Annual Financial Report
Strategic Equity Capital plc
Report & Financial Statements
for the year ended 30 June 2011
The Full Annual Report and Accounts can be accessed via the
Company's website at: www.strategicequitycapital.com or by contacting the
Company Secretary by telephone on 01392 412122.
Investment Objective
The investment objective of the Company is to achieve absolute
returns (i.e. growth in the value of investments) rather than relative returns
(i.e. attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
The Company's investment policy can be found in the Report of the
Directors in the Report of Financial Statements for the year ended
30 June 2011.
Investment Manager's Strategy
The Investment Manager, SVG Investment Managers Limited ("SVGIM"),
employs a strategy to invest in publicly quoted companies which create value
through strategic, operational and management change. SVGIM follows a practice
of constructive corporate engagement and aims to work with management teams in
order to enhance shareholder value.
A more detailed explanation can be found in the
Investment Manager's Report below.
Shareholder information
Financial calendar
Company's year-end 30 June
Annual results announced September
Annual General Meeting November
Company's half-year 31 December
Half yearly results February
announced
Share price
The Company's Ordinary shares are listed on the London Stock
Exchange. The mid-market price is quoted daily in the Financial Times under
`Investment Companies'.
Share dealing
Shares can be traded through your usual stockbroker.
Share register enquiries
The register for the Ordinary shares is maintained by Computershare
Investor Services plc ("Registrar"). In the event of queries regarding your
holding, please contact the Registrar on 0870 707 1285. Changes of name and/or
address must be notified in writing to the Registrar.
NAV
The Company's net asset value is announced weekly to the
London Stock Exchange.
Website
Further information on the Company can be accessed via the
Company's website
www.strategicequitycapital.com
Capital structure
Issued share capital
70,122,203 Ordinary shares of 10p each: £7,012,220.
At 30 June 2011 the issued share capital of the Company was
70,122,203 Ordinary shares. All shares have equal voting rights.
Financial summary
At 30 June
%
2011 2010 change
Performance
Total return¹ 55.35%
Capital return
Net asset value (statutory) per 103.35p 66.72p 54.90%
Ordinary share
Ordinary share price (mid-market) 93.00p 51.25p 81.46%
Discount of Ordinary share price to 10.01% 23.19%
net asset value
Total assets (£'000) 73,877 51,403 43.72%
Equity shareholders' funds (£'000) 72,470 51,222 41.48%
Total expense ratio (TER)² 1.52% 2.09%
Revenue return per Ordinary share 0.40p 0.31p
Dividend yield 0.44% 0.60%
Proposed final dividend for year 0.44p 0.30p 46.67%
Ordinary shares in issue with voting
rights (excluding shares held in
treasury) 70,122,203 6,770,474 (8.66%)
Ordinary shares held in treasury - 3,045,500 (100.00%)
Year's Highs/Lows High Low
Net asset value per Ordinary share 104.51p 65.69p
Ordinary share price 93.00p 51.00p
Discount of Ordinary share price to
net asset value 27.06% 9.00%
¹Total return is the increase per share in net asset value plus
dividends paid.
²Total expense ratio calculated as the total expenses divided by
the average shareholders' equity.
Chairman's report
Introduction
I am pleased to report that the Company made good progress in all areas over
the past twelve months to 30 June 2011, delivering strong and market beating performance,
narrowing its discount, reducing its undrawn commitments to unlisted investments and
improving its size and liquidity.
The Manager's focus on undervalued companies with strong competitive positions
in growing niche markets worked well. The portfolio also benefitted from its
high exposure to companies with a high proportion of overseas earnings and an
ability to pass on inflationary pressures.
It is pleasing to see that the same holdings which contributed to last year's
excellent performance have continued to deliver strong performance as the
corporate cycle has moved on.
Performance
As at 30 June 2011 the Company had net assets of £72.5 million (103.35p per
share). This represented an increase of 54.90% over the previous year, and was
driven by a combination of factors including: continued strong operating
performance from mature portfolio holdings, amplified by the Company's
investment in Strategic Recovery Fund II, and the absence of any "problem"
holdings within the portfolio.
The Company's performance per share was considerably better than that of
comparable markets; it outperformed the FTSE Small Cap Companies (ex
Investment Trust) Index by 30.8%. The Company's Net Asset Value ("NAV") per
share has cumulatively outperformed the comparable index over 5 years by 6.4%,
and over 3 years by 16.2%. This increasingly consistent performance partially
reflects the refinements made to the investment process following the
financial crisis, and has confirmed my confidence in the Company's investment
strategy.
Including dividends paid the Company delivered a total return to shareholders
of 82.05% over the 12 months (based on share price). The discount to NAV at
which the Company's shares trade narrowed again to an average of 19.14% over
the year, and ended the period at 10.01%, a three year low. It is worth noting
that the level of the discount has been narrowing consistently since the end
of 2009, and is now much more in line with other smaller company focused
investment trusts.
Discount Management
During the year, the Company bought back 6,648,271 shares, at an average
discount to NAV of 12.8%, at a cost of £5.96m. All these shares were
cancelled. The Board remains committed to buying back shares when it believes
that to do so is in the best interests of the shareholders generally, in
particular with a view to reducing the discount volatility and generating
modest enhancements to the NAV remaining shares.
However, as SVG Capital plc (the Investment Managers parent company) and
connected parties hold 26.13% of the issued share capital, the Board intends
to seek approval of the independent shareholders of a waiver of certain
obligations that may arise under the City Code as a result of further share
buybacks. It is expected that the General Meeting at which this approval will
be sought will be held immediately following the conclusion of this year's
Annual General Meeting and a separate circular will be sent to shareholders
regarding this meeting.
The Board
There were no changes to the Board over the period. The Board has operated
effectively during the period and I believe that the current composition of
the Board is appropriate.
Investment Manager
The Manager has agreed to provide the Company with protective notice in the
event of the shareholders of the Company voting against its continuation.
As adopted by shareholders at the General Meeting in November 2010, the new
management fee arrangements are in place and are set out below in the Report
of the Directors.
Banking Arrangements
The Company currently has a £5.0 million revolving facility with RBS which
expires on 14 July 2012. This facility is currently unutilised. Following the
better than expected reduction in undrawn commitments to unlisted investments,
the Board has authorised the Manager to use this facility to increase
investment flexibility over the short term.
Dividend
The Directors continue to expect that returns for shareholders will derive
primarily from the capital appreciation of the shares rather than from
dividends. The Board is proposing a final dividend of 0.44p per Ordinary share
for the year ended 30 June 2011, payable on 17 November 2011 to holders on the
register as at 21 October 2011.
AGM
The AGM of the Company will be held at 11.30am on 8 November 2011 at the
offices of SVG Investment Managers Limited, 61 Aldwych London WC2B 4AE.
Continuation Vote
Shareholders have the opportunity to vote on an ordinary resolution to
continue the Company as an investment trust at each annual general meeting. As
the Company met its annual investment performance and discount tests (having
substantially outperformed, on a NAV total return basis, the FTSE SmallCap (ex
Investment Companies) Index over the three years ended 30 June 2011 and with
the average discount at which the Company's shares traded over the three
months to 30 June 2011 being narrower than that of the UK Smaller Companies
sector over that period), the Board is recommending shareholders to vote in
favour of the continuation Resolution. If that Resolution is not passed, the
Company will be entitled to give notice terminating the Investment Manager's
appointment without any compensation being payable to the Investment Manager
in lieu of notice.
Marketing Activities
The Manager and the Company's broker continue to work together to broaden the
shareholder base. I am optimistic that the Company's narrowing discount,
improving long term track record and increased size should all help to achieve
this goal over the coming year.
Outlook
The Board shares the Manager's belief that the prospects for the Company are
good. This reflects the attractive valuation of the portfolio and the
Manager's increasingly successful track record of identifying undervalued
companies with the potential to experience significant uplifts through
strategic, operational and management change.
J Hodson
21 September 2011
Directors
The Directors as at the date of this report and who served during
the year, all of whom are non-executive, are as follows:
John Hodson (Chairman)
Sir Clive Thompson (Deputy Chairman)
John Cornish
Michael Phillips
Ian Dighé
Investment Manager's report
Investment Strategy
Our strategy is to invest in publicly quoted companies which will create value
through strategic, operational and management change. We follow a practice of
constructive corporate engagement and aim to work with management teams in
order to enhance shareholder value. We aim to build a consensus with other
stakeholders, and prefer to work alongside like-minded co-investors as
leaders, followers or supporters. We try to avoid confrontation with investee
companies as we believe that there is strong evidence that overtly hostile
activism generally generates poor returns for investors.
We are long-term investors; we typically aim to hold companies for the
duration of three year investment plans that include an entry and exit
strategy and a clearly identified route to value creation. The duration of
these plans can be shortened by transactional activity or lengthened by
adverse economic conditions. Before investing we undertake an extensive due
diligence process, assessing market conditions, management and stakeholders.
Our investments are underpinned by valuations, which we derive using private
equity-based techniques. These include a focus on cash flows, the potential
value of the company to trade or financial buyers and potentially beneficial
changes in capital structure over the investment period.
Our typical investee company has a market capitalisation of under £150m at the
time of initial investment. We believe that smaller companies provide the
greatest opportunity for our investment style as they are relatively
under-researched, often have more limited resources, and frequently can be
more attractively valued.
We believe that this approach, if properly executed, will generate favourable
risk adjusted returns for shareholders over the long term.
Market Background
The period initially saw a strong recovery in UK stock markets led by cyclical
sectors in the second half of 2010. This was followed by a mild sell-off in
the first half of 2011 driven primarily by macroeconomic concerns and a
plethora of disruptive world events including the earthquake in Japan and the
"Arab Spring" uprisings. On balance, the corporate outlook remained positive,
with continued earnings growth and debt reduction. Rather the threat of
sovereign debt defaults in peripheral Europe, and then the dawning realisation
that printing money and negative real interest rates would prolong rather than
solve the debt crisis, led to risk aversion.
Smaller companies marginally underperformed the FTSE 100 index by 1% over the
twelve months. Once again, the best performing segment of the market was the
FTSE 250 index, to which the Company has little exposure. This may have been
driven higher by larger institutional investors attempting to chase smaller
company returns in relatively liquid companies.
One of the consequences of this macro uncertainty was very subdued M&A
activity in the UK market. Both takeovers of public companies and secondary
fundraisings were few and far between. In addition liquidity among most
markets seized up at the beginning of 2011, with trading volumes among
FTSE 100 and 250 companies materially lower than prior years. Although smaller
companies also suffered from poor liquidity from March until May, June volumes
rebounded somewhat.
Performance
Performance over the period was driven principally by stock specific factors,
with self help and recovery situations driving the growth in net asset value.
Within the context of our corporate engagement strategy the tactic of
investing in highly cash generative, niche market leaders, with a high
proportion of overseas earnings and avoiding companies with exposure to UK
public or consumer spending has worked well again.
High market volatility and low volumes combined with substantial changes to
forecast earnings and ratings to produce some very large share price movements
over the period. E2V was the standout performer, delivering a total return of
170% as the results of its restructuring combined with a recovery in end
markets led to substantial earnings improvement and a return to the dividend
list. Gooch & Housego delivered a return in excess of 100% before the position
was exited. RPC, having completed its three year restructuring programme, made
an attractive acquisition, returned 84% and entered the FTSE 250. Lavendon
returned 83% following significant reduction in its debt, and the announcement
of a nascent recovery in its end market and the commencement of an operational
review. Finally KCOM returned 81% after successfully completing its
restructuring programme and increased its dividend substantially.
Other holdings also achieved returns significantly in excess of the market.
4imprint gained 40% across the year, driven by continued recovery and growth
in its US operation. Lupus also gained 40% on the back of continued debt
reduction, returning to the dividend list and evidence of market share gain in
flat, depressed markets. Pinewood gained 40% over the year, with the company
being successfully bid for by a major shareholder in June 2011.
Mecom and Allocate returned 27% and 4% respectively over the year. Mecom's
operational and financial turnaround has continued to meet and exceed our
expectations except for a recovery in the top line in the Netherlands. It also
signalled a return to the dividend list in the autumn of 2011. The share price
has proven to be volatile and often driven, incorrectly in our view, by
sentiment towards the UK newspaper sector. We believe that it remains grossly
undervalued. Allocate started the year well with a significant contract win in
the Australian market. Disruption among its NHS customer base led investor
sentiment lower during the Spring of 2011, but the company's trading update in
June confirmed it had achieved its forecasts.
On the negative side Wilmington fell 19% following a profit warning driven by
a false recovery in its training division, and Statpro which returned -2%
across the year as the market digested the implications of the decision to
invest substantial capital into the new SaaS based product.
Top 5 contributors to performance
Company Valuation Period attribution
£'000 %
E2V Technologies plc 8,406 13.9
Strategic Recovery Fund II 11,807 8.5
RPC Group plc 6,351 8.3
KCOM Group plc 6,336 6.4
Lavendon Group plc 5,970 5.1
Bottom 5 contributors to performance
Company Valuation Period attribution
£'000 %
Wilmington Group plc 2,149 (0.9)
Redstone plc - (0.2)
Western & Oriental - (0.1)
Kewill plc 2,560 -
CVS Group plc 1,503 0.3
Once again, there were far fewer negative contributors to performance than
positives over the period, with Wilmington being the only material
disappointment over the year. Redstone and Western & Oriental were legacy
holdings exited during the year. Both Kewill and CVS are relatively new
investments and we anticipate steady value creation over the usual investment
horizon.
Dealing activity
The level of portfolio activity was in line with our stated investment
strategy of three year holding periods with £21.9m of disposals (excluding
distributions from unlisted investments) in the period representing around
32.8% of the weighted average NAV. In addition £545k of net distributions were
received from unlisted investments. £16.1m of purchases were made (excluding
purchases of unlisted investments) with 42% of purchases representing money
into new investments, the remainder being additions to existing holdings.
The primary sources of proceeds over the period were from the full exit of
successful mature holdings, top slicing strong performers and continued
clearing out of the tail of the portfolio. Full successful exits were made in
Gooch & Housego (£2.9m), Spirent (£2.6m), and Intec. All three investments
achieved in excess of 2x cash multiples, with Gooch generating an IRR of 283%.
The position in Pinewood was realised following the takeover bid, raising
£2.3m. Strong performances from RPC, KCOM and E2V necessitated some top
slicing, raising £4.7m, £2.3m and £2.5m respectively. A run up in the Statpro
share price in the Spring enabled a further realisation of £1.3m. The
longstanding position in Thorntons was reduced in the run up to Christmas due
to weather related trading concerns, realising £1.8m. Finally, small legacy
positions in Filtronic, Redstone and Western & Oriental were fully exited.
We deployed the proceeds into building the existing holdings and establishing
small to medium weights in three new investments. Existing positions in Lupus
and Mecom were taken to full weights, accounting for purchases of £3.4m and
£2.4m respectively. £3m was deployed funding the RPC rights issue and
subsequent modest opportunistic top ups and modest top ups were made in
Allocate and KCOM. The background to these investments has been detailed in
prior reporting periods. £6.8m was deployed in new investments, mainly
Wilmington (£2.9m), Kewill (£2.5m) and CVS (£1.3m), all being made through
market purchases.
Wilmington is a provider of specialist business information and training
services. The Company's investment was predicated on a stable core earnings
base from the business information division and initial signs that the
depressed legal training business had begun to recover in the first few months
of 2011. This recovery has proven to be a false dawn. In addition the company
has subsequently experienced faster than anticipated decline in small but
profitable legacy print products, which has necessitated accelerating spend to
transition the products to a digital format. Whilst the business remains
strongly cash generative and offers a dividend yield of more than 6%, we are
examining whether more attractive medium term returns exist elsewhere.
Kewill is a global provider of niche software and technology solutions for
supply chain and logistics management. It is a market leader in a fragmented
market, has more than 40,000 users worldwide many of whom have been customers
for many years. It is strongly cash generative and has sound management. The
board has been refreshed during the past year and is focused on
re-invigorating growth. The valuation is highly undemanding given the quality
of the company and scope exists for accelerating shareholder returns.
CVS is the UK's leading provider of veterinary services. CVS
operates more than 220 practices, enjoying a market share of 12% and a
relative market share of 3x larger than the next largest competitor. In
addition, it operates its own crematorium and diagnostics services and sells
veterinary medicine and premium food products online. Following several years
of a debt funded consolidation strategy, it experienced negative like for like
sales growth in the first half of 2010. This necessitated two profit warnings,
and led to a substantial fall in the share price. The Company's investment at
this point was predicated on like for like sales stabilising, the strong
underlying cash flows of the business, its attractive cash flow yield, and
scope to improve returns through operational consolidation of recent
acquisitions.
Our bar for new investments remains high in terms of asset quality, valuation
and risk adjusted prospective returns. We maintain an active pipeline of new
investments, executed both through market purchases and in addition through
secondary fundraisings. The latter have been few and far between of late, but
we anticipate a gradual pick up over the next year and remain actively engaged
with the corporate broking community to ensure we have sufficient time to
conduct due diligence on the best potential opportunities.
Portfolio Review
The portfolio remained highly focused, with a total of 18 holdings and with
the top 10 holdings accounting for 86.8% of the portfolio at the end of the
financial period. The portfolio remains predominantly invested in quoted
equities, however the percentage of the portfolio invested in unlisted
securities (including SRF II) changed from 16.5% to 19.3% at the end of the
period due to their strong performance. 3.2% of the net assets was invested in
cash at the period end.
Top 10 holdings
A summary of the top 10 investments at 30 June 2011, which
represented approximately 85.4% of net assets (2010: 76.5%), is given below:
2011 2010
Date of % of % of % of
Sector first Cost Valuation invested invested net
Company Classification investment £'000 £'000 portfolio portfolio assets
Strategic Recovery Fund II Unquoted
investments Jul 2009 4,695 11,807 16.6 13.9 16.3
E2V Technologies Technology Oct 2009 3,076 8,406 11.8 8.5 11.6
Lupus Capital Manufacturing Apr 2007 5,086 6,597 9.2 4.4 9.1
RPC Group Manufacturing Feb 2007 3,489 6,351 8.9 9.8 8.8
KCOM group Telecoms May 2007 2,959 6,336 8.9 9.0 8.7
Lavendon Group Support Nov 2009 3,991 5,970 8.4 6.6 8.2
services
Mecom Group Media Aug 2005 7,482 5,570 7.8 5.1 7.7
4imprint Group Support Feb 2006 4,885 5,200 7.3 7.9 7.2
services
Allocate Software Technology Dec 2009 2,485 3,096 4.3 5.0 4.3
Kewill Technology Mar 2011 2,507 2,560 3.6 0.0 3.5
Sector spilt Percentage
Technology 21.6
Unquoted investments 19.0
Manufacturing 18.3
Support services 16.7
Media 11.4
Telecoms 8.7
Retail 2.7
Net cash 1.6
Size split Percentage
(by market capitalisation)
£100m-£300m 37.3
<£100m 24.6
Unquoted 19.0
>£500m 8.8
£300m-£500m 8.7
Net cash 1.6
Portfolio (excl Investment
(money weighted) Companies) Index
Price/Earnings ratio FY1 11.3X 12.4X
Dividend yield 2.9% 3.0%
Price/Book ratio 1.9X 0.5X
Prices/Sales ratio 0.8X 0.5X
SVGIM cash flow yield 14.2% N/A
Forecast earnings growth (FY1) 7.3% 8.1%
Net debt to EBITDA 1.3X 1.6X
Source: Factset Portfolio Analysis System
Unlisted investments
The investment in SRF II has progressed well in terms of distributions
received and the likely lifespan of the fund which is better than expected at
the time of its acquisition. The company has received additional distributions
of £1.0m from SRF II and £0.5m from Vintage Mizuho I, bringing the total
distributions from unlisted investments to £1.5m for the year, slightly below
the £1.7m calls made for the SRF II.
The SRF II investment period ended in June 2011 and the fund is now a
distributing vehicle. The manager continues to anticipate the fund will be
fully returned by the end of June 2013. The outstanding commitments relating
to Vintage is £2.0m and the manager has communicated that it does not expect
to make any further net draw downs.
Top 10 Investee Company Review
4imprint Group is the fourth largest distributor of promotional products in
the world with an international network of companies in the UK, USA, Hong Kong
and Europe. We have been involved with the company since a change of
management in 2003. The company has benefitted recently from material upgrades
to forecast earnings. The US business has continued to grow strongly and we
believe its value is significantly in excess of the value of the whole
company. Funds managed by SVGIM currently hold approximately 13% of the
company's equity.
Allocate Software is the leading workforce optimisation software applications
provider for global organisations with large, multi-skilled workforces. It is
the clear European market leader in the healthcare vertical market, where the
compelling return on investment for clients is driving significant growth. It
is also the clear lead provider of optimisation software for the global
offshore and defence markets. A strong management team is focused on
delivering continued profitable growth, maximising the commercial potential of
the product suite. SVG became a major shareholder as part of a placing to fund
the acquisition of its Nordic equivalent, Timecare AB, in December 2009. The
company has subsequently made two further acquisitions of complimentary
businesses - Dynamic Change in the UK and RosterOn in Australia. Funds managed
by SVGIM currently hold approximately 7% of the company's equity.
E2V Technologies is a global market leader in the design and manufacture of
specialist electronic components and low volume/high value and high
reliability semiconductors, predominantly for the medical, aerospace, defence
and industrial markets. An ill-timed acquisition in September 2008 funded by
debt left the balance sheet of the business over-stretched as the economic
downturn began. A new finance director, well known to SVGIM, was appointed in
May 2009. The management team has acted to raise equity to pay down debt as
well as restructure the UK and French cost base, a process which is now
largely complete. The company made its initial investment during December 2009
via a placing and a deeply discounted rights issue to refinance the balance
sheet. The restructuring has been executed flawlessly and the company is
returning to a growth track. Funds managed by SVGIM currently hold
approximately 10% of the company's equity.
KCOM Group is a provider of communications solutions to businesses and the
public sector in the UK. It has a very strong regional consumer-based business
based around Hull in East Yorkshire. Following discussions instigated by
shareholders the company announced major changes to its management team in
November 2008. Following further consultation with shareholders the company
has implemented an innovative remuneration package that closely aligns
shareholders and management. Since then, the company has undergone a strategic
review and announced an important network sharing deal with BT Group. The
positive impact of these changes and the company's growth potential are
beginning to be appreciated by the market, helped by the increase in dividend
over the year of 150% and an ongoing dividend growth commitment of 10% p.a.
Funds managed by SVGIM currently hold approximately 5% of the company's
equity.
Kewill is a leading global provider of software and services to simplify
global trade and logistics. Its applications are used to reduce complexity and
automate manual processes across supply chains, in areas such as sourcing,
customs, compliance, transportation, storage, finance, visibility and
connectivity. The company was founded in 1972 and has sales activities in the
UK, Europe, North American and Asia. Kewill has generated consistent returns
to shareholders during the past eight years and its revenues proved resilient
during the credit crisis. Historic strong cashflows have been used to acquire
complementary businesses in its sectors. We believe that a recent refresh of
the Board, combined with a medium term improvement in the macro environment,
augur well for accelerating organic growth, continued operating margin
progression and shareholder value creation. M&A activity is a recurrent
feature in its sector and we believe it unlikely that Kewill will remain
independent in the long term. Funds managed by SVGIM currently hold
approximately 3% of the company's equity.
Lavendon Group is the market leader in the rental of powered aerial work
platforms in both Western Europe and the Gulf States. The group entered the
current downturn having over-spent on equipment, and with an overstretched
balance sheet. The nature of powered access equipment is such that capital
expenditures can be reduced materially for a significant amount of time
without detriment to the fleet. We believe that the company will generate
significant surplus cash flow over the next two years which will be used to
pay down debt and thus create value for equity shareholders. We invested in
the company via a fundraising in late 2009 which brought the company's debt
down to high but manageable levels, and have been actively engaged with the
board to help drive improved returns. Since 2009, the company has met its debt
reduction targets, announced an operational and strategy review and executive
board changes, including the appointment of an advisor to SVGIM as CEO of its
European operations. Funds managed by SVGIM currently hold approximately 10%
of the company's equity.
Lupus Capital is a leading international supplier of building products to the
door and window industry, and the world's leading manufacturer of marine
breakaway couplings. The company has significant operations in nine separate
countries across Europe, the Americas, Asia and Australasia. The building
products division enjoys clear market leadership in a number of niches, with a
highly diversified customer base, serving both the new build and RMI (repair
and maintenance) markets. The building products division has been adversely
impacted by the significant fall in residential construction activity
experienced since 2007, which, combined with a geared balance sheet, led to a
material fall in the share price through 2008. Despite end markets continuing
to trade at low ebb, the building products division generates double digit
margins with strong cash flow. The marine couplings business operates in a
structural growth market and is a very high quality asset. We began building
our stake in the company in late 2009 following the appointment of a new
chairman, who has subsequently reconstituted the executive management and
non-executive board. Since then, strong cashflows have reduced the debt burden
substantially. We believe the company trades at a material discount to its sum
of parts valuation and that there is substantial upside from a medium term
recovery in the end markets of the building products division. Funds managed
by SVGIM currently hold approximately 6% of the company's equity.
Mecom Group is a European media business. The group owns over 300 printed
titles and over 200 websites in its four divisions, with substantial
operations in the Netherlands, Denmark, Norway and Poland, generating
readership of 23 million per week and attracting 32 million unique website
users per month. The company has undergone substantial corporate restructuring
in the last two years having over-extended its balance sheet through
acquisitions in the run up to the recession. We have engaged extensively with
the company, investigating the progress of its turn around, assisting it with
investor relations and lobbying on its behalf for greater coverage by the
analyst community. Having originally invested in 2005 and fully realised the
cost of that investment before the recession struck, we have revisited the
investment case and added to our holding, selectively building it to a high
weight over the past 12 months. We believe that the company is worth multiples
of its current share price based on precedent transactions and should create
substantial value through de-gearing and dividends. Funds managed by SVGIM
currently hold approximately 5% of the company's equity.
RPC Group is Europe's leading manufacturer of rigid plastic packaging.
Following lobbying from SVGIM and another shareholder acting in concert the
group has initiated a strategic and operational review and made substantial
changes to its board. The CEO has performed well against RPC's new objectives,
leading to a significant reduction in group debt and ongoing focus on
improving return on invested capital. As the restructuring ended, RPC acquired
its smaller Scandinavian competitor, Superfos, funded by a mixture of debt and
new equity. The Superfos transaction has the scope to deliver significant
shareholder value through hard synergies, underpinning double digit earnings
growth for the next three years. While this is a longer term investment we
believe that there is still more for the taking, particularly when taking into
account the scope for more favourable raw materials pricing. Funds managed by
SVGIM currently hold approximately 4% of the company's equity.
Wilmington provides information and training services to professional business
customers in the legal services, financial services and healthcare sectors as
well as pockets of the public sector. The company's business information
division provides a number of must-have products to its client base and enjoys
significant recurring revenues and strong cashflow. Digital delivery accounts
for 75% of sales, and is forecast to account for virtually all information
sales within 3 years. Demand for Wilmington's legal training services fell
materially in the wake of the financial crisis. The core customer base for
these services includes small and medium sized legal firms which have come
under financial pressure as conveyancing and SME M&A volumes have fallen to
almost unprecedented lows. A cyclical recovery is likely here, although may
take longer than we had originally anticipated. Nevertheless, the company
generates substantial cashflows, pays a generous well covered dividend, and
has grown overseas sales so that they now represent a quarter of sales. Funds
managed by SVGIM currently hold approximately 4% of the company's equity.
Outlook
Until the impact of the global financial crisis is fully worked through, and a
solution to the currently high levels of Government indebtedness is found,
global stock markets are likely to remain turbulent. Yet swings in markets and
tough economic conditions should not distract investors from the excellent
progress that public companies in the UK have made in the past three years.
Levels of corporate indebtedness are reaching 20 year lows and operating
margins are at record high levels. In addition the attractive governance and
commercial benefits of a UK Listing mean that the UK stock market has now
overtaken the Japanese as the second largest in the world, and that UK listed
companies have by far the highest proportion of non-domestic earnings of any
major market.
For stronger, quality companies, the outlook for continued strong share price
performance continues to look positive. The market continues to project double
digit earnings growth and in excess of 3% dividend yield. Many companies have
significant flexibility to grow dividends, buy back shares or initiate
value-enhancing M&A. Historically, the Company has benefitted significantly
from M&A as both trade and private equity investors' acquisition criteria
often match our investment criteria and focus. The lack of trading volumes
among larger companies, a seizure in IPOs, a lack of secondary fundraisings
and very limited M&A placed immense commercial pressure on the brokerage
houses. This should ultimately lead to less market efficiency, and increases
opportunities for the Company to add value through its investment strategy.
SVG Investment Managers Limited
21 September 2011
All statements of opinion and/or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent SVG Investment Managers Limited's own
assessment and interpretation of information available to it at the date of
this report. As a result of various risks and uncertainties, actual events or
results may differ materially from such statements, views, projections or
forecasts. No representation is made or assurance given that such statements,
views, projections or forecasts are correct or that the objectives of the
Company will be achieved.
Extracts from the Report of the Directors
The statement on corporate governance forms part of the Report of
the Directors.
The Directors present their report and financial statements for the
year ended 30 June 2011.
The Company has been incorporated with an indefinite life. The
Company is registered in England with number 5448627.
Business Review
The Business Review should be read in conjunction with the
Chairman's report and the Investment Manager's report above, and the statement
on corporate governance below.
The purpose of the Business Review is to provide an overview of the
business of the Company by:
- Analysing development and performance using appropriate key
performance indicators ("KPI's").
- Outlining the principal risks and uncertainties affecting the
Company.
- Describing how the Company manages these risks.
- Explaining the future business plans of the Company.
- Setting out the Company's environmental, social and ethical
policies.
- Providing information about persons with whom the Company has
contractual or other arrangements which are essential to the business of the
Company.
- Outlining the main trends and factors likely to affect the future
development, performance and position of the Company's business.
Review of the Business of the Company
The principal activity of the Company is to conduct business as an
investment trust. The Company is currently an investment company in accordance
with the provisions of Section 833 of the Companies Act 2006. The Directors do
not envisage any change in the Company's activity in the future.
The Company has received approval from HM Revenue & Customs as an
investment trust under Section 1158 of the Corporation Tax Act 2010 for the
year ended 30 June 2011 ("Section 1158"). This approval is subject to there
being no subsequent enquiry under corporation tax self assessment. Under
Section 1158 companies can obtain `approved' status for tax purposes, meaning
that such companies do not pay capital gains tax on any profits arising on
disposals of their investments and in turn shareholders are only subject to
capital gains tax on the disposal of their shares in the investment trust. The
principal requirements for retaining `approved' status are: no single holding,
at the time of investment, may exceed 15% of gross assets; 70% of total income
must constitute investment income from securities; and no more than 15% of
such investment income may be retained.
It is the opinion of the Directors that the Company has directed
its affairs so as to enable it to continue to qualify for approval as an
investment trust for the year ended 30 June 2011 and the Company will continue
to seek approval under Section 1158 each year.
Investment objective
The investment objective of the Company is to achieve absolute
returns (i.e. growth in the value of investments) rather than relative returns
(i.e. attempting to out-perform selected indices) over a medium-term period,
principally through capital growth.
Investment policy
The Company invests primarily in equity and equity-linked
securities quoted on markets operated by the London Stock Exchange where the
Investment Manager believes the securities are undervalued and could benefit
from strategic, operational or management initiatives. The Company also has
the flexibility to invest up to 20% of the Company's gross assets at the time
of investment in securities quoted on other recognised exchanges.
The Company may meet all calls on its undrawn loan commitment to
Strategic Recovery Fund II ("SRF II") and to Vintage 1 Limited ("Vintage").
Subject thereto, until such time as all of the undrawn loan commitment to SRF
II has been called or, if earlier, SRF II's investment period has expired,
save for investments pursuant to its commitments to SRF II and Vintage, the
Company will not make any further investments in unquoted securities.
Thereafter, the Company may invest up to 20% of its gross assets at the time
of investment in unquoted securities, provided that, for the purpose of
calculating this limit, any undrawn commitment to Vintage which may still be
called shall be deemed to be an unquoted security.
The maximum investment in any single investee company will be no
more than 15% of the Company's investments at the time of investment.
The Company will not invest more than 10%, in aggregate, of the
value of its total assets at the time the investment is made in other listed
closed-end investment funds provided that this restriction does not apply to
investments in any such funds which themselves have published investment
policies to invest no more than 15% of their total assets in other listed
closed-end investment funds.
Other than as set out above, there are no specific restrictions on
concentration and diversification. The Board does expect the portfolio to be
relatively concentrated, with the majority of the value of investments
typically concentrated in the securities of 10 to 15 issuers across a range of
industries. There is also no specific restriction on the market capitalisation
of issues into which the Company will invest, although it is expected that the
majority of the investments by value will be invested in companies with a
market capitalisation of less than £300 million.
The Company's Articles of Association permit the Board to take on
borrowings of up to 25% of the net asset value at the time the borrowings are
incurred for investment purposes.
Investment Manager
The Investment Manager appointed by the Company is SVG Investment
Managers Limited ("SVGIM"). Established in 2002, the Public Equity Team of
SVGIM were one of the first in the UK to invest in publicly traded equities
using private equity techniques. The team now consists of five investment
professionals who combine a number of complimentary skill sets, including
corporate finance, traditional fund management, research and private equity
disciplines. SVGIM currently has funds under management of over £200m.
Performance
Over the year to 30 June 2011, net assets have increased by 41.5%
to £72.5 million (54.9% on a per share basis). Further information on the
performance of the Company's portfolio is contained in the Investment
Manager's report above.
The Company's investment objective is one of capital growth and it
is anticipated that returns for shareholders will derive primarily from
capital gains. The Board only intends to declare final dividends where
necessary. The Board recommends a final dividend of 0.44p (2010: 0.30p)
per Ordinary share, amounting to £309,000 (2010: £230,000).
Share capital
At the year end the Company's issued share capital comprised
79,815,974 Ordinary shares, with 3,045,500 shares held in treasury (2010:
79,815,974 in issue and 3,045,500 held in treasury) representing 3.82% of the
shares in issue). At general meetings of the Company, the holders of Ordinary
shares are entitled to one vote for every share held.
On 25 February 2011 the Company cancelled its entire holding of
3,045,500 Ordinary shares that were held in Treasury.
Performance Analysis using Key Performance Indicators
At quarterly Board meetings the Directors consider a number of key
performance indicators to assess the Company's success in achieving its
objective, principally: the NAV per Ordinary share, the movement in the
Company's share price, the discount of the share price in relation to the NAV
and the total expense ratio.
- The Company's Statement of comprehensive income is set out below.
- The NAV per Ordinary share at 30 June 2011 was 103.35p (2010:66.72p).
- The mid market share price at 30 June 2011 was 93.00p (2010:51.25p).
- The discount to NAV at 30 June 2011 was 10.01% (2010: 23.19%).
- The total expense ratio at 30 June 2011 was 1.52% (2010: 2.09%).
Principal Risks and Uncertainties Associated with the Business
General
Changes in economic conditions (including, for example, interest
rates, foreign exchange rates and rates of inflation), industry conditions,
competition, changes in the law, political and diplomatic events and trends,
tax laws and other factors can substantially affect the value, adversely or
positively, of investments made by the Company and, therefore, the Company's
performance and prospects, in addition to the value of the shares.
Market risk
The Company's investments are subject to normal market fluctuations
and the risks inherent in the purchase, holding or selling of equity
securities and related instruments, and there can be no guarantee that the
quoted value of the Company's investments will be realisable in the event of a
sale.
Market price and discount volatility
The market price of the shares, as well as being affected by the
Company's net asset value, also takes into account prevailing interest rates,
supply and demand for the shares, market conditions and general investor
sentiment. As a result, the total market value of the shares in the Company
may vary considerably from the net asset value per share of the Company. In
addition, other factors such as a concentrated shareholder base may contribute
to infrequent trading or volatile share price movements.
Details of the discount management policy can be found in the
Chairman's report above. At the AGM held on 9 November 2010 the Company was
authorised to make market purchases of its own shares up to a limit of
11,507,894 Ordinary shares.
On 8 April 2011 the Company appointed Canaccord Genuity Limited to
manage a programme to buyback Ordinary shares within certain pre-set
parameters (the "buyback programme") which ended on 16 June 2011. During this
time a total of 3,950,000 representing 4.95% of Ordinary shares where
purchased for cancellation.
Subsequently a further 2,698,271 representing 3.38% of Ordinary
shares were purchased for cancellation making a total of 6,648,271
representing 8.33% of Ordinary shares cancelled during the course of the year
to 30 June 2011.
Reliance on the Investment Manager
The Investment Manager has the right to resign as the Investment
Manager under the Investment Management Agreement. The Investment Manager must
give 12 months written notice to the Company. Such a resignation could have an
adverse effect on the Company's performance and prospects.
Nature of investee companies
The investment portfolio is focused towards small and mid sized
companies. These companies may involve a higher degree of risk than larger
sized companies. In addition, while the investment policy of the Company is to
identify and invest in companies that the Investment Manager believes are
undervalued, there is a risk that the Investment Manager may be unable to
deliver on the strategic, management and operational initiatives identified at
the time of initial investment and, as such, companies may not prove to be
capable of generating additional value for shareholders and so would not
assist in achieving the Company's investment objective.
Concentrated portfolio
The majority of the Company's portfolio is invested in 10 to 15
companies operating in a number of industries, as was the initial intention.
As a result the portfolio could carry a higher degree of risk than a more
diversified portfolio.
As the Company's objective is to achieve absolute returns rather
than returns relative to a particular index or benchmark over a medium term
period, the portfolio is managed without comparison to any stockmarket index.
As a result there will be periods when the Company's performance will not
correlate with such indices.
Borrowing and gearing
At 30 June 2011, the Company had not drawn down under a revolving
credit facility of £5 million with The Royal Bank of Scotland. In accordance
with the current loan facility's covenant, gross borrowings shall not be more
than 20% of adjusted portfolio valuation at any time. The use of gearing can
magnify both gains and losses in the asset value of the Company, dependent on
the value of the portfolio at the time.
This is in accordance with the Company's Articles of Association
which permit borrowings of up to 25% of the net asset value at the time the
borrowings are incurred.
Unlisted investments
The Company may invest a proportion of its gross assets in
companies that are not listed or admitted to trading upon any recognised stock
exchange. These investments may be illiquid and difficult to realise and more
volatile than investments of larger, longer-established businesses. The SRF II
valuation is updated monthly and other unlisted investments are updated at
least once every six months.
Overseas investments
The Company may invest up to 20% of its gross assets in companies
listed or traded on recognised stock exchanges other than the London Stock
Exchange. In any instances where the Company does not hedge its currency
exposure, the movement of exchange rates between sterling and any other
currencies in which the Company's investments are denominated may have a
material effect, unfavourable as well as favourable, on the return otherwise
experienced on the investments made by the Company. Although the Investment
Manager will seek to manage any foreign exchange exposure in relation to the
Company, there is no assurance that this can be performed effectively.
Currency hedging may force the Investment Manager to realise underlying
investments as well as affecting the overall value of the portfolio and the
net asset value per share.
Movements in the foreign exchange rate between sterling and the
currency applicable to a particular shareholder may have an impact upon that
shareholder's returns in its own currency of account.
Debt investments
Any debt securities that may be held by the Company will be
affected by any changes to interest rates.
Future trends
Both the Chairman's report and the Investment Manager's report
above contain `Outlook' sections setting out their view of the future.
Charges against capital
The Company's current accounting policy is to charge its
operational costs to revenue, with the exception of any performance fee, which
will be charged wholly to capital. In the event of the Company making a
revenue loss or becoming liable to a performance fee, it may need to liquidate
some of its investments to pay operational costs or the performance fee or
both.
Regulatory risks
A breach of Companies Act regulations and FSA/London Stock Exchange
rules may result in the Company being liable to fines or the suspension of the
Company from the London Stock Exchange.
The Board, with its advisers, monitors the Company's regulatory
obligations both on an ongoing basis and at quarterly Board meetings.
If the Company did not comply with the provisions of Section 1158
of the Corporation Tax Act 2010 ("Section 1158"), it would lose investment
trust status and become subject to corporation tax on realised capital gains.
In order to minimise this risk, the Directors, the Investment Manager and the
Company Secretary monitor the Company's compliance with the key criteria of
Section 1158 on a monthly basis. At quarterly Board Meetings, compliance with
these provisions is discussed in detail between the Board, the Investment
Manager and the Company Secretary.
Financial risks
The financial situation of the Company is reviewed in detail at
each Board meeting, monitored and approved by the Board and the Audit
Committee.
Financial instruments
As part of its normal operations, the Company holds financial
assets and financial liabilities. Full details of the role of financial
instruments in the Company's operations are set out in Note 18 to the
financial statements.
Social, Environmental, Community and Employee Issues
The Company has no employees and the Board consists entirely of
non-executive Directors. As an investment trust, the Company has no direct
impact on the environment and as such has no policies in this area. In
carrying out its activities and in relationships with suppliers, the Company
aims to conduct itself responsibly, ethically and fairly.
Investment Management Agreement
The Company's investments are managed by SVG Investment Managers
Limited under an agreement dated 12 July 2005.
The Investment Manager's appointment is subject to termination on
12 months notice given at any time by either party.
There are no specific provisions contained within the Investment
Management Agreement relating to compensation payable in the event of
termination of the agreement other than entitlement to fees, including
performance fees, which would be payable within any notice period.
However, the Investment Management Agreement expressly permits, in
the event that a continuation resolution proposed at any annual general
meeting is not passed, the Company may give notice terminating the Investment
Manager's appointment without any compensation being payable to the Investment
Manager in lieu of any period of notice otherwise required under the
Investment Management Agreement.
At regular Board meetings the Directors keep under review the
performance of the Investment Manager. In the opinion of the Directors the
continuing appointment of SVG Investment Managers Limited as Investment
Manager is in the best interests of shareholders as a whole.
Investment Manager's fees
The Investment Manager is entitled to receive from the Company a basic fee
together, where applicable, with a performance fee.
Existing basic fee
Previously, a basic management fee was payable to the Investment Manager at
the annual rate of 1% of the adjusted NAV of the Company. In order to avoid
double charging of basic management fees payable to the Investment Manager by
the Company, the NAV of the Company is reduced by the aggregate of the value
of the Company's limited partnership interest in SRF II and the amount of the
Company's undrawn loan commitment to SRF II.
The basic management fee accrues weekly and is payable quarterly in arrears.
Following shareholder approval at a General Meeting held on 9 November 2010,
the basic fee is now the lower of (i) the basic fee as calculated under the
previous fee arrangements and (ii) 1.0% per annum of the Company's market capitalisation.
Performance fee arrangements
At a General Meeting held on 9 November 2010 shareholders approved a new
performance fee for the Investment Manager. The changes were made to better
align the respective interests of shareholders with the Investment Manager
with the parallel benefit of providing a better incentive for the Investment
Manager to continue to deliver a strong investment performance over the longer term.
The Company's performance is now measured over a rolling three year period
ending on 30 June in each year, the first performance period having commenced
on 1 July 2008 and ended on 30 June 2011.
The Company's performance is measured by comparing the NAV total return per
share over a performance period against the total return performance of the
FTSE SmallCap (ex. Investment Companies) Index (calculated before any accrual
for any performance fee to be paid in respect of the relevant performance
period) at the end of the relevant performance period exceeds both:
(i) the NAV per share at the beginning of the relevant performance period as
adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap
(ex. Investment Companies) Index (expressed as a percentage) and (b) 2.0% per
annum over the relevant performance period ("Benchmark NAV"); and
(ii) the high watermark (which is the highest NAV per share by reference to
which a performance fee was paid previously). Currently, the Investment Manager #
will be entitled to 15% of the excess over the higher of the Benchmark NAV
per share and the high watermark.
Payment of a performance fee that has been earned will be deferred to the
extent that the amount payable exceeds 1.75% per annum of the Company's NAV at the end of
the relevant performance period (amounts deferred will be payable when, and to
the extent that, following any later performance period(s) with respect to
which a performance fee is payable, it is possible to pay the deferred amounts
without causing that cap to be exceeded or the relevant NAV total return per share
to fall below the relevant Benchmark NAV per share and the relevant high watermark).
Administration Agreement
Under an agreement dated 12 July 2005, company secretarial services and the
general administration of the Company are undertaken by Capita Sinclair
Henderson Limited ("CSH") for a fee for the year to 30 June 2011 of £71,000.
The fee is subject to annual review based on the UK Retail Price Index. In the
event that there is an increase in the issued share capital of the company,
the fee will be adjusted upwards by agreement between the Company and CSH. The
agreement may be terminated by either party giving notice of not less than six months.
Payment of Suppliers
It is the Company's policy to obtain the best possible terms for all business
and therefore there is no consistent policy as to the terms used. The Company
agrees with its suppliers the terms on which business will take place and it
is our policy to abide by those terms. Trade creditors at 30 June 2011 were £Nil(2010: £Nil).
General Meetings
At a General Meeting held on 9 November 2010 Shareholders approved amendments
to the Investment Management Agreement as described above.
Going Concern
The Company's investment objective and investment policy, which are described
above and which are subject to regular Board monitoring processes, is designed
to ensure that the Company is invested mainly in liquid, listed securities.
The Company retains title to all assets held by its custodian, and has
agreements relating to its borrowing facilities with which it has complied
during the year. Cash is held only with banks approved and regularly reviewed
by the Investment Manager. Note 18 to the accounts sets out the financial risk
profile of the Company and indicates the effect on the assets and liabilities
of falls (and rises) in the value of securities and market rates of interest.
The Board made the decision last year to give shareholders the opportunity to
vote on an ordinary resolution to continue the Company at every AGM, provided
that the NAV total return per share over the three years ending on the
preceding 30 June has outperformed the total return on the FTSE SmallCap
(ex-Investment Companies) Index over the same period and the average discount
over the three months ending on the preceding 30 June is not wider than the
average discount of the UK smaller companies sector over that period.
The Directors believe, in the light of the above and the controls and review
processes noted above and bearing in mind the nature of the Company's business
and assets, that the Company has adequate resources to continue in operational
existence for the foreseeable future.
The Board is pleased to confirm that the Company met both of the performance
tests as at 30 June 2011. The Board is particularly pleased by the Company's
strong investment performance, with the NAV total return per share
outperforming the total return on the FTSE SmallCap (ex-Investment Companies)
Index by 16.2 percentage points over the three years ended 30 June 2011 (and
by 30.8 percentage points over the 12 months ended 30 June 2011, making the
company one of the best performers in its peer group over that period).
For this reason, the Board continues to adopt the going concern basis in
preparing the accounts.
Auditors
Ernst & Young LLP have expressed their willingness to continue in office as
Auditor and a resolution proposing their re-appointment will be submitted at
the forthcoming Annual General Meeting.
Company number 5448627.
On behalf of the Board
John Hodson
Chairman
21 September 2011
Statement of Directors' responsibilities in respect of the financial statements
An ongoing process, in accordance with the guidance supplied by the Financial
Reporting Council's Internal Control: Guidance for Directors on the Corporate
Governance Code, has been established for identifying, evaluating and managing
risks faced by the Company. This process is regularly reviewed by the Board.
The risk management process and systems of internal control are designed to
manage rather than eliminate the risk of failure to achieve the Company's
objectives. It should be recognised that such systems can only provide
reasonable, not absolute, assurance against material misstatement or loss.
Internal control assessment process
Risk assessment and the review of internal controls are undertaken by the
Board in the context of the Company's overall investment objective. The
review, which has been in place for the year ended 30 June 2011 and up to the
date of this report, covers the key business, operational, compliance and
financial risks facing the Company. In arriving at its judgement of what risks
the Company faces, the Board considers the Company's objectives in light of
the following factors:
- the nature and extent of risks which it regards as acceptable for the
Company to bear within its overall business objective;
- the threat of such risks becoming reality;
- the Company's ability to reduce the incidence and impact of risk on its
performance; and
- the cost to the Company and benefits related to the Company and third
parties of operating the relevant controls.
Against this backdrop the Board has split the review into four sections
reflecting the nature of the risks being addressed. The sections are as
follows:
- corporate strategy;
- published information and compliance with laws and regulations;
- relationship with service providers; and
- investment and business activities.
Given the nature of the Company's activities and the fact that most functions
are subcontracted, the Directors obtain information from key third party
suppliers regarding the controls operated by them. To enable the Board to make
an appropriate risk and control assessment, the information and assurances sought
from third parties include the following:
- details of the control environment;
- identification and evaluation of risks and control objectives;
- assessment of the communication procedures; and
- assessment of the control procedures.
The key procedures which have been established to provide effective internal
controls are as follows:
- investment management is provided by SVGIM. The Board is responsible for the
implementation of the overall investment policy and monitors the action of the
Investment Manager at regular meetings;
- the provision of administration, accounting and company secretarial duties
are the responsibility of CSH. The Audit Committee reviews the internal
controls report of CSH on an annual basis;
- custody of assets is undertaken by HSBC Global Services;
- the duties of investment management, accounting and custody of assets are
segregated. The procedures of the individual parties are designed to
complement one another;
- the non-executive Directors of the Company clearly define the duties and
responsibilities of their agents and advisers in the terms of their contracts.
The appointment of agents and advisers is conducted by the Board after
consideration of the quality of the parties involved; the Board monitors their
ongoing performance and contractual agreements;
- mandates for authorisation of investment transactions and expense payments
are set by the Board; and
- the Board reviews detailed financial information produced by the Investment
Manager and the Company Secretary on a regular basis.
The Company does not have an internal audit function. All of the Company's
management functions are delegated to independent third parties whose controls
are reviewed by the Board. It is therefore felt that there is no need for the
Company to have an internal audit function. However, this need is reviewed
annually.
Company Secretary
The Board has direct access to the advice and services of the Company
Secretary, CSH, which is responsible for ensuring that Board and Committee
procedures are followed and that applicable regulations are complied with. The
Company Secretary is also responsible to the Board for ensuring timely
delivery of the information and reports and that statutory obligations of the
Company are met.
Dialogue with shareholders
Communication with shareholders is given a high priority by both the Board and
the Manager. Shareholders can communicate with the Board by writing to the
Company Secretary at the address disclosed on page 4 of the Company's Annual
Report & Accounts. Major shareholders of the Company are offered the
opportunity to meet with the Investment Manager and the Directors in order to
ensure that their views are understood. All shareholders are encouraged to
attend and vote at the Annual General Meeting, during which the Board and the
Investment Manager are available to discuss issues affecting the Company and
shareholders have the opportunity to address questions to the Investment
Manager, the Board and the Chairmen of the Board's standing committees.
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable United Kingdom law and
those International Financial Reporting Standards ("IFRS") adopted by the
European Union ("EU").
Under Company law the Directors must not approve the financial statements
unless they are satisfied that they present fairly the financial position, the
financial performance and cash flows of the Company for that period. In
preparing these financial statements, the Directors are required to:
- select suitable accounting policies in accordance with IAS8: Accounting
Policies, Change in Accounting Estimates and Errors, and then apply them
consistently;
- present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the Company's
financial position and financial performance;
- state that the Company has complied with International Financial Reporting
Standards, subject to any material departures disclosed and explained in the
financial statements; and
- make judgements and estimates that are reasonable and prudent.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy, at any time, the financial position of the Company and to
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors, to the best of their knowledge, state that:
- the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and loss/profit
of the Company; and
- the Chairman's report, Investment Manager's report and Report of the
Directors include a fair review of the development and performance of the
business and the position of the Company together with a description of the
principal risks and uncertainties that it faces.
The Directors confirm that, so far as they are each aware, there is no
relevant audit information of which the Company's Auditor is unaware, and each
Director has taken all the steps that ought to have been taken as a Director
to make himself aware of any relevant audit information and to establish that
the Company's Auditor is aware of that information.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Non-Statutory Accounts
The financial information set out below does not constitute the Company's
statutory accounts for the period ended 30 June 2011 and 30 June 2010 but is
derived from those accounts. Statutory accounts for 2011 will be delivered to
the Registrar of Companies in due course. The Auditor has reported on those
accounts; their report was (i) unqualified, (ii) did not include a reference
to any matters to which the Auditor drew attention by way of emphasis without
qualifying their report and (ii) did not contain a statement under Section 498
(2) or (3) of the Companies Act 2006. The text of the Auditor's report can be
found in the Company's full Annual Report and Accounts at www.strategicequitycapital.com.
Statement of comprehensive income
for the year ended 30 June 2011
Year ended 30 June 2011 Year ended 30 June 2010
Revenue Capital Revenue Capital
return return Total return return Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Investments
Gains on investments at
fair value through profit or
loss - 27,131 27,131 - 12,674 12,674
Exchange losses - - - - (1) (1)
8 - 27,131 27,131 - 12,673 12,673
Income
Dividends 2 1,253 - 1,253 1,087 - 1,087
Interest 2 26 - 26 16 - 16
Underwriting commission 2 23 - 23 24 - 24
1,302 - 1,302 1,127 - 1,127
Expenses
Investment Manager's fee 3 (473) - (473) (396) - (396)
Other expenses 4 (469) - (469) (447) - (447)
Total expenses (942) - (942) (843) - (843)
Net return before
finance costs and
taxation 360 27,131 27,491 284 12,673 12,957
Finance costs (50) - (50)
Interest payable (50) - (50)
Total finance costs (50) - (50) (50) - (50)
Net return before
taxation 310 27,131 27,441 234 12,673 12,907
Taxation 5 - - - - - -
Net return and total
comprehensive income
for the year 310 27,131 27,441 234 12,673 12,907
pence pence pence pence pence pence
Return/ (loss) per
Ordinary share
Basic 7 0.40 35.60 36.00 0.31 16.72 17.03
The total column of this statement represents the Company's profit
and loss account. The supplementary revenue and capital return columns are
both prepared under guidance published by the Association of Investment
Companies ("AIC"). All items in the above statement derive from continuing
operations. No operations were acquired or discontinued during the year.
Statement of changes in equity
for the year ended 30 June 2011
Share Capital
Note Share premium Special Capital redemption Revenue
capital account reserve reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
For the year
ended
30 June 2011
1 July 2010 7,981 5,246 60,398 (23,014) - 611 51,222
Net return and
total
comprehensive
income for the
year - - - 27,131 - 310 27,441
Dividends paid 6 - - - - - (230) (230)
Treasury shares
cancelled (305) - - - 305 - -
Share buy backs (665) - (5,963) - 665 - (5,963)
30 June 2011 7,011 5,246 54,435 4,117 970 691 72,470
For the year
ended
30 June 2010
1 July 2009 7,262 2,070 60,398 (35,687) - 607 34,650
Net return and
total
comprehensive
income for the
year - - - 12,673 - 234 12,907
Dividends paid 6 - - - - - (230) (230)
New shares
issued in the year 719 3,176 - - - - 3,895
30 June 2010 7,981 5,246 60,398 (23,014) - 611 51,222
Balance sheet as at 30 June 2011
30 June 30 June
2011 2010
Note £'000 £'000
Non-current assets
Investments held at fair value
through profit or loss 8 71,336 49,859
Current assets
Other receivables 10 217 177
Cash and cash equivalents 15 2,324 1,367
2,541 1,544
Total assets 73,877 51,403
Current liabilities
Other payables 11 1,407 181
1,407 181
Total assets less current liabilities 72,470 51,222
Net assets 72,470 51,222
Capital and reserves:
Share capital 12 7,011 7,981
Share premium account 14 5,246 5,246
Special reserve 14 54,435 60,398
Capital reserve 14 4,117 (23,014)
Capital redemption reserve 14 970 -
Revenue reserve 14 691 611
Total shareholders' equity 72,470 51,222
pence pence
Net asset value per share
Basic 16 103.35 66.72
The financial statements were approved by the Board of Directors
and authorised for issue on 21 September 2011.
They were signed on its behalf by
J Hodson
Chairman
21 September 2011
Statement of cash flows
for the year ended 30 June 2011
Year ended Year ended
30 June 2011 30 June 2010
Note £'000 £'000
Operating activities
Net return before finance costs and taxation 27,491 12,957
Adjustment for gains on investments (27,131) (12,673)
Interest paid (50) (50)
Operating cash flows before movements in working capital 310 234
Increase in receivables (39) (72)
Increase in payables 22 39
Purchases of portfolio investments (17,367) (25,168)
Sales of portfolio investments 23,451 20,212
Net cash flow from operating activities 6,377 (4,755)
Financing activities
Equity dividends paid 6 (230) (230)
Shares bought back in the year (5,190) -
Shares issued in the year - 3,895
Net cash flow from financing activities (5,420) 3,665
Increase / (decrease) in cash and cash equivalents for the year 957 (1,090)
Cash and cash equivalents at start of the year 1,367 2,457
Cash and cash equivalents at 30 June 2011 15 2,324 1,367
Notes to the financial statements for the year ended 30 June 2011
1.1 Corporate information
Strategic Equity Capital plc is a public limited company
incorporated and domiciled in the United Kingdom and registered in England and
Wales under the Companies Act 2006 whose shares are publicly traded. The
Company is registered as a public limited company and is an investment company
as defined by Section 833 of the Companies Act 2006.
The Company carries on business as an investment trust within the
meaning of Section 1158 of the Corporation Tax Act 2010.
The financial statements of Strategic Equity Capital plc for the
year ended 30 June 2011 were authorised for issue in accordance with a
resolution of the Directors on 21 September 2011.
1.2 Basis of preparation and statement of compliance
The financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards ("IFRS") issued by
the International Accounting Standards Board (as adopted by the EU),
interpretations issued by the International Financial Reporting
Interpretations Committee, and applicable requirements of United Kingdom
company law, and reflect the following policies which have been adopted and
applied consistently. Where presentational guidance set out in the Statement
of Recommended Practice ("SORP") for investment trusts issued by the AIC (as
revised in 2009) is consistent with the requirements of IFRS the Directors
have sought to prepare financial statements on a basis compliant with the
recommendations of the SORP.
Convention
The financial statements are presented in Sterling, being the
currency of the Primary Economic Environment in which the Company operates,
rounded to the nearest thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single segment of business, being investment business.
1.3 Accounting policies
Investments
All investments in the scope of IAS 39 held by the Company are
classified as "fair value through profit or loss". As the Company's business
is investing in financial assets with a view to profiting from their total
return in the form of interest, dividends or increase in fair value, listed
equities and fixed income securities are designated as fair value through
profit or loss on initial recognition. The Company manages and evaluates the
performance of these investments on a fair value basis in accordance with its
investment strategy. Investments are initially recognised at cost, being the
fair value of the consideration, excluding transaction costs associated with
the investment which are charged to the Statement of comprehensive income and
allocated to capital.
After initial recognition, investments are measured at fair value,
with movements in fair value of investments and impairment of investments
recognised in the Statement of comprehensive income and allocated to capital.
Gains and losses on investments sold are calculated as the difference between
sales proceeds and cost.
Capital distributions from SRF II are accounted for on a reducing
cost basis; cash received is first applied to reducing the historical cost of
an investment; a realised gain will be recognised only when the cost has been
reduced to nil.
For investments actively traded in organised financial markets,
fair value is generally determined by reference to Stock Exchange quoted
market bid prices at the close of business on the Balance sheet date, without
adjustment for transaction costs necessary to realise the asset.
In respect of unquoted instruments, or where the market for a
financial instrument is not active, fair value is established by using
recognised valuation methodologies, in accordance with International Private
Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are
initially carried at cost, for a limited period, being the price of the most
recent investment in the investee company. This is in accordance with IPEVC
Guidelines as the cost of recent investments will generally provide a good
indication of fair value. Fair value is the amount for which an asset could be
exchanged between knowledgeable, willing parties in an arm's length
transaction.
Trade date accounting
All "regular way" purchases and sales of financial assets are
recognised on the "trade date" i.e. the day that the entity commits to
purchase or sell the asset. Regular way purchases, or sales, are purchases or
sales of financial assets that require delivery of the asset within a time
frame generally established by regulation or convention in the market place.
Income
Dividends receivable on quoted equity shares are taken into account
on the ex-dividend date. Where no ex-dividend date is quoted, they are brought
into account when the Company's right to receive payment is established. Other
investment income and interest receivable are included in the financial
statements on an accruals basis. Dividends receivable from UK registered
companies are accounted for net of imputed tax credits. Income on fixed income
securities is recognised on a time apportionment basis from the date of
purchase so as to reflect the effective yield on the securities.
Expenses
All expenses are accounted for on an accruals basis. Transaction
costs and other expenses incurred on the acquisition of an investment
classified as fair value through profit or loss are not included within the
cost of that investment but are charged immediately through the Statement of
comprehensive income and allocated to capital. The Company's investment
management and administration fees, finance costs (including interest on the
bank facility, calculated on the effective interest rate method) and all other
expenses are charged through the Statement of comprehensive income. These
expenses are allocated 100% to the revenue column of the Statement of
comprehensive income. The Investment Manager's performance fee is allocated
100% to the capital column of the Statement of comprehensive income. In the
opinion of the Directors the fee is awarded entirely for the capital
performance of the portfolio.
Cash and cash equivalents
Cash in hand and at bank and short-term deposits which are held to
maturity are carried at fair value. Cash and cash equivalents are defined as
cash in hand, demand deposits and short-term, highly liquid investments
readily convertible to known amounts of cash and subject to insignificant risk
of changes in value. Bank overdrafts that are repayable on demand which form
an integral part of the Company's cash management are included as a component
of cash and cash equivalents for the purpose of the Statement of cash flows
and balance sheet.
Bank loans and borrowings
All bank loans and borrowings are initially recognised at cost,
being the fair value of the consideration received, less issue costs where
applicable. After initial recognition, all interest-bearing loans and
borrowings are subsequently measured at amortised cost, any difference between
cost and redemption value being recognised in the Statement of comprehensive
income over the period of the borrowings on an effective interest rate basis.
Taxation
Income tax on the profit or loss for the year comprises current and
deferred tax. Income tax is recognised in the Statement of comprehensive
income except to the extent that it relates to items recognised directly in
equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for
the year, using tax rates enacted or substantively enacted at the Balance
sheet date, and any adjustment to tax payable in respect of previous years.
The tax effect of different items of expenditure is allocated between revenue
and capital on the same basis as the particular item to which it relates,
using the Company's effective rate of tax, as applied to those items allocated
to revenue, for the accounting year.
Deferred income tax is provided on all temporary differences at the
Balance sheet date between the tax basis of assets and liabilities and their
carrying amount for financial reporting purposes. Deferred income tax
liabilities are measured on an undiscounted basis at the tax rates that are
expected to apply to the year when the liability is settled, based on tax
rates (and tax laws) that have been enacted or substantively enacted at the
Balance sheet date. Deferred tax assets are recognised to the extent that it
is probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Dividends payable to shareholders
Interim dividends to shareholders are recognised as a liability in
the period in which they are paid. Final dividends to shareholders are
recognised as a liability in the year in which they have been declared and
approved by the shareholders. The final dividend is proposed by the Board and
is not declared until approved by the shareholders at the Annual General
Meeting following the year end. Dividends are charged to the Statement of
changes in equity.
Share capital transactions
Incremental costs directly attribute to the issuance of shares
recognised as a deduction from equity. When share capital recognised as equity
is repurchased, the amount of the consideration paid, including directly
attributed costs, is recognised as a deduction from equity. Repurchased shares
are either classified as treasury shares and are presented as a deduction from
stockholders' equity, or are cancelled.
Foreign currency transactions
The currency of the Primary Economic Environment in which the
Company operates is Sterling which is also the presentational currency.
Transactions denominated in foreign currencies are translated into Sterling at
the rates of exchange ruling at the date of the transaction.
Investments and other monetary assets and liabilities are converted
to Sterling at the rates of exchange ruling at the Balance sheet date.
Exchange gains and losses relating to investments and other monetary assets
and liabilities are taken to the capital column of the Statement of
comprehensive income.
Use of estimates
The preparation of financial statements requires the Company to
make estimates and assumptions that affect items reported in the Balance sheet
and Statement of comprehensive income at the date of the financial statements.
Although the estimates are based on best knowledge of current facts,
circumstances, and, to some extent, future events and actions, the Company's
actual results may ultimately differ from those estimates, possibly
significantly.
Use of significant estimates - In respect of unquoted instruments,
or where the market for a financial instrument is not active, fair value is
established by using recognised valuation methodologies, in accordance with
International Equity and Venture Capital ("IPEVC") Valuation Guidelines. New
investments are initially carried at cost to recent investments will generally
provide a good indication of fair value. Fair value is the amount for which an
asset could be exchanged between knowledgeable, willing parties in an arm's
length transaction.
1.4 New standards and interpretations not applied
IASB and IFRIC have issued the following standards and
interpretations which are not effective for the year ended 30 June 2011
and have not been applied in preparing these financial statements.
International Accounting Standards (IAS/IFRS) Effective date
IFRS 7 Amendments enhancing disclosures about transfers of
financial assets 1 July 2011
IFRS 9 Financial Instruments: Classification & Measurement 1 January 2013
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 12 Disclosure of Interests in Other Entities 1 January 2013
IAS 1 Amendments to revise the way other comprehensive income is presented 1 July 2012
IAS 27 Reissued as IAS 27 Consolidated and Separate
Financial Statements (as amended in 2011) 1 January 2013
The Directors do not anticipate that the initial adoption of the
above standards, amendments and interpretations will have a material impact on
the Group's financial statements in the period of initial application.
2 Income
30 June 2011 30 June 2010
£'000 £'000
Income from investments:
UK dividend income 1,253 1,087
Liquidity fund income 26 16
1,279 1,103
Other income:
Underwriting commission 23 24
23 24
1,302 1,127
Total income comprises:
Dividends 1,253 1,087
Interest 26 16
Underwriting commission 23 24
1,302 1,127
Income from investments:
Listed UK 1,253 1,087
Listed overseas 26 16
1,279 1,103
3 Investment Manager's fee
30 June 2011 30 June 2010
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 473 - 473 396 - 396
A basic management fee is payable to the Investment Manager at the
lower of (i) the annual rate of 1% of the adjusted Net Asset Value of the
Company or (ii) 1% per annum of the market capitalisation of the Company. In
order to avoid double charging of basic management fees payable to the
Investment Manager by the Company, the NAV of the Company is reduced by the
aggregate of the value of the Company's Limited Partnership interest in SRF II
and the amount of the Company's undrawn loan commitment to SRF II. The basic
management fee accrues weekly and is payable quarterly in arrears. Prior to
the General Meeting in November 2010, the Management fee had been calculated
at 1% of the adjusted Net Asset Value of the Company, adjusted for SRF II as
described above.
The Investment Manager is also entitled to a performance fee,
details of which are given in the Report of the Directors above.
No performance fee has been payable in either year.
4 Other expenses
30 June 2011 30 June 2010
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Secretarial services 71 - 71 73 - 73
Auditors' remuneration for:
Audit services* 24 - 24 24 - 24
Directors' remuneration 95 - 95 89 - 89
Other expenses 279 - 279 261 - 261
469 - 469 447 - 447
* No non-audit fees were incurred during the year.
5 Taxation
30 June 2011 30 June 2010
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Corporation tax at 27.5%
(2010: 28%) - - - - - -
The Company is subject to corporation tax at 27.5%, the average
rate for the current tax year. As at 30 June 2011 the total current taxation
charge in the Company's revenue account is lower than the standard rate of
corporation tax in the UK (27.5%). The differences are explained below:
30 June 2011 30 June 2010
Revenue Capital Revenue Capital
return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return on ordinary activities
before taxation 310 27,131 27,441 234 12,673 12,907
Theoretical tax at UK corporation
tax rate of 27.5% (2010: 28%) 85 7,461 7,546 66 3,548 3,614
Effects of:
- UK dividends that are not taxable (345) - (345) (303) - (303)
- Gains on investment - (7,461) (7,461) - (3,611) (3,611)
- Unrelieved expenses 260 - 260 191 - 191
- Expenses not deductible
for tax purposes - - - 46 63 109
- - - - - -
Factors that may affect future tax charges
The Company has £5,945,000 management expenses (2010: £4,989,000)
that are available to offset future taxable revenue. It is considered too
uncertain that there will be sufficient future taxable profits against which
these expenses can be offset and therefore, in accordance with IAS 12,
deferred tax asset of £1,547,000 (2010: £1,397,000) in respect of these
amounts has not been recognised.
Deferred tax is not provided on capital gains and losses arising on
the revaluation or disposal of investments because the Company meets (and
intends to continue for the foreseeable future to meet) the conditions for
approval as an investment trust company.
6 Dividends
Under the requirements of Section 1158 Corporation Tax Act 2010 no
more than 15% of investment income generated from qualifying shares and
securities may be retained by the Company. These requirements are considered
on the basis of dividends declared in respect of the financial year as shown
below.
30 June 2011 30 June 2010
£'000 £'000
Net return after taxation per
Company accounts 310 234
Final dividend proposed of 0.44p
(2010: 0.30p) per share (309) (230)
Revenue retained for Section 1158 purposes 1 4
7 Return per Ordinary share
30 June 2011 30 June 2010
Weighted Weighted
average average
Net number of Per Net number of Per
return Ordinary share return Ordinary share
£'000 shares pence £'000 shares pence
Total
Return per share 27,441 76,214,492 36.00 12,907 75,785,546 17.03
Revenue
Return per share 310 76,214,492 0.40 234 75,785,546 0.31
Capital
Return per share 27,131 76,214,492 35.60 12,673 75,785,546 16.72
8 Investments
30 June 2011
£'000
Investment portfolio summary
Listed investments at fair value through profit or loss 57,542
Unlisted investments at fair value through profit or loss 13,794
71,336
30 June 2011
Listed Unlisted Total
£'000 £'000 £'000
Analysis of investment portfolio movements
Opening book cost 58,106 4,470 62,576
Opening investment holding (losses)/gains (16,719) 4,002 (12,717)
Opening valuation 41,387 8,472 49,859
Movements in the year:
Purchases at cost 16,078 1,719 17,797
Sales - proceeds (21,894) (1,557) (23,451)
- realised (losses)/gains on sales (922) 400 (522)
Increase in unrealised appreciation 22,893 4,760 27,653
Closing valuation 57,542 13,794 71,336
Closing book cost 51,368 5,032 56,400
Closing investment holding gains 6,174 8,762 14,936
57,542 13,794 71,336
A list of the top 10 portfolio holdings by their aggregate market
values is given in the Investment Manager's report above.
Transaction costs incidental to the acquisitions of investments
totalled £99,000, (2010: £308,000 including costs associated with the
acquisition of SFR ll of £223,000) and disposals of investments totalled
£44,000 (2010: £31,000) for the year.
30 June 2011
Total
£'000
Analysis of capital gains
Losses on sale of investments (522)
Movement in investment holding gains 27,653
27,131
The Company is required to classify fair value measurements using a
fair value hierarchy that reflects the subjectivity of the inputs used in
measuring the fair value of each asset. The fair value hierarchy has the
following levels:
- Quoted bid prices (unadjusted) in active markets for identical
assets or liabilities ("level 1").
- Inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices) ("level 2").
- Inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs) ("level 3").
The level in the fair value hierarchy within which the fair value
measurement is categorised is determined on the basis of the lowest level
input that is significant to the fair value of the investment.
The following table analyses within the fair value hierarchy the
Company's financial assets and liabilities (by class) measured at fair value
at 30 June 2011.
Financial instruments at fair value through profit and loss
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Equity investments and limited 57,542 11,807 1,987 71,336
partnership interests
Liquidity funds - 2,150 - 2,150
Total 57,542 13,957 1,987 73,486
Investments whose values are based on quoted market prices in
active markets are classified within level 1, include active listed equities.
The Company does not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered
to be active but are valued based on quoted market prices, dealer quotations
or alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded
in active markets and/ or subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/ or non-transferability, which are
generally based on available market information.
Level 3 instruments include private equity, as observable prices
are not available for these securities, the Company has used valuation
techniques to derive the fair value. In respect of unquoted instruments, or
where the market for a financial instrument is not active, fair value is
established by using recognised valuation methodologies, in accordance with
International Private Equity and Venture Capital ("IPEVC") Valuation
Guidelines.
There were no transfers between levels for the year ended
30 June 2011.
The following table presents movements in level 3 instruments for
the year ended 30 June 2011 by class of financial instrument.
Total
equity
investments
£'000
Opening balance 1,524
Disposals during the year (145)
Total gains for the year included in the Statement of 608
comprehensive income
Closing balance 1,987
9 Significant interests
The Company had holdings of 3% or more in the following companies:
Name of Class of 30 June 2011
investment Share Percentage held
Journey Group Ordinary 10.85
4imprint Group Ordinary 7.50
Allocate Software Ordinary 6.82
Lupus Capital Ordinary 4.50
Lavendon Group Ordinary 3.46
Unlisted investments::
Strategic Recovery Fund II Partnership interest 16.29
10 Other receivables
30 June 2011 30 June 2010
£'000 £'000
Dividends receivable 204 167
Accrued income 3 -
Other receivables and prepayments 10 10
217 177
11 Other payables
30 June 2011 30 June 2010
£'000 £'000
Amounts due to brokers 430 -
Amounts due to broker regarding
share buy back 773 -
Other payables and accruals 1,407 181
12 Called up share capital
Number £'000
Allotted, called up and fully paid
Ordinary shares of 10p each:
At 1 July 2010 79,815,974 7,981
Treasury shares cancelled (3,045,500) (305)
Share buy backs (6,648,271) (665)
At 30 June 2011 70,122,203 7,011
13 Own shares held in treasury
30 June 2011 30 June 2010
£'000 £'000
Nil (2010: 3045,500) Ordinary shares of 10p each - 305
The cost of the shares held in treasury, £Nil (2010: £1,884,000),
has been taken to the special reserve. All the shares held in treasury we
cancelled at par value on 25 February 2011.
14 Reserves
Capital Capital
reserve reserve
arising on arising on Capital
Share Special investments investments redemption Revenue
premium reserve sold held reserve reserve
£'000 £'000 £'000 £'000 £'000 £'000
Opening balance 5,246 60,398 (10,297) (12,717) - 611
Net losses on
realisation of
investments - - (522) - - -
Increase in
unrealised
appreciation - - - 27,653 - -
Treasury shares
cancelled - - - - 305 -
Share buy backs - (5,963) - - 665 -
Retained net
revenue for the
period - - - - - 310
Dividends paid - - - - - (230)
As at
30 June 2011 5,246 54,435 (10,819) 14,936 970 691
15 Reconciliation of net cash flow to net debt
30 June 2011 30 June 2010
£'000 £'000
Opening net funds 1,367 2,457
Increase / (decrease) in cash and
cash equivalents in year 957 (1,090)
Closing net funds 2,324 1,367
At Net At
30 June 2010 cashflow 30 June 2011
£'000 £'000 £'000
Cash at bank 167 7 174
Liquidity funds 1,200 950 2,150
1,367 957 2,324
Note that in the cash flow statement, amounts outstanding for the
share buy back (£773,000; 2010:£Nil) have not been included in the movement in
payables calculation as this does not constitute an operating activity but
rather a financing activity.
16 Net asset value per Ordinary share
The net asset value per Ordinary share is based on net assets of
£72,470,000 (2010: £51,222,000) and on 70,122,203 (2010: 76,770,474) Ordinary
shares, being the number of shares in issue at the year end, less the number
of shares being held in treasury of nil (2010: 3,045,500).
17 Capital commitments and contingent liabilities
The Company has a commitment to invest €2,160,000 (2010:
€2,160,000) in Vintage I and an outstanding commitment to SRF II of
£Nil(2010: £2,367,000).
18 Analysis of financial assets and liabilities
The Company's financial instruments comprise securities, cash
balances (including amounts held in liquidity funds) and debtors and creditors
that arise from its operations, for example, in respect of sales and purchases
awaiting settlement and debtors for accrued income.
The Company has little exposure to credit and cash flow risk.
Credit risk is due to uncertainty in a counterparty's ability to meet its
obligations. The Company has no exposure to debt purchases and ensures that
cash at bank is held only with reputable banks with high quality external
credit ratings. All the assets of the Company which are traded on listed
exchanges are held by HSBC Global Services, the Company's Custodian.
Bankruptcy or insolvency of the Custodian may cause the Company's rights with
respect to securities held by the Custodian to be delayed or limited. The
Board review the Custodian's annual controls report and the Manager's
management of the relationship with the Custodian.
Due to timings of investment and distributions, at any one time the
Company may hold significant amounts of surplus cash. Any funds in excess of
those required to meet daily operation requirements are invested in
Institutional Liquidity Funds. These are highly liquid assets monitored by the
Investment Manager. As at 30 June 2011 the Company had £2.2 million (2010:
£1.2 million) invested in such funds. The maximum exposure to credit risk is
£3,731,000 (2010: £1,548,000).
The Company finances its operations through its issued capital,
existing reserves and a £5.0 million revolving credit facility which
remains undrawn at 30 June 2011.
The principal risks the Company faces in its investment portfolio
management activities are:
- market price risk, i.e. the movements in value of investment
holdings caused by factors other than interest rate movement;
- interest rate risk;
- liquidity risk; and
- foreign currency risk.
The Investment Manager's policies for managing these risks are
summarised below and have been applied throughout the year:
Policy
(i) Market price risk
The Company's investment portfolio is exposed to market price
fluctuations which are monitored by the Investment Manager.
Adherence to the investment objectives and the limits on investment
set by the Company mitigates the risk of exposure to any one particular type
of security or issuer.
If the investment portfolio valuation fell by 20% from the 30 June
2011 valuation (2010: 20%), with all other variables held constant, there
would have been a reduction of £14,267,000 (2010: £9,972,000) in the return
before taxation and equity. An increase of 20% in the investment portfolio
valuation would have had an equal and opposite effect on the return before
taxation and equity.
(ii) Cash flow interest rate risk exposure
The Investment Manager is permitted to borrow up to 20% of the
Company's adjusted portfolio valuation in accordance with the current facility
loan covenant, and uses a £5,000,000 revolving credit facility for this
purpose, at variable rates to be determined prior to any drawdown. No amounts
were drawn down during the year (2010: £Nil)
The Company's bank accounts earn interest at a variable rate which
is subject to fluctuations in interest rates.
The Company holds cash in liquidity funds. Income from these funds
is dependent on the performance of the funds.
If interest rates had reduced by 1% from those obtained at 30 June
2011 (2010: 1%), it would have the effect, with all other variables held
constant, of reducing the net return before taxation and equity by £17,000
(2010: £16,000). If there had been an increase in interest rates of 1% there
would have been an equal and opposite effect in the net return before taxation
and equity. The calculations are based on cash at bank and liquidity funds as
at 30 June 2011 and these may not be representative of the year as a whole.
Non-interest rate risk exposure
The remainder of the Company's portfolio and current assets are not
subject directly to interest rate risk.
Details of the risk profile of the Company are shown in the
following tables.
The interest rate risk profile of the Company's financial assets at
30 June 2011 was:
Cash flow
No interest interest
rate risk rate risk
financial financial
Total assets assets
£'000 £'000 £'000
Sterling
Ordinary shares 57,542 57,542 -
Unlisted 11,807 11,807 -
investments
Liquidity funds 2,150 - 2,150
Cash 174 - 174
Receivables* 207 207 -
71,880 69,556 2,324
Euros
Unlisted 1,987 1,987 -
investments
1,987 1,987 -
Total 73,867 71,543 2,324
* Receivables exclude prepayments which under IAS 32 are not
classed as financial assets.
The interest rate risk profile of the Company's financial assets at
30 June 2010 was:
Cash flow
No interest interest
rate risk rate risk
financial financial
Total assets assets
£'000 £'000 £'000
Cash flow
Sterling
Ordinary shares 41,387 41,387 -
Unlisted investments 6,948 6,948 -
Liquidity funds 1,200 - 1,200
Cash 167 - 167
Receivables* 167 167 -
49,869 48,502 1,367
Euros
Other investments 1,524 1,524 -
1,524 1,524 -
Total 51,393 50,026 1,367
* Receivables exclude prepayments which under IAS 32 are not
classed as financial assets.
The interest rate risk profile of the Company's financial
liabilities at 30 June 2011 was:
No interest
rate risk
financial
Total liabilities
£'000 £'000
Sterling
Creditors 1,407 1,407
All amounts are due in three months or less.
The interest rate risk profile of the Company's financial
liabilities at 30 June 2010 was:
No interest
rate risk
financial
Total liabilities
£'000 £'000
Sterling
Creditors 181 181
All amounts are due in three months or less.
(iii) Liquidity risk
The Investment Manager may invest on behalf of the Company in
securities which are not readily tradable, which can lead to volatile share
price movements. It may be difficult for the Company to sell such investments.
Although the Company's AIM quoted investments and unquoted investments are
less liquid than securities listed on the London Stock Exchange, the Board
seeks to ensure that an appropriate proportion of the Company's investment
portfolio is in invested in cash and readily realisable investments, which are
sufficient to meet any funding requirements that may arise.
(iv) Foreign currency risk - Needs Updating
The Company invests in a private equity fund denominated in Euros.
In addition, the Company's loan may be drawn down in US Dollars or Euros as
well as Sterling. The Company is, therefore, subject to foreign currency risk.
During the year the Sterling/Euro exchange fluctuated 11% from a
low of 1.1073 on 30 June 2011 to a high of 1.2251 on 23 August 2010, before
closing at 1.1073 on 30 June 2011 (2010: 1.2214).
If the Sterling/Euro exchange rate had decreased by 15% from that
obtained at 30 June 2011 (2010: 15%), it would have the effect, with all other
variables held constant, of increasing net profit and equity shareholders'
funds by £351,000 (2010: £198,000). The calculations are based on the value of
the investment in Vintage I as at 30 June 2011 and this may not be
representative of the year as a whole. The balance exposed to foreign currency
risk is £1,987,000.
The bank facility, which since 14 July 2009 (before this date the
facility was for £10 million) is a £5.0 million revolving credit facility with
The Royal Bank of Scotland plc, incurs interest at the rate of 1.0% over LIBOR
or EURIBOR. The facility may be drawn down in Sterling, US Dollars or Euros.
The facility was undrawn at 30 June 2010. The undrawn balance incurs interest
at the rate of 0.2%. The facility is available until 13 July 2012 in
accordance with the current loan facility's covenant, gross borrowings shall
not be more than 20% of the adjusted portfolio valuation at any time.
Fair values of financial assets and financial liabilities
The carrying value of the financial assets and liabilities of the
Company is equivalent to their fair value.
Managing Capital
Capital structure
The Company is funded through shareholders' equity, cash reserves
and an existing £5.0 million loan facility with The Royal Bank of Scotland
plc, which was not utilised as at 30 June 2011. The Company's Articles of
Association permit the Board to borrow up to 25% of the Company's net asset
value at the time of borrowing. Capital is managed so as to maximise the
return to shareholders while maintaining an appropriate capital base to allow
the Company to operate effectively in the marketplace and to sustain future
development of the business. The Company pays such dividends as are required
to maintain its investment trust status, and may also from time to time return
capital to shareholders through the purchase of its own shares at a discount
to net asset value.
Capital constraints
The Company operates so as to qualify as a UK investment trust for
UK tax purposes. Inter alia, this requires that no investment may exceed 15%
by value of the Company's portfolio at the point of investment.
The Company's capital requirement is reviewed regularly by the Board.
19 Related party transactions
The Investment Manager: SVG Investment Managers Limited is regarded
as a related party of the Company. The Investment Manager may draw upon advice
from the Industry Advisory Panel ("IAP") of which Sir Clive Thompson, a
Director of the Company, is a member. The IAP was established to provide
advice to SVGIM in relation to the strategy, operations and management of
potential investee companies.
The amounts paid to the Investment Manager are disclosed in note 3 above.
The amount due to the Investment Manager at 30 June 2011 was
£134,000 (30 June 2010: £109,000).
In June 2009 SVGIM entered into a Commission Sharing Arrangement
with four executing brokers. Under this arrangement the amount of commission
received by SVGIM in relation to trading activities was carried out on behalf
of the Company for the period to 30 June 2011 was £9,000(30 June 2010:£6,000).
The amount outstanding at year end was £Nil (2010:£6,000).
Notice of Annual General Meeting
The Annual General Meeting of Strategic Equity Capital plc will be
held at the offices of SVG Investment Managers Limited at 61 Aldwych, London
WC2B 4AE at 11.30 am on Tuesday 8 November 2011.
The notice of this meeting can be found in the Annual Report and
Accounts at: www.strategicequitycapital.com
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for inspection
at the NSM, which is situated at: www.hemscott.com/nsm.do.
ENDS
Neither the contents of the Company's website nor the contents of
any website accessible from hyperlinks on this announcement (or any other
website) is incorporated into, or forms part of, this announcement.