Final Results

RNS Number : 9919T

IP Group PLC

26 March 2019

 

FOR RELEASE ON

26 March 2019

("IP Group" or "the Group" or "the Company")
IP Group plc Annual Results Release

IP Group plc (LSE: IPO), the developer of intellectual property-based businesses, today announces its annual financial results for the year ended 31 December 2018.

Portfolio highlights

·      Fair value of portfolio: £1,128.2m (2017: £1,099.8m)

·      Net portfolio loss¹ of £48.4m (2017: gain of £94.2m)

·      Portfolio cash realisations: £29.5m (2017: £6.6m)

·      Capital provided by IP Group to portfolio companies and projects: £100.9m (2017: £71.2m), with Parkwalk Advisors investing a further £20.3m (2017: £13.4m)

·      Total funds raised by portfolio companies of £695m (2017: £315m)

·      Oxford Nanopore completed £100m financing round plus £50m investment from NASDAQ-listed Amgen; significant commercial progress

·      Ceres Power raised new capital of £74m from financial investors, and new strategic partners Bosch and Weichai Power

·      Microbiotica signed microbiome collaboration with Genentech worth up to $534m

·      Avacta Group plc signed development alliance with LG Chem Life Sciences worth up to $310m

·      Artios Pharma completed £65m funding round

·      Ultrahaptics completed £35m funding round

·      IP Group Australasia completed its first two spin-out investments

Financial and operational highlights

·      Hard NAV¹ £1,217.5m (2017: £1,295.8m)

·      Net assets £1,218.2m (2017: £1,508.5m)

·      Gross cash and deposits £219.0m (2017: £326.3m)

·      Return on Hard NAV¹ of negative £75.6m (2017: positive £64.1m)

·      Loss for the year of £90.6m before exceptional goodwill impairment¹ of £203.2m (2017: profit £53.4m; £nil)

·      Annual synergies achieved from Touchstone integration of £8m by full year 2020

·      US business attracted external funding from privately held US blue-chip family office

·      Appointment of Sir Douglas Flint as Chairman and Heejae Chae as Non-Executive Director

Post period end highlights

·      Featurespace completed £25.0m funding round

·      Technology Transfer Operations transferred back to Imperial College; resulting in annual cost savings of c.£3m

[1] Alternative performance measure, see Note 27 for definition and reconciliation to IFRS primary statements.

Alan Aubrey, Chief Executive of IP Group, said: "2018 has been a year of consolidation for the Group as we finalised the integration of Touchstone Innovations and identified significant cost synergies that are now starting to come through. We remain excited by the enlarged portfolio which we continue to believe will deliver significant benefits for all stakeholders.

Material progress was made on a number of fronts in 2018, notably the maturation of our model and portfolio with cash realisations rising more than fourfold to £29.5m while our portfolio companies raised £695m, more than double the prior year. While market conditions for AIM-listed small-cap companies were challenging, there was significant commercial progress among many of the key companies in our portfolio, now valued at £1.1bn.

We retain a high level of confidence in our portfolio, with many of our companies due to reach material inflexion points this year, and the benefits that will accrue sustainably to shareholders in the years ahead.

For more information, please contact:

IP Group plc	www.ipgroupplc.com
Alan Aubrey, Chief Executive Officer Greg Smith, Chief Financial Officer Liz Vaughan-Adams, Communications	[phone] [phone]/[phone]
Charlotte Street Partners
David Gaffney Andrew Wilson	[phone] [phone]

Further information on IP Group is available on our website: www.ipgroupplc.com

Notes

(i) Nature of announcement                                                                                                      

This Annual Results Release was approved by the directors on 25 March 2019.

The financial information set out in this Annual Results Release does not constitute the company's statutory accounts for 2018 or 2017. Statutory accounts for the years ended 31 December 2018 and 31 December 2017 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for 2018 and 2017 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2018 will be delivered to the Registrar following the Company's annual general meeting.

The 2018 Annual Report and Accounts will be published in April 2019 and a copy will be posted on the Group's website (www.ipgroupplc.com). In accordance with Listing Rule 9.6.1 a copy of the Annual Report and Accounts will also be submitted to the National Storage Mechanism on or around this date and will be available for inspection at: www.Hemscott.com/nsm.do from that time.

Throughout this Annual Results Release the Group's holdings in portfolio companies reflect the undiluted beneficial equity interest excluding debt, unless otherwise explicitly stated.

(ii) Forward looking statements

This Annual Report and Accounts may contain forward looking statements. These statements reflect the Board's current view, are subject to a number of material risks and uncertainties and could change in the future. Factors which could cause or contribute to such changes include, but are not limited to, the general economic climate and market conditions, as well as specific factors relating to the financial or commercial prospects or performance of individual companies within the Group's portfolio.

STRATEGIC REPORT

Chairman's summary

2018 was a year of consolidation for IP Group as it bedded down its acquisition of Touchstone Innovations plc ('Touchstone') and navigated public investment markets that were not particularly favourable towards smaller technology focussed companies, given broader market uncertainties. Therefore, realisation opportunities at valuations that made sense were limited, given the Group's assessment of long-term potential. Encouragingly, our longer-term valuation perspective was reinforced by a number of third-party investments into and partnership collaborations across a number of our most important portfolio companies during the year. Our portfolio companies as a whole raised £695m, the highest annual total so far. Alan Aubrey will cover these in more detail in his report.

This is my inaugural report as Chairman of IP Group, having taken over the role in November last year. I want to record on behalf of shareholders and the Board our gratitude to my predecessor, Mike Humphrey, for his commitment and wise counsel, initially as a non-executive director upon joining the Board in October 2011, before becoming Non-executive Chairman in March 2015.

Technology is reshaping the world at least as significantly as the geopolitics which attracts so much media attention. This is increasingly apparent in areas where technology leadership commands global market dominance or has strategic implications. But it is also the key to addressing some of the world's most pressing challenges in disease prevention and mitigation, in the transition to a less carbon intense energy world and in productivity improvement. These are all core areas of focus within IP Group with its focus on backing and building world-changing businesses, based on innovative science and technology. This focus is enabled through collaboration with the science and engineering departments of leading universities in the UK, the United States and Australasia.

By way of illustration of the impact of IP Group, with your support, the Group has invested more than £850m to date in the UK in science and technology and created more than 300 companies which, in aggregate, have raised approximately £4.7bn of funding. Through these endeavours, we calculate more than 5,000 jobs have been created across the UK.

In addition, the Group's portfolio companies are, from the outset, truly international in outlook, as technology has few national boundaries, so projecting the 'Global Britain' positioning that will be increasingly important to the UK's future trading success.

One simple illustration of this in 2018 was the £7m investment by portfolio company Ceres Power in a new, state of the art manufacturing facility in Redhill in the UK, creating 60 new jobs as demand, largely from overseas, for its low cost, next generation fuel cell technology expanded. Alongside this, as part of a broader strategic collaboration with Weichai Power, one of the leading automobile and equipment manufacturing companies in China, Ceres Power announced a joint venture for a major new fuel cell manufacturing facility in Shandong, China, subject to completion of successful trials.

Alan's operational review, which follows, highlights the other key events during the year within the Group's portfolio.

Financial performance

The Group had a disappointing financial performance in 2018, the most significant driver of which was share price declines of a number of AIM listed portfolio companies. 2018 was the first year for a long time that the world's major equity markets all declined, with the FTSE100 down 12%, FTSEAIM down 19%, the S&P500 down 10% and NASDAQ down 8%. China's 'A' share market fell by 12%.

Given the long-term focus of the Group's business, management's key financial performance indicator remains Hard NAV and this is the core element of the incentive portion of directors' remuneration, as approved by shareholders. At the end of 2018, Hard NAV amounted to £1,217.5m, a reduction of 5.9% over the year, with the fair value of the portfolio broadly flat at £1,128.2m (2017: £1,099.8m). In terms of financial performance for the year, the Group's Return on Hard NAV was negative £75.6m (2017: positive £64.1m). It is important to recognise that, as the Group's business model is long-term in nature, fluctuations in portfolio company valuations and results are to be expected. The Group ended the year with a strong balance sheet with gross cash and deposits of £219.0m (2017: £326.3m).

The Board remains focused on actions that will bring the Group into a more sustainable position and has taken steps to streamline its operations following the Touchstone acquisition in late 2017. Following modest headcount reductions and other combination synergies, such as rationalising duplicated professional adviser and similar costs during 2018, on 28 February 2019 we agreed to transfer back to Imperial College their Technology Transfer Operations. In this way we have reduced both cost and complexity in the Group's business. We also began the process of slimming the portfolio, disposing of a number of smaller investments.

Given these operational changes, the current macroeconomic climate and the recent performance of the Group's portfolio, considerable Board focus was directed to the carrying value of goodwill on the Group's balance sheet, the significant majority of which arose from the nil-premium, all-paper acquisition of Touchstone and it was clear that this should be written off. Although the resulting non-cash charge does not impact the Group's key performance indicator of Hard NAV, which has always excluded goodwill, this action resulted in an overall reported IFRS loss for the year of £293.7m (2017: profit £53.4m). It is also worth reiterating at this point that the strategic rationale for the Touchstone acquisition, i.e. that of scale, liquidity and a more balanced portfolio by sector and stage of development, remains sound.

Governance and the Board

At Board level, there have been a number of changes this year in addition to the departure of the previous Chairman, Mike Humphrey, following his indication earlier in the year that he wished to retire.

Sadly, we also said goodbye to Professor Lynn Gladden during 2018 following her appointment as Executive Chairman of the Engineering and Physical Sciences Research Council (EPSRC) in October. She left the Board at the end of September and I would like to express on behalf of shareholders and the Board our thanks to her for her dedicated service since joining the Board in 2014.

Heejae Chae, Chief Executive of AIM-listed Scapa Group plc, was appointed as Non-executive Director in May. He brings to the Board considerable experience both from the perspective as a CEO of growing businesses and in finance, having spent the early part of his career at The Blackstone Group and Credit Suisse First Boston. Mr Chae has degrees in Economics and Engineering from Columbia University and an MBA from Harvard University.

Our people

A key focus for the Board is recruitment and retention of the talent needed to drive long-term sustainable success for the Group. As we integrated Touchstone into the Group it reinforced the imperative to create an environment of collaboration, co-operation and collegiality, but also one that encourages challenge and questioning, given the high degree of ambiguity and uncertainty that surrounds the world of technology and life science investment.

The culture we aim for at IP Group is necessarily entrepreneurial while being collaborative, reflecting the Group's purpose of evolving great ideas into world-changing businesses. As we partner with academic institutions, it is critical that we have a highly skilled workforce who can work constructively in partnership to help foster the commercialisation of novel science. IP Group's core values of being 'passionate, pioneering and principled' guide the behaviours the Group wishes to see not only in its general endeavours but also in its interactions with all stakeholders. We believe that these values and behaviours have contributed positively to the portfolio that we have built over many years and we will be exploring how we refine and build on them to deliver future success. I have been particularly impressed by the quality and enthusiasm of IP Group's team and their overwhelming ambition to make a difference to the world through building the companies of the future.

Outlook

IP Group's portfolio is both well diversified and maturing and we remain confident that it will deliver appropriate and meaningful returns for stakeholders over the medium to long term. I would like to thank our staff, academic partners and portfolio companies for their commitment and contribution during the year as well as our shareholders for their continued support.

Sir Douglas Flint

Chairman

 

 

Chief Executive's operational review

UK business

The results for the period, which showed a negative Return on Hard NAV of £75.6m compared to a positive return of £64.1m for 2017, were impacted by the exposure of our quoted portfolio to the weaker performance of stock markets as well as certain company specific issues, the biggest of which was Diurnal. This financial performance does not, we believe, reflect the underlying strength and quality of IP Group's portfolio and overshadows the commercial progress seen in the year from a number of our key assets which are emerging as the leaders in their respective fields.

Turning first to Diurnal, its shares fell 78% over the year, resulting in a £33.1m reduction in the value of our holding, after its drug Chronocort did not meet the primary endpoint in a Phase 3 study in congenital adrenal hyperplasia (CAH). IP Group has invested a total of £19.4m into Diurnal to date and the company is currently valued at £19.7m on AIM. Despite the headline results, the company is optimistic that the drug remains approvable, given some very positive outcomes using other measures in the Phase 3 study, and that premium pricing is still possible. You can read more in the life sciences report below.

Excluding Diurnal, the Group's quoted portfolio fell 35% in 2018, against a 19% decline in the performance of the AIM index which has suffered this year from a number of well-documented factors. Including Diurnal, the Group's quoted portfolio fell 43% during 2018. Of the bigger quoted share price falls were Xeros Technology Group (£21.1m loss), Circassia (£14m loss) and Mirriad Advertising (£12.3m loss), in addition to a £12.4m loss for private company Cell Medica Limited. These falls more than offset fair value gains, the largest of which came from Garrison Technology (£15.2m gain), Ceres Power (£11.1m gain), Uniformity Labs (£9.0m gain) and Featurespace (£9.6m gain).  

I am also pleased to report that there was strong commercial progress in the year from a number of our portfolio companies. Oxford Nanopore Technologies, Ceres Power and WaveOptics have all signed partnerships with blue chip companies further validating their respective technologies. In particular, Ceres Power signed agreements with China's Weichai Power and Germany's Robert Bosch. In the private portfolio, NASDAQ-listed Amgen invested £50m into Oxford Nanopore Technologies while WaveOptics agreed a partnership with and investment from Goertek, a global leader in the design and manufacturing of high-tech consumer electronics.

In the quoted portfolio, there was excellent commercial progress from a number of companies that, in our opinion, has not yet been reflected in their share prices. Tissue Regenix (£4.6m loss) announced that its subsidiary CellRight Technologies entered into an agreement to allow Arthrex, Inc. to distribute its proprietary 'BioRinse' bone portfolio throughout Europe, with the initial focus on the UK. Avacta Group (£5m loss) signed a development alliance with LG Chem Life Sciences worth up to $310m including $180m across upfront, near-term payments and development milestones. Medaphor, which has changed its name to Intelligent Ultrasound Group plc, is expecting turnover for 2018 to increase by approximately 27% to between £5.3m and £5.4m.

Touchstone integration

From an operational perspective, in 2018 one of the most significant areas of focus for the Group was finalising the integration of the Touchstone team and portfolio, which I am pleased to report is now substantially complete.

The former Touchstone and IP Group portfolio companies are being managed together in the UK by our Life Sciences and Technology partnerships that were formed in the year from a combination of professionals from both businesses. While there has been a level of further reduction in the fair values of some of the former Touchstone companies, the combined portfolio is now well-balanced by sector and stage of development and contains a number of opportunities for significant future value growth.

While the strategic rationale of the transaction was primarily one of scale and combined portfolio strength, it also presented the opportunity to realise synergies from an operational perspective. During the 18 months since the transaction completed, we have taken a number of steps to streamline the two businesses. Most recently, in the first quarter of 2019, we agreed to transfer back to Imperial College the technology transfer operation known previously as Imperial Innovations. This will not impact our plans to continue to work with Imperial and continue to invest in some of the most exciting opportunities from the university.

There has been some modest headcount reduction, outside of the transfer of the technology transfer team to Imperial College. We have taken the opportunity to rationalise professional fees and other administrative costs, particularly for services duplicated across the two businesses, including the costs of Touchstone being a listed entity. Finally, in March 2019, we surrendered the lease on Touchstone's former head office in Central London. As a result of these actions, we anticipate annual cost synergies by full-year 2020 of more than £8m from the combination versus the pre-integration cost base of the two companies.

North America

Turning to North America, IP Group, Inc. and its portfolio companies continued to make significant developments during the 12-month period.  The portfolio attracted $30m of external investment from both financial and strategic investors and reached several significant milestones. These financing rounds resulted in net portfolio gains in the US portfolio of $14m during the year, representing an increase of approximately 50% on the opening position. The team also attracted a significant strategic investment into the US business that was led by a privately held blue-chip family office based in the US. We consider these co-investments to be a great endorsement of both our model and attractiveness of the portfolio and future opportunities to US investors.

Of particular note in the portfolio, Exyn Technologies (University of Pennsylvania) completed a series of global commercial engagements, the most recent with Dundee Precious Metals (TMX:DPM), a Canadian-based international mining company, that we believe significantly endorse Exyn's ground-breaking artificial intelligence technology and its commercial relevance. Carisma Therapeutics (University of Pennsylvania), a developer of technology that targets and kills solid tumours, closed a $53.0m Series A financing round led by AbbVie Ventures and Healthcap. Uniformity Labs (Princeton University) has made substantial progress establishing relationships with new customers, including multiple validation projects and a signed letter of intent for the supply of aluminium powder.

We added Yale University as a collaboration partner, bringing our total to six prominent universities and three U.S. Department of Energy Labs.  We have an established team of 16 professionals with broad business development capabilities across life sciences and technology who continue to advance the existing portfolio of 21 exciting companies.

Australasia

In Australasia, the Group completed its first two investments from partner universities in 2018, Canopus Networks (The University of New South Wales) and Inosi Therapeutics (Monash University). Canopus is using machine learning and software-defined networking to develop solutions for analysing and optimising data flows within telecommunication networks and large corporates. Inosi is developing small-molecule inhibitors of a novel target for fibrosis-related diseases and the Group invested alongside BioCurate, a joint venture of Monash and Melbourne universities for early stage commercialisation of pharmaceutical research.

On the capital side, the Group continued to work with Hostplus, one of Australia's largest superannuation funds with over AU$34 billion in funds under management, through the AU$100m IP Group Hostplus Innovation Fund which participated in financings for Oxford Nanopore Technologies and Ultrahaptics in 2018.

Our team in Australasia now totals nine, based between Melbourne, Sydney and Brisbane, and represents a strong blend of expertise and experience in academia, industry and commercialisation. In addition, the Group has established a steering group in Australasia comprising experienced senior executives with a broad range of operational and investment experience. The team has identified an attractive pipeline of opportunities and anticipates progressing several of these to investment in 2019.

Greater China

Many of our portfolio companies have secured investment and business partnerships in China, including Oxford Nanopore, Ceres Power, Mirriad Advertising and Creavo Medical Technologies. The Group considers China to be strategically important and, in September, announced the launch of its office in Hong Kong in order to continue to facilitate market entry, business partnership and investment discussions with relevant Chinese partners for our portfolio companies. This also allows the Group to manage its growing pan-Asian investor base. Following last year's success in Beijing and Shenzhen, the Group hosted its second annual "Global Deep Tech Forum" event in Hong Kong and Shanghai in September where 22 of our portfolio companies introduced their technology and business to hundreds of attendees from the Greater China area.

Outlook

In summary, significant progress was achieved by many of our portfolio companies during 2018, which in our view is yet to be reflected in their valuations. As a result, the Board is confident about the potential of the Group's portfolio including Oxford Nanopore, which commented publicly on significant increases in its order book and has attracted investment from a world-leader in human genetics, First Light Fusion Limited, which aims to demonstrate fusion using its 'Machine 3' by mid-2019 and a number of our therapeutic assets which are approaching key inflexion points.

While IP Group is a long-term business where results can and do fluctuate from year to year, the Board is confident that the portfolio can generate significant returns for stakeholders and in the medium term will begin to position the business for transition to a more self-sustaining model. This will allow the Group to sustainably fulfil its mission of supporting outstanding science from around the world from the eureka moment through to maturity.

Alan Aubrey

Chief Executive Officer

 

Portfolio review

Overview

At 31 December 2018 the value of the Group's portfolio had increased to £1,128.2m, from £1,099.8m at the end of 2017, as a result of the fair value movements set out below, and a net investment of £71.4m (2017 £64.6m). The portfolio now consists of interests in 147 companies (122 UK, 23 US and 2 Australasia, and 61 of which are of key focus), strategic holdings in three multi-sector platform businesses as well as a further 44 de minimis holdings and 47 organic holdings (2017: 155,3,42,39).

In a departure from previous years, we have categorised the portfolio to highlight those companies on which the life science and tech partnership teams focus a significant proportion of their resources and capital. These 61 companies comprise 84% of the portfolio by value. Outside these companies, the portfolio contains a broad selection of potentially exciting opportunities, many of which are at an early stage, but which typically receive a lower level of management resource and capital.

During the year to 31 December 2018, the Group provided pre-seed, seed and post-seed capital totalling £100.9m to its portfolio companies (2017: £71.2m). The Group deployed capital into nine new companies or projects during the year (2017: 21), five of which were sourced from the UK, two from the US and two from Australasia (2017: 10,11,0). The three geographies have provided consistent pipelines of opportunities, and the Group has backed the best innovations from all three, whilst sustainably managing portfolio size. The new investments in Australasia have helped to further diversify the portfolio geographically and are a reflection of the quality of new research the Group now has access to through the additional university partnerships it formed in 2017.

In 2018 we fully exited three investments (2017: two), and a further 15 companies, with a total historic cost of £8.5m, were closed or fully provided against (2017: two, £2.9m).

During 2018 the cash proceeds from the realisation of investments increased to £29.5m (2017: £6.6m), arising from 14 investments, spread roughly evenly across the sectors and comprising a mix of quoted and private capital. The largest disposals were from interests in Veryan Medical Limited, Abzena plc, Getech Group plc and Concirrus Limited. The largest realisations in the prior year arose from the cash received from the sales of Puridify Limited and Plaxica Limited.

Performance summary

A summary of the Income Statement gains and losses which are directly attributable to the portfolio is as follows:

	2018  £m	2017 £m
Unrealised gains on the revaluation of investments	99.7	99.3
Unrealised losses on the revaluation of investments	(153.1)	(49.2)
Effects of movement in exchange rates	3.0	(1.1)
Change in fair value of equity and debt investments	(50.4)	49.0
Gain on disposals of equity investments	2.0	0.1
Gain on deconsolidation of subsidiary	-	45.1
Net portfolio gains/(losses)	(48.4)	94.2

The most significant contributors to unrealised gains on the revaluation of investments were Garrison Technology Limited (£15.2m), Ceres Power Holdings plc (£11.1), Featurespace Limited (£9.6m), Uniformity Labs Inc (£9.0m), Wave Optics Limited (£7.6m) and Ultrahaptics Holdings Limited (£6.4m)¹. 

The major contributors to the unrealised losses on the revaluation of investments were Diurnal Group plc (£33.1m), Xeros Technology Group plc (£21.1m), Circassia Pharmaceuticals plc (£14.0m), Cell Medica Limited (£12.4m), Mirriad Advertising plc (£12.3m), Actual Experience plc (£8.4m), OxSyBio Limited¹ (6.6m), Abzena plc (£5.2m) and Avacta Group plc (£5.0m).

The performance of the Group's holdings in companies quoted on AIM saw a net unrealised fair value decrease of £99.8m (2017: decrease of £1.0m) while the Group's holdings in unquoted companies experienced a net fair value increase of £46.4m (2017: increase of £49.9m, in addition to a £45.1m gain in respect of the deconsolidation of Istesso Limited and its recognition as a portfolio company).

Investments and realisations

The Group's overall rate of capital deployment increased during 2018, with a total of £100.9m being deployed across 77 new and existing projects (2017: £71.2m, 79 projects). The average level of capital deployed per company remained relatively consistent, at £1.3m, compared to £1.2m in 2017.

Cash invested by company focus was as follows:

	2018  £m	2017 £m
Top 20	26.0	20.7
Focus	41.6	23.7
Other (including companies exited by 31 December 2018)	19.4	20.7
Total United Kingdom	87.0	65.1
United States2	13.2	6.1
Australasia	0.7	-
Multi-sector platforms	-	-
Total purchase of equity and debt investments	100.9	71.2
Less cash proceeds from sales of equity investments	(29.5)	(6.6)
Net investment	71.4	64.6

²United States investment total includes £1.1m invested in Uniformity Labs, Inc., which is one of the Top 20 holdings by value. 

During the year, 9 opportunities received initial incubation or seed funding (2017: 21).

 

 

 

 

¹Of the fair value gains noted above, the following amounts are attributable to the third-party limited partners in the consolidated fund, IPVF II: Ultrahaptics Holdings Limited: gain of £1.8m (2017, £2.0m), OxSyBio Limited: loss of £1.3m (2017: gain of £0.7m).

 

 

 

 

Portfolio analysis by focus

At 31 December 2018, the Group's portfolio fair value of £1,128.2m was distributed across the portfolio as follows:

Stage	As at 31 December 2018				As at 31 December 2017
	Fair value		Number		Fair value2		Number
	£m	%		%	£m	%		%
Top 20 by value	732.5	68%	20	13%	663.0	62%	20	13%
Focus	204.4	19%	41	27%	216.8	20%	41	26%
Other	147.7	13%	89	60%	190.5	18%	97	61%
Total	1,084.6	100%	150	100%	1,070.3	100%	158	100%
De minimis & Organic holdings	8.3				7.2
Total Portfolio	1,092.9				1,077.5
Attributable to third parties1	35.3				22.3
Gross Portfolio	1,128.2				1,099.8

¹ The amount attributable to third parties consists of £18.7m attributable to minority interests represented by third party limited partners in the consolidated fund, IPVFII, £5.5m attributable to minority interests represented by third party limited partners in the consolidated US portfolio, £8.1m attributable to Imperial College London and £3.0m to other third parties (2017: £16.3m IPVFII, n/a US, £5.7m Imperial College, £0.3m other).

^2.Restated following finalisation of provisional acquisition accounting in respect of Touchstone acquisition (see note 26)

Top 20 investments consist of 20 most valuable holdings in the Group's portfolio by year-end value. Focus investments are those investments that are not within the 20 most valuable but on which the life sciences and technology teams focus a significant proportion of their resources and capital. These investments typically, although not exclusively, fall within the 100 most valuable portfolio company holdings by year-end value. Other companies are those that are not within the Top 20 or focus category.

Companies which are at a very early stage or in which the Group's holding is of minimal value, but remain as operating businesses, are classed as de minimis holdings. Organic holdings are investments in which the Group has acquired a shareholding upon creating the company as a result of our technology transfer relationship with Imperial College London, but in which we have not actively invested.

The total value of the Group's 147 portfolio companies (excluding multi-sector platforms, organic investments and de minimis holdings), calculated by reference to the Group's holding in such companies and grossed up to reflect their total value, is now in excess of £5bn, or almost £6bn including the Group's holdings in multi-sector platform companies, most significantly Oxford Sciences Innovation plc (2017: £4bn, £5bn).

Portfolio analysis by sector

The Group funds spin-out companies based on a wide variety of scientific research emerging from leading research-intensive institutions and does not limit itself to funding companies from particular areas of science. The Group splits its core opportunity evaluation, investment and business building team into two specialist divisions, Life Sciences and Technology. Where the Group invests in businesses that cannot be classified within these divisions, primarily those portfolio companies which also invest in other opportunities, they are recorded as multi-sector platforms. An update on the two primary operating segments is included in the financial review.

Sector	As at 31 December 2018				As at 31 December 2017
	Fair value		Number		Fair value2		Number
	£m	%		%	£m	%		%
Life Sciences	624.5	57%	64	43%	680.1	63%	73	46%
Technology	396.9	37%	83	55%	327.3	31%	82	52%
Multi-sector platforms	63.2	6%	3	2%	62.9	6%	3	2%
Total	1,084.6	100%	150	100%	1,070.3	100%	158	100%
De minimis & Organic holdings	8.3				7.2
Total Portfolio	1,092.9				1,077.5
Attributable to third parties1	35.3				22.3
Gross Portfolio	1,128.2				1,099.8

1.   The amount attributable to third parties consists of £18.7m attributable to minority interests represented by third party limited partners in the consolidated fund, IPVFII, £5.5m attributable to minority interests represented by third party limited partners in the consolidated US portfolio, £8.1m attributable to Imperial College London and £3.0m to other third parties (2017: £16.3m, £0.0m £5.7m, £0.3m).

2.   Restated following finalisation of provisional acquisition accounting in respect of Touchstone acquisition (see note 26)

The following table lists the value movements attributable to the largest twenty portfolio investments by value, which represent 62.8% of the total portfolio value (2017: 69.0%). Additional detail on the performance of these companies is included in the Life Sciences and Technology portfolio reviews.

Company name	Description	Sector, Quoted (Q)/ Unquoted (U) %	Group stake at 31 Dec 20181 %	Fair value of Group holding at 31 Dec 20172 £m	Net investment/ (divestment) £m	Fair value movement and fees settled in equity £m	Fair value of Group holding at 31 Dec 2018 £m
Oxford Nanopore Technologies Limited	Enabling the analysis of any living thing, by any person, in any environment	Life Sciences (U)	18.2%	274.1	-	-	274.1
Istesso Limited	Design and development of novel therapeutic drugs	Life Sciences (U)	59.1%	51.1	2.0	4.8	57.9
Oxford Sciences Innovation plc	University of Oxford preferred IP partner under 15-year framework agreement	Multi-sector platforms (U)	7.6%	55.5	-	-	55.5
Ceres Power Holdings plc	World leading developer of next generation fuel cell technology	Technology (Q)	18.9%	31.5	4.4	11.2	47.1
Garrison Technology Limited	Anti-malware solutions for enterprise cyber defences	Technology (U)	23.4%	9.8	3.8	15.2	28.8
Ultrahaptics Holdings Limited	Contactless haptic technology "feeling without touching"	Technology (U)	23.8%	21.8	0.5	5.2	27.5
Autifony Therapeutics Limited	Developing high value, novel medicines to treat CNS diseases	Life Sciences (U)	28.2%	23.9	-	1.7	25.6
Featurespace Limited	Leading predictive analytics company	Technology (U)	25.4%	15.6	-	9.6	25.2
PsiOxus Therapeutics Limited	Oncolytic viral therapeutics for cancer	Life Sciences (U)	25.0%	22.7	-	-	22.7
Actual Experience plc	Optimising the human experience of networked applications	Technology (Q)	22.1%	28.3	-	(8.4)	19.9
Inivata Limited	Clinical cancer genomics company utilising circulating DNA analysis to improve testing and treatment in oncology	Life Sciences (U)	31.3%	12.8	6.0	-	18.8
First Light Fusion Limited	New methodology for achieving extreme intensity cavity collapse	Technology (U)	35.9%	13.9	3.8	0.2	17.9
Wave Optics Limited	Novel optical waveguide technology and modules for augmented reality displays	Technology(U)	21.1%	5.6	2.0	7.6	15.2
Creavo Medical Technologies Limited	Quantum cardiac imaging technology	Life Sciences (U)	39.3%	14.4	-	-	14.4
Cell Medica Limited	T cell therapeutics for oncology	Life Sciences (U)	24.6%	26.3	-	(12.4)	13.9
Ieso Digital Health Limited	Online text-based psychotherapy software and service	Life Sciences (U)	45.5%	14.7	-	(0.8)	13.9
Mission Therapeutics Limited	Cancer therapeutics based on new understandings of DNA damage response	Life Sciences (U)	20.6%	12.4	-	1.3	13.7
Yoyo Wallet Limited	Mobile payments with integrated loyalty schemes	Technology (U)	40.0%	13.3	0.3	-	13.6
Econic Technologies Limited	Novel catalyst technologies to build carbon dioxide into polyurethanes and other polymers	Technology (U)	49.7%	10.6	3.0	-	13.6
Uniformity Labs Inc	Equipment, materials and software for additive manufacturing	Technology (U)	22.8%	4.7	(0.6)4	9.0	13.1
Top 20 total				663.0	25.2	44.2	732.4
Other companies (130 companies)				407.3	38.8	(93.9)	352.2
De-minimis & Organic investments				7.2	2.5	(1.4)	8.3
Value not attributable to equity holders				22.3	6.9	6.1	35.33
Total				1,099.8	73.4	(45.0)	1,128.2

1.     Represents the Group's undiluted beneficial economic equity interest (excluding debt), including the Group's portion of IPVFII, and the Group's portion of the US portfolio. Voting interest is below 50%.

2.     31 Dec 2017 fair value restated following finalisation of provisional acquisition accounting in respect of Touchstone acquisition (see note 26)

3.     Includes £2.0m increase in revenue share to Imperial College London, with a corresponding increase in revenue share liability resulting in no net fair value movement.

4.     The Group has not sold shares in Uniformity Labs Inc. during the year. The realisation noted above reflects the effect of minority ownership of the US portfolio, following the strategic investment made during the year.

 

Portfolio review
LIFE SCIENCES

Dr Sam Williams Managing Partner, Life Sciences

IP Group's Life Sciences portfolio comprises 64 companies worth £624.5m as at 31 December 2018

Review of the year
Oxford Nanopore

The Group's largest holding, Oxford Nanopore Technologies Ltd, continues to make excellent progress with tangible signs of it disrupting the ~$3.7bn DNA sequencing market. The company produces a range of novel, proprietary, real-time DNA sequencing devices, from small and portable formats such as MinION and Flongle to the high-throughput PromethION, which can deliver sub-$1,000 genomes.  Oxford Nanopore's long-term goal is to enable the analysis of any living thing, by any person, in any environment. Where sequencing has traditionally been performed in the central lab environment, the company seeks to address that central market but also open up new, distributed markets. The Company made significant progress in 2018, as set out in further detail below, and this continued in 2019, including the announcement in March 2019 that its new 'R10' nanopore had been released into early access. ONT also described very promising internal results with R10, including consensus accuracy of Q50 (or 99.999%).

Oxford Nanopore successfully completed a £100m fundraising in March 2018, primarily from Asian investors, to support commercial expansion and continued investment in R&D. It subsequently announced a $50m investment from Amgen, whose subsidiary deCODE Genetics noted that they have now used nanopore technology to sequence several hundred genomes. While Oxford Nanopore has not yet disclosed 2018 orders, it noted at the start of the year that it was expecting strong growth across the world, with notable contribution from China. In the previous year, between 2016-2017, the Company approximately tripled its orders.

Key 2018 highlights for Oxford Nanopore included:

Technology

·      PromethION launch. PromethION is Oxford Nanopore's largest device, designed to offer multi-Tb of sequence data, on demand.  Dramatic performance improvements during the year showing that a PromethION could offer a 30X human genome for less than $600, and a rapid pathway to less than $300 with larger data yields. By the end of the year, researchers were routinely using PromethION to sequence human genomes at scale.

·      Upgrades in nanopore, algorithms for enhanced performance.  The Company announced that a new nanopore, R10, will come online in early 2019. Having delivered 'Q42' accuracy internally, and with a pathway to Q50 (99.999%), this is expected to expand the applications for which Oxford Nanopore can be used.  The company is also focused on updating its analysis algorithms and other improvements that all contribute to ongoing performance enhancements.

·      "RevD", a flow cell upgrade for high yields of data. This release enabled as much as 30Gb of sequence data to be generated from a single GridION/MinION Flow Cell, making these small devices into powerful devices that can address an even broader range of scientific questions.

·      Ultra-long reads. Oxford Nanopore technology sequences the fragment of DNA/RNA that is presented to it, allowing very long contiguous fragments to be analysed.  This confers huge benefits including easier assembly, characterisation of repeats and structural variations and phasing.  In 2018, the longest read ever sequenced (2.3Mb) was revealed. This is symbolic of a broader desire to get consistently high 'N50'; large numbers of long reads, enabled by Oxford Nanopore's '109' kits also released in 2018.

·      Flongle. The adapter for MinION that allows low cost, rapid, smaller tests, was released into an early access community in late 2018. With hugely disruptive potential in a range of testing applications, 2019 will bring more examples of how it is being used by the scientific community.

Applications

·      Whole human genomes: At the start of the year, Nature Genetics published the first complete human genome using Oxford Nanopore sequencing. Described as the most complete genome using a single technology to date, the consortium of researchers, from nine different institutions, added ultra-long reads to their assembly to double their contiguity, estimate telomere lengths, and resolve complex regions including the 4Mb major histocompatibility complex. 

·      Direct RNA: A landmark paper using nanopore sequencing for the direct analysis of RNA was published in Nature in 2018. RNA analysis accounts for about a third of the sequencing market; this information gives scientists an insight into how DNA information is really being expressed. Oxford Nanopore technology can uniquely analyse RNA without using an intermediary (bisulfite sequencing), giving new biological insights including methylation profiling. 

·      Towards diagnostics: Oxford Nanopore technology is currently for research use only, however scientists are exploring ways to use it in a regulated environment to provide diagnostic testing. During the year, researchers showed methods for rapid characterisation of lung infections in an acute setting, TB in remote populations, rapid characterisation of acute myeloid leukemia, and rapid testing of Huntingdon's disease. These applications are expected to progress towards clinical use in 2019.

·      Public health: Real time, portable sequencing is uniquely positioned to be used in the field rather in the lab, for rapid insights. In 2018, Oxford Nanopore's technology was used in real time surveillance of outbreaks of Rabies, Lassa fever, Yellow Fever, Flu, Dengue, Malaria, E. coli and MRSA.

·      Plant genomes: Understanding plant genomes is important for agriculture and food industries, however plant genomes are typically very large and complex; the abundant long read sequencing of Oxford Nanopore is uniquely positioned to address this. In 2018, researchers spoke about using nanopore to sequence many plant species, including '100 tomato genomes in 100 days'.

·      Targeted sequencing: Oxford Nanopore has indicated that in 2019 it will expand the availability of its technology in targeted sequencing, which is used in a broad range of application areas. 

For more information about the uses of nanopore technology, visit https://nanoporetech.com/resource-centre 

Other significant portfolio company updates

The overall performance of the rest of the life sciences portfolio has been poor (-10.4%), largely as a result of negative share-price movement in the listed companies. Most notably, Diurnal Group plc suffered a setback when its drug Chronocort did not meet the primary endpoint in a Phase 3 study in congenital adrenal hyperplasia (CAH). The stock closed the year down 85.5%, marking a £33.1m reduction in our fair value holding. However, despite this, we and the company are optimistic that the drug remains approvable, given some very positive outcomes using other measures in the Phase 3 study, and that premium pricing is still possible. Diurnal is due to receive advice from the EMA in the first half of 2019 which will provide an indication of the way forward. Assuming a positive outcome, the company anticipates filing a Marketing Authorisation Application (MAA) for Chronocort® in Q4 2019.  

Other poor performers in the portfolio were Circassia (£14.0m), Avacta (£5.0m), Cell Medica (£12.4m), OxSyBio (£6.6m) and Abzena which, despite being acquired for £34m by a private equity buyer, provided a -£5.2m return for the year.

In the private Life Sciences portfolio, there were some notable successes, including Microbiotica signing a $534m deal with Genentech, Mission Therapeutics signing a collaboration with Abbvie and Avacta signing a $310m deal with LG Group.  From a financing perspective, a number of our companies announced significant funding rounds including Series B financings for Crescendo Biologics (headline $70m raised), Artios Pharma (£65m raised) and Inivata ($51.4m raised).

Portfolio review
TECHNOLOGY

Mark Reilly Managing Partner, Technology

IP Group's Technology portfolio comprises 83 companies worth £396.9m as at 31 December 2018.

Review of the year

Technology

2018 saw strong revenue progress, major commercial deals, and several large transactions in the Technology Partnership's portfolio.

WaveOptics raised £20m from investors including Octopus, Bosch and Goertek to further commercialise its waveguide technology, which we believe will be one of the fundamental building blocks of a huge emerging opportunity in augmented reality. The involvement of Goertek in this transaction, whose customers include Samsung, Sony and Google, is a major endorsement for the WaveOptics technology and will enable the company to achieve mass market manufacturing scale.

Another of our portfolio companies targeting the virtual and augmented reality market, remote haptics pioneer Ultrahaptics, capped off a year of progress by securing the Queens Award for Enterprise and raising £35m from Mayfair Equity Partners, Hostplus and Dolby Family Ventures. Another recipient of the Queens Award, Featurespace, continued its impressive revenue growth in 2018, securing a place in the Sunday Times Tech Track 100, Deloitte Technology Fast 50 and FT 1000 Fastest Growing Companies in Europe. Featurespace announced that it had secured a new round of £25.0m growth capital immediately after the year end. The round was led by Insight Venture Partners, a New York-based global private equity firm focused on high-growth investments in the technology sector, while MissionOG, a US-based venture capital fund with significant operational experience across the payments industry, also participated in the round as a new investor. The funding was also supported by existing investors including IP Group plc, Highland Europe, TTV Capital, Robert Sansom and Invoke Capital.

One particularly notable element of these transactions is the amount of money brought in from high-quality financial and strategic investors who have never before invested in an IP Group portfolio company. Between them, the Ceres Power, WaveOptics and Ultrahaptics transactions brought in more than £75m from high-quality first-time co-investors alongside circa £10m invested by IP Group. This demonstrates the growing appeal of our portfolio to a broader and deeper pool of capital.

We were also encouraged by the revenue progress at many of our top assets, several of which are showing signs of progressing maturity as revenue undergoes high double-digit or even triple-digit growth. Examples include Ceres Power and Azuri, both of which have a rapidly-growing revenue run rate that now exceeds £10m per annum, and others such as Featurespace, Perpertuum and Import.io which have all shown rapid recent revenue growth.

Unfortunately, the substantial fair value uplift delivered by the above-mentioned transactions was significantly offset in the year by negative movement in the price of some of our listed assets in very challenging stock market conditions for small cap technology companies. Xeros saw a large drop in price as the shares reacted to slower than hoped-for commercial progress, but we were also disappointed to see significant commercial progress at some other assets contradicted by the share price. Actual Experience, in particular, achieved major milestones in 2018 with its first full-scale deployment of a large customer from one of its channel partners, yet its share price reduced by 30% over the year. We hope that these will prove short-term anomalies that will be rectified as further progress occurs.

Cleantech

In our Cleantech portfolio we focus on building outstanding, science-based businesses that mitigate the impacts of climate change and other environmental challenges.

The IP Group Cleantech team continues to enhance its growing reputation in both venture and policy-making circles. Our Head of Cleantech, Dr Robert Trezona, is one of the handful of leaders from the energy sector chosen to be a commissioner of the Energy Transitions Commission (www.energy-transitions.org), which has been working for over a year to develop a roadmap for how to reduce carbon emissions from "hard to abate" sectors that must be addressed by 2050 to avoid climate breakdown. The commission's report was launched by Lord Adair Turner in November and vindicates a number of technology themes we have been pursuing in the IP Group Cleantech portfolio, notably fuel cells, carbon capture and fusion.

The portfolio saw significant progress this year, most notably at Ceres Power, which received new equity investment totalling £74 million from financial investors and Bosch and Weichai Power. The company announced in December that it had hit major milestones with both of those two strategic partners, meaning that revenue for their current 2017/18 financial year is expected to more than double to approximately £15 million, from £7 million in 2016/17.

Elsewhere in the portfolio, carbon capture chemistry company C-Capture announced a major partnership with Drax, the UK's biggest power station, to deliver a Bioenergy Carbon Capture and Storage (BECCS) pilot plant. If this project is successful, the C-Capture technology could enable Drax to become the world's first carbon-negative power station.

Finally, we were pleased to welcome a new company to the Cleantech portfolio, University of Oxford spin-out and autonomous vehicle software pioneer Oxbotica. Soon after our investment, the company was among the lead recipients of a £25m grant supporting the UK's first trials of self-driving vehicle services and has already secured a strategic alliance with Addison Lee Group, the global ground transportation business, to accelerate the implementation of autonomous vehicles on London's streets.

 

Portfolio review
MULTI-SECTOR PLATFORMS

The Group has maintained its strategic stakes in its multi-sector platform companies, most significantly Oxford Sciences Innovation plc (OSI) and Cambridge Innovation Capital plc (CIC).

As a result of its 15-year framework agreement with the University of Oxford, OSI is the preferred intellectual property partner for the provision of capital to, and development of, Oxford spin-out companies and is entitled to 50 per cent of the university's founder equity in spin-out companies. OSI has raised in excess of £580m to date, and 2018 was another good year for OSI as the portfolio continued to develop with a further 22 companies being added to the portfolio, and OSI leading on 33 investments. The number of investments now stands at 69 with a total portfolio value of £229m and cash and deposits of £455m. Net Asset Value per share has increased from 111.2p to 116.1p. In early 2019, OSI announced the appointment of Patrick Pichette, previously Google's Chief Financial Officer, as Chairman designate and Charles Conn, most recently Chief Executive of the Rhodes Trust, as Chief Executive.

CIC is a preferred investor for the University of Cambridge for the commercialisation of intellectual property created at the University under a 10-year memorandum of understanding, and a Cambridge-based investor in technology and healthcare companies from the Cambridge Cluster. CIC has raised £125.0m to date, and in September 2018 CIC announced that it had committed a total of £19.6m into two new and nine existing portfolio companies during the period ending September 2018. By the end of 2018, CIC had invested £111.0m since inception, in 24 companies.

 

Financial review
Greg Smith Chief Financial Officer

The Group recorded a loss for the year of £293.8m (2017: profit of £53.4m) and a negative Return on Hard NAV, i.e. on the Group's net assets excluding goodwill and intangible assets, of £75.6m (2017: positive £64.1m). Net assets at 31 December 2018 were £1,218.2m (2017: £1,508.5m) and Hard NAV totalled £1,217.5m at 31 December 2018 (2017: £1,295.8m), representing 115.0p per share (2017: 122.5p).

Consolidated statement of comprehensive income

A summary analysis of the Group's financial performance is provided below:

	2018  £m	2017 £m
Net portfolio gains/(losses) (1)	(48.4)	94.2
Change in fair value of limited and limited liability partnership interests	2.3	(0.2)
Net Overheads (2)	(26.0)	(17.6)
Licensing income - Istesso group	-	3.4
Administrative expenses - Istesso group	-	(3.5)
Administrative expenses - other consolidated portfolio companies	(2.6)	(2.1)
Administrative expenses - share based payments charge	(1.9)	(2.4)
IFRS3 charge in respect of acquisition of subsidiary	(3.3)	(4.4)
Carried interest plan release/(charge)	1.1	(1.3)
Amortisation of intangible assets	(9.9)	(3.9)
Goodwill impairment	(203.2)	-
Acquisition and restructuring costs	-	(9.1)
Net finance (expense)/income Taxation	(1.8) (0.1)	0.3 -
(Loss)/profit for the year	(293.8)	53.4
Other comprehensive income	(0.1)	-
Total comprehensive income/(loss) for the year	(293.9)	53.4
Exclude:
Amortisation of intangible assets	9.9	3.9
Goodwill impairment	203.2	-
Share based payment charge	1.9	2.4
IFRS charge in respect of acquisition of subsidiary	3.3	4.4
Return on Hard NAV	(75.6)	64.1
Exclude:
Acquisition and restructuring costs	-	9.1
Return on Hard NAV excluding acquisition and restructuring costs	(75.6)	73.2

⁽¹⁾ Defined in Note 27 Alternative Performance Measures

⁽²⁾ See net overheads table below and definition in Note 27 Alternative Performance Measures

Net portfolio gains/(losses) consist primarily of realised and unrealised fair value gains and losses from the Group's equity and debt holdings in spin-out businesses, which are analysed in detail in the Portfolio review above.

Net Overheads

	2018  £m	2017 £m
Other income	9.9	6.1
Administrative expenses - all other expenses	(34.5)	(21.2)
Administrative expenses - Annual Incentive Scheme	(1.4)	(2.5)
Net Overheads	(26.0)	(17.6)

Other income totalled £9.9m; an increase on the year (2017: £6.1m) due to the acquisition of Touchstone Innovation plc on 17^th October 2017; the 2018 results see the consolidation on this business for the full year. In addition, 2018 saw continued growth in revenues for Parkwalk Advisors Limited, which was acquired on 31 January 2017. Other income comprises fund management fees, licensing and patent income from Imperial Innovations, corporate finance fees as well as consulting and similar fees, typically chargeable to portfolio companies for services including executive search and selection as well as legal and administrative support.

Other central administrative expenses, excluding performance-based staff incentives and share-based payments charges, have increased to £34.5m during the period (2017: £21.2m), primarily as a result of the annualised cost of Touchstone Innovations plc, as well as the growth in IP Group's Australasian operations. Of the £34.5m gross overheads, £5.8m relates to the cost of the Group's US and Australasian operations. The charge of £1.4m in respect of the Group's Annual Incentive Scheme (2017: £2.5m), reflects performance against 2018 AIS targets.

£3.3m of the Group's 2018 net overheads relate to the Technology Transfer Office (2017: £0.7m). On 28 February 2019, the Group transferred back the future commercialisation operations of the TTO to Imperial, although retained its rights to future earnings in respect of existing licenses. The transfer of the TTO and the surrender of the lease on Touchstone Innovation's head office in Central London (agreed on 22 March 2019), represent the final steps in the conclusion of the Touchstone integration, that management estimates will result in annual cost synergies of £8m compared to IP Group and Touchstone's combined pre-acquisition net operating cost base. The full level of annual synergies will be realised following the completion of these last two integration steps, i.e. for the year ending 31 December 2020 onwards.

Other income statement items

The share-based payments charge of £1.9m (2017: £2.4m) reflects the accounting charge for the Group's Long-Term Incentive Plan and Deferred Bonus Share Plan. This non-cash charge reflects the fair value of services received from employees, measured by reference to the fair value of the share-based payments at the date of award, but has no net impact on the Group's total equity or net assets.

In late 2017, the Group's drug development subsidiary, Istesso Limited, was deconsolidated from the Group and recognised as a portfolio company; its licensing income and administrating costs are no longer consolidated into the Group's results.

Included within the Group's administrative expenses are costs in respect of a small number of other portfolio companies. Typically, the Group owns a non-controlling interest in its portfolio companies; however in certain circumstances the Group takes a controlling stake and hence consolidates the results of a portfolio company into the Group's financial statements. The administrative expenses included in the Group's results for such companies primarily comprise staff costs, R&D and other operating expenses.

The carried interest plan release of £0.8m (2017: charge of £1.3m) relates to the recalculation of liabilities under the Group's carry schemes, which include a newly constituted scheme for the combined UK investment teams, as well as historic IP Group and Touchstone schemes. No cash payments are due to scheme members until sufficient asset realisations have occurred.

Costs of £3.3m (2017: £4.4m) were recognised in relation to deferred and contingent consideration payable to the sellers of Parkwalk Advisors Ltd deemed under IFRS3 to be a payment for post-acquisition services.

Included in the Group's results are non-cash charges in respect of the impairment of historic goodwill of £203.2m (2017: £nil) and amortisation of acquisition intangibles of £9.9m (2017: 3.9m). The Group conducts impairment testing of goodwill on at least an annual basis (or earlier if impairment triggers are identified), using a consistent model to estimate the value in use of the assets in each CGU versus the carrying value of goodwill. Key inputs to the model include an estimate of the Group's future portfolio return, the anticipated level of portfolio investment and the Group's cost of capital. The rate of return estimate has previously been based on the Group's long-term returns forecast, which was supported by the Group's cumulative IRR performance. As a result of current year portfolio performance, particularly the Group's AIM-quoted companies, as well as the broader macroeconomic and equity market environment, management has lowered its assumptions for future rate of return for these purposes, using historic cumulative IRR as a basis. This is the primary factor resulting in the impairment of goodwill.

Acquisition intangibles relates to separately identifiable assets recognised through the acquisition of Touchstone Innovations plc, Parkwalk Advisors Limited and Fusion IP plc; these assets are amortised over the period to which the contractual commitments relate.

Statement of financial position

A summary analysis of the Group's assets and liabilities is provided below:

		Year ended 31 December 2018 £m	Year ended 31 December 2017 £m
Goodwill and other intangible assets		0.7	212.7
Portfolio		1,128.2	1,099.8
Other non-current assets		18.8	12.6
Cash and deposits		219.0	326.3
EIB debt facility		(97.8)	(104.0)
Other net current liabilities		(9.9)	(11.4)
Other non-current liabilities		(40.8)	(27.5)
Total Equity or Net Assets		1,218.2	1,508.5
Exclude:
Goodwill		(0.4)	(202.5)
Other intangible assets		(0.3)	(10.2)
Hard NAV		1,217.5	1,295.8
Hard NAV per share		115.0p	122.5p

Goodwill and other intangible assets relate to the group's previous acquisitions including Touchstone Innovations plc, Parkwalk Advisors Limited, Fusion IP plc, Techtran Limited and Top Technology Venture Limited.

The composition of, and movements in the Group's portfolio is described in the Portfolio review above.

The majority of non-current assets relate to holdings in LP and LLP funds; these include our co-investment fund IP Venture Fund, as well as investments in Apollo Therapeutics LLP, UCL Technology Fund LP and Technikos LLP. These funds give us both economic interest and direct investment opportunities in a portfolio of early stage companies, as well as relationships with high quality institutional co-investors.

The largest item within other non-current liabilities are loans from LPs of consolidated funds. The Group consolidates the assets of two managed funds in which it has both a significant economic interest, specifically co-investment fund IP Venture Fund II LP and IPG Cayman LP, which was created during the year to facilitate third party investment into the Group's US portfolio. Loans from third parties of consolidated funds represent third party loans into these partnerships. These loans are repayable only upon IPVFII generating sufficient returns to repay the Limited Partners.

At 31 December 2018, the Group held gross cash and deposits of £219.0m (2017: £326.3m). It remains the Group's policy to place cash that is surplus to near-term working capital requirements on short-term and overnight deposits with financial institutions that meet the Group's treasury policy criteria or in low-risk treasury funds rated "A" or above. The Group's treasury policy is described in detail in note 2 to the Group financial statements alongside details of the credit ratings of the Group's cash and deposit counterparties.

At 31 December 2018, the Group had a total of £40.2m (2017: £1.2m) held in US Dollars and £0.1m (2017: £0.1m) held in AUS Dollars.

Both IP Group and Touchstone Innovation plc arranged debt facilities with the European Investment Bank ("the EIB"), total borrowings under which totalled £97.8m at the period end (2017: £104m). Of these facilities, £15.4m is due to be repaid within twelve months of the period end (2017: £6.3m). The facility provides IP Group with an additional source of long-term capital to support the development of the portfolio.

All-share acquisition of Touchstone Innovations plc

On 17 October 2017 the Group acquired control of 100% of the ordinary shares in Touchstone Innovations plc. The Group has recognised the assets and liabilities acquired in accordance with IFRS 3 'Business Combinations'. Certain assets, primarily holdings in unlisted portfolio companies that have been accounted for using valuation techniques, were provisionally determined and for a 12-month period post-acquisition, adjustments are made to these assets to the extent that new information is obtained about facts and circumstances that were in existence at the acquisition date. Post finalisation of the acquisition accounting, the prior year Touchstone net assets acquired have been restated by £30.4m (which comprises £30.8m portfolio valuation decrease, £0.4m decrease in fixed assets and £0.8m decrease in non-current liabilities) with a corresponding increase in goodwill.

Cash, cash equivalents and short-term deposits ("Cash")

The principal constituents of the movement in Cash during the year are summarised as follows:

	2018  £m	2017 £m
Net Cash generated/(used) by operating activities	(24.9)	(22.4)
Net Cash generated/(used) in investing activities (excluding cash flows from deposits)	(76.0)	(67.6)
Cash acquired on acquisition of subsidiary undertakings (net of cash acquired)	-	107.8
Issue of share capital	-	181.0
Repayment/drawdown of debt facility	(6.3)	15.0
Effect of foreign exchange rate changes	(0.1)	0.2
Movement during period	(107.3)	214.0

At 31 December 2018, the Group's Cash totalled £219.0m, a decrease of £107.3m from a total of £326.3m at 31 December 2017 due to net cash used by operating activities of £24.9m, net cash used in investing activities of £76.0m and debt repayments of £6.3m.

Taxation

The Group's business model seeks to deliver long-term value to its stakeholders through the commercialisation of fundamental research carried out at its partner universities. To date, this has been largely achieved through the formation of, and provision of services and development capital to, spin-out companies formed around the output of such research. The Group primarily seeks to generate capital gains from its holdings in spin-out companies over the longer term but has historically made annual net operating losses from its operations from a UK tax perspective. Capital gains achieved by the Group would ordinarily be taxed upon realisation of such holdings; however since the Group typically holds in excess of 10% in its portfolio companies and those companies are themselves trading, the Directors continue to believe that the majority of its holdings will qualify for the Substantial Shareholdings Exemption ("SSE"). This exemption provides that gains arising on the disposal of qualifying holdings are not chargeable to UK corporation tax and, as such, the Group has continued not to recognise a provision for deferred taxation in respect of uplifts in value on those equity holdings that meet the qualifying criteria. Gains arising on sales of non-qualifying holdings would ordinarily give rise to taxable profits for the Group, to the extent that these exceed the Group's operating losses from time to time.

The majority of investments acquired via the combination with Touchstone Innovations plc were previously held via Imperial Innovation Sárl, which exempted dividends and gains from tax under Luxembourg law provided the conditions for the relevant participation exemption were met. During the year, the group unwound this structure and as a result the assets of Touchstone Innovations are now subject to the UK tax regime described above.

The Group complies with relevant global initiatives including the US Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard.

Alternative Performance Measures ("APMs")

The Group discloses alternative performance measures, such as Hard NAV and Return on Hard NAV, in this Annual Report. The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group. Further information on APMs utilised in the Group, is set out in note 27.

Risk management

Managing risk: our framework for balancing risk and reward

A robust and effective risk management framework is essential for the Group to achieve its strategic objectives and to ensure that the directors are able to manage the business in a sustainable manner, which protects its employees, partners, shareholders and other stakeholders. Ongoing consideration of, and regular updates to, the policies intended to mitigate risk enable the effective balancing of risk and reward.

Governance

Overall responsibility for the risk framework and definition of risk appetite rests with the Board, who through regular review of risks ensure that risk exposure is matched with an ability to achieve the Group's strategic objectives. The IP Group Risk Council operates to establish, recommend and maintain a fit for purpose risk management framework appropriate for the Group and oversees the effective application of the framework across the business. Risk identification is carried out through bottom-up process via operational risk registers maintained by individual teams, with additional top-down input from the management team with non-executive review being carried out by the audit and risk committee.

Risk management process

Ranking of the Group's risks is carried out by combining the financial, strategic, operational, reputational, regulatory and employee impact of risks and the likelihood that they may occur. Operational risks are collated into strategic risks which identifies key themes and emerging risks and ultimately informs our principal risks which are detailed in the Principal Risk and Uncertainty section of this report. The operations of the Group, and the implementation of its objectives and strategy, are subject to a number of principal risks and uncertainties. Were more than one of the risks to occur together, the overall impact on the Group may be compounded.

The design and ongoing effectiveness of the key controls over the Group's principal risks are documented using a 'risk and control matrix', which includes an assessment of the design and operating effectiveness of the controls in question. The key controls over the Group's identified principal risks are reviewed by management, the audit and risk committee and the Board at least twice a year. However, the Group's risk management programme can only provide reasonable, not absolute, assurance that principal risks are managed to an acceptable level.

During 2018 we have continued to build on our existing risk management framework, enhancing risk management and internal control processes and established an outsourced internal audit function with PwC. This activity included the development of operational risk registers for new front line operations and a refresh of existing front line and operational risk registers, an assessment of the strategic risks and the appropriateness of our principal risks, testing of key controls over our principal risks, a review of protectionist policies across the globe that may impact our investments internationally including proposed CFIUS laws in the US and an updated Brexit risk review led by the Group's Risk Council. We have continued to support the Board in exercising their responsibility surrounding risk management through the Risk Council who meet on a regular basis. Priorities for 2019 include embedding the risk management culture further across the business, integrating internal audit in the business and empowering control owners to identify and react to risks as they happen through regular risk reporting.

Brexit

The Group continues to closely monitor political developments as the UK prepares to leave the EU in 2019. Management updated its assessment of the impacts of Brexit on the Group in response to the likelihood of a "No Deal" scenario increasing in 2018. PwC's specialist trade team facilitated a Brexit workshop with key people within IP Group across capital markets, finance, compliance, operations, legal, talent management and human resources to i) identify the key risks of the likely impacts of Brexit and ii) to discuss actions the Group could take to mitigate the risks identified. As a result of this work, management determined that Brexit did not constitute a principal risk for the Group however management produced guidance for portfolio company boards and the Group's representatives to assist with their preparations. The key risks impacting our strategic aims identified via the above-mentioned process are detailed further below:

Key risks	Actions taken
Macro-economic environment could cause a short-term UK recession which would reduce investor confidence and impact access to capital for both IP Group and its portfolio companies. Access to capital: Ø A No Deal Brexit would create uncertainty in the short term, likely translating to more restrictive financing conditions. Any reduction in UK credit worthiness due to a Brexit induced increase in the current account deficit and higher exposure outside the EU could increase the cost of lending and decrease the availability of capital. Ø Significant parts of the Brexit outcome and political declarations are still vague, continuing to exacerbate the political and economic uncertainty. Subdued investor confidence across the investment sector is highly likely regardless of a Deal/No Deal scenario. This could impact access to capital for both IP Group and its portfolio companies. Ø In both a No Deal and a Deal scenario the UK will leave the EIB which results in loss of access to funding. While the Group has assumed no further funding, changes to repayment obligations of existing funding could be initiated.	Ø Reassurance provided to key stakeholders and investors that tangible and measurable preparations are being considered and made in order to mitigate any risks that Brexit poses as much as possible for IP Group Ø Diversification of co-investors and funding has been undertaken over recent years to mitigate the reliance on UK co-funders of the Group and its portfolio companies. Ø Material contracts that the Group considered most likely impacted by the Brexit process were reviewed. It was concluded that there were no clauses contained within these contracts and no indications from the third parties received that would indicate contracts such as EIB loan facilities or fund management contracts would be terminated.
The performance and management of portfolio companies is crucial to the success of the Group and, as a result, the preparation that portfolio company management teams have undertaken to address key Brexit risks will be central to the successful navigation of operational and other issues that may impact their performance. Performance and management of portfolio companies: Ø The macro-economic impact of a No Deal Brexit would lead to a significant GDP fall and the risk of a short-term recession is high. IP Group's portfolio companies have significant exposure to the UK economy. Ø The regulated nature of a number of the Group's portfolio companies across both sectors could mean that marketing pharmaceuticals and selling medical devices into the EU is no longer possible in the current way in the event of a No Deal Brexit.	Ø A portfolio company risk exposure and consultation plan was developed. The Group surveyed the portfolio companies' representatives of a sample of the most mature companies to determine the common Brexit-related risks which had been discussed at their board meetings. This analysis determined that the key risks across this subsection of the portfolio fell into the following five categories: i.      Hiring and retaining talent ii.     Supply chain difficulties including tariffs, delays and additional cost for storing extra stock iii.    Macro-economy and currency risk impacting profit iv.    Access to funding from investors and EU grants v.     Regulatory changes Ø The Group used this information to prepare an advice note for all portfolio company representatives at IP Group to enable those individuals to raise relevant issues at portfolio company board levels. Ø Additional advice was obtained from advisors regarding clinical trials sponsored in the UK, companies distributing medicine into the EU and selling medical devices into the EU.
The macro-economic environment has an impact on long-term recruitment and planning for companies. Additional visa restrictions will also impact academics and student movement to the UK thus affecting the pool for potential portfolio companies and the quality of university partnerships. People: Ø IP Group and its portfolio companies have current employees who do not hold a UK passport and are allowed to work in the UK based on their European Citizenship. These employees are experiencing high levels of uncertainty and could be considering alternative options for working in the UK. Ø As a result of the Brexit vote and ongoing political, economic and academic uncertainty, the UK is considered a less attractive job market on a global scale. This will impact on the Group and its portfolio companies who depend on highly skilled and specialised employees who are difficult to attract and retain. Significant impact on long-term recruitment is likely to be impacted. Ø Individuals within the field of academia and students from overseas may face uncertainty.	Ø A employee engagement strategy was developed and communicated to relevant employees at IP Group advising of the latest advice from Government and confirming the Group's support of those affected. Ø The Government's White Paper on immigration was reviewed and concluded that while no short term impacts are envisaged for current employees over the medium term the Group will need to closely monitor the proposed new immigration rules including salary thresholds for skilled migrants. The proposals are subject to change and the Group will continue to monitor the impact of the final changes.

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