP software experts on both a contract and permanent basis, has again shown strong growth in its contracting division. The contracting division has performed well in the UK, Germany and the US markets, benefitting from an experienced and knowledgeable team of consultants. This has resulted in a 15% increase in maintainable EBITDA.

Kingsbridge, the provider of insurance services to contractors, has also continued to show strong organic growth. This has resulted from the company expanding and enhancing the product range, diversifying the distribution channels and building its market profile and reputation. As a result maintainable EBITDA increased by 16% in the year. Following the year end Kingsbridge undertook a refinancing of its bank debt resulting in £3.2m being returned to Dunedin Enterprise.

EV, the provider of high-performance cameras for the oil and gas industry, has shown a 25% increase in maintainable EBITDA. The company has benefitted from an increasing oil price during the course of the year.

The Realza portfolio showed an unrealised movement of £1.5m. The majority of this uplift was generated from an uplift in the valuation of Litalsa which was realised in January 2019, details of which are noted above.

Unrealised valuation reductions

The most significant valuation reduction in the year to 31 December 2018 was at Formaplex (£1.9m). The maintainable EBITDA has suffered in the year from a number of lost and delayed orders. This has in part been caused by the controversy surrounding diesel cars and their emission levels. Profits have also been impacted by the costs associated with the move to the new 120,000sqft Voyager Park facility.

Cash and commitments

The Company had outstanding commitments to limited partnership funds of £19.4m. The outstanding commitment position consisted of £18.8m to Dunedin managed funds and £0.6m to Realza, the one remaining European fund. Assuming these funds are held to maturity, it is estimated that only some £11.5m of this total outstanding commitment will be drawn over the remaining life of the funds.

The original investment periods of all funds to which the Company has made a commitment have now ended. In future the Company will only be required to meet drawdowns for follow-on investments, management fees and expenses during the remainder of the funds' life.

The Company has a revolving credit facility with Lloyds Bank of £10m which was undrawn at 31 December 2018 and is available until 31 May 2019. The Board and the Manager keep the cash and commitment position under regular review.  It is the Board's intention to extend the revolving credit facility by a further year but at a lower level of £5m.

Brexit

Your Manager has a representative on the Board of each Dunedin managed portfolio company.  Portfolio companies hold regular board meetings.  The board of each portfolio company has assessed the impact of Brexit on their business and developed contingency plans to mitigate a variety of Brexit outcomes.  These contingency plans will be kept under constant review as the outcome of the Brexit negotiations become clearer.

 

Valuations and Gearing

The average earnings multiple applied in the valuation of the Dunedin managed portfolio was 8.2x EBITDA (2017: 7.6x), or 9.4x EBITA (2017: 9.3x). These multiples continue to be applied to maintainable profits.

Within the Dunedin managed portfolio, the weighted average gearing of the companies was 2.7x EBITDA (2017: 3.1x) or 3.1x EBITA (2017: 3.7x).

Analysing the portfolio gearing in more detail, the percentage of investment value represented by different gearing levels was as follows:

Less than 1 x EBITDA	41%
Between 1 and 2 x EBITDA	-%
Between 2 and 3 x EBITDA	11%
More than 3 x EBITDA	48%

Of the total acquisition debt in the Dunedin managed portfolio companies the scheduled repayments are spread as follows:

Less than one year	11%
Between one and two years	7%
Between two and three years	9%
More than three years	73%

 

Fund Analysis

Detailed below is an analysis of the investment portfolio by investment fund vehicle.

Dunedin Buyout Fund II	48%
Dunedin Buyout Fund III	36%
Equity Harvest Fund	3%
Third Party managed	13%

 

Portfolio Analysis

Detailed below is an analysis of the investment portfolio by geographic location as at 31 December 2018.

UK	88%
Rest of Europe	12%

Sector Analysis

The investment portfolio of the Company is broadly diversified. At 31 December 2018 the largest sector exposure of 49% remains to the diverse Support Services sector.

Automotive	4%
Consumer products & services	4%
Financial services	31%
Industrials	12%
Support services	49%

Valuation Method

Cost	11%
Earnings - provision	23%
Earnings - uplift	45%
Assets basis	16%
Exit value	5%

Year of Investment

In the vintage year chart below, current value is allocated to the year in which either Dunedin Enterprise or the third-party manager first invested in each portfolio company.

<1 year	11%
1-3 years	26%
3-5 years	13%
>5 years	50%

Dunedin LLP

18 March 2019

 

Ten Largest Investments   

(both held directly and via Dunedin managed funds) by value at 31 December 2018

	Approx.			Percentage
	percentage	Cost of	Directors'	of net
	of equity	investment	valuation	assets
Company name	%	£'000	£'000	%
FRA	5.4	6,035	12,874	15.1
Hawksford	17.8	6,746	11,181	13.1
Realza	8.9	6,729	10,200	12.0
Weldex	15.1	9,505	9,611	11.3
Kingsbridge	12.4	4,112	7,932	9.3
CitySprint	5.2	7,308	6,382	7.5
GPS	8.2	6,357	6,357	7.5
Red	20.1	9,665	4,530	5.3
U-POL	5.0	5,657	3,628	4.3
Incremental	8.2	2,992	2,992	3.5
		65,106	75,687	88.9

 

 Income Statement

				2018						2017
	Revenue		Capital		Total		Revenue		Capital		Total
	£'000		£'000		£'000		£'000		£'000		£'000
Investment income	778		-		778		4,589		-		4,589
Gains/(losses) on investments	-		6,269		6,269		-		20,573		20,573
Total income	778		6,269		7,047		4,589		20,573		25,162
Expenses
Investment management fee	(49)		(148)		(197)		(26)		(77)		(103)
Other expenses	(448)		(113)		(561)		(490)		(63)		(553)
Profit/(loss) before finance costs and tax	281		6,008		6,289		4,073		20,433		24,506
Finance costs	(66)		(197)		(263)		(94)		(284)		(378)
Profit/(loss) before tax	215		5,811		6,026		3,979		20,149		24,128
Taxation	(38)		38		-		(52)		55		3
Profit for the year	177		5,849		6,026		3,927		20,204		24,131
Basic return per ordinary share
(basic & diluted)	0.86p		28.33p		29.19p		19.02p		97.87p		116.89p

The total column of this statement represents the Income Statement of the Group, prepared in accordance with International Financial Reporting Standards as adopted by the EU. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.

All income is attributable to the equity shareholders of Dunedin Enterprise Investment Trust PLC.

Statement of Changes in Equity

for the year ended 31 December 2018

Year ended 31 December 2018

	Share capital £'000	Capital redemption reserve £'000	Capital Reserve realised £'000	Capital reserve - unrealised £'000	Special Distributable Reserve £'000	Revenue account £'000	Total retained earnings £'000	Total equity £'000
At 31 December 2017	5,161	23,409	57,936	(18,752)	26,956	6,278	72,418	100,988
Profit/(loss) for the year	-	-	127	5,722	-	177	6,026	6,026
B shares issued during the year	20,644	(20,644)	-	-	-	-	-	-
B shares redeemed during the year	(20,644)	20,644	-	-	(20,644)	-	(20,644)	(20,644)
Dividends paid	-	-	-	-	-	(1,135)	(1,135)	(1,135)
At 31 December 2018	5,161	23,409	58,063	(13,030)	6,312	5,320	56,665	85,235

Year ended 31 December 2017

	Share capital £'000	Capital redemption reserve £'000	Capital Reserve realised £'000	Capital reserve - unrealised £'000	Special Distributable Reserve £'000	Revenue account £'000	Total retained earnings £'000	Total equity £'000
At 31 December 2016	5,161	2,765	49,204	(9,580)	47,600	8,751	95,975	103,901
Profit/(loss) for the year	-	-	29,376	(9,172)	-	3,927	24,131	24,131
B shares issued during the year	20,644	-	(20,644)	-	-	-	(20,644)	-
B shares redeemed during the year	(20,644)	20,644	-	-	(20,644)	-	(20,644)	(20,644)
Dividends paid	-	-	-	-	-	(6,400)	(6,400)	(6,400)
At 31 December 2017	5,161	23,409	57,936	(18,752)	26,956	6,278	72,418	100,988

 

Balance Sheet

As at 31 December 2018

	31 December 2018 £'000	31 December 2017 £'000
Non-current assets
Investments held at fair value	77,431	90,690
Current assets
Other receivables	5,731	1,032
Cash and cash equivalents	3,645	9,441
	9,376	10,473
Current liabilities
Other liabilities	(1,572)	(175)
Net assets	85,235	100,988
Capital and reserves
Share capital	5,161	5,161
Capital redemption reserve	23,409	23,409
Capital reserve - realised	58,063	57,936
Capital reserve - unrealised	(13,030)	(18,752)
Special distributable reserve	6,312	26,956
Revenue reserve	5,320	6,278
Total equity	85,235	100,988
Net asset value per ordinary share (basic and diluted)	412.9p	489.2p

 

Cash Flow Statement

for the year ended 31 December 2018

	31 December 2018 £'000	31 December 2017 £'000
Cash flows from operating activities
Profit/(loss) Adjustments for:	6,026	24,128
Gains/(losses) on investments	(6,269)	(20,573)
Interest paid	263	378
(Increase)/decrease in debtors	(4,699)	(927)
Increase/(decrease) in creditors	1,398	(935)
Net cash from operating activities	(3,281)	2,071
Cash flows from investing activities
Purchase of investments	(13,942)	(9,393)
Drawdown from subsidiary	(162)	(385)
Purchase of 'AAA' rated money market funds	(47)	(42,117)
Sale of investments	11,251	53,142
Distribution from subsidiary	1,014	13,794
Sale of 'AAA' rated money market funds	21,413	19,658
Net cash used in investing activities	19,527	34,699
Taxation
Tax recovered	-	3
Cash flows from financing activities
Redemption of B shares	(20,644)	(20,644)
Dividends paid	(1,135)	(6,400)
Interest paid	(263)	(378)
	(22,042)	(27,422)
Net increase/(decrease) in cash and cash equivalents	(5,796)	9,351
Cash and cash equivalents at 1 January	9,441	90
Effect of exchange rate fluctuations on cash held	-	-
Cash and cash equivalents at 31 December	3,645	9,441

 

Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of their profit or loss for that period. In preparing these financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgments and estimates that are reasonable and prudent;

- state whether they have been prepared in accordance with IFRSs as adopted by the EU;

- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.  As explained in note 2, the Directors do not believe that it is appropriate to prepare these financial statements on a going concern basis.

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 enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

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

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company taken as a whole; and

- the Strategic Report and Directors' Report includes 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.

We consider the annual report and accounts taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Duncan Budge

Chairman

18 March 2019

 

Notes to the Accounts

1. Preliminary Results

The financial information contained in this report does not constitute the Company's statutory accounts for the years ended 31 December 2018 or 2017. The financial information for 2017 is derived from the statutory accounts for 2017 which have been delivered to the Registrar of Companies, and those for 2018 will be delivered in due course. The auditor has reported on those accounts. Their report was (i) unqualified, (ii) without qualifying their report, included an emphasis of matter referring to note 1 to the financial statements explaining that the financial statements have not been prepared on a going concern basis for the reason set out in that note and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

2.       Going Concern

The financial information for 2017 and 2018 has not been prepared on a going concern basis, since the Company's current objective is to conduct an orderly realisation of the investment portfolio and return cash to shareholders.  Following the Director's assessment, no adjustments were deemed necessary to the investment valuations or other assets and liabilities included in the financial information as a consequence of the change in the basis of preparation.

3.       Dividends

		Year to 31  December 2018 £'000		Year to 31  December 2017 £'000
Dividends paid in the year		1,135		6,400

A final dividend of 2.0p per share for the year ended 31 December 2018 will be paid on 16 May 2019 to shareholders on the register at close of business on 26 April 2019.  The ex-dividend date is 25 April 2019.

4.         Earnings per share

	Year to 31 December 2018	Year to 31 December 2017
Revenue return per ordinary share (p)	0.86	19.02
Capital return per ordinary share (p)	28.33	97.87
Earnings per ordinary share (p)	29.19	116.89
Weighted average number of shares	20,644,062	20,644,062

The earnings per share figures are based on the weighted average numbers of shares set out above.  Earnings per share is based on the revenue profit in the period as shown in the consolidated income statement.

 

References to page numbers and notes in the disclosures below are to page numbers and notes to the annual report and accounts of the Company for the year ended 31 December 2018.

5.         Principal Risks and Uncertainties (Strategic Report)

The principal risks and uncertainties identified by the Board which might affect the Company's business model and future performance, and the steps taken with a view to their mitigation, are as follows:

Brexit: the profitability of the Company's investments is adversely impacted due to an adverse economic impact on the UK economy for a no-deal Brexit and restricted access to European markets.  Mitigation: Brexit has been an ongoing board agenda item for all our portfolio companies.  Each portfolio company has developed plans to cater for a variety of outcomes from the Brexit negotiations.  These plans will be continually revisited as the course of the Brexit negotiations becomes clearer.

Investment and liquidity risk: the Company's investments are in small and medium-sized unquoted companies, which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. Mitigation: the Manager aims to limit the risk attaching to the portfolio as a whole by closely monitoring individual holdings, including the appointment of investor directors to the board of portfolio companies. The Board reviews the portfolio, including the schedule of projected exits, with the Manager on a regular basis with a view to ensuring that the orderly realisation process is progressing.

Portfolio concentration risk: following the adoption of the Company's revised investment policy in May 2016 the portfolio will become more concentrated as investments are realised and cash is returned to shareholders. This will increase the proportionate impact of changes in the value of individual investments on the value of the Company as a whole. The Directors' valuation of the Company's investments represents their best assessment of the fair value of the investments as at the valuation date and the amounts eventually realised from such investments may be more or less than the Directors' valuation. Mitigation: the Directors and Manager keep the changing composition of the portfolio under review and focus closely on those holdings which represent the largest proportion of total value.

Financial risk: most of the Company's investments involve a medium to long term commitment and many are relatively illiquid. Mitigation: the Directors consider it appropriate to finance the Company's activities through borrowing on a short-term basis. Accordingly, the Board seeks to ensure that the availability of cash reserves and bank borrowings match the forecast cash flows of the Company both on a base and stress case basis given the level of undrawn commitments to limited partnership funds.

Economic risk: events such as economic recession or general fluctuations in stock markets and interest rates may affect the valuation of portfolio companies and their ability to access adequate financial resources, as well as affecting the Company's own share price and discount to net asset value. Mitigation: the Company invests in a diversified portfolio of investments spanning various sectors and maintains access to sufficient cash reserves to be able to provide additional funding to portfolio companies should this become necessary.

Credit risk: the Company holds a number of financial instruments and cash deposits and is dependent on counterparties discharging their commitment. Mitigation: the Directors review the creditworthiness of the counterparties to these investments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.

Currency risk: the Company is exposed to currency risk as a result of investing in companies and funds denominated in euros. The sterling value of these investments can be influenced by movements in foreign currency exchange rates. Mitigation: Currency risk is monitored by the Manager on an ongoing basis and on a quarterly basis by the Board.

Internal control risk: the Company's assets could be at risk in the absence of an appropriate internal control regime. Mitigation: the Board regularly reviews the system of internal controls, both financial and non-financial, operated by the Company and the Manager. These include controls designed to ensure that the Company's assets are safeguarded and that proper accounting records are maintained.

6.         Related Party Transactions (Notes to the Accounts)

The Company has investments in Dunedin Buyout Fund II LP, Dunedin Buyout Fund III LP, Dunedin Fund of Funds LP and Equity Harvest Fund LP. Each of these limited partnerships are managed by Dunedin. The Company has paid a management fee of £0.7m (2017: £1.5m) in respect of these limited partnerships. The total investment management fee payable by the Company to the Manager is therefore £0.9m (2017: £1.6m).

Since the Company began investing in Dunedin Buyout Funds ("the Funds") executives of the Manager have been entitled to participate in a carried interest scheme via the Funds. Performance conditions are applied whereby any gains achieved through the carried interest scheme associated with the Funds are conditional upon a certain minimum return having been generated for the limited partner investors. Additionally, within Dunedin Buyout Fund II LP and Dunedin Buyout Fund III LP the economic interest of the Manager is aligned with that of the limited partner investors by co-investing in this fund.

As at 31 December 2018 there is a provision made within Investments for carried interest of £5.1m (2017: £4.0m) relating to Dunedin Buyout Fund III LP and £1.4m (2017: £1.3m) relating to Equity Harvest Fund LP. Current executives of the Manager are entitled to 85% of the carried interest in Dunedin Buyout Fund III LP and 14% in Equity Harvest Fund LP.

Brian Finlayson has an interest in the carried interest scheme of Dunedin Buyout Fund LP and received £749 from that scheme during 2018 (2017: £3,874). The Dunedin Buyout Fund LP has now been liquidated.

7.         Glossary of Terms and Definitions and Alternative Performance Measures

Buy-out fund

A fund which acquires stakes in established unquoted companies.

Commitment

The amount committed by the Company to a fund investment, whether or not such amount has been advanced in whole or in part by or repaid in whole or in part to the Company.

Distribution

A return that an investor in a private equity fund receives.

Draw down

A portion of a commitment which is called to pay for an investment.

EBITDA

Earnings before interest expense, taxes, depreciation and amortisation.

Enterprise value (EV)

The value of the financial instruments representing ownership interests in a company plus the net financial debt of the company.

Net Asset Value ("NAV") per Ordinary Share

The value of the Company's assets and cash held less any liabilities for which the Company is responsible divided by the number of shares in issue.

NAV Total Return

The NAV total return is calculated by adding dividends and capital returned in the period to the increase or decrease in the net asset value. The dividends or capital returned are assumed to be re-invested in the quarter that the dividend or capital return is paid.

Ongoing Charges

Management fees and all other recurring operating expenses that are payable by the Company excluding the costs of purchasing and selling investments, finance costs, taxation, non-recurring costs and costs of returning capital to shareholders, expressed as a percentage of the average net asset value during the period.

Premium/Discount

The amount by which the market price per share of an investment company is either higher (premium) or lower (discount) than the NAV per share, expressed as a percentage of the NAV per share.

Secondary transaction

The purchase or sale of an investment and its undrawn commitment (if any) to a fund or collection of fund interests in the market.

Share buy-back transaction

The repurchase by the Company of its own shares which will reduce the number of shares on the market.

Share price total return

The share price total return is calculated by adding dividends and capital returned in the period to the increase or decrease in the share price. The dividends or capital returned are assumed to be re-invested on the day the share price goes es-dividend.

ENDS

 

END

 

 

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