Half-year Report

RNS Number : 2593B

Schroder UK Public Private Tst plc

30 September 2022

 

Half Year Report

Schroder UK Public Private Trust plc hereby submits its Half Year Report for the six months ended 30 June 2022 as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.2. 

The Half Year Report is also available to download from the Company's webpage. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/2593B_1-2022-9-29.pdf

The Company has submitted a copy of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at  https://data.fca.org.uk/#/nsm/nationalstoragemechanism  

Enquiries:

Schroder Investment Management Limited

Andrew Pearce (Press)   0207 658 2203

John Spedding 0207 658 3206

Schroder UK Public Private Trust plc

Half Year Report and Accounts for the six months ended 30 June 2022

Chairman's Statement

Introduction

I am pleased to present my second report as Chairman covering the six month period ending 30 June 2022.

Performance and valuation

During the six month period to 30 June 2022, the net asset value ("NAV") per share decreased by 31.8% from 48.08 pence per share to 32.80 pence per share. The share price decreased by 36.1% from 33.10p to 21.15p in the same period.

The majority of the decline in NAV was a consequence of weakness in the Company's public market holdings in a very challenging period for equity markets. Against a global backdrop of elevated energy costs, disrupted supply chains, sustained inflation and rising interest rates, investor sentiment towards 'growth' stocks fell sharply in the first half of the year. The Company's listed holdings were not immune to these pressures.

The Company's private equity holdings were more resilient against this volatile backdrop, with the exception of Rutherford Health which was fully written off in June 2022. This was previously announced to the market and incorporated into the daily NAV on 6 June 2022.

The decline in the share price of BenevolentAI since the end of June 2022, details of which may be found in note 10 to the accounts, has now been well publicised. On 20 September 2022, the Board announced the discovery of an administrative error by the Company's outgoing AIFM which resulted in the valuation of this holding in the daily indicative unaudited NAV being mis-stated. I would like to assure shareholders that the Board has engaged with all service providers so that this unfortunate incident is not repeated.

More details on performance, valuation and portfolio activity can be found in the Portfolio Manager's Review.

Change of AIFM, Custodian, Fund Administrator and Depositary

The Company announced on 11 July 2022 that, subject to regulatory approvals, Schroder Unit Trusts Limited would replace Link Fund Solutions Limited as Alternative Investment Fund Manager. We are pleased to confirm that regulatory approval has now been received and that this change is effective from 1 October 2022. In addition, the Board has appointed HSBC as Custodian and Depositary, to replace Northern Trust, also effective from 1 October 2022.

Discount management

The share price discount to NAV per share widened from 31.2% to 35.5% during the period.

In the last Annual Report the Board stated that the Company was in a position to consider buying back shares following the repayment of outstanding debt. Given the share price performance and widening discount during the period the Board has been buying back shares since 9 May 2022 and a total of 770,000 shares were bought back for cancellation at a cost of £170,000 across 12 transactions during the period. Since the end of the period, the Company has purchased an additional 1,575,000 shares at a cost of £307,000 across 21 trades and will continue to be active in the market.

Outlook

It is now over two and a half years since the former Portfolio Manager of the Company resigned and the Board appointed Schroders as Portfolio Manager. While performance has been challenging during this time, significant progress has been made in reducing the prohibitive levels of debt on the balance sheet and rebalancing the portfolio. Through a combination of selective realisations from the legacy portfolio and a number of new investments the Portfolio Manager has stabilised the Company's balance sheet, improved the quality and diversification of the portfolio and ensured its ongoing viability.

The Portfolio Manager has now made eight new private equity investments since taking over management of the Company which includes two investments made post-period. The Portfolio Manager continues to reshape the portfolio and align it with its strategy of aiming to invest in best in class global private companies, at either the venture or growth stage. Importantly the Portfolio Manager also continues to focus on extracting the highest possible value from the positions it inherited and to manage stock-specific issues, working closely with management teams to navigate the current environment.

The recent expansion of the investment mandate has resulted in a global, and thus a wider, pipeline of opportunities. The Company is now in a better position to take advantage of the international deal sourcing capability of Schroders and its encouraging long-term performance record. The Company remains well capitalised and ready to exploit the most attractive of these opportunities.

Despite the unsettled macroeconomic environment, the Portfolio Manager remains optimistic about the long-term prospects for the portfolio. While many areas of private equity will continue to face significant short-term challenges, other areas are likely to be more resilient. This resilience is being shown in a number of our private equity holdings of late. Despite the reasonably short period of time that many of these investments have been held, the Portfolio Manager is encouraged by the operational robustness these businesses are demonstrating despite the prevailing headwinds.

The Board believes that while the period under review has been challenging, the Company is well placed to produce long-term growth in future and to provide a compelling vehicle for both institutional and private investors to gain access to private equity markets.

Tim Edwards

Chairman

30 September 2022

Portfolio Manager's Review

Summary

· The Company reported a net asset value ("NAV") of 32.80p per share as of 30 June 2022, a decrease of 31.8% relative to the NAV as of 31 December 2021 (48.08p per share) and 17.1% relative to the NAV as of 31 March 2021 (39.57p per share).

·   The largest detractor to performance was gene sequencing company Oxford Nanopore, the Company's largest holding, which declined by 61.8%, generating a market value loss of £100.6 million over the half year period (72% of the NAV loss over the period). Since the end of June, the share price has been relatively more stable and the company's operational progress has been encouraging.

·   The Company completed its fifth and sixth new private equity investments in the leading, dedicated renewed technology marketplace, Back Market, and in innovative developer of immunoglobulin E antibodies to treat cancer, Epsilogen, as part of our strategy to invest in ground-breaking companies.

·   As of 30 June 2022, we believe the Company is well placed to benefit from the current depressed valuation environment when making new investments with more than £6.7m in cash, an unutilised loan facility, £127.7m in public equity investments and a healthy pipeline of global venture/growth stage companies.

Introduction

Economic and market backdrop

The first half of 2022 saw the MSCI All Country World Index's biggest H1 fall since its inception in 1990. The war in Ukraine has exacerbated already present inflationary forces. Europe is facing an acute crisis with energy supplies from Russia under threat. Interest rates around the world have risen as central banks have admitted that inflation is more ingrained, rather than just a series of transient shocks. Incomes are being squeezed; consumer confidence indicators have fallen; and fears of a recession have increased. Meanwhile, global IPO activity almost halved in volume in the first half of 2022.

Despite this challenging backdrop, we remain steadfast in our long-term investment strategy and believe exciting opportunities will continue to present themselves, but at better valuations.

Portfolio composition and valuation reviews

As of 31 December 2021, the Company had 35 portfolio holdings¹ including 11 quoted holdings and 24 unquoted holdings. During the period, the number and composition of holdings was impacted by the following events:

·   New investment in leading, dedicated renewed technology marketplace, Back Market (incorporated as Jung S.A.S).

·   New investment in innovative developer of immunoglobulin E antibodies to treat cancer, Epsilogen Ltd ("Epsilogen").

·   Rutherford Health plc ("Rutherford Health") announced the withdrawal of its shares from trading on the AQSE Growth Market. Subsequently, the company was revalued to no value after its Board resolved to wind-up the company. The Schroders' investment team spent a considerable amount of time working with the company to improve its financial situation and operational performance and explore alternatives but the wind-up could not be avoided.

· Sale of Seedrs Ltd ("Seedrs").

· BenevolentAI completed its business combination with Odyssey Acquisition S.A. ("Odyssey"), a Euronext Amsterdam-listed investment company.

As of 30 June 2022, the Company ended the period with 34 holdings² including 11 quoted holdings and 23 unquoted holdings. All the Company's quoted holdings were valued using unadjusted quoted prices. For the unquoted holdings, Link Fund Solutions Limited ("LFS"), the Company's Alternative Investment Fund Manager (AIFM), conducted a full valuation review to determine the fair value of the portfolio as of 30 June 2022.

¹ Excluding 9 holdings with no value. ²Excluding 11 holdings with no value.

Recent developments

Since 30 June 2022, volatility in the performance of its earlier stage, loss-making public companies has continued, including Oxford Nanopore (-7.5%¹), BenevolentAI (-47.5%¹), Immunocore (+16.9%¹) and IDEX Biometrics (-40.7%¹). The Company's more mature public equity holdings have been more stable, including Spirent Communications (+5.6%¹) and Johnson Matthey (-3.1%¹).

The decline in the share price of BenevolentAI since the end of June 2022, details of which may be found in note 10 to the accounts, has now been well publicised. The Portfolio Management team is supporting the Board so that the administrative error by the Company's outgoing AIFM, which caused the daily indicative unaudited NAV to be mis-stated, will not be repeated following the transition of the AIFM role to Schroder Unit Trusts Limited.

In August, the Company completed two further new private equity life sciences investments, representing combined commitments of £3.7 million. Further details of these new investments are expected to be disclosed shortly. These two new companies, combined with the earlier investment in Epsilogen, form the first three investments of our dedicated life sciences sub-strategy. Our aim is to build a diversified portfolio of 6-8 healthcare therapeutics companies addressing key unmet medical needs with a focus on oncology and the treatment of solid tumours. We plan to make small initial investments (up to £3 million), build a diversified portfolio, implement prudent capital reserving (up to an additional £3 million) and target an aggregated portfolio to represent ~10% of total investments. We believe this approach balances the risk-return trade-off of this high potential, yet high risk, sector.

¹ Share price performance between 30 June 2022 and 23 September 2022.

Financial Performance

Attribution			Net
Analysis	Public	Private	(debt)/
(£m)	equity	equity	cash	Other	NAV
Value at 31.12.21	243.3	197.6	(2.9)	(1.1)	436.9
+ Investments	-	13.9	(13.9)	-	-
- Realisations at
value	(12.2)	(13.6)	25.8	-	-
+/- Fair value gains/
(losses)	(116.3)	(28.5)	-	-	(144.8)
+/- FX gains/
(losses)	1.5	6.2	-	-	7.7
+/- Reclassified
holdings	11.4	(11.4)	-	-	-
+/- Costs and other
movements	-	-	(2.3)	0.3	(2.0)
Value at 30.06.22	127.7	164.2	6.7	(0.8)	297.8

Source: Link Fund Solutions, the Company's AIFM, as of 30 June 2022.

The NAV as of 30 June 2022 was £297.8 million or 32.80p per share, a decrease of 31.8% compared with the NAV as of 31 December 2021 and of 17.1% compared with 31 March 2022.

The half year NAV decrease of -31.8% comprised:

· Public equity holdings: -26.6%

· Private equity holdings: -6.5%

· Foreign exchange: +1.8%

· Costs and other movements: -0.5%

The Company's public equity holdings saw a decrease in value of 47.8% contributing -26.6% to the half year decrease in NAV. The largest negative contributor was Oxford Nanopore Technology. The company's share price declined 61.8% over the half year period, 43.0% and 33.1% over the first and second quarters respectively, resulting in a total loss of £100.6 million. Factors affecting the stock included a broader sectoral rotation from growth to value stocks and fears of a potential stock overhang following the expiry of the post-IPO lockup period at the end of March. From an operational perspective the company continued to expand its commercialisation capabilities. Revenue guidance for the core business of £145-160m for 2022 and £190-220m for 2023 was reiterated in September 2022, demonstrating board and management confidence in continued commercial momentum.

The share price of IDEX Biometrics, the Norwegian developer of biometric cards, declined 59.2% over the period, a loss of £7.0 million. IDEX has continued to deliver on their commercial plans with three commercial launches of bank cards utilising its biosensor technology in H1, with a further 8-10 launches expected over the course of 2022. However, the revenue growth arising from these launches has been slower than anticipated, and the company remains unprofitable, so the stock has been affected by the wider market rotation from growth to value.

The Company's private equity holdings saw a decrease in value of 14.4% contributing -6.5% to the half year decrease in NAV. The largest negative contributor to unquoted performance was Rutherford Health, which was fully written-off in June 2022 following news that the company's Board had resolved to wind-up the company and appoint the official receiver as liquidator. The revaluation resulted in a fair value loss of £23.6 million. The company is reported as an unquoted holding following withdrawal of its shares from trading on the AQSE Growth Market on 24 January 2022. Since assuming portfolio management of the Company, the Schroders investment team had spent a considerable amount of time working with Rutherford to improve its financial situation and operational performance but the wind-up could not be avoided. A number of factors contributed to Rutherford's failure, but the flawed expansion strategy pursued by the company in the initial development phase from 2015 to 2019 laid the ground for an unsustainable funding need.

The largest positive contributor to performance was BenevolentAI, which was revalued following completion of its business combination with Odyssey Acquisition S.A. ("Odyssey"), a Euronext Amsterdam-listed investment company. As of 30 June 2022, the Company's holding in BenevolentAI was valued at £32.7 million based on a share price of €8.00, an increase of £4.3 million relative to the holding value of as of 31 December 2021 (£28.5 million). However, since the period end, BenevolentAI's share price has declined 47.5% to €4.20 per share, as of 23 September 2022.

The only other private equity holding that experienced a fair value gain or loss of greater than £5 million over the period was Atom Bank. The Company's AIFM, Link Fund Solutions, revalued the holding down to reflect deterioration in the U.K. economic and public market backdrop.

Valuation of new investments

The subset of companies in the portfolio which represent the new private equity holdings since our appointment as Portfolio Manager saw a small decrease in value which was immaterial in the context of the overall portfolio. The AIFM reduced the valuations of Revolut and Back Market to reflect the performance of their respective listed market peers which are used as the basis of the Company's ongoing valuations. Despite what we see as a much-needed correction in the valuation of high growth public companies, both businesses are delivering operationally at an underlying level, and we remain encouraged by their long-term operational and financial outlook, which should far outweigh any contraction in value of comparable businesses - a factor anticipated in our original investment case.

Foreign exchange

Over the half year period, the fair value of investments denominated in the United States Dollar (USD), Euro (EUD), Swiss Franc (CHF) and Australian Dollar (AUD) benefited from the depreciation in the value of the British pound sterling (GBP). Whereas the investment in IDEX Biometrics, denominated in Norwegian Krone (NOK), was marginally negatively impacted by the appreciation of GBP. Overall, changes in foreign exchange rates contributed +1.8% to the half year change in NAV.

Cash and debt

As of 30 June 2022, the Company held £6.7 million in cash with no funds drawn from the loan facility.

Top 10 Holdings

The Company's top ten holdings as of 30 June 2022 compared with the respective holding as of 31 December 2021.

	Value	% of	Value	% of
	as of 31	total	as of 30	total
	December	invest-	June	invest-
	(£'000)	ments	(£'000)	ments
Oxford Nanopore	162,641	36.9%	62,069	21.3%
Atom Bank	46,209	10.5%	38,090	13.1%
BenevolentAI	28,484	6.5%	32,734	11.2%
AMO Pharma	11,668	2.6%	16,151	5.5%
Reaction Engines	12,500	2.8%	12,500	4.3%
Federated Wireless	8,618	2.0%	12,481	4.3%
Ada Health	9,905	2.2%	10,155	3.5%
HP Environmental
Technologies Fund	10,667	2.4%	10,006	3.4%
Nexeon	7,788	1.8%	8,770	3.0%
Immunocore	21,044	4.8%	8,564	2.9%

Source: Link Fund Solutions, the Company's AIFM, as of 30 June 2022.

Oxford Nanopore

Technology company at the forefront of next generation DNA sequencing instrumentation

Oxford Nanopore Technologies ("ONT") has developed a new generation of nanopore-based electronic systems for the analysis of single molecules, including DNA, RNA and proteins. The handheld MinION™ device, the high-throughput PromethION™ and the GridION™ system are used in scientific research, personalised medicine, crop science, security and defence and environmental applications.

·   Stock performance disappointed over the period reflecting changes in the market backdrop including growth to value rotation, aversion to negative free cashflow businesses, and weaker operating performance reported at peers.

· ONT reported its results for the six months to 30 June in September with good underlying progress:

o  Revenues for Life Science Research Tools ("LSRT", the main business line) up 34% year-on-year to £70.6 million

o  Gross margin for the LSRT business increased to 54.8%, a good outturn given supply chain strains and increased component costs

o  Reiterated 2022 LSRT revenue guidance of £145-160 million, representing 20% growth and a strengthening of mix, with slightly reduced expectations for Covid related revenues, and stronger growth from target customers

o  Reiterated 2023 revenue guidance of £190-220 million

o  Closing cash balance of greater than £600 million which should be more than adequate to fund the business to profitability

Atom Bank

Leading UK app-only challenger bank

Atom Bank is the UK's first bank built exclusively for mobile. It is redefining what a bank should be, making things easier, more transparent and better value in a world of finance. Atom currently offers savings accounts, mortgages and business loans.

· In July 2022, Atom released details of its operating performance to 31st March 2022 detailing positive progress on multiple fronts including:

o  After recording its first month of operating profit in Q1 FY22, Atom has recorded operating profits for the remaining three quarters of the year to 31st March 2022

o  Net interest margin (NIM) rose significantly to 127bps (compared to 54bps in 2021) driven by lending growth across the residential and business portfolio

o  Income grew by over 200%, with costs increasing by just 6%, reflecting Atom's focus on automation and cost management, whilst continuing to offer great rates to both savers and borrowers

o  Growth in income is attributed to increases in the loan book across both business and residential lending, with Atom's total loan book reaching £3.3 billion (up from £2.7 billion in FY21)

o  Ended the financial year with a Trust Pilot score of 4.6/5, an App Store rating of 4.7/5 and a customer Net Promoter Score of +87

o  Over six months on from the introduction of a four-day week with no loss of pay in November 2021, employees are reporting being happier and healthier, with increased employee engagement and decreased sickness and attrition levels.

BenevolentAI

Healthcare technology company applying artificial intelligence for drug discovery and development

BenevolentAI creates and applies artificial intelligence (AI) and machine learning to transform the way medicines are discovered and developed. Benevolent integrates its technology into every step of the drug discovery process from hypothesis generation to late-stage clinical development. The Benevolent Platform® is used by scientists and technologists to find new ways to treat disease, improve the efficacy and lower the development time and costs of new treatments.

· Expanded collaboration with AstraZeneca to four disease areas, identifying three novel targets for their drug development portfolio.

· In-house pipeline grew to 13 named programmes identified by the Benevolent Platform.

· Completed Business Combination with Odyssey Acquisition S.A. on 22nd April 2022 raising gross proceeds of €225 million.

· As at H1 2022, held sufficient cash on balance sheet to cover costs to Q4 2024, without including any future capital from licensing or collaboration agreements.

· Listed stock trades on very thin volumes. Post-listing lock ups expire in mid-October, and options for improving liquidity in the stock are being explored.

AMO Pharma

Developer of drugs to treat rare or orphan diseases

AMO Pharma is a biopharmaceutical company working to identify and advance promising therapies for the treatment of serious and debilitating diseases in patient populations with significant areas of unmet need, including rare, debilitating childhood onset neurogenetic disorders with limited or no treatment options. The company is developing AMO-02 for congenital myotonic dystrophy, AMO-01 for Phelan McDermid Syndrome and AMO-04 for Rett Syndrome and related disorders.

·   Announced additional investment from existing shareholders to progress the REACH-CDM study, a double-blind, placebo-controlled, randomized clinical trial to assess the efficacy and safety of AMO-02 (tideglusib) for the treatment of congenital myotonic dystrophy.

·   I n December 2021, AMO Pharma announced activation of additional clinical trial sites in Australia and New Zealand for the REACH-CDM trial and confirmed that more than two-thirds of patients had been enrolled in the trial. The REACH-CDM trial will enroll a total of 56 patients. Upon completion of the trial, patients will have the opportunity to transition to the REACH-CDM X study, a 52-week open-label study designed to evaluate the long-term safety and efficacy of AMO-02.

Reaction Engines

Developer of high-performance engine technologies to enable space and hypersonic travel

Reaction Engines is developing a Synergistic Air Breathing Rocket Engines (SABRE) to enable a step-change in space and hypersonic travel through advancements in performance and efficiency. Multiple applications are being spun off from this core vision across an array of commercial industries.

· Reaction Engines, Rolls-Royce, the Royal Air Force's Rapid Capabilities Office (RCO), the UK Government's Defence Science and Technology Laboratory (Dstl) and the UK's National Security Strategic Investment Fund (NSSIF) have announced new details of their joint programme to deliver significant enhancements to UK defence capabilities through the development of innovative hypersonic technologies

·   Started a new testing campaign to expand the performance envelope of the high-Mach enabling technology through the Foreign Comparative Testing (FCT) Program at the Department of Defense, supported by the Air Force Research Laboratory (AFRL)

· Awarded the Technology and Innovation Award at the rescheduled 2021 Motorsport Industry Association Awards at the Energy Efficient Motorsport Show in Birmingham in recognition of the company's innovative adaptation of SABRE technology for the motorsport industry.

· Honeywell (NASDAQ: HON) and Reaction Engines signed a memorandum of understanding to collaborate on the development of thermal management technologies as a critical enabler to reduce aircraft emissions, regardless of the fuel type used in the aircraft.

Investment Activity

Realisations

During the six-months to 30 June 2022, the Company made realisations totalling £25.8 million.

The Company completed the sale of its holding in Seedrs Limited ("Seedrs") to a global institutional investment management firm in March receiving cash proceeds of £12.0 million. For further information regarding the transaction, investors can refer to the original announcement made by the Company on the 1st December 2021.

The Company received its first distribution of £1.5 million from the HP Environmental Technologies Fund following the acquisition of portfolio company, Driivz, by Vontier Corporation, a global industrial technology company focused on transportation and mobility solutions.

As Portfolio Manager, we also trimmed the Company's public equity holdings in Immunocore and Plenti Group to fund new private equity investments and repayment of the bank overdraft.

New Investments

During the six-month period to 30 June 2022, the Company made two new private equity investments totalling £11.5 million.

Back Market

In January 2022, the Company invested €12.0 million (£10.0 million) in Back Market (incorporated as Jung S.A.S.), as part of its $510 million Series E funding round. The round was led by Sprints Capital, together with Eurazeo Growth, Aglaé Ventures, General Atlantic, and Generation Investment Management. The Company invested alongside its co-investment partner, Sprints Capital, via a single asset fund, Sprints Capital Ellison LP.

Launched in 2014, Back Market is the leading dedicated renewed technology marketplace. The company brings high-quality professionally refurbished electronic devices and appliances to customers in 16 countries including the United Kingdom, the United States, France, Germany, Italy, Spain, Belgium, Austria, the Netherlands, and more recently, Portugal, Japan, Finland, Ireland, Greece, Slovakia, and Sweden. The Series E round underpins Back Market's ambitious vision and allows the company to build on its position as the leading marketplace exclusively dedicated to the sale of expertly refurbished electronics. Back Market is determined to make circular technology mainstream by delivering an experience even better than buying new.

Epsilogen

In March 2022, the Company committed £3.0 million to innovative developer of immunoglobulin E antibodies to treat cancer, Epsilogen, as part of its £30.75 million Series B funding round. The round was led by a new investor, Novartis Venture Fund, and joined by new investors 3B Future Health Fund, British Patient Capital and Caribou Property. The new syndicate joins founding Series A investor Epidarex Capital and Series A investor ALSA Ventures both of whom also committed further capital in the Series B fundraising.

Epsilogen is an innovative developer of immunoglobulin E (IgE) antibodies to treat cancer. IgE's natural function is to provide immunological defence against certain parasites. This functionality makes it an ideal treatment of solid tumours due to its strong potency, enhanced tumour access and long tissue half-life. Epsilogen's lead product candidate, MOv18 IgE, is the first therapeutic IgE antibody to enter the clinic and encouraging data from a phase I trial demonstrated MOv18 IgE to be safe and well tolerated with early signs of clinical activity also seen. Epsilogen is also developing a proprietary IGEGTM antibody platform combining elements from both IgE and IgG antibodies into novel and proprietary antibody molecules with enhanced functionality.

As of 30 June 2022, the Company had invested £1.5 million of its total commitment of £3.0 million. The undrawn commitment of £1.5 million is expected to be called in two subsequent tranches in the first quarter of 2023 and in the first quarter of 2024.

Follow-on investments

During the period, the Company made two small follow-investments in its existing private equity holdings, totalling £2.4 million.

The Company invested a small amount in Rutherford Health to extend its runway while in the process of trying to secure long-term funding. This investment formed part of a restructuring plan which included the recruitment of a new leadership team to preserve some value of the significant historical investment made by the Company into Rutherford over the preceding years. While the new leadership team vigorously pursued multiple options over the last months to save the business, it could ultimately not correct the inherited severe underlying challenges in the business.

In January 2022, the Company invested £0.1 million in Freevolt Group Limited ("Freevolt") as part of an internal funding round designed to extend runway to the point that commercial revenues begin to build. Freevolt was previously known as Drayson Holdco 2 Limited.

Source: Portfolio companies including information disclosed publicly on their websites.

Strategy and portfolio construction

The portfolio of new private equity investments has started to take shape with eight investments¹ completed across all three of our core sub-strategies: venture, growth and life sciences, outlined below.

The Company's investment strategy is focused on pursuing investment opportunities in private companies at the venture and growth-stage with the potential to deliver 2x to 5x returns over the medium term. We are targeting companies with best-in-class products or services, with high disruption potential, poised for significant growth, managed by world class management teams and backed by high-quality, value-add co-investors with a track record of building great businesses. The investment team source deals both directly and as co-investments alongside the world's leading venture capital firms, benefitting from Schroders Capital's 25-year history of investing in venture capital funds in the US, Europe and Asia, which has delivered an "indirect" portfolio of over 5,000 venture and growth companies globally.

The Company will target an approximate 75% allocation to private equity in the portfolio, with around 25% in public equities. Most public holdings will be a consequence of private holdings having gone on to IPO, which will enable the Company to capture the full lifetime value of portfolio companies and avoid the need to sell at this offering stage.

While several unlisted stock specific situations still remain from the inherited portfolio and we continue to focus on maximising return potential from these for shareholders, the Company is now in a far more stable position. We have capital available to continue to make investments as we continue to rebalance the portfolio. We are excited about the prospects for the future now that the hard work put in by the team since taking over management of the Company is beginning to bear fruit.

¹ Including two new investments completed in August 2022.

Outlook

The global economy has faced an increasing number of headwinds since the start of this year, including the war in Ukraine, the energy crisis, rising inflation, rising interest rates, record debt levels and supply chain shortages to name but a few. The consequence of which has been a significant correction in global stock markets and contraction in M&A activity. Schroders' economists are expecting the US, UK and eurozone economies to go into recession and the outlook for the global economy is gloomy.

Despite this challenging backdrop, we believe the Company is well-placed to capitalise on new investment opportunities in the private markets with its new global strategy. The extended geographical focus allows us to leverage our network and invest in the best opportunities, when viewed on a risk return basis, no matter where they are in the world. While we recognise that private equity is not immune to the forces which are buffeting all financial assets at present, we believe that some parts of the market are likely to face more difficult times, while others are likely to be more resilient, even with opportunities to thrive.

With the firepower available, we believe we are well placed to make new investments and benefit from the current depressed valuation environment. As of 30 June 2022, the Company had £6.7 million in cash, an unutilised loan facility (up to £40 million) and £127.7 million in public equity investments from which to make new investments. We also have a healthy pipeline of global venture/growth stage companies from which to consider potential investment.

Schroder Investment Management Limited

30 September 2022

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Investment Portfolio

As at 30 June 2022

The 20 largest investments account for 92.9% of total investments by value (31 December 2021: 93.6%).

				Total
			Fair value	investments
Holding	Quoted/unquoted	Industry sector	£'000	%
Oxford Nanopore	Quoted	Health Care	62,069	21.3
Atom Bank	Unquoted	Financials	38,090	13.1
BenevolentAl	Quoted	Health Care	32,734	11.2
AMO Pharma	Unquoted	Health Care	16,151	5.5
Reaction Engines	Unquoted	Industrials	12,500	4.3
Federated Wireless	Unquoted	Technology	12,481	4.3
Ada Health	Unquoted	Health Care	10,155	3.5
HP Environmental Technologies Fund	Unquoted	Industrials	10,006	3.4
Nexeon	Unquoted	Industrials	8,770	3.0
Immunocore	Quoted	Health Care	8,564	2.9
Sprints Capital Ellison	Unquoted	Technology	8,098	2.8
Genomics	Unquoted	Health Care	8,018	2.7
Revolut LLP	Unquoted	Financials	6,843	2.3
Spirent Communications	Quoted	Technology	5,918	2.0
Attest Technologies	Unquoted	Business Services	5,748	2.0
Tessian	Unquoted	Technology	5,543	1.9
OcuTerra	Unquoted	Health Care	4,985	1.7
Cequr	Unquoted	Health Care	4,951	1.7
IDEX Biometrics ASA	Quoted	Technology	4,810	1.7
Johnson Matthey	Quoted	Industrials	4,634	1.6
Kymab	Unquoted	Health Care	4,566	1.6
Petershill Partners	Quoted	Financials	4,390	1.5
Autolus Therapeutics	Quoted	Health Care	3,777	1.3
Industrial Heat	Unquoted	Industrials	2,030	0.7
American Financial Exchange	Unquoted	Financials	1,864	0.7
Epsilogen	Unquoted	Health Care	1,464	0.5
Mafic	Unquoted	Industrials	983	0.3
Novabiotics	Unquoted	Health Care	605	0.2
ReNeuron Group	Quoted	Health Care	556	0.2
Plenti Group	Quoted	Financials	150	0.1
Xeros Technology	Quoted	Industrials	139	-
RM2 International	Unquoted	Industrials	133	-
Freevolt (formerly Drayson)	Unquoted	Technology	85	-
Econic	Unquoted	Industrials	47	-
Metaboards	Unquoted	Technology	-	-
Sphere Medical	Unquoted	Health Care	-	-
Mereo BioPharma Group	Quoted	Health Care	-	-
Halosource	Unquoted	Industrials	-	-
Bodle Technologies	Unquoted	Technology	-	-
Origin	Unquoted	Health Care	-	-
Rutherford Health	Unquoted	Health Care	-	-
Lignia Wood	Unquoted	Industrials	-	-
Oxsybio	Unquoted	Health Care	-	-
Spin Memory	Unquoted	Technology	-	-
Kind Consumer	Unquoted	Consumer Staples	-	-
Total investments1			291,857	100.0
1 Total investments comprise:
			£'000	%
Unquoted			164,116	56.2
Listed on the London Stock Exchange			77,011	26.4
Listed on a recognised stock exchange overseas			50,035	17.2
Quoted on AIM			695	0.2
Total			291,857	100.0

Half Year Report

Principal Risks and Uncertainties

The Board has determined that the key risks for the Company are general economic and market risk, portfolio concentration risk, performance risk, general and specific portfolio valuation risk, investee company specific risk, gearing risk, portfolio manager and key man risk, outsourced service provider risk, currency risk and cyber risk. These risks are set out on pages 29 to 33 of the Annual Report and Accounts for the year ended 31 December 2021.

Except with respect to a degree of uncertainty relating to continued geo-political and market volatility and heightened service provider risk as AIFM, Depositary and Administrator services transition across to the new providers, the Company's principal risks and uncertainties, and their mitigation, have not materially changed during the six months to 30 June 2022 or since the Annual Report was published on 21 April 2022.

Going concern

The Board has considered the Company's principal risks and uncertainties (including whether there are any emerging risks); has scrutinised the detailed cash flow forecast prepared by the Portfolio Manager; and considered their assessment of the likelihood and quantum of funds which could be raised from sales of investments. As a result, the Board is comfortable that the Company will have sufficient liquid funds to pay operating expenses.

The Board has also considered the provisions in the revolving credit facility, and have taken into account that the loan was undrawn as at the date of these financial statements. On this basis, the Board considers it appropriate to adopt the going concern basis of accounting in preparing the Company's accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 30 June 2022.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, in particular with Financial Reporting Standard 104 "Interim Financial Reporting" and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in April 2021 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Income Statement

for the six months ended 30 June 2022 (unaudited)

	(Unaudited) For the six months ended 30 June 2022			(Unaudited) For the six months ended 30 June 2021			(Audited) For the year ended 31 December 2021
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss	-	(137,192)	(137,192)	-	54,554	54,554	-	124,583	124,583
Gains/(losses) on foreign exchange	-	72	72	-	(120)	(120)	-	(466)	(466)
Income from investments	258	-	258	57	-	57	112	-	112
Gross return/(loss)	258	(137,120)	(136,862)	57	54,434	54,491	112	124,117	124,229
Portfolio management fee	(1,175)	-	(1,175)	(1,537)	-	(1,537)	(3,019)	-	(3,019)
Administrative expenses	(647)	-	(647)	(784)	-	(784)	(1,448)	-	(1,448)
Net (loss)/return before finance costs and taxation	(1,564)	(137,120)	(138,684)	(2,264)	54,434	52,170	(4,355)	124,117	119,762
Finance costs	(202)	-	(202)	(863)	-	(863)	(960)	-	(960)
Net (loss)/return before taxation	(1,766)	(137,120)	(138,886)	(3,127)	54,434	51,307	(5,315)	124,117	118,802
Taxation	-	-	-	-	-	-	-	-	-
Net (loss)/return after taxation	(1,766)	(137,120)	(138,886)	(3,127)	54,434	51,307	(5,315)	124,117	118,802
(Loss)/return per share	(0.20)p	(15.09)p	(15.29)p	(0.34)p	5.99p	5.65p	(0.58)p	13.66p	13.08p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net (loss)/return on ordinary activities after taxation is also the total comprehensive (loss)/return for the period.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

for the six months ended 30 June 2022 (unaudited)

for the six months ended 30 June 2022 (unaudited)

			Capital
	Called-up	Share	Redemption	Capital	Revenue
	share capital	premium	reserves	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31 December 2021	9,086	891,017	-	(439,105)	(24,127)	436,871
Purchase of shares for cancellation	(8)	-	8	(170)	-	(170)
Net loss after taxation	-	-	-	(137,120)	(1,766)	(138,886)
At 30 June 2022	9,078	891,017	8	(576,395)	(25,893)	297,815

for the six months ended 30 June 2021 (unaudited)

			Capital
	Called-up	Share	Redemption	Capital	Revenue
	share capital	premium	reserves	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31 December 2020	9,086	891,017	-	(563,222)	(18,812)	318,069
Net return/(loss) after taxation	-	-	-	54,434	(3,127)	51,307
At 30 June 2021	9,086	891,017	-	(508,788)	(21,939)	369,376

for the year ended 31 December 2021 (audited)

			Capital
	Called-up	Share	Redemption	Capital	Revenue
	share capital	premium	reserves	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31 December 2020	9,086	891,017	-	(563,222)	(18,812)	318,069
Net return/(loss) after taxation	-	-	-	124,117	(5,315)	118,802
At 31 December 2021	9,086	891,017	-	(439,105)	(24,127)	436,871

Statement of Financial Position

at 30 June 2022 (unaudited)

		(Unaudited)	(Unaudited)	(Audited)
		30 June	30 June	31 December
		2022	2021	2021
	Note	£'000	£'000	£'000
Fixed Assets
Investments held at fair value through profit or loss	4	291,857	341,953	440,899
Current Assets
Debtors		247	28,002	171
Cash at bank and in hand		6,729	1,291	19,077
		6,976	29,293	19,248
Current liabilities
Creditors: amounts falling due within one year	5	(1,018)	(1,870)	(1,276)
Net current assets		5,958	27,423	17,972
Total assets less current liabilities		297,815	369,376	458,871
Creditors: amounts falling due after more than one year	6	-	-	(22,000)
Net assets		297,815	369,376	436,871
Capital and reserves
Called-up share capital	7	9,078	9,086	9,086
Share premium		891,017	891,017	891,017
Capital redemption reserves		8	-	-
Capital reserves		(576,395)	(508,788)	(439,105)
Revenue reserve		(25,893)	(21,939)	(24,127)
Total equity shareholders' funds		297,815	369,376	436,871
Net asset value per share	8	32.80p	40.65p	48.08p

Cash Flow Statement

for the six months ended 30 June 2022 (unaudited)

	(Unaudited)	(Unaudited)	(Audited)
	For the six	For the six	For the
	months ended	months ended	year ended
	30 June	30 June	31 December
	2022	2021	2021
	£'000	£'000	£'000
Cash flows from operating activities
(Loss)/return before finance costs and taxation	(138,684)	52,170	119,762
Adjustments for:
Losses/(gains) on investments held at fair value through profit or loss	137,192	(54,554)	(124,583)
Increase in debtors	(76)	(33)	(145)
Decrease in creditors	(200)	(614)	(1,231)
Net cash flow from operating activities	(1,768)	(3,031)	(6,197)
Cash flows from investment activities
Purchases of investments	(13,853)	(14,774)	(61,199)
Proceeds from sales of investments	25,703	120,584	166,035
Net cash flow from investment activities	11,850	105,810	104,836
Cash flows from financing activities
Purchase of shares for cancellation	(159)	-	-
Finance costs	(271)	(835)	(909)
Bank loan drawn down	-	-	22,000
Repayment of bank loan	(22,000)	(107,032)	(107,032)
Net cash flow from financing activities	(22,430)	(107,867)	(85,941)
Change in cash and cash equivalents	(12,348)	(5,088)	12,698
Cash and cash equivalents at the beginning of the period	19,077	6,379	6,379
Cash and cash equivalents at the end of the period	6,729	1,291	19,077

Notes to the Accounts

1.  Financial Statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's independent auditor.

The figures and financial information for the year ended 31 December 2021 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditor which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting Policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, in particular with Financial Reporting Standard 104 "Interim Financial Reporting" and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in April 2021.

All of the Company's operations are of a continuing nature.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2021. In particular, the policy on valuation of investments is consistent with that detailed in note 1(b) to the accounts for the year ended 31 December 2021, presented on pages 64 and 65 of the annual report.

3.  (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	For the six	For the six	For the
	months ended	months ended	year ended
	30 June	30 June	31 December
	2022	2021	2021
	£'000	£'000	£'000
Revenue loss	(1,766)	(3,127)	(5,315)
Capital (loss)/return	(137,120)	54,434	124,117
Total (loss)/return	(138,886)	51,307	118,802
Weighted average number of shares in issue during the period	908,544,238	908,639,238	908,639,238
Revenue loss per share	(0.20)p	(0.34)p	(0.58)p
Capital (loss)/return per share	(15.09)p	5.99p	13.66p
Total basic and diluted (loss)/return per share	(15.29)p	5.65p	13.08p

The basic and diluted (loss)/return per share is the same because there are no dilutive instruments in issue.

4.  Investments held at fair value through profit or loss

(a)  Movement in investments

	(Unaudited)	(Unaudited)	(Audited)
	For the six	For the six	For the
	months ended	months ended	year ended
	30 June	30 June	31 December
	2022	2021	2021
	£'000	£'000	£'000
Opening book cost	622,857	759,715	759,715
Opening investment holding losses	(181,958)	(338,563)	(338,563)
Opening fair value	440,899	421,152	421,152
Purchases at cost	13,853	42,255	88,680
Sales proceeds	(25,703)	(176,008)	(193,516)
(Losses)/gains on investments held at fair value through profit or loss	(137,192)	54,554	124,583
Closing fair value	291,857	341,953	440,899
Closing book cost	604,401	615,744	622,857
Closing investment holding losses	(312,544)	(273,791)	(181,958)
Closing fair value	291,857	341,953	440,899

The Company received £25,703,000 (30 June 2021: £176,008,000; 31 December 2021: £193,516,000) from investments sold in the period. The book cost of the investments when they were purchased was £32,309,000 (30 June 2021: £186,226,000; 31 December 2021: £225,538,000). These investments have been revalued over time and, until they were sold, any unrealised gains/losses were included in the fair value of the investments.

Purchases and sales for the period ended 30 June 2021 and the year ended 31 December 2021, include non-cash transactions in relation to Athenex and Kuur.

(b)  Unquoted investments, including investments quoted in inactive markets

Material revaluations of unquoted investments during the period (unaudited)

	Opening		Closing
	valuation at		valuation at
	31 December	Valuation	30 June
	20211	adjustment	2022
	£'000	£'000	£'000
Rutherford Health	21,312	(21,312)	-
Atom Bank	46,209	(8,119)	38,090

¹ Based on the closing holding at opening prices.

Material disposals of unquoted investments during the period

				Gain
				based on
		Carrying		carrying
		value at		value at
		31 December	Sales	31 December
	Book cost	2021	Proceeds	2021
	£'000	£'000	£'000	£'000
Seedrs	10,470	11,271	12,000	729

5.  Creditors: amounts falling due within one year

	(Unaudited)	(Unaudited)	(Audited)
	30 June	30 June	31 December
	2022	2021	2021
	£'000	£'000	£'000
Other creditors and accruals	1,018	1,870	1,276
	1,018	1,870	1,276

The directors consider that the carrying amount of creditors falling due within one year approximates to their fair value.

6.  Creditors: amounts falling due after more than one year

	(Unaudited)	(Unaudited)	(Audited)
	30 June	30 June	31 December
	2022	2021	2021
	£'000	£'000	£'000
Bank loan	-	-	22,000
	-	-	22,000

The bank loan at 31 December 2021 was drawn on the Company's facility with The Northern Trust Company, and was fully repaid during the period.

7.  Called-up share capital

	(Unaudited)	(Unaudited)	(Audited)
	For the six	For the six	For the
	months ended	months ended	year ended
	30 June	30 June	31 December
	2022	2021	2021
	£'000	£'000	£'000
Ordinary shares allotted, called up and fully paid:
Ordinary shares of 1p each:
Opening balance of 908,639,238 (30 June 2021 and 31 December 2021: same) shares	9,086	9,086	9,086
770,000 (30 June 2021 and 31 December 2021: nil) shares bought back and cancelled	(8)	-	-
Closing balance of 907,869,238 (30 June 2021 and 31 December 2021: 908,639,238) shares	9,078	9,086	9,086

8.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	30 June	30 June	31 December
	2022	2021	2021
Net assets attributable to shareholders (£'000)	297,815	369,376	436,871
Shares in issue at the period end	907,869,238	908,639,238	908,639,238
Net asset value per share	32.80p	40.65p	48.08p

9.  Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.

FRS 102 requires that financial instruments held at fair value are categorised into a hierarchy consisting of the three levels below. A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

The Company's investment portfolio was categorised as follows:

			30 June 2022 (unaudited)
			Level 1	Level 2	Level 3	Total
			£'000	£'000	£'000	£'000
Investments in equities	- quoted		127,741	-	-	127,741
	- unquoted		-	-	164,116	164,116
Total			127,741	-	164,116	291,857

During the period ended 30 June 2022, BenevolentAI £39,634,000 transferred from Level 3 to Level 1 following its IPO on Euronext Amsterdam Stock Exchange.

		30 June 2021 (unaudited)
		Level 1	Level 2	Level 3	Total
		£'000	£'000	£'000	£'000
Investments in equities	- quoted	53,953	-	33,889	87,842
	- unquoted	-	-	254,111	254,111
Total		53,953	-	288,000	341,953

During the period ended 30 June 2021, Immunocore £23,410,000 transferred from Level 3 to Level 1 following its IPO on the NASDAQ.

		31 December 2021 (audited)
		Level 1	Level 2	Level 3	Total
		£'000	£'000	£'000	£'000
Investments in equities	- quoted	222,031	-	21,312	243,343
	- unquoted	-	-	197,556	197,556
Total		222,031	-	218,868	440,899

During the year ended 31 December 2021, Immunocore £21,044,000 and Oxford Nanopore £162,641,000 transferred from Level 3 to Level 1 following their IPOs on the NASDAQ and London Stock Exchange respectively.

10.  Events after the interim date that have not been reflected in the financial statements for the interim period

There has been a sharp fall in the market price of BenevolentAI after the interim date. At 27 September, the price had fallen to Eur 4.18 per share, valuing the Company's holding at £17,740,000. This is £14,994,000 lower than the valuation included in these interim accounts and would reduce the Company's NAV per share by 1.65p.

The directors have evaluated the period since the interim date and have not noted any other events which have not been reflected in the financial statements.

 

END

 

 

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