Annual Financial Report

RNS Number : 6714Q

Graphite Enterprise Trust PLC

16 April 2009

 



16 APRIL 2009

GRAPHITE ENTERPRISE TRUST PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

Following the Company's voluntary disclosure of its results for the year ended 31 December 2008 by way of a preliminary announcement dated 3 April 2009, the Company has now published its annual report and accounts for 2008.  

This Annual Financial Report announcement contains the information previously disclosed in the preliminary announcement together with additional items required to comply with the Disclosure and Transparency rules. The additional items consist of a Statement of Directors' Responsibilities and an indication of the website on which the full report and accounts are available.  

The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2007 or 2008. The annual report and accounts will shortly be available on the Company's website at www.graphite-enterprise.com .

The Company's 2009 Annual General Meeting will be held at 11.30 am on Tuesday 19 May 2009 at The Coronation Suite, 2nd Floor, The Hilton Hotel Park Lane, London W1K 1BE.

GRAPHITE ENTERPRISE TRUST PLC

AUDITED FINAL RESULTS 

FOR THE YEAR ENDED 31 DECEMBER 2008

SUMMARY OF THE YEAR

Net asset value per share The net asset value per share fell by 13.6% compared with a fall of 32.8% in the FTSE All-Share Index	-13.6%
Share price The discount to the net asset value per share widened from 8.7% to 58.4%	-60.5%
Closing cash and cash equivalents Cash and cash equivalents increased by £4.3 million and accounted for 41.9% of total assets at the year end	£139.0m
Undrawn commitments The level of undrawn commitments increased by £4.3 million	£307.3m

FINANCIAL SUMMARY

	31 Dec 2008	31 Dec 2007	Change
Net asset value per share	449.0p	519.4p	-13.6%
Share price	187.0p	474.0p	-60.5%
Dividend per share	4.5p	8.0p	-43.8%
FTSE All-Share Index	2,209	3,287	-32.8%

  CHAIRMAN'S STATEMENT

Summary

In 2008 Graphite Enterprise Trust PLC experienced the most turbulent year in its history. This was reflected in disappointing results, with the net asset value per share falling by 13.6% and the share price falling by 60.5%. By comparison the FTSE All-Share Index fell by 32.8% in the year.

The very sharp fall in the share price, which was common throughout the private equity sector, was driven by a widening of the discount of the share price to the net asset value from 8.7% to 58.4%. At the year end the discount was at its highest ever level reflecting the market's concerns over the weakness of the balance sheets of listed private equity funds and over the valuations of their underlying portfolios.

In the first quarter we became concerned that market conditions might deteriorate during the year and took some early action to conserve cash and to strengthen the Company's financial position. However, as the year developed it became clear that cash inflows from the portfolio might remain at low levels for some time and that if bank funding remained unavailable we might have difficulties in meeting our commitments to funds in the longer term. We therefore took further steps to secure the Company's position by selling a portfolio of fund investments and associated commitments and by transferring some of the cash balance into euros to cover part of our euro denominated fund commitments.

The result of these defensive actions has been to strengthen significantly the Company's financial position. Cash and cash equivalents at the year end totalled £139.0 million, equivalent to 41.9% of net assets. We believe that there are clear advantages in holding high levels of cash at this point in the economic cycle, particularly as the Company continues to have substantial undrawn commitments to funds. It is not easy to predict the speed at which these commitments will be drawn down, but at the low point in the cycle we would expect to be more or less fully invested.

The external environment 

In 2008 the problems in the international credit markets which became apparent towards the end of 2007 started to have a material impact on the real economy. Confidence levels both in financial markets and in the economy as a whole declined steadily in the first half of the year. Conditions became much worse following the failure of Lehman Brothers in September and deteriorated further when the US and UK governments were forced to intervene to support the banking sector.  

Despite government action on an unprecedented scale to inject liquidity into the global banking system, confidence in international financial markets fell very sharply in the final quarter. Levels of economic activity declined rapidly in response and the world economy moved into recession. It is now generally accepted that the scale of the banking crisis and the speed of the economic slowdown are without parallel since the 1930s.  

Performance

The financial crisis has had a severe impact on the Graphite Enterprise share price. While the fall in the net asset value per share of 13.6% was relatively modest by comparison with the fall in the stock market, the fall in the share price was much greater. In total, the share price fell by 60.5% of which 25.1% was in the first nine months and 35.4% in the last three.  This reflected a general loss of confidence in the private equity sector which became more pronounced in the final quarter as economic conditions deteriorated.  

The fall in the net asset value per share would have been considerably greater had the Company not benefited from substantial currency gains and retained substantial cash balances throughout the year.  

The underlying value of the investment portfolio would have declined by 26.0% had the year end valuation been based solely on the valuations prepared by the managers of our fund portfolio. However, as many of these valuations still appeared high and the economic outlook remained extremely uncertain, we thought it prudent to make a further provision which increased the total fall to 30.7%.  

This decline was partially offset by currency movements. At the beginning of the year 53.3% of our investment portfolio was denominated in euros and 7.6% was denominated in US dollars. Both currencies rose sharply against sterling in the final quarter of the year and the resultant rise in the sterling value of these foreign currency denominated investments had a substantial impact on the value of the portfolio as a whole. The overall effect was to reduce the fall in the value of the portfolio in the year from 30.7% to 17.7%.

As the Company held substantial cash balances throughout the year, the percentage fall in the net asset value per share was materially less than the percentage fall in the value of the portfolio, with the 17.7% fall in the portfolio translating into a fall of 14.6% in the net asset value per share. Other revenue and capital items, the largest of which was the currency gain on cash balances, generated a net increase of 1.0%, bringing the overall decline in the net asset value per share for the year down to 13.6%.

Details of the performance of the investment portfolio and of the provision are given in the Manager's Review.

The discount

As a result of the financial crisis, the stock market rating afforded to the private equity sector fell very sharply. This reflected a combination of doubts over the valuations of investment portfolios, and concerns that listed companies investing in funds might not be able to meet their commitments without either making asset sales at a penal discount or raising capital on highly dilutive terms. A number of companies have had well publicised problems of this nature and the market has responded by marking down the valuations of the sector as a whole.

At the end of the year the share price was at its lowest level since 2002, having briefly dipped during December to a level last experienced in 1997. The discount of the net asset value to the share price widened from 8.7% at the beginning of the year to 58.4% at the end. This gave the Company a market capitalisation of £136.3 million by comparison with the net asset value attributable to shareholders of £327.3 million. As cash and other net current assets stood at £139.5 million, this attributed a negative value of £3.2 million to the investment portfolio by comparison with its year end valuation of £192.2 million.  

Reflecting the market's very negative view, the discount at the year end was the highest since Graphite Enterprise was established in 1981. In the recession of the early 1990s and again following the dotcom crash in 2000, the market became concerned that private equity portfolios were overvalued, but had little or no concern over the security of the balance sheets of listed funds. At both times, discounts typically rose to a maximum of 30-40%, considerably less than the range for listed private equity funds of funds at the end of 2008 of 60-70%.  

Long term performance

We measure long term performance against the benchmark of the FTSE All-Share Index, as we believe that this is the relevant comparator for the great majority of shareholders. While there is no reason for the performance of Graphite Enterprise to move closely with the All-Share over shorter periods, we aim to outperform the Index over five and ten years.

Over the five and ten years to December 2008, the net asset value per share rose by 55.2% and 64.6% respectively, while the share price fell by 15.9% and 28.8% as a result of the sharp widening of the discount in the last quarter. In the same periods the FTSE All-Share Index rose by 0.1% and fell by 17.4% respectively. The net asset value per share has therefore comfortably outperformed the benchmark, while regrettably the recent performance of the share price has fallen short.

Years to 31 December 2008	1	3	5	10
Net asset value per share	-13.6%	+12.7%	+55.2%	+64.6%
Share price	-60.5%	-48.7%	-15.9%	-28.8%
FTSE All-Share Index	-32.8%	-22.4%	+0.1%	-17.4%

The balance sheet

As discussed earlier, we believe that concerns over the weakness of balance sheets in our sector largely explain Graphite Enterprise's poor share price performance in the last quarter of the year. By comparison with our peer group, we have consistently held high levels of cash compared with the size of our undrawn commitments. Prior to the current financial crisis, undrawn commitments appeared to be comfortably covered by a combination of these cash balances, cash inflows expected from realisations and the availability of bank debt in the unlikely event that the first two sources of funds were not sufficient.  

Cash and commitments

Early in the year, concerned by the general deterioration in economic and investment conditions, we decided to strengthen the balance sheet, by suspending new commitments to funds, stopping share buy backs and selling the remainder of the option over the FTSE 100 Index. 

Although these measures were extremely helpful in strengthening the Company's financial position we were concerned that, in the continued absence of bank debt, they might not be sufficient. While we were confident that both drawdowns and realisations would remain low for some time, we felt that drawdowns might eventually pick-up before realisations. This could arise if the managers of our fund portfolio started to make new investments while pricing remained depressed but deferred the sale of existing investments in such conditions.

We therefore moved rapidly to sell a portfolio of fund investments and commitments. The terms of this secondary sale were agreed in October and the disposal was completed in December. The sale further strengthened the balance sheet, increasing the level of cash by £54.9 million and reducing outstanding commitments to funds by £49.2 million. Details of the transaction are given in the Manager's Review.

Foreign currency  

The final significant measure we took to secure the balance sheet was in the management of foreign currency. Graphite Enterprise has substantial investments and commitments in euros and, to a much lesser degree, in US dollars and other currencies. We regularly review our foreign currency exposure, and until late 2008 had concluded that hedging was unjustified given the long term nature of the activities of the Company, the unpredictability of its cash flows and the likelihood that long-term investment returns would, overall, be largely unaffected by currency fluctuations. We believed that the balance sheet was of sufficient strength to absorb any short term increase in foreign currency denominated liabilities which might result from a fall in the value of sterling. 

In the new and much tighter financial conditions we concluded that, while in the long term these views remained valid, in the short term we should seek to minimise the risk of a fall in sterling increasing the cost of funding foreign currency denominated commitments. We therefore moved to match our cash, the great majority of which was in sterling, more closely to our commitments, which were largely in euros. In October we transferred £48.0 million into euros which proved prescient as the euro strengthened considerably in the following months. By the year end the rise in the euro had increased the value of the amount transferred by £10.0 million. 

The year end balance sheet

At 31 December the Company had net assets of £331.7 million, of which £192.2 million (57.9%) was in the investment portfolio and £139.5 million (42.1%) was held in cash or other net current assets. Outstanding commitments to funds totalled £307.3 million. Commitments therefore exceeded cash balances by £167.8 million. This overcommitment was equivalent to 50.6% of net assets as compared with 62.0% at 30 June 2008. The overcommitment level would have been materially lower were it not for the large currency movements in the fourth quarter of the year which greatly increased the sterling value of euro denominated commitments.

Based on what we believe to be highly cautious assumptions in relation to future drawdowns, the current level of cash should be sufficient to meet all commitments for the next two years even if no cash inflows are received from the portfolio. We expect however that cash outflows will be lower and cash inflows materially higher than in these assumptions and that bank finance will be available if required. We therefore remain confident that the company will continue to be able to meet its commitments in the longer term without the need to raise additional capital.

 A more detailed analysis of future cash flows is given in the Manager's Review.

Income statement and dividend

The total loss after tax attributable to shareholders was £46.8 million, or 64.1p per share. This comprised a capital loss of £50.5 million (69.2p per share) and a revenue return of £3.7 million (5.1p per share). 

As predicted in last year's statement, the revenue return, which determines the level of the annual dividend, was materially lower than in 2007. The fall of 46.4% was largely the result of lower income being received from the investment portfolio. In the light of this reduction, the Board is proposing that the dividend per share for the year to December 2008 should be reduced to 4.5p. By comparison, the dividend in 2007 was 8.0p and in 2006 was 6.5p.  

It is likely that the revenue return, and therefore the dividend, will fall again in 2009, as average cash balances are forecast to be lower and interest rates considerably lower than in 2008. 

The Board

Having been the Chairman of Graphite Enterprise since 1986, I shall be retiring from the Board at the Annual General Meeting in May. My place will be taken by Mark Fane, who has been on the Board since 2000 and has wide and relevant experience in the private equity market and elsewhere.

I have worked in financial services for 46 years and for half that period I have been Chairman of Graphite Enterprise Trust. This has been an exceptional privilege and pleasure as the task itself has been fascinating and as my fellow directors, our managers and our professional advisors have throughout been of the highest calibre. I have always received most generous support from them all, for which I offer my heartfelt thanks. 

I have noticed in recent years that there are those in some circles who apparently seek to encourage an atmosphere of suspicion and distrust between the boards and managers of investment trusts - as also between the non-executive and executive directors of other companies. I believe that in our Company's case we have demonstrated the wisdom and benefit not only of challenging each other but also of working in partnership together to secure our common objective - good service to our shareholders. 

On balance, in spite of the extraordinary turmoil and destruction of capital which have characterised the last six to nine months, I believe that we have served our shareholders effectively and well throughout the life of our Company. It is, of course, a great disappointment to me that in my final year the share price performance has been the worst since I became Chairman. However it was much better that this should have happened in my last year as Chairman rather than in Mark's first.

So I wish Mark, his colleagues and our shareholders well. I personally believe that our market has passed its darkest hour and I am sure that Mark will successfully lead our Company onwards and upward. I hope he enjoys his tenure as much as I have enjoyed mine. 

Outlook

Uncertainty in the economy and in credit markets continues, with all major developed economies now in a recession, the length and depth of which is hard to predict. Despite government pressure and incentives, banks remain unwilling or unable to lend as they struggle to repair their damaged balance sheets. The continued shortage of bank finance further weakens the real economy by putting under pressure businesses which would normally have no difficulty in withstanding the impact of a recession. This could create a spiral of decline in economic activity. 

The impact of the recession on the long term performance of private equity portfolios remains difficult to quantify. Much will depend on the position taken by the banks. While many companies are trading well and should have no difficulty in meeting their debt obligations, others are in weaker positions. For these companies, it will be important that the banks allow them to maintain their current levels of borrowing. If they do not, new equity may be required which would further depress investment returns.  

In these circumstances our priority is clear. We shall continue to focus on managing the balance sheet. This should improve market confidence in Graphite Enterprise and give us the strength and flexibility to take advantage of the investment opportunities which will almost certainly arise in this very difficult period. Our experience of the recession of the early 1990s shows that some of the best investments are made when cash is scarce and confidence is at its lowest. We are in the fortunate position of having substantial cash balances which may well be invested when market conditions are at their most attractive.

John Sclater

April 2009

MANAGER'S REVIEW

The year to 31 December 2008 proved to be extremely challenging for Graphite Enterprise. Against a hostile background, in which financial markets fell sharply and the global economy deteriorated rapidly, the net asset value per share experienced its largest percentage fall for seven years, falling by 13.6% to 449.0p. This fall would have been considerably greater had not the rise in the value of the euro and the US dollar generated substantial currency gains which partially offset the decline in the value of the portfolio.

At the end of the year the investment portfolio was valued at £192.2 million, 23.8% lower than a year earlier. A summary of the main changes during the year is set out below.

2008 £m	Opening value	Invested	Proceeds	Net valuation decrease	Closing value
Continuing portfolio	200.8	66.9	(24.5)	(51.0)	192.2
Portfolio sold in December	51.3	11.0	(54.9)	(7.4)	-
Investment portfolio	252.1	77.9	(79.4)	(58.4)	192.2

Market environment

The slowdown in European buy-out activity that started towards the end of 2007 continued in 2008. The number of buy-outs completed during the year fell by 29% to 580, while their total value fell by 62% to €70 billion. The greater decline in value reflected the impact of the tightening of the banking market on the large buy-out sector. This is best illustrated by the sharp falls in the number of larger transactions with those of over €1 billion falling from 42 in 2007 to 11 in 2008 and those of between €500 million and €1 billion falling from 45 to 19.  

The full year figures mask the scale of the decline in activity towards the end of the year, with deal volume and value falling by 64% and by 74% respectively in the last quarter compared with the same period in 2007. Figures are not yet available for the first quarter of 2009 but, based on the pattern of drawdowns from our own portfolio, we expect activity levels to have contracted further.

Uncertainty over the economic outlook has undoubtedly been a major factor in this slowdown but perhaps of more significance has been the scale of the contraction in the leveraged finance market. This contraction has resulted from banks being unwilling or unable to underwrite large loans and from many of the institutional buyers of leveraged loans, to whom the banks would normally syndicate, having withdrawn from the market. The reduction in debt capacity has both reduced the number of transactions completed and reduced the level of debt used in those transactions. This is reflected in the fall in the market average total debt to EBITDA ratio for new transactions from an all-time high of 6.1 in 2007 to 5.2 in 2008. It seems unlikely that bank lending will recover in the short term and deal volumes, particularly in the large buy-out market, will therefore almost certainly remain relatively depressed in 2009.  

Portfolio performance

The underlying value of the investment portfolio fell by £120.6 million or by 30.7% during the year. Currency gains on investments denominated in foreign currencies partially offset this, reducing the net decline in the value of the portfolio to £58.4 million or 17.7%.

Managers of private equity funds typically value their portfolios every three months. In the first nine months of the year, the value of the portfolio remained broadly unchanged as managers of our fund investments were slow to adjust valuations to take account of the changed economic circumstances. However at December most managers made substantial reductions which brought the unadjusted fall in the value of the portfolio to 26.0%.

As many of the underlying portfolio companies were acquired with relatively high levels of debt, the value of the equity in these companies is particularly sensitive to changes in profitability or in valuation multiples. After taking this into account we felt that it would be prudent to make a provision against the reported valuation of the third party portfolio. The provision, which amounted to 11.7% of that valuation at 31 December 2008, had the effect of increasing the fall in the value of the total portfolio by £18.5 million to £120.6 million and the percentage fall from 26.0% to 30.7%.

At the beginning of the year £134.3 million of the underlying investment portfolio was denominated in euros and £19.2 million in US dollars. Both these currencies rose strongly against sterling during the year and the sterling value of the portfolio increased by £62.2 million as a result. This reduced the fall in the portfolio as a whole from £120.6 million to £58.4 million and the percentage fall to 17.7%.

Summary of portfolio performance
	£m
Unadjusted movement in portfolio	(102.1)
Provision	(18.5)
Total movement in portfolio before currency	(120.6)
Effect of currency	62.2
Total movement in portfolio	(58.4)

These figures may overstate the currency gain, as certain funds which report in euros have underlying investments in the UK. In the December 2008 accounts of these funds the valuations of these investments may have declined on account of the fall in sterling. Such falls have been included in the unadjusted portfolio movement figure discussed above. The conversion of the euro value of these funds into sterling in the Company's accounts will have resulted in a corresponding currency gain.

Investment activity 

New investments

Reflecting the general downturn in the market, Graphite Enterprise invested materially less in 2008 than in 2007, with total new investment falling by 24.4% to £77.9 million. Drawdowns from funds accounted for the overwhelming majority of new investment, representing 97.8% of the total. This compares with last year's figure of 91.1%.

The rate at which commitments were drawn down also declined materially. In 2007, 34.2% of commitments outstanding at the beginning of the year were drawn down while in 2008 this figure fell to 22.3%. 

The pattern of investment was extremely uneven. Although the amount invested in the first half was broadly similar to that in the second, the last quarter saw a dramatic fall off with only £5.9 million invested, equivalent to only 7.5% of the full year total.  

New investments by type and geography 2008 £m	UK	Continental Europe	Rest of World	Total
Mid-market buy-outs	11.4	8.5	-	19.9
Large buy-outs	3.9	35.3	6.7	45.9
Small buy-outs	3.7	-	-	3.7
Mezzanine	-	6.2	-	6.2
Quoted	1.5	-	-	1.5
Infrastructure	0.7	-	-	0.7
Total	21.2	50.0	6.7	77.9

New commitments

The amount committed to new funds fell even more sharply than the rate of new investment, with £64.9 million being committed to five funds in 2008 compared with £186.0 million to nine funds in 2007. Even if the £70.0 million committed to funds raised by Graphite Capital in 2007 were excluded, the fall exceeded 40%. The great majority of the commitments made in 2008 were made in the first quarter. In most cases these were closings of commitments made in the final quarter of 2007. Details of these funds are given below.

Net new fund commitments				Commitment
Fund		Investment type	Focus	£m
CVC European Equity Partners V		Large buy-out	Global	28.9
CSP Secondary Opportunities Fund II		Secondary fund	Europe	10.0
AnaCap Financial Partners II		Financial services	Europe	9.9
Vision Capital Partners VII		Secondary investments	Europe	9.2
Advent Central and Eastern Europe IV		Mid-market buy-out	Europe	7.9
Other movements				(1.0)
Total				64.9

This was the second time that we had invested in funds managed by CVC Capital Partners, Vision Capital and Newgate CSP and the first time we had invested with Advent International and AnaCap Financial Partners.

Secondary sale

As discussed in the Chairman's Statement, with market conditions deteriorating we decided that we should take steps to strengthen the balance sheet. Although the Company still retained substantial levels of cash, we were concerned that drawdowns for investment might start to recover before the rate of realisations.  

We believed that realisations would remain at relatively low levels in both the short and the medium term. However, while we expected drawdowns to remain low in the short term, we felt that they might then gradually accelerate as managers started to make new investments to take advantage of the relatively low prices available at the bottom of the economic cycle. This increase might well start before realisations recovered, as the low prices might continue to deter the managers of our fund investments from selling portfolio companies. Drawdowns might also be required to provide follow-on finance to portfolio companies, either to support those which were underperforming or to provide expansion or acquisition finance to those which were continuing to perform well.

In normal circumstances we would have expected bank finance to have been available to cover any potential shortfall in funding but in current market conditions this could not be relied upon. 

In October we therefore exchanged contracts on the sale of a portfolio of interests in ten funds. We sold our entire interest in four third party funds and 25% of our interest in another three. We also sold 20% of our interests in Graphite Capital Partners VI and Graphite Capital Partners VII and 50% of our interest in Graphite Capital Partners VII Top Up Fund.

The sale of the portfolio offered the combined benefits of generating cash from the sale of existing investments and of releasing the Company from undrawn commitments.

The sale completed on 30 December, generating cash proceeds of £54.9 million and releasing the Company from £49.2 million of commitments. The proceeds represented a discount of £7.4 million or 11.8% to the valuation of the interests at the beginning of the year. After taking account of drawdowns and distributions received in earlier years the portfolio sold generated a net gain of £1.4 million over original cost. 

The effect of the sale was to increase year end cash balances by 64.7% and to reduce the level of outstanding commitments by 13.8%. It also reduced the Company's current and future exposure to large buy-outs as 80.5% of the proceeds and 65.7% of the commitments released related to funds focusing on this sector.

Realisations

Realisations from the continuing portfolio were at a historically low level totalling only £24.5 million, or 12.2% of the opening value of the continuing portfolio. This compares with an average in the preceding four years of 54.1% of the opening portfolio value and the average for the seven years before that of 31.2%. The sharp reduction reflected the very weak market for private equity realisations during the year. 

The pattern of realisations from the continuing portfolio, like that of drawdowns, was extremely uneven with 80.0% of proceeds being received in the first half of the year and a minimal amount being received in the fourth quarter. 

Realisations by type and geography 2008 £m	UK	Continental Europe	Rest of World	Total
Mid market buy-outs	7.9	3.0	-	10.9
Large buy-outs	-	7.6	-	7.6
Small buy-outs	4.1	-	-	4.1
Mezzanine	-	1.7	-	1.7
Quoted	0.2	-	-	0.2
Infrastructure	-	-	-	-
Secondary sale	10.6	37.8	6.5	54.9
Total	22.8	50.1	6.5	79.4

The closing portfolio

At 31 December 2008, Graphite Enterprise had holdings in 40 funds and in 19 direct investments. Third party private equity firms selected by the Manager were responsible for managing 36 of these funds and these 26 firms collectively managed 70.5% of the portfolio by value. Graphite Capital directly managed the remaining 29.5% of the portfolio.

The secondary sale discussed in the previous section both reduced the size of the portfolio and changed its profile. As over 80% of the investments sold were in large buy-outs and almost 85% were made in the years 2005 to 2007, the sale reduced exposure to the two categories of investment which are perceived to have been most exposed to the peak of the pricing cycle.

Small and mid-market buy-outs replaced large buy-outs as the largest category of investment at the end of the year. This was primarily because the effect of the secondary sale and of valuation changes was to generate a larger fall in the closing value of large buy-outs. Overall, large buy-outs fell from 42.3% to 36.3% of the portfolio while small and mid-market buy-outs fell only marginally from 42.1% to 40.9%. The two categories combined fell from 84.4% to 77.2% of the portfolio and from 53.2% to 44.7% of total assets. 

Mezzanine and infrastructure investments increased from 11.9% to 21.0% of the total as none of these assets were included in the secondary sale and as funds in these categories generally reported lower declines in value.

Portfolio - Investment category

	% of total assets by value	% of total portfolio  by value
Mid-market and small buy-outs	23.7%	40.9%
Large buy-outs	21.0%	36.3%
Mezzanine	11.1%	19.1%
Infrastructure	1.1%	1.9%
Quoted	1.0%	1.8%
Total	57.9%	100.0%

The Company had holdings in 159 underlying companies in the buy-out portfolio, with a total valuation of £148.4 million. After taking account of the provision discussed earlier, these companies were valued on a weighted average multiple of 7.9 times 2008 EBITDA. The average level of debt in these companies was equivalent to 4.2 times 2008 EBITDA and the average gearing was therefore 53.2%.

In recent years an increasing proportion of commitments made have been to funds which invest wholly or partly outside the UK. The balance of the portfolio has therefore been moving steadily towards continental Europe as these commitments have been drawn down. This trend continued in 2008 with continental European investments increasing from 39.5% to 46.6% of the total and UK investments falling from 50.7% to 41.2%.

Portfolio - Geographic distribution

	% of total portfolio  by value
UK	41.2%
France	16.8%
North America	10.6%
Germany	10.6%
Benelux	9.2%
Spain	5.2%
Other European	4.8%
Rest of World	1.6%
Total	100.0%

The age profile of investments is shown in the table below. The proportion of investments made in the three years from 2005 to 2007 has fallen from 76.4% to 66.2% of the portfolio and from 48.4% to 38.3% of total assets.  

Portfolio - Year of investment

	% of total assets by value	% of total portfolio  by value
2008	11.9%	20.6%
2007	23.0%	39.7%
2006	13.4%	23.1%
2005	2.0%	3.4%
2004	2.8%	4.8%
2003	0.6%	1.1%
2002	0.4%	0.6%
2001	1.1%	1.8%
2000	0.3%	0.7%
1999 and before	2.4%	4.2%
Total	57.9%	100.0%

The 263 underlying companies in the total portfolio operate across a broad range of sectors of the economy. The most important of these remain business services, manufacturing and engineering and consumer goods and services which together account for nearly 60% of the portfolio by value.

Portfolio - Sector analysis

	% of total portfolio  by value
Business services	25.7%
Manufacturing and engineering	19.7%
Consumer goods and services	12.7%
Leisure	8.7%
Healthcare and pharmaceuticals	7.1%
Retailing	5.9%
Media	5.4%
Financial services	3.4%
Construction and building supplies	2.6%
Infrastructure	1.9%
Other	6.9%
Total	100.0%

Closing commitments

Movements in commitments 

	£m
Opening at 1 January 2008	303.0
Net new commitments	64.9
Drawdowns	(76.3)
Commitments sold	(49.2)
Currency movements	64.9
Closing at 31 December 2008	307.3

At the year end the Company had undrawn commitments totalling £307.3 million of which 48.7% was committed to small and mid-market buy-out funds and 45.0% to large buy-out funds. If all of these were to be drawn down, small and mid-market buy-outs would account for 45.7% of the portfolio and large buy-outs 41.7%. 

The great majority of outstanding commitments are to funds that are at a relatively early stage in their lives, with more than half being to funds that have drawn down less than 20% of commitments. Funds which are still within their initial investment periods account for 94.0% of these commitments and these funds have on average 3.9 years in which to complete their investment programme. The immaturity of the funds to which the Company is committed has the dual benefits of reducing pressure on the underlying managers to invest quickly and of reducing the amount that is likely to be drawn down into follow-on, rather than new investments. 

Fund portfolio - percentage drawn down	Percentage of commitments
0-20%	50.7%
21-40%	13.4%
41-60%	28.4%
61-80%	0.5%
81-90%	5.5%
90%+	1.5%
	100.0%

Fund portfolio commitments	Original commitment	Outstanding commitment	Percentage of outstanding commitments
	£m	£m
Funds in investment period	428.1	288.8	94.0%
Funds post-investment period	200.1	18.5	6.0%
Total	628.2	307.3	100.0%

Fund portfolio - remaining investment period	Percentage of commitments
5-6 years	23.2%
4-5 years	23.6%
3-4 years	24.2%
2-3 years	18.6%
1-2 years	3.8%
<1 year	0.6%
Investment period completed	6.0%
	100.0%

Liquidity

At 31 December the Company had cash and other net current assets of £139.5 million and outstanding commitments of £307.3 million. The net level of overcommitment was therefore £167.8 million. A standard measure of liquidity is the overcommitment percentage which expresses net overcommitment as a percentage of net asset value. At the year end Graphite Enterprise was 50.6% overcommitted. In comparison with most other listed private equity funds of funds, a number of which had net debt at the end of the year, the Company had materially higher levels of cash and a materially lower percentage level of overcommitment.

In predicting future cash movements it is important to point out that most funds typically draw down cash for new investment over a period of five years and normally retain approximately 20% of commitments at the end of this investment period to fund follow-on investments and expenses.

We estimate that if funds were to make drawdowns at a constant rate such that they had drawn down 80% of total commitments at the end of their investment periods, the annual cash outflow would be between £60 million and £65 million over the next two years. This suggests that the Company has sufficient cash reserves to meet all drawdown requirements for at least two years even under the most conservative assumptions.  

We expect the net cash outflow to be materially lower than this for two main reasons. Firstly, no proceeds are assumed to be received from realisations whereas, even in the very difficult market conditions of 2008, proceeds of £24.5 million were received. Secondly we believe drawdowns will be at lower levels, as most managers are likely to conserve cash in the first part of the downturn and large funds are constrained by the absence of bank debt from making new investments. In the six months to 31 March 2009, drawdowns totalled only £11.1 million.

Further, we would expect debt markets to recover sufficiently within the next two years for the Company to be able to obtain debt facilities if required.

Currency

At the end of 2008, 67.5% of the Company's net asset value was denominated in foreign currencies. Of the £331.7 million of net assets, £198.8 million (59.9%) was in euros and £24.4 million (7.4%) was in US dollars. Almost all of the balance was denominated in sterling. The £307.3 million of undrawn commitments was also heavily weighted towards foreign currencies, with £224.9 million (73.2%) being denominated in euros and £12.3 million (4.0%) in US dollars.

This creates a number of issues. If the euro rises against sterling the Company benefits to the extent that the sterling value of its euro denominated investments and hence the net asset value also rises. However, counterbalancing this, the sterling cost of funding euro denominated commitments also rises. The reverse is true if the euro falls, with the net asset value falling but the sterling cost of commitments also falling. A movement in the value of the euro in either direction therefore has both a negative and a positive effect. In less volatile times we might have been able to hedge these foreign currency risks by buying options but the sharp swings in currency have made these prohibitively expensive. Similarly, we are not currently in a position to obtain currency borrowings to hedge these risks.

The importance of currency movements on the Company's performance is best illustrated by the results for 2008 when currency movements generated a gain of £74.7 million but also caused our commitments to increase by £64.9 million. This outcome was partly the result of our following a more interventionist currency strategy. At the end of the third quarter we became concerned that the rise in the euro had already generated a substantial increase in commitments and that a further rise could have a material adverse effect on future cash flow. In October we therefore transferred £48 million of sterling cash balances into euros. This was to ensure that if further rises in the euro drove up the sterling value of commitments the impact would be partially offset by a rise in the sterling value of euro cash balances. In the event, the euro rose by 15.7% between the date of the transfer and the year end and as a result the Company made a currency gain on cash balances of £11.8 million in the final quarter.

At 31 December 2008 the euro was at close to an all time high against sterling. While the rise in the euro had generated the currency gain discussed in the previous paragraph it had also increased the sterling value of euro denominated commitments to a level which was considerably higher than we had anticipated when the original commitments were made. In deciding how much of the Company's £139.0 million of cash balances should be held in euros we have had to weigh up the risk that a fall in the euro from this high level might materially reduce the net asset value against the risk that a further rise could materially increase the level of outstanding commitments.  

Looking forward, we will continue to review currency closely, adapting our policy in the light of movements in exchange rates and in the value of undrawn commitments.

Share price

As reported in the Chairman's Statement, the share price fell by 60.5% in the year reflecting a general loss of confidence in the private equity sector. During the first nine months of the year, the share price fell by 25.1%, which was broadly in line with the decline in the FTSE All-Share Index which fell by 24.4%. In the final quarter, however, share prices in the listed private equity sector were particularly badly affected by the financial crisis with the result that the share price fell by a further 47.3% compared with a fall of only 11.1% in the Index. Although the fall in the share price was obviously disappointing it was less than the falls suffered by many of the other companies in the listed private equity sector.

Prospects for 2009

In the first three months of the current financial year, new investment has remained low while realisations have been minimal. A total of £5.2 million has been drawn down by funds while no new direct investments have been made. The Company has made no new commitments.  

The share price on 2 April 2009 was broadly unchanged from its year end level at 186.0p. Again, this was less than the share price falls experienced by other companies in the listed private equity sector, which declined on average by more than 25% in the same period.

In last year's review, we commented that there were signs that the crisis in international credit markets was deepening and questioned whether this would lead to a recession in the wider economy or to a sustained fall in equity markets. Clearly, the eventual outcome has been considerably worse than we had anticipated.

Looking forward, the next twelve months are likely to be difficult for the great majority of our portfolio companies. How well they respond will be the main determinant of the performance of the Company in 2009. With 60% of the net asset value denominated in euros at the beginning of the year and with the euro at close to an historical high, foreign currency movements will again play an important role.

On a more positive note, at the end of 2008 approximately 42% of the net asset value was held in cash and other net current assets. This both gives the Company considerable protection against a further downturn and puts it in a very strong position to take advantage of the attractive investment opportunities which invariably become available at times of economic uncertainty.

Graphite Capital

April 2009

THE 30 LARGEST UNDERLYING INVESTMENTS

The tables below and on the following page present the 30 companies in which Graphite Enterprise had the largest investments by value at 31 December 2008. These investments may be held directly, through funds, or in some cases both. Values are shown as a percentage of the total investment portfolio of £192.2 million 

	Entity	Year of  investment	Country	Value as a % of investment portfolio
1	Micheldever Tyre Services
	Distributor and retailer of tyres	2006	UK	5.2%
2	MCE
	Provider of industrial services	2007	Germany	2.7%
3	Park Holidays UK
	Operator of caravan parks	2006	UK	2.6%
4	NES Group
	Recruitment agency for technical contractors	2006	UK	2.3%
5	Kurt Geiger
	Retailer and distributor of luxury footwear	2008	UK	2.2%
6	Alexander Mann Solutions
	Provider of recruitment process outsourcing	2007	UK	2.0%
7	Ceridian
	Provider of human resource and payment processing services	2007	USA	2.0%
8	Wagamama
	Chain of Japanese noodle restaurants	1996	UK	1.8%
9	Svendborg Brakes
	Provider of industrial brake solutions	2008	Denmark	1.7%
10	Norit
	Supplier of water purification technologies	2007	Netherlands	1.5%
11	Intermediate Capital*
	Provider of mezzanine finance	1989	UK	1.4%
12	Algeco Scotsman
	Supplier and operator of modular buildings	2007	USA	1.4%
13	Evonik Industries
	Diversified industrial group	2008	Germany	1.4%
14	Data Explorers Group
	Provider of information to global securities lending industry	2007	UK	1.3%
15	Dominion Gas
	Supplier of specialist gases	2007	UK	1.3%
	Total of the 15 largest underlying investments			30.8%

* Quoted  

	Entity	Year of  investment	Country	Value as a % of investment portfolio
16	Stork
	Diversified engineering group	2008	Netherlands	1.3%
17	Avanza Group
	Operator of buses	2007	Spain	1.3%
18	Ziggo
	Cable operator	2006	Netherlands	1.2%
19	Clyde Bergemann
	Supplier of components for power generation industry	2005	Germany	1.2%
20	TMF
	Provider of management and accounting outsourcing services	2008	Netherlands	1.2%
21	Hellermann Tyton
	Manufacturer of high performance cable management products	2006	UK	1.1%
22	Segur Iberica
	Provider of security services	2004	Spain	1.0%
23	Balta
	Manufacturer of carpets and floor coverings	2004	Belgium	1.0%
24	Alma Consulting
	Provider of cost reduction and tax recovery services	2007	France	1.0%
25	Optimum Care
	Owner and operator of care homes for the elderly	2007	UK	1.0%
26	Parques Reunidos
	Operator of attraction parks	2007	Spain	0.9%
27	Marken
	Provider of specialist courier services	2007	UK	0.9%
28	CEVA
	Manufacturer and distributor of animal health products	2007	France	0.9%
29	West Corporation
	Provider of outsourced communication services	2006	USA	0.9%
30	KPI
	Manufacturer of prefabricated concrete products	2007	France	0.9%
	Total of the 30 largest underlying investments			46.6%

THE 15 LARGEST FUND INVESTMENTS

The largest funds by value at 31 December 2008 are set out below.

	Fund	Outstanding commitment £m	Year of commitment	Country	Value £m
1	Graphite Capital Partners VI
	Mid-market buy-outs	7.0	2003	UK	21.2
2	ICG European Fund 2006
	Mezzanine loans to buy-outs	15.1	2007	Europe	13.0
3	Doughty Hanson & Co V
	Mid-market and large buy-outs	12.9	2006	Europe	10.8
4	Euromezzanine 5
	Mezzanine loans to mid-market buy-outs	2.6	2006	France	10.5
5	Thomas H Lee Equity Fund VI
	Large buy-outs	12.3	2007	USA	10.3
6	Doughty Hanson & Co IV
	Mid-market and large buy-outs	0.3	2005	Europe	9.5
7	Fourth Cinven Fund
	Large buy-outs	13.2	2006	Europe	8.4
8	Candover 2005 Fund
	Large buy-outs	5.3	2005	Europe	7.8
9	Deutsche Beteiligungs AG Fund V
	Mid-market buy-outs	12.0	2006	Germany	7.4
10	Apax Europe VII
	Large buy-outs	16.4	2007	Global	6.8
11	Graphite Capital Partners VII
	Mid-market buy-outs	32.5	2007	UK	6.5
12	Deutsche Beteiligungs AG Fund IV
	Mid-market buy-outs	0.9	2002	Germany	5.1
13	Barclays European Infrastructure Fund
	Infrastructure projects	0.4	2001	UK	3.6
14	CVC European Equity Partners Tandem Fund
	Large buy-outs	4.9	2006	Global	3.5
15	Activa Capital Fund
	Mid-market buy-outs	1.8	2002	France	3.5
	Total of 15 largest fund investments	137.6			127.9
	Percentage of total investment portfolio				66.6%

CONSOLIDATED INCOME STATEMENT

	Year to 31 December 2008			Year to 31 December 2007
	Revenue return	Capital return	Total	Revenue return	Capital return	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Investment Returns
Gains on investments held at fair	1,326	(63,443)	(62,117)	5,563	54,077	59,640
value
Income from cash and cash	5,001	-	5,001	6,770	-	6,770
equivalents
Other income	298	-	298	45	-	45
Foreign exchange gains and losses	-	12,516	12,516	-	544	544
	6,625	(50,927)	(44,302)	12,378	54,621	66,999
Expenses
Investment management charges	(1,110)	(3,330)	(4,440)	(1,203)	(3,609)	(4,812)
VAT reclaim	647	1,942	2,589	-	-	-
Other expenses	(1,090)	(81)	(1,171)	(1,328)	(90)	(1,418)
	(1,553)	(1,469)	(3,022)	(2,531)	(3,699)	(6,230)
Profit/(loss) before tax	5,072	(52,396)	(47,324)	9,847	50,922	60,769
Taxation	(1,337)	396	(941)	(2,878)	1,083	(1,795)
Profit/(loss) for the period from
continuing operations	3,735	(52,000)	(48,265)	6,969	52,005	58,974
Attributable to:
Equity shareholders	3,735	(50,527)	(46,792)	6,969	46,143	53,112
Minority interests	-	(1,473)	(1,473)	-	5,862	5,862
Basic and diluted earnings per			(64.09p)			67.56p
share

The column headed 'Total' represents the income statement for the relevant years and the columns headed 'Revenue return' and 'Capital return' are supplementary information.

CONSOLIDATED BALANCE SHEET

		As at 31 December		As at 31 December
			2008		2007
	Notes		£'000s		£'000s
Non-current assets
Investments held at fair value
- Unquoted investments			188,137		242,354
- Quoted investments			4,041		9,737
- FTSE 100 Call Option			-		12,757
			192,178		264,848
Current assets
Trade and other receivables			2,750		575
Cash and cash equivalents			138,963		134,699
			141,713		135,274
Current liabilities
Trade and other payables			2,152		1,845
Net current assets			139,561		133,429
Net assets			331,739		398,277
Capital and reserves
Called up share capital	7		7,292		7,529
Capital redemption reserve	7		2,112		1,875
Share premium	7		12,936		12,936
Capital reserve	7		290,066		351,663
Revenue reserve	7		14,939		17,037
Equity attributable to equity shareholders	7		327,345		391,040
Minority interests	7		4,394		7,237
			331,739		398,277
Net asset value per share (basic and diluted)			449.0p		519.4p

CONSOLIDATED CASH FLOW STATEMENT

			Year to		Year to
			31 December 2008		31 December 2007
			£'000s		£'000s
Operating activities
Sale of portfolio investments			24,454		106,823
Sale of portfolio of fund interests			54,949		-
Purchase of portfolio investments			(77,869)		(103,536)
Sale of FTSE 100 Call Option			7,693		21,310
Income received from investments			1,791		5,337
Other income received			5,299		6,815
Investment management charges paid			(3,204)		(4,809)
Other expenses paid			(1,412)		(1,576)
Taxation paid			(1,731)		(990)
Net cash inflow from operating activities			9,970		29,374
Financing activities
Investments by minority interests			580		465
Distributions to minority interests			(1,899)		(6,688)
Purchase of ordinary shares			(11,070)		(33,190)
Equity dividends paid			(5,833)		(5,242)
Net cash outflow from financing activities			(18,222)		(44,655)
Net decrease in cash and cash equivalents			(8,252)		(15,281)
Cash and cash equivalents at beginning of year			134,699		149,436
Net decrease in cash and cash equivalents			(8,252)		(15,281)
Effect of changes in foreign exchange rates			12,516		544
Cash and cash equivalents at end of period			138,963		134,699

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Year to  31 December		Year to  31 December
			2008		2007
			£'000s		£'000s
Total equity at the beginning of the year			398,277		380,955
(Loss)/profit attributable to equity shareholders			(46,792)		53,112
(Loss)/profit attributable to minority interests			(1,473)		5,862
Total (loss)/profit for the period and total recognised income and expense			(48,265)		58,974
Dividends to equity shareholders			(5,833)		(5,242)
Purchase of ordinary shares			(11,070)		(31,100)
Net distribution to minority interests			(1,370)		(5,310)
Total equity at end the of year			331,739		398,277

NOTES 

1 GENERAL INFORMATION

Graphite Enterprise Trust PLC (the 'Company') and its subsidiaries (together 'Graphite Enterprise' or the 'Group') are registered in England and Wales and domiciled in England. The registered office is at Berkeley Square House, Berkeley Square, London W1J 6BQ. The Company's objective is to provide shareholders with long term capital growth through investment in unquoted companies, mostly through specialist funds but also directly. 

2 AUDITED ANNUAL FINANCIAL REPORT 

The condensed consolidated financial information is extracted from the annual report and financial statements for the year ended 31 December 2008 and does not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985 (Section 434 of the Companies Act 2006). The annual report and financial statements include the report of the independent auditors which is unqualified, does not contain an emphasis of matter paragraph and does not contain any statements under Section 237 of the Companies Act 1985 (Section 498 of the Companies Act 2006).

The annual report and accounts will shortly be available on the Company's website at www.graphite-enterprise.com. 

Statutory accounts for the year ended 31 December 2008 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at the Coronation Suite, 2nd Floor, The Hilton Hotel, Park Lane, London W1K 1BE, on 19 May 2009 at 11.30 a.m. 

3 BASIS OF PREPARATION

This annual financial report has been prepared in accordance with the Disclosure and Transparency Rules.  The accounting policies applied are consistent with those of the annual report and financial statements for the year ended 31 December 2008, as described therein.  

4 DIVIDENDS

Year to  31 December 2008

Year to  31 December 2007

Dividends paid in the period

£'000s

£'000s

Final paid: 8.0p (2007: 6.5p) per share

5,833

5,242

The Board has proposed a final dividend of 4.5p per share in respect of the year ended 31 December 2008 which, if approved by shareholders, will be paid on 27 May 2009, to shareholders on the register of members at the close of business on 8 May 2009.

5 EARNINGS PER SHARE

							Year to  31 December 2008			Year to  31 December 2007
Revenue return per ordinary share								5.12p	8.86p
Capital (loss)/return per ordinary share								(69.21p)	58.70p
Earnings per ordinary share (basic and diluted)								(64.09p)	67.56p
Weighted average number of shares								73,012,852	78,620,500

The earnings per share figures are based on the weighted average numbers of shares set out above.

6 SHARE BUY-BACKS

							Year to  31 December 2008					Year to  31 December 2007
Number of shares bought back						2,374,000							7,048,718
Average price per share						463.1p							438.2p
Total cost including expenses						£11,070,000							£31,100,000
Number of shares in issue at the end of the period						72,913,000							75,287,000

All shares bought back were subsequently cancelled.

7 CHANGES IN EQUITY

Year ended 31 December 2008	Share capital £'000s	Capital redemption reserve £'000s	Share premium £'000s	Capital reserve £'000s	Revenue reserve £'000s	Total  shareholders'  equity    £'000s	Minority interest £'000s		Total equity £'000s
Opening balance at 1 January 2008	7,529	1,875	12,936	351,663	17,037	391,040	7,237		398,277
(Loss)/profit for the	-	-	-	(50,527)	3,735	(46,792)	(1,473)		(48,265)
period attributable to recognised income and expense
Dividends paid or approved	-	-	-	-	(5,833)	(5,833)	-		(5,833)
Purchase of own shares	(237)	237	-	(11,070)	-	(11,070)	-		(11,070)
Net distribution to minority interests	-	-	-	-	-	-	(1,370)		(1,370)
Closing balance	7,292	2,112	12,936	290,066	14,939	327,345	4,394		331,739
Year ended 31 December 2007	Share capital £'000s	Capital redemption reserve £'000s	Share premium £'000s	Capital reserve £'000s	Revenue reserve £'000s	Total  shareholders' equity    £'000s	Minority interest £'000s		Total equity £'000s
Opening balance at 1 January 2007	8,233	1,171	12,936	336,620	15,310	374,270	6,685		380,955
Profit for the period attributable to recognised income and expense	-	-	-	46.143	6,969	53,112	5,862		58,974
Dividends paid or approved	-	-	-	-	(5,242)	(5,242)	-		(5,242)
Purchase of own shares	(704)	704	-	(31,100)	-	(31,100)	-		(31,100)
Net distribution to minority interests	-	-	-	-	-	-	(5,310)		(5,310)
Closing balance	7,529	1,875	12,936	351,663	17,037	391,040	7,237		398,277

8 RELATED PARTY TRANSACTIONS

Investment management charges

The investment management charges and irrecoverable VAT thereon set out in the table below were paid to the Manager, Graphite Capital Management LLP, in the period. The Manager is a related party of the Company. 

						Year to  31 December		Year to  31 December
						2008		2007
						£'000s		£'000s
Investment management fee						4,440		4,261
Irrecoverable VAT thereon / VAT reclaim						(2,589)		551
						1,851		4,812

The allocation of the total investment management charges was unchanged in 2008 with 75% of the total allocated to capital and 25% allocated to income.

The Company has borne a net management charge of £764,000 (2007: £808,000) in respect of Graphite Capital Partners VI and £784,000 (2007: £250,000) in respect of Graphite Capital Partners VII.  These charges are at the same level as those paid by third party investors.  The total investment management charges payable by the Group to the Manager (excluding VAT) were therefore £5,988,000 (2007: £5,870,000).

Graphite Capital Management LLP was a related party of Graphite Enterprise Trust PLC during the year. The amounts payable during the year are set out above. There was an amount outstanding of £908,000 (excluding VAT) as at 31 December 2008 (2007: nil).

Other related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation for the Group.

Significant transactions between the parent company and its subsidiaries are shown below:

						Year to 31 December		Year to 31 December
Subsidiary				Nature of transaction		2008		2007
						£'000s		£'000s
Graphite Enterprise Trust LP				Increase in loan balance		5,579		7,840
				Income allocated		335		1,191
Graphite Enterprise Trust (2) LP				Increase in loan balance		3,850		-
				Income allocated		10		-

		Amounts owed by  subsidiaries					Amounts owed to  subsidiaries
Subsidiary			2008	2007			2008		2007
			£'000s	£'000s			£'000s		£'000s
Graphite Enterprise Trust LP			14,045	8,466			-		-
Graphite Enterprise Trust (2) LP			3,850	-			-		-

9 VAT ON MANAGEMENT FEES

The Company may be entitled to repayments of VAT previously paid on management fees as HM Revenue and Customs ('HMRC') confirmed in October 2007 that fund management services to investment trusts are exempt from VAT. The Company was charged VAT on invoices for management fees up to and including the third quarter of 2007.  Separately, as a result of a decision concerning the way in which a limit was introduced on the time period for which overpaid VAT may be reclaimed, VAT may be recoverable for the period from 1990 to late 1996. 

Claims have been lodged with HMRC relating to periods 2002-2007 and 1990-1996. The Company has now been able to quantify the repayment and interest thereon relating to the period from 2002 onwards and considers that there is sufficient certainty over the recovery of these amounts to record them as assets. The back-VAT is £2,589,000 of which £258,000 has been received during 2008. The receivable at 31 December 2008 in respect of this is £2,331,000 and the accrued interest thereon is £277,000. The VAT has been allocated to income and capital in the ratio 25:75. The interest has been allocated to income.

Until all remaining uncertainties surrounding the reclaim process have been resolved, it is not practicable to quantify the amount of VAT relating to 1990-1996 with sufficient certainty and accordingly no asset has been recognised in these accounts. The total amount recovered is likely to be less than 0.2% of the Company's net asset value at 31 December 2008. Any recovery will be credited to the income reserve and realised capital reserve in the same proportion as originally charged. 

10 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Company is an investment company as defined by section 266 of the Companies Act 1985 and conducts its affairs so as to qualify as an investment trust under the provisions of section 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). The Group's objective is to provide shareholders with long term capital growth through investment in unquoted companies, mostly through specialist funds but also directly.

Investments in funds have anticipated lives of approximately ten years. Direct investments are made with an anticipated holding period of between three and five years. Investment agreements will, however, usually provide that any loans advanced to investee companies are for a longer period than this. The agreements will usually provide for repayments to be made by instalments with provision for full repayment on sale or flotation.

Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (comprising currency risk, interest rate risk and price risk), investment risk, credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Manager has overall responsibility for managing the risks and the framework for monitoring and coordinating these risks. This is monitored by the Board. The Group's financial risk management objectives and processes used to manage these risks have not changed from the previous period and the policies are set out below:

Market risk

(i) Currency

The Group's investments are principally in the UK and continental Europe and are primarily denominated in sterling and in euros. There are also smaller amounts denominated in US dollars and in other European currencies. The Group is exposed to currency risk in that movements in the value of sterling against these foreign currencies will have an impact on net asset value and on the cash required to fund undrawn commitments. The Board regularly reviews the level of foreign currency denominated assets and outstanding commitments in the context of current market conditions and may decide to buy or sell currency or put into place currency hedging arrangements.

(ii) Interest rate risk

The fair value of the Group's investments, money market funds and cash balances are not directly affected by changes in interest rates. The Group has no borrowings and its liabilities are therefore not affected by changes in interest rates. However, changes in interest rates do affect interest income from money market funds and cash balances.

(iii) Price Risk

The risk that the value of a financial instrument will change as a result of changes to market prices is one that is fundamental to the Group's objective, which is to provide long term capital growth through investment in unquoted companies. The investment portfolio is continually monitored to ensure an appropriate balance of risk and reward in order to achieve the Group's objective. No hedging of this risk is undertaken.

The Group is exposed to the risk of changes in value of its fund investments, direct unquoted investments and quoted investments. For quoted investments and fund investments, the market risk variable is deemed to be the price itself.  For unquoted direct investments, the market variable is deemed to be the price/earnings ratio. 

Credit and investment risk

(i) Investment risk

Investment risk is the risk that the financial performance of the companies in which Graphite Enterprise invests either improves or deteriorates, thereby affecting the value of that investment. Investments in unquoted companies whether held indirectly or directly are by their nature subject to potential investment losses. The investment portfolio is highly diversified and the Group complies with the Section 842 requirement for investment trusts not to invest more than 15% of the portfolio in the securities of any one company at the time of initial or subsequent purchase.

(ii) Credit risk

The Group's exposure to credit risk arises principally from its investment in money market funds and its cash deposits. This risk is managed through diversification across a number of separate funds which have strong credit ratings. The Group's policy is to limit exposure to any one fund to 15% of gross assets. This is regularly monitored by the Manager as a part of its cash management processes.

Each of the money market funds in which the Company invests has a credit rating of AAAm from Standard & Poor's. As at 31 December 2008 the total invested in money market funds was £111,800,000 (2007: £92,000,000). Cash is held on deposit principally with one UK bank and totalled £27,200,000 (2007: £42,700,000). Together, these represent the maximum exposure to credit risk at the balance sheet date. No collateral is held by the Group in respect of these amounts. None of the Group's money market funds or cash deposits were past due or impaired at 31 December 2008 (2007: nil).

The Manager does not expect any losses from non-performance by these counterparties.

Liquidity risk

The Group has significant investments in unquoted companies which are inherently illiquid.  The Group also has substantial undrawn commitments to funds, the great majority of which are likely to be called over the next five years.  The Group aims to manage its affairs to ensure sufficient cash will be available to meet contractual commitments when they are called and also seeks to have cash generally available to meet other short term financial needs. All cash and cash equivalents are available on demand. The Group's liquidity management policy involves projecting cashflows and considering the level of liquid assets necessary to meet these. 

The Group has the power to enter into borrowing arrangements, both short and long term. The Group currently has no borrowing facilities in place. In normal circumstances, we would expect borrowing facilities to be available, however in current market conditions, this cannot be relied upon.  

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders (whilst remaining within the restrictions imposed by its investment trust status), return capital to shareholders or issue new shares.  The Group currently has no debt.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that this condensed consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rule 4.1.12, namely:

• the financial statements, prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and 

•  the Chairman's Statement, Manager's Review and notes to the accounts include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

By the order of the Board

J. Sclater

8 April 2009

For further information, please contact:

Rod Richards/Stephen Cavell  Graphite Capital

Tel: [phone]

 

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