Proposed change of investment policy

RNS Number : 9891T

LMS Capital PLC

24 July 2015

 

24 July 2015

LMS Capital plc

Proposed change of investment policy of the Company

Summary

LMS Capital plc (the "Company") is today announcing the Company's half year results for the six months to 30 June 2015 and also today announces a proposal to change its investment policy (the "Change of Investment Policy") from its current realisation strategy to enable it instead to make investments in the global energy sector. Full details of the Change of Investment Policy will be set out in the circular to be sent to shareholders later today (the "Circular"). 

Subject to shareholder approval of this Change of Investment Policy, an investment team comprising Robert Rayne, Tom Daniel, Bernard Duroc-Danner and Tony Hayward will oversee the new strategy (the "Investment Team"). Julian Metherell will act as a senior adviser to the Investment Team.

The collapse of oil and gas prices over the past year has caused severe dislocations in the energy sector, which has put the industry under great pressure and created a potentially compelling investment opportunity.

The Board believes that the Change of Investment Policy will:

· provide an opportunity for shareholders to participate in the anticipated enhanced investment returns associated with the new investment policy;

· allow the remaining net assets of the Company to continue to be realised in accordance with an optimum timeline of return;

· reduce the winding-up costs of the existing Company structure; and

· potentially reduce the discount to net asset value per share at which the Ordinary Shares currently trade.

Commenting on the Change of Investment Policy, Martin Knight, Chairman of LMS Capital plc, said:

"The Board has assembled a new Investment Team to execute the proposed new strategy of active investment in the energy sector. The new Investment Team combines complementary skill sets and broad industry networks with deep domain expertise and a successful track record in the energy and related sectors.

We have continued to make good progress with the realisation strategy during the first half of the year but the Board is mindful that, as the portfolio reduces in size, the management time and costs involved in running the portfolio, together with the requirement to maintain sufficient working capital requirements, could increasingly impact returns to shareholders.

The Board is excited by the prospect of working with the new Investment Team which it believes is an opportunity to create long term value for shareholders"

Change of Investment Policy

If the Change of Investment Policy is approved by shareholders, the Company's investment objective would be to generate total returns above market averages through income and long-term capital growth by making investments in the global energy sector and related industries, with a particular focus on resource-based and supply chain and services investment opportunities.

The Company would continue its realisation programme in respect of its existing portfolio in accordance with the time line and strategy under the existing investment policy. The disposal proceeds (net of an amount required for working capital purposes) would then be invested in accordance with the proposed investment policy.

Assuming that there are no capital constraints, over the course of the investment cycle, the Company would aim to make between 10 and 20 investments, comprising small to medium-sized transactions with an average investment size of £20 million to £40 million per investment, with the aim of providing diversification in the portfolio and generating value for shareholders.

If shareholders do not approve the Change of Investment Policy, the realisation strategy approved by shareholders in November 2011 will continue.

New equity capital

The Company will initially use its existing cash balances and the proceeds generated from the realisation of its existing portfolio (net of an amount required for working capital purposes) to make new investments in accordance with the proposed investment policy (such investments to be the "Energy Assets"). The Company has committed to make available for the purposes of the Energy Assets cash proceeds from the realisation of the legacy assets (the "Legacy Assets") of a minimum £100 million. A proportion of this amount (comprising net cash and certain other assets) will be available for investment from the effective date of the change of investment policy. 

Longer term, it is intended that at least £150 million in equity capital will be raised within 24 months of adoption of the Change of Investment Policy. If this capital is not raised in this timeframe, the Board will review the options available to the Company. FCA and Shareholder approval will be sought if the Board decides to change the investment policy of the Company at that time.

Board composition

Nick Friedlos will step down from the Board when the Change of Investment Policy becomes effective, but will continue to oversee realisation of the assets held by the Company as at the date of the Change of Investment Policy. Tony Sweet will remain on the Board as an executive director, continuing in his role as Chief Financial Officer. His role will include assisting with the realisation of Legacy Assets, transitioning the administration of the Company to an externally managed structure and aiming significantly to reduce the costs associated with the legacy structure, over what is currently expected to be a 12 month period. In order to meet the independence requirements for closed-ended investment funds in the Listing Rules, two additional independent non-executive directors will be appointed to the Board before the Company implements the Change of Investment Policy. The Company will announce these appointments when they are made.

Investment Team

To effect the Company's Change of Investment Policy, a new investment team will be formed comprising Robert Rayne, Tom Daniel, Bernard Duroc-Danner, and Tony Hayward. Julian Metherell will act as a senior adviser to the investment team.

Robert Rayne, who is currently a non-executive Director of the Company, has over 40 years' experience investing in the energy sector. He has had leadership roles in investment and real estate businesses for 30 years, including acting as a director and chief executive of London Merchant Securities PLC, the investment division of which was spun out to form the Company in 2007. He is also Chairman of Derwent London PLC and is the senior non-executive director of Weatherford International PLC.

Tom Daniel has over 20 years of alternative investment experience in public markets, private equity and special situations and in the last six years has focused on investment in the natural resources and energy sectors.

Bernard Duroc-Danner, who is currently a non-executive Director of the Company, has been Chairman, President and CEO of Weatherford International PLC since 1988. He has also served on a number of different oilfield service and equipment, oil and gas, and energy boards, holding positions at companies including Arthur D. Little Inc. and Mobil Oil Inc. He is a member of the National Petroleum Council and the Society of Petroleum Engineers.

Tony Hayward has 33 years of experience in board, operational management and investment experience in the global energy industry. He is Chairman of Glencore PLC and Genel Energy PLC. He was also Chief Executive of BP PLC.

Julian Metherell has 25 years of experience in board and operations management and investment execution in the global energy industry. He spent 22 years in investment banking, including four years as head of Goldman Sachs' UK investment banking division. During his time in investment banking, he was primarily focused on advising companies operating in energy-related sectors. He was an executive director and Chief Financial Officer of Genel Energy PLC.

As part of their commitment to the proposed strategy, Tom Daniel and Tony Hayward are proposing to acquire ordinary shares to the value of £500,000 each within 12 months of the proposed Change of Investment Policy becoming effective.

Management structure

The Company is proposing to appoint Frostrow Capital LLP, an independent FCA regulated investment firm, as its external alternative investment fund manger. This appointment is subject to FCA approval, which the Company and Frostrow Capital LLP expect to be forthcoming by the end of September 2015. Frostrow Capital LLP will delegate key elements of its portfolio management functions to St James's Asset Management (an investment management firm established by Tom Daniel, in which it is intended that the rest of the Investment Team will become partners).

Investment trust status

The Company intends to apply to HMRC for approval as an investment trust. The advantage of obtaining investment trust status is that, for each accounting period for which the Company continues to be approved by HMRC as an investment trust, the Company will be exempt from UK taxation on its capital gains. The Company is intending to qualify as an investment trust in respect of its accounting period which commenced on 1 January 2015 and its accounting periods commencing thereafter.

Management fees

Under the agreement to be entered into between the Company, Frostrow Capital LLP and St James's Asset Management (the "Portfolio Management Agreement"), St James's Asset Management will be entitled to an annual fee of 2% of the Company's committed capital and assets under management in respect of the Energy Assets. This fee (as well as certain other agreed costs until a further successful fundraising is completed) will be payable by the Company on a monthly basis. In order to cover the costs of terminating and winding up its operations, a £2.5m termination fee will be payable to St James's Asset Management if the Company is not able to raise at least £150 million of equity capital within 24 months of the Change of Investment Policy becoming effective (unless a longer period is agreed between the parties).

Carried interest arrangements

Carry will be calculated based on the net asset value ("NAV") of the Energy Assets (adjusted in accordance with certain agreed policies and principles). Gains on the Legacy Assets will not be subject to the carry arrangements. Carry will be allocated based on both realised and unrealised gains. Carry will be calculated by reference to changes in the adjusted NAV of the Energy Assets at the end of each financial year, and will only be allocated in respect of a financial year in which there is a profit as a result of an increase in such NAV.

Subject to the high water mark provision described below, any such profit will be allocated, before the allocation of carried interest, to the Company until the aggregate amount allocated to the Company is equal to a preferred return of 5% per annum. Further profits would then be allocated (subject to certain adjustments) 80% to the Company and 20% to the Carry Partnership.

The high watermark provision is designed to ensure that carry is not allocated in instances where the NAV of the Energy Assets, adjusted to take into account capital movements, has fallen and where increases in the adjusted NAV of the Energy Assets are only putting the adjusted NAV of the Energy Assets back to the level it was at before this fall occurred.

General Meeting

Shareholder approval for the resolutions set out in the Circular will be sought at a General Meeting of the Company which will be held at 12:00 p.m. on 12 August 2015 at Durrants Hotel, 26-32 George Street, London W1H 5BJ.

Recommendation

The Board considers the Change of Investment Policy to be in the best interests of shareholders as a whole. The Board is unanimously recommending that shareholders vote in favour of the resolutions set out in the Circular at the General Meeting, as the Directors intend to do in respect of their own beneficial holdings of, in aggregate, 4,733,460 ordinary shares, representing approximately 3.26% of the ordinary shares currently in issue.

The Company has received irrevocable undertakings to vote in favour of the resolutions from members of the Rayne family and associated trusts in respect of 34.06% of the ordinary shares of the Company (of which 2.97% comprises the beneficial holding of Robert Rayne).

For further information please contact:

LMS Capital plc                                                                                 020 7935 3555

Nick Friedlos, Executive Director

Tony Sweet, Chief Financial Officer

J.P. Morgan Cazenove                                                                      020 7742 4000

Michael Wentworth-Stanley

William Simmonds

Bell Pottinger                                                                                     020 3772 2569

Rollo Crichton-Stuart

Nick Lambert

www.lmscapital.com

 

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